copyright © cc-by-nc 2020, cribfb | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 69 accounting practices and organizational performance: evidence from small and medium scale enterprises in sri lanka saseela balagobei senior lecturer department of financial management university of jaffna sri lanka e-mail: saseelab@univ.jfn.ac.lk abstract over the past few decades, the researchers demonstrate consistent effort in investigating the small and medium scale enterprises (smes). this sector plays a crucial role in the economic growth in both developing and developed countries. the research investigated how accounting practices influence the organizational performance of small and medium scale enterprises in sri lanka. accounting practices consists of record keeping, budgeting practices and payroll accounting whereas organizational performance is measured by organizational goal achievement, organizational effectiveness and organizational efficiency records. a structured questionnaire was used to collect the primary data from 75 smes which were selected by means of the random sampling technique. the results revealed that among the accounting practices, only record keeping and budgeting practices have significant positive influence on organizational performance of small and medium enterprises in sri lanka. it can be recommended that academic institutions and other bodies which are responsible for smes should organize training programmes for those operators who do not have the technical knowhow in the field of accounting to come to grips with it and also provide some sme-specific accounting guidelines and template forms for capturing accounting practices for the operators to use. jel classification: m41. 1. introduction small and medium enterprises (smes) are considered as vital for promoting economic growth and social development of sri lanka. in recent years, smes have been identified as a key source of income generation, employment, poverty alleviation and regional development. the smes engage in broad areas of economic activity such as agriculture, mining, manufacturing, construction and service sector industries. accounting practices are crucial in the success of contemporary business organizations. it foils the exploitation of assets, increases production and yield, controls expenses and helps to improve the efficiency of the overall management. the role of management is vital in the whole development of a business organization. accounting is an essential tool for recording, analyzing, monitoring and evaluating the financial status of the organisations . it provides a source of information to owners and managers of smes operating in any industry for measuring financial performance (maseko & manyani, 2011). today’s accounting system provides more appropriate, consistent and suitable financial information to stakeholders to make the effective financial decisions concerning their business entities. according to the business dictionary ‘accounting’ can be defined as a systematic procedure that helps to identify record, measure, classify, verify, summarize, interpret, and communicate financial information. it reveals profit or loss for a specific period, and the value and nature of an organization’s assets and liabilities and owner’s equity. it involves ascertainment, recording, summarizing, and reporting of financial facts used in evaluating and monitoring an organization’s economic undertakings. an accounting system, therefore, is an organized discipline of manual and computerized accounting methodology, processes, and wheels which are employed in gathering, recording, classifying, analyzing, summarizing, interpreting, and presenting accurate and timely financial information for decision making in an organization. the importance of organizational performance measurement to any business organization, large or small, can’t be over-emphasized. in any sense, profit can analogously be viewed as the life-blood of a business and hence the accounting bases, concepts and principles adopted ought to capture and report all the relevant accounting information to ensure reliability in its measurement. reported profits reflect changes in wealth of owners and this can explain why major economic decisions in business are centered on financial performance as measured by profitability (cooley & edwards, 1983). it has keywords: accounting practices, organizational performance, record keeping, budgeting practices. . copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 70 been recognized that appropriate accounting information is important for a successful management of any business entity, whether large or small (european commission, 2008). it is fundamental therefore that accounting practices of smes supply potential and appropriate financial information needed to economic decisions made by entrepreneurs. the study therefore mainly focuses on investigating the types of accounting practices followed by smes, their completeness and the availability of accounting skills and knowledge to capture and process accounting information which can be used to measure performance in smes. the accounting practices such as the cost accounting practices, the financial accounting practices and even the management accounting practices provide more information on the performance and other useful material about the organization to the stakeholders. the purpose of financial statements is to provide information about the financial position, financial status, performance and changes in financial position of an organization that is valuable to various users in making effective decisions. similarly, accounting practices are the procedures and controls that accounting departments use for creating and recording business transactions. accounting practice should ideally be tremendously constant, since many business transactions must be dealt with in exactly the same way in order to prepare consistently reliable financial statements. sme development is vital for any country, since this sector has great prospective to create maximum social and economic advantages to the country with minimum investment. smes make up 80 per cent of all businesses, approximately 20 percent of industrial establishments. the smes accounts for more than ninety percent of business establishments and are estimated to contribute about thirty five percent of employment in the service sector. the smes play an important role in developing the country. there are few studies conducted on accounting practices and organizational performance of smes in sri lanka. these studies conducted have not shown that how all components in accounting practices improve the overall organizational performance of smes in sri lanka. therefore the study attempts to examine the effect of accounting practices on organizational performance of smes in sri lanka 2. research problem one of the the problems of smes failure is poor management including accounting problem-solving. smes face difficulties in increasing equity capital from the individuals and financial institutions. even when the financial institutions approve to obtain equity capital, the conditions are always dreadfully frightened. therefore there is inadequate capital available to sme and thus lead to poor funding facilities. further the issues experiencing smes is dearth of proficient management which affects the ability of entrepreneurs to employ the services of experts; usage of obsolete equipment and devices of production because of entrepreneur’s inability to access new technology; more competition which resulted from sales which is a consequence o f poor finance to cope with increased competition in the industry; the highest cost of available raw materials influences the prices of finished goods. it only has adverse consequence on the business of the enterprise but also on the success; the availability of infrastructural facilities is totally inadequate in the areas of access roads, electricity, water supply, etc. and various policies and regulatory measurements such as exclusion of fuel subsidy, taxes, and burdens on loans. although the role of smes in the country is significant, they face challenges and problems. in sri lanka there are more failures of smes and the central bank of sri lanka (1998) indicated that insufficient capital and loan facilities, improper accounting techniques and etc. the failure of smes to find their counter funds obligations as a condition of financial arrangements generates another obstacle for smes to acquire the facilities offered in concessionary finances (abeygunasekera & fonseka 2012). however, inefficient record keeping practices, incompetent use of accounting information to support the financial decision making and the low quality and consistency of financial facts are main problems in financial management concerns of smes (karunananda & jayamaha, 2011). the place of sound accounting and internal control systems of any enterprises, regardless of its scale, cannot be overstated. a vast majority of smes cannot afford the complication of a detailed accounting system even if they would have. hence, the existence of single entry in books and in some cases incomplete records (onaolapo, et al., 2011). audits of smes have proven to be among the most worrisome for professional accountants as the internal controls are inadequacy. but for statutory demands, smes hardly provide critical thoughts to the process of sound accounting, yet the insufficiency and incompetence of accounting processes have been answerable for untimely failure of a host of them (aremu & adeyemi, 2011). based on the problem, the following research question is formulated, to what extent accounting practices influence the organizational performance in sri lanka? 3. objectives of the study accounting information is fruitful in important activities as: the evaluation of position of enterprises in terms liquidity, profitability, leverage and activities; measurement of performance; and assessment of the effectiveness of alternative courses of action. the objective is to investigate the impact of accounting practices on organizational performance of smes in sri lanka. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 71 4. literature review there have been some studies that link between accounting practices and organizational performance of enterprises. for instance, onaolapo & adegbite (2014) investigate the impact of accounting records on smes’ business performance. the primary data were gathered by using interviews and questionnaires from sample of 113 smes using a mixture of stratified and purposive sampling techniques. descriptive statistics, chi-square and anova were employed for analyzing the data. the results revealed that accounting records keeping has a strong positive relationship with smes’ performance. yousef (2013) conducts a study on the use of accounting information by smes in the south district of jordan. data were systematically gathered using a list of questions from a sample of 136 smes. the study shows that the level of awareness on the significance of financial management and accounting information is still very low among smes in the south district of jordan. amaoko (2013) studied the accounting system of smes in the kumasi metropolis of ghana. the study was based on primary data collected through structured questionnaires from a sample of 210 smes. the study found that majority of smes fail to keep proper accounting records as they feel that it is not necessary; it exposes their financial position; it is time consuming; and expensive. this study reaches the same conclusion with the study of yousef (2013) “that the level of awareness among smes on the importance of proper accounting record keeping is still very low.” ohachosim et al. (2012) carried out the study of “financial challenges of small and medium-sized enterprises (smes) in nigeria: the relevance of accounting information” from a survey of 348 smes in anambra state. structured questionnaire were used in data collection. analysis was by means of ordinary least square (ols). they found out that poor accounting system is what characterizes most smes of nigeria. maseko & manyani (2011) investigate about accounting practices of smes in zimbabwe using bindura as a case study. data were gotten from a survey of 100 smes through structured questionnaires. the findings revealed that generality smes don’t keep records because of lack of accounting knowledge. they recommended that the national authorities should develop guidelines of accounting for smes and undertake programes for train entrepreneurs of smes in accounting. smes will contribute, in no small measure, to their performance. in their recommendation, they advised smes to consult accountants regularly so that they can be able to maintain high and generally accepted accounting practices. tuanmat & smith (2011) show that the level of changes of management accounting practices increased during the period of 2003 to 2007. these changes mostly happened due to the introduction of new practices, replacement of existing practices and modification of the way existing practices were used. further it found out that there is no any significant difference in management accounting practices among foreign companies and local companies, or between smes and large enterprises. tzempelikos & gounaris (2015) ascertain few key account management practices at the strategic, organizational, and tactical levels of management and offer support for greatest hypothesized relationships, presenting that the recognized practices positively influence performance and dyadic results through the mediation coming from the variables examined. the study extends to understanding of the factors underlying effective key account management practices based on theoretical perspective. many researchers conducted the studies about smes with different study problems such as; management issues, accounting issues and financial issues and challenges, reasons of small business failures. few researchers examined about the contribution of record keeping practices to business performance of smes. they have pointed out that, some smes produce accounting records based on computerized accounting packages, relying on accountants but often they left the complexity of information, accounting records hinder application of appropriate measures in evaluating business success. therefore this study attempts to fill this gap. 5. methodology the methodology is the effective way to achieve the purpose of the study, develop the conceptual framework and explains independent and dependent variables used and operationalization of concepts and variables. furthermore it discusses the technique adopted for sample selection and data extraction. determining the population of smes in sri lanka is indeterminate. thus there is no unified database available representing wide range of areas that smes are operating like manufacturing, agriculture, mining, construction, service etc. there are 144 smes which are registered in sri lanka chamber of small and medium industries. the primary data were collected from 75 smes which were selected by using random sampling technique. 150 questionnaires were issued. a pilot test was performed. primary data was obtained from the selected smes through structured questionnaires. the questionnaire consists of two sections: section a and section b. section a consists of the questions related to personal information of respondents for the research and section b evaluate the degree of the agreement with the impacts of accounting practices on organizational performance. the respondents were requested to indicate the extent of their agreement with a series of questions on a five-point likert scale. the collected data was analyzed by using statistical software for social science (spss 21). https://www.emerald.com/insight/search?q=tuan%20zainun%20tuanmat https://www.emerald.com/insight/search?q=malcolm%20smith copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 72 6. conceptualization according to literature and problem statement, a conceptual model constructs the research framework. this model represents the relationship between accounting practices and organizational performance. source: developed by researcher figure1. conceptual framework 7. data analysis and discussion the data collated through the survey are presented and analyzed for achieving the objective. the study focused entirely on smes sector mainly consists of seventy five manufacturing, trading and beverage food and tobacco enterprises. in this study descriptive statistics describe the business characteristics of smes and adoptability of accounting practices to develop a general view about the sample of the study. in pilot testing, validity and reliability were conducted to measure that questionnaires are valid and reliable to be used in this research. according to hair et al. (1998) validity is “extent to which a measure or set of measures correctly represents the concept of study— the degree to which it is free from any systematic or nonrandom error. validity is concerned with how well the concept is defined by the measure(s).” validity in this pilot testing is determined. the result is valid and questions for the entire item are valid and can be used in this study. according to hair et al. (1998) reliability is “extent to which a variable or set of variables is consistent in what it is intended to measure.” the questionnaire on this study evaluated the reliability by using spss software with cronbach’s alpha method. the result will be stated as reliable if the value of cronbach’s alpha value is greater than 0.60. thus the internal consistency of different accounting practices and organizational performance of this study were verified through cronbach alpha coefficient. table 1. testing the reliability variables number of items cronbach’s alpha record keeping proper accounting records 6 0.603 preparation of accounting records 2 0.701 accounting records procedures 2 0.688 budgeting practices budget planning 3 0.731 budget skills competency 5 0.725 budget information system 3 0.725 payroll accounting timely payroll accounting 2 0.724 accurate payroll accounting 6 0.732 accessible payroll records 4 0.654 organizational performance 6 0.653 the results represent that the cronbach’s alpha coefficient for each accounting practice exceeds the generally accepted standard of 0.6. all selected accounting practices hold significant reliability test values. therefore, the data gathered from selected accounting practices of smes through questionnaires were considered as reliable. accounting practices record keeping proper accounting records preparation of accounting records accounting records procedures budgeting practices budget planning budget information system budget skills competency payroll accounting timely payroll accounting accurate payroll accounting accessible payroll records organizational performance organizational goal achievement organizational effectiveness organizational efficiency records copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 73 7.1 demographic and business characteristics the survey of accounting system and organizational performance includes the male-female distinction, education background, size of the business, legal form and number of years in operations of the current business. these features support to recognize the nature of the smes in sri lankan context with reference to the selected sample of the study. table 2 represents summary of descriptive statistics pertaining to different demographic and business characteristics of the selected smes. table 2. demographic and business characteristics of the selected sample of smes demographic characteristics frequency percentage gender: male female 72 03 96 % 4 % position of the business: owner is separate from the manager both owner and manager is one individual 54 21 72 % 28 % number of years in operations of the current business: up to 05 05 to 10 over 10 21 21 33 28% 28% 44% education: school level graduate level professional level 52 15 08 69.33% 20% 10.64% size of the business: small medium 50 25 66.66% 33.34% legal form: sole-proprietorship limited company 48 27 64% 36% with regard to the male-female distinction, majority of the business owners are male and it represented 96% of the sample, thus showing male dominance in the ownership of smes. with respect to the management of entities it was noted that around 28% of businesses are managed by the owners whereas the rest of the organizations are managed by a manager who is not an owner of the business. the majority of smes have been conducting its operations more than five years (72%). further qualifications of owners revealed that more than 69% of the sme owners possess school level education. however, the level of professional achievements and qualifications of owners were at a low level. the classification between small and medium businesses revealed that more than 33% entities satisfied the criteria to be considered them as medium size businesses. from the legal form of smes' perspective, it was revealed that more than 64 % of smes are sole-proprietorship. 7.2 multicollinearity multicollinearity represents that two or more independent variables are highly correlated with each other. multicollinearity refers to the successive inclusion of additional variables that lift the collinearity of the full set of explanatory variables to a ‘harmful’ level (lauridsen & mur, 2006). table 3. multicollinearity model collinearity statistics tolerance vif record keeping .869 1.150 budgeting practices .925 1.000 payroll accounting .869 1.151 variance inflation factor (vif) is a technique used to identify the multicollinearity using spss and, if the vif is greater than 10, which is a clear case of multicollinearity (hair et al., 1995). in this study multicollinearity problem don’t arise among the variables as all variance inflation factors are less than 10. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 74 7.3 correlation analysis correlation is a statistical technique for examining the relationship between two variables. it establishes an invaluable initial analysis and a building a basis for further analysis. in accordance with the correlation matrix represented in table 04, record keeping and payroll accounting have a significant relationship with organizational performance at 5% levels (r=.317 **, p < 0.05 and r=.225, p < 0.05)) respectively. there is a significant relationship between budgeting practices and organizational performance at 10% levels (r=.217, p < 0.05). table 4. correlations matrix for accounting practices and organizational performance (1) (2) (3) (4) (1) record keeping pearson correlation 1 sig. (2-tailed) (2) budgeting practices pearson correlation .003 1 sig. (2-tailed) .982 (3) payroll accounting pearson correlation -.362** -.022 1 sig. (2-tailed) .001 .854 (4) organizational performance pearson correlation .317** .217 .225 1 sig. (2-tailed) .006 .061 .0500 **. correlation is significant at the 0.01 level (2-tailed). 7.4 multiple regression analysis table 5 represents the results of multiple regression analysis to study the impact of accounting practices and organizational performance of smes in sri lanka. table 5. regression coefficients for accounting practices and organizational performance. model b std. error t sig 1 (constant) 5.447 .712 7.653 .000 record keeping .119 .051 2.316 .023 budgeting practices .249 .122 2.035 .046 payroll accounting .087 .077 1.140 .258 adjusted r2 – 0.368 f value 4.623 (p= 0.05) as shown in table 5 among three accounting practices only record keeping and budgeting practices have a significant influence on organizational performance at 0.05 levels (=.119, p<0.05 and =.249, p<0.05) respectively. further payroll accounting is not significant and influencing on organizational performance (=.087, p<0.05). therefore it can be concluded that only record keeping and budgeting practices have a substantial positive influence on organizational performance. this finding is collaborated with previous study of onaolapo & adegbite (2014). the adjusted r2 value for accounting practices and organizational performance is 0.368 which represents that 36.8 % percent of the variability in organizational performance is determined by accounting practices such as record keeping, budgeting practices and payroll accounting and the remaining 63.2% of the variance is not shown in this model. as f value is 4.623 (p=0.05) in this analysis the regression model is more applicable for this study. 8. conclusion and recommendation this study was designed for exploring the extent of use of accounting practices among smes sri lanka and to find if there is any significant influence on organizational performance. this study mainly focus on small and medium enterprises in sri lanka and seventy five small and medium enterprises have been selected as sample while pearson’s correlation and multiple regression analysis have been performed to investigate the influence of accounting practices on organizational performance. the findings of this study reveals that among the accounting practices, only record keeping and budgeting practices have significant positive influence on organizational performance of small and medium enterprises in sri lanka. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 75 it can be recommended that academic institutions and other bodies which are responsible for smes should organize training programmes for those operators who do not have the technical knowhow in the field of accounting to come to grips with it and also provide some sme-specific accounting guidelines and template forms for capturing accounting practices for the operators to use. references aremu, m. a., & adeyemi, s. l. (2011). small and medium scale enterprises as a survival strategy for employment generation in nigeria. journal of sustainable development, 4(1), 200. amaoko, g. b. (2013). accounting practices of smes: a case study of kumasi metropolis in ghana. international journal of business and management, 8(24), 73-83. abeygunasekera, a.w. j. c., & fonseka, a. t. (2012). non-compliance with standard accounting practices by small and medium scale enterprises in sri lanka. postgraduate institute of management, university of sri jayawardenepura, sri lanka. cooley, p., & edwards, c. (1983). financial objectives of small firms. american journal of small business, 8(1), 28-31. european commission. directorate-general for economic. (2008). emu@ 10: successes and challenges after 10 years of economic and monetary union (no. 2). european communities. hair, j. f., black, w. c., babin, b. j., anderson, r. e., &tatham, r. l. (1998). multivariate data analysis, 5(3), 207-219. upper saddle river, nj: prentice hall. karunananda, a., & jayamaha, a. (2011). financial practices and performance of small and medium-size enterprises in sri lanka. proceedings of international conference on business & information. available from: digital repository.kln.ac.lk. lauridsen, j., & mur, j. (2006). multicollinearity in cross-sectional regressions.journal of geographical systems, 8(4), 317-333. maseko, n., & manyani,o. (2011). accounting practices of smes in zimbambwe. journal of accounting and taxation, 3(8), 171 – 181. ohachosim, c. i., onwuchekwa, f. c., & ifeanyi, t. t. (2012). financial challenges of small and medium-sized enterprises (smes) in nigeria. the relevance of accounting information. review of public administration and management, 1(2), 77-99. onaolapo, a., & adegbite, i. (2014). the analysis of the impact of accounting records keeping on the performance of small scale enterprises. international journal of academic research in business and social sciences, 4.http://dx.doi.org.10.6007/ijarbss/v4-i1/506. onaolapo, a. a., fasina, h. t., opoola, n. a., &olatunji, a. (2011). basic accounting one. ogbomosho: johnny printing works. tuan zainuntuanmat and malcolm smith (2011). changes in management accounting practices in malaysia. asian review of accounting, 19(3), 221-242. tzempelikos, n., & gounaris, s. (2015). linking key account management practices to performance outcomes. industrial marketing management, 45. 22–34. yousef, b. (2013). the use of accounting information by small and medium enterprises in south district of jordan (an empirical study). research journal of finance and accounting, 4(6), 169-175. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). https://link.springer.com/journal/10109 http://dx.doi.org.10.6007/ijarbss/v4-i1/506 contents indian journal of finance and banking vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 33 transfer pricing and the regulations in nigerian milieu shafi‟u abubakar kurfi1 noraza mat udin2 usman muhtari tsohuwar kasuwa3 1 department of accounting, umaru musa yar‟adua university, katsina, nigeria 2tunku putri intan safinaz school of accountancy, universiti utara malaysia, malaysia 3department of accounting, umaru musa yar‟adua university, katsina, nigeria correspondence: department of accounting, umaru musa yar‟adua university, katsina, nigeria, e-mail: abubakarkurfishafiu@gmail.com received: july 25, 2017 accepted: august 1, 2017 online published: august 1, 2017 abstract the main objective of this paper is to provide an overview of the transfer pricing practices and highlight the newly adopted regulations on transfer pricing in nigeria. due to the increase numbers of multinational corporations in the country, reports show that the transfer pricing activities by these entities has resulted in economics lost and a large amount of net resources being carried way from the region. these unethical exercises had signal clearly of the serious need to amend the massive leakages of economic resources. over decades, nigeria has worked tirelessly to develop its own transfer pricing formulae and finally the income tax (transfer pricing) regulations no. 1, 2012 (or known as tp regulations) has been published on 21 september 2012. specifically, the tp regulations in nigeria served as the mechanisms that the government through the tax authority can use to combat the misused of transfer pricing practices. this paper also highlights some issues that need to be strengthen and future challenges in implementing the regulations. some recommendations are also provided at the end of the paper to the tax authority and policy makers to enhance and improve the governance of transfer pricing matters in the country. keywords: nigeria, transfer pricing, regulations. 1. introduction nigeria is the most populous country in africawith over 173.6 million people and ranked as seventh most populous country in the world (world bank, 2013). the people, nigerian, comprises of more than 250 different ethnic groups with three major religions which are islam, christianity and traditional religions. nigeria was awarded independency from england on 1october 1960 and encloses more historic cultures and empires than any other nations in africa. african countries nicknamed nigeria as “mother of africa” where it consists of six geographical zones i.e. north-west, north-east, north central, south-east, south-south and south-west. in terms of administration, nigeria has774 local governments, 36 states and abuja as federal capital territory which are all placed under the federal government. transfer pricing and the regulations in nigerian milieu shafi’u abubakar kurfi, noraza mat udin and usman muhtari tsohuwar kasuwa 34 nigeria, a member of the organization of petroleum export countries (opec) since 1971, ranks as the largest oil producing county in the africa and turned as the 17th largest producing oil in the world (oyedele, curtis, sweigart& smallwood, 2013). the united states (us) energy information administration spelt out vividly that nigeria has total oil reserved of 37.2 billion barrels as of 2011.as of 9 march 2007, it was reported that there were about 283 listed companies in nigeria with a total market capitalization of about ₦15 trillion (us$125 billion).according to the research carried out in 2013 by global financial integrity (gfi) and the african development bank, between the periods of 1980 to 2009, african economies lost between us$597 billion and us$1.4 trillion in net resources carried way from the region. this unethical transfer of slush was gained primarily through mispricing transfer. these phenomena signal clearly of the serious need to amend the massive leakages of economic resources from the country (akhidime, 2011).since then, the issue of transfer pricing (tp) has become a prevalent debate from various parties. the government has been urged to set up rules to prevent the activities from getting worst and weaken the nigerian economy. the aim of this paper is to overview the tp practices and highlight the newly release regulations of tp in nigeria. this paper is organized as follows: the next section, section two, presents definitions and prominence of tp, it is then followed by section three which explains the nigerian tax laws on tp and their applications to taxpayers. section four highlights future challenges in implementing the regulations. the final section i.e. section five provides conclusion and some recommendations related to the implementation of the new regulations. 2. ransfer pricing and its prominence transfer pricing is a term used to describe all aspects of intercompany pricing arrangements between related business firms including transfers of tangible goods, services, intellectual property and financial transactions (oyedele et al., 2013).in the us, tp is known as a practice meant to minimize us taxable profits by overpaying foreign subsidiaries for product supplies(new york times, 2006). tpis also referred as intra-firm trade which involves the sale or transfer of tangible and intangible goods between related companies in two or more countries (tang, 1997). a study byonyeukwu (2007) describestp as an issue in contemporary international taxation which has everlastingly continues to befuddle both the taxpayer and the tax authorities. it is permissible for associated companies in the pricing of inter-related transactions within the circumference of the group of companies, but this created a lot of suspicion for the tax authorities, that the pricing may be in a way of shifting the corporate profits which would results to providing room for tax avoidance (onyeukwu, 2007).however, akinla (2014) suggests that tpis the price at which one company buys and sells goods and/or services/resources with a related affiliated in its supply chain. it is clear from the definition that transfer pricing is not a concept exclusivelyrelated to taxation, but when use in the context of international tax, it connotes the artificial manipulation of internal prices within a multinational group with the intention of creating a tax advantage (miller and oats, 2012). on the other hand, sheppard (2012) stress that transfer pricing would never in itself illegal or necessarily abusive, but what is actually illegal or abusive is transfer mispricing which is also known as transfer pricing manipulation or abusive transfer pricing. transfer mispricing is a general phenomenon known as trade mispricing which includes transactions between unrelated or apparently unrelated parties. in general, the main objectives or goals of transfer pricing are: performance evaluation and cost minimization (doupnik and perera, 2010). performance evaluation means to evaluate the performance of both parties on an intercompany transaction i.e. the transfer should be made at a price acceptable to both parties. the consensus price could be determined by reference to outside market prices or it could be determined by allowing the transfer pricing and the regulations in nigerian milieu shafi’u abubakar kurfi, noraza mat udin and usman muhtari tsohuwar kasuwa 35 parties concerned to negotiate the price. the second objective, cost minimization,relates to intercompany transactions across national borders whereby differences between countries might lead themultinational corporations(mnc) the desire to achieve certain cost-minimization objectives via the use of discretionary transfer prices mandated by their headquarters (doupnik and perera, 2010). there are also other cost minimization objectives such as avoidance of withholding taxes, minimization of import duties, circumvent profit repatriation restrictions, protect cash flows from currency devaluation and finally improve competitive position of foreign operations. the basic elements of a transaction which would trigger the transfer pricing implication includes but not limited to the following: commercial transaction, related entities, difference jurisdictions, motive to avoid tax not a pre-requisite (christina, 2010). according to the un member‟s tax committee, there are three (3) basic issues attached to transfer pricing which include jurisdictional, allocation and valuation issues. jurisdictional issues include the challenges of which country should tax the mnc‟s income and what about if both countries claim the same right? if we consider also the case where the tax base arises in more than one country, should one of the countries give tax relief in order to avoid double taxation to mncs‟ income?if so, which one among the countries is the destination of transfer or which one is the source of the transfer? hence, there are some jurisdictional issues which arise as a result of cross-border transactions. in term of allocation issues, there are two perspectives to be considered i.e. mncs and government. from the perspectives of mncs, their resources especially taxable profits need to be allocated with maximum efficiency and with utmost good faith in the most optimal manner as well, whereas for the government, the allocation of costs and income from the mncs resources needs to be addressed to compute the tax judiciously. sometimes these diverse perspectives tend to be a „tug-of-war‟ between the countries in the allocation of costs and resources in the hope towards maximizing the tax base in their respective states. finally, many of the resources for mncs which are sources of competitive advantage for them (mncs) cannot be disentangled from the global income of the mncs for tax purpose especially in the case of intangible and service-related intra-group transactions. the third issues i.e. valuations deals with the valuation of intra-firm transfer. this simply means that the mere allocation of income and expenses to one or more members of the mncs group are insufficient; hence, the income and expenses must also be valued extensively. the above discussions indicate that the transfer pricing regulations are important for developed countries in order to protect the image of their tax base, to eliminate double taxation on mncs and simultaneously to improve international trade. for developing country like nigeria the importance of transfer pricing regulations is to provide a climate of certainty and environment for international trade and at the same time maximize tax revenue which is of paramount importance. therefore, detailed of transfer pricing regulations are necessary in all countries be it developed, developing or under-developed countries. historically, transfer pricing regulations have been captured by many tax systems since 1930s but the us and the organisation for economic co-operation and development (oecd) had some elements of transfer pricing only by 1979 (abdallah, wagdy&maghrabi, 2009). in 1995, the oecd issued the first draft of its transfer pricing guidelines which was also expanded in 1996 and 2010 respectively. while for the u.s, the issue of transfer pricing started since 1988 and the proposal of comprehensive transfer pricing guidelines was came into effect in between 1990 -1992, which ultimately becomes regulation in 1994. the two sets of guidelines are indistinguishable where almost all the countries in the world have adopted these principles. similarly, the oecd guidelines have been formally followed by many european union countries with little or zero modifications (abdallah, wagdy&maghrabi, 2009). transfer pricing and the regulations in nigerian milieu shafi’u abubakar kurfi, noraza mat udin and usman muhtari tsohuwar kasuwa 36 3. transfer pricing in the nigerian milieu general anti-avoidance rules (gaar) has been in the books of nigeria for many decades, (oyedele et al., 2013). specifically, section 17 of personal income tax act (2004), section 22 of companies income tax act (2004 as amended 2007) and section 15 of the petroleum profit tax act (2004) allow the federal inland revenue service (firs) to adjust any transaction i.e. intercompany or between unrelated partieswhich is deemed to produce a result artificially reducing taxable income in nigeria (onyeukwu, 2007). however, until present, gaar were mostly insignificant from a practical perspective. this is because there was no guidance or mechanism to enforce gaar in nigeria. moreover, the lack of mechanism and guidance is due to the inconsistent application of the principles of the original legislation and compounded existing perceptions by some taxpayers that firs is dysfunctional (oyedele et al., 2013). over decades, nigeria has worked tirelessly to develop its own transfer pricing formulae. in 2012, due to the illicit acts of transfer mispricing by multinational corporations, the mother of the continent called nigeria to come up with unique rules to combat the problem. consequently, the firs i.e. the nigerian tax regulatory body invited all stakeholders to a one day sensitization program on transfer pricing rules in nigeria. the main goal of this program was to inform and notify all the stakeholders about the progress made by the tax authority subsequent to the introduction of the income tax (transfer pricing) regulations no. 1, 2012 (or known as tp regulations) which put into effect from 2 august 20121. the regulations is developed based on the oecd transfer pricing guidelines for multinational enterprises and tax administration (oecd guidelines) and the commentary surrounding the development of the united nation transfer pricing manual (un manual). the firs released the draft of transfer pricing rules in may 2012 and the final rules in september 2012. these tpr regulations consist of six (6) parts which spell as follows: part i purpose, objective and scope of application. part ii compliance with arm’s length principles, documentation, advanced pricing agreements and corresponding adjustments. part iii comparability factors and connected taxable persons. part iv application of documents. part v offences, penalties and dispute resolution. part vi supplementary and general provisions. each part of the tp regulations is discussed below in order to show how the regulations will apply to nigerian taxpayers: 3.1 part i purpose, objective and scope of application of the regulations the main purpose of these regulations is to curb the level of transfer mispricing among the inter-related companies within and outside nigeria. these regulations give effect to the provision of: (i) section 17 of the personal income tax act, cap p8; (ii) section 22 of the company income tax act, cap c21; and (iii) section 15 of the petroleum profit tax act, cap 13, laws of the federation of nigeria 2004. 1 the introduction of the tp regulations is one of the innovations of the regulations that introduced advance pricing agreement (apa). unlike oecd tp guidelines which always uses the term „advance pricing arrangement‟, the nigerian regulations adopts the „advance pricing agreement‟ term. notwithstanding the differences in terminologies between advance pricing agreement (for the nigerian regulations) and advance pricing arrangements (for oced guidelines), their goals are inseparable (akinla, 2014). transfer pricing and the regulations in nigerian milieu shafi’u abubakar kurfi, noraza mat udin and usman muhtari tsohuwar kasuwa 37 the objectives of the regulations are: (i) to make sure that nigeria is capable to tax on an appropriate taxable basis related to the economic activities deployed by taxable persons in relation to their transactions and dealings with associated enterprises; (ii) to equip the nigerian authorities with the appropriate tools to fight tax evasion and/or tax avoidance via over or underpricing of controlled transactions between associated enterprises; (iii) to reduce the risk of economic double taxation; (iv) to provide a level playing field between multinational enterprises and independent enterprise doing business within nigeria; and (v) to provide taxable persons with certainty of transfer pricing treatment in nigeria. the scope of these regulations shall apply to all transactions between connected taxable persons carried on in a manner not consistent with the arm‟s length principles including the following: a.sales and purchase of goods and services; b.sales, purchase or lease of tangible assets; c.transfer, purchase, license or use of intangible assets; d.provision of services; e.lending or borrowing of money; f.manufacturing arrangement; and g.any transactions which may affect profit and loss or any other matter incidental to, connected with or pertaining to the transactions referred to (a) to (f) of this regulations. 3.2 part ii compliance with arm’s length principles, documentations, advance pricing agreements and corresponding adjustments 3.2.1 compliance with arm’s length principles the major principles of transfer pricing is usually based on the arm‟s length rules (onyeukwu,2007). the principles of arm‟s length was derived from the concept of “separate entity” to determine taxable income, whereby each affiliate of a multinational organization is treated as an independent entity for the purpose of determining taxable income (urquidi, 2008). under this part, the regulations state that whenever a taxable person has entered into a transaction or series of transactions to which these transfer pricing regulations apply, the person shall ensure that the taxable profits resulting from the transaction(s) is in a manner that is consistent with the arm‟s length principles. 3.2.2 methods of transfer pricing nigerian transfer pricing regulations state that in order to determine whether the result of a transaction or series of transactions are in line with the arm‟s length principles, one of the following methods shall be applied: i.the comparable uncontrolled price (cup) method; ii.the resale price methods; iii.the cost plus method; iv.the transactional net margin method; v.the transactional profit split method; or vi.any other method which may be prescribed and applicable by the regulations from time to time. 3.2.3 documentations under the regulations of transfer pricing, the taxpayers are required to prepare transfer pricing documentation prior to the due date for filing the income tax return for the period in which the documented transactions occurred(oyedeleet al., 2013). alltaxable persons that will be affected must plan for documentation to shows the arm‟s length nature of their related party transactions. the documentations usually include data on the group transfer pricing and the regulations in nigerian milieu shafi’u abubakar kurfi, noraza mat udin and usman muhtari tsohuwar kasuwa 38 structure and activities of the business of related parties, method of pricing adopted and the reason for choosing such methodas well as the information on comparable transactions between the unrelated parties. finally, the regulations also requires that the documentations must be submitted within 21 days of the request from the firs after filing the company‟s annual returns which are due not later than six months after the accounting year-end date. 3.2.4 advance pricing agreements under the regulations, taxpayers can enter into apa with the firs. an apa is a consensus between the firs and the taxpayer in which both agree to the method and way in which related party business will be placed for a specified future period of time. 3.2.5 corresponding adjustments this part of the regulations deals with the adjustments made for income subjected to tax in two different tax treaties i.e. nigeria and other country where the double taxation treaty exist. under such situation, the regulationsstate that the firs may, on request by the connected taxable person subject to tax laws in nigeria, determine whether the adjustment is consistent with arm‟s length principles. if so, the firs may make a corresponding adjustment to the slush of tax charged in nigeria on the income in order to avoid double taxation. 3.3 part iii comparability factors and connected taxable persons obviously, it is difficult to have an authentic data on nigerian (or even african) entities to be used in benchmarking. so,to be fair, the regulations allow taxpayers to use benchmark information from outside nigeria or even africa with appropriate adjustments. the yardsticksto measure whether two or more transactions are comparable are as follows: a.characteristic of subject matter, which includes goods, property or services; b.functions undertaken party i.e. connected taxable persons (ctp) to transactions including assets used and risks assumed; c.contractual terms of the transactions; d.economic condition/context for the transaction; and e.business strategies pursued by the ctp. the definition of taxable person in the regulations includes persons, individuals, entities, partnerships, joint ventures, trusts or associations (collectively referred to as „connected taxable persons‟) and also the persons referred to in the following sections: a.regulations 13(2)(d), 18(2)(b) and 22(b) of the companies income tax act 2004 (as amended); b.section 15(2) of the petroleum profit tax act, cap p13, laws of the federation of nigeria, 2004 (as amended); c.section 17(3)(b) of the personal income tax act cap p8 laws of the federation of nigeria, 2004; d.article 9 of the oecd model tax convention; and e.„associated enterprise‟ referred to the oecd guidelines. 3.4 part iv – applicability of documents the un & oecd documents are made applicable into the nigerian tp regulations in order to assist the interpretative views and capacity leverage for compliance/enforcement by ctps and firs. it is very crucial to be noted that the nigerian transfer pricing regulations shall prevail any other laws, rules, regulations, un practical manual on tp, oecd documents in the event of inconsistency with other regulatory authorities‟ approvals. transfer pricing and the regulations in nigerian milieu shafi’u abubakar kurfi, noraza mat udin and usman muhtari tsohuwar kasuwa 39 3.5 part v – offenses, penalties and dispute resolution the nigerian transfer pricing regulations humbly do not spare any unique penalty for noncompliance with the regulations but the penalties and interest as provided in the relevant acts will however apply to transfer pricing adjustments.the firs currently set up a decisional review panel (drp) solely in order to tackle disputes or controversy that may arise from the application of tp regulations. any taxpayer who has any objection(s) with the rulings of drp on any tp matter has an ultimate right to go to the court of competent jurisdiction in the first instances. 3.6 part vi – supplementary and general provisions 3.6.1 materiality and safe harbor provisions in the nigerian regulations of tp there are no materiality thresholds. however, a taxpayer may be exempted from the documentation requirements by the firsbut not the requirement to transact at arm‟s length. however, the firs agree that when the controlled transactions are conducted in accordance with the nigerian statutory provisions or in instances where the prices have been previously approved by other nigerian regulatory authorities (not firs), the firs may challenge these prices if there is a belief without reasonable doubt that they are not in accordance with arm‟s length. examples of such nigerian regulatory authorities includecentral bank of nigeria, nigerian customs services and national office for technology acquisition and promotion (notap). 3.6.2 limitation on usage of information documentation and any other related correspondence provided by a connected taxable person shall only be used for the purpose of establishing the arm‟s length price in respect of the controlled transactions for which the documentation is supplied. 3.6.3 official language of documents according to the nigerian regulations on tp, the official language for the purpose of any documentation shall be in the english language. however, where a document is not in english, firs may be written notice require the taxpayer to, at his own expense, produce a translation in the english language, prepared and certified by a sworn translator or any other person(s) approved by the firs. 3.6.4 retention of documents all records related to tp including cashbooks, ledgers, journals,cheque books, bank statements, pay slips invoices, stock list and all other books of accounts as well as data relating to any trade carried out by the taxpayer, recorded details inclusive from which the taxpayers returns were prepared for assessment of taxes, are to be retained for a period of six years from the date on which the last entry related to the relevant return was made. 4. future challenges the introduction of the tp regulations is based on the general anti-avoidance provisions in many tax laws in nigeria which requires related party transactions to be conducted at arm‟s length. after reviewing the regulations, it is noticed that there are some issues which taxpayers may find them very helpful if they are specified in the regulations. these includes: (i) a real, authentic and/or unique definition of the arm‟s length range; (ii) the effect of tp adjustments especially on demarcation of income and secondary income taxes (like royalty taxes and dividend) which involve the acceptability of year-end tp adjustments; and (iii) the regulations does not specify the exact and extent to which non-nigerian data will be acceptable for benchmark analysis. the guide related to non-nigerian data is need because due to the insufficient information on nigerian transfer pricing and the regulations in nigerian milieu shafi’u abubakar kurfi, noraza mat udin and usman muhtari tsohuwar kasuwa 40 companies, it is expected that data from foreign companies should be enough and acceptable with appropriate adjustment. there are twenty rules under six (6) parts in the tp regulations which attempt to cover almost all angles of tp transactions in nigeria. many companies have already received letters from the firs asking them to summit their tp policy documents (taiwo, 2014). it is expected that the implementation of tp regulations will face more challenges which includes, among others, are: (i) lack of full commitment in making sure that the rules are applied from rhetoric to action both by firs and taxpayers; (ii) the level of enlightenment by firs to taxpayers is extremely weak; and (iii) the penalty mechanism for any defaulting taxpayers are not even well address in the tp regulations as spelt out in part v regulation 13, this is a signal that the regulations would perish if extra care is not taken. specifically, the tp regulations in nigeria served as the mechanisms that the nigerian government through firs can use in order to combat the size of the figures that taxpayers stash away illicitly via transfer pricing (transfer mispricing). as stated earlier, if this phenomenon is unattended, it will lead to a serious tax evasion if not tax avoidance problem. since the implementation of the regulations is still current, it is important for the firs to make all possible efforts to monitor and enforce to ensure its full compliance by the taxpayers. 5. conclusion and recommendation base on the above discussions, it is perceived that in order for nigerian tp regulations to be effective and benefits the nigerians (both firs and taxpayers), it is recommended that the firs to carry out various educational programmes in order to create and enhance more awareness to the taxpayers and the public as a whole about the value and importance of these regulations and the risk of tax avoidance and calamity of tax evasion related to the tp activities to the nigerian economy. in addition, the regulations 13 and 14 under part v related to offences and penalties by and for the taxpayers need to be emphasized and strengthen to make it clearer in order for the taxpayers to easily understand the offences and punishments for misusing the provisions in the regulations. besides the programmes for the taxpayers, it is also important that the firs to equip the personnel in charge with the tp matters to possess necessary and relevant knowledge to handle and administer the tp matters according to the specified provisions in the regulations. the firs personnel must be made familiar and comprehend all aspects of tp substances in the regulations so that the regulations can be implemented smoothly. taking the advantage of the advancement in information technology worldwide, it is also recommended that the firs to introduce an electronic tp audit (e-tpa) as part of its internal control system. this can be realized by introducing well-designed software for all taxpayers in nigeria to fill it as their tp declaration form electronically to replace the manual system. the electronic system will enhance the efficiency and effectiveness of the assessment process by firs related to tp matters and indirectly encourages the compliance by taxpayers by reducing documentation bureaucracy. as a newly implemented regulations, it is recommended that there are proper and timely evaluation to be carried out by the enforcement body and related authorities in order to determine its applicability and suitableness with the nigerian economics and business environment. other established regulations and guidelines such as the un transfer pricing manual for developing countries and the oecd‟s rules can be taken as a benchmark to revise and improve the regulations from time to time in order to strengthen and established a comprehensive regulations related to tp matters in nigeria. transfer pricing and the regulations in nigerian milieu shafi’u abubakar kurfi, noraza mat udin and usman muhtari tsohuwar kasuwa 41 references akinla, o. 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(2010).international accounting (3rded.). new york: mcgraw hills. income tax (transfer pricing) regulations, no 1 government notice no. 206 page 815-839 21st september 2012 federal republic of nigeria official gazette vol. 99. miller, a. & lynne, o. (2012).principles of international taxation (3rded.). west sussex: bloomsbury professional. new york times. (2006, september 12).glaxosmithkline to settle tax dispute with u.s. retrievedfromhttp://www.nytimes.com/2006/09/12/business/worldbusiness/12glaxo.html oecd.(2010). transfer pricing guidelines for multinational enterprises and taxadministrators. paris: oecd publicationservices. onyeukwu, h. (2007). transfer pricing in the nigerian context.businessday taxation journal.http://works.bepress.com/humphrey_onyeukwu/5 oyedele t., curtis a., sweigart e., & smallwood r.(2013).the impact of nigeria‟s new transfer pricing rules on multinational enterprises.research solution. retrieved from http://www.com/research/xlink?go =tax sheppard, l. (2012). transfer pricing is the leading edge of what is wrong with international tax. tax analysts.retrieved from http://www.taxjustice.net/topics/corporate-tax/transfer-pricing/taiwo, o. (2014, march 4). transfer pricing policy: paving the way for the journey ahead. businessday.retrieved from www.businessonline.com tang, roger y.w. (1997). intrafirm trade and global transfer pricing regulations. westport, connecticut: quorum books. urquidi, a. j. (2008). an introduction to transfer pricing.new school economic review,3(1), 27 – 45. world bank. (2013). retrieved from http://www.worldbank.org/ 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 | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 65 dispute resolution on unauthorized liquidation of futures positions at the leading stock exchange in india: a case study1 bezawada brahmaiah phd professor of finance & accounting icfai business school (ibs), hyderabad, india e-mail: brahmaiahb@ibsindia.org abstract the paper studies compliances of futures trading rules and regulations of the stock exchange .in the derivate market in india. the paper applies case method approach to study the trading practices of trading members of the exchanges. it investigates the derivative market’s misuses and abuses by the trading members of the exchange. the paper provides guidance for the appropriate regulatory framework to curtail violations of rules and regulations in indian derivative market, and enables the investor protection. the results may be generalized in the emerging markets. hence, researchers are encouraged to study results further in other developed countries. the paper finds that these practices are not only violation of trading rules of the stock exchange but also unfair and unethical trading practices. the research findings and results may lack generalizability in a case study approach. 1. introduction this paper is an appeal matter referred to the appellate tribunal by the stock exchange of india ltd (sebi2010). this appeal has been preferred against the award passed by the arbitrators with regard to a dispute between mr prasad reddy (constituent and applicant) and zebra securities ltd, (trading member and respondent) regarding squaring off the client’s open positions in futures segment by the trading member on account of margin short fall. the panel of arbitrators directed zebra securities ltd (zbl), the respondent to pay rs 36.78 million to the applicant through the said award. aggrieved and dissatisfied by the award, zebra securities ltd, the trading member filed the appellate application at the stock exchange. (the arbitration and conciliation act. 1996 1.1ground for the appeal appellant submits that the original panel of arbitrators had incorrectly and arbitrarily upheld its arbitration application, and directed them to pay rs.36.78 million to mr. prasad reddy, the respondent. the purported findings in the said impugned award are based on totally erroneous and untenable assumptions by ignoring the appellant's responses, submissions and facts of the case. appellant further submits that the impugned award is unjust, unfair, untenable and liable to be and ought to be set aside. the original panel of arbitrators had not appreciated the functioning of the stock market, various rules, regulations, circulars etc of the securities and exchange board of india (sebi) and stock exchanges such as bse and nse for collection of margins, the real time facilities provided by the appellant to its clients. the appellant further submits that the impugned award is contrary to the pleadings of the parties and is deserves to be quashed and set aside, on reasons. the impugned award was based on the ipse dixit of the arbitrators. the arbitrators were bound to act and adjudicate according to the principles of natural law. but the award in question was bad in -law and deserves to be set aside. the impugned award is contrary to the principles of natural justice. 1.2 statement of claim by the appellant zebra (hereinafter referred to as "appellant") is a trading member (tm) registered with stock exchange of india ltd. (sei) having the sebi registration and is permitted to trade in all the segments of the stock exchange. it is headquartered in bangalore and has physical presence in all major indian cities. appellant is a leading trading member in the country and the entire trading is completely online using advanced technology. the back office portal allows a client to check his profile details including details of bank account mapped to the trading account and other such personal information using which the account was opened. mr prasad reddy, a constituent (hereinafter to be referred to as respondent) is registered with the appellant in the cash, futures & options, and currency derivatives segments. 1. this paper is based on an arbitration matter resolved at the leading stock exchange of india by the author. names of client (respondent), trading member, (appellant), and exchange were disguised to preserve confidentiality. the facts and circumstances were remained same to maintain originality of the case matter. the arbitration mechanism of the stock exchange is framed under the arbitration and conciliation act, 1996 of india. keywords: dispute resolution, arbitration, futures trading, stock exchanges. . copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 66 1.3 brief description of the dispute the account status of the respondent as on august 09, 2017 and the positions were  30,000 quantity of india motors august 2017, futures series  30,000 quantity of india motors september 2017 futures series and  30,000 quantity of india motors october 2017 futures series. the quarterly financial results of india motors ltd were announced after market hours of august 09, 2017. there was a sharp fall in prices of india motors ltd future contracts on august 10, 2017. the mark to market (mtm) loss on account of sharp fall in prices of the said positions was to the tune of inr 14. 00 million. the loss increased during the day as the prices were falling and the mark to market (mtm) loss of august 10, 2017 was inr 32.76 million. appellant squared off 75,000 shares of india motors futures consisting of 30,000 shares of india motors august 2017 futures series, 30,000, shares of india motors september 2017 futures series and 15,000 shares of india motors october 2017 futures series of the respondent’s positions at 09:25 am on august 11, 2017 on account of shortfall in margins for trading day of august 10, 2017. appellant submits that all the efforts were made to intimate the respondent about margin requirements and intentions of squaring off his positions for want of margins. sms's regarding breach of margins was sent on august 10, 2017 and the "funds" sections of the trading platform clearly show the margin requirements of the respondent on a live basis. web notifications on the trading terminal regarding shortage of margin were continuously shown to the respondent; and the margin statement, which gave the client an additional two hours between 07:30 am and 09:30 am to bring in additional funds to avoid any square off. only after receiving of all such segment wise files, the trading member can complete the trade process and send the margin statements to clients. the appellant generates margin statements post 09:00 pm on a daily basis. after completion of process at the back end at around 09:00 pm, the appellant emails the margin statements to all clients as daily practice. appellant further submits that rights and obligations of stock brokers, sub-brokers and clients as prescribed by sebi and stock exchanges, are required to do trading as per the rights and obligations as prescribed by the sebi. 2. statement of defense by the respondent respondent submits that he has received margin statements, from appellant on potential shortfall of funds on august 9, 2017. accordingly, respondent has arranged inr 7.00 million, through online transfer before 09:00 am on august 10, 2017. after that the respondent has not received any communication from appellant on margin short fall until the morning of the august 11, 2017. appellant usually sends margin statements every day without fail, after the market closure of the day or before market opens on the next day. respondent follows these emails to track the fund balance and arrange funds for any short fall in margins. respondent has not received any margin statements or contract notes for august 10, 2017 until august 11, 2017. respondent received a sms from appellant on august 11, 2017 at around 09:15 am for the shortfall of margins and immediately he logged into his email to find contract notes sent at 07:00 am on the same day. he was in the process of mobilizing funds from his bank accounts such as hdfc bank ltd, state bank of india and axis bank ltd. due to balance transfer limitations, he could transfer only rupees one million at a time from state bank of india and rupees five million at a time from axis bank. although he has the credit balance in his account with the appellant is coming down due to under performance of india motors shares, there was no short fall of account until first quarterly results on august 10, 2017. the account went into debit balance in margins for the first time on august 10, 2017. respondent submits that while he was in the process of arranging funds to transfer, appellant liquidated 78,000 shares of india motors ltd futures in his account at market price. as the sell orders were placed at market price, the shares got executed at substantial lower prices causing the stock price to hit 52 week’s low price. the bulk sale of shares at market price created pressure on the stock price and pushed down the prices of the stock significantly. this unwarranted sale has caused severe distress, and resulted huge financial loss to the respondent. at that time his account had several equity shares worth of about ten million rupees which are sufficient enough to cover the negative balances. the email for the margin statement was sent by appellant only in the early hours at 07:44 am on august 11, 2017. he took a note of the email at around 09:00 am and initiated the process of money transfer, before which the appellant liquidated his long positions. this essentially gave only 90 minutes time to arrange for the margins shortfall, which was contrary to the guidelines prescribed and stipulated by the nse. appellant could have used his equity holdings as collateral to hold off any hasty sell off. instead, appellant liquidated all his positions of futures segment. he has one full day of august 11, 2017 to arrange funds for the short fall in margins. as per point 1.7.1 of the guidelines, stock broker can liquidate the securities if the client fails to arrange the funds after a day's time for the client to arrange funds. in this case the margin short-fall was calculated by the end of day on august 10, 2017 and the liquidation was carried out in the early trading hours of next trading day on august 11, 2017 without giving enough time as per the provisions of sebi and nse guidelines. the india motors stock price was inr. 380/per share, on closure of august 10, 2017 and price at the time of liquidation was inr 360/per share. the appellant failed miserably to comply with the liquidation guidelines of nse, in not providing sufficient time for the client to respond and arrange funds to support margin shortfall. giving time till closure of market on august 11, 2017 would have kept the margin short-fall almost at the level of the short fall on august 10, 2017. it is possible that appellant or its employees sold their shares and the same time either to buy the shares or short options at the same time to get guaranteed outcome for their personal transactions at the cost of his shares. respondent requests a thorough investigation of possible foul play by the appellant in the derivative market. . in view of the copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 67 development, respondent also requests the arbitration panel to advise the stock exchange and sebi to investigate any possible malpractices involved in these transactions. appellant was normally very punctual in sending margin statements on a daily basis. the fact that the communication was not sent on august 10, 2017 and that the appellant choose to communicate the margin statements at a short notice so gives scope to believe that he should not get an opportunity to go through the communication for making necessary arrangement for funds. it also makes him to believe that the communication is withheld intentionally so as to give appellant and its employees the opportunity to sell of these units. (sebi 2012)respondent submits that appellant had enough time till the end of the day to ensure margin guidelines set by stock exchange. having taken all these considerations, appellant could have avoided hasty sell-off at lowest price. respondent contends that the appellant had no right to liquidate the positions. therefore, respondent pleads the arbitration panel to direct appellant to refund inr 41.35 million towards the losses incurred by him. respondent claimed inr. 36.35 million towards losses incurred by him and inr 5.00 million towards mental agony, totaling inr 41.35 million. respondent requests panel of arbitrators to consider the interest on compensation from the day of his loss till realization of the award. 3. findings and award of the earlier panel of arbitrators the original panel of arbitrators observed that margin requirements are worked out on the basis of end of day closing prices of stocks. admittedly, the margin statements would be ready later in the night and could be sent only by the next day. as such, the client could not be expected to work out the complex span margin, dynamically and take appropriate corrective action. the respondent cannot set aside the responsibility to provide the margin statements promptly so that the clients can take the required action. the sms messages sent by the respondent did not provide details regarding the extent of shortfall and the amounts required to make good the shortfall. . since the applicant in this case was taking active steps for remitting funds promptly, it would be preposterous to consider it as a case of non-payment of the dues or shortfalls in margins. it is observed that the sms message was sent as late as 09:25 am on august 11, 2017 urged the applicant to remit the funds to avoid the danger of squaring off. at the very same time the risk management team of the respondent had squared off the position. it, therefore, is surprising to note that that on one hand the respondent asked the applicant to replenish funds immediately, and simultaneously liquidated the position. the applicant had equities worth about inr l0.00 million in his account. even if there was further erosion in the margins, the respondent could have exercised his lien on these securities to compensate the short fall in margins to that extent. it is therefore; felt that the respondent had acted in undue haste to liquidate the positions of client, causing him huge losses. arbitration members had considered the highest quotes for the share during the contract periods, based on which, the sale value for 78 ,000 shares of india motors worked out to inr 321.60 million. as against this, the respondent realized inr 284.82 million for liquidation of 78000 shares of india motors. 4. analysis, observations, findings and conclusions of present panel arbitrators as per the submissions made by the appellant, it is observed that the cash balance available in account of respondent as on august 09, 2017 was inr 44.43 million and margins blocked for such position held by the respondent was inr 47.38 million. as a result of this crystallization of higher margin, the account of respondent with appellant moved to debit (negative) balance of (inr 2.94 million.). the financial position as on mtm losses based on the closing prices on august 10, 2017 was (inr 32.76 million) and cash balance available in account as on august 10, 2017 was inr. 44. 43 million and net cash balance available in the account as on august 10, 2017 was inr 11.67 million. the margin shortfall on closure of market as on august 10, 2017 (daily trading/settlement day) was inr 30.50 million. this was due as on august 10, 2017 and has to be payable by the respondent (on t+1 basis) on august 11, 2017 and not on august 10, 2017. margin payment day and settlement day for mtm (t+1) was august 11, 2017 not august 10, 2017. this is evidenced and confirmed by the nsccl circular no 75/ 2017 dated july 05, 2017 on subject: f&o monthly settlement schedule for august 2017(sebi 2017). it is very clear that initial margins and exposure margins are to be collected from the clients on upfront basis i.e., before taking positions in the futures market (stocks futures /index futures). initial margin includes for two days var to compensate the one day delay (one day time given to client) for collection of mtm. mtms are collected on t+1 day basis. as per national securities clearing corporation ltd (nscl) circular no 75/ 2017 dated july 05, 2017, the august 10, 2017 was the daily settlement date for the trading day of august, 09, 2017 and the august 11, 2017 was the settlement date for the trading date of august 10, 2017. the appellant and its team members in compliance department and risk management either ignored these margins rules, regulations, settlement obligations and settlement days or not aware of the same. it seems appellant confused on different margin calculations and collections management for futures and options segment. the margins rules and regulations are very clear on calculations, collections and timing of collections. appellant instead of following nse’s margin rules and regulations, and adhering to the schedule for collection and settlement obligations, appellant was relying on its arguments on other issues such as terms of agreement and clauses of disclosure requirements client has to make payment on t+1 day, respondent has time to make margin payment (short fall of margin/ mark to market losses) till august 11, 2017 provided appellant informs the same to the respondent. it is noticed that appellant didn’t send the contract notes, margin statements and margin obligations to the respondent after closure of the market on august 10, 2017 but these were sent to him in the early hours of august 11, 2017. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 68 risk department of the trading member without knowing the settlement obligations, payment obligations and settlement cycle i.e., and without informing the respondent, liquidated all the positions of respondent within ten minutes of market opening since it has access and control over the client’s open positions and its trading system. this was nothing but an unauthorized trade. appellant indulged in unauthorized trades in the account of the respondent. these are leveraged transactions which are created and traded with 20 to 30 per cent of the exposure or traded value. appellant had squared off 75,000 shares of india motors hurriedly and recklessly within ten minutes of the market opening. as result of the heavy selling at the counter, the price of india motors crashed and it hit 52 week’s low (yearly low) and respondent suffered huge losses. trading member has to take the full responsibility of meeting margin obligations on real time basis after having opted for trading membership in futures and options segment. trading member is primarily subjected to the rules and regulations of the stock exchange at first level and indian contract act 1872 would apply if there no rules and regulations on these issues. contrary to this, the appellant claims that it had adhered to the terms and conditions and clauses in the disclosure requirements. it is not tenable and does not form valid grounds or any substance in this matter. all trading members are subject to stock exchange’s rules and regulations at first level and therefore, any contrary terms and clauses in the agreements to the nse rules and regulations, the terms will not have any validity and substance. the issues before the present panel of arbitrators is whether the appellant is within its rights to square off the open position of the client on account of shortage of margins or not. it is concluded that appellant is not justified in liquidation of respondent’s open positions. as per extant rules and regulations of the stock exchange, respondent had time till august 11, 2017 to meet the mtm margin obligations belonging to the trading day of august 10, 2017. hence, there was no question of default in pay in obligations by the respondent. therefore, appellant doesn’t have the right to square off the position of the respondent. the tribunal did not consider the compensation of inr .5.00 million towards mental agony as this is not under the jurisdiction of this tribunal. while calculating the losses and compensation, the original panel of arbitrators had taken the highest quotes for the scrip during the contract periods, based on which, the sale value for 78000 quantities of india motors. the tribunal is of the opinion and view that it is difficult for seller to sell at highest price of the series/month as well as it is difficult for buyer to buy at the lowest price of the series/month. occasionally, liquidations and square off takes place at lowest prices as these were sold by trading members not by investors/clients. therefore, we are taking average closing/settlement price which is arrived by adding highest closing/settlement price and lowest closing/settlement price of the series/month and the same is divided by two is considered. the respondent suffered a loss of inr. 28.95 million on account of unauthorized trading indulged by the appellant. therefore, this loss has to be borne by the appellant, and the same has to be reimbursed to the respondent on the principles of equity, fairness and natural justice. 5. recommendation and award in view of the foregoing submissions, hearings, and arguments of the both parties, and on the basis our findings and conclusions, the loss incurred by the respondent on account of unauthorized liquidation has to be borne by the appellant. therefore, the panel of arbitrators passed following award. the award passed by the original panel of arbitrators is quashed and set aside. the appeal filed by the appellant is dismissed. the appellant, zebra securities ltd is directed to pay inr 28. 95 million with an interest rate of 12 per cent per annum for the delayed period i.e., from the date of the payout for squaring off the transaction day references sebi. (2010). arbitration mechanism in stock exchanges. no. cir/mrd/dsa/29/, 1-4. the arbitration and conciliation act. 1996, 1-26. sebi. (2012). rights and obligations of stock brokers, sub brokers and clients issued by the sebi, mu2.mbai, 1-15. sebi. (2017). prevention of unauthorized trading by stock brokers, september 26,pp. 1-2. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess 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 | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 14 why private sector led financial inclusion cannot work for development? case of micro credit in india seema sahai research fellow public policy, management development institute, gurgaon, india e-mail: seemassahai@gmail.com rupamanjari sinha ray assistant professor economics area, management development institute, gurgaon, india e-mail: rupamanjari@mdi.ac.in s k tapasvi professor public policy, management development institute, gurgaon, india e-mail: tapasvi@mdi.ac.in abstract this paper analyzes the potential of the private sector-led micro-credit business to impact poverty. despite the financial and policy support by donor agencies and multilateral agencies microcredit has not been able to create a positive impact on household income. the study concludes that the credit policy of private sector providers is not designed to create a substantial impact. microcredit is a business model for doing business with the poor. all aspects of a credit policy including selection criteria, appraisal process, and product offered, and loan amount serves the interest of the lender and not that of the client. 1. introduction there has been a paradigm shift towards outsourcing development by involving private players in resolving development issues-particularly in developing countries. governments across the globe and multilateral agencies are increasingly practicing this policy shift. the premise is that it will bring better results due to the efficiency and availability of funds. this paper is an attempt to examine this policy shift by examining the policy of financial inclusion through private micro finance companies (mfi) in india. 2. the innovation called microfinance the premise underlying the concept of microcreditas conceptualized by mohammad yunus, is that poor lack capital and microcredit would help them invest in productive activity, enhance household income and resultantly reduce poverty. this simplistic solution to the complex problem of poverty has evoked overwhelming support for microcredit from policy quarters including governments across the globe, the united nations, world bank, and donor agencies. mohammad yunus conceptualized the microcredit model to make the poor bankablethat isthe loan lent to the poor is repaid. improvising the gaps in the existing banking system an innovative business model for lending to the poor in a sustainable way was developed. no principles of prudent banking were compromised--only their format was changed. thus, physical collateral was replaced by social collateralwherein group members stood guarantee for each other; weekly repayment schedule replaced monthly repayments to match the cash flow of poor; doorstep banking was offered. these changes made borrowing easy for the poor. for the lender, this business model ensured repayments and a reasonable margin to cover the high transaction cost of small ticket size of loans. the rate of interest charged by the microcredit providers was lower than the private sources like money –lenders. the hence higher interest rate was acceptable and even welcome by borrowers and policymakers. this easy availability of credit for poor facing constant cash crunch at the bottom of the pyramid on the one hand and a profitable business opportunity for the lender on the other made microfinance truly a winwin proposition as termed by prahlad (2004). thus, microcredit is truly a marketbased solution to financial inclusion. un has also approved and promoted the private sector-led poverty reduction initiatives in financial inclusion. since the original intention for developing a micro-credit business model was to help the poor move out of the poverty cycle by keywords: microfinance, financial inclusion, impact of microfinance, microenterprises. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 15 providing them credit support that philanthropic image continues to be associated with microcredit. this image helped mfis to attract funds and policy support from donor agencies and multilateral agencies in the hope of helping poverty eradication. but the studies carried out to assess the impact of microcredit has a different story to tell. 2.1. impact of micro credit on the beneficiaries most recently six experimental studies or the random control trials (rcts) carried out in different parts of the globe concluded that the impact of microfinance is at best modestly positive and not transformative (banerjee et al., 2014). even that modestly positive impact varies amongst the clients with as high as 25% of clients reporting even negative profits (crepon, 2011). these studies are conducted in six different countries (ethiopia, india, mexico, mongolia, bosnia, and morocco); conducted on both urban and rural population; used experimental methods (rcts) to minimize the methodological weaknesses like self-selection bias and choice of control group; and have done both individual-level and area-level randomization to take into account the spillover impact. despite these variations, the conclusions are the same that there is no transformative impact. these rcts have put a stamp of confirmation on findings of earlier studies (yunus, 1998; sinha, 2007). there is no conclusive proof of the positive impact of microcredit (duvendack et al., 2011; chowdhury, 2009). 2.2 impact on the micro credit providers on the other hand, the microfinance industry has shown tremendous growth in terms of the number of clients and the amount of loan disbursed. the global microfinance sector is expected to grow by 15-20% in the year 2015. a growth rate of 44% in the credit amount and 23% in client base was registered in the first quarter of fy 201516 against the same period in fy2014-15 as per microfinance industry association in india 'mfin'. the reason for this incongruence in the growth of microfinance providers and that on the clients is obvious. microcredit offered a new business model for the lender and not for the poor. sustainability of the lender and not that of the poor was ensured. for the poor, the model just assumed that the poor lack capital and credit would help them find the way out of poverty. this leads us to question two basic premises put forward by the microcredit modelone-whether credit as a development intervention help poor enhance their income, and second, the private sector-led intervention for financial inclusion. many studies have recognized the limited role of credit (nichter & goldmark, 2009; kuzilwa, 2005; chowdhury, 2009). this paper analyzes the second premise underlying the microcredit modelthat marketbased solutions can help achieve the goal of poverty eradication if there is a tremendous growth of lender and no growth of borrower then we need to question whether this incongruence has its genesis in the microcredit business model itself. the model focuses on the sustainability of the lender. the sustainability comes from a reasonable profit allowed in the model. this further leads us to question whether this profit motive and commercial interest are the reason for the lack of impact? this premise is the basis for policy support for microcredit. many scholars (bateman & chang, 2008) have questioned the microcredit model on this ground. to analyze this premise, we arrive at the research question: is there incongruence between the commercial interest of the mfis and the impact on the household poverty level? in india, 96% of total microcredit borrowers are covered by 'for profit' micro finance institutions (mfis) (mcril, 2014)another confirmation of dominance of commercial interest of lenders. to put things in perspective it is pertinent to point out that mfis are just lenders. since the role of credit as a development initiative is limited as mentioned above so it is unfair to hold mfis solely responsible for the overall lack of impact. mfis are lenders; so it is fair to analyze the credit policies pursued by the mfis to understand whether the credit policies can meet the capital requirements of the poor for carrying out the productive activity. cohen (2002); meyer (2001) have analyzed the credit policies to enable the mfis to sustain themselves because of increased competition. this study aims to analyze the credit policy to understand whether the sustainability and commercial interest of the lender is compatible with the objective of adequate credit support to the productive activity of the poor to come out of the poverty cycle. the microfinance model proposes the loan has to be for productive purposes. in india government has stipulations that 85% of credits by mfis must go for productive loans. in the paper, we look at the possible support that credit can give to the productive activity of the poor. poor carry out these productive activities through their microenterprises. micro enterprises are most aptly defined as the enterprise of poor (adb, 1997). the objective of the study was to analyze the credit policy of mfis in terms of their client focus and potential to fill the capital gap faced by the poor in starting and running their micro-enterprises. 3. methodology this study analyzed the credit policies of three microfinance institutions. all three microcredit providers were 'for profit' non-banking financial companies (nbfc). we name these as mfi 1, mfi 2, and mfi 3. the credit policy shared by management was analyzed. borrowers of each mfi were interviewed to understand their experience and perspective. fgds and personal interviews of clients were done. application forms, appraisal forms, and mfi branch office records were perused. content analysis of data was done. the area of operation of mfi 1 was the state of rajasthan in india and the area of operation of mfi2 and mfi 3 was the state of uttar pradesh in india. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 16 credit policy was to be analyzed in its potential to create an impact on micro enterprises. the impact was measured through the growth of microenterprises. indicator of growth was employment generationa well-accepted indicator of growth in existing literature (nichter & goldmark, 2009). 4. findings the evidence strongly proved that microcredit policies are not designed to create an impact for the micro-enterprises supported by them. all three mfis had exactly similar lending policies except for the loan amount, which varied marginally between inr12000to inr15000. borrowers were associated with the mfi for a minimum of 2 years in all cases. credit provided by mfis is an important source of credit for the borrowers. it is a cheap and hassle-free, easily available loan as compared to any other source of loans. this loan was timely available. all clients had clear calculations about the comparative cost of different sources of funds like private lenders and mfis. borrowers found this loan cheaper as compared to other sources of funds. even if microcredit was not available due to a shortage of funds in mfi (as was the case in mfi 1 at the time of the study) the clients were ready to wait for it rather than going to private moneylenders. not only was this loan cheap it was also easily available at the doorstep saving the borrowers the problem of running around for a loan. the loans offered by government banks were much cheaper but borrowers didn't go to government banks. the opportunity cost was of approaching government banks was high because it resulted in wastage of productive time. in government bank systems were complex and the bank staff was non-cooperative. against this, mfi loan officers visited the clients at the doorstep and were responsive and cooperative. loan executives in the field have good relations with the borrowers. moreover, the loan is considered as fair, transparent and honest. clients were confident that if they fulfill the criteria then they should get a loan without any hassles. in absence of any other credible alternative source of the loan, mfi loans are welcomea fact confirming the observations by cohen (2002). despite this, we find that growth (employment generation) could not be attributed to credit. the policies are top-down and true to the observations by cohen (2002) are not in alignment with the business needs and heterogeneity of the micro-enterprises. the growth-oriented enterprises already had employees or full-time employment for family members before they opted for the loan. there was not a single case out of 205 respondents where growth could be attributed to microcredit. all enterprises, which showed growth, had done so before getting the loan. the main reasons for this lack of growth are as follows in the next section. the lending policy is and guided by the business interests of the mfi rather than the business interests of the micro-enterprises as reflected in the following aspects of credit policy. 4.1 eligibility criteria of a borrower the eligibility criteria of all the mfis included: ▪ the enterprise should have existed for at least a year. ▪ the household must own a pakka (brick and cement) house, ▪ the client must be a permanent resident of the area. all the clients fulfilled these criteria. these pre-conditions for client selection are prudent lending norms and ensure repayments but these selection criteria could not create a transformative impact. firstly, the impact of credit can be transformative only if a productive asset is created. but as per the eligibility criteria, the investment in the productive asset was already done. so transformative change if any could not be attributed to credit. further, the condition requires that the enterprise has not only made that investment but it has sustained for a year. the micro-enterprises are vulnerable enterprises with thin margins. the enterprise that has made an investment in start-up and survived a year has already crossed the most vulnerable period when it needed the capital support the most. in such cases, capital support comes from own resources. only those who already had capital could survive. crepon et al., (2011) have also noted in their study on the al amana program in morocco that financing is done only for existing activities with a track record. this also leaves the theoretical client of microcredit who needs credit for productive assets out of the scope. next, the condition of a household with a pakka house categorically leaves the very poor out. sinha (2007) has concluded based on a study of the top 20 mfis in india that approximately 35% of clients are not even poor. so, it is not logical to expect a dent in poverty with this credit policy. further, these selection criteria make the choice of eligible borrowers very limited. all mfis target the same set of borrowers. this fact has been confirmed in many studies. a study by mcril, 2012 has found that as many as 40% of the clientbase of the microfinance sector in india as in march 2011 is due to overlapping of clients. this phenomenon of 'shg poaching' (instead of finding new clients mfis lend to the trusted members of existing shgs developed for government lending programs) has been one of the major reasons for multi borrowing and over-indebtedness of poor clients. this practice and resultant heavy indebtedness has been noted in studies and also by the government. this practice, on the one hand, makes the eligible client vulnerable and on the other hand, leaves the poor client outside the scope of mfi business policy. that was the reason that the reserve bank of india limited the number of loan accounts of borrowers to two. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 17 thus, we found that due to the selection criteria of mfis the impact is bound to be low or negligible. firstly, because it selects only preexisting units, which have already invested in the productive asset. secondly, the very poor client is out of the scope of a 'for profit' mfi. 4.2 loan appraisal system the mfis appraisal process does not take into account the enterprise business needs. a perusal of the forms showed that the loan appraisal forms does not have columns for assessing the enterprise business needs like working capital gap, gestation period, or expected cash flow of the business or even the scope of the activity. rather it has columns for assessing present repayment capacity of the clients like present household income, number of earning members, number of vehicles, etc. the present repayment capacity rather than future expected cash flow is the criterion for appraisal of the client. for instance, if a client can afford to send children to english schools (english medium schools which are costlier than vernacular medium schools) and the household owns a two-wheeler, she/ he is more likely to repay the loan. since the payment does not come from the enterprise income enterprise growth is not the concern of the mfi. the loan is given for existing units hence obviously there is no appraisal for the fixed asset requirement of the enterprise. but more importantly, the appraisal system does not have provisions to consider even the working capital gap for an already running enterprise. based on the analysis of application and appraisal form, and field-level appraisal processes the study finds that the appraisal system is more of an exercise in baseline data collection about the household, and checking the references and antecedents. this simplifies the appraisal system and decision-making. this facilitates scaling up but this system eventually leads the impact to be limited to consumption smoothening. thus the guiding principle for loan appraisals is to support the mfi business interest and not the business interest of the micro-enterprises. 4.3 single loan product thirdly, there is a single loan product on offer while enterprise needs vary significantly. the mfi product list might have more products but for all practical purposes, all mfis have only one product to offer for a particular area. there is no flexibility and the credit product offered has a similar loan amount, repayable in a similar repayment period, with similar installment amount, and similar terms and conditions for all the borrowers in all three mfis. the heterogeneous needs of the enterprises are not taken into account while designing the product. for example, the respondents interviewed had different occupationsphotocopier, a tailor, a beauty parlor, and a welderto name a few. these occupations have a huge difference in investment needsa photocopying machine costs above inr 100,000 and a sewing machine costs under inr 5000 but all were given similar loan amounts of inr 15000. even repayment programs have no flexibility to accommodate the gestation period of activity. for example, a retail shop may not require any gestation period but a manufacturing enterprise or an artisan may require different gestation periods. since the repayments start immediately first few installments are paid from the loan amount itself. this further reduces the loan amount available for investment. similarly, the growth potential of different enterprises is not considered. an already established enterprise catering to a value chain like potato storage or zardozi embroidery has a higher scope of growth as compared to an enterprise, which is doing a home-based activity and catering to neighborhood demand like home-based kirana shop. a product designed to cater to the credit needs of enterprises with more scope may lead to higher employment generation while the lack of a wellsuited product may hamper the growth prospects. but the assessment of the growth potential of the enterprises is beyond the scope of the mfis. these single products are easy to administer because the loan officer collects similar installments from all the borrowers, calculation of emis are easy, and defaults are easy to detect. this leads to lower staff requirements for the mfi. thus, the focus of mfis is on homogeneity for easy administration of loans and not the enterprise needs. this policy can do well for cost optimization for the lender but cannot bring about a transformative change for the enterprise. meyer (2002) has rightly pointed out that "the one-year working capital group loan made to poor women with weekly installments and little or no grace period is the bread and butter product for most bangladeshi mfis. the advantage of this product is that it is easy for clients to understand, for loan officers to manage, and for mfis to maintain internal control with manual bookkeeping systems". thus, the policy is guided by the profit considerations of mfi and not the growth of the enterprise. a few studies have focused on the impact of flexible repayment period on enterprise performance. these studies find, given a grace period, enterprises can show higher returns as they get the opportunity to invest in illiquid assets (field et al., 2013). in our study, however, we find that there is no scope for such a decision, as the investment decision is not taken based on the loan. this is a policy common to all the mfis indicating that a single uniform product is a rule and not an exception. besides other studies like cohen (2002); meyer (2001) has also noted similar observations. this policy again does not have the potential to bring about any substantial change in household income. 4.4 inadequacy of loan amount fourthly even this single product offers an inadequate amount of loan. under financing is not a good lending practice as it throttles the growth prospects and leads to further indebtedness. all the entrepreneurs found the loan amount inadequate. it was inadequate to create even average income-generating investment. for example, while a buffalo costs more than rs copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 18 40,000 the loan amount was just rs 1200015000. there were cases that those who could not manage the balance amount bought a calf instead. by the admission of mfi field staff, the amount offered was not sufficient to start a new profitgenerating enterprise. adam & bartholomew (2010) in a study of the impact of microfinance in ghana has also mentioned a small loan amount as a reason for the inability of the borrower to repay the loan amount. since the loan amount is inadequate for productive asset creation, and the enterprise has already created the asset, the loan was used mostly as working capital. it was used to replenish the stock in case of traders or raw material in the case of manufacturers or consumables in the case of enterprises like mechanic and motor winders. the role of working capital cannot be undermined for any enterprise hence this loan could help the enterprises as a source of working capital. but the loan amount was inadequate even as working capital enterprises that are part of value chains have constant demand and a higher loan amount can help them grow and generate more employment. these clients wanted higher amounts and were ready to repay a higher amount on the same terms and conditions. similarly, enterprises carrying out high investment work like furniture making were ready to repay 5-6 times higher loan amount within the same repayment period because a higher loan amount would give them leverage to earn in peak period and prepare for the next season in advance. these enterprises are high investment businesses and cannot do with a small loan amount. the loan amount is insufficient to meet the peak season demand even for general merchant shops that have to stock for festival seasons. the capital crunch was mentioned as the single most important reason by the enterprises as a reason for laggard growth. multiple borrowing from another mfi was availed by all growth-oriented enterprises and survivalist enterprises wherever it was available. with the constant need for funds and limited loan amount and with all mfis offering a loan with similar terms multiple borrowing was a convenient option. meyer (2001) has mentioned the same reason for multiple borrowings in the context of bangladesh mfis. this inadequacy also leads to borrowing from expensive private sources, which further erodes the already thin margin. the inadequacy of the loan is again strong evidence of the credit policy being indifferent to client needs. such a policy cannot bring about substantial change. 4.5 fungibility of the loan amount the study finds that in all the enterpriseswhether growth-oriented enterprises or survivalist enterprises the loan amount constituted a small part of total investment in the enterprise. the loan amount was part of the household corpus of funds and was rotated and used as per household priorities. cohen (2002) has also pointed out that since clients do not have any control over the product, they adjust their needs according to the loan amount. this applies to both growth-oriented enterprises and survivalist enterprises but more to the growth-oriented enterprises. in this study, we find that diversion of the loan amount was found more in households with higher income. the entrepreneurs that have no other source of capital were more likely to use the loan amount in the enterprise. growth-oriented enterprises or those who had multiple sources of income used the loan amount for other activities like purchase of motorcycle, or spouse’s business or marriage in the household. thus, clearly fungibility is not the reason for lack of impact. this fact was in knowledge of mfi officials also but since it did not impact the repayment performance there was no reason to check the practice. the loan amount was small and it could not impact productivity anyway. we find that fungibility does not impact repayments. this finding truly reflected the observation by dichter (2007) that money is fungible and can be used for anything and the poor use it to iron out the highs and lows of cash flow leading to consumption smoothening. this does not confirm the general perception that the fungibility of funds is a reason for low impact. 4.6 agri-business advisory service two of the three mfis offered additional services like agri-business advice for helping the borrower grow. these services were not complementary but were another product of the mfi. there were no takers for these services as per the admission of mfi staff. as a rule, borrowers either did not know that the company (mfi) had any service to help them or there was clear disinterest amongst those who knew about it. clients do not want to pay for a service, which does not bring immediate results. secondly, the credit is given for already running enterprises so the chargeable advisory service was not adding to a skill set. studies like augsburg (2008) have found these services to be even loss incurring for the clients. all these reasons together lead to a lack of interest in agribusiness services. that explains the reason for findings in earlier studies that credit plus services are supply-driven and have no positive impact on growth. more importantly, we find that even mfis are not aggressively promoting these services. one reason could be that these do not bring immediate high returns, as done by the financial services. 5. conclusion the findings explain why majority studies have found evidence that the impact of microcredit program is just consumption smoothening and not substantial growth in income. this is because mfi credit policies are not designed to create a transformative impact. cost-cutting and resource optimizationnot the focus on the growth of an enterprise, guide the copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 19 credit policy of the mfi. highly standardized products are offered without taking into account the needs of the clients. mfis prefer clients with a certain standing and those who have already invested in the productive asset. secondly, the appraisal is done based on the present repayment capacity and not based on the growth prospects of enterprises. thirdly, a single product is offered without taking into account the varied enterprise business needs. fourthly, the loan amount is too small to cater to even the working capital needs of the enterprise. finally, credit plus programs have remained supply-driven and do not cater to the actual requirements of the clients. based on these we conclude that the microcredit business model may be good but credit policies of mfis cater to the profit motive of mfis and not to genuine business needs of the microenterprises. at the same time, we find that microcredit is a welcome loan. the positive role of microcredit cannot be negated even if it brings about just consumption smoothening. handling vulnerability is equally important as poverty is dynamic in nature and the slightest reason can push those above the poverty line to below it. microcredit can address transitory poverty. but assigning the responsibility of poverty reduction to private sector-led financial inclusion is not justified. this study concludes that mfi is a successful vehicle for financial inclusion at the bottom of the pyramid. but the expectation of poverty reduction through micro-credit is based on the wrong premise. the government cannot outsource development and poverty reduction to mfis. reference asian development bank (1997), asian development bank microenterprise development: not by credit alone, asian development bank, manila. adams, s., & bartholomew, t. a. (2010). the impact of microfinance on maize farmers in nkoranza (brong ahafo region of ghana). journal of management research, 2(2), 1. augsburg, b. (2008). microfinance plus–impact of the ‘plus’ on customers’ income in rural india. maastricht graduate school of governance, university maastricht, the netherlands. banerjee, a., karlan d., zinman j. (2014). six randomized evaluations of microcredit: introduction and further steps, american economics journal, (1), 132. bateman, m., & chang, h. j. (2008). microfinance illusion: mimeo. university of juraj dobrila pula, croatia, and university of cambridge, uk. chowdhury, a. (2009). microfinance as a poverty reduction tool: a critical assessment. cohen, m. (2002). making microfinance more client-led. journal of international development, 14(3), 335. crépon, b., devoto, f., duflo, e., & parienté, w. (2011). impact of microcredit in rural areas of morocco: evidence from a randomized evaluation (no. 6659). mit working paper. dichter, t. (2007). a second look at microfinance. development policy briefing paper, (1). duvendack, m., palmer-jones, r., copestake, j. g., hooper, l., loke, y., & rao, n. (2011). what is the evidence of the impact of microfinance on the well-being of poor people?. field, e., pande, r., papp, j., & rigol, n. (2013). does the classic microfinance model discourage entrepreneurship among the poor? experimental evidence from india. american economic review, 103(6), 2196-2226. kuzilwa, j. a. (2005). the role of credit for small business success: a study of the national entrepreneurship development fund in tanzania. the journal of entrepreneurship, 14(2), 131-161. meyer, r. l. (2002). the demand for flexible microfinance products: lessons from bangladesh. journal of international development, 14(3), 351-368. mcril microfinance review. (2014). mcril microfinance review 2014, risk regulation and reward. nichter, s., & goldmark, l. (2009). small firm growth in developing countries. world development, 37(9), 1453-1464. pralahad, c. k. (2004). fortune at the bottom of the pyramid: eradicating poverty through profits. upper saddle river, nj: wharton school publishing.. sinha, s. (2007). efficiency with growth: the emerging face of indian micro finance. adb-finance for the poor, 8(3). yunus, m. (1998). banker to the poor. penguin books india. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). contents indian journal of finance and banking vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 16 an evaluation of the role of commercial banks in financing small and medium scale enterprises (smes): evidence from nigeria ibrahim aliyu gololo1 1 accounting department, faculty of social and management science, bauchi state university gadau, nigeria correspondence: accounting department, faculty of social and management science, bauchi state university gadau, bauchi, nigeria, tel: +234 8036312938, e-mail: aliyugololo2@gmail.com received: june 21, 2017 accepted: july 15, 2017 online published: july 20, 2017 abstract in this study an attempt was made to evaluate the role of commercial banks in financing small and medium scale enterprises in nigeria. there is absolutely no doubt that small and medium scale enterprises play a pivotal role and contributes tremendously to the economic growth and development of many developing economy including nigeria, but survival of small and medium scale enterprises is often hampered by access to finance which key players were making attempt to solve. the objective of this study is to evaluate the extent to which commercial banks in nigeria play their role in solving financing needs of small and medium scale enterprises. the study employed secondary data which use the ratio of loans to small and medium scale enterprises by commercial banks as a percentage of their total credit for the period between 1991-2012.the study utilize paired sample t-test and significance of ratio of loans to small and medium scale enterprises was tested to access the performance of small and medium scale enterprises equity investment scheme by banks to provide finance to small and medium scale enterprises. the result shows that commercial banks loans even with the equity scheme introduction do not make significance positive impact on loan disbursement to finance smes. it is recommended that nigerian commercial banks should embrace risk-averse behavior in respect of loans to smes, interest rate should be review for smes loans by central bank of nigeria and increase smeeis contribution by commercial banks. specialized bank should be established by government to finance smes; it should also provide adequate infrastructural facilities in the country and address present security challenges so as to make nigeria conducive for smes to operate. keywords: financing, nigeria, small and medium enterprises, small and medium enterprises, equity investment scheme, commercial banks. 1. introduction small and medium scale enterprises (smes) are important engines of economic growth, jobs and social cohesion. smes play an important role in the economies of many developing countries including nigeria. thus, governments throughout the world focus on the development of the smes sector to promote economic growth finlayson, (2003). however, the creation, survival and growth of smes are often hampered by access to an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 17 finance. thus access to smes finance has become a key priority in developing countries like nigeria. therefore, non-availability of debt finance to finance operations and expansion is one of the major causes of failure for smes in nigeria. according to global entrepreneurship monitor (gem) survey in 2008; financial constraint is the primary exit reason for most smes failure in nigeria. however, the need for smes growth in nigeria is beyond question, but access to finance is a major factor stagnating the way of its growth, as a financing tool, debt financing has a distinct advantages over equity financing for the development of smes, but debt financing in nigeria presently comes with significant challenges as can be seen from low responses of commercial banks to finance smes. there is evidence that most smes in nigeria with low capital formation raise capital through loans from family and friends because at the initial stage, majority of young budding entrepreneurs lack laudable forms of collateral, business plans and feasibility studies to actually meet the requirement and convince banks to grant them loans ebube, (2011). this implies that a vast majority of smes depend on internal finance ( i.e contribution from the owners, family and friends etc). internal financing is often inadequate for smes in nigeria to survive and grow, as it is increasingly difficult to keep the costs within the constraints of self-financing. therefore smes need capital from external sources (or debt financing). because of this nigerian government over time introduced small and medium enterprises equity investment scheme (smeeis) as an initiatives through commercial banks by the cbn to solve financing problem of smes and the creation of (small and medium enterprises development agency of nigeria) smedan as an agency to enhance the development of smes. the banking system is very important for any nation because it is the pivot of socio-economic development of any economy terungwa, (2011). this implies that commercial banks have active developmental roles to play in the economy such as mobilizing fund from the surplus to the deficit spending units. commercial banks are considering as the main source of finance for smes or rather entrepreneurs in nigeria. akabueze, (2002) assert that finance has been seen as a critical element in the growth and development of smes. for instance the commencement and efficient performance of any industrial enterprises be it small or large will require the provision of funds for its capitalization, working capital and rehabilitation needs, as well as for the creation of new investments. provision of funds to the industrial sector, particularly, for the smes has, therefore, been of prime interest to policy-makers in both the public and private sectors. it is a known fact that firms depend on a variety of sources for their finances. these include external and internal, formal and informal sources aruwa 2004. according to demirguc-kunt, maksimovic, beck and laeven, (2006) external finance makes many smes developed, they depends on bank loans and overdrafts and suppliers credit for early stage financing. despite the dependence of smes on debt finance, paradoxically access to debt finance is very limited for smes in nigeria. mambula (2002) laments that small and medium scale enterprises dominate the private sector of the nigerian economy, but almost all of them lack access to credit finance. this implies that commercial banks and trade creditors hesitate to lend to smes. however, only few smes in nigeria are able to access bank loans. previous studies have decried the limited access to external financial resources available to smaller enterprises compared to larger organizations and the consequences for their growth and development (hossain, 1998; wattanpruttipaisan, 2003; berger and udell, 2004; ogujiuba et al., 2004 ;). according to velverde et al (2005) bank credit play a crucial role in providing for external financing to smes, but in nigerian context, this crucial source of finance for smes is apparently non-functional kadiri, (2012). an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 18 this is evident in the ratio of loans to smes to commercial banks’ total credit, which shows that a meager 0.13% of commercial banks’ total credit was granted to smes in the year 2012 (cbn 2012). more worrisome is the fact that this ratio has been falling over the years iorpev, (2012). on the other hand, internal sources include personal savings, loans from family and friends, retained earnings and disposal of the enterprise assets and esusu contribution. the main objective of this study is therefore to evaluate the extent to which commercial banks in nigeria play their role in solving financing needs of small and medium scale enterprises (smes). in view of this, this study specifically intends  to highlight the different sources of finance available to small and medium scale enterprises in nigeria.  to identify the problems encountered by small scale industrialists in obtaining finance from nigerian commercial banks.  to proper possible solutions to financing problems of small and medium scale enterprises in nigeria. in line with the objectives, null hypothesis is formulated.  ho: commercial banks loans granted to smes have no any significant impact on their development in nigeria before and after smeeis introduction. 2. review of literature 2.1 overview of small and medium scale enterprises because of the pivotal role that small and medium scale enterprises play in the economy of many countries, different countries of the world defined smes in different ways but all the definitions shared common things such as number of employees and total assets base. in nigeria, however, the definition was not different. sme was defined by the national council on industries in july, 2001 according to size and scale of operations. 2.1.1 small scale industry an industry with a labour size of 11-100 workers or a total cost of not more thann50 million, including working capital but excluding cost of land. 2.1.2 medium scale industry an industry with a labour size of between 101-300 workers or a total cost of over n50 million but not more than n200 million, including working capital but excluding cost of land. in essence, smes are defined as an enterprises with a maximum total cost of n200 million including working capital but excluding cost of land, and with the number of staff employed by the enterprise not less than 11 and not more than 300. on the other hand, the revised operational guidelines of small and medium enterprises equity investment scheme smeeis (2006) defines a small and medium enterprise as an enterprise with a maximum assets base of one billion five hundred million naira (n1.5b)(excluding land and working capital), and with no lower or upper limit of staff. moreover, nigerian government should as a matter of fact review the above definition every five (5) years as given by the national council on industry because in present day smes should possess more than n1.5 billion naira working capital since the definition was derived 6 years ago to meet up with the present nigerian economic realities. 2.2 characteristics of small and medium scale enterprise in nigeria. the small and medium scale enterprises (smes) in nigeria are commonly characterized by the following: an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 19  simple management structure resulting from the fusion of ownership and management by one person or very few individuals.  smes tend to strongly revolve around the owner-managers, rather than as a separate corporate entity.  there is often greater subjectivity in decision making and prevalence of largely informal employer employee relationships.  many smes are labour-intensive although modern smes are increasingly employing reasonably high technology.  personal commitment of the proprietors whose life savings usually form the start-up capital  ease of entry and exit  high potential for employment opportunities.  the manager performs all functions of management himself that is he/she handles financial, production, marketing and personnel decision of the enterprise.  the manager finds it difficult to borrow short and long term finance from organized financial institutions and therefore rely so much on personal savings, relations, money lenders or profit of the enterprise for finance.  the business enterprises cater or meet only the immediate demands of the local community where the business is carried out without knowledge of wider coverage or distant markets.  the managers are usually conservative and suspicious and unwillingly to divulge information regarding their business for fear of inviting unwelcome tax investigations.  low level of management skills, poor marketing information and technical condition of production due to low level of education among managers weaken their establishment and also the proprietors are reluctant to combine in partnership or limited liability companies due to mutual distrust. all these lead to high mortality rate among them.  little or no proper accounting record keeping and this adversely affect their access to utilize banking services example loan facility. 2.3 role/benefits of small and medium scale enterprises in the nigerian economy in nigeria every known regime recognizes the importance of promoting smes as the basis of economic growth and sustainable development. in a developing economy like nigeria, the commitment to the development of smes is an effort towards the development of the whole economy. kpelai, (2009) as cited in terungwa, (2011) asserts that smes are the engine room for the growth of any developing economy, because they form the bulk of business activities in developed and developing economies like nigeria. according to (udechukwu; 2003; ayesha; 2007; ayozie and latinwo 2010; sirifiyu and njogo; 2012) smes encourage entrepreneurship development and employment generation. on the other hand, salami, (2003) view smes benefit as accelerating the achievement of wider economic and socio-economic objectives, includes poverty alleviation.the potential benefits of smes to any economy include contribution to the economy in terms of output of goods and services; creation of jobs; provision of a vehicle for reducing income disparities; development of a pool of skilled and semi-skilled workers as a basis for future industrial expansion, among others. according to philip, (1989) at a national conference on small and medium scale enterprises development held at ibadan “small scale enterprises are said to be bedrock of any national industrial development especially in a typical developing country like ours.” the role small and medium scale enterprises play in a developing an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 20 economy is so vast and enormous that they cannot ordinarily be neglected. this was noticed in countries like india, pakistan, indonesia, bangladesh, japan, china, u.s.a, taiwan and south korea to mention just a few, where small and medium scale enterprises (smes) contributes in the agro-based sub-sector, textile manufacturing, leather and leather products sub-sector etc. in some of these countries, small and medium scale enterprises are funded and operated by single family employing more than 60 percent of the population. the role and importance of these firms according to philip, in any nation are as follows:  they form starting point for industrialization which calls for the establishment of industries of all types and sizes: for instance, microsoft company may be a software giant today, but it started off in typical sme fashion, as a dream developed by a young student with the help of family and friends, bill gates were able to take it to the market place where it is today.  small and medium scale enterprises provide employment opportunity per unit of capital invested because they are generally labour-intensive: globally, employment generation is one of the most important reasons for promoting the development of smes. this more so in the developing countries in which a large proportion of the labour force is unemployed. many countries benefits from employment of small and medium scale enterprises, ranging from 45 per cent (manufacturing sector only in australia to 79.3 per cent in switzerland (world bank, 2008) in addition, the study showed that recent gains in employment in the us, u.k., germany and spain were almost confined to small firms, employing fewer than 20% workers (world bank, 2008). in nigeria, the small and medium scale enterprises sub-sector has been expanding, especially since the mid-1980s, following the prolonged recession in the economy which forced many large enterprises to lay off large proportions of their workforce. the sector accounts for about 70 per cent of industrial employment (world bank, 1995). also, the agricultural sector, which largely consists of smes, employs over 60 per cent of the nation’s work force.  they aid large-scale industries by manufacturing raw material inputs and generally acts as a catalyst to them, and helps expand the nation output thereby generating the desire to build a healthy industry base: in many middle-income economies small and medium scale enterprises contribute substantially to the national output. in india for example, the small scale industry sub-sector alone, excluding medium enterprise, accounted for 40 per cent of total industrial output and 35 per cent of total exports in 1998. the sub-sector produces over 75,000 products (india, 2000). in nigeria, however, the output of the sector is low. although the sme sector as a whole account for about 70 per cent of total industrial employment, its contribution to manufacturing output is estimated at only 10-15 per cent, indicating very low contribution.(cbn, 2010)  they are often the sources of new ideas and invention that is, they help to form technological base where they start operating as small unit innovating indigenous goods and services to suit our particular needs using local resources, product, equipment and manpower: all economies have transited from household artisan industries over time to the modern industrial set-up which has witnessed phenomenal upgrading in skills, machinery and equipment, and management practices. historical evidence indicates that most of today’s giant corporations began as very small firms. these include guinness of dublin and philips international of the netherlands; as well as sonny and honda of japan. developing countries can learn from the experience of these giants and create a conducive environment that will enable an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 21 small and medium scale enterprises to adapt imported technologies, modernize their process and grow to become large corporation.  promotion of even development and reduction of income disparities: the promotion of smes development aids the dispersal and diversification of economic activities, and induces even development in a country or region. this is because smes need relative small seed capital to start operations and their raw materials are widely dispersed in most countries. in addition, their processing technologies and management styles are simple, making investment in the sector affordable to the ordinary people in the society.  they generally source their raw materials locally thereby conserving foreign exchange: small and medium scale enterprises (smes) are known for their creativity in the utilization of local raw materials, that do not require high level technology to process. in nigeria for instance, smes are concentrated in such enterprises as food processing, textiles, wood works, leather products, soap and detergent sub-sector etc that require simple technology and the raw material are in abundance. the enterprises also recycle discarded by-products of large firms as primary inputs in their own production processes.  they are less vulnerable in period of depression and this have greater degree of flexibility than large scale industries: this is due to the fact of smaller unit of operation because most of them are sole proprietorship and the manager or proprietor controls all the enterprise activities.  their establishment provides an increase in the revenue to the state and local government areas which may be used to provide social amenities: through various forms of taxes, including personal and company income taxes, smes contribute to increasing government revenues in nigeria.  presently in nigeria, the small and medium scale enterprises contributes immensely to the nigerian economic growth and development, because the sub-sector employed a large number of nigerian citizens and this made them to utilized local raw materials in their production process. the nigerian government having realized the importance of smes has since developed financing avenues to help cater to their financing needs so as to keep them liquid however the policy implementation of this financing need is a matter of great concern to researchers, practitioners and even policy makers. 2.4 financing problems of small and medium scale enterprises (smes) in nigeria the problem of smes financing received tremendous research efforts from researchers. some notable works in this respect include aernold (1998), anic and paus (1998), inang and ukpong (2002) and aruwa (2004). in their findings, five problems in financing smes have become recurrent: the cost of capital; credit risk; the inappropriate terms on bank loans; difficulty in accessing loans; and the shortage of equity capital. another scholar identified financing as a key managerial problems confronting smes in nigeria today terungwa (2011). according to udechukwu and olorunshola (2003) small and medium scale enterprises are bedeviled with the following problems which result for their failure.  lack of proper and accurate accounting records keeping that will actually give reliable financial state of affairs of the enterprise.  nonsegregation of personal assets from that of company by entrepreneurs thereby making the valuation of the business difficult.  fear of dominance or hijacking by banks thus making the promoters to resist dilution of control. an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 22  in ability of the entrepreneurs to provide timely and accurate information/documents that will facilitate the processing of their loan request.  absence of good corporate governance on the part of smes management.  low capital base of the enterprise  inadequate and inefficient infrastructural facilities which tend to escalate costs of operation, as smes are forced to resort to private provisioning of utilities such as road, water electricity, etc.  lack of adequate credit facility for smes, traceable to the reluctance of banks to extend credit to them owing, among others, to poor documentation at project proposals as well as inadequate collateral by sme operators.  bureaucratic bottlenecks and inefficiency in the administration of incentives which discourage rather than promote sme growth.  weak demand for products, arising from low and dwindling consumer purchasing power and lack of patronage for locally produced goods by those in authority.  incidence of multiplicity of regulatory agencies and taxes which has always resulted in high cost of doing business and poor management practices and low entrepreneurial skill arising from inadequate educational and technical background of many sme promoters.  financial indiscipline; some sme proprietors deliberately divert loans obtained for project support to ostentatious expenditure. some do not divert, but refuse to pay back as and when due, the interest and the principal.  poor implementation of policies; the poor implementation of policies, including administration of incentives and measures aimed at facilitating smes growth and development have had unintended effects on the sub-sector.  overbearing regulatory and operational environment;the plethora of regulatory agencies, multiple taxes, cumbersome importation procedure and high port charges has continued to exert serious burden on the operations of the smes. many smes have to deal with myriad of agencies at great cost.  problems and costs of business registration, land acquisition and other peculiar problems  high rate of business failures due to state of nigerian economy;  attitudinal disposition of nigerians toward made-innigeria goods; i.e lack of patronage of made in nigerian goods, hence this result from most promoters of smes low educational background, lack of management and entrepreneurial skills. the availability of and accessibility to credit is also crucial to the effectiveness of smes in nigeria. for local people to generate income from productive activities requires credit, especially to stimulate traditional heavily under-capitalized local enterprises. availability of credit, more than any other service, awakens the aspirations of potential entrepreneurs. the frequent changes, and sometimes conflicting government monetary policies, have also tended to hurt the smes. for example, while the government increased total credit allocation to smes from 10 to 20 per cent, the same government removed excess liquidity in the banking industry through increases in the minimum rediscount rate (mrr), transfer of government and parastatals accounts to the central bank and the creation of a stabilization securities account (ssa) whereby the banks were debited with excess liquidity in their accounts with the central bank of nigeria. an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 23 2.5 solutions to financing problems of small and medium scale enterprises in nigeria. the following solutions are therefore offered to remedy some of the problems of small and medium scale enterprises in nigeria.  changing the mindset of bank staff to offer more attractive loan facility to small and medium scale enterprises sub-sector.  changing the mindset of nigerian consumers to patronize made in nigerian goods so as to encourage the producers of those smes products.  training and re-training of nigerian entrepreneurs to acquaint them with the modern technological production process; this, of course can be organized by the private sector or government to help improve their technological know-how.  nigerian entrepreneurs must be ready to show greater desire to institutionalize and separate the company from self.  continuous enlightenment campaign by the central bank of nigeria and the banking industry for the importance of the smes subsector  government must ensure stable economic and interest rate policy and so also stable political environment for the entrepreneurs to operate.  government also must ensure a conducive environment by providing infrastructures, capacity building, regulatory and legal framework for the enterprises.  small and medium scale enterprises should not be subjected to multiple taxes as this discourages them from going on with the business.  entrepreneurs should inculcate financial indiscipline in their enterprises  sufficient credit facility should be made available by commercial banks to smes to cushion the effect of starting business with low capital base. 2.6 sources of small and medium scale enterprises financing in nigeria the importance of finance to business organization cannot be over-emphasized. business finance is however, not easy to come by especially in respect of smes. smes require funds from every source available to meet their asset needs, working capital needs, and for expansion purpose. nnanna (2001) observes that the bank loan (credit) is important for the take-off and efficient performance of any enterprise. such an enterprise may be small, medium or large. loan is the formal source of financing smes and it is the largest element of risk in the books of most commercial banks in nigeria and failures in the management of credit risk mostly weakens individual banks and in some cases, the banking system as a whole, has contributed to many episodes of financial instability. the banks by their nature and position in the economy remain the known formal source of finance for enterprises (agumagu, 2006). it is disheartening to know that a 2001 world bank survey on nigerian firms showed that although 85% of the firms had relationships with banks, but, most of them had no access to their credit. this explains why smes in nigeria represent about 80% of firms in the nigerian industrial sector on numerical basis but regrettably contribute as low as 10% to gdp in contrast to countries like indonesia, thailand and india where smes contribute almost 40% to gdp (weaci, 2002). aladekomo (2003) notes that successive governments in nigeria have, since the last three decades, shown great interest in financing of smes, by establishing specialized banks and other credit agencies/schemes to provide customized funding to the sub-sector to enhance growth and stability. in addition to these, programmes like the nigerian an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 24 directorate of employment (nde), better life for rural women, family support programme, child care trust, people‟s bank, national poverty eradication programme (napep), have been founded to support smes in nigeria. therefore, in this studied two different sources of financing smes have been identified namely: internal and external sources. 2.6.1 internal sources 2.6.1.1 owner’s savings owner’s savings or personal savings: this simply means funds save over time by the entrepreneur with the intention of financing the business it mostly forms the initial source of funds for the take-up of small and medium scale business in nigeria. it is very cheap source of fund when business commence operations, however, the expansion will depend on increase in owner’s savings.when this source is depended upon, and limited rate of expansion will be experienced. 2.6.1.2 retained earnings this is defined as “undistributable profit of the company which is plough back to the enterprise for expansion.” the entrepreneur will therefore wish to maximize the value of his consumption overtime and in terms of cash. in order to do this, he may wish to differ the consumption of part of his income or wealth in order to be in a position to consume more at a later date, or may wish to spend more than he has now anticipating future income or wealth by borrowing on the strength of what he has. when part of profit is not used or is reserved. the enterprise always resorts to it when the need for finance arises. 2.6.1.3 disposal of asset assets are disposed when they become obsolete and this is a source of fund to the organization. also surplus asset, represent a once-off (overtime) internal sources of fund which becomes available from time to time. examples of assets disposed are outright sales of building, plant, machinery and equipment, or other investments. 2.6.1.4 depreciation it is a reserve of costless source. it is another cheap source of fund to small and medium scale enterprises in nigeria. it is a secret reserve because when it is charged to profit and loss as an expensed, no actual cash movement out of the business is involved. it can also be defined as part of the cost of asset consumed during its period of use by the organization. 2.6.1.5 loans from relatives and friends majority of entrepreneurs in nigeria are having difficulty in raising funds through commercial banks, due to difficulty and non-availability of loans. this makes most of them to raise funds through family and friends. 2.6.1.6 esusu contribution esusu is a name given by the yorubas of nigeria to a particular type of informal credit institution organized and operated mainly by farmers, petty traders, craftspeople, social clubs, teachers, civil servants, etc. it is a major and popular form of informal financial institution which is identified across africa. it is also called susu, adashi, sanduk, tontines and hangbad in ghana, chad, sudan, cameroon and somalia, respectively. the esusu arrangement is helpful in business finance as it provides members or contributors with a lump sum that can be employed in their business. most small and medium scale enterprises sticked to internal sources because they are good for planning, flexibility, no encumbrances attached, less bureaucracy involved, from risk of relaying on external sources. an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 25 however, if additional financing is required.there is often an irresistible desire to look outside the firm immediately. but internal sources should be considered especially to small and medium scale enterprises because they are normally cheaper than external sources. in addition, financing from within provides the opportunity to redeploy existing funds so as to achieve a more efficient utilization of capital 2.6.2 external sources 2.6.2.1 commercial banks loans the commercial banks in nigeria provide assistance in form of loans to small and medium scale enterprises under the umbrella of small and medium scale enterprises equity investment scheme (smeeis) where they contribute parts of their profit before tax to finance smes development in nigeria. the potential entrepreneurs are therefore expected to benefit from these loans given by the commercial banks. however, banks have been very reluctant to grant loans to smes, which they regard as a high-risk sub-sector. most of the banks would rather pay the penalty imposed for not meeting the minimum exposure to preferred sectors of the economy than actually run the risk of being exposed to them. over the years, nigerian commercial banks have variety of credit facilities for the smes finance and these includes working capital finance (overdraft), import finance facility, equity finance, short-term loans and long-term loans. these credit facilities cut-across almost all the banks. an entrepreneur can access any of the facility when meet the requirement of the banks. the banks also have launched a number of initiatives to serve the smes sub-sector better. these are:  reducing costs of lending by applying latest information technologies, streamlining the organization and simplifying the lending process.  developing products better adapted to smes needs  improving financial services for smes through training of banks staff and segmentation of smes customers.  reducing information asymmetry of smes and high perceived risks by using credit scoring system.  simplifying strict rules of lending policy of the banks. table 1: showing commercial banks loans to smes from year 1991-2012 years commerci al banks loans to smes (n’ million) commercial banks total credit (n’million) commercial banks loans to smes as percentage of total credit commercial banks loans percentage (increase/decrease) after smeeis introduction by banks 1991 32,912.40 7,572.30 23.80 --- 1992 20,400.00 41,810.00 48.80 --- 1993 15,462.90 48,056.00 32.20 --- 1994 20,552.50 92,624.00 22.20 --- 1995 32,374.50 141,146.00 22.90 --- 1996 42,302.10 169,242.00 25.00 --- 1997 40,844.30 240,782.00 17.00 --- 1998 42,260.70 272,895.50 13.60 ---- an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 26 1999 46,824.00 353,081.00 13.30 ---- 2000 44,542.30 508,302.20 8.80 ---- 2001 52,428.40 796,164.80 6.60 2.2 2002 82,368.40 954,628.80 8.60 2 2003 90,176.50 1,210,033.10 7.50 1.1 2004 54,981.20 1,519,242.70 3.60 3.9 2005 50,672.60 1,899,346.40 2.70 0.9 2006 25,713.70 2,609,289.40 1.0 1.7 2007 41,100.40 4,820,695.70 0.9 0.1 2008 13,512.20 7,799,400.10 0.2 0.7 2009 16,366.50 9,667,876.70 0.17 0.15 2010 12,550.30 9,198,173.10 0.14 0.3 2011 15,611.70 9,614,445.80 0.16 0.2 2012 13,863.5 10,440,956.30 0.13 0.3 source: central bank of nigeria statistical bulletin (december 2012) in table 1 above, it appears obviously there are fluctuations in the equity financing of smes by commercial banks twelve years after the introduction of smeeis by commercial banks to support smes financing. only in year 2004 the banks were able to record highest increment of 3.9%. in essence the ratio of commercial bank loans to smes continued to decline even with the smeeis put in place, this is due to the stringent conditions for accessing finance under smeeis and non-enforcement of sanctions to erring banks whose fail to adhered completely to smes financing. though some commercial banks claims non-compliance to support smes rising from shortage of skill among the sponsor of the smes, weak infrastructural facilities, high administrative costs to monitor loans advanced to the smes, poor demand for the finished products of the smes, restricted access and land tenure system in operation in the country, difficulties in input procurement and lack of continuity after the death of their owners, notwithstanding, they should mitigate these risks and ensure steady flow of loans to smes. 2.6.2.2 development banks small and medium scale enterprises also obtain financial assistance from development banks and micro-lending institutions such as the nigerian industrial development bank (nidb), bank of industry (boi) the people’s bank of nigeria (pbn), community banks (cb), nigerian export and import bank (nexim), nigerian agricultural, cooperative and rural development bank (nacrdb) and bank of agriculture (boa). this is done to further ensure that smes sector is developed, government in its effort encourage these institutions to lend to smes sector, most of these development banks have contributed by setting aside billions of naira for smes finance. 2.6.2.3 trade credit trade credit refers to transactions which allows for the cash settlement to be done at a different period. it is based on conditions called credit terms which include the credit period, the size of the cash discount, and the discounting cash period. an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 27 2.6.2.4 hire purchase hire purchase is a financial arrangement between a hire-purchase company (hirer) and its customers whereby the later (hiree) is allowed to take possession of equipment or goods without immediate cash payment. the legal title of the equipment remains with the owner until the hiree exercises his right of option to purchase, and then the ownership passes to him. 2.6.2.5 equipment leasing in this system, the enterprise instead of buying and owning assets, it enters into an agreement with a leasing firm whereby the borrower is allowed to use the assets on terms of leasing for a specified period of time. this form of short-term finance offers opportunity to small and medium scale enterprises to get a required equipment for their production without being purchased. 2.7 review of related previous studies a review conducted of some foreign studied on financing small and medium scale enterprises shows that countries like canada, japan, u.s.a, china, india, south africa and some european union countries approach smes financing with the indispensible support of banks loans and other financial institutions, in some of these countries the government and financial institutions “share the risks inherent in extending credit” in which smes financing comes in form of bank loans with low interest rate, credit guarantees, loans/equity investments and grants. however, findings from few studied carried out in nigeria were that, among the most popular of the formal sources of financing, the commercial banks and development banks supposedly remain the readily available source of financing option for enterprises (aruwa; 2004 terungwa; 2011 garba; 2005 kadiri 2012). 3. research methodology in this research work, the methodology is geared towards studying the financing of small and medium scale enterprises by commercial banks in nigeria using their ratio of loans disbursed to smes. the study employs both survey research design and empirical method which utilize existing records and documents that relate to the subject under study. therefore, the study intends to look at the lending habit of commercial banks to smes and how it affects smes from 1991-2012 that is ten years before the introduction of smeeis and twelve years after the smeeis introduction by the banks in nigeria. to achieve this, paired sample t-test was used. the t-test is used to measure the significance of loans to smes by banks who contribute to the smeeis funds. the banks loans to smes as a percentage of its total credit from 1991-2000 was taken as a separate pair which relate to the period when smeeis was yet to be introduce. bank loans to smes as a percentage of its total credit for the period 2001-2012 was taken as the second pair which now relates to the period smeeis was introduced. the paired sample t-test was then statistically applied to see if there is any significance in the disbursement of loans to smes between these periods. 4. data presentation, analysis and discussion of result table 2: computation of paired sample t-test years x y d=(x-y) d 2 1991/2001 23.80 6.60 17.2 295.84 1992/2002 48.80 8.60 40.2 1616.04 1993/2003 32.20 7.50 24.7 610.09 1994/2004 22.20 3.60 18.60 345.96 an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 28 1995/2005 22.90 2.70 20.20 408.04 1996/2006 25.00 1.0 24.00 576.00 1997/2007 17.00 0.9 16.1 259.21 1998/2008 13.60 0.2 13.40 179.56 1999/2009 13.30 0.17 13.13 172.40 2000/2010 8.80 0.14 8.66 74.99 2001/2011 6.60 0.16 6.44 41.47 2002/2012 8.60 0.13 8.47 71.74 source: researcher computation from cbn statistical bulletin (2012) from the table 2 above, the data were generated from the commercial bank loans to smes as a percentage of total credit from 1991-2012 (as obtain in column four of table 1) which were used in calculating the paired sampled t-test. x in table 2 represents percentage of loans to smes from 1991-2002 while y represents percentage of loans to smes from 2001-2012 while d is the difference between x and y. the formula was then applied to compute the value of t and then compare it with the critical value at 5% significant level. nigerian government over the years observed a decline in the ratio of loans by commercial banks to smes, to save this scenario smeeis was introduce in year 2001 to ensure a significant improvement in the ratio of loans to smes. this would have been so if the values of d in (table 2) above were predominantly negative if not all. the t in the end would have been a negative figure greater than the critical value. computed value of t = 2.959 and the critical value is 2.365 at 0.05 significance level and degree of freedom df = 7. with this computation we obtained a positive value of computed t which shows there was no significant improvement in loans to smes even after smeeis was introduced. the result of insignificance was due to the fact that smeeis did not create a significant impact on the financing of smes. we therefore accept the null hypothesis that commercial banks loans granted to smes have no any significant impact on their development in nigeria before and after smeeis introduction. 4.1 discussion of result smes by their nature finds it difficult to raise finance internally, this necessitated for them to look for finance externally especially bank loans. it is clearly seen in table 2 that commercial banks loans to smes as a percentage to their total credit has been on the decrease from 1991-2000. to improve the scenario, smeeis was introduced in 2001 but smeeis could not meet the objectives for which it was established as can be seen in the ratio of loans as percentage of total credit of commercial banks granted to smes in year 2001 as 6.6% in table 2. the ratio of loans continues rises in 2002 and falls in 2003 again. however, the stringent conditions for accessing funds under the scheme by smes, reluctant of some commercial banks to contribute to the scheme in nigeria and financial mismanagement by the benefiting smes and the administrators of loans also contribute to the failure of smeeis. commercial banks in nigeria only lends to enterprises that have high potential to repay loans, the genesis of this decrease in banking sector overall credit to smes in nigeria started when 20% of commercial banks profit before tax mandatory credit allocations to smes was abolished in 1996, therefore without mandatory regulations by government commercial banks cannot actively support smes in terms of financing. this is at variance with social contract theory which maintains that companies or rather commercial banks should lend a support to all stakeholders including entrepreneurs in the society. based on these analyses, an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 29 the researcher finds that commercial banks loans have not made significant improvements in helping smes in terms of loans granted to them even with the socalled small and medium enterprises equity investment scheme (smeeis). 4.2findings of the research based on the analysis made in the preceding section, this study hereby reveals the following findings:  weak performance of financing of smes by commercial banks in nigeria even with the smeeis put in place.  decline in the ratio of commercial banks loans to smes as a percentage of their total credit from year 1991-2012 except the recorded highest increment in year 2004 because banks feel reluctant to contribute to smeeis since there is no legal framework backing the scheme like the mandatory 20 percent credit to smes before 1996 abolition.  stringent conditions of accessing smeeis funds may prevent smes from accessing and benefitting from the scheme. 5. conclusion the purpose of this study was to evaluate the role of commercial banks in financing smes in nigeria. over the years, considerable attention has been paid to the issue of financing smes in nigeria, because there is absolutely no doubt that small and medium scale enterprises contribute tremendously to the nation’s economic growth and development, but harnessing the economic potentials of smes in nigeria is still a mirage because sme finds it difficult to access funds especially from commercial banks despite the smeeis schemes initiated and funded by the commercial banks and other incentives put in place by government to support prospective smes operators in nigeria to have easy access to funds set aside for smes development. however, this study has shown that smes in nigeria have insufficient access to finance from financial institutions, and as a result, rely more and more on their own savings or friends' and relatives' savings among others for their investment capital. commercial banks which are suppose to provide loans and implement smeeis requires collaterals which most smes cannot provide. smes are also discouraged by continuous increase in lending rate or interest rate. the cbn in its own way also try to aid the financing of smes through several approaches such as use of monetary and policy guidelines to channel credit as well as operation of loan guarantee scheme and gingering of smeeis by commercial banks among others. however, the current modus operandi of the smeeis is in a number of ways, not exactly according to the basic understanding of the public and the original conception of cbn. though these efforts have attained varying levels of success and have actually moved the sme sub-sector forward. hence, much still needs to be done by all the stakeholders in the sub-sector. this hopefully would minimize the constraints to accessing institutional credit by the smes, while ensuring that identified bottlenecks to the efforts are corrected. the study also explore financing problems from both commercial banks and smes side and the solutions to financing problems to small and medium scale enterprises were enumerated. efforts were also made to identify several sources of finance available to small and medium scale enterprises, issues raised by both commercial banks and the smes were analyzed and discussed. if smes mainly depends on bank loans, and the bank loans are not made available for common smes in the country, the situation could be disastrous and this will impact negatively on the economy of the nation and hinder the achievement of vision 20-20-20 which nigerian government is clamouring to achieve. an evaluation of the role of commercial banks in financing small and medium enterprises (smes): evidence from nigeria ibrahim aliyu gololo 30 6. recommendation if the following policy recommendations are given serious attention by both the key players’ i.e. the government, commercial banks and the smes themselves, financing the smes by commercial banks will be made a lot easier, more effective and the impact will be felt towards the growth and development of small and medium scale enterprises vis-à-vis the economic growth and sustainable development of nigeria:  if nigeria is to achieve adequate and sustainable financing for small and medium scale enterprises by commercial banks and other development banks and credit agencies established. commercial banks should stop exhibiting risk-averse behavior in respect of granting loans to small and medium scale enterprises.  the central bank of nigeria should reduce the lending rate or interest rate in respect of loans to smes since high lending rate discourages smes from borrowing. for instance, presently lending rate in commercial banks is 24% and this has a negative impact on the ability of small and medium scale enterprises to obtain credit from the banks. the lending rate to smes should be single digit.  the central bank of nigeria (cbn) and other financial institutions should embark on extensive smes enlightenment with the provisions of credit requirements by commercial banks through efficient training and counseling of the small and medium scale entrepreneurs to enable them access credit facilities with ease.  smeeis contribution by commercial banks should be increased to 25% of their profit before tax. this is borne out of the fact that their capital base when banks were contributing 10% was not up to twenty five billion naira.  the government should established specialized bank to provide loans to smes. the bank if established should provide loans and other financial support at the barest minimum interest rate. this is purposive so as to encourage the smes to patronize the institution.  smes should not rely mainly for banks loans, they should consider all available financing options that would enable them expands their business.  the government should provide adequate infrastructural facilities like electricity, roads and water supply for the smes and these no doubt will go a long way in reducing the production costs of smes. this will also encourage banks to fund the smes as their investment will be recouped.  the banks should adopt relationship lending as a dominant bank rule in funding smes.this will mitigate the problem of weak asset based collateral. however, this can be more effective if the borrowers show some high level of responsibility, discipline and trustworthiness.  the nigerian populace should patronize made in nigerian goods especially smes products so as to encourage the sub-sector to developed government should support smes by bulk purchasing their products and retailing them both for the 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(2003). “four proposals for improved financing of sme development in asean. asian development review. vol. 20, no. 2. world bank (1995). nigeria: “a diagnostic review of the small and medium scale enterprise sector.” (interim report) world bank (2000). world bank survey on sme financing in developing countries. world bank (2001). world bank survey 2001. world bank (2008). world bank survey on sustainable development. world bank (2011). world bank survey 2011. 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 | ijfb indian journal of finance and banking; vol. 4, no. 2; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 17 failure of operational ppp projects in india leading to private developer’s apathy to participate in future projects: a case study based analysis sandeep ganpat kudtarkar assistant professor & phd scholar aruna manharlal shah institute of management and research amsimr, near mtnl, ghatkopar west mumbai 400086, maharashtra, india nmims university, mumbai 400056 (phd scholar) e-mail: skudtarkar@amsimr.org received: june 13, 2020 accepted: june 30, 2020 online published: august 05, 2020 doi: 10.46281/ijfb.v4i2.693 url: https://doi.org/10.46281/ijfb.v4i2.693 abstract the goal of this study is to examine the failure of operational public-private partnership (ppp) infrastructure projects in india. the case study based analysis is done of eleven operational ppp projects from infrastructure subsectors like roads, metro rail, seaports, and power projects to investigate various risks faced during the life cycle of projects. the construction risks like land acquisition delay, change in scope, delay in financial closure resulting in time and cost overrun, revenue risk of not getting adequate revenue during operation phase and legal disputes between the authority and the concessionaire are prominent risks observed in these projects. mitigating these risks through efficient life cycle contract management and appropriate allocation of risk creates adequate risk-adjusted financial returns to the private developers and value for money for the government. the study concludes that failure in contract and risk management in case of the majority of operational projects resulting in disappointing financial returns is the major reason for the private developer's apathy towards participation in a once successful ppp program in india. keywords: ppp projects in india, financial returns, contract and risk management, value for money, sponsor risk, dispute risk. 1. introduction before the advent of ppp, the government provided infrastructure services in india through public procurement, financed by the government budget. the ppp model was introduced in india in the year 1999 with great enthusiasm and expectations. a large number of concessions were signed in all the subsectors of infrastructure. by 2010, india became one of the largest markets of ppp projects in india, according to infra scope report 2015. but after 2015 onward, the number of ppp projects reduced drastically. a large number of already started projects were delayed, stalled, and terminated. the data analysis from the government database (www.pppindia.gov.in) suggests that only 48% of ppp projects were operational out of 1500 ppp projects initiated during the last two decades. even the operational projects disappointed the private developers due to its failure in providing adequate financial returns which made them shying away from participating in ppp projects and even the lenders had restrained themselves from lending to ppp projects. all this resulted in zero participation by private developers in the year 2019 even if the government's desire to initiate new ppp projects. the objective of this research is to do the case studies based empirical study of operational ppp projects in india to understand the underlying economic, financial and institutional constraints faced by ppp projects and their life-long contract and risk management and to investigate the causes of the private developer's apathy toward participation in ppp program which makes once successful ppp program comes to standstill. the rest of the paper is structured as follows. the first section proposes a review of the literature on the relationship between financial success and risk and contract management of ppp projects. the second part describes the research design and applied methodologies. the third part discusses case studies. finally, the last section summarizes the main findings. 2. literature review the modern theory of incomplete contracts is discussed by grossman and hart (1986) and hart and moore (1990). in classic principal-agent theory, contracts are assumed to be complete as contingencies are expected for all states. in case of incomplete contracts, information is asymmetric leading to problems such as the moral hazard and adverse selection. a moral hazard problem occurs when the agent’s action cannot be verified, or when the agent receives private information after the relationship is established. in the case of informational asymmetry, the principal cannot check and control the actions of https://doi.org/10.46281/ijfb.v4i2.693 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 18 the agent after signing of the contract. an adverse selection happens as the agent possesses private information before the contract is signed. the ppps are long term contracts wherein anticipating every contingency affecting the relationship over the contract period is impossible and even if all contingencies could be predictable, it will be costly to include all that in the contract. hence the ppp contracts are incomplete. the renegotiations occur due to the incomplete nature of contracts (grout, 1997; bettignies & ross, 2004). the incomplete contract theory described in detail by grossman and hart (1986), hart and moore (1990), hart 1995) is used for the analysis of contract design and risk transfer in ppps. the complexity in contracts results in contractual incompleteness leading to underinvestment in projects due to the threat of ex-post hold-up. grossman and hart (1986), and hart and moore (1990) discuss asset ownership which gives residual rights of control over assets. asset ownership motivates agents to invest due to the bargaining power ex-post since they retain control over assets they own in case of dispute and thus higher financial return on their investment. in ppp contracts, sharing of project risks among stakeholders is significant for the success of projects. the initial allocation of risk among the partners should be managed over the whole life of the project and modified when unforeseen risks arise ensuring that all partners would manage the risks effectively (chan, yeung, yu, wang, & ke, 2011). the basis of achieving higher efficiency in a ppp project is to pass on the risk to the partner who can handle it effectively (irwin, 2007). the project team should monitor the situation, balance the expectations of all stakeholders, and initiate proactive communication with all partners to ensure the success of the project. the inefficient monitoring of the contracts and failure in the contractual obligations results in loss of trust resulting in court cases reducing the intended public benefits and value for money for the government. hence sound contract management is crucial for the success of a ppp (grimsey & lewis, 2004). the government entity transfers risks to the private sector as they are experts, technically competent, and experienced in managing complicated projects (cheung, chan, & kajewski, 2012). the private partner manages and sufficiently price the risks assigned to them and the public authority mitigates risks that cannot be assigned to the private partner (cheung, et al 2012; zhang, 2005). the allocation of risks among the stakeholders and associated compensation is decided and contracted during the project development and procurement phase (abd karim, 2011). the private sector investors prefer to invest in ppp projects wherein revenue risk is mitigated through certainty of the cash flow to cover the project's construction cost and generates the risk-adjusted returns while the government attempts to lower the cost of building infrastructure by transferring some of the risks to a private party (grimsey & lewis, 2004). the risk should be managed on the project life cycle basis by identifying risks in the initial stages of the project and proactively managing them by the partner who can control and manage them continuously (zou, wang, & fang, 2008). in the indian context, indian authors baruah and kakati (2016), laksmanan (2008), mathur (2017), pai, patnaik, mittal, and anand (2018), rajeswari (2014), gupta (2015), iyer and zha (2006), pathan and pimpalkar (2013) have analyzed various issues of risks and contract management of indian ppp projects like land acquisition delays, permission delays, disputes, litigations, and financially weak sponsors. based on a thorough review of existing literature following hypothesis is constructed and shall be tested in this study. there is a positive relationship between operationally and financially successful ppp projects and their project lifelong efficient contract and risk management as ppp contracts are inherently incomplete due to a long time, substantial work to be provided, significant complexities, and high uncertainty of future events and occurrences. 3. research design the conceptual model is developed based on the literature review. the data of all operational ppp projects in india is collected from government databases. financially large projects with project cost more than usd 7m$ and having revenue history available for at least three years are selected for the study. a hypothetical financial model is developed to calculate the lifelong returns of the projects (pirr and eirr) based on which the projects are categories into the financially successful and failed projects. from each category information-rich cases selected to test the hypothesis. 3.1 the conceptual framework the basic underlying economic theory for this study is the incomplete contract theory along with agency theory and property rights theory. the operational success of ppp projects depends on how various issues in ppp model such as adverse selection, moral hazard, asymmetry of information and hold up due to contract incompleteness and agency problems are addressed by project participants through the strong contract and risk management and ability to create value for money for the government, risk-adjusted returns for the private investors and creation of world-class infrastructure for the nation. 3.2 hypothetical financial model the capital asset pricing model (capm) of sharpe (1964) is used to calculate the cost of equity, which is in line with the corporate financial theory to calculate financial returns on investment (graham & harvey, 2001; treasury, 2012). the cost of debt is calculated by adding a risk premium to the yield of government security of the ten-year maturity of the year when financial closure of the project is achieved. having got the cost of debt and the expected return on equity, the weighted average cost of capital (wacc) is calculated. the equity betas of listed infrastructure companies reflect the systemic risk of those companies. hence, these betas are un-levered to calculate betas of an individual project as per their capital structure. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 19 the wacc is used as the discount rate of the project. this is standard practice for evaluating pfi projects in the uk (national audit office, 2012). the model calculates the free cash flow of a project to calculate project irr and free cash flow to equity to calculate equity irr. in the case of toll/fee-based projects, assumptions are made for growth in revenue and operational cost based on past available time-series data of the same project and other projects in the sector. 3.3 case study based analysis the qualitative studies using case studies are often viewed by academia as "non-scientific" due to alleged subjectivity and difficulty in generalizing the results. but as bent flyover quotes, "a social science should be problem-driven and not methodology-driven and should apply methods to investigate the research problem." the case studies are used in this research to study the ppp model of building infrastructure within its real-life context while explaining the mechanism and outcome of ppp phenomena. one single case study may blame as subjective since it disallows the use of analysis based on the comparison of multiple cases hence additional cases are selected till the point of redundancy. the case studies are selected based on the requirement of information needed to address every aspect of the research problem and how detailed analysis can be done at the level of each case. the cases containing useful insights in explaining the research problem, diversified with a high variation of causes, results, and contextual conditions of ppp phenomena and allow easy access to a large number of rich information are selected for the study. the case studies are selected by purposeful sampling method where an iterative approach of sampling and resampling is applied to draw an appropriate sample to make theoretical saturation based on the conceptual framework and addressing the research question for drawing clear inferences and credible explanations to generalize the conclusion of the study. the cases are selected to achieve literal replication which takes place when at least two cases give similar results and theoretical replication when at least two cases give contrary results. a pattern-matching approach to describe two patterns, one closely fitting the research hypotheses and an alternative one constituting a rival explanation is used. then research data are compared to both patterns to see which explanation matches the data better. the basis of these case studies is a theoretical framework based on "theory of incomplete contract" which guides the analysis and interpretation of the research topic. the quantitative data for case studies such as project irr is collected from a hypothetical financial model developed by author and qualitative data is collected through interviews, observations, newspaper articles, and the government official records. after analyzing individual case studies, the key findings and takeaways from all case studies are clubbed together connecting it back to the literature and theory and discussing how it fits into wider patterns or debates. 3.4 sample size and sources of data two cases from the category of financially successful operational ppp projects and nine cases from financially failed operational ppp projects are selected for this study. the data for the case study is collected from sources such as the annual report of the project sponsor companies and project spvs, credit rating reports of project spvs, corporate database capital line, government of india's database of ppp projects www.ppinindia.gov.in,web sites of project authorities like nhai, articles in periodicals and publications and filing by project sponsors on stock exchanges. 4. case study analysis case1: mumbai international airport limited (a case of financially successful operational ppp airport project) contractual and financial details of mumbai international airport limited state maharashtra project specification international airport commercial operation date february 2014 concession ending month may 2037 project cost in inr crore 12300 credit rating crisl aa pirr 13.00% eirr 9.00%  excellent project economics reduce revenue risk: the airport is strategically located in the heart of a key metro city, thereby attracting a strong flow of both domestic and international passengers. the attractive location and a large catchment area ensure strong traffic growth.  strong monitoring by authority: efficient supervision by the project authority, airport authority of india (aai) with its board presence, for strategic decisions and related-party transactions. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 20  mitigation of bankruptcy risk: the presence of an escrow account with a payment waterfall mechanism ensuring debt repayment on time. the cash flows are ring-fenced.  key take away: the privatization of the mumbai international airport project is a success in the light of productive efficiency, the governance and financing of the airport. but significantly negative impact is observed on airlines and passengers due to higher charges. case 2: mumbai nasik expressway ppp road project (a case of financially successful operational ppp national highway project) contractual and financial details of mumbai nasik expressway state maharashtra project specification national highway road 100 km commercial operation date may 2010 concession ending month april 2026 project cost in inr crore 770 cost overrun in % 15 credit rating icra aa pirr 17.00% eirr 12.00%  time and cost overrun mitigated by excellent toll revenue: even though the project delayed by 24 months and cost overrun of 15%, the project has given good financial returns due to excellent toll revenue during the operation phase.  the takeover of project by brookfield from initial sponsors: brookfield asset management company acquired the mumbai nasik expressway from initial sponsors gammon infra in 2015. the deal was part of the selling of a bunch of assets by debt-laden gammon infrastructure. the deal could happen because the cabinet committee on economic affairs permitted 100 percent equity divestment after two years of construction/completion for all bot projects, irrespective of year of the award.  key takeaway: various risks were observed during the life span of the project which resulted in cost and time overrun which impacted the economics of the project. most of the risks were transferred to the concessionaire who managed the risks adequately due to sound toll revenue. the acquiring of this asset by brookfield allows the debtladen initial sponsor to offload its equity and the project is saved from bankruptcy. case 3: mumbai metro one private limited (a case of financially failed operational ppp metro rail project) contractual and financial details of mumbai metro one pvt. ltd. state maharashtra project specification metro rail commercial operation date june 2014 concession ending month may 2042 project cost in inr crore 3012 cost overrun in % 25 credit rating icrd d pirr -4.00% eirr -2.00%  time and cost overrun: the project was delayed by 39 months due to frequent and substantial changes in project planning and timelines on account of uncontrollable factors such as a highly constrained right of way.  the dispute between the concessionaire and project authority about fair fixation: the high court of bombay directed the constitution of the fare fixation committee (ffc) for recommending the fare to be charged to passengers. the ffc recommended the metro fare in the range of inr 10 to inr 110.mmrda challenged the recommendations of the ffc in the high court of bombay to retain the fares as per the provisions of the copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 21 concession agreement. the high court of bombay set aside the recommendations of the ffc and allowed the company to continue with the present fare structure (inr10 to inr40).  the legal dispute between the concessionaire mmopl and project authority mmrda: mmopl has filed various claims against mmrda on account of damages incurred due to delays by mmrda in handing over of unencumbered right of way and land, and additional cost incurred due to various changes in design to accommodate project encumbrances. the number of claims filed against mmrda as on march 31, 2019 aggregate inr 1,766.25 crore. mmrda has not accepted the said claims filed by mmopl and hence mmopl has initiated arbitration proceedings as per the provisions of the concession agreement.  the weak financial position of the sponsor-reliance infrastructure ltd.: in june 2019, rating agency india ratings downgraded the sponsor of the project reliance infrastructure's long-term rating to default grade. the reliance group incurred a net loss of₹2,426.82 crores during the year ended 31 march 2019.  bank loan classified as npa: the bank's loan of inr 2500 of mmopl is classified as a non-performing asset (npa) in 2018. the lead bank of the consortium syndicate bank is planning to seek legal advice for the resolution of its loans to mmopl.  material uncertainty related to going concern: the auditors of mmopl have commented on the material uncertainty related to going concerned in respect of mmopl in their audit report.  key takeaway: the delay in the land acquisition had resulted in high time and cost overrun of the project during construction. the revenue of the project even though increasing every year but not sufficient enough to pay the interest and principal of the high debt taken which resulted in the lenders declaring the project as npa. due to a weak financial position, the sponsor reliance infrastructure ltd. is not in a position to financially support the mmopl. the dispute between the project authority and the concessionaire had added to the problems of the project. case study 4: irb surat dahisar tollway pvt. ltd. (a case of financially failed operational ppp national highway project) contractual and financial details of irb surat dahisar tollway pvt. ltd. state maharashtra-and gujarat project specification 239 km road commercial operation date feb-09 concession ending month apr-20 project cost in inr crore 2537 cost overrun in % 49 credit rating ind bbb+ stable pirr -0.10% eirr -21%  time and cost overrun: the project observed cost overrun of 49% due to due to delay in handing over right of way by project authority nhai which severely impacted the project economics.  revenue sharing dispute: there had been a dispute between the nhai and the concessionaire over the sharing of the toll revenue. according to nhai, the concessionaire was to pay over inr32 crore as part of its "revenue share", which the concessionaire was unwilling to do. as per the concession agreement, the concessionaire was supposed to share 38 percent of the revenue in the first year of the contract which would increase by a percent every year.  key takeaway: the project has generated negative irr both in terms of project (pirr) and equity investors (eirr).the major risk the concessionaire observed was revenue risk which severely impacted its equity irate company had lower-than-expected traffic growth and in turn, the toll collections subdued on the company's project stretch. the unrealistic traffic projections during the pre-bid stage phase of the project failed the project in terms of negative project irr and equity irr. case 5: png tollway private limited (a case of terminated national highway operational ppp project) contractual and financial details of png tollway private limited state maharashtra project specification 60 km road commercial operation date may-14 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 22 concession ending month march 2016 (termination) project cost in inr crore 840 cost overrun in % 25 credit rating icra d pirr na eirr na the project had recorded weak toll traffic volumes since the achievement of partial cod in october 2012 due to local protests and diversion of traffic near nasik. the protests had continued in the form of political agitations demanding stoppage of tolling for local users. despite the maharashtra state government being a party to the tripartite state support agreement, there was no support for additional security to toll plazas which would have aided full tolling. according to the writ petition filed by the project spv, the bombay high court had directed the district administration to ensure law and order at the toll plaza and on the project highway. the said directions of the court had not been implemented by the district administration and the project spv was forced to continue offering the discounted rates. further, given that the toll rates notified post the partial cod in oct-2012 were at ~30% of the applicable rates, the average daily revenue collections were significantly weaker than the initial estimates. even after the revision in toll in may 2014, the average daily revenue collections had witnessed a sizable deficit vis-à-vis company's initial forecasts. as a result, the company had stopped paying the committed revenue share to nhai. the concessionaire faced a revenue loss of almost inr100 crore. in march 2016 the concessionaire, the consortium of ashoka buildcon and l&t infra served a termination notice to nhai on the grounds of prevailing force majeure conditions in the absence of requisite state support citing “lack of state support” as a reason and the toll and maintenance operations was taken over by nhai. in case the default is not cured and termination notice is served, this is expected to be classified as an indirect political event as per the concession agreement and the spv will be eligible for termination payments to the extent of debt due & 110% of adjusted equity. in the event this is decided as an authority event of default, the termination payment would be to the extent of debt due & 150% of adjusted equity. a payment of inr4.2b was made by the nhai, which has been disputed and the same is under arbitration. case 6: l&t halol shamlaji tollway limited (a case of terminated state road operational ppp project) contractual and financial details of l & t halol shamlaji tollway state gujarat project specification 173 km road commercial operation date apr-12 concession ending month september 2028 project cost in inr crore 1303 cost overrun in % 61% credit rating icra d pirr na eirr na since the beginning of tolling operations, the traffic volume had been significantly lower than the initial estimates, due to the presence of a significant alternate route. this has resulted in lower-than-anticipated cash accruals. as per the concession agreement, the company has to share a part of the revenues generated from toll collections with the project authority gujarat state road development corporation limited (gsrdcl). however, due to lower toll collections, the company was not able to pay the same. the government of gujarat had exempted car/jeep/van/state transport buses from the toll on state highways starting august 15, 2016. it planned to compensate revenue loss incurred from such toll exemption by way of monthly reimbursements for exempted vehicles. the toll exemption resulted in disputes as the quantum of compensation was not agreeable to the concessionaires. the project spv served a termination notice to gsrdc in april 2016. the lenders had converted part of the outstanding debt into equity, post which the lenders hold a 51% stake in the company. case 7: ashoka highways (bhandara) limited copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 23 (a case of financially failed national highway operational ppp project) contractual and financial details of ashoka highways (bhandara) limited state maharashtra-chhattisgarh project specification 80 km road commercial operation date oct-10 concession ending month sep-27 project cost in inr crore 535 cost overrun in % 2% credit rating crisl bbb+ (so) stable pirr 1.00% eirr -6.00% the project completed on time and within budgeted cost. during the construction phase, the project authority, national highways authority of india (nhai) delinked the last stretch of 7.9 km which is 10% of the total stretch from the scope of work as it was in a forest area, with no clearances from the forest department which became a matter of dispute and arbitration. the concessionaire had received arbitration award aggregating inr 168.01 crores inclusive of interest and declaratory award against various claims filed by the concessionaire before nhai in january 2019. the commercial vehicles constituted a major portion of traffic on the road stretch along the chhattisgarh-maharashtra border but the traffic volume remained vulnerable to the slowdown in the economy. traffic growth had been impacted in fiscal 2019 and 2020. because of lower-than-expected traffic growth and in turn toll collections and subdued toll revenue growth on the project stretch throughput the operations phase. the 100% wpi-linked escalation in toll charges had limited the escalation in toll rates due to the prevailing lower inflation numbers. case 8: tamil nadu dindigul karur expressways limited (a case of financially failed national highway operational ppp project) contractual and financial details of tamil nadu dindigul karur expressways limited state tamilnadu project specification 68k km road commercial operation date nov-09 concession ending month oct-26 project cost in inr crore 374 cost overrun in % 25% credit rating icra d pirr 2.00% eirr -1.00% the project had a time overrun of twelve months and a cost overrun of 24.66%. the project had wpi-linked escalations. the toll collections remained significantly below expectations when compared to initial projected levels. the toll collections remained weak and insufficient to meet overall expenses and debt servicing requirements. the continued underperformance of traffic had constrained the liquidity of the project spv resulting in default (d) rating. the concessionaire failed to carry out maintenance of the road due to lack of funds and had approached lenders in february 2018 to raise additional term loans to carry out major maintenance (mm) works. as per the concession agreement, the first major maintenance (mm) was scheduled to happen in november 2014 delayed by 53 months due to poor toll collections and mm had started in january 2019 with an estimated cost of inr 70 crores. the funding for the same was happening through the project cash flows as banks did not sanction additional term loan for mm. this had resulted in a pile-up of debt obligation thereby turning the account into npa. nhai had levied penalties of inr 109 crores for the delay in mm activity. the project spv could not get support from the sponsor, madhucon projects ltd due to a weak financial position. the credit rating agency icra had affirmed the default long-term rating of [icra] d of madhucon projects limited. case 9: gmr ambala chandigarh expressways private limited copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 24 (a case of financially failed national highway operational ppp project) contractual and financial details of gmr ambala chandigarh expressways state punjab project specification 35 km road commercial operation date dec-08 concession ending month may-26 project cost in inr crore 610 cost overrun in % 104% credit rating icra bb stable pirr -4.00% eirr -7.00% the project had a time overrun of 18 months and a cost overrun of 104% which had severely impacted the economics of the project. the financials of the project spv were constrained by the significantly lower-than-originally-envisaged toll collection in the project which had resulted in credit risk and dependence on promoter/group support. the traffic on the project stretch post completion was significantly lower than initially envisaged due to the diversion of traffic to alternate routes. the sponsor gmr group supported the project by way of fund infusion in the form of preference shares and unsecured loans. further, the group supported the funding of the periodic maintenance expenditure. in february 2010, the project spv claimed compensation from nhai on account of losses due to traffic diversion to alternate routes and invoked the arbitration clause in the concession agreement for the same. the arbitration tribunal was formed to resolve the dispute. a prolonged delay in realization of the compensation harmed the company's liquidity and credit metrics as the debt repayments are scheduled to increase sharply from fy2022 onwards. restructuring of term loans in fy2016 helped to ease cash flow pressure over the medium term but the company’s cash flows remained insufficient to fund its major maintenance expenses in fy2019. this too is being supported by extension of credit from the sponsor gmr infrastructure. case 10: karaikal port private limited (a case of financially failed state-owned operational sea port ppp project) contractual and financial details of karaikal port private limited state puducherry project specification 173 km road commercial operation date apr-09 concession ending month feb-42 project cost in inr crore 2066 cost overrun in % 11.66% credit rating icra d pirr -2.00% eirr -7.00% after getting commissioned in 2009, the port ran into rough weather and struggled to service its debt. the project spv’s term loan was restructured in fy13 with a two-year moratorium. the loans of the port were sold to edelweiss arc which currently holds over 95% of the port's outstanding debt. edelweiss has converted part of the outstanding loan (interest haircut that it took) into equity and now holds around 11 percent stake in the company. armed with equity stake and majority debt, the asset reconstruction company in september 2017 had taken over the day-to-day operations of the port from the sponsor marg ltd. as per the original concession agreement signed between the initial sponsor and the state government of puducherry, the former is required to maintain a minimum 26% stake in the project. a change in ownership can be implemented only if the current promoter agrees to exit the project through a substitution agreement duly ratified by the pondicherry government. case 11: coastal gujarat power limited (tata mundra umpp) copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 25 (a case of financially failed operational ppp ultra mega power project) contractual and financial details of coastal gujarat power limited state gujarat project specification 173 km road commercial operation date mar-12 concession ending month apr-32 project cost in inr crore 12000 cost overrun in % 15 credit rating crisil d pirr -18% eirr -22 % tata mundra is the first ultra mega power projects (umpp) commissioned in india. it has a total installed capacity of 4,000 megawatts. the project was awarded to tata power ltd on 24th april 2007. the three 800 mw units were commissioned in 2012. the coal for the project was contracted to source from indonesia mines. the tariff consisted of 55% non-escalable and 45% escalable fuel cost. in the year 2013 coal prices spiked internationally. the actual increase in coal prices was 150% to $120 from $50 at the time of the bid. it is against this background that the concessionaire requested the central as well as the state governments of the procuring states to look into the issues of imported fuels and resolved the issue by review of the ppas to ensure the viability of the project. the project spv cgpl had filed a petition with the cerc seeking intervention to establish an appropriate mechanism to offset in tariff the adverse impact of the unforeseen escalation in the imported coal price. cgpl in its submissions to cerc and aptel had said that if a compensatory tariff were not awarded the project would lose inr 1,873 crores a year, totaling inr 47,500 crores over its entire 25-year period of expected operation. in 2014, the cerc had awarded compensatory tariffs to cgp. the compensatory tariffs awarded amounted to inr 0.52 per unit for cgp. the award was challenged before aptel by the discoms. aptel then ruled that while some compensation was due to cgpl, the legal basis on which the cerc had awarded this was invalid. the order by the supreme court, by setting aside the aptel ruling effectively also set aside the cerc award. the supreme court’s order implied a huge earnings setback for cgpl. the court order results in a yearly loss of inr800 inr1000 crores, if the company continues running their power-producing units at the minimum plant load factor, that is, at the minimum level needed for the plant to stay operational. the fact that the supreme court set aside the cerc award increases the probability of power plant at mundra becoming economically unviable. 5. discussion and findings based on the analysis of two financially successful and nine financially failed project, following risks and contract management related issues are observed in indian ppp projects; 5.1 construction risk and time and cost overrun in the case of failed operational projects, the key execution challenges during construction were the acquisition of land and right of way, securing necessary clearances, and financial closure. as per model concession agreements, it was the responsibility of the government authority to hand over the required land and right of way to the concessionaire, failure of which resulted in the time and cost overrun of the projects. india is a federal state where land is a common subject for the central and state governments. it is the responsibility of the state government to make available land to central government projects. but there had been incidences where state authorities had not cooperated proactively to make available land or resolved land-related issues. as observed in the case of mumbai metro rail and national highway projects, the concessionaire received delayed right of way to complete the construction work. a project's inability to acquire all statutory clearances before the commencement of construction activity resulted in construction risk and delay in the completion of the projects. in case of cost overrun, the private developer has to arrange the additional funds which severely impacted the financial returns of the developer and discourage them to participate in future projects. 5.2 revenue risk the major risk observed in the case of most of the failed projects is lower-than-expected traffic growth and in turn, subdued toll/fee collections during the operation phase. the unrealistic traffic projections during the pre-bid stage phase of the project were the cause of this debacle. although optimism bias is a common phenomenon in most public projects, it is essential to be realistic in assessing the market risk of a project as traffic projection is the key input in projecting tariff during operation has and it is directly linked to the revenues against which project cost and final returns are decided. in the absence of robust project preparation, many projects observed to face revenue risk. proper attention was not given to the projection of traffic volume. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 26 5.3 financially weak sponsor risk the financial strength of the sponsor is critical during financial closure and construction when the cost of the projects overshoots. it is observed that the financially weak sponsor could not support the project spv in the time of need. due to aggressive and inadvertent bidding without adequate due diligence in the quest for grabbing the project and subsequent time and cost overrun issues, the balance sheet of sponsor construction companies having a large portfolio of ppp projects became highly stressed. as a result, they failed in funding the mismatched cash flow and equity during construction due to cost overrun and during the operational phase when the revenue of spvs was insufficient even to carry out major maintenance work as in the case of dindigul expressway and mumbai metro rail project. 5.4 legal dispute risk the concession agreement enumerates various events like political, indirect political, non-political force majeure event, and the concessionaire event of default which triggers the termination of the concession agreement by both the project authority and the concessionaire. the prominent cause of the terminations of the operational projects like png tollway and l&t halol state road project was a dispute between the project authority and the concessionaire. the ppp contracts based on model concession agreements were very rigid and lacked provision to change as per market conditions. due to long tenure of 20-30 years and a lot of contingencies that cannot be expected ex-ante while designing the contract, ppp contract is an incomplete contract where provision for dealing with all the contingencies in all the states of the world cannot be included. when the emergency occurs which is not defined in the contract, the question arises who and how will deal with that issue and who will bear the cost of managing the issue. since there was no provision in the ppp contracts for renegotiation and due to fear of blame of a moral hazard, nobody including the contract management team decided to deal with the issues. this resulted in a delay in the projects, cost overrun, and ultimately financial failure of the projects. 5.5 regulatory risk since a ppp project has a long concession period, an independent regulator is needed to balance the interests between the public authority and the private partner. there is no such independent regulator for the highway road sector which results in disputes, arbitration, and court cases between nhai which is an implementation agency and the private concessionaires. as a result, nhai did not receive any bid for its ppp road projects from the private developers in fy2020. as observed in the case of the mumbai airport project, the private operators must be regulated in terms of tariff and other charges to safeguard the stakeholders like passengers and airlines. 6. conclusion the case studies based analysis of operational ppp projects reveled in the fact that various risks had emerged and could not be mitigated in many projects in the absence of sound institutional, contractual and risk management framework culminating into negative risk-adjusted returns to the private investors (eirr) and negative returns to all project stakeholders (pirr) resulting into depleted value for the money. as a result of the disappointing performance of ppp projects, private developers who earlier enthusiastically participated in the ppp program of building the much-needed infrastructure in india stayed away from it and ppp model in india come to standstill. the results of the study support the research hypothesis that there is a positive relationship between operationally and financially successful ppp projects and their project lifelong efficient contract and risk management as ppp contracts are inherently incomplete due to a long time, substantial work to be provided, significant complexities and high uncertainty about future events and occurrences. references abd karim, n. a. 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(2008). a life‐cycle risk management framework for ppp infrastructure projects. journal of financial management of property and construction. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess 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 | ijfb indian journal of finance and banking; vol. 3, no. 1; 2019 issn 2574-6081 e-issn 2574-609x research article published by centre for research on islamic banking & finance and business, usa 1 an empirical evaluation on performance of organization through human resource accounting (hra): a study on selected corporate units of india atul bansal phd associate professor (accounting and finance) department of commerce, j.v.jain college, saharanpur (up), india email id: dr.atulbansal@gmail.com mobile : +91 8899470388 preeti sharma phd professor & head school of business management university of engineering & management, jaipur,india e-mail id:sh_preeti@rediffmail.com mobile no : 7891233350 abstract this study attempts to analyze the importance of human resource accounting (hra) practices for corporate financial reporting. this paper is both a theoretical and empirical exploration, aimed to some suggestions of new thoughts, methods, techniques and applications of hra. various mncs in the field of hrm provide different types of thought about the practices of personnel management with different systems and aims of financial analysis and reporting. hrm has been and remains one of the most powerful and influential ideas to have emerged in the field of business and management. effective practices of human resources in the accounting statement can ensure long-term benefits to the employees of the corporations and it also increases quality, performance, values, and commitment to future need. the data of this study was collected from secondary and primary sources from selected corporate units. very few corporations are practically practices this concept in their accounting and financial report. some findings and suggestions are addressed in the study that may be the prerequisite for organizational growth and development. keywords:human resource accounting (hra), indian human resource practices,lev and schwartz model effectiveness, human assets, financial reporting 1. introduction and / or statement of the problem human resource accounting (hra) is the process of identifying, measuring data about human resources and communicating this information to interested parties. the major benefits of such accounting are that it develops effective managerial decision making, quality of management, prevents misuse of human resources, increases human asset productivity, improve morale, job satisfaction, performance appraisal, motivation and creativity, etc. to ensure growth and development of any organization, the efficiency of people must be augmented in the right perspective. without human resources, the other resources cannot be operationally effective. the original health of the organization is indicated by the human behavior variables, like group loyalty, skill, motivation, quality and capacity for effective interaction, cooperation, communication and decision making. men, materials, machines, money and methods are the resources required for an organization. these resources are broadly classified into two types such as human and physical resources. men, otherwise known as the human resources, are considered to be animate resources. others, namely, materials, machines, money and methods are considered to be inanimate or physical resources. human resource accounting (hra) is a new concept of accounting. it follows the traditional theory that all expenditure on human capital formation is taken as a charge against the revenue of the period as it does not create any physical asset. but modern view is that cost incurred on any asset as human resources need to be capitalized as it provides benefits measureable in monetary terms. measurement of cost and value of the people to organizations is highly important, costs incurred in recruitment, selection; hiring, training and development of employees along with their economic values are very much relevant for human resource accounting. all the processes of the organization are operated by human resource, so valuation of this resource is very necessary and copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 2 information about the valuation should be given to the investors, the management and others through financial statements. human resource accounting is basically an information system that explains management what changes are occurring over time to the human resources of the business. in the early 1990s industries were recognized the value and importance of human assets. skillful and specialized human resources are of vital importance for an organization just like its physical properties and investments. managers of the organizations spend a lot of money for training and educating their workers and employees in order to increase the efficiency of the organization under their control, but human resources accounting system which should be used for human resources information processing have not been used practically by any organization. in this study, an alternative to the traditional methods of accounting for human worth has been proposed. the concept of human resource accounting was developed to give management an accurate estimation of the value of people to the organization. the hra is being developed to provide a system that the goals are to define present human resource value and to predict future human resource value to the organization. the human resource accounting is an application of the technology of a basic management dimension return on investment (roi) from human resources as program justification, evaluation of promotion policies, prediction of human asset costs associated with new construction overruns, estimation of personnel costs associated with adjusting of an organization and evaluation of detailing and assignment procedures. 2. rationale and scope of the study management of human resources in any organizations is very much important from accounting point of view. valuation of human resources, recording the valuation in accounts and fair disclosure of such information in financial statements are the demand of the stakeholders to enhance managerial performance and employees' productivity. investment in developing human resources is not revenue expenditure. its impact on developing the capability of employees provides benefits for a long period. there is a genuine need for reliable and complete information that can be used in improving and evaluating human resource management. hra is actually a part of social accounting in which accountants need to apply their specialized abilities to help find solutions to our social problems. we know that accounting is a science of measurement, analysis and communication. the designing of proper accounting system for providing information to the stakeholders is also a difficult task. the information concerning human assets is more relevant to a great variety of decisions made by external and internal users. accounting for human asset constitutes an explicit recognition of the premise that people are valuable organizational resources and an integral part of a mix of resources. this study will be helpful for the different users of accounting information for their day to day decision making. this study, therefore, will help to presents a critical assessment of the concept of hra thereby unveiling its strengths and weaknesses. the study also presents the likely impact that reporting human resource as assets will have on the quality and quantity of companies‘ corporate financial reports. the basic premises underlying the practices of human resource accounting are:  people are valuable physical resources of an organization.  the usefulness of hr as an organizational resource is determined by the management and  information on investment and value of human resource is useful for decision making in the organization. 3. need & problems of hra it is fact that the 21st century is era of human demand, countries those have labor quality ruling the world with dominant technology. countries like china and japan forerunners in technology advancement, is all result of work force performance. hence whole world realized that human resource is the real investment into business ventures that should only catch and stick the success waves. human resource accounting can be defined as an application of financial skills, and an investigative mentality to unresolved issues, conducted within the context of rules of evidence. as a discipline, it encompasses financial expertise, fraud knowledge and a sound knowledge and understanding of business reality and the working of the legal system.‖ this implies that the human resource accountant should be skilled not only in financial accounting, but also in internal control systems, the law, other institutional requirements, investigative proficiency, and interpersonal skills. corporations can rely on these skills for developing a consistent system of corporate governance, disseminating such information within and outside the company, ensuring that governance policies and objectives are interwoven into the internal control system, setting up fraud prevention systems, and investigating any existing fraud. human resource is a term which refers to the set of individuals who make up the workforce of an organization or a business entity. the work of bassey &tapang (2012) points to the fact that human resources .have been identified as one of the main sources of competitive advantage by many organizations in today‘s economy. particularly, the private sector organization is widely diverse and has focused on human resources as having special strategic value for organization development. abdullahi & kirfi (2012) maintain that the quantification of the value of human resources helps the management to cope up with the changes in its quantum and quality so that equilibrium can be achieved in-between the required resources and the provided human resources. as a result, it becomes imperative to put measures in place to effectively manage people with their needs and expectations to enhance productivity. therefore, proper appreciation of human resource copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 3 accounting will enable managers take appropriate decisions regarding investment in human resources. it will also provide comparative information regarding costs and benefits associated with investments in human assets. hr accounting is very much needed to provide effective & efficient management within the organization. 4. aims and/or objectives of the study this study is an attempt for achievement of two major objectives of the human resource accounting practices in national corporations. 4.1 general objective: to analyze the importance of hra in hrm decision from an organizational perspective by increasing the transparency of human resource costs, investments and outcomes in profit and loss accounts, balance sheets and investment calculations. 4.2 specific objectives: the specific objectives are:  to analyze and evaluate the hra plans and policies from previous literature review and applications of hra in different organizations.  to evaluate the execution of hra programs in financial statements and to identify the strength and weakness of hra practices in the organizations.  to provide information to all people concerned regarding the efficiency of hr in obtaining productivity and profitability.  to facilitate valuation of human resources, recording the valuation in the books of account and disclosure of the information in the financial statement.  to provide some arguments and suggestions with a view to increasing the use of hra in most of the corporations in india. 5. conceptual framework given the problem and the theoretical perspective for investigation of the problem, the proposal should clearly bring out the concepts to be used and demonstrate their relevance for the study. besides, the dimension of empirical reality that needs to be explored for investigating the problem should also be specified. 5.1 historical cost method this method was developed by brummet fand w.c. pyle. under this method capital expenditure on human assets are amortized over an expected life of human assets. when employee is leaving early than unrecovered will be treated loss and charge to p&l a/c. however it is difficult to find out the effective life of human assets and fix the rate at which cost be amortized. 5.2 replacement cost method this method was developed by r.likert and e.g. flamhottz. under this method all the cost of replacement are considered when an employee is replaced (i.e, recruiting, training, placing etc.) with a person of equal ability. this method of suggests a current value of the human assets. it is difficult to determine the replacement cost of an employee and replacement cost does not reflect the competence of an employee. 5.3 opportunity cost method this method was developed by hekimian and jones. under his method opportunity cost‘s are considered as an asset value when the target of an alternative use. only scarce human resources would have value at any particular point of time. opportunity cost is calculated on the basis of efforts made by several organizational units, profit centers or departments. 5.4 competitive bid price method it is developed by hekimian and jones. under this method human resources are valued on the bidding cost. only scarce work force or employees are considered under this method. the value of human assets is determined by capitalizing the total of bid prices of all the scarce employees within the company 5.5 standard cost method this method was developed by david watson. under this method standard cost of recruitment training and professional growth for each grade or category of employees are fixed and compared with actual after recruitment and replacement. variance if any is charged to profit & loss account. 5.6 current purchasing power method in this approach investment in human assets or workforce is converted into the current purchasing power of money with help of index number. it is difficult to find suitable index in the changing scenario therefore; this method may not be representative of actual value of human resources. 5.7 human resource accounting practicing companies in india even though, many benefits have contributed by hra, yet its development and application in different industries has not been encouraging. because indian companies act 1956, does not provide any scope for showing any information about human resources in financial statement. due to the development of business and industries, some copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 4 of the indian companies, both public and private, value their human resources and report this information in their annual report. the companies, who are presently reporting human assets valuation, include:  oil and natural gas commissioning (ongc).  hindustan petrolium corporation limited (hpcl)  oil india ltd  cement corporation of india. (cci). 6. human resource accounting in india there certain major issues relating to implementation of human resources accounting arises because of it try to attempt measure and evaluate intangible. which are as follow?  charging the expenditure incurred on recruitment, training and development of human resources to current period‘s profit and loss account, profit during that period are understated or losses overstated.  by not capitalizing expenses relating to human resource, even when they are substantial the assets are concealed and net worth is understated to that extent.  writing of goodwill when profits are rising, accountants create secret reserves.  the historical cost approach to develop measures of human resource accounting uses an amortization rate, which provides the figure of amortization to be charge to the profit and loss account every year. but it is very difficult to develop norms in this regard. physically and mentally, individuals grow and deteriorate at different rate. some grow more capable as a result of their work experience, other do not. given the difficulty of predicting such changes, it is even more difficult to develop a means of writing off and individual‘s value. so far, precise measures for amortization of human assets have not been developed.  though physical assets are fully recorded under the existing system, human assets are ignored in the internal as well as external reports.this lead to faulty evaluation and decisions.  by not valuing human resources, on the principles of accounting depreciation or appreciation of human assets is ignored. there had been any attempt to systematically measure and report the depreciation or appreciation of human resource, the quality of management would certainly improve. 7. research question or hypotheses traditional financial accounting considers only the fixed assets and current assets as assets and records this in the balance sheet of companies annual reports, but the real asset, that is, the human assets are not taken into consideration. this accounting of human asset is done in human resource accounting. in developed countries, hra is very well followed and is attached in their annual reports. although, there is much research about hra in developed countries, there is a gap in the literature on this area in developing and fast developing countries. till today many of the indian companies do not follow the hra. therefore it is necessary to raise certain questions on the following  what is the nature and characteristics of hra,  to examine whether hra is useful to the management or any other users who make use of hra,  how to analyze the perception of management and employees,  how to determine the contribution of human resource accounting on the financial statement of indian companies – public companies and private companies and  to know whether there is a relationship between the profitability of the company with human resource accounting disclosure. these questions are called for an in-depth analysis on hra so as to give the awareness about hra and make benefits out of human resource accounting disclosures. hence this study is carried out. the following research hypotheses are framed and tested in the present study:  h0: there is no significant difference between the socio-economic variables and the nature and characteristics of human resource accounting disclosures in indian companies.  h1: there is a significant difference between the socio-economic variables and the nature and characteristics of human resource accounting disclosures in indian companies.  h0: there is no significant difference between the socio-economic variables and the ability of users of human resource accounting to make wise decisions  h1: there is a significant difference between the socio-economic variables and the ability of users of human resource accounting to make wise decisions.  h0: there is no significant difference between the socio-economic variables and the perception of management and employees on human resource accounting.  h1: there is a significant difference between the socio-economic variables and the perception of management and employees on human resource accounting. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 5  h0: accounting for human resource does not improve the financial position of public sector companies in india.  h1: accounting for human resource improves the financial position of public sector companies in india.  h0: accounting for human resource does not improve the financial position of private sector companies in india.  h1: accounting for human resource improves the financial position of private sector companies in india.  h0: there is no significant difference between the profitability of the company and the extent of human resource accounting disclosures.  h1: there is a significant difference between the profitability of the company and the extent of human resource accounting disclosures. 8. review of literature s.no title of article author year variable used conclusion 1 investigation of the influence of human resources accounting information on managers' decision making in social security organization of khuzestan province irajisvan 2014 there is significant relationship between human resources accounting information and managers' decisions in social security organization in khuzestan province. correlation value is positive and this shows that an increase in human resources accounting information can result in managers' decisions improvement 2 a comparison of similarities between iranian and european organizations in terms of lack of attention to the human resources mohsen asgari 2013 the main goal of hr accounting is to describe potential capacity of the hr in providing financial report of the organization and providing economical values of the human resource in order to eliminate the shortcomings traditional accounting. based on ranking results, lack knowledge of managers about hra is one of the important and essential reason of lack implementation and attention to hra 3 problem with human resource accounting and a possible solution md. mustafizurr ahaman 2013 the existing models proffered under the hra were adequately reviewed and objectively criticized so that more comprehensive could be developed. as an employee of an organization will not merely work for a single year, it seems rational to account for employee as an asset in the balance sheet on the ground that they will provide future economic benefit to the entity. 4 the role of human resource accounting information on the accounting information system dr. adel m qatawneh 2013 the statistical analysis showed that human resource accounting information had a positive impact on the ais and that human resource accounting information has a significantly statistical relationship with ais itself human resource accounting information had a statistically significant influence for ability to reduce cost, improve operational performance of through accounting information systems 5 a review of human resource accounting and organizational performance jacob cherian 2013 there is no legal regulation for accounting human resources in any of the organization‘s annual report. the main aim of this review is to study the benefits of hr practices to the firm. human resources are considered as building blocks for any organization. it is necessary to identify the contribution of the employees to the firm. then, the evaluation measures of ―human resources‖ are carried out. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 6 6 the role of human resources accounting at research & development centers meysameiv azi 2013 human resources accounting will provide required information for the manager in order to find and modify any allocation and maintenance and utilization, evaluation and compensation of human resources. it was obvious that after all studies and researches companies may realize the real value of human resources accounting. up to now we found out a part of advantages of this resource including providing required information for different sections of an organization including financial department. 7 human resources accounting disclosures in nigeria quoted firms augustine , o. enofe this study was carried out to ascertain the relationship between firms‘ financial performance and human resources accounting disclosures on one hand, and the differences in human resources accounting disclosures reporting level between financial sector and non-financial sector companies quoted in the nigerian stock exchange. findings of the study indicate that financial companies such as banks and insurance companies in nigeria are disclosing human resources accounting information than non-financial companies 8 human resource accounting: recognition and disclosure of accounting methods& techniques md. admiral islam 2013 to understand the needs and significance of hra inthe context of business performance measurement. to provide suggestions for developing such accounting practices in our business enterprises. human resources are the energies, skills and knowledge of people which are applied to the production of goods or rendering useful services. 9 human resources accounting between recognition and measurement: an empirical study khaled jamal jaarat 2013 researcher discussed and investigated the possibility of including the human resources within the definition of asset, and also, the possibility of measuring the human resources, and as a result recognizing it the possibility of measuring human resources, by using one of the generally accepted bases in accounting that included in conceptual framework of financial reporting issued by iasb. 10 practice of human resource accounting in banking sector of bangladesh syed moududul huq 2012 by the practicing of hra an organization can be benefited in case of.a)cost effectiveness b)ensuring the best use of human resources c)sound & effective basis for human asset control d)the productivity of human resources bangladesh bank provides guidelines towards to practicing hra, iasb issues a standard for implementing hra, then the problems of practicing hra can alleviate soon and commercial banks in bangladesh may continue to boost the economy. over the last two decades the idea of accounting for human resources is gaining active consideration. so, hra is not a new issue in economics. economists consider human capital as a production factor, and they explore different ways of measuring its investment in business, agriculture, education, health, and other areas. accountants have recognized the value of human assets for at least 50 years ago. research into true hra began in the 1960s by rensis copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 7 likert (bowers, 1973). likert defends long-term planning by strong pressure on human resources' qualitative variables, resulting in greater benefits in the long run. american accounting society on hra defined hra as the process of identifying, measuring data about human resources and communicating this information to interested parties. stephen knauf states that hra is the measurement and quantification of human organizational inputs like recruiting, selecting, hiring, training, experience and communications. the experts in the field of hra were shultz (1960), william pyle (1967), flam holtz (1973), kenneth sinclare (1978) and roa (1983), etc who contributed appropriate methodology and correct methods for finding out the value of the employee to the organization. accounting has special position and plays an important role in economic, trade and manufacturing development (tomassini, et al. 1977). it is a man-made art and its principles, techniques and procedures have been evolved over a long period to aid business in reporting for the management and public. the four factors of production man, money, material and land, the last three of them are amenable to conventional accounting, but the first one, the human resource has not been subject to such accounting (carme, barcons et. al 1995). 9. scope of the research the study is based on analysis of the information supplied in the questionnaire. as responses have been checked according to the perception of the person filling the questionnaire, the probability of certain amount of subjectivity in the response cannot be ruled out. in preparing the questionnaire related to stock of human resource, labour turnover, absenteeism, age, qualification, grouping, earnings, own funds, total assets, hrd expenditure, net sales, profit information, capital employed etc. has been used.  in this study the meaning of accounting is taken in the sense of information system. the main focus of the study is to examine and evaluate the existing accounting practices in respect of expenditure on human resource. more specifically, the study examines the accounting treatment regarding conducting interviews etc.  the present study is a pilot project and an exploratory one conducted by an individual scholar. this study has not previewed all industries.  it is conducted among the employees of selected companies from bse sensex 200. the period of the study will be past 10 years.  the study aims to reveal whether there is any impact of human resource accounting on indian companies. hence the present study is captioned as ―human resource accounting in indian companies‖.  overall quantum of audited industries was examined. 10. methodology of the research 10.1 study population the population of this study consists of the total number of companies in the bombay stock exchange sensex (bse 200). out of which only 30 companies follow human resource accounting. hence these 30 companies, 16 public ltd. companies and 14 private ltd. companies have been selected as a sample unit for the study. 10.2 sample design and sampling techniques the present study used convenience sampling method and opinions have been collected from managers, accountants and employees in the respective companies. the companies which follow human resource accounting have been selected as a sample unit for the study. hence 30 companies have been selected as a sample unit for the study, 16 public ltd companies and 14 private ltd companies. a pre-test has been conducted through pilot study so as to ensure the relevance and consistency of various items and statements in the questionnaire, inconsistent statements have been altogether dropped and others found appropriate. based on the determination and allocation formula, 300 respondents have been selected as a sample size for the study. 10.3 collection of data the present study has collected both primary and secondary data. 10.3.1 primary data the primary data are collected from managers, accountants and employees of both private and public ltd companies from the administration of questionnaire. 11. disclosure relating to human resource accounting 11.1 measurement of human resources human beings are the dynamic elements of every organization. the success of any organization, to a great extent, depends upon the quality and caliber of the people working in it. in other words, human resources are the most important asset of an organization. thus, in spite of all technological developments, the importance of human resources has in no way diminished. with the advent of scientific management, which emphasis on quantitative copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 8 methodology to make a most efficient use of all resources, also it includes the computation of the human resource capital. oil and natural gas corporation table-1. total number of employees in ongc during the period from 2008-09 to 2015-16 particulars 2008 2009 2010 2011 2012 2013 2014 2015 technicalexecutive 19349 19129 18780 18361 18684 18305 18379 19110 technical – nonexecutive 7567 7267 7135 6368 5194 5072 3997 3452 total (a) 26916 26396 25915 24729 23878 23377 22376 22562 nontechnical executive 4880 4655 4526 4451 4474 4365 4638 4834 non-technicalnon-executive 8484 8301 7592 7005 6370 6068 5982 5639 total (b) 13364 12956 12118 11456 10844 10433 10620 10473 total number of employees 40280 39352 38033 36185 34722 33810 32996 33035 (index) 100 97.7 94.42 89.83 86.2 83.94 81.92 82.01 source: annual reports of ongc during the period from 2008-09 to 2015-16 hindustan petrolium corporation limited the numbers of employees under hpcl are classified among management and nonmanagement table -2. total number of employees in hpcl during the period from 2008-09 to 2014-15 particulars 2008 2009 2010 2011 2012 2013 2014 2015 management 3571 3583 3594 3562 3866 4074 4094 4551 non-management 7786 7630 7494 6999 6912 6817 6855 6695 total number of employees 11357 11213 11088 10561 10778 10891 10949 11246 (index) 100 98.73 97.63 92.99 94.9 95.9 96.41 99.02 source: annual reports of hpcl during the period from 2008-09 to 2015-16 cement corporation of india limited (cci) the number of employees under cci is classified among executives, supervisors, skilled workers, semi – skilled workers, clerical and other supporting staff and unskilled workers. table -3. total number of employees in cci during the period from 2008-09 to 2015-16 particulars 2008 2009 2010 2011 2012 2013 2014 2015 executives 303 237 188 182 173 165 150 134 supervisors 445 335 206 204 199 187 176 178 skilled workers 1089 762 552 577 577 580 534 388 semi-skilled workers 404 293 202 238 237 223 233 184 clerical & other supporting staff 426 289 250 212 212 201 209 150 unskilled workers 346 218 209 173 172 167 158 125 total 3013 2134 1607 1586 1570 1523 1460 1159 (index) 100 70.83 53.33 52.64 52.11 50.55 48.46 38.47 source: annual reports of cci during the period from 2008-09 to 2015-16 oil india limited (oil) the number of employees under oil is classified among technical – executive, technical – workmen and administrative – executive, administrative workmen. table -4. total number of employees in oil during the period from 2008-09 to 2014-15 particulars 2008 2009 2010 2011 2012 2013 2014 2015 technicalexecutive nr 994 1264 1256 1122 technical – workmen nr 6952 5833 5426 5131 7304 7249 7127 total (a) nr 7946 7097 6682 6253 administrative -executive nr 599 422 456 607 administrative workmen nr 1020 1254 1549 1798 1172 1182 1260 total (b) nr 1619 1696 2005 2405 total number of employees 9725 9565 8793 8687 8658 8476 8431 8387 (index) 100 98.35 90.42 89.33 89.03 87.16 86.69 86.24 source: annual reports of oil during the period from 2008-09 to 2015-16 copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 9 disclosure of selected variable for hr related information by selected companies. d= disclosed nd= not disclosed table5. disclosure of various variables disclosure of variables company ongc hpcl cci oil total value added d d d nd 3 no of employee d d d d 4 eva d nd d nd 2 value of hr nd nd d nd 1 value of hr per employee nd nd d nd 1 value added per employee d nd nd nd 1 valuation model used d d d nd 3 discount rate applied d d d nd 3 age wise distribution nd nd d nd 1 group wise distribution d d d nd 3 gender wise distribution nd nd d nd 1 turnover per employee d nd nd nd 1 employee cost nd nd d d 2 total identified variables 8 5 11 2 26 table-5 shows human resource accounting disclosure practices by ongc, hpcl, cci and oil. the table helps to understand which company provides more information regarding its hr. it can be seen that cci provides 11 type of information (i.e. 84.6%) out of 13 listed information. ongc disclose the 8 type of information (i.e. 61.53 %), than comes hpcl, it provide the 5 type of information (i.e. 38.46%) and oil provide only 2 type of information (15.38%). 11.2 measurement of human resources human beings are the dynamic elements of every organization. the success of any organization, to a great extent, depends upon the quality and caliber of the people working in it. in other words, human resources are the most important asset of an organization. thus, in spite of all technological developments, the importance of human resources has in no way diminished. with the advent of scientific management, which emphasis on quantitative methodology to make a most efficient use of all resources, also it includes the computation of the human resource capital. table indicates the value of employees‘ vis-à-vis total no. of employees as per lev and schwartz model. the total value of employees of sampled organizations is about 15crores. according to this table, ongc indicates the highest value of employees i.e. 87.09% and it also have highest percentage among total number of employees 53.9% (17,000employees). the second company which have highest value is hpcl i.e. 4.22% value. but the table shows that there are some companies in sample that have higher number of employees but value of their human resources is not higher likes oil that has employed 11.46% (3,620 employees) but their human worth is only2.3% that is too much less than number of employees. thus, in spite of large number of employees, value of human capital is not high. the lowest value of human capital is represented by cci which employed 0.063% employees and their human worth is only 0.004%. table-6.total value of hr as per lev and schwartz model s.no. name of company no. of employees value of human resource in cores 1 oil & natural gas corporation ltd. (ongc) 33035 3,620(11.46) 2 hindustan petroleum corporation ltd. (hpcl) 11246 1,568 (4.96) 3 cement corporation of india ltd. (cci ) 1159 53(0.167) 4 oil india ltd. (oil) 8387 790(0.60) source: data compiled from questionnaire 11.3 per capital value of human resources high performing organizations in order to keep performing on a continuous basis must treat their human capital as the most important and valuable asset. they should treat them as adults, as partners and with dignity and respect. as we all know that ‗people who feel good about themselves produce good results‘ and people who produce good results feel good about themselves‘. such a healthy and virtuous cycle goes on and on, satisfying the individual copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 10 goals and organizational goals too at the same time, in that the individual drives the job satisfaction, which in turn induces him to reach out for excellence, culminating in the all-round development of the performing organizations. in recent years, india has evolved from an inward looking economy to one with a global orientation. today, the company exports large number of products to various destinations than ever before. sound human resources not only facilitate to improve a firm‘s long run responsiveness and flexibility also thereby competitiveness. table indicates the value per employee and number of employees working in organization. ongc have the highest number of employees i.e. 17,000 and value per employee is also very high i.e. 80 lakh. after ongc, hpcl have the highest value 46.4 lakh of each employee that is very high in comparison to the number of employees‘ i.e only 200 but the value shows that human resources are very important for these organizations. table 7: value of hr per employee as per lev and schwartz model s.no. name of company no. of employees value of human resource in cores 1 oil & natural gas corporation ltd. (ongc) 3,620(11.46) 10.3 2 hindustan petroleum corporation ltd. (hpcl) 1,568 (4.96) 42.3 3 cement corporation of india ltd. (cci ) 53 (0.167) 12.6 4 oil india ltd. (oil) 790(0.60) 7.7 source: data compiled from questionnaire 11.4hierarchical per capita human resources human beings are the dynamic elements of the organization. the success of an enterprise will depend upon the caliber and motivation of persons working in it. the success of an organization depends upon the effective and meaningful utilization of men, materials and money. infract, business is a system which consists of elements and inter-connections between elements. one cannot simply say that the value generated by a business consists of the sum of the value generated by individual elements. value arises because each of the elements performs various functions and because these functions interact. table 8.value of hr per employee as per level of lev and schwartz model s.no. name of company value of employee at higher level value of employee at middle level value of employee at lover level value per employee 1 oil & natural gas corporation ltd. (ongc) 143.90 79.4 2.92 75.44 2 hindustan petroleum corporation ltd. (hpcl) 37.5 31.7 5.6 24.9 3 cement corporation of india ltd. (cci ) 25 9.74 7.8 42.5 4 oil india ltd. (oil) 44.9 17.5 3.3 65.7 source: data compiled from questionnaire the enterprises follow someone similar practice evolved out of the synthesis of the three approaches based on economic value as advocated by lev and schwartz, flamholtz and jaggi and lew may appear to be an improved version. the present value approach to hra is still in the experimental stage. but, it is already required in valuing some specific under general accepted human accounting standards. hr value may reflect the present value of future liability of an organization towards employer wage payment. it does not reflect the value of hr as an asset, nor does it facilitate to manage the same as an asset as against expense in the traditional accounting practice. the cost of the wages may have to be judged in relation to the services they render to access their value and improve organizational productivity. besides the wages as a servicing cost of employees, the cost of manpower acquisition may be no less relevant. formulation of generally accepted human accounting standard is essential at this juncture. it may not represent the value of the hr as proposed in the historical cost based hra, but the same cost elements may have to be recognized while judging the extent of the services, the employees render to the organization to reflect their value. the value assigned by indian companies to their human resources just denotes the present value of the costs with respect to remaining service life of an employee in the organization rather than their contribution that it will receive from hr. 12. obstacles in hra although, the theory of hra appears to be useful, the redistill lack of adequate standards for the valuation of hr. the mere process of putting number to things can easily be taken outside the context of their proper use. it is likely that managers will treat human quantitative data not different from quantitative data regarding the physical plant and copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 11 machinery. the managers may use hra as a means of manipulating the employee. she/he may decrease the value of an employee as a form of punishment or control. this may be done by altering the variables like the probability of an employee being promoted to the next state, future increments etc., determining the value of hr. the employee‘s bargaining power might be increased if his/her value was known. however, power might be increased if his/her value was known. 13. conclusion hra being an emerging area in accounting has greater potential for further research. the model devised so far, for the valuation of hra, has been developed in usa keeping into consideration the environments prevailing there. there is a great need to review their applicability in india, a country which is substantially facing different environments. the special studies needed periodically to calculate cost of turnover, cost-benefit analysis of training and the cost of labor etc., must be a joint effort since many value judgments and assumptions must be made and understood by the prepares of data as well as the user. hra has a promise; it has not yet met the test of usage. much more research is necessary before hra can possibly be useful to operating managers. references iraj isvan (2014).investigation of the influence of human resources accounting information on managers' decision-making in social security organization of khuzestan province.journal of applied environmental and biological sciences. mohsen asgari.(2013).a comparison of similarities between iranian and european organizations in terms of lack of attention to the human resources accounting .international journal of academic research in accounting, finance and management sciences,3(1),265–270. mustafizur rahaman.(2013). problem with human resource accounting and a possible solution.research journal of finance and accounting,4(18). adel m qatawneh(2013). the role of human resource accounting information on the accounting information system .european journal of business and management, jacob cherian, a review of human resource accounting and organizational performance international.journal of economics and finance,5(8). meysam eivazi, morteza ranjkesh, the role of human resources accounting at research & development centers national park-forschung in der schweiz. switzerland research park journal. a.o. enofe, dr. c. mgbame, sunday otuya.(2013). human resources accounting disclosures in nigeria quoted firms .research journal of finance and accounting,4(13). amirul islam, md. kamruzzaman & md. redwanuzzaman human resource accounting: recognition and disclosure of accounting methods & techniques by md. global journal of management and business .research accounting and auditing,13(3). khaled jamal jaarat.(2013).human resources accounting between recognition and measurement: an empirical study .journal of business studies quarterly ,5(2). dasari, p., chand d. b. & rajasekhar d. 2013, ‗a study on human resource accounting methods and practices in india‘, international journal of social science & interdisciplinary research,2(4). maria l. b., kel a. e. (2013).‗human resource accounting and international developments: implications for measurement of human capital‘, journal of international business and cultural studies human resource accounting. zafor mamoon .(2013).human resource accounting for decision making. international journal of innovative research & development. (2). syed moududulhuq.(2012). practice of human resource accounting in banking sector of bangladesh .international journal of accounting and financial management research. asha sharma impact of human resources accounting on organizational performance.(2012).iosr journal of business and management .(5)1 fariborz a. & raiashekar d.h. (2011).decision-making based on human resource accounting information and its evaluation method, asian journal of finance & accounting, 3(1),14. lawler, e. e. (2009). make human capital a source of competitive advantage. organizational dynamics, 38(1), 1– 7. http://dx.doi.org/10.1016/j.orgdyn.2008.10.007 baker & mckenzie (2010).australian master human resources guide.cch australia limited.macquarie university. graduate school of management : 51 mukesh chauhan & shivani gupta.(2009).human resource accounting—concepts & practices in india‖. the management accountant. (44) bras, f. a. & rodrigues, l.l. (2007). accounting for firms‘ training programs: an exploratory study, 11 (3), 229. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 12 andrikopoulos, a. (2005). using intellectual capital statements to determine valuedrivers and priorities for organizational change: a portfolio selection approach. knowledge management research & practice, 3 (3), 166. 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/). indian journal of finance and banking; vol. 2, no. 2; 2018 issn 2574-6081 e-issn 2574-609x impact factor: 3.8 published by centre for research on islamic banking & finance and business, usa 15 validity of capm by using portfolios: evidence from indian capital market k.m. yaseer 1 & k.p. shaji 2 1 department of commerce, pg department of commerce govt. college madapally, university of calicut , india 2 urban and rural development finance corporation, thiruvananthapuram, india correspondence: k.m. yaseer, department of commerce, pg department of commerce govt. college madapally, university of calicut , india received: may 20, 2018 accepted: may 28, 2018 online published: july 25, 2018 abstract this article tests the validity of capital asset pricing model and compares the results of 16 periods including 14 sub periods which comprises 3 years each for the prediction of the expected returns in the indian capital market. the tests were conducted on portfolios having different security combinations. by using black jenson and scholes methodology (1972) the study tested the validity of the model for the whole and different sub periods. the study used daily data of the bse 100 index for the period from january 2001 to december 2010. empirical results mostly in favor of the standard capm model. however, the result does not find conclusive evidence in support of capm keywords: capital asset pricing model, beta, systematic risk, security market line. i. introduction globalization and international investments to indian capital market over the past decade made investment arena tougher and investment decisions complex. today the market is highly volatile and the investor should be cautious and should identify an appropriate tool to evaluate the risk and return involved in his investment decisions. normally rational investor will expect high return for bearing risk and the rate of return on the investment should commensurate with the riskiness of the assets. capital asset pricing model (capm) was developed by sharpe (1964), lintner (1965), and mossin (1966) and it has been used widely for determining the risk return relationship in asset management. the core assumption of this model is that contribution of an asset to the variance of the market portfolio is the asset’s systematic risk and beta can explain the asset’s risk. in other words, rate of return and the risk premium, which will be proportional to assets market risk or beta quantifies the amount of risk that cannot be diversified away. this study has four testable objectives. it checks the empirical validity of the capm in indian stock market and ascertains the relationship between return of securities and market return. it also compared whether expected rate of return is linearly related with systematic risk and the difference in results while using different security combinations. this study is unique in the sense that it is difficult to find a study, which tested the validity of capm in indian capital market by using different portfolio combination. the analysis was conducted for the whole study period and for different sub periods by using two different set of portfolios and failed to find irrefutable evidence in validating capm. the size of the sample and the number of companies used to construct the portfolio is one of the important limitations. 2. review of literature capm is the widely applauded model to explain the risk return relation. large number of studies has been carried out to elucidate the relationship between return and factors which affect return and this has been tested with individual security return and portfolio return. generally portfolio betas are more precise when compared to the individual security beta and researchers like black and et.al (1972), friend and blume (1973) etc, followed portfolio approach to examine capm. in1973 fama and mac.beth tested the linearity between expected return and pre www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 16 ranked historic beta of assets and included squared beta as an additional variable to the basic capital asset pricing model and found a positive relation between return and risk. results of various empirical tests revealed that there is a mixed feeling on the applicability of capm in predicting risk return relationship. studies conducted by (fama and mac beth 1973), (gibbons and ferson, 1985) are generally in favor of capm. at the same time there is substantial criticism against the capm since the mid of 1975 and many empirical studies uncovered various anomalies that were clearly in conflict with the model’s predictions. (ross, 1976) introduced the concept of a multi factor model with the theoretical foundation and presented a number of state variables to explain the expected. (roll, 1977) argued that one cannot empirically test the capm because the construction of the market portfolio as per the theory is impossible. (basu, 1977) found that when stocks are sorted on earnings-price ratios (e/p), the expected returns on high e/p stocks are higher when compared to the return predicted by the capital asset pricing model. similarly (stattman, 1980) tested the effect of book value on stock return, (banz, 1981) the size effect. (bhandari, 1988) the effect of leverage and showed the inefficiency of beta to explain the market returns. in 1992 by using the cross-sectional regression fama and french examined the validity of capm and found that size, book to market, debt equity and earning price should consider in the explanation of expected stock return. further, chan et.al (1991) challenged the validity of capm. (bark, 1991) tested the riskreturn relationship for assets by using the capm with fama and macbeths’ two-stage approach and found sharpelinter-mossin capm frame work is not adequate in the korean stock market. (yue, 1997) tested capm with multivariate testing based on gibbon’s methodology in hong kong market and their results rejected both the sharpelintner capm and black capm at an extremely low level. (harris et al., 2003), (fan, 2004), (malin and et. al, 2004) uk, france and german markets rejected capm. (michailidis et.al, 2006) found that their study do not support the theory’s basic hypothesis of capm in greek securities market but explained the excess returns. pettengill et. al (1995) found valid relationship between beta and returns by using a modified methodology of fama and macbeth (1973). (rahman et al., 2006) in bangladesh market, (andor et al., 1999) hungarian capital market also found positive relationship between beta and ex-post return, concluded that capm valid for these markets. besides this (majumdar et al., 2007) neither support nor reject (mixed result) the capital asset pricing model. in indian context few studies were conducted for analyzing riskreturn relationship and studies by (madhusoodanan, 1997), (srinivasan, 1988) have generally supported capm. studies by (rao and bhole, 1990), (vaidyanathan, 1995), (sehgal, 1997), (sehgal, 2003), (mohanthy, 2002), (manjunatha, et.al 2006) questioned the validity of capm in indian context. while examining the literature it is clear that most of the studies in india used monthly or yearly data and only few studies used daily and weekly data to test the validity of capital asset pricing model. there is dearth of studies in indian context and is planned to examine the capm by using daily data of 70 companies listed in bse100-index with two different combinations of portfolios. 3. objectives of the research the main objectives of the study is to revisit the empirical validity of capm frame work in indian stock market by using different set of portfolios . the study will use black et.al (1972) methodology and fama and mac beth (1973) methodology to test the non linearity.  to examine the empirical validity of the ‘capm’ in indian stock market.  to establish the relationship between return of securities and market return in indian stock market.  to check whether expected rate of return is linearly related with systematic risk.  to compare the result of portfolios with different security combinations. 4. source and period of data the sample for the study covers nine years daily data of 70 companies of bse 100 stock index, a broad-based index, launched in 1989 for the period from 01-01-2001 to 31-12-2009 the data used in this study were sourced from of prowessa data base of cmie and the websites reserve bank of india (rbi). the study considers 91 day treasury bill rate as the proxy for the risk free assets, will better reflects the short term changes in the financial market. 5. methodology for testing capital asset pricing model black, jensen and scholes (1972) introduced a time series test of the capm and the relationship between risk and return has been analyzed systematically. the present study also follows a similar approach will follow portfolio technique and use time series regression of excess portfolio return on excess market return and also cross sectional regression in risk premium form and is expressed by the equation below. in the first step, betas (systematic risk) of individual securities are measured and the beta coefficients of individual securities were calculated for the whole period and for the sub periods. a time series regression between the daily percentage return against the market return is used to get the beta coefficient of each security in the sample and the model is shown below. ritrft =  i +i (rmt –rft) + eit --------------------- (1) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 17 where: rit is the rate of return on asset i (or portfolio) at time t, rft is the risk-free rate at time t, rmt is the rate of return on the market portfolio at time t, bse 30 index is taken as the best proxy for the market portfolio. eit is the beta of stock i, eit is the error term of regression equation at time t. in the second stage, for the formation of portfolios individual beta for each stock is arranged on ascending order and stocks were grouped in to portfolios having 10 and 5 stocks each according to their beta value .the first portfolio comprises the first 10/5 securities with lowest beta, the next portfolio with the next 10/5 securities and same method is followed for the formation of other portfolios and there by last portfolio is formed with securities having the highest beta. then portfolio betas are calculated by using the following model. rpt = p + p rmt + ept --------------------- (2) where rpt is the average excess portfolio return on time t,p is the estimated portfolio beta, and, e pt is the error term in the regression equation at time t. to estimate the ex post security market line for each testing period the portfolio return are regressed against portfolio betas. the model is rp = λ0 + λ1 p + ep --------------------- (3) where rp = is the average excess return of the portfolio p, p is the beta of the portfolio p, and ep is the error term in the regression equation further the study will also tested the nonlinearity between the total portfolio return and betas by using the following equation. rp = λ0 + λ1p + λ2  p + ep ------------------ (4) 6. capm in different periods. to test the validity of capm, the study considered whole period data that is (2001-2009) and then the entire test period is divided in to seven different sub periods comprising three years each. the details are shown in table1 below. table 1. different portfolio formation periods and testing periods period 1 2 3 4 5 6 7 8 period range 01-09 01-03 02-04 03-05 04-06 05-07 06-08 07-09 portfolio formation 2001 2001 2002 2003 2004 2005 2006 2007 testing period 2009 2003 2004 2005 2006 2007 2008 2009 6.1. capm in the whole study period (2001-2009) with portfolios having ten securities the study investigated the applicability of capm and the data used in this study consists 5259 days observations of 70 stocks listed in the bse 100 index. the results for the whole period by using the model (2) are shown in table 2 below. portfolio 1(p1) with lowest beta earned the minimum return of (0.1113) and the portfolio 5 with the beta (1.0538) gives the maximum return (0.1997). during the study period the average risk free return is (0.0163) and the average excess return on the market is (0.0669).the capm postulates that higher risk beta is associated with higher table 2.test results for whole study period (2001 – 2009) (n= 5259) rate of return and the result of the study partially supports this argument since portfolio6 and portfolio7 with highest beta bags less return than portfolio 5. port folio portfolio return(rp) intercept beta standard error r2 f value p value of beta at 99% p1 0.11130 0.07971*** 0.47233 0.76289 0.54509 2688.93 0.0000 p2 0.11554 0.06680*** 0.72892 0.97319 0.63685 3935.33 0.0000 p3 0.12702 0.06868*** 0.87242 0.79571 0.78981 8432.46 0.0000 p4 0.13047 0.06646*** 0.95720 0.90286 0.77844 7884.51 0.0000 p5 0.19971 0.12924*** 1.05378 0.91577 0.80541 9288.38 0.0000 p6 0.16271 0.08401*** 1.17683 1.09133 0.78425 8156.95 0.0000 p7 0.18238 0.09388*** 1.32345 1.20891 0.78931 8406.92 0.0000 avg rf 0.01626 average rm = (rm-rf) 0.06687 ***significant at 99 % level. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 18 r-square explains the relative amount of the variance in return of a particular portfolio with the return on index. in the case of portfolio 1, the r 2 value is (0.54509), which indicates less than adequate correlation with the market index. were as in portfolio 5, r 2 value is (0.80541), which indicates that above 80 per cent of the variation in the scrip has been explained by the relationship with the index. the positive constants suggest that the portfolios have earned higher returns than the capm has predicted. thus from the analysis it is clear that in most of the cases β is a predictor of return in indian capital market during the study period but there no conclusive evidence in favor of capm. 6.1.1 test of non-linearity (2001-2009) test for the non-linearity helps one to check whether there exists non-linearity between portfolio return with beta. as per theory, if capm holds true λ0 and λ2 will be equal to zero and the λ1 will be equal to the average risk premium. in this work the non-linearity has been tested by using the regression model (4).the results of the estimated values are summarized in the table 3; it shows that the value of the constant λ0 is not significantly different from zero. statistically the t value is (0.8377), which is less than (2.7765) at 5% significant level and thereby it is consistent with the argument of capm. table 3. test of non-linearity for the whole period (2001 2009) critical value for 4-degrees of freedom (2.7765) in the case of λ1, the tvalue is (0.1159) is smaller than (2.7765), and it is not significantly different from zero. as per the capm, the λ1 should be equal to the average risk premium; hence the result is inconsistent with the capm hypothesis. in the case of λ2, the value (0.3130) and the t-value is less than (2.7765) at 5% significance level and thereby it is consistent with the capm hypothesis. thus, it is clear tha betas are linearly related with expected return. hence capm cannot be clearly rejected during the study period. 6.2. capm in different sub periods 6.2.1 consolidated test results for different sub –periods (ten securities) capm is tested for different study period by using portfolios having 10 securities. the results for different study periods are summarized below in tables 4 to 7. the findings are mostly supportive in different test periods to the hypothesis of capital asset pricing model, which says that higher beta provides higher return to the investor. study reveals that while using percentage return and portfolios with equal weight, in most of the case beta explain the variation in portfolio returns, in few periods lower beta earned more return than higher beta portfolios, which is clear from table. 4. table 4. consolidated results for different sub periods by using 10 securities *** significant at 99% coefficients std error tvalue p-value λ0 0.08368 0.09989 0.8377 0.4493 λ1 0.02685 0.23162 0.1159 0.9133 λ 2 0.03990 0.12751 0.3130 0.7699 port folio sub period 1 (20001-2003) sub period 2 (2002-2004) portfolio return constant beta r2 f value p value beta portfolio return constant beta f value r2 p value beta p1 0.1358 0.1189*** 0.34760 0.2715 279.90 0.0000 0.18812 0.1456*** 0.40544 390.38 0.3402 0.0000 p2 0.1988 0.1709*** 0.57192 0.3664 434.37 0.0000 0.13299 0.0651*** 0.64687 1315.22 0.6347 0.0000 p3 0.1438 0.1084*** 0.72707 0.5547 935.38 0.0000 0.27030 0.1820*** 0.84115 1378.53 0.6455 0.0000 p4 0.1821 0.1415*** 0.83370 0.5541 933.16 0.0000 0.20948 0.1071*** 0.97486 1317.89 0.6352 0.0000 p5 0.2164 0.1702*** 0.94681 0.5903 1081.92 0.0000 0.23339 0.1177*** 1.10212 2776.67 0.7858 0.0000 p6 0.2196 0.1668*** 1.08355 0.5961 1108.22 0.0000 0.27087 0.1415*** 1.23187 2449.39 0.7639 0.0000 p7 0.1284 0.0514 1.57857 0.7688 2496.59 0.0000 0.27020 0.1172*** 1.45715 2179.65 0.7422 0.0000 avg rf 0.01681 average rm = (rm-rf) 0.04881 avg rf 0.0142 average rm = (rm-rf) 0.10498 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 19 table 5. consolidated results for different sub periods by using 10 securities *** significant at99%,** significant at 95%,* significant at90% table 6. consolidated results for different sub periods by using 10 securities *** significant at99%, ** significant at95%, note: the values of constant, f, pand r 2 are adjusted to 4 digits. table 7. consolidated results for different sub periods by using 10 securities 6.2.2 test of non –linearity the test for the nonlinearity (table 8-10) reveals that, for whole and adjusted period result support capm hypothesis. in addition high value of estimated correlation coefficient between the intercept and the slope indicates that the model explains excess returns port folio sub period 3( 2003-2005) sub period 4 (2004-2006) portfolio return constant beta r2 f value p value beta portfolio return constant beta r2 f value p value beta p1 0.19576 0.1312*** 0.46072 0.39166 487.370 0.0000 0.19367 0.13865*** 0.56299 0.53150 854.283 0.0000 p2 0.23213 0.1359*** 0.69667 0.64385 1368.55 0.0000 0.13098 0.04788** 0.81057 0.77784 2636.53 0.0000 p3 0.19582 0.0762*** 0.84995 0.73712 2122.70 0.0000 0.18110 0.09071*** 0.89768 0.78512 2751.36 0.0000 p4 0.24712 0.1152*** 0.94406 0.70782 1833.88 0.0000 0.16977 0.07077*** 0.97381 0.81428 3301.59 0.0000 p5 0.24341 0.0943*** 1.06785 0.84625 4166.87 0.0000 0.13713 0.02389 1.1060 0.81169 3245.86 0.0000 p6 0.23194 0.0589** 1.24122 0.74919 2261.24 0.0000 0.17221 0.04885* 1.20218 0.84072 3974.74 0.0000 p7 0.27509 0.0690** 1.47422 0.79990 3026.13 0.0000 0.17639 0.02408 1.48129 0.84064 3972.28 0.0000 avg rf 0.01366 average rm = (rm-rf) 0.13860 avg rf 0.0142 average rm = (rm-rf) 0.10505 port folio sub period 5 (2005-2007) sub period 6 (2006-2008) portfolio return constant beta r2 f value p value beta portfolio return constant beta r2 f value p value beta p1 0.27919 0.0613 1.4924 0.8002 2997.27 0.0000 0.05494 0.05317* 0.4755 0.59363 1085.4 0.0000 p2 0.28746 0.0672 1.5099 0.7860 2748.69 0.0000 0.00965 0.00700 0.7117 0.77526 2563.1 0.0000 p3 0.30661 0.0858 ** 1.5166 0.7784 2628.29 0.0000 0.03012 0.02690 0.8655 0.81634 3302.5 0.0000 p4 0.31259 0.0911** 1.5203 0.7617 2391.5 0.0000 -0.01330 0.01678 0.9389 0.86496 4759.4 0.0000 p5 0.30497 0.0842 * 1.5222 0.7771 2608.02 0.0000 0.05991 0.05603** 1.0439 0.90513 7088.8 0.0000 p6 0.30914 0.0865 ** 1.52323 0.7822 2686.45 0.0000 0.06231 0.05787 1.1944 0.86683 4836.6 0.0000 p7 0.31722 0.0972** 1.52382 0.7717 2529.03 0.0000 0.12303 0.11767*** 1.4412 0.87329 5120.82 0.0000 avg rf 0.01724 average rm = (rm-rf) 0.14487 avg rf 0.01939 average rm = (rm-rf) 0.00372 port folio sub period 7 (2007-2009) portfolio return constant beta r2 f value p value beta p1 0.08502 0.06672 ** 0.393851 0.53903 860.651 0.0000 p2 0.04054 0.00929 0.67844 0.73441 2035.23 0.0000 p3 0.08185 0.04320 0.82771 0.79910 2927.60 0.0000 p4 0.08081 0.03690 0.93784 0.83494 3723.10 0.0000 p5 0.11927 0.06948 ** 1.04698 0.84949 5719.99 0.0000 p6 0.16448 0.10719*** 1.23770 0.87192 5010.55 0.0000 p7 0.12786 0.05648 1.47794 0.88429 5624.87 0.0000 avg rf 0.04611 average rm = (rm-rf) 0.04611 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 20 table 8.consolidated results for different study periods by using 10 securities *** significant at 99 %level, ** significant at 95% level table 9. consolidated results for different study periods by using 10 securities table 10. consolidated results for different study periods by using 10 securities coefficient sub period 6 (2006-2008) sub period 7(2007-2009) constant t value p value constant t value p value  0.2037 2.393 0.0750 0.0647 0.7213 0.5106  −0.4595 −2.485 0.0678 −0.0185 −0.0924 0.9308  0.2826 2.975** 0.0410 0.0529 0.5030 0.6414 *** significant at 99 %level, ** significant at 95% level 6.3 capm frame work in indian capital market (portfolios with five securities) in this section an attempt is made to test the empirical validity of the capm by using portfolios having five securities. the theory says that through diversification one can strategically reduce the risk by allocating available funds in many securities by forming balanced portfolios. further, this test will also help us to compare the results with our studies with same set of data and also to check whether number of securities in a portfolio has any influence on measuring the efficiency and validity of capm. while analyzing table 11, it is clear that out of the14 portfolios, with the increase in beta we cannot see any increasing trend in the average portfolio excess return; rather it comes up and down. results also supplement that, all portfolios including portfolio with lowest beta earned more than the average excess market return and the risk free return. further the positive constants suggest that, the portfolios earned higher returns than the capm has predicted. further from the table11, it can be noted that the all constants has positive values. thus the result indicates that, the alpha coefficients are significantly different from zero and hence we reject the null hypothesis. further all estimated betas are found to be statistically significant at 99% level; thereby we reject the null hypothesis that the portfolio beta is not a significant determinant of portfolio return. thus β is a predictor of return during the whole study period (2001-2009). table 11.results of the whole study period (2001 – 2009) port folio portfolio return(rp) constant beta standard error r2 f value p value 99% p1 0.08861 0.06414 0.36583 0.92121 0.33020 1106.26 0.0000 p2 0.13393 0.09521 0.57899 1.09383 0.46691 1965.43 0.0000 p3 0.12553 0.07899 0.69593 1.38381 0.44153 1774.18 0.0000 p4 0.10556 0.05461 0.76191 1.05857 0.61823 3633.93 0.0000 p5 0.13207 0.07543 0.84704 1.06828 0.66276 4410.18 0.0000 coefficient whole period (2001-2009) sub period 1(2001-2003) sub period 2(2002-2004) constant t -value p value constant tvalue p value constan t t value p value  0.0837 0.8377 0.4493 0.03810 0.5678 0.6005 0.12757 1.0150 0.3674  0.0269 0.1159 0.9133 0.33520 2.252 0.0874 0.0991 0.3444 0.7479  0.0399 0.3130 0.7699 −0.1736 −2.326 0.0806 0.0030 0.0201 0.9849 coefficient sub period 3(2003-2005) sub period 4(2004-2006) sub period 5 (2005-2007) constant tvalue p value constant t value p value constant t value p value  0.1839 2.6050 0.0597 0.2984 2.766 0.0505 60.2641 1.055 0.3509  0.0298 0.1946 0.8552 −0.2699 −1.244 0.2815 −80.6609 −1.065 0.3469  0.0186 0.2389 0.8229 0.12792 1.224 0.2881 27.1154 1.080 0.3410 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 21 p6 0.12198 0.06193 0.89781 1.09352 0.67816 4728.54 0.0000 p7 0.13557 0.07309 0.93429 1.14146 0.67682 4699.57 0.0000 p8 0.12536 0.05982 0.98011 1.22015 0.66855 4526.25 0.0000 p9 0.18670 0.11754 1.03411 1.11044 0.73053 6083.59 0.0000 p10 0.21272 0.14094 1.07345 1.30458 0.67912 4749.29 0.0000 p11 0.18653 0.10890 1.16086 1.68331 0.59786 3336.14 0.0000 p12 0.13889 0.05912 1.19280 1.29372 0.72657 5962.97 0.0000 p13 0.18345 0.10019 1.24502 1.51927 0.67734 4710.72 0.0000 p14 0.18131 0.08756 1.40188 1.44521 0.74628 6600.44 0.0000 avg rf 0.01626 average rm =(rm-rf) 0.06687 significant at 99% level 6.4 consolidated result for the sub periods (five securities) in the second phase test is repeated with five securities by using same methodology and procedure by constructing 14 portfolios for different sub periods and results for different study periods are summarized below in table 12 to 15. 6.5 through portfolios having five securities each. table 12. consolidated results for different sub periods by using 5 securities *** significant at 99%, ** significant at 95% . table 13. consolidated results for different sub periods by using 5 securities port folio sub period 1 (20001-2003) sub period 2 (2002-2004) portfolio return constant beta r2 f value p value beta portfolio return constant beta f value r2 p value beta p1 0.19742 0.18649*** 0.224016 0.05953 47.543 0.0000 0.17171 0.13756*** 0.32533 0.15175 135.43 0.000 p2 0.07307 0.05011*** 0.47042 0.32234 357.22 0.0000 0.20452 0.15354*** 0.48554 0.28184 297.09 0.000 p3 0.11733 0.09139*** 0.53131 0.35932 421.19 0.0000 0.09170 0.02911 0.59613 0.46562 659.59 0.000 p4 0.28033 0.25043*** 0.61253 0.19548 182.48 0.0000 0.17428 0.10105*** 0.69761 0.52564 838.85 0.000 p5 0.14339 0.11568*** 0.56765 0.67610 1567.61 0.0000 0.23518 0.15026*** 0.80884 0.54483 906.11 0.000 p6 0.17951 0.14242*** 0.75989 0.43036 567.39 0.0000 0.30542 0.21372*** 0.87345 0.48309 707.48 0.000 p7 0.17044 0.13072*** 0.81355 0.43529 578.89 0.0000 0.29151 0.19444*** 0.92460 0.42010 548.40 0.000 p8 0.19392 0.15224*** 0.85385 0.48513 707.62 0.0000 0.12744 0.01982 1.02513 0.54577 909.55 0.000 p9 0.20621 0.16085*** 0.92927 0.49174 726.60 0.0000 0.21617 0.10394*** 1.06901 0.67917 1602.54 0.000 p10 0.22664 0.17956*** 0.96435 0.45395 624.35 0.0000 0.25062 0.13144*** 1.13524 0.64087 1350.90 0.000 p11 0.23548 0.18411*** 1.05245 0.44146 593.58 0.0000 0.29870 0.17431*** 1.18485 0.59285 1102.28 0.000 p12 0.20380 0.14939*** 1.11465 0.54388 895.50 0.0000 0.24304 0.10877** 1.27889 0.69318 1710.29 0.000 p13 0.20038 0.13433 1.35309 0.57866 1031.42 0.0000 0.24396 0.10043*** 1.36722 0.66184 1481.60 0.000 p14 0.05651 −0.0315 1.80405 0.60889 1169.21 0.0000 0.29643 0.13401** 1.54707 0.63798 1334.06 0.000 avg rf 0.01681 average rm = (rm-rf) 0.04881 avg rf 0.0142 average rm = (rm-rf) 0.10498 port folio sub period 3 (20003-2005) sub period 4 (2004-2006) portfolio return constant beta r2 f value p value beta portfolio return constant beta f value r2 p value beta p1 0.24929 0.20095*** 0.34627 0.05431 43.47 0.0000 0.28197 0.23574*** 0.44003 0.24059 238.56 0.0000 p2 0.20172 0.12413*** 0.55581 0.33865 387.63 0.0000 0.10538 0.03384 0.68098 0.54276 893.85 0.0000 p3 0.20792 0.11751*** 0.64766 0.52264 828.82 0.0000 0.14888 0.06619 0.78709 0.59590 1110.41 0.0000 p4 0.25831 0.15440*** 0.74439 0.45755 638.53 0.0000 0.11308 0.02567 0.83205 0.68855 1664.72 0.0000 p5 0.23397 0.12034*** 0.81396 0.57012 1003.95 0.0000 0.17716 0.08494** 0.87792 0.65463 1427.33 0.0000 p6 0.15640 0.03245 0.88791 0.60786 1173.46 0.0000 0.18503 0.08919** 0.91237 0.67145 1538.93 0.0000 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 22 *** significant at 99%, ** significant at 95% * significant at 90 table 14. consolidated results for different sub periods by using 5 securities *** significant at 99%, ** significant at 95% * significant at 90 table 15. table showing consolidated results for different sub periods by using 5 securities p7 0.18686 0.05801 0.92303 0.61339 1201.05 0.0000 0.20167 0.10168*** 0.95182 0.63368 1302.60 0.0000 p8 0.30750 0.17265*** 0.96590 0.54568 909.245 0.0000 0.13786 0.03367 0.99184 0.74699 2223.26 0.0000 p9 0.21573 0.07267** 1.02480 0.67206 1551.36 0.0000 0.12929 0.01800 1.05944 0.81215 3255.66 0.0000 p10 0.27128 0.11611*** 1.11157 0.70056 1771.07 0.0000 0.14496 0.02424 1.14913 0.63506 1310.39 0.0000 p11 0.23793 0.06852* 1.21355 0.72147 1960.87 0.0000 0.09773 −0.0250 1.16838 0.79510 2922.04 0.0000 p12 0.22874 0.05149 1.26967 0.60091 1139.83 0.0000 0.24669 0.11720*** 1.23260 0.70469 1796.91 0.0000 p13 0.30853 0.11609*** 1.37849 0.64444 1372.07 0.0000 0.12800 −0.01909 1.40033 0.77133 2539.94 0.0000 p14 0.24079 0.02146*** 1.57112 0.72060 1952.39 0.0000 0.22479 0.06110 1.55817 0.76394 2436.99 0.0000 avg rf 0.01366 average rm = (rm-rf) 0.13960 avg rf 0.01496 average rm = (rm-rf) 0.10505 port folio sub period 5 (2005-2007) sub period 6 (2006-2008) portfolio return constant beta r2 f value p value beta portfolio return constant beta f value r2 p value beta p1 0.18841 0.12317*** 0.45032 0.27014 276.86 0.0000 0.04525 0.04382 0.382707 0.37697 449.574 0.0000 p2 0.05039 −0.0449 0.65794 0.45728 630.24 0.0000 0.06464 0.06252 0.568486 0.52345 816.136 0.0000 p3 0.09877 −0.0093 0.74606 0.55341 926.918 0.0000 -0.00058 −0.0030 0.674543 0.62702 1249.06 0.0000 p4 0.16718 0.05084 0.80304 0.61659 1202.75 0.0000 0.01988 0.01709 0.749013 0.68243 1596.64 0.0000 p5 0.27100 0.14695*** 0.85632 0.63024 1274.93 0.0000 -0.0127 −0.0158 0.841287 0.68243 1596.65 0.0000 p6 0.30328 0.17368*** 0.89459 0.51774 803.03 0.0000 0.07296 0.06965* 0.889805 0.72932 2001.94 0.0000 p7 0.17761 0.04330 0.92708 0.71130 1842.96 0.0000 -0.05857 −0.0619 0.918755 0.74232 2140.44 0.0000 p8 0.19412 0.05283 0.97526 0.68251 1608.00 0.0000 0.03197 0.02840 0.959227 0.78576 2725.07 0.0000 p9 0.16470 0.01685 1.02056 0.85017 4244.59 0.0000 0.02223 0.01848 1.00811 0.80510 3069.29 0.0000 p10 0.19538 0.03938 1.07679 0.73240 2047.21 0.0000 0.09760 0.09358** 1.07988 0.83894 3870.42 0.0000 p11 0.21096 0.04895 1.11830 0.76155 2389.04 0.0000 0.07970 0.07545* 1.14211 0.80342 3036.71 0.0000 p12 0.22037 0.04218 1.23002 0.69938 1740.26 0.0000 0.04492 0.04028 1.24674 0.78747 2753.06 0.0000 p13 0.23825 0.02799 1.45135 0.69469 1701.98 0.0000 0.15627 0.15127*** 1.34516 0.79343 2853.99 0.0000 p14 0.32012 0.09764** 1.53569 0.75221 2270.75 0.0000 0.08980 0.08408 1.53739 0.80657 3098.32 0.0000 avg rf 0.01724 average rm = (rm-rf) 0.144872 avg rf 0.01939 average rm = (rm-rf) 0.00372 port folio sub period 7 (2007-2009) portfolio return constant beta r2 f value p value beta p1 0.08810** 0.07446** 0.29498 0.30900 329.13 0.0000 p2 0.08176 0.05897 0.49271 0.49339 718.79 0.0000 p3 0.06897 0.04041 0.61765 0.54659 887.28 0.0000 p4 0.01236 −0.02181 0.73922 0.60759 1139.59 0.0000 p5 0.10275 0.06578 0.79951 0.61307 1168.77 0.0000 p6 0.06021 0.02063 0.85599 0.74569 2158.11 0.0000 p7 0.08465 0.04232 0.91536 0.70034 1720.14 0.0000 p8 0.07589 0.03148 0.96031 0.80335 3006.82 0.0000 p9 0.15860 0.11175** 1.01291 0.78123 2628.33 0.0000 p10 0.07721 0.02722 1.08105 0.81452 3232.01 0.0000 p11 0.11063 0.05557 1.19049 0.86458 4698.93 0.0000 p12 0.21823 0.15881*** 1.28490 0.76514 2397.79 0.0000 p13 0.11196 0.04916 1.35803 0.85806 4449.48 0.0000 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 23 *** significant at 99%, ** significant at 95% * significant at 90 findings reveals that beta can explain the variation in portfolio return while using equally weighted portfolios and it is found that in most of the cases the return on portfolio increases with increase in beta, but we cannot see this trend in all the portfolios as similar to the previous results 6.7 test of non –linearity the test for non-linearity shows that in each case the beta square coefficient was insignificantly different from zero, which tells that there exists a linear relationship between expected return and beta. thus the findings are according to the capm hypothesis. but in most of the cases, it is found that the tests in the sub periods were also consistent with the above hypothesis and indicate evidence in supporting the capm but did not provide conclusive evidence in favor of capm. table 16. consolidated results for different study periods by using 5 securities ** significant at 95 %level,** significant at 95 %level table 17. consolidated results for different study periods by using 5 securities *** significant at 99 %level, ** significant at 95 %level note: some of the coefficients in tables are significant at 90% level table 18. consolidated results for different study periods by using 5 securities the test for non-linearity for the whole period shows that in each case the beta square coefficient was significantly different from zero, which tells that there exists a linear relationship between expected return and beta. thus the findings are according to the capm hypothesis. further it is found that the tests in the sub periods were also consistent with the above hypothesis and indicate evidence in supporting the capm but did not provide conclusive evidence, or not fully in favor of the capm in all the tests. this leads to the conclusion that some of the results is inconsistent with the theory and hence against the capm. the test for portfolios based on percentage return with equally weighted portfolios having 5 securities does not give conclusive evidence in support of capm. in some periods, the test clearly rejects the capm hypothesis and in few periods it partially supports the capm hypothesis. further in some of the sub periods the constants are insignificant and reject the capm hypothesis. the study also found that, during the study period most of the portfolios, including the portfolio with lowest beta earned more than p14 0.13770 0.06381 1.59784 0.79477 2850.37 0.0000 avg rf 0.01702 average rm = (rm-rf) 0.046245 coefficient whole period (2001-2009) sub period 1(2001-2003) sub period 2(2002-2004) constant t -value p value constant tvalue p value constant t value p value  0.0823 0.7274 0.4822 0.0614 0.8831 0.3961 0.11708 1.08700 0.3005  0.1659 0.6458 0.5316 0.3015 2.0410 0.066 0.12597 0.51670 0.6156  −0.0332 −0.2383 0.816 −0.1613 −2.266** 0.0446 −0.01167 −0.0906 0.9294 coefficient sub period 3(2003-2005) sub period 4(2004-2006) sub period 5 (2005-2007) constant tvalue p value constant t value p value constant t value p value  0.24430 2.8490** 0.0158 0.450307 3.383*** 0.0061 0.1325 0 .76954 0.4578  −0.06528 −0.3534 0.7305 −0.588368 −2.200 0.0501 −0.0087 −0.0253 0.9803  0.05308 0.5643 0.5839 0.281998 2.175 0.0524 0.0730 0.43605 0.6713 coefficient sub period 6 (2006-2008) sub period 7 (2007-2009) constant t value p value constant t value p value  0.1067 1.0370 0.3222 0.0777 1.073 0.3064  −0.2344 −1.0620 0.3110 −0.0457 −0.2867 0.7797  0.1637 1.4520 0.1743 0.06414 0.7770 0.4536 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 24 the average excess market return and the positive constants suggest that the portfolios earned higher return than the capm has predicted. the fluctuation in the market seems to influence the return of the portfolios. during the period of recession, some of the portfolios found to report a negative return (during the sub period 2006-2008) 7. summaries and conclusion investment decision is one of the key areas in finance and the risk return relationship is one of the most discussing facts in investment decisions. this study tested the empirical validity of capm, and non-linearity between risk return. the result of the study is mostly in support and favor of the capm and is in support ansari (2000) who suggests that the evidence is not sufficient to drop the use of the model. while comparing the test with ten securities and five securities it is found that the capm rejected in more tests when portfolios are formed with 10 securities and it shows almost similar result but there is difference in rejection period. this leads to the conclusion that portfolio combination may have importance in pricing and it should be established with more empirical tests. in short the result reveals that the capm not conclusively validated during the study period and this do not means that the data fully reject capm. present study reveals that beta can explain the variation in portfolio return while using equally weighted portfolios and it is found that, in most of the cases the return on portfolio increases with increase in beta, but we cannot see this trend in all the portfolios. references andor, g., ormos, m., & szabó, b. 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(2007). testing the capm model: a study of the chinese stock market. , master thesis essay. sweden: umea school of business 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 | ijfb indian journal of finance and banking; vol. 4, no. 2; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 1 a framework to score the risk associated with suspicious money laundering activity and social media profile dillip kumar parida research scholar k. l. u. business school, k. l. university greenfields, vaddeswaram guntur district, andhra pradesh, india e-mail:dillip_parida@hotmaill.com d. prasanna kumar phd associate professor k. l. u. business school, k. l. university greenfields, vaddeswaram guntur district, andhra pradesh, india e-mail:dr.prasanna@kluniversity.in received: may 27, 2020 accepted: june 30, 2020 online published: july 15, 2020 doi: 10.46281/ijfb.v4i2.662 url: https://doi.org/10.46281/ijfb.v4i2.662 abstract money laundering has immense entailments. the criminal who possesses black money and wants to mask it as legitimate must fabricate the source to look genuine. it makes the crime organized and more systematic to break the financial system. the existing aml (anti money laundering) solutions and its design based on the creation of a transaction profile. most of the leading aml software focuses on financial transactions and rarely focuses on linked suspicious individual‟s social media profiles. social networking is one of the most popular platforms to interact with others and millions of users use these platforms to communicate with each other from around the world. at the same time, the web has plenty of social and demographic information to create an accurate profile that aims to construct a legitimate profile. this paper consolidates the fragmented discussion from several articles and provides a detailed view of fraud profile identification. practical insights are identified from various aml solutions and summarized from an extensive literature review. the risk scoring framework and definitions of filters can be widened to include more parameters for effective alert generation. in this paper, we propose an approach and risk scoring framework to assess customer profiles that drive the suspicious profile or transactions based on social media attributes. keywords: anti money laundering, social media profile, financial fraud, fraud detection, money laundering detection, risk profile scoring, anomaly detection. 1. introduction money laundering is the process of criminal proceeds for the secrecy of their illicit source of money. money laundering helps to enjoy the profit without the stake of their illegal resource. money laundering is described as „„the process by which the proceeds of crime and the true ownership of those proceeds are concealed or made opaque so that the proceeds appear to come from a legitimate source” (johnston & abbott, 2005).the widespread technology and wired transfers help the money laundering activity by layering the transactions. the organized criminals seek to make investments in the 'legitimate' economy, by investing in the legal business and real estate (kruisbergen, kleemans, & kouwenberg, 2015).with the advancement of technologies and integration of financial systems, it provides multiple ways for the drug traffickers, terrorist groups, and smugglers to expand their operation and launder the money. the identification of the money laundering activity is too difficult and complex due to the large volume of transactions globally. to identify and prevevfnt this activity many financial institutions installed software to track the illegal wired transfer. now robust anti-money laundering solutions are developed to combat financial crime. the technology helps to combat the money launder based on risk profile and alert system. but the major anti money laundering software focuses on financial transactions and limited to banking transactions. money launders constantly devising new and innovative ways to launder money. it has become a major concern to combat money launderers with effective new measurements. hence prevention of money laundering, detection of back mailto:dr.prasanna@kluniversity.in https://doi.org/10.46281/ijfb.v4i2.662 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 2 money placement in the economy, and control of these illicit activities are crucial for a stable economy and safeguard financial institutions. social media sites such as facebook, linkedin, and tweeter can be utilized as an investigative tool to identify and vet individuals and businesses, determine connections between counterparties and discover criminal involvement (glass, 2018).to combat this situation, the anti-money laundering framework needs to be more robust and a combination of transaction profiles with a social media profile may provide additional capability to detect money launderers. this new methodology can identify the patterns in social media activities that could indicate a suspicious profile. if the data is not consistent across social media platforms then it triggers a suspicious alert about the credibility of the user for further assessment. we find that a better view of risk profiles can be created with the help of social media attributes. scoring of these parameters may help to detect the credibility of a user based on social media entities and attributes present in the network. the relationships can be built with the social network entities and degree of centrality to find the association. a lot of research has been done in this area but not much regarding anti-money laundering. the objective of the proposed solution is to identify the suspicious customer and create a complete 360-degree view of a customer profile that provides evidence to categorize the risk category based on social media events. this research paper explores the possibilities for anti money laundering application to include suspicious social media profile detection and its scoring framework to categorize risk categories. we analyzed real-world aml systems and social media platforms that can be used as an investigative tool by utilizing facebook, linkedin, and tweeter to identify and appraise individuals and businesses. the major contributions of this research paper are (a.) a framework to include social media events as one of the criteria and (b.) risk scoring model to provide a risk score based on predefining criteria. 2. aml risk views for financial and social media profile every day we have millions of transactions in the financial industry. transactions can be identified associated with risk and analyzed to remove the potential threat. risk views give a data profile with the possibility of money launder activity. social media contains a plethora of information and evidence of keywords that may be associated with money laundering. the social media data can be mined to get meaningful information regarding suspicious transactions. social media could be rich sources of data that leads to a suspicious profile or event which is more prone to money laundering. using text analytics on social media data for profiling may detect a suspicious user in social media concerning money laundering. table 1. money laundering events financial and transactional events social media profile network events  cash transactions (high frequency and value)  sudden high-value transactions in the dormant account  accounts with high turnover  instruments with high volatility  transactions without descriptions  sending and receiving high volume transactions out of the country  multiple transfers in multiple accounts  purchasing of remittance in cash just below threshold limits  multiple accounts with same name and addresses  the profile has nothing in common such as friends or even a professional interest  profile network connections are random  offensive or sensitive content on the profile  lack of complete information in profiles  data mismatching in different platform and profiles even though the researchers presented a few strategies and approaches for identifying fake profiles, however, it is as yet a hard challenge. for instance, some ai calculations are proposed for identifying suspicious financial transactions, however, it does not give the complete proof to recognize all counterfeit transactions. utilizing accurate social profile identification process can be an additional parameter to the financial transaction to understand the complete view of the user profile and its associated transactions. 3. profile and characteristics understanding the risk profile enables the financial institutions to apply appropriate risk management processes and solutions to the aml compliance solution to mitigate risk.  characteristic: a distinguishable behavior related to the financial transaction of the account holder. (e.g. unusual cash transaction pattern) copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 3  profile: profile created with a standard set of mostly defined by the characteristic of the transaction (e.g. online transaction) and social media profile. the solution will also have a standard set of behavioral rules about customer segments and their typical behavior.  a profile is based upon the transactions and it may contain no of occurrences or value of the transaction.  a profile is based upon the consistency of data across social media platforms.  a social media profile that linked to any other suspicious profile.  any of the social media profile attributes has a noise keyword that relates to illegal activity, money laundering, or crime.  when the transaction (financial and social) imported and profile created, the system compared the profile with its historical records/profile.  the combination of the rules and the customer segments to identify instances or patterns that are abnormal or suspicious behavior.  the defined rules or behavior combine to assign a risk to the profile and the alert generated with a risk score.  the risk score is derived from an algorithm using the sum and weightings of the associated risks. figure1. risk filter process and stages 4. risk scoring model on filter view the combination of financial transaction view and social media profiles created a pool of information that combines structured and unstructured data. if any data that looks suspicious in financial transactions can be profiled in the social media category. that will give a more detailed view of other aspects to get an insight into data concerning suspicious transactions. 4.1 risk scoring model framework risk rating involves the categorization of individual profile based on social and financial parameters, into a series of graduating categories based on types of risk. a primary function of a risk rating model is to assist in the creation of the kyc profile. as well, risk ratings assist management in predicting changes in the social and financial portfolio quality and its impact on the current kyc framework of the financial institution. the risk rating can lead to a proactive response to the potential threat and a wider choice of reactive action to track money laundering. risk ratings should be determined based on individual institution's policy and government regulations. continuous monitoring of exiting profiles required as a part of the profile review process. the following sample risk rating model can be enhanced and developed concerning organization policy. the model may be modified as appropriate to meet the specific needs of individual institutions. each transaction is evaluated under five risk filter components. behavior, aggregated, list matching, key aml noise phrase, and suspicious profile detection. risk scores used for ratings are based on an evaluation of individual transactions and aggregated also. the maximum individual risk component score and the overall score are mentioned below. 4.2 risk filter components risk filter components (risk assessment filter) refer to the screening of transactions, events, information related to the customer. this screening can be classified into five different categories based on the nature of information and source systems. the classified filters are associated with risk percentage (weight) to prioritize features for alert generation. the weight can be changed based on the priority and organization‟s money laundering policy. risk assessment score is calculated for a particular risk assessment filter and to be anywhere between 0 to 100. every filter can be divided into subsections or sub filters where the score can be calculated based on the type of violations. if copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 4 the risk assessment filter has n number of subsections or criteria‟s then the maximum score of any one of the matching filters can be considered here. table 2. risk filter components filter number risk assessment filters description weight risk assessment score ( max) 1 behavior behavior views provide the behavioral aspect of data. the pattern shows if any negative behavior associated with financial data or social media profile data. ( e.g. money transfer to illegal entities or user‟s social media profile linked to drug dealer profile) 15% 100 refer to table 3 2 aggregated aggregated view. a combined, weighted view on multiple risk views. identify if an activity is suspicious faster, based on previouslyrecognized patterns and aggregated view of the entities. (e.g. if a legal threshold for cash deposit in the bank account is 5000 usd and a user deposits multiple cash deposits less than 5000 for a while, then the system will create an aggregated view of customer transaction profile) 20% 100 refer to table 4 3 list matching list matching. customers, accounts, and transactions can be matched against blacklists (provided by office of the foreign asset control) or defaulters lists (provided by the central or federal bank), and the results can be shown in risk views. if any of the social media profile directly or indirectly linked to any of the blacklisted people. (e.g. if john dave is a criminal and blacklisted by ofac (office of the foreign asset control) for terrorist activities then list matching filter will sync with ofac list on realtime and any transaction made by john dave will be on hold till the alert is examined) 25% 100 refer to table 5 4 key aml noise phrases (suspicious and money laundering keywords) text mining is the measurement of the various qualitative and quantitative attributes of textual (unstructured data) related to financial crimes. collection of online data from social media and other online platforms in the form of unstructured text, web harvesting, and web data extraction (batrinca & treleaven, 2014). text mining can be done on every word related to customer and words those are more related to money laundering can be clustered to mine meaningful insight. (e.g. if user‟s social media conversation consists of appreciation to terrorist activity and the user is linked to non-profitable organization then the system creates risk score and creates alert) 20% 100 refer to table 6 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 5 5 suspicious profile detection any financial transaction related to blacklisted customer, account, instrument, pep (politically exposed person). the profile can be identified as a suspicious profile. (if any customer is linked to political exposed person in social media and unusual high-value transaction identified for that customer, then it creates a high score and generates alert)(choo, 2008). 20% 100 refer to table 7 total 100% table 3. risk assessment score. behavior f il te r 1 . b eh av io r behavior subcomponents scenario assessment score unusual activity in comparison to previous data. data are mostly derived out by comparing unusual transaction records with normal behavior norms(gao & ye, 2007). frequent transactions in comparison to previous transactions score out of 100 money transfer to the illegal entity or outside of industry entity money transfer to the blacklisted country score out of 100 unusual social profile network increase or decrease increase of irrelevant social profile count score out of 100 unusual conversation with comparison to previous data the inclination of user conversation towards illegal social media posts score out of 100 unusual change of recency and frequency of activities multiple account creation from the same user score out of 100 note. please refer to table 2(risk filter components) and filter number 1 for definition table 4. risk assessment score. aggregate view f il te r 2 . a gg re ga te v ie w aggregate view subcomponents scenario assessment score aggregate view of cash deposit aggregated deposit of cash exceeds the previous record score out of 100 aggregate view of wire transfer aggregated wire transfer exceeds the previous record score out of 100 aggregate view of cash withdrawal aggregated cash withdrawal exceeds the previous record score out of 100 aggregate view of suspicious words on the social platform an aggregated view of negative sentiments on the social media platform score out of 100 aggregate view of linked suspicious profiles a complete view of linked profiles related to the customer score out of 100 note. please refer to table 2(risk filter components) and filter number 2 for definition table 5. risk assessment score. list matching f il te r 3 . l is t m at ch in g list matching subcomponents scenario assessment score list from ofac ofac issues list of blacklisted people. the business rule matches the name and based on matching it provides the score. if the name matches exactly then score comes 100 and its name matches partially then score comes 80. exact matching=100 partial matching=80 list from united nations as above as above copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 6 list from european union as above as above list from world bank as above as above other official watch lists as above as above country-specific sanction list as above as above region-specific sanction list as above as above note. please refer to table 2(risk filter components) and filter number 3 for definition table 6. risk assessment score. money laundering keywords f il te r 4 . m on ey l au nd er in g k ey w o rd s money laundering keywords subcomponents scenario assessment score terms related to the negative source of wealth source of money from illegal activities score out of 100 negative news user attended a gathering which has negative news score out of 100 negative key words user conversation or linked information consists of a negative keyword like “drugs” or “import of the illegal article” score out of 100 negative sentiments like support to terrorist activities sharing and support of news inclined towards illegal activities score out of 100 negative industry the profile is linked to industries like leather or ammunition. score out of 100 association with the bankrupt entity or illegal industry words the profile is linked to a bankrupt company or customer. score out of 100 note. please refer to table 2(risk filter components) and filter number 4 for definition table 7. risk assessment score. suspicious profile f il te r 5 . s us p ic io us p ro fi le suspicious profile subcomponents scenario assessment score geographic patterns proximity relationships between apparently unrelated countries and location transfer from a user in the current country to another high-risk country and the user has no personal and professional relationship with risk profile countries. score out of 100 conversation patterns fictitious invoice numbers, fictitiously-generated transaction amounts profile with false information related to financial transactions. score out of 100 profile network patterns – link to suspicious profile link to profile those marked as suspicious score out of 100 profile network patterns – link to the political exposed person the profile is linked to political parties and profile score out of 100 profile network patterns – link to negative words e.g. gambling and drugs etc. the profile is linked to the gambling profession score out of 100 note. please refer to table 2(risk filter components) and filter number 5 for definition copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 7 4.3 usage of risk scoring model framework figure 2. money laundering filter and it‟s sub components the weight scoring formula is to calculate the potential risk of the customer. the value of the weight is used as a multiplier for the risk value. when risk values are used to compute the risk, weights are used to calculate the importance of a risk assessment score. figure 3. potential risk where potential risk = total risk score of customer wi = risk weightage for each filter i = 1,..., n ri = risk assessment score for each filter i = 1,..., n n = number of risk assessment filter note that for each customer, the max score is taken for the risk assessment in the respective category. under each risk filter component, the number of possible scores can be divided into smaller sections or areas. note. the parameters can be introduced or modified based on financial institutions' policies and regulations. for each filter sub-component, there will be a maximum score out of the list of parameters. if one profile matches more than 2 parameters then the maximum score will be considered for that filter subcomponent and will be calculated for the final score. the following table provides the risk score range to identify the risk category and it helps to promote the case to further investigation. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 8 table 8. risk category this risk category table is a reference to the final potential score to decide whether a suspicious profile requires further investigation or not. minimum risk score max risk score risk category further action 0 30 low no 31 60 medium no 61 100 high yes the risk category helps to filter the cases for further investigation. the cases with low risk will come to filter again with the aggregated view. it will compile all the views and comes to alter when it becomes significant. the event with the low score but frequent occurrence may accumulate to a high score for an alert. 5. calculation of risk for customer or business account with the help of risk assessment score and weight this can be better understood with the help of an example. john smith is a bank customer and he has an account with the bank. the bank needs to run the aml filter on john smith‟s information to calculate the risk score based on his financial transactions and social media profile details. below are the scenarios and risk core for john smith to calculate the potential risk score. table 9. risk calculation for customer profile risk assessment filters weight risk assessment score remark behavior 15% 55  money transfer to an illegal entity or outside of industry entity (john smith regularly transfers money to an account of the leather industry. but, john smith works in pharma company). based on the score matrix this event scores 55 out of 100.  unusual social profile network increase or decrease (john smith added many new friends from a geo risk country and an unusual increase of profiles in the friend list.). based on the score matrix this event scores 45 out of 100. note. score matrix can be repaired based on individual organization requirements. john smith has two marked behaviors events and the max score (55, 45) is 55. so, the score of the behavior risk assessment filter is 55. reference form table 3. aggregated 20% 45 similar to the above. the score for aggregated filter view is 45. reference from table 4. list matching 25% 60 similar to the above. the score for list matching filter view is 60. reference from table 5. key aml noise phrases (suspicious and money laundering keywords) 20% 90 similar to the above. the score for key aml noise phrase filter view is 90. reference from table 6. suspicious profile detection 20% 100 similar to the above. the score for the suspicious profile filter view is 100. reference from table 7. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 9 refer to the expression in equation (1) potential risk score= (.15*55) + (.2*45) + (.25*60) + (.2*90) + (.2*100) =70.25 (the risk score is rounded off to 70.) risk category. high (reference to table 8.) this customer can be created as a case for further investigation and analysis by aml experts. the case management system must have a feedback system where the feedback should incorporate the changes in the scoring framework. if the score or alert is not accurate for any of the customer then the scoring framewo rk must be updated to generate a valid score. 6. insight based on the literature review of relevant research papers and personal experience in this area, this paper focuses on several key insights for the new generation aml solutions to handle money launders more effectively. this will help to mitigate financial security risks with the use of customer‟s social media data. users of these insights can generate more discussion and methods to address money laundering scenarios. to determine filters or par ameters for addressing different risk areas, organizations need to analyze each potential area to ensure that money laundering risks are being sufficiently considered and the organization‟s aml policies need to be restructured in the context of social media regulations. although many organizations have considered social media profile check as one of the kyc (know your customer) check and customer due diligence process, consideration of this data in the daily monitoring process is not widely implemented. thus, organizations need to consider new areas in aml measurement policies to ensure that the solution is more effective to generate alerts (reserve bank of india reports, 2009). a standardized framework for all financial institutions and social media platform is required. this strategy will help to feed enough information to the monitoring system so that an accurate result can be derived from the alert generating engines of aml software. 7. conclusion and future work the money laundering policy plays an important role in banks due to its necessity. the measure on customer social media profile is rarely part of money laundering regulations. however, few banks consider social media profile checks as part of know your customer and customer due diligence process. in this paper, we provide a basic framework for identifying money laundering activity by creating a transactional profile and social media profile. we show firstly the whole process of aml activity and then the framework through which the solution can be extended considering the social profile network. we also discuss an extension of current aml solutions to have a better watch view. an important knowledge retrieved from our experience is that by selecting appropriate parameters, the solution can be customized and can be applied to detect money laundering cases from social networks as well. we used parameters that are widely used in the banking and financial industry. the study finds out that we have more research papers on financial transaction monitoring but there is very little research work done on suspicious social media profile identification. the monitoring solution can be more robust if we add more data from the social media platform. more data will give better insight into the customer and more parameters can be identified for the filter to have better decision points. the subcomponents are the pillars of primary filters and these subfilters can be modified based on organization policy. the business rules and boundary criteria for decisions can be enhanced based on industry and geography. besides, the combination of subcomponents for parent filter helps to improve the accuracy in the detection of money laundering cases. the paper adds to the existing literature on improving the antimoney laundering framework and the inclusion of more parameters for each area. references batrinca, b., & treleaven, p. c. (2014). social media analytics: a survey of techniques, tools and platforms. ai and society, 30(1), 89–116. https://doi.org/10.1007/s00146-014-0549-4 choo, k. k. r. (2008).politically exposed persons &lpar;peps&rpar;&colon; risks and mitigation. journal of money laundering control, 11(4), 371–387. https://doi.org/10.1108/13685200810910439 gao, z., & ye, m. (2007). a framework for data mining-based anti-money laundering research. journal of money laundering control, 10(2), 170–179. https://doi.org/10.1108/13685200710746875 glass, n. b. (2018). the leveraging of social media by corporate credit unions to enhance the detection and reporting of suspicious activity. johnston, r. b., & abbott, j. (2005). deterring abuse of the financial system: elements of an emerging international integrity standard (policy discussion paper no. 05/3). https://www.imf.org/en/publications/imf-policydiscussion-papers/issues/2016/12/31/deterring-abuse-of-the-financial-system-elements-of-an-emerginginternational-integrity-18105 kruisbergen, e. w., kleemans, e. r., & kouwenberg, r. f. (2015). profitability, power, or proximity? organized crime offenders investing their money in legal economy. european journal on criminal policy and research, 21(2), 237–256. https://doi.org/10.1007/s10610-014-9263-5 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 10 reserve bank of india. (2009). state finances: a study of budgets of... reserve bank of india. retrieved june 23, 2020, from https://www.rbi.org.in/scripts/publicationreportdetails.aspx?urlpage=&id=543#1r copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess 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 | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 92 revisiting the efficiency of indian banking sector: an analysis of comparative models through data envelopment analysis jyoti tanwar research scholar department of economics and finance bits-pilani, pilani campus jhunjunu, rajasthan333031, india e-mail: jyotanwar@gmail.com himanshu seth research scholar department of management bits-pilani, pilani campus, india e-mail: hseth91@gmail.com arun kumar vaish assistant professor department of economics and finance bitspilani, pilani campus, india e-mail: arunkvaish@gmail.com n v m rao professor department of economics and finance bits-pilani, pilani campus, india e-mail: nvmrao@pilani.bits-pilani.ac.in abstract this study examines the efficiency of the overall indian banking industry using data envelopment analysis (dea) and to perform a comparative efficiency analysis of public, private, and foreign banks using six varied forms. also, providing ranks to the banks based on their efficiency. the study incorporates bcc output-oriented dea model using a sample of 50 indian banks (public banks = 17, private banks = 18, foreign banks = 15) for a period ranging from 2009-10 to 2018-19, hence incorporating the after-effects of the financial crisis and demonetization, this study uses panel data from 2009-10 to 2018-19. the results showed that most of the indian banks fall on the efficient side or are near to full efficiency. however, public banks outperform private and foreign banks in terms of their average efficiency. results also specify that the performance of banks is sensitive to input-output variables, units under evaluation, and choice of the model. the current study has just focused on the internal factors for analyzing the efficiency of indian banks; however, certain external factors might also impact the banks’ efficiency. 1. introduction history of banking in india is as old as vedic civilization where usury, as well as kusidin (money lender), has been commonly referred. in modern times the banking in india originated in the last decade of the 18th century and has evolved over the years to the present shape. after independence, india got a formal banking structure catering to the elite class of society comprising mainly traders, industrialists, and high net worth individuals. banks act as a financial intermediary by converting deposits into productive investment, creating new capital, and thus accelerating economic development. few significant events such as nationalization of scheduled banks, creation of statutory liquidity ratio and cash reserve ratio, entry of private banks, and introduction of income recognition and asset classification norms to determine non-performing assets led to greater competition and strengthening of the indian banking sector. reserve bank of india has regulated the banking system from time to time to ensure that banks are resilient to global turmoil. the working population of india is raising demand for banking services. due to modernization and technological interference, banks have become accessible through mobile and internet. mobile banking, internet banking, and atms have increased the volume of business for banks. banks are also enjoying higher interest margins, which has led to competition. to curd competition and reduce npas, few public banks have decided to undergo a merger. efficiency and productivity keywords: banking, dea, efficiency, ownership. . mailto:jyotanwar@gmail.com mailto:hseth91@gmail.com mailto:arunkvaish@gmail.com mailto:nvmrao@pilani.bits-pilani.ac.in copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 93 analysis of banks became essential to reduce costs and increase profitability. this critical analysis has gained importance, mainly due to the speediest dynamic environment where banks are facing heavy competition, and survival has become difficult. the soundness and effectiveness of a banking system are often measured by efficiency, profitability improvement, increasing volume of funds flowing from savers to borrowers, and better-quality services for the customers. the efficiency and productivity analysis have caught the eye of the researcher in recent times. researchers have faced one major hitch while measuring the effectiveness of banks. banks provide products and services which are intangible. it is challenging to measure input injected, and output generated out of it. a plethora of models were developed to calculate performance and efficiency. one such model was introduced in 1978 by charnes et al., as data envelopment analysis (dea). dea is a mathematical approach for evaluating the performance of a set of peer entities called decision making units (dmu) that converts multiple inputs and multiple outputs. the simplicity of dea over other models makes it a widely used method. in this model, its method and algorithm help in finding an optimization solution. moreover, the input/output resulting in inefficiencies can be traced to every decisionmaking unit. earlier, ratio analysis has been used as a cross-sectional technique to measure and compare the productivity of different industries. ratio analysis is simple in use but also provides a limited explanation of results. multiple data cannot be analyzed at once, limiting the use of ratio analysis. it loses its credibility when a comparison is made for firms having a different size. results may also be ambiguous and incomplete. data envelopment overcame the limitations associated with ratio analysis. dea has been implemented to measure the performance of many other industries such as railways (kwak et al., 2016; george & rangaraj, 2008); hospitals (sharma & dipasha, 2018); airport (keskin & köksal, 2019); schools (mante & o’brien, 2002); communication (kwon et al., 2008; sigala, 2003); retail distribution network (lau, 2012); environment (mehta et al., 2019); and energy (ashuri et al., 2019) etc. in this research paper, an attempt is made to study efficiency analysis and performance benchmarking of banks in india. the analysis is developed based on four areas of banking operational efficiency: deposit mobilization, fund conversion, noncore activities, and cost-revenue management. the efficiency of the bank as a whole is also estimated by following the intermediation approach and production approach. the bcc model of the dea technique is implemented to evaluate the efficiency of banks. the paper is comprised of an extensive literature review of dea in banking, research methodology, sampling technique and data collection, the basis for selection of input and output, presentation and analysis of empirical findings, and conclusion. 2. literature review for dea in banking dea is a popular tool for the practitioner in deciding on a multidimensional framework. initially, charnes et al. (1978) extended farrell’s efficiency measurement model. charnes et al. (1978) developed a method that can incorporate multiple inputs and multiple outputs to determine single firm efficiency assuming constant return to scale (crs). later, banker et al. (1984) further extend the charnes et al. (1978) crs to variable returns to scale (vrs). in their study, they split the technical efficiency into pure technical efficiency and scale efficiency. the use of dea in the banking industry helps management to benchmark different decision-making units (dmus). dea is a widely used tool to evaluate the performance of banks based on multiple inputs and outputs. in prior studies on banking efficiency using dea, researchers have used either a production approach or an intermediation approach. in the production approach, the bank is viewed as a producer of products and services using physical labor, physical assets, and other resources as inputs while deposits, loans granted and the number of transactions done is treated as output (ferrier & lovell, 1990; fried et al., 1993; sherman & gold, 1985). whereas, the intermediation approach views the bank as an intermediate that transforms and transfers financial assets from saver to borrowers (elyasiani & mehdian, 1995; rangan et al., 1988; mercan et al., 2003). the production approach and an intermediation approach became the foundation for the selection of inputs and outputs. the application of the dea technique in recent literature is very vast. wanke et al. (2019) studied the banking industry of mena using dynamic network dea. they tried to develop a relationship between financial and accounting indicators in banks used under the study. the banking industry is affected by the cultural and regulatory heterogeneity of mena countries. ownership, origin, and type of banks are also factoring that led to variation in efficiency scores of mena banks. wang et al. (2019) estimated the efficiency of 18 large banks from all over the world by a dynamic slacks-based measure model in dea. the dynamic sbm model developed a new structure for interpreting the inputs and outputs. the findings of the study reveal the accurate efficiency of 18 banks to position them in the global market. jreisat et al. (2018) undertake 14 egyptian banks to investigate productivity changes using malmquist indices in dea model. determinants of productivity change were further investigated using regression model. maturity of banks, size of banks and higher loan to deposit ratio reflected higher potential for productivity. kamarudin et al. (2019) studied the revenue efficiency, cost efficiency, and profit efficiency of the domestic malaysian islamic banks and malaysian foreign islamic banks. the study revealed that malaysian domestic banks are relatively revenue and cost-inefficient as compare to foreign banks operating in malaysia. profit inefficiency is influenced by higher revenue inefficiency. further, bank specific and external factors are analyzed to derive their relationship with domestic malaysian copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 94 islamic banks’ efficiency. the factors such as bank size, liquidity, and management quality have a positive effect on efficiency whereas, bank market power has negatively influenced the efficiency of banks in malaysia. zhou et al. (2019) developed a three-stage model to examine the efficiency of listed chinese banks for the year 201416. inefficiencies of banks in three stages and different periods are evaluated. unused assets were carried forward in this model. employees' cost and fixed assets are termed as shared inputs because these can be used as inputs for multiple outputs. credit risk is reflected by npas that are treated as undesired output in the study. the study indicated that increasing business scale and identifying sensitive banks can improve the performance of banks in the future. grmanová & ivanová (2018) analyzed the efficiency of banks based in the slovak republic for the years 2009 and 2013. in the year 2009, most banks suffered the effects of the financial crisis. by the end of year 2013 most banks were able to overcome the ill-effects of the financial crisis. the efficiency of banks is determined using a combination of inputs and outputs. ofori-sasu et al. (2019) studied the effect of the funding structure of 25 ghana banks on technical efficiency. deposit funding and non-deposit funding have a positive influence on technical efficiency. ghana banks are generally inefficient as managers are unable to exploit technology, and optimally utilize inputs to generate outputs. yannick et al. (2016) addressed the difficulty faced by banks of côte d’ivoire to convert deposits into credit. after investigating 25 banks, it is found that banks are inefficient in loan allocation due to incompatibility of production scale. foreign private banks are more efficient as comparative to pubic banks. janet et al. (2015) examined the performance and productivity of state-owned commercial banks in china. big four banks are analyzed from 1990 to 2008 to study the banks' reaction to bank reform. the banks under study reacted positively during the reform period in terms of technical efficiency, scale efficiency, and productivity change. the results also indicate that protection, support, and intervention of the government has reduced innovation and motivation among employees. desta (2016) has shown various applications of the dea model.the dea model can be used to determine the firm's efficiency, ranking of firms based on efficiency scores, and selecting the most efficient banks. jemric & vujcic (2002); hauner & peiris (2005); matthews & ismail (2006); isik (2007) studied the efficiency of banks based on their ownership structure and revealed that foreign banks are more efficient and productive than domestic banks. on the other hand, hadad et al. (2008); sufian (2009); tahir et al. (2009); fethi et al. (2011) results presents that domestic banks are more efficient than foreign banks. 2.1 literature review on dea in indian banking several studies have been carried out on efficiency analysis using dea approach on indian banking. bhattacharyya et al. (1997) used dea and stochastic frontier approach (sfa) to analyze the technical efficiency of banks and reasons for variations in efficiency scores, respectively. the results reveal that public sector banks performed way better than private and foreign banks in terms of technical efficiency. the performance is hindered by operational constraints, capital adequacy norms, and priority sector lending requirements. the study of kumar & gulati (2009) showed that the technical efficiency of indian public banks has improved in the post-reform period. most banks exhibit improvement in efficiency after the first phase of reform. by using the concept of convergence, it is discovered that the inefficient banks performed reasonably well, and few overtake the already existing efficient banks. the noteworthy reasons for the increase in performance are heightened competition due to entry of private sectors, increase in operational efficiency, reduction in the cost of financial transactions, rightsizing of the labor force, use of technology, and recovery of npas. a study conducted by ray & das (2010) during the post-reform period indicates that the profit efficiency of public banks is higher than private banks. the estimates of non-parametric kernel density manifest rightward-shift in the distribution of efficiency. the cause of inefficiency is the ineffective scale of economy, bank size, and product mix. sathye (2003); mohan & ray (2004) undertake banks of a developing country, i.e., india, in the research. the productive efficiency of banks is measured, and the efficiency scores demonstrate that public sector banks and foreign banks perform better than private banks. the study recommends that efforts should be made to bring down npas and the cost of operations. however, the study of (shanmugam & das, 2004) indicated the supremacy of deposits input in generating outputs. the output of banks such as non-interest income, investments, and credits has shown steady improvement over a period of time. progress in the productivity of indian banks proclaims the success of the implementation of reforms. sanjeev (2006, 2009) studied the indian banks during the reform period to ensure the improvement in the efficiency of banks. the average efficiency scores of public and private sector banks have increased significantly. a few banks in the public sector have declined in their performance due to increased competition. the competition has risen with liberalization policy, giving a green signal for entry of private sectors in the banking industry. an increase in npas has shown an inverse relationship with the efficiency of banks. likewise, tamatam et al. (2019) proves that public sector banks had less efficiency and improvement in technology when compared with private banks. zhao et al. (2008) examined indian banks based on ownership, where foreign banks have higher technical efficiency scores in the first phase of deregulation than private and public banks. in the second phase, public banks performed better than others due to the rise in competition and the advancement of technology. the npls are taking into consideration to determine the output efficiency. it is, however, observed that priority sector lending affected the credit quality of banks. rezvanian et al. (2008) conducted a study on the indian banking industry covering the period between 1998 and 2003. an attempt is made to examine the effect of ownership, technological progress, and productivity growth on the efficiency of banks. based on the efficiency scores calculated for three types of banks, foreign-owned banks ranked one in the efficiency, copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 95 whereas private banks ranked two, and public banks stood last in the ranking. the rationalization for inefficiency is the under-optimal scale of operations of most of the banks. das & ghosh (2009) assessed that banks are cost-efficient in india and can control the wastage and underutilization of resources. however, in terms of profit efficiency, banks lie inside the efficient profit frontier. higher capital and less nonperforming loans exhibit an increase in the efficiency of most banks. jagwani (2012) studied the pure technical and scale efficiency of indian banks. the inefficiency of banks is justified by managerial sub-performance. management is incapable of converting inputs into outputs optimally. other than management quality, the sub-optimal scale of operation caused inefficiencies in the banking sector. the study of mukherjee et al. (2002) showed the positive outcome of liberalization on banking sector performance measures. with the implementation of a multi correlation clustering method, a strategic group of banks is identified based on efficiency measure. this approach will help bank managers to recognize their key competitors and plan for future strategies. 2.2 literature review on input and output it is essential in dea methodology to select appropriate inputs-outputs for estimating the efficiency of banks. there is no consensus on the choice of input-output, and input-output variables affect the derived efficiency level. for the banking industry, there are two approaches, mainly: the production approach and the intermediation approach. the selection of deposit as an input variable or out variable is the only difference between the two approaches. for the production, approach deposit is treated as output, while for the intermediation approach, the deposit is treated as input. various inputs and outputs used by authors for deriving the efficiency of banks are given under in table 1. table 1. summary of input-output literature s. no author and year input output no. of banks country 1. kantor & maital (1999) labour costs, services, area number of demand deposits, customer services transactions, credit cards, commission on import-export, commercial accounts activity 250 mid-east 2. golany & storbeck (1999) labour, area, marketing loans, deposits, number of accounts per customer, satisfaction 182 branches usa 3. mukherjee et al. (2002) net worth, borrowings, operating expenses, number of employees, number of bank branches deposits, net profits, advances, noninterest income, interest spread 68 banks india 4. sathye (2003) interest expense, non-interest expense interest income, non-interest income 94 india 5. ho & zhu (2004) assets, employees, branches, capital stocks sales, deposits 41 taiwan 6. howland & rowse (2006) non sales fte, sales fte, size, city employment rate loans, deposits, average number of products/customers, customer loyalty 162 canada 7. ariff & can (2008) deposits and other funds, number of employees, physical capital loans, investments 28 china 8. das & ghosh (2009) deposits, number of employees, capital-fixed asset, equity loans and advances, investments, other income 71 india 9. olson & zoubi (2011) deposits, labour, physical capital net loans, dollar value of securities and other earning assets 80 mena 10. jagwani (2012) net fixed assets, staff, deposits and borrowings, net worth, operating expenses, non-performing assets, payments and provisions related to employees, other liabilities and provisions net interest income, non-interest income, investments, net profits, advances 42 banks india 11. řepková (2013) labour, deposits loans, net interest income 11 banks czech republic 12. malhotra et al. (2011) efficiency ratio, interest expensed to interest earned ratio, loan to total fund ratio return on asset, interest income relative total fund, interest spread, asset utilization ratio, capital adequacy 35 banks india 13. yannick et al. (2016) deposits, fund borrowed volume of loan granted 14 banks côte d’ivoire 14. desta (2016) interest expense, non-interest expense, transaction deposit, non-transaction deposit gross loan, other earning assets, interest income, non-interest income 19 banks africa copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 96 15. grmanová & ivanová (2018) liabilities to banks and customers, operating cost loans and advances to banks and customers, non-interest income. 13 banks slovakia 16. ofori-sasu et al. (2019) total cost, total deposits total loans, other earnings 25 banks ghana 17. kordrostami et al. (2016) employees (the number of staffs and the manager of each branch), expenses (personnel, office, and other expenses) deposits (long term investment deposits, saving deposits and current deposits of government) loans (the aggregation of shortand long-term personal loans) 20 branches iran 18. kamarudin et al. (2019) deposits, labour loans, income 17 banks malaysia 19. zhou et al. (2019) interest payments, employees’ salaries, fixed assets net interest incomes, non-performing loans 16 banks china 20. wanke et al. (2019) net loans, total earning assets, non-earning assets, loan loss provisional costs net interest margin, equity, income 82 banks mena 21. wang et al. (2019) assets (tangible and intangible), capitalization (net worth) and liabilities revenue as output and net interest income as good link 18 banks all over the world 3. theoretical framework and methodology over the past two decades, several parametric and non-parametric frontier models have received considerable attention for measuring the efficiency of various financial and non-financial institutions. among these, a non-parametric performance assessment technique termed as data envelopment analysis (dea) has increasingly become accessible for undertaking benchmarking studies concerning the banking sector (kamarudin et al., 2019; paradi et al., 2018). charnes et al. (1978) originally designed the dea technique for measuring the relative efficiencies of decision-making units (dmus) or organizational units using the input-output dataset, also known as the ccr model which assumed a constant return to scale. further, banker et al. (1984) extended the ccr model for technologies exhibiting a variable return to scale. these dea approaches involve constructing an efficient production frontier by applying linear programming techniques based on best practices over the data set. the efficiency of each dmu is then measured with this frontier. the dmus with efficiency scores as '1' will lie on the frontier and would be efficient, and dmus not lying on the frontier would be inefficient with scores less than 1. most popularly, organizations involving multiple inputs for producing multiple outputs have been using the dea technique for evaluating their organizations' efficiency. the available literature on dea models has used various mathematical approaches. essentially, these models establish which dmus govern the efficient frontier or best practice frontier or envelopment surface. mainly, there are two types of models input-oriented and output-oriented. input oriented model aims at reducing the number of inputs keeping the output levels at the same levels. the objective of the output-oriented model is maximizing the level of output, following the same level of inputs. the present study incorporates specific dea model as prescribed by kumar & gulati (2009). it uses the bcc output-oriented model for identifying the banks on the output frontier provided with several inputs at their disposal. considering varying economies of scale in the practical scenario, using the bcc model for the analysis is more suitable. the following expression illustrates the dea bcc model: max φ subject to ∑ 𝜆𝑗 𝑛 𝑗=1 ∗ 𝑥𝑖𝑗 ≤ 𝑥𝑖0 ∑ 𝜆𝑗 𝑛 𝑗=1 ∗ 𝑦𝑟𝑗 ≥ φ𝑦𝑟0 ∑𝜆𝑗 𝑛 𝑗=1 = 1 where, ▪ i = 1,2, 3,………….,m; ▪ r = 1,2, 3,…………….,s; ▪ j ≠ 0 and, ▪ φ signifies efficiency scores ▪ 𝜆𝑗 denotes the weight of dmu (decision-making unit) j ▪ 𝑥𝑖𝑗 denotes the i input of dmu j ▪ 𝑦𝑟𝑗 denotes the r input of dmu j there are m inputs and s outputs for all n decision-making units. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 97 3.1 sampling and data the present study selects 50 banks in india, consisting of 17 public banks, 18 private sector banks, and 15 foreign banks; the list is given appendix 1. the selection of banks is made as per the availability of data for years 2010-2019. the data collected for the research paper is annual and collected from the secondary source. annual bank-level data is obtained from ‘capitaline plus’ for the financial year 2009-2010 to 2018-2019, i.e., for 10 years. the time period taken in the study covers the post-financial crisis period and demonetization period effects. therefore, the period is sufficient to study the drastic changes that occur in the economy. 3.2 selection of input and output the input and output variables selected for the study pertain to the existing literature. mainly the input-output is guided by the operational pattern, performances, and objectives of the banks functioning in india. the input-output variables have been segregated in two headings: area wise and approach wise. area-wise selection of input & output variables is further divided into four sets based on performance-based efficiency, whereas, approach-wise selection of input & output variables is divided into two sets. the table 2 and table 3 shows the choice of input-output variables in the study. table 2. area wise four sets of input & output variables s.no performance base efficiency input output 1. deposit mobilization efficiency (dme) fixed assets, employee cost, interest expense on deposits deposits 2. fund conversing efficiency (fce) fixed asset, employee cost, loanable fund earning assets 3. off-balance sheet activities efficiency (obe) fixed assets, employee cost total noninterest income 4. costrevenue management efficiency (cre) total interest expense, total non-interest expense net total income profit after tax (pat) table 3. approach wise two sets of input & output variables s. no approach based efficiency input output 1. intermediation approach efficiency (iae) loanable funds, operating expenses earning assets, total income, profit after tax (pat) 2. production approach efficiency (pae) fixed assets, employee cost deposits, earning assets dme and fce capture traditional functions of banks, whereas obe measures the efficiency of the bank for nontraditional activities. cre depicts the cost minimization and revenue maximization efficiency of banks. in the production approach, a bank is treated as a producer of services, while in the intermediation approach, it is treated as a facilitator. in previous researched fixed assets and number of employees were taken as a proxy for physical capital and labor. here, in the present study, fixed assets and employee costs have been used instead. here is a detail for inputs and outputs: (a) deposit = saving deposits + demand deposits + term deposits (b) loanable fund = deposits + borrowings (c) earning assets = investments + advances (d) total non-interest income = commission & brokerage + other non-interest income (e) total interest expense = interest expense on deposits + interest paid on borrowings (f) total non-interest expense = operating expenses + non-operating expenses (g) total income = interest income + non-interest income (h) net total income = noninterest income + net interest income (interest income – interest expense) the study has undertaken six types of efficiency for each bank selected for 10 years using the vrs (bcc) model. the banks are segregated further based on ownership, i.e., public banks, private sector banks, and foreign banks. the purpose of the study is to find efficient banks as per the ownership structure based on all six types of efficiency and composite scores derived from the average of the above six types. 4. results and discussion 4.1 private sector banks the study was conducted on 18 private banks, and efficiency scores were calculated based on six sets of input & output variables. from the descriptive analysis of statistic of efficiency, it was revealed that private banks were most efficient in intermediation approach based efficiency (97.35%), followed by fund conversion efficiency (96.99%), costrevenue efficiency (88.41%), deposit mobilization efficiency (81.56%), production approach based efficiency (71.54%). the copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 98 lowest efficiency of banks was found in off-balance sheet activity efficiency, i.e., 36.36%. the inefficiency of the bank also reveals that there is further scope for banks to increase output from the same inputs. table 4. summary statistics of efficiency of private banks the summary statistics of different efficiency iae pae dme fce obe cre composite score no. of dmu 18 18 18 18 18 18 18 average efficiency 0.9735 0.7154 0.8156 0.9699 0.3636 0.8841 0.7870 sd 0.0275 0.2259 0.1488 0.0257 0.3336 0.0997 0.1113 maximum efficiency 1 0.9751 0.9838 1 0.9972 1 1 minimum efficiency 0.9061 0.3447 0.3589 0.9040 0.0390 0.6548 0.5819 no. of efficient banks 3 1 1 2 1 1 1 the table 5 shows the list of banks that were fully efficient in six types of efficiency calculated. table 5. list of fully efficient private banks type of efficiency name of the bank iae hdfc, nainital bank, rbl bank ltd pae hdfc dme jammu & kashmir bank fce hdfc, nainital bank obe icici bank cre nainital bank it was observed that no bank was fully efficient in all six types of efficiencies. the composite score has been calculated by taking the average of iae, pae, dme, fce, obe, and cre. the most efficient bank as per composite score is icici bank, followed by axis bank, hdfc bank, indusind bank, and federal bank. just after the financial crisis, the performance of most banks in the private sector is inefficient. however, few banks recovered in a later period, and their performance has also accelerated. during the demonetization phase 2016-17, the business of banks has undoubtedly flourished, which is reflected in their performance. excess deposit growth in the banking system during this period has increased the performance of most of the banks in the private sector. if we talk about non-traditional activities, then private banks are still lagging. traditional activities generate a large portion of revenue, and non-traditional activities contribute a very insignificant amount. figure 1 shows the efficiency score of private banks. the average score for 10 years has been taken to determine the efficiency score for iae, pae, dme, fce, obe and cre. figure 1. efficiency score of private banks (average of 10 years) 4.2 public sector banks likewise, the analysis was conducted on 17 public sector banks, and the results were similar to private sector banks. the efficiency of banks is highest in iae with 98.58%, followed by fce 98.28%, cre 94.36%, dme92.32%, pae – 84.94%, obe78.92%. this analysis shows that the performance of banks is still based on traditional functions. still, the 0 0.2 0.4 0.6 0.8 1 1.2 iae pae dme fce obe cre copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 99 off-balance-sheet activity efficiency of public banks is significantly better than private and foreign banks. public banks deal in insurance, brokerage, and generate fair revenue. table 6. summary statistics of efficiency of public sector banks the summary statistics of different efficiency iae pae dme fce obe cre composite score no. of dmu 17 17 17 17 17 17 17 average efficiency 0.9858 0.8494 0.9232 0.9828 0.7892 0.9436 0.9124 sd 0.0158 0.1240 0.0668 0.0175 0.1594 0.0446 0.0554 maximum efficiency 1 1 1 1 1 1 1 minimum efficiency 0.9363 0.5913 0.7884 0.9472 0.4813 0.8761 0.8312 no. of efficient banks 3 4 3 4 2 2 2 the table 7 shows the list of banks that were fully efficient in six types of efficiency calculated. table 7. list of fully efficient public sector banks type of efficiency name of the bank iae indian bank, punjab & sind bank, state bank of india pae bank of baroda, corporation bank, punjab & sind bank, state bank of india dme bank of baroda, corporation bank, punjab & sind bank, state bank of india fce andhra bank, corporation bank, punjab & sind bank, state bank of india obe punjab & sind bank, state bank of india cre punjab & sind bank, state bank of india state bank of india and punjab & sind bank are fully efficient in all six types of efficiencies – iae, pae, dme, fce, obe, and cre. the most efficient bank as per composite score is again state bank of india and punjab & sind bank. apart from them, other efficient banks with rank 2, 3, 4 & 5 are corporation bank, bank of baroda, andhra bank, and canara bank, respectively. the efficiency of public sector banks is generally stagnant even after the crisis. most banks have recovered at a faster pace due to the governmental policies to revive the economy. during demonetization, public sector banks have lion share in deposits leading to lower cost of funds, yet the performance of banks has declined. most banks were not able to discharge their day to day operations during the demonetization phase. there was excess deposit but also withdrawals from banks. most banks were busy exchanging banned currency notes as per the rbi guidelines and could not perform their regular work. these events led to a decline in the performance of banks. figure 2 represents the efficiency score of public sectors banks. the average score for 10 years has been taken to determine the efficiency score for iae, pae, dme, fce, obe and cre. figure 2. efficiency score of public sector banks (average of 10 years) 0 0.2 0.4 0.6 0.8 1 1.2 iae pae dme fce obe cre copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 100 4.3 foreign sector banks foreign banks also showed a similar pattern of efficiency when compared with public banks and private banks. banks are highly efficient for iae – 92.83% and least efficient in obe – 55.88%. table 8. summary statistics of efficiency of foreign banks the summary statistics of different efficiency iae pae dme fce obe cre composite score no. of dmu 15 15 15 15 15 15 15 average efficiency 0.9283 0.7871 0.8696 0.9374 0.5588 0.8532 0.8224 sd 0.0911 0.2354 0.1567 0.0906 0.3323 0.1394 0.1192 maximum efficiency 1 1 1 1 1 1 1 minimum efficiency 0.7409 0.2443 0.5257 0.6863 0.0943 0.6134 0.6369 no. of efficient banks 4 4 5 6 4 4 1 the table 9 shows the list of banks that were fully efficient in six types of efficiency calculated. table 9. list of fully efficient foreign banks type of efficiency name of the bank iae standard chartered bank, barclays, bank of ceylon, american express pae standard chartered bank, barclays, shinhan bank, krung thai bank public company ltd dme standard chartered bank, barclays, ab bank, mashreq bank, psc, krung thai bank public company ltd fce standard chartered bank, barclays, bank of ceylon, american express, ab bank, krung thai bank public company ltd obe standard chartered bank, american express, ab bank, krung thai bank public company ltd cre bank of ceylon, american express, mashreq bank, standard chartered bank there is only one bank which is fully efficient in all six types of efficiency i.e., standard chartered bank. when composite efficiency is calculated and banks are ranked, then also standard chartered bank is ranked first. banks that secured rank 2, 3, 4, and 5 are krung thai bank public company ltd, ab bank, barclays, and mashreq bank respectively. figure 3 represents the efficiency score of foreign sectors banks. figure 3. efficiency score of foreign banks (average of 10 years) 0 0.2 0.4 0.6 0.8 1 1.2 iae pae dme fce obe cre copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 101 4.4 ownership based analysis from the tables provide above on descriptive statistics of efficiency based on iae, pae, dme, fce, obe, and cre for private, public and foreign banks, a summary table is derived which shows the most efficient, moderately efficient and least efficient banking sector. the analysis shows that public sector banks are leading private and foreign banks in all six types of efficiency. in contrast, private banks are moderately efficient for iae, fce, and cre and least efficient for pae, dme, and obe. as for foreign banks, they are moderately efficient for pae, dme, and obe. table 10. ownership-wise efficiency of banks efficiency level iae pae dme fce obe cre most efficient public bank public bank public bank public bank public bank public bank moderately efficient private bank foreign bank foreign bank private bank foreign bank private bank least efficient foreign bank private bank private bank foreign bank private bank foreign bank later based on composite scores, it was revealed that public banks are leading, followed by private banks and foreign banks. ownership of banks has a significant impact on the productivity and efficiency of banks. public banks are more efficient than private and foreign banks (jagwani, 2012). the efficiency of public sector banks is 91.23%, private bank – 78.71%, and foreign bank – 82.24%. though the efficiency of foreign banks is significantly more than private banks yet when compared with standard deviation, private bank shows lesser deviation. the dispersion amongst the public banks is very less when compared with private and foreign banks, which reflects the single ownership of government. moreover, public banks generally follow identical practices and policies. the competition has also contributed towards increased efficiency of public banks as they thrive for their survival with expansion of private and foreign sector banks (zhao et al., 2008; sanjeev, 2006, 2009; kumar & gulati, 2009). rationalization of staff and branches has reduced cost burden on banks. the higher value of standard deviation in private and foreign banks indicates that the methods of banks might differ due to diverse management and ownership. minimum dispersion in public sector banks is consistent with the results of bhattacharyya et al. (1997); sathye (2003). public sector banks are more familiar with the regulatory system as compared to foreign banks. bhattacharyya et al. (1997) justified the greater variability in the efficiency of foreign banks by showing that they depend on less stable wholesale or corporate resources, interbank borrowings, and refinance of assets. on the other hand, the domestic banks have an extensive network of branches and rely on a more stable retail banking business. table 11. summary of statistics based on ownership summary of statistics public bank private bank foreign bank no. of dmu 17 18 15 mean 0.9124 0.7871 0.8224 sd 0.0554 0.1112 0.1191 maximum 1 1 1 minimum 0.8312 0.5819 0.6369 no. of efficient banks 2 1 1 coefficient of variation 0.0607 0.1415 0.1449 4.5 overall analysis lastly, the efficiency score of all 50 banks without segregating them sector-wise was calculated, and the results are unique. the top five banks for overall efficiency are state bank of india, icici, yes bank, axis bank, and hdfc. fully efficient banks for iae, pae, dme, fce, obe and cre is shown in the table 12 below: table 12. list of fully efficient banks in six types of efficiency iae pae dme fce obe cre state bank of india bank of baroda bank of baroda state bank of india state bank of india state bank of india barclays bank of ceylon state bank of india barclays ab bank ltd hdfc bank of ceylon krung thai bank public company ab bank ltd ab bank ltd krung thai bank public standard chartered copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 102 ltd company ltd american express ----mashreqbank bank of ceylon ----bank of ceylon --------krung thai bank public company ltd krung thai bank public company ltd ----american express ------------american express ----mashreqbank 5. conclusion the paper studies 50 banks operating in india for the period 2009-10 to 2018-19, segregated them based on ownership into public, private and foreign banks. the study is very comprehensive in a manner as it uses different inputs and outputs to calculate the efficiency of banks. it is noted that the dea technique is sensitive to inputs and outputs, ccr and bcc model, number of dmus, and the number of inputs and outputs. the results in the study proved that by changing inputs and outputs, the efficiency score of banks has also fluctuated. the efficiency scores are based on technical efficiency in this study. here in this study, efficiency is calculated using four key performance areas. the choice of input and output changes the efficiency scores each performance area, i.e., dme, fce, obe, and cre. the model has also determined overall efficiency scores of banks using intermediation and production approach (iae and pae). analyzing the efficiency in such a broader way made it possible to capture the multidimensional performance of banking. it provides insight for banks to improve performance in their weak areas of efficiency. banks can also improve their productivity by bringing down the non-performing loans, reducing the cost in fixed assets, and reducing the number of branches (sathye, 2003; chaluvadi et al., 2018). digitalization and online banking have the potential to reduce both fixed asset cost and employee cost. the analysis depicts that the technical efficiency of private banks is relatively less in off-balance sheet efficiency (obe) and production approach efficiency (pae) as compared to other efficiencies. banks can improve performance by focusing more on commission-based activities, increasing brokerage income, and other non-interest income. the results are similar for public banks and foreign banks. all banks are relatively efficient in the intermediation approach (iae). merger and acquisition can also play a significant role in increasing the efficiency of banks. many studies, like ishwarya (2019); patel (2018); singh & gupta (2015) have found significant positive impact on the productivity of banks. through mergers & acquisitions, banks were able to pool resources and minimize cost. generally, all banks have shown an increasing trend in efficiency scores with few exceptions. the efficiency score of dhanlaxmi bank, tamilnad bank, rbl bank ltd, and dcb (from private sector banks) has shown a decreasing trend in most of the types of efficiency. as for public banks, the performance of banks as accelerated over the period, but banks like bank of india, andhra bank, and bank of maharashtra performed poorly in obe. in foreign banks, the growth is seen in most of the banks apart from a few. the poor-performing bank is societe generale. over a while, the efficiency of a few banks declined due to intense competition as banks fight for resources. there are a few limitations of this study, which can become a further scope of research. the relevance of the inputs and outputs can be examined by using regression analysis. moreover, in this study, only the internal factors affecting the performance of banks are taken whereas, environmental factors could also be used to test their influence on efficiency. the analysis may go further by decomposing technical efficiency change and technological progress using the dea-based malmquist productivity index. also, scale efficiency can be calculated for further refinement of analysis. data for 10 years for each bank was unavailable; 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(2019). efficiency evaluation for banking systems under uncertainty: a multi-period three-stage dea model. omega, 85, 68–82. appendix -a table 1. list of banks s.no. private banks public banks foreign bank 1 axis bank allahabad bank standard chartered bank 2 dcb bank ltd. andhra bank barclays bank 3 hdfc bank bank of baroda ab bank ltd. 4 icici bank ltd. bank of india bnp paribas 5 indusind bank ltd. bank of maharashtra societe generale 6 kotak mahindra bank ltd. canara bank shinhan bank 7 yes bank corporation bank bank of ceylon 8 dhanlaxmi bank indian overseas bank abu dhabi commercial bank 9 city union bank indian bank credit agricole corporate bank 10 federal bank oriental bank of commerce bank of bahrain & kuwait bank 11 jammu and kashmir bank punjab & sind bank mashreqbank p s c bank 12 karnataka bank punjab national bank mufg bank ltd 13 karur vysya bank state bank of india firstrand bank ltd 14 lakshmi vilas bank syndicate bank krung thai bank public bank 15 nainital bank uco bank american express bank ltd. 16 rbl bank ltd. union bank of india 17 south indian bank united bank of india 18 tamilnad mercantile bank appendix -b table 2. average efficiency score of private sector banks (10 years) dmu iae pae dme fce obe cre composite score composite rank axis bank 0.9960 0.9738 0.9289 0.9869 0.9614 0.9668 0.9690 2 dcb bank ltd. 0.9834 0.5335 0.8124 0.9974 0.1360 0.7078 0.6951 15 hdfc bank 1 0.9752 0.8349 1 0.9449 0.9588 0.9523 3 icici bank ltd 0.9999 0.9688 0.9517 0.9761 0.9972 0.9997 0.9822 1 indusind bank ltd. 0.9798 0.9092 0.9409 0.9621 0.6480 0.7640 0.8673 4 kotak mahindra bank 0.9988 0.8611 0.7360 0.9988 0.6259 0.8947 0.8525 6 yes bank 0.9657 0.9060 0.7042 0.9614 0.4144 0.9813 0.8222 8 dhanlaxmi bank 0.9305 0.3642 0.3590 0.9677 0.2154 0.6549 0.5819 18 city union bank 0.9635 0.4209 0.7985 0.9627 0.1497 0.8919 0.6979 14 federal bank 0.9739 0.9071 0.9182 0.9679 0.3933 0.9550 0.8526 5 jammu & kashmir bank 0.9335 0.9391 0.9839 0.9490 0.3557 0.8568 0.8363 7 karnataka bank 0.9525 0.7310 0.9030 0.9387 0.0779 0.8249 0.7380 11 karur vysya bank 0.9753 0.6274 0.8567 0.9508 0.0537 0.8734 0.7229 13 lakshmi vilas bank 0.9764 0.5899 0.9301 0.9532 0.2284 0.8162 0.7490 10 nainital bank 1 0.6345 0.6913 1 0.2031 1 0.7548 9 rbl bank ltd 1 0.4404 0.6728 0.9856 0.0518 0.9589 0.6849 16 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 106 south indian bank 0.9061 0.7505 0.8762 0.9040 0.0391 0.9350 0.7352 12 tamilnad mercantile bank 0.9884 0.3448 0.7839 0.9963 0.0495 0.8751 0.6730 17 note: composite score = iae+pae+dme+fce+obe+cre / 6 appendix -c table 3. average efficiency score of public sector banks (10 years) dmu iae pae dme fce obe cre composite score composite rank allahabad bank 0.9745 0.7154 0.8397 0.9768 0.6787 0.9350 0.8533 14 andhra bank 0.9835 0.9125 0.9753 1 0.8343 0.9574 0.9438 4 bank of baroda 0.9363 1 1 0.9961 0.9244 0.9836 0.9734 3 bank of india 0.9993 0.8897 0.9223 0.9486 0.8061 0.9031 0.9115 8 bank of maharashtra 0.9790 0.5913 0.9811 0.9750 0.4813 0.9797 0.8312 16 canara bank 0.9878 0.9090 0.8672 0.9880 0.9050 0.9607 0.9363 5 corporation bank 0.9880 1 1 1 0.9932 0.8818 0.9772 2 indian overseas bank 0.9832 0.6820 0.7885 0.9472 0.6979 0.8896 0.8314 15 indian bank 1 0.6866 0.8742 0.9987 0.6169 1 0.8627 13 oriental bank of commerce 0.9874 0.8604 0.8915 0.9935 0.7719 0.8838 0.8981 10 punjab & sind bank 1 1 1 1 1 1 1 1 punjab national bank 0.9987 0.8823 0.9004 0.9833 0.8527 0.9822 0.9333 6 state bank of india 1 1 1 1 1 1 1 1 syndicate bank 0.9895 0.8052 0.8983 0.9804 0.5911 0.9278 0.8654 11 uco bank 0.9960 0.8542 0.9260 0.9612 0.5724 0.8761 0.8643 12 union bank of india 0.9875 0.8638 0.8486 0.9880 0.8355 0.9244 0.9080 9 united bank of india 0.9687 0.7876 0.9819 0.9725 0.8547 0.9566 0.9203 7 appendix -d table 4. average efficiency score of foreign banks (10 years) dmu iae pae dme fce obe cre composite score composite rank standard chartered bank 1 1 1 1 1 1 1 1 barclays bank 1 1 1 1 0.5192 0.8471 0.8944 4 ab bank ltd 0.9862 0.7845 1 1 1 0.8423 0.9355 3 bnp paribas 0.9635 0.9766 0.9766 0.9789 0.3777 0.9225 0.8660 8 societe generale 0.8656 0.5855 0.6774 0.8466 0.1692 0.6774 0.6369 15 shinhan bank 0.9069 1 0.9967 0.9448 0.3134 0.8343 0.8327 9 bank of ceylon 1 0.9030 0.7542 1 0.5935 1 0.8751 7 abu dhabi commercial bank 0.7409 0.7419 0.8742 0.6863 0.0943 0.7016 0.6399 14 credit agricole corporate bank 0.9910 0.8346 0.8072 0.9637 0.4313 0.8400 0.8113 10 bank of bahrain & kuwait bsc 0.7744 0.7578 0.8649 0.8165 0.1755 0.6134 0.6671 12 mashreqbank p s c 0.9730 0.5375 1 0.9409 0.8737 1 0.8875 5 mufg bank ltd 0.9951 0.9794 0.9320 0.9807 0.4486 0.9817 0.8862 6 firstrand bank ltd 0.9322 0.4616 0.6352 0.9021 0.3860 0.6305 0.6579 13 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 107 krung thai bank public co. ltd 0.7963 1 1 1 1 0.9071 0.9506 2 american express bank 1 0.2443 0.5258 1 1 1 0.7950 11 appendix -e table 5. average efficiency score of all banks without segregation (10 years) dmu iae pae dme fce obe cre composite score composite rank axis bank 0.9632 0.9745 0.9135 0.9985 0.9958 0.9320 0.9629 4 dcb bank limited 0.8725 0.4363 0.6764 0.7869 0.1934 0.6851 0.6084 48 hdfc bank 0.9994 0.8694 0.9286 0.9989 0.9334 1.0000 0.9549 5 icici bank ltd 0.9875 0.9522 0.9897 0.9782 0.9896 0.9776 0.9791 2 indusind bank limited 0.9710 0.6729 0.7292 0.9199 0.7726 0.8666 0.8220 17 kotak mahindra bank 0.9797 0.4698 0.7968 0.9729 0.5232 0.9591 0.7836 27 yes bank 0.9935 0.9335 0.9213 0.9969 0.9741 0.9586 0.9630 3 dhanlaxmi bank 0.7995 0.4011 0.6483 0.7059 0.1251 0.6145 0.5491 50 city union bank 0.9185 0.8029 0.8317 0.8781 0.3652 0.7850 0.7636 29 federal bank 0.9501 0.7264 0.8084 0.9315 0.4039 0.8883 0.7848 26 jammu&kashmir bank 0.9849 0.5429 0.8220 0.8851 0.2222 0.8699 0.7212 38 karnataka bank 0.9294 0.6908 0.7781 0.9004 0.4001 0.7810 0.7466 34 karur vysya bank 0.9548 0.6836 0.7353 0.9059 0.3646 0.8217 0.7443 35 lakshmi vilas bank 0.9214 0.6361 0.7020 0.8169 0.2514 0.6778 0.6676 43 nainital bank 0.9093 0.6709 0.8312 0.5953 0.1013 0.7409 0.6415 46 rbl bank ltd 0.8810 0.5598 0.7421 0.8391 0.3074 0.7481 0.6796 42 south indian bank 0.9113 0.6515 0.7327 0.8702 0.2462 0.8715 0.7139 39 tamilnad mercantile bank 0.9790 0.7116 0.7945 0.8670 0.3243 0.8485 0.7541 32 allahabad bank 0.9488 0.6896 0.7652 0.9226 0.3850 0.7753 0.7478 33 andhra bank 0.9596 0.8159 0.8869 0.9425 0.5114 0.8081 0.8207 18 bank of baroda 0.9118 1.0000 1.0000 0.9471 0.4908 0.8685 0.8697 12 bank of india 0.9887 0.8751 0.9058 0.8907 0.4034 0.7899 0.8090 20 bank of maharashtra 0.9312 0.5676 0.7864 0.8845 0.2622 0.7688 0.7001 41 canara bank 0.9770 0.8886 0.8540 0.9211 0.4313 0.8920 0.8273 16 corporation bank 0.9693 0.9785 0.9805 0.9781 0.7143 0.7616 0.8971 8 indian overseas bank 0.9623 0.6564 0.7347 0.8900 0.3558 0.7565 0.7260 36 indian bank 0.9922 0.6579 0.7638 0.9356 0.2978 0.8790 0.7544 31 oriental bank of commerce 0.9737 0.8329 0.8446 0.9434 0.3906 0.7503 0.7892 22 punjab & sind bank 0.9819 0.6107 0.7135 0.8898 0.1816 0.8599 0.7062 40 punjab national bank 0.9946 0.8186 0.8726 0.9307 0.5097 0.8615 0.8313 15 state bank of india 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1 syndicate bank 0.9811 0.7065 0.8232 0.9249 0.3321 0.8018 0.7616 30 uco bank 0.9828 0.8295 0.8620 0.9203 0.3338 0.7183 0.7744 28 union bank of india 0.9782 0.8383 0.8229 0.9338 0.4175 0.8394 0.8050 21 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 108 united bank of india 0.9400 0.6266 0.7956 0.8810 0.3938 0.6992 0.7227 37 standard chartered bank 0.9946 0.4601 0.9700 0.9813 0.6425 1.0000 0.8414 14 barclays bank 1.0000 0.9353 0.9098 1.0000 0.5638 0.8416 0.8751 10 ab bank ltd 0.9862 0.7715 1.0000 1.0000 1.0000 0.8423 0.9333 7 bnp paribas 0.9209 0.7404 0.8763 0.9785 0.3510 0.8652 0.7887 24 societe generale 0.8630 0.5250 0.6279 0.8466 0.1692 0.6708 0.6171 47 shinhan bank 0.9017 0.9626 0.9497 0.9441 0.3134 0.8285 0.8167 19 bank of ceylon 1.0000 0.8785 0.7476 1.0000 0.5935 1.0000 0.8699 11 abu dhabi commercial bank 0.7312 0.6280 0.8401 0.6630 0.0943 0.6897 0.6077 49 credit agricole corporate bank 0.9794 0.7409 0.7992 0.9428 0.4313 0.8400 0.7889 23 bank of bahrain & kuwait bsc 0.7717 0.6658 0.8223 0.8157 0.1755 0.6105 0.6436 45 mashreqbank p s c 0.9730 0.5292 1.0000 0.9409 0.8737 1.0000 0.8861 9 mufg bank ltd 0.9819 0.9175 0.8967 0.9742 0.4471 0.9781 0.8659 13 firstrand bank ltd 0.9314 0.4453 0.6348 0.9021 0.3860 0.6305 0.6550 44 krung thai bank public company ltd 0.7960 1.0000 1.0000 1.0000 1.0000 0.9071 0.9505 6 american express bank ltd. 1.0000 0.2113 0.5224 1.0000 0.9871 1.0000 0.7868 25 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess 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 | ijfb indian journal of finance and banking; vol. 3, no. 1; 2019 issn 2574-6081 e-issn 2574-609x research article published by centre for research on islamic banking & finance and business, usa 13 complex probability and markov stochastic process bijan bidabad b.a., m.sc., ph.d., post doc. professor of economics and chief islamic banking advisor bank melli iran, tehran, iran email: bijan@bidabad.com behrouz bidabad faculty of mathematics, polytechnics university hafez ave., tehran, 15914, iran email: bidabad@aut.ac.ir abstract this note discusses the existence of "complex probability" in the real world sensible problems. by defining a measure more general than the conventional definition of probability, the transition probability matrix of discrete markov chain is broken to the periods shorter than a complete step of the transition. in this regard, the complex probability is implied. keywords: prbability, markov process, stochastic process, population census 1. introduction sometimes analytic numbers coincide with the mathematical modeling of real world and make the real analysis of problems complex. all the measures in our everyday problems belong to r, and mostly to r+. probability of occurrence of an event always belongs to the range [0,1]. in this paper, it is discussed that to solve a special class of markov chain which should have a solution in the real world; we are confronted with "analytic probabilities"!. though the name probability applies to the values between zero and one, we define a special analog measure of probability as a complex probability where the conventional probability is a subclass of this newly defined measure. now define the well-known discrete-time markov chain  ny a markov stochastic process whose state space is  ns ,...,2,1 for which  0,1,2,...t  . refer to the value of yn as the outcome of the nth trial. we say yn being in state i if yn = i. the probability of yn+1 being in state j, given that yn is in state i (called a one-step transition probability) is denoted by 1, nn ijp , i.e.,  , 1 1prn n ij ij n np p y j y i     (1) therefore, the markov or transition probability matrix of the process is defined by 1 (2) 0 , 1 ij ij n ij j p p i j s p i s         p copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 14 the n-step transition probability matrix ( ) ,n n ijpp which n ijp denotes the probability that the process goes from state i to state j in n transitions. formally,  pr ,n ij n m mp y j y i i j s     (3) according to chapman – kolmogorov relation for discrete markov matrices (karlin and taylor (1975)), it can be proved that ( ) ( ) (4)n n n n natural numbers p p p n that is p to the power n is a markov matrix if p is markov. now, suppose that we intend to derive the t-step transition probability matrix p(t) where t≥0 from the above (3) and (4) definition of n-step transition probability matrix p. that is, to find the transition probability matrix for incomplete steps. on the other hand, we are interested in finding the transition matrix p(t) when t is between two sequential integers. this case is not just a tatonnement example. to clarify the application of this phenomenon, consider the following example. example 1. usually, in the population census of societies with n distinct regions, migration information is collected in an nxn migration matrix for a period of ten years. denote this matrix by m. any element of m, mij is the population who left region i and went to region j through the last ten years. by dividing each mij to sum of the ith row of m, a value of pij is computed as an estimate of the probability of transition from ith to jth regions. thus, the stochastic matrix p gives the probabilities of going from region i to region j in ten years (which is one–step transition probability matrix). the question is: how we can compute the transition probability matrix for one year or one-tenth step and so on. if we knew the generic function of probabilities in a very small period of time, we would be able to solve problems similar to example 1. but the generic function (5) is not obtainable. if it were, we would apply the continuous time markov procedure using the generic nxn matrix a as ( ) lim (5) h o h h    p i a where p(h) denotes transition probability matrix at time h. then the transition probability matrix at any time 0t might be computed as follows. (karlin and taylor (1975)). p(t) = e at (6) therefore a special procedure should be adopted to find the transition probability matrix p(t) at any time t from discrete markov chain information. as will be shown later, the adopted procedure coincides with a transition probability matrix with complex elements. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 15 2.breaking the time in discrete markov chain consider again matrix p defined in (2). also, assume p is of full rank. assumption 1: p is of full rank. this assumption assures that all eigenvalues of p are nonzero, and p is diagonalizable, searle (1982), dhrymes (1978). this assumption is not very restrictive, since; actually, most of markov matrices have dominant diagonals. that is the probability of transition from state i to itself is more than the sum of probabilities from state i to all other states. the matrices having dominant diagonals are non-singular, takayama (1974). therefore, p can be decomposed as follows (searle (1982), klein (1973)). 1p xλx (7) where x is an nxn matrix of eigenvectors 1,..., ,,i ni x 1[ ,...., ]nx x x (8) and λ the nxn diagonal matrix of corresponding eigenvalues, 1{ ,..., }ndiag  λ (9) using (7), (8), and (9) to break n-step transition probability matrix p to any smaller period of time t 0, we do as follows. if 0it for all iє{1,…,k}are fractions of n–step period and 1 k i i t n   for any n belonging to natural numbers then, 1 1 k ik n i j t it      p p p (10) on the other hand, the transition probability matrix of n-step can be broken to fractions of n, if the sum of them is equal to n. therefore, any 0t fraction of the one-step transition probability matrix can be written as, 1t t p xλ x (11) where,  1 ,....,t t t ndiag  λ (12) before discussing the nature of eigenvalues of p, let us define the generalized markov matrix. definition 1. matrix q is a generalized markov matrix if the following conditions are fulfilled: copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 16     1 1 1) , 2) re ( ) 0,1 , 3) im( ) 1,1 , 4) re ( ) 1 5) im( ) 0 ij ij ij n ij j n ij j q c i j s q i j s q i j s q i s q i s                   remark 1. according to definition 1, matrix q can be written as: i q u v (13) where u and v are nxn matrices of real and imaginary parts of q with .1i remark 2. matrix u has all properties of p defined by (2); thus, p q. theorem 1. if p is a markov matrix, then pt also satisfies markovian properties. proof: according to chapman–kolmogorov relation for continuous markov chain (karlin and taylor (1975)), we have ( ) ( ) ( ) , 0t s t s t s  p p p (14) that is, if p(t) and p(s), transition probability matrices at times t and s are markovs, then the product of them p(t+s) is also markov. let t=1, then p(1) is a one-step transition probability matrix which is equivalent to (2). hence, our discrete markov matrix p is equivalent to its continuous analog p(1). so (1)p p (15) if we show that ( )t tp p (16) copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 17 then according to (14) t s t s p p p (17) we can conclude that if p is markov then pt, ps and pt+s are also markovs for 0, st and the theorem is proved. rewrite p(t) in (6) as (18). 1( ) ( )t t p xλ x (18) where ,i i s  are the eigenvalues of a defined by (5), and  1( ) exp( ),...,exp(t t nt diag  λ (19) and x is the corresponding eigenmatrix of a. take the natural logarithm of (18), 1( ) ( )ln t t p xφ x (20) where,  1( ) ,..., nt t diag    (21) so, 1( )ln t t p xψx (22) where  1 ,..., ndiag  ψ (23) write (22) for t=1 and multiply both side by t, copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 18 1(1)t ln t p xψx (24) by comparison of (22) and (24) conclude that ( ) (1)ln t t lnp p (25) or, ( ) (1)tt p p (26) given (15), equation (26) is the same as (16) q.e.d. result 1. matrix pt fulfills definition 1. thus, t p q . this comes from the following remarks. remark 3. sum of each row of pt is equal to one. since pt satisfies markovian properties (theorem 1). remark 4. sum of imaginary parts of each row is equal to zero. this immediately comes from remark 3. remark 5. if qij denotes the ijth element of pt for 0,t  then 1ijq  for all i and j belonging to s. this remark can be concluded from theorem 1. remark 6. if , 0t t q p equals to the complex matrix defined by (13), then 1 , .jkv j k s   since, 2 2 2 2 1 1 1 1 . jk jk jk jk jk jk jk jk q u iv u iv u v v           remark 7. given q as in remark 6, then ujk[0,1]. this also comes immediately from theorem 1. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 19 3. discussion on broken times the broken time discrete markov chain is not always a complex probability matrix defined by definition 1. matrix p t has different properties with respect to t and eigenvalues. i may be real (positive or negative) or complex depending on the characteristic polynomial of p. since p is a non–negative matrix, frobenius theorem (takayama (1974), nikaido (1970)) assures that p has a positive dominant eigenvalue 01  (frobenius root) (27) and  1 2, ...,i i n    (28) furthermore, if p is also a markov matrix then its frobenius root is equal to one, (bellman (1970), takayama (1974)). therefore, 1 1  (29) 1i i s    (30) with the above information, consider the following discussions. ) (0,1]ia i s    in this case all 0t i for 0t and no imaginary part occurs in matrix p t. i are all positive for i belonging to s if we can decompose the matrix p to two positive semi-definite and positive definite matrices b and c of the same size (mardia, kent, bibby (1982)) as 1p c b  ) 1,1 , 0,i ib i s      copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 20 0, tt i belongs to sets of real and imaginary numbers based on the value of t. in this case, pt belongs to the class of generalized stochastic matrix q of definition 1. for i r  , it is sufficient that p be positive definite. ) , (0,1]i ic c i s     p t in this case for 0t and t n belongs to the class of generalized morkov matrices of definition 1. ntd ) (natural numbers) in all cases of a, b, and c we never coincide with complex probabilities. since p t can be driven by simply multiplying p, t times. )e t z (integer numbers) in this case, pt is a real matrix but does not always satisfy condition 2 of definition 1. )f t r  p t is a complex matrix but does always satisfy conditions 2 and 3 of definition 1. 4. complex probability justification interpretation of the "complex probability" as defined by definition 1 is not very simple and needs more elaborations. the interesting problem is that it exists in operational works of statistics, as example 1 discussed. many similar examples like the cited may be gathered. with this definition of probability, the moments of a real random variable are complex. although the t–step distribution t of initial distribution 0 with respect to pt may be complex, they have the same total as .0 that is, if 0 01 0( ,..., )n π (32) then, t t o o o oi   π π p π q π u π v copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 21 (33) and we have the following remark accordingly, remark 8. sum of t-step distribution is equal to sum of initial distribution. that is, 1 1 n n oj tj j j       (34) this can be derived based on (32) and (33) as 1 1 1 1 1 1 ( ,..., ) ( ,..., ) ( ,..., ) n n n n t tn oj j oj jn oj ji oj jn j j j j u u i v v               (35) and, the sum of t–step distribution is 1 1 1 1 1 ( ... ) ( ,..., ) n n n tj oj j jn oj j jn j j j u u i v v            (36) the two parentheses in (36) are one and zero, respectively based on conditions 4 and 5 of definition 1. thus, (36) and (34) are the same. the above remark 8 states that though there exists imaginary transition probabilities to move from state j to k, the total sum of “imaginary transitions” is equal to zero. on the other hand, after the tth step transition, the total distribution has no imaginary part. 5. summary by summarizing the discrete and continuous times markov stochastic processes, a class of real-world problems was introduced which cannot be solved by each of the procedures. the solutions of these problems coincide with “complex probabilities” of transitions that are inherent in the mathematical formulation of the model. complex probability is defined, and some of its properties with respect to the cited class are examined. justification of the idea of complex probability needs more work that is left for further research. 6. acknowledgments the authors are indebted to dr. a. monajemi, who read the manuscript and gave valuable remarks. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 22 references r. bellman (1970), introduction to matrix analysis, mcgraw–hill. p.j. dhrymes (1978), mathematics for econometrics. springer-verlag. w. feller (1970, 1971), an introduction to probability theory and its applications, vols. 1,2, wiley, new york. p.g. hoel, s.c. port, c. j. stone (1972), introduction to stochastic processes. houghton mifflin, new york. s. karlin, h.m.taylor (1975), a first course in stochastic processes. academic press. e. klein (1973), mathematical methods in theoretical economics, topological and vector space foundations of equilibrium analysis, academic press. k.v. mardia, j.t. kent, j.m. bibby (1982), multivariate analysis, academic press. h. nikaido (1970), introduction to sets and mapping in modern economics. north holland publishing co. s.s. searle (1982), matrix algebra useful for statistics. wiley. a.takayama (1974) mathematical economics. dryden press, illinois. e. wentzel, l. ovcharov (1986) applied problems in probability theory. mir, moscow. 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 | ijfb indian journal of finance and banking; vol. 3, no. 2; 2019 issn 2574-6081 e-issn 2574-609x research article published by centre for research on islamic banking & finance and business, usa 1 the pros and cons of adopting technology as a business pilot: global perspective afenya millicent selase zhongnan university of economics and law, wuhan, china aphu elvis selase huazhong university of science and technology, wuhan, china e-mail: elvis.qapito@yahoo.com abstract technology has revolutionized human society. a complex scientific knowledge that takes various forms is technology. it is also referred to as a set of meticulous knowledge used to create tools process actions and extricate materials to make work easy. technology includes equipment such as computers, mobile phones, multimedia, software, games and apps, these are simple tools individuals use in their daily lives to make life comfortable and luxurious. technology comes in various forms of such as mechanical, electrical, industrial or manufacturing and medical technology. any establishment set as a going concern for profit maximization is a business. technology has various benefits which helps businesses achieve its ultimate goal, thus, maximize profit. technological infrastructure’s impact on business efficiency and effectiveness is inevitable. there is a correlation between technology and business profit maximization be it positive or negative, because it has various impacts on businesses. the question is, does the type of technology adopted affect the business? the various types of technology indicate it has different purpose, to be efficient it needs to be used effectively. today’s business world has been massively influenced by internet technology adoption. the utilization among business is inescapable since technology is rapidly regenerating global production, work and business methods, trade and consumption patterns of enterprises and consumers therefore, the paper is to evaluate if there is the need to adopt a particular technology that best fit a business industry. keywords: adoption, businesses, efficiency, profit, technology, utilization. 1. introduction the present time is the era of information power, especially since internet use has added new dimensions to information creation and delivery. the definition of technology is subjective to individuals understanding of the meaning of technology, it can be interpreted as investment in equipment and production machinery which ultimately can lead firms to grow in sales. the ease of use of technology, usefulness of technology, compatibility and cost effectiveness are few of the factors that encourage the adoption and utilization of technology. however, a positive connection exists amid technology usage and profit maximization. the internet provides a new economic environment in which virtual business can be conducted. therefore, as more consumers spend excess time on the internet, it is crucial for businesses to use online, interactive communications to affect consumers directly at all stages of the consumer decision funnel and thus to strengthen offline marketing efforts and in the long run enhance growth. businesses are driven to embrace appropriate technology with the aspiration of improving their internal operations, improving their product via a rapid communication with their clients, and better promoting and distributing their product and services. affirmations on the relevance of technology are frequently founded on models made available by the technology acceptance; its success is due to the fact that technology has become the heart of economic growth in countries across the globe. alberto and fernando (2007) argued that the use of technology can improve business competitiveness with internet providing numerous opportunities for small business to compete equally with large corporation. there is universal consensus that factors driving technology adoption rely on the nature of technology, indicating that a one-size-fits-all approach is unfitting and the factors intensify acquiring of specific technologies require specific attention. with the advent of global competition, technological advances and demographic changes, the roles of small business in a country’s development have become more important. currently, small businesses are increasingly adopting and utilizing technology due to the advent of personal computers, tablets and mobile phones. leaders who are positively familiar with e-commerce deployment promote and support the innovations. the information age has transformed how business operates. business now requires quick response to change consumer and client demands of companies. enterprises are equipped with the help of technology to meet this challenge. technology is a new development that has improves ways and manner of doing things, in commerce, trade, mining, agriculture, manufacturing, and education and government services. it is to be adopted by business as a way of responding to world dynamics. copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 2 highlighting the influence of internet in recent years, oladejo and adereti (2010) observed that the 1990s observed the proliferation and massive growth of internet and intranet technologies, which together are creating a universal and costeffective medium for business to communicate and conduct commerce. mobile internet commerce can improve business efficiency by disposing information to the workforce remotely and by delivering new channels for customer interaction. considering the trend toward internet adoption in most organizations is not the important issue whether the users accept the internet or not. the challenge is whether the users are satisfied using the newly adopted technology and whether user satisfaction affects technology usage or not. successful adoption should be evaluated not in terms of ‘actual usage’ but in terms of ‘user satisfaction’. since it is difficult to directly measure the contribution of an information system to organizational performance, the perceived market performance is used as a perceptual measure of organizational success and growth. unfortunately, businesses have been challenged with increasing rates of business failure and such rates are likely to exacerbate due to the recent global economic hardships. innovative strategies are obviously needed to improve survival and growth. also, effective deployment of information and communication technologies (ict) is likely to be a critical part of such strategies. successful small businesses often face a major challenge when they grow into a new space either moving to a new location or increasing the size of the current one. as they expand, they need technological infrastructure that keeps pace with their growth and development. can small business be able to compete with large business given the same platform and technological advancement? small businesses are seen to be imperative in stimulating entrepreneurial development, contributing to the transformation of the traditional sector into a modern one, creation of employment, reducing rural and urban migration and serving as the training ground for managerial skill acquisition (akande, 2011). 2. what is technology? technology is such a complex and broad body of knowledge that, it is difficult to comprehend all of its types. everything in this modern world is technology from every little improvement from nothing to something. however, it can be categorized into information technology, mechanical technology, agricultural technology, medical technology, architectural technology, industrial technology and internet technology. furthermore, these can be narrow down to networks, computers, appliances, sensors, energy, clothing, accessories, robotics, space, trackers and others. technology is actually developed from artificial intelligence. anything out of nature is a form of development, therefore technology. the various sectors of a country’s economy each use technology. the service sector uses technology like stationaries, computers. networks, mobile phones, ipad, projectors, headsets, software, hardware, information systems, intranet and many more. the manufacturing sectors deals with plants, machinery, robotics, engines and others which are all born out of technology. most agricultural technology such as tractors, bulldozer, hoe, cutlass, planters, harvesters etc. is used in the agriculture sector. medical technology also uses bio-related technology, ultra sound machines and others. transportation involves movement and it includes cars, airplanes, trains, pipelines, bicycle, moto bikes and others. 3. importance of technology to business large‐scale computerization, perpetuation of the internet, and the worldwide scope of the web has made dissemination of information quick and broad (poulter, 2003). technology has important effects on business operations, no matter the size of the business. there are infinite reasons why technology is important in business. the role of technology in business is expanding and will keep growing as the world is a revolution. business need to secure their operations, employees and bottom line to utilize the new technological innovations. business cannot undermine the importance of technology in business anymore, they must accept the benefit technology has to offer which are; technology saves time and money, since it now conducts most of the tedious tasks that employees used to be expected to perform. this enables employees to focus their time on more important duties hereby cutting down expense, improving productivity and increase efficiency. time is a major organizational weapon in so far as business is concerned. the effective exploitation and utilization of time has a positive effect on the regular functioning and development of all civil service institutions (elvis s. aphu, 2017) technology increase capacity of business as it allows business to reach more people in less time. it creates platforms for a wider market. business can reach clients, potential clients, suppliers and customers at any part of the world through variety of technological communication mediums. it enables businesses to work as a team on a common platform. business rely on diverse technology for communication such as email, skype, wechat, instant messaging, business phones, video conferencing, tango, whatsapp messenger and others. communication breakdowns can result to disasters for business and employees. leung and antypas (2001) suggested that mobile internet commerce can enhance business efficiency by distributing information to the workforce remotely and by offering new channels for customer interaction. technology can assist in ensuring that the business is prepared for the difficult communication. technology is essential for a business to succeed. operational day to day activities rely on technology. investors, clients and prospective clients evaluate the business technological usage to make informed decisions. every department in the organization depend on technology to run, hr relies on it to train and develop employees, accounting employees rely on it to copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 3 complete payroll and execute necessary monetary such as file sharing, human relations need it improve communication, operations need it reduces stress by allowing business to schedule important deadlines and meetings using the electronic calendar, and it gives employees the flexibility to perform work functions on mobile device. technology improves business by providing new resources. cyber-attacks are growing at an alarming rate. so too are amazing cyber-security defense such as sopho’s deep learning technology. in an age where almost all-important business assets are sorted in the cloud or on endpoint, it is imperative that business adopt security technology to protect their assets. technology is revolving and growing rapidly, new innovations are been invented consistently. businesses that are not consistence in looking out for new innovations miss out in development. technology keeps employees engaged since it allows them to telecommute; it encourages collaborations between coworkers through tools sharing and improves communication. it promotes hard work and reduces idealness since their job is at stalk. technology can take over their duties. there are no limitations with technology. employees expect their employers to provide them with the modern technology which will in turn enable them succeed in performance of their job responsibilities. technology improves business competitiveness. the role of technology is not new in the business world. it is a great challenge to compete against businesses that fully employ technological advancements when one’s own business is lagging in technology. technology is the order of the day in this century. 4. consequences of adopting technology technology is irreproachably integrated into day-to-day operations of business. those in business depend on technology to keep them updated, overcome competition, inspire innovation, manage inventory, track operation and provide speedy internal and external communication venues. however, just as technology adoptions have benefits; it has other sides unfavorable to business. technology is expensive in the short run but its benefits are wealth while. new technology often requires firms to hire new employees or train existing employees. having a revolution technology is an ongoing expense. there is initial purchasing cost, continuous maintenance, update and training expenses. technology is a continuous investment and that makes it very expensive. moreover, should a system failure occur, loss of revenue can result due to loss of services rendered or production halted, hereby disappointing and losing customers. matters with regards to technology need to be handled by skilled expertise. technology utilization exposes business to risk of cyber-crime and fraud. cyber-crime is any criminal activity down over the internet via computers. hackers use computer network to commit crimes. technology doesn’t only help businesses, criminals also commit crime with actually been there. they steal money from bank accounts, information they get access to be sometimes sold for money. despite increased security efforts, hackers are mostly a step ahead. many employees have access to financial and personal data of clients and customers, therefore, the need to monitor employees to protect information and increase client loyalty and confidentiality. monitoring employees to protect the information can raise employee privacy issues. also, securing password and access to information and screening of employees prior to issuing access are necessary challenges that add to company’s cost and jeopardize employee relationship. the same technology is used to fight those who abuse it. should it be so? with technology serving the larger role in the business. employees have become disconnected from final products and each other. job task are often delineated, therefore fewer people are part of the final work which leads to workplace boredom. with the use of technology, communication is sometimes misunderstood often making workers look rude. people reading emails, texts or instant messages cannot accurately measure the tone, body language, facial expression with serve as point of reference for effective communication. however, avenues such as video conferencing have eliminated some of these obstacles. technology can distract employees at work hereby lowing their work input level. aside from issues ceasing work production such as system failure, interruptions can include emails and instant messages. on average, it takes eight minutes for a person to return to creative state after distractions. there are other forms of technology vying for employee time are online games, music and video. taking a scenario, elvis is conducting a job interview via skype, obed is into second hour of his interactive webinar and milly is walking through the office talking on her cell phone. add all these distractions to the normal noise of ringing phones, constant emails and noisy fax machine and it makes sense that sometimes it’s hard to get actual work done. the time saving advantage is super acid with the constant distractions. 5. discussion this delivers several contributions suggesting that usefulness, ease of use; compatibility and cost effectiveness are significantly related to usage of technology by business. this is an indication that before business decides to use internet services, they must find it to be compatible with their existing infrastructure if not it would find it difficult to adopt the internet similarly, cost effectiveness is also significant. in spite of exponential growth of technology within business, the rate of technology adoption by these businesses have remained relatively low (mac-gregor and vrazalic, 2005) and this makes business generally have limited access to the market and hence obtain low market share which affects market performance. also, internet technology has positive impacts on marketing performance. these processes include increase in sales transactions, increase sales volume, increase sales enquiries, and increase number of customers as it helps aligning customer needs copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 4 with sales and marketing activities. in today’s era the digital advertisements, especially the internet usage has help reduced the cost of advertising conspicuously, which is an important factor for business considering their financial constraints. customer relations are improved by allowing customers direct online access to information for which they would previously have had to telephone, or e-mail for. moreover, organizations can get the information about their potential customers, clients and competitors through google search rating. 6. conclusion the factors that influence the adoption and utilization of technology by business are usefulness of technology to business and ease of use (compatibility and cost effectiveness). this indicates that, before business can decide to use internet services, they must find it to be compatible with their existing infrastructure, if not, it would find it difficult to use the internet. also cost effectiveness is a significant factor to internet technology adoption and utilization since most business objective is to minimize cost and maximize profit. other benefits of technology include increase in sales transaction, increase sales volume, increase sales enquires and increase in volume of loyal consumers. internet technology enables market research work which helps business align their products and services to consumer wants which in the long run increase consumer loyalty. as internet technology is a global network where digital advertisement is made. businesses are able to reach a larger market which intends increase their market to wide range of consumers. however, consumer relations are improved since consumers can have direct access to information through the internet via e-mail or telephone. finally, the factors that hinder the adoption of internet technology by businesses are applicable of business, security and trust issues, expertise in adopting internet, high cost involve in installing internet software, high wages of internet software developers and enough knowledge about the internet and its utilization. the security and trust issues are the main hindrance to internet technology adoption and utilization. the internet is a global network which enhances accessibility for that matter hacker can easily break protocol or passwords to access business information. for that fear of hackers and virus corrupting files, businesses will rather not utilize internet technology. also, business executives lack knowledge and skills needed to use technology and will rather stick to ache ways. 7. suggestive measures the purpose of introducing technology is improve performance and be innovative and businesses need to consider the following when making such decision; align technology and strategic goals, perform a current system analysis to evaluate technological usefulness, communicate technology by developing a training program, integrate technology adoption to change management program and implement technology. business enterprises have become the beacon of hope for the struggling economies that are looking for answers to sustainable growth and development. it is critical to recognize the impact of business in the growth of the economy, which includes creation of jobs, increase of gdp (gross domestic product), increase of standard of living, alleviating poverty and achieving societal goals. the growth of the nation’s economy, the future of innovation and the sustainability of a growing national population rely on businesses. this is because the business serves as economic growth engine and they need access to the same technology as the big players to level the playing field, be flexible, responsive, and be able to anticipate consumer needs. adoption of technology is needed for business to be profitable so as to enhance operations. reference alberto, b. m., & fernando, l. l. (2007). a firm-level analysis of determinants of ict adoption in spain. tec novation. akande, o. o. (2013). does entrepreneurship programs influence business performance? an empirical investigation of the nigeria smes. international journal of research in commerce and management,4(9). aphu e.s (2016). time management within civil service institutions in ghana. a case of accra metropolitan assembly.european journal of business and management ,7(30).201 oladejo, m. o., & adereti, a. s. (2010). the impact of information technology on the performance of micro finance institutions in nigeria. journal of economic development and managerial studies. leung and antypas (2001). journal of business strategy,2001-emerald group publishing ltd. http://www.ro.uow.edu.au.//mac-gregor and vrazalic, (2005) 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 indian journal of finance and banking vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 8 bank performance versus recession indicators: a linear cointegration approach ashamu sikiru oyerinde 1 1 department of banking and finance, faculty of management sciences, lagos state university, ojo, lagos. correspondence: department of banking and finance, faculty of management sciences, lagos state university, ojo, lagos, tel: +2348033713969, e-mail: soyerinde2012@gmail.com received: july 13, 2017 accepted: july 15, 2017 online published: july 17, 2017 abstract in this study, the researcher provides an empirical investigation of the nexus between banks’ performance and recession indicators. a sample size of 35 years was selected on annual data. a linear cointegration method was adopted after accounting for seasonality through logarithmic transformation. the results revealed that indicators of recession-exchange rate, inflation and interest rate maintain long run relationship with bank performance, and evidence of long run influence was established. furthermore, we discover that within the purview of short run dynamic situation, inflation influences banks’ performance inversely, while exchange rate and interest rate increase with increase in banks’ performance. we therefore conclude that banks’ performance is driven by indicators of recession both in the short and in long run. keywords: banks, exchange rate, inflation, interest rate and cointegration. 1. introduction over the past decade, the credit quality of loan portfolios across most countries in the world remained relatively stable until the financial crises hit the global economy in 2007-2008. since then, average bank asset quality deteriorated sharply due to the global economic recession. the fact that loan performance is tightly linked to the economic cycle is well known and not surprising. yet the deterioration of loan performance was very uneven across countries. for example, the baltic countries which stand out in cross-country comparisons of gdp performance during the crisis had very large increases in non-performing loans (npls) even when controlling for the severity of the recession. thus, the 2007-2009 global financial turmoil affected banking systems around the world, including nigeria. nevertheless, nigerian banks have not performed relatively well. they for example, require capital injections at some point in time, and deposit guarantees have to be expanded. according to kithinji and waweru (2007), banking problems is back-dated as early as 1986 culminating in major bank failures (37 failed banks as at 1998) following the crises of 1986 to 1989, 1993/1994 and 1998; they attributed these crises to npls which is due to the interest rate spread. according to (mcnulty et al 2001), controlling npls is very important for both the performance of an individual bank and the economy’s financial environment. due to the nature of their business, bank performance versus recession indicators: a linear cointegration approach ashamu sikiru oyerinde 9 commercial banks expose themselves to the risks of default from borrowers. prudent credit risk assessment and creation of adequate provisions for bad and doubtful debts can cushion the banks risk. it is established that when the level of nonperforming loans is very high, the provisions are not adequately protected (waweru and kalani, 2009). the occurrence of banking crises has often been associated with a massive accumulation of nonperforming assets which can account for a sizable share of total assets of insolvent banks and financial institutions. therefore, the causes of loan defaults should be established so as to reduce the level of nonperforming loans. from the foregoing, it seems there is negative relationship between recession and banks’ performance. however, management of recession in an economy helps improve the financial performance of banks, as interest on loans is the biggest income of banks, and increase the liquidity position of banks, protect the bank reputation and reduce loan losses. also, golden, sam and harry (1993) emphasized that since one of the most important aspects of lending is determining the customer desire to repay the loan, information in the credit file will give the credit officer document on the customer’s repayment history. this is accomplished with the fact that commercial banks have measures in place to guard against loans, taking mortgages on landed properties, stock, bonds and other securities to fall on in time of default. this was debunked by samuel (2011) who claimed that loan default has become an inevitable part of the banking or lending business in a recessive economy, there is high default risk because the income of borrowers has to be reduced. accordingly leading to repression situation and consequently reducing the ability to honor obligations at maturities. the argument perhaps is do banks drive well in recession, when exchange rate and interest rate increase sporadically. many studies have answered this question differently. this growing gap has inspired me to investigate the dynamic causations that exist between recession proxies and bank performance in nigeria with the aim of justifying or expanding existing positions. the rest of the paper is organized as literature review, methodology and data, results, conclusion and recommendations 2. literature review the great recession is strongly associated with the us real estate crisis and recent work has explored the link between real estate stresses and bank distress. aubuchon and wheelock (2010) find that both during the 2007-2010 and the 1987-92 episodes, bank failures were concentrated in regions with the largest declines in economic activity (as evident in declines in personal income or gross state product, and in increases in unemployment) and with the most severe stresses in the real estate market (as evident in declines in house prices and increases in delinquency rates). beltratti and stulz (2012) find that banks whose returns were more exposed to us real estate exhibited better stock performance during the crisis, but this effect they find to only be present in a subsample of very large banks (assets greater than $50 billion). new england experience of the early 1990s has shown that even well-capitalized banks can fail, as capital buffers deteriorate rapidly when banks approach failure (peek and rosengren (1997)). in a more recent paper, berger and bouwman (2013) exploit an exogenous source of variation in the stock of capital buffers to study the effect of capital on two dimensions of bank performance, probability of survival and market share, and find the effect to vary across banking crises, market crises, and normal times. in particular, capital increases the probability of survival and market share of smaller banks for all three types of crises, but improves the performance of medium and large banks primarily during banking crises. though these studies advance our understanding ecb working paper 1779, april 2015, 9 of bank capital’s primary function as the buffer that stands between bank survival and failure, they do not speak to the root causes of the losses that capital buffers are set to absorb. bank failure is normally attributed to excessive risk-taking by banks, and some studies have bank performance versus recession indicators: a linear cointegration approach ashamu sikiru oyerinde 10 modeled bank risk as an outcome variable of managerial quality and/or corporate governance. wheelock and wilson (2000) show that during the 1984-1993 banking crisis banks with low managerial quality were more likely to fail and less likely to be acquired. laeven and levine (2009) use an international sample of banks to study the effect of conflicts of interest between managers and shareholders on risk-taking during the early 2000s. they find that banks with more powerful owners tend to take greater risks and also find the impact of banking regulations to vary with shareholder concentration. cole and white (2012) is the only study known to the author that identifies the composition of a bank’s loan portfolio into real estate products as a relevant predictor of bank failure during the great recession. cole and white (2012) decompose the bank’s loan portfolio into various categories of real estate loans and show that exposure to commercial real estate loans, loans for construction and development projects, and multifamily mortgages increased the probability of failure relative to exposure to non-real estate loans. the authors do not find similar effects stemming from holdings of traditional mortgages or mbs, though the absence of an effect for mbs holdings is likely a result of their model not explicitly accounting for holdings of mbs. beltratti and stulz (2012) confirm the findings of laeven and levine (2009) for the pre-crisis period, but challenge the view that poor bank governance was a major cause of the crisis by showing that banks with more shareholder-friendly boards performed significantly worse during the crisis. in addition, fahlenbrach and stulz (2011) find no evidence that banks with incentive structures which better aligned the interests of shareholders to those of the ceo performed better during the crisis.these studies identify agency-type drivers of bank risk, but, with the exception of beltratti and stulz (2012), abstract away from the specific ways in which risk-taking by bank management manifests itself in the choice of business model. related research has addressed directly the question of whether certain business models were more prone to distress than others during the financial crisis of 2007-2008. ratnovski and huang (2009) examine bank performance on a sample of large oecd banks and show that higher levels of capital adequacy, deposit funding, and asset liquidity were associated with both a lower probability of government intervention and lower stock price declines. altunbas, manganelli and marques-ibanez (2012) use a sample of listed banks operating in the european union and the united states, and explore several measures of realized bank risk to show that credit expansion, lower dependence on deposit-funding, larger size, and weaker capital buffers in the run up to the crisis accounted for higher ex-post levels of distress. fahlenbrach, prilmeier and stulz (2012) identify the presence of persistence in bank risk, showing that stock return performance during the1998 crisis can predict stock return performance and the probability of failure during the great recession.the authors also show that reliance on short-term funding, high leverage, and high growth rates are all associated with poor bank performance in both crises. beltratti and stulz (2012) examine the determinants of stock return performance across an international sample of banks during the period from july 2007 to december 2008, and find that banks which were more dependent on wholesale funding and held less capital performed poorly during the crisis. deyoung and torna (2013) focus on composition effects, and examine the degree to which the composition of a bank’s income sources affected bank distress during the recent financial crisis.they show that for distressed banks the probability of bank failure increased with asset-based nontraditional activities (venture capital, investment banking and asset securitization), but declined with pure fee-based nontraditional activities (securities brokerage and insurance sales). deyoung and torna (2013) also show that banks with a substantial amount of asset-based nontraditional activities tended to take more risk on their traditional banking activities. bank performance versus recession indicators: a linear cointegration approach ashamu sikiru oyerinde 11 3 methodology and data 3.1 model the model adopted in this study follows the approach of ratnovski and huang (2009) but with distinct focus on the link between bank asset and recessive factors (exchange rate, inflation and interest rate). with this objective, our specification is quite stance from fahlenbrach, prilmeier and stulz (2012). thus, our baseline var (p) relation can be represented in log form as. 10 1 1 1 1 1 1 1 1 1 20 2 2 2 2 2 1 1 1 1 30 3 3 1 1 int inf int inf int int p p p p t i t i i t i i t i i t i t i i i i p p p p t i t i i t i i t i i t i t i i i i p p t i t i i t i i inba a a inba b inex c in d in u inex a a inex b inba c in d in u in a a in b inex                                              3 3 3 1 1 40 4 4 4 4 4 1 1 1 1 inf inf inf int p p i i t i i t i t i i p p p p t i t i i t i i t i i t i t i i i i c inba d in u in a a in b in c inex d inba u                            3.1 where: ba (bank asset), ex (exchange rate), inf (inflationary rate) and int (interest rate). the var (p) above is a four-dimension specification and it is plausible to represent it in a compacted form 0 1 1 ... t t p t p ty a a y a y u      3.2 where y is vector of four dimension log dependent variables (ba, ex, int and inf). then equation 3.2 with lag or backward shift operator can be expressed as. 0 1 1 ... t t p t p ty a a y a y u      3.3 0 1 ... t p t p t ty a a ly a l y u     3.4 1 0... t p t p t ty a ly a l y a u     3.5 1 0(1 ... )p t p t ta ly a l y a u     3.6 0( ) t tl a y a u  3.7 1 1 1 p p p i l a    3.8 equation 3.8 shows that all the roots of the var polynomial rest on the complex cycle, meaning that the var system is not ergordic and all the variables in their log form are i(1) and therefore not stationary. the nonstationary var (p) needs to be transformed and as usual, we propose a vec representation as expressed below. 0 1 1 ... t p t i t p t i y a y a y e           3.9 bank performance versus recession indicators: a linear cointegration approach ashamu sikiru oyerinde 12 by assumption: ( )rank m k   , therefore, there is existence of cointegration and  can be decompose into adjustment parameter  and long run coefficient ' . then, equation 3.9 becomes ' 0 1 1 ... t p t i t p t i y a y a y e           3.10 like johansen (1980), we employed trace statistic to obtain the rank of the cointegration. the statistic is specified as follows. 1 ( ) (1 ) p tr i i m lik t p in         3.11 where: 1,...,i p   , 1 2 ... p     are the eigen values and the eigen vectors show the cointegration rank. 3.2 data source the data for this study are secondary and are were sourced from the cbn annual statistical bulletin over the period of 1980 to 2015 4. results 4.1 descriptive statistics results the descriptive statistics results are based on values of the mean, standard deviation, skewness, kurtosis and jaque-bera. these values are presented in table 1 below. table 1 result of descriptive statistics on ex, inf, int and tot ass (1980-2015) ex inf int tot ass mean 11.44389 19.39667 21.24750 6004.744 minimum -21.95000 3.230000 9.500000 18.45630 std. dev. 13.88579 17.29469 5.895561 9147.837 skewness 0.626376 1.617202 -0.057698 1.325447 kurtosis 4.423916 4.595930 3.232494 3.167121 jarque-bera 5.395383 19.51254 0.101055 10.58275 probability 0.067361 0.000058 0.950728 0.005035 source: author’s computation using e-views window 9 the mean values of exchange rate, inflation interest rate and total asset of banks in table 1 are about 11.44, 19.40, 21.25 and 6004.74. it appears that all these values are positive. this an indication that these variables do not decrease throughout the period of investigation. the standard deviation of these variables are 13.89, 17.29, 5.90 and 9147.84 respectively for ex, inf, int and tot ass. looking at these values, it shows that total asset has the highest standard deviation implying that it likely going to be the most volatile. table 1 also shows that only interest rate is negatively skewed and as they asymmetric in nature. in the same token, we discover that the kurtosis values of the exchange rate and inflation are in excess of three, meaning that they all leptokurtic, while bank performance versus recession indicators: a linear cointegration approach ashamu sikiru oyerinde 13 interest rate and total asset are approximally three. meaning they are mesokurtic. however, the probabilities of the jarque-bera statistics show that exchange rate interest rate and total asset are normally distributed while inflation does not follow a normal distribution. 4.2 unit root test table 3: the result of unit root test on ex, inf, int and tot ass variable adf stat 5% cv p.v ex -4.934 -2.95 0.0003 d(ex) -6.76 -2.95 0.0000 inf -2.99 -2.95 0.0458 d(inf) -5.66 -2.95 0.0000 int -2.96 -2.95 0.0458 d(int) -6.64 -2.95 0.0000 tot ass 0.97 -2.95 0.9953 d(tot ass) -2.10 -2.95 0.2475 source: author’s computation using e-view 9 from the above table, it is seen that at level exchange rate, inflation, and interest rate are stationary while the null holds for total asset that the series of total asset is not stationary or has a unit root. in the same token, at first difference exchange rate, inflation, and interest rate are stationary while total asset is not stationary. 4.3 test of cointegration on the variables ex, inf, int and tot ass the cointegration technique introduced by johansen was adopted in this study. the results however are reported in table 4 table 4 cointegration test result on ex, inf, int and tot ass hypothesized trace 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.597136 69.61549 63.87610 0.0152 at most 1 0.475563 38.70421 42.91525 0.1239 at most 2 0.232552 16.75957 25.87211 0.4331 at most 3 0.204070 7.760295 12.51798 0.2719 source: author’s computation using e-view 9 table 4 reports the results of the trace test and maximum eigen test in panel a and b respectively. the highest eigen value is about 0.60, meaning that each of the eigen values is less unity. this result indicates that the system is stable and cointegration test can be conducted. the trace statistic under the null hypothesis of no cointegration is 69.62 while the corresponding critical value at 5 percent is 63.88. this suggests that the null of no cointegration is rejected. also, the trace statistic under the null hypothesis of one cointegrating equation is 38.70 associating with critical value 42.92. this means the hypothesis of one cointegrating vector cannot be rejected. thus, the trace test indicates one cointegrating vector and two cointegrating ranks. therefore, there is evidence of cointegration or long run relationship between exchange rate, inflation, interest rate and total asset of banks. bank performance versus recession indicators: a linear cointegration approach ashamu sikiru oyerinde 14 table 5 results of short run relationship and ecm coefficient regressor nt coefficient std. error t-statistic prob. ecm(-1) -0.001172 0.006732 -0.174072 0.8625 dtot ass(-1) 0.895007 0.261394 3.423974 0.0012 dex(-1) 0.159291 0.331641 0.480311 0.6330 dinf(-1) -0.462181 0.324225 -1.425497 0.1600 dint(-1) 0.439379 0.290755 1.511163 0.1368 c 10.09596 35.91628 0.281097 0.7798 source: author’s computation using e-view 9 note that * and ** imply significance at 1% and 5% respectively, the critical tstatistics @ 1% and 5% are 2.70 and 1.67 respectively. the degree of freedom is 33. the ecm coefficient -0.001 or 0.1 percent as shown in table 5 has the right theoretical sign and significant at 5 percent. this means that any disequilibrium in the long run can be corrected at the rate of 0.1 percent. also, these results show that there is long run influence or causality running from exchange rate interest rate and inflation to total asset. the short run dynamic results reveal that has. meanwhile exchange rate and inflation have significant relationship with total asset. 5. conclusion and recommendation conclusively, recession has a negative significant relationship with bank performance in nigeria. and on this note, it is recommended that monetary authority should formulate policies that will reduce the negative impact of recession on banks’ performance since the nigeria economy is bank driven. references altunbas, yener, simone manganelli, and david marques-ibanez. (2012). “bank risk during the financial crisis: do business models matter?” bangor business school, prifysgol bangor university (cymru / wales) working papers 12003 aubuchon, craig p., and david c wheelock. (2010). “the geographic distribution and characteristics of u.s. bank failures, 2007-2010: do bank failures still reflect local economic conditions?” federal reserve bank of st. louis review, , (sep): 395–415. beltratti, andrea, and ren m. stulz. (2012). “the credit crisis around the globe: why did some banks perform better?” journal of financial economics, 105(1): 1–17. berger, allen n., and christa h.s. bouwman. (2013). “how does capital aff ect bank performance during financial crises?” journal of financial economics, 109(1): 146–176.. cole, rebel allen, and lawrence white. (2012). “d´ej`a vu all over again: the causes of u.s. commercial bank failures this time around.” journal of financial services research, 42(1): 5–29. deyoung, robert, and gkhan torna. (2013). “nontraditional banking activities and bank failures during the financial crisis.” journal of financial intermediation, 22(3): 397–421. fahlenbrach, rdiger, and ren m. stulz. (2011). “bank ceo incentives and the credit crisis.” journal of financial economics, 99(1): 11–26. fahlenbrach, rdiger, robert prilmeier, and ren m. stulz. (2012). “this time is the same: using bank performance in 1998 to explain bank performance during the recent financial crisis.” journal of finance, 67(6): 2139–2185. golden, sam and harry (1993): the ten commandments of commercial credit. the cs of good and bad bank performance versus recession indicators: a linear cointegration approach ashamu sikiru oyerinde 15 loans. journal of commerial bank leading laeven, luc, and ross levine. (2009). “bank governance, regulation and risk taking.” journal of financial economics, 93(2): 259–275 peek, joe, and eric rosengren. (1997). “how well capitalized are well-capitalized banks?” new england economic review, , (sep): 41–50. ratnovski, lev, and rocco huang. (2009). “why are canadian banks more resilient?” imf working paper, 1–19. wheelock, david c, and paul w. wilson. (2000). “why do banks disappear? the determinants of u.s. bank failures and acquisitions.” the review of economics and statistics, 82(1): 127–138. waweru, n.m. and kalani, v.m. (2009). commercial banking crises in kenya: causes and remedies. african journal of accounting, economic, finance and banking research, (n), 12-33. mcnulty, j., akhigbe, a. &verbrugge, j.(2001). small bank loan quality in a deregulated environment: the information advantage hypothesis.journal of economics and business, 53, 325-39. samuel, k.s.(2011): lending practices and causes of loan defaults. leading practices and causes of loan default among some selected banks in ghana. 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 | ijfb indian journal of finance and banking; vol. 3, no. 2; 2019 issn 2574-6081 e-issn 2574-609x research article published by centre for research on islamic banking & finance and business, usa 10 a study on effectiveness of the crop insurance in karnataka -with special reference chikmagalur district hamsini h.p final year student ramaiah university of applied sciences bangalore-560054, india e-mail: hamsinigowda13@gmail.com rashmi.r professor faculty of management and commerce ramaiah university of applied sciences bangalore-560 054, india e-mail: rashmi.co.mc@msruas.ac.in abstract indian agriculture activities are severely dependent on rainfall that occurs in monsoon year. the behavior of the monsoon is unusual that cause natural disasters like lack of rainfall or floods, cyclones, etc. majority of the cropped area is affected by drought. about 12 million hectors of the agricultural land is affected by the calamities and this land does not have irrigation facility. crop insurance is a tool to protect the farmers from financial loss as a result of crop loss out of nearly all natural factors past their manage consisting of weather, natural calamities , floods, pests, illnesses etc. there is a need for the crop insurance to protect the farmers against the financial loss due to crop loss. there are various schemes under crop insurance which aim to provide financial support to farmers. this is the motivation behind the study. the research is carried out to understand the effectiveness of crop insurance. a sample of 348 farmers was considered to collect opinions through a structured questionnaire in chikmaglur district, karnataka. the factors under the study were awareness, financial security, income stability, loan repayment towards the future acceptance of crop insurance keywords: crop insurance, awareness, financial security, income stability, loan repayment, future acceptance 1. introduction crop insurance is one of the several types of insurance which are provided to the farmers. this coverage is given to the agriculturists and farmers. this crop coverage policy has been given since the time of kharif 1985.insurance gives economic help for loss control in agriculture. this coverage provide protection scheme for the farmers whose vegetation get damaged at some point of natural disaster. the loss is suffered because of natural calamities is given protection by the government of india. it is to be stated that the insurance covers the insured crop. the crop insurance does not provide insurance cover for multiple vegetation. experimental crop coverage policy is obtainable to the medium farmers. many farmers are protected underneath this insurance policy. this scheme provides financial security to the farmers. crop insurance makes up the loss or harm to developing plants as a consequence of a selection of causes which includes drought, flood and disorder. the cultivators pay a premium and protection is given to them at the equal basis as in other coverage. whilst the production from an insured acreage falls under the insured insurance, the risk is entitled to an indemnity. 2. literature review the study reviewed the provisions, performance and improvements in pradhan mantri fasal bima yojana scheme. pmfby was compared with nais and was found that pmbfy benefited more to farmers with low premium rate, covered majority of the risk and they used technology for the settlements (mahatma jyothi rao phoole, 2017).the study was conducted to know the better scheme in andhra pradesh and it was found that more number of farmers was benefited under weather based crop insurance scheme (karthick (2016).the other study evaluate the mass acceptance of nais under control of aic of india among loanee and non-loanee farmers. the study showed 40% of the loanee farmers were unaware of compulsory insurance benefit of nais scheme (avik challoadhaya 2016). examine and associate indicators with their coverage, financial performance copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 11 and operational efficiency that provide safety for the farmers. he finds that wbcis wbcis performance better than nais because of the higher adoption rate, higher percentage of the farmers are benefited, lower premium (mamatha swain 2015). elicit the issues and challenges of agricultural insurance in india. it was found that there was an issue relating to operations ,governance and financial sustainability .nais scheme only covers sowing risk ,post harvesting losses are not covered (shathabonia raju 2015). paper has studied the structures and concert of national agricultural insurance scheme (nais) working in the country and has optional some alterations to make it more operative. national agricultural insurance scheme has served very limited purpose. the coverage in terms of area, number of agriculturalists and worth of farming production is very lesser, sum of indemnity, created on area approach, miss affected the farmers outside the compensated area, and many of the other policy are also not feasible (s.s. raju, 2015). 3. objectives of the study  to study the currently available crop insurance schemes and challenges in crop insurance  to study the performance of the crop insurance in chickmaglur district  to study acceptance of crop insurance amongst the loanee and non-loanee farmers.  to study the problems faced by farmers in crop insurance and provide suitable suggestions 4. database and methodology data collection: the present study is conducted to understand and know the importance of crop insurance and the factors which are affecting towards acceptance of crop insurance .the analysis is conducted using primary data collected from the farmers and descriptive statistics is used to derive results. for this research a total of 348 farmer’s in chikmaglur district have been collected. primary data: questionnaire survey was done to collect the opinions of farmers in chickmagalur district. obtained data was analyzed using spss statistical software to examine the relationship among the identified factors. secondary data: this data is collected through literature reviews, websites and books 5. results and discussion table 1: showing reliability statistics cronbach's alpha cronbach's alpha based on standardized items n of items .806 .861 23 table 1 measure the questionnaires consistency cronbach’s α was used. the complete coefficient was found to be 0.806 which outstrips the marginal approvals i.e., 0.70. hence, the sustainability and strength of the implement is reasoned to be good. 5.1 hypothesis h0: satisfaction, financial security, income stability loan repayment has no significant impact in future acceptance of crop insurance h1: satisfaction has a significant impact on future acceptance of crop insurance h2: income stability has a significant impact on future acceptance of crop insurance h3: financial security has a significant impact on future acceptance of crop insurance h4: loan repayment has a significant impact on future acceptance of crop insurance 5.2 correlations table 2: showing correlations between future acceptance and loan repayment satisfaction financial security income stability future acceptance loan repayment satisfaction financial security income stablity future acceptance pearson correlation 1 .510** .780** .705** .722** sig. (2-tailed) .000 .000 .000 .000 n 348 348 348 348 348 in table 2 correlation results reveal that there is a positive relation between financial security, loan repayment satisfaction, income stability and future acceptance. as we can see that the correlation coefficient is 0.510, 0.780, 0.705, 0.722 between financial security, loan repayment satisfaction, income stability and future acceptance respectively at of 0.01 level of significance of financial security and future acceptance. copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 12 5.3 regression table 3: showing regression model summary model r r square adjusted r square std. error of the estimate 1 .824a .679 .675 .475 table 4: showing regression coefficient model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) .156 .078 2.014 .045 income stability .139 .085 .121 1.628 .104 financial security .258 .074 .235 3.469 .001 satisfaction .487 .042 .518 11.657 .000 loan repayment .039 .035 .042 1.108 .269 a. dependent variable: future acceptance table 3 and 4 shows that the model is capable of explaining 67.9% of the impact of future acceptance of crop insurance by independent variables such as satisfaction, financial security, and income stability loan repayment. this is from the evidence that the adjusted r square is 0.679, which also means that remaining 32.1% on future acceptance will happen by the factors that are not included in the model. in order to study future acceptance of crop insurance in chikmaglur district, correlation and regression analysis is been conducted. from the results it is concluded that there is a relationship between future acceptance, satisfaction, financial security, income stability. this makes us reject the null hypothesis h0. that is the statement “satisfaction, financial security, income stability has no significance in future acceptance of crop insurance.” is rejected. the results obtained show considered has a strong impact on future acceptance of crop insurance which makes us accept the alternate hypothesis. 5.4 chi-square tests the null hypotheses h0: there is no significant influence of loan status on decision of taking crop insurance. the alternative hypothesis h1: there is significant influence of loan status on decision of taking crop insurance. table 5: showing chi-square test value df asymptotic significance (2-sided) exact sig. (2-sided) exact sig. (1-sided) pearson chi-square 10.566a 1 .001 continuity correctionb 9.020 1 .003 likelihood ratio 8.688 1 .003 fisher's exact test .005 .003 linear-by-linear association 10.535 1 .001 n of valid cases 348 a. 0 cells (0.0%) have expected count less than 5. the minimum expected count is 5.43. b. computed only for a 2x2 table table 5 observes that pearson chi-square value is 10.56 at 1 degree of freedom .the p value is 0.005 which is less than the alpha value 0.05 .hence the it is significant.so we reject the null hypothesis i.e. h0: there is no significant influence of loan status on decision of taking crop insurance and accept the alternative hypothesis i.e. h1: there is significant influence of loan status on decision of taking crop insurance. . 0 cells (.0%) have expected count less than 5.cramer’s v value represents the size of the effect .here the cramer’s value is .174 which means there is a good effect on influence of loan status on decision of taking crop insurance. 6. conclusion the study revealed the farmers have taken crop loan depending on their income. it was found that loan status of the farmers influence the decision of taking crop insurance. the studies found that crop insurance have helped farmers in repayment of loan. copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 13 the study found that crop insurance helps in stabilizing the income of the farmers. it was found that the pay out of the crop insurance is low and also more time is taken by the surveyors for assessment which delays the claim settlement. the premium of the (pmfby) pradhan mantri fasal bima yojana is comparatively more than (wbcis)weather based crop insurance scheme (pmfby) pradhan mantri fasal bima yojana provides more benefits compared to any other schemes it was found that majority of the farmers were satisfied with the currently available crop insurance schemes and would suggest to their friends and relatives crop insurance provides protection to farmers against crop loss.it helps farmers to repay their debts during the time of financial loss due to crop loss .it also provides replant security and preventive planting .crop insurance protects farmers form the financial loss due to pesticides and weather changes .it acts as tool to farmers which helps farmers which helps farmers to manage their financial yield and yield loss. insurance coverage conduct awareness programs and protects farmer’s farm. national bank for agricultural and rural development and reserve bank of india must monitor the regulation regarding the compulsory cop insurance for loaned farmers. financial institutions must settle the claims on time. the premium of mains must be reduced. references avik chattopadhaya1, subrata ray, journal of advances in business management, adoption of nais by farmers to cope up with agricultural risk ,2(3),154-158, adivappar n, aditya ks. (2014). status & prospects of national agricultural insurance scheme in india. international journal of entrepreneurship & business environment perspectives, 3(1), 876-880. gurdev singh. (2012). crop insurance in india, international journal of advanced research and development. kumar fr, breshnev. current issues on crop insurance in cauvery delta regionan overview. international journal of world research, 1(11), 73. karthick. (2016). an inclusive study on agriculture insurance schemes in india ,amity journal of agribusiness ,1(2),38-45. mahatma jyothi rao phoole.(2017).to review the provisions and performance of crop insurance scheme in india. mamatha swain.(2015).‘to analyse and compare various indicators’ , south asian network for development and environmental economics ,104–16. mahatma jyothi rao phoole.(2017).to review the provisions and performance of crop insurance scheme in india. mohapatra l, dhaliwal rk. (2014). review of agricultural insurance in punjab state of india. international journal of advanced research, 2(5), 459-467. nair, r. (2010). “crop insurance in india: changes and challenges” economic and political weekly, february 6th: 19-22. pal d, mondal t. (2010). agricultural insurance in india: approaches and challenges. international journal of rural studies, 17(1), 1-7. olivier mahul, world bank policy research working paper 3654, july 2005. prasanna v. (2014). impact of monsoon rainfall on the total food grain yield over india; j. earth syst. sci. 123(5),1129–1145. raju, s.s., r. chand.(2008). agricultural insurance in india: problems and prospects,” indian council of agricultural research, new delhi, ncap working paper. raju ss, ramesh c. (2008).a study on the performance of national agricultural insurance scheme and suggestions to make it more effective. agricultural economics research review, 21, 11-19. singh s. (2004).crop insurance in india a brief review. journal of indian society of agriculture statistics, 57, 217-225. sreejamol k.s, sridevi k.b.(2018). farmers behaviour and attitudes towards crop insurance scheme in india. agricultural economics research review, 21, 11-19. sindhu rs,vatta k.(2012).risk in punjab agriculture: current status and emerging issues. vandana rathore.(2017). the performance of pmfby and other crop insurance models in india, international journal of advanced research and development, 2(5),602-607. 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 | ijfb indian journal of finance and banking; vol. 3, no. 2; 2019 issn 2574-6081 e-issn 2574-609x research article published by centre for research on islamic banking & finance and business, usa 27 an analysis of effectiveness of bancassurance among customers as an alternative distribution channel in bangalore bhavana gowda sp final year student ramaiah university of applied sciences bangalore-560054, india e-mail: mailmebhavanasp@gmail.com rashmi.r professor faculty of management and commerce ramaiah university of applied sciences bangalore-560 054, india e-mail: rashmi.co.mc@msruas.ac.in abstract in this study we had conducted a survey among customers of bank in order to know whether they are aware of the concept of bancassurance and exploring the reasons why customer would like to buy insurance products from banks. customer attitude to two different distribution channels was calculated by getting the mean of 24 statements on likert scale. 74% of the sample was aware of the fact that their banks sell insurance products. it was reported that the reference (56%) and bank employees (54%) are the two main information sources for these customers. the respondents emphasized trust, convenience in terms of location as the main reasons for buying the insurance products from banks instead of insurance agents and after analyzing 24 statements administered among target sample population we can conclude: customers feel that insurance agents have more expertise in insurance products than bank employees and can give better advice. it was also found that banks employees give them all the information needed than insurance agents and customers trust bank more than insurance company for all their financial requirements. therefore, banks in india should try to exploit the existing opportunities to cross-sell insurance products through their branch network. keywords: bancassurance, awareness, insurance, bank employees, future acceptance. 1. introduction this chapter is an introduction for the scope and topic of the study, which outlines the significance of bancassurance. banking has become a part and parcel of our day-to-day life. today, banks offer an easy access to a common man. they carry out variety of functions apart from their main functions of accepting deposits and lending. banking is a service industry. banks provide financial services to the people, business and industries. merchant banking, money transfer, credit cards, atm's are some of the important financial services provided by the modern banks. indian banking system, over the years has gone through various phrases after establishment of rbi in 1935 according to rbi act, 1934, during british rule, to function as central bank of the country. earlier central bank's functions were being looked after by the imperial bank of india. the development of 'banking’ is evolutionary in nature. there is no single answer to the question of what is banking. because a bank performs a multitude of functions and services which cannot be comprehended into a single definition. for a common man, a bank is a storehouse of money, for a businessman it is an institution of finance and for a worker it may be a depository for his saving. it may be explained in brief as "banking is what a bank does". but it is not clear enough to understand the subject in full the oxford dictionary defines a bank as "an establishment for the custody of money which it pays out on a customer's order'. but this definition is also not enough, because it considers the deposit lending and repayment functions only. the meaning of a bank can be understood only by its functions just as a tree is known by its fruits, as any other subjects, it has its own origin, growth and development. 2. objectives of the study  to understand the concepts and models of bancassurance.  to analyse the present scenario of bancassurance in india. copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 28  to examine whether indian customers are aware of the concept of bancassurance i.e. selling of insurance products by banks.  to examine the preference of indian customer for buying insurance products from insurance company or the bank and the reason for such preference. 3. literature review in most of the emerging economies where spread of insurance sector is not that much strong or level of awareness about various types of financial products are low. the success of bancassurance business model basically depends on the strength of the financial market and economic performance of the country. (bergheetal. 1999). the paper focuses on the liberalization of european financial market by creating a single insurance market. (sterzynski, 2003). the new and innovative model of bancassurance each and every target consumer can get the true benefits of the same. the product knowledge about various insurance products is limited among bank staff. (agarwal. 2004). the paper highlights that there is no unique model of bancassurance operations and its nature and implementation may vary country or region wise. looking at the increasing phenomenon of developing a financial supermarket it will surely add values to the both players in the form of differentiated product, offering of a wider product mix not only helps the service providers to satisfy the increasing demand of specialized services but also helps to gain. (brahmametal. 2004). the study is on the emerging trends of bancassurance in indian market, factors like huge branch network, fee-based earnings for bank staffs and common acceptability of banks among mass consumers vis – a –vis insurance companies play a dominant roleresponsible for this growing trend. the problems of bad loans faced by the indian banks as well as overstaffing situation also forces the banks to take this route. kind of trust enjoyed by the bank staffs can also be utilized properly. (sinha (2005). the concept of bancassurance is not new but with changing time and geographical location wise the same model need to be re – oriented. (kumar. 2008). it was concluded in the study that going by the present pace, bancassurance would turn out to be a common phenomenon rather than an exception in future in india. it would be a ‘winwin situation’ for all the parties involved i.e. the customer, the insurance companies and the banks. (karunagaran. 2006). 4. database and methodology data collection: the methodology includes the information of the features of the bancassurance in the form of primary data that had been received from the basic users of bancassurance i.e., the customers who are the actual users. it also includes the information’s from the related books & the related websites. for this research a total of 348 people who had availed bancassurance from different banks in bangalore city have been collected through questionnaire survey. primary data: questionnaire survey was done to collect the opinions of customers of bangalore city. secondary data: this data is collected through literature reviews, websites and books. 5. results and discussion cronbach's alpha n of items .942 20 cronbach’s α was used to measure the questionnaire’s consistency. the overall coefficient was found to be 0.942 which exceeds the minimal recommendations i.e., 0.90. therefore, the viability and validity of the instrument is deemed to be sufficient. hypothesis  h0low mis selling of products, ease of access, satisfaction under one roof, bank showing sincere interest in solving problems has no significance in effects of bancassurance among customers in building good future in bangalore.  h1low mis selling of products has significance effect in of bancassurance among customers in building good future.  h2ease of access has significance effect in of bancassurance among customers in building good future.  h3 satisfaction under one roof has significance effect in of bancassurance among customers in building good future.  h4bank showing sincere interest in solving problems has significance effect in of bancassurance among customers in building good future. copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 29 correlations correlations good future easy to access good future pearson correlation 1 .658** sig. (2-tailed) .000 n 348 348 easy to access pearson correlation .658** 1 sig. (2-tailed) .000 n 348 348 **. correlation is significant at the 0.01 level (2-tailed). good future low misspelling of products good future pearson correlation 1 .715** sig. (2tailed) .002 n 348 348 low misspelling of products pearson correlation .715** 1 sig. (2tailed) .002 n 348 348 **. correlation is significant at the 0.01 level (2-tailed). model summary model r r square adjusted r square std. error of the estimate 1 .834a .695 .692 .360 a. predictors: (constant), bank shows sincere interest in solving, easy to access, enables satisfaction under one roof, low mis-selling of products copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 30 this analysis mainly shows that the model can explain 69.2% of the impact of integrating good future by independent variables such as bank shows sincere interest in solving, easy to access, enables satisfaction under one roof, low misselling of products. this is from the evidence that the adjusted r square is 0.692, which also means that remaining 30.8% on developing good future for bancassurance will happen by the factors that are not included in the model. the analysis findings shows that there is a good strong relationship between developing good future by independent variables such as bank showing sincere interest in solving, easy to access, enables satisfaction under one roof, low mis-selling of products as evidenced by the regression model showing coefficient of r as 83.4%. this result is complimented by the r square of about 69.2%, which in essence is the proportion of total variance that is explained by the model. further the results it also show that there is strong relation between satisfaction under one roof and there is no strong relation between showing interest in solving problems on bancassurance. this makes us accept the alternate hypothesis h3and reject h4. that means that the statement “showing interest in solving problems of customers has a significant impact on good future in bancassurance” is accepted and the statement “providing customer satisfaction under one roof has a significant impact on effectivesness of bancassurance in building good future” is rejected. 6. conclusion the life insurance industry in india has been progressing at a rapid growth since opening up of the sector. the size of country, adverse set of people combined with problems of connectivity in rural areas, makes insurance selling in india a very difficult task. life insurance companies require good distribution strength and tremendous man power to reach out such a huge customer base. the concept of bancassurance in india is still in its nascent stage, but the tremendous growth and the potential reflects a very bright future for bancassurance in india. the success of bancassurance greatly depends upon banks ensuring excellent customers relationship; therefore banks need to strive towards that direction. the fact that the banking operations in india, unlike in other developed countries, are still branch oriented and manually operated vis-à-vis highly mechanized and automated banking channels, viz., internet banking, atms, etc. are all the more conducive for flourishing of bancassurance. it’s a win-win strategy for the banks as well for the insurance companies, as the banks get their commission for selling the insurance products and in the same way the insurance companies get the wide spread networking of their branches. the prospect of bancassurance is also bright as it is one of the most preferred distribution channels among the customers who wish to buy insurance products. with more incentives and focus in the in specified areas the bank can even have the potential of making more customers to buy insurance products from banks. with bancassurance, company can also take the advantage of more customer base and can become more competitive. thus, in the coming years insurance companies will definitely play a predominant role in the bancassurance industry and thereby can contribute more to the upliftment of the company. references bcg & swiss re report. (2009). bancassurance in china – reaching the next level18 bajaj allianz news track .(2011). bancassurance: ties that strengthen26 chang, p. r., peng, j. l., & fan, c. k. (2011). a comparison of bancassurance and traditional insurer sales channels. the geneva papers on risk and insurance-issues and practice, 36(1), 76-93. clipici, e., & bolovan, c. (2011). bancassurance–main insurance distribution and sale channel in europe. scientific bulletin– economic sciences, 11, 54-62. fiordelisi, f., & ricci,o. (2010). efficiency in the life insurance industry: what are the efficiency gains from bancassurance; emfi working paper 2, 201020rga report (2010); bridging the cultural divide between banks & life insurers, 2010australia bancassurance study21 anova a model sum of squares df mean square f sig. 1 regression 101.329 4 25.332 195.768 .000b residual 44.384 343 .129 total 145.713 347 a. dependent variable: good future b. predictors: (constant), bank shows sincere interest in solving, easy to access, enables satisfaction under one roof, low misspelling of products copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 31 fan, c. k., lee, l. t., tang, y. c., & lee, y. h. (2011). factors of cross-buying intention-bancassurance evidence. african journal of business management, 5(17), 7511-7515. krstić, b., vojvodić-miljković, n., & mandić, d. (2011). bancassurance–new options for the development of serbian financial sector. facta universitatis, series: economics and organization, 8(1), 15-29. kumaraswamy, d. s. (2012). bancassurance: tapping of insurance into banking pursuit. international journal of scientific and research publications, 2(7), p1-5. mukadam, k. (2011). bancassurance: a growing model; icsi paper (a – 487), december,2011, pp 1727 – 172923 (2011) bancassurance: a growing model; icsi paper (a – 487), december,2011, pp 1727 – 172923 mishra, n. (2012). banc assurance: problems and challenges in india. integral review: a journal of management, 5(1). neelamegam, r., & veni, k. p. (2008). bancassurance an emerging concept in india. the journal, 11(3), 49-54. sinha, t. (2009); the indian insurance industry: challenges & prospects; report of institute of insurance & risk management, india17 sorina, o. c. (2012). bancassurance development in europe. international journal of advances in management and economics, 1(6), 64-69. 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 indian journal of finance and banking vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 1 an empirical research on beximco knitting ltd: ratio, dupont, valuation and pro-forma analysis k. m. anwarul islam1 1 department of business administration, the millennium university, dhaka, bangladesh correspondence: c/o k. m. kamal uddin, deputy registrar, registrar‘s office, room no-201(k),dhaka university, dhaka-1000, tel: +8801768343171, e-mail:ai419bankingdu@gmail.com received: june 21, 2017 accepted: july 05, 2017 online published: july 17, 2017 abstract beximco knitting ltd belongs to the textile industry. this paper examines some ratio analysis that showed the overall internal liquidity position of the company, that is not satisfactory; because of the entire ratio performance is not good, operating efficiency ratio is not good, indicates that lower efficiency generate capacity in terms of sale, debt-equity ratio is increasing overtime in order to employ the more debt financing as long-term borrowing compare to the equity financing, which make the firm more risky. beximco knitting ltd is more sensitive to leverage compare to net profit margin and asset turnover discounted cash flow analysis model is using for valuation of the beximco knitting ltd‘s prospective analysis. forecasting the cash flow we have to use 2016-2017 as the base year of foresting cash flow for 2018-2020.the terminal growth rate of free cash flow is 2% and the present value of free cash flow is arrived using the ‗exit multiple‘ model.free cash flow to equity is discounted 10.77% to arrive at an estimated present value of free cash flows available to equity (debt and equity holders as a group), which is also known as enterprise value. equity value per share (142.07) on the other hand, the market price of beximco knitting is 47.5tk per share, which indicates the share price is undervalued. under pro-forma analysis we find out that all items of the financial statement is improving based on the assumption, but as investor‘s perspective we think investing in that company is not beneficial over the long run.because the company can‘t earn positive return until 2020. findings of the artcle are to really negative signs in accordance the investor‘s perspective, because its earnings per share are not attractive as much to invest. keywords: beximco knitting ltd, ratio, dupont, valuation, pro-forma. 1. introduction in the area of equity analysis, research in finance has not been successful. equity analysis or fundamental analysis—was once the mainstream of finance. but, while enormous steps have been taken in pricing derivatives on the equity, techniques to value equities have not advanced much beyond applying the dividend discount model. so-called asset pricing models, like the capital asset pricing model, have been developed, but these are models of risk and the expected return, not models that instruct how to value equities. real option analysis has been applied to equity valuation, but the measurement problems are significant. some progress has been made by accounting researchers in what has come to be referredto as accounting-based valuation research. that is not an empirical research on beximco knitting ltd: ratio, dupont, valuation and pro-forma analysis k. m. anwarul islam 2 surprising. equity analysis is largely an analysis of information, and accountants deal with information about firms. this paper carries the recent research to the level of product design. not only are relevant ratios identified, but an algebra like the traditional dupont analysis (which is incorporated here)—ties the ratios together in a structured way. this algebra not only explains how ratios ―sum up‖ as building blocks of residual income but also establishes a hierarchy so that many ratios are identified as finer information about others. so the analyst identifies certain ratios as primary and considers other ratios down the hierarchy only if they provide further information. this brings an element of parsimony to practical analysis. but it also provides a structure to researchers who wish to build (parsimonious) forecasting models and accounting-based valuation models.(chu, n. c., taylor, r. n., chavagnac, v., nesbitt, r. w., boella, r. m., milton, j. a., ... & burton, k. ,2002). 2. data analysis 2.1 ratio analysis the internal liquidity (solvency) ratio, which measure the ability to meet future short-term financial obligations, 2.1.1 performance of current ratio year 2012 2013 2014 2015 current ratio 3.16 .88 1.00 .96 in this table we can see that current ratio is decrease in year 2013 & 2015 and increase in year 2012 & 2014. because of increasing total current asset in year 2012 & 2014 by increasing the marketable securities & inventories and decreasing the current liabilities in year 2012 & 2014 by decrease the a/p and increasing the liabilities in year 2013 and 2015 by increase of a/p & notes payable. which indicate beximco knitting has lower ability to pay the shot -term obligation against of current asset? 2.1.2 performance of quick ratio year 2012 2013 2014 2015 quick ratio 0.91 0.27 0.52 0.48 quick ratio is decrease in year 2013 & 2015 and increase in year 2012 & 2014. because of increasing numerator by increase in a/r & marketable securities in year 2012 & 2014 and decreasing the current liabilities in year 2012 & 2014 by decrease the a/p. according to increase numerator as much compare to decrease denominator, which increase the quick ratio and vice-versa the rest of the year. 2.1.3 performance of turnover ratio year 2012 2013 2014 2015 inventory turnover 1.20 0.62 0.79 0.78 inventory turnover ratio decrease in 2013 and 2015, because of decreasing the cogs & increase the average inventories. inventory turnover ratio increase in 2012 and 2014, because of increasing the cogs & decrease the average inventories. the current ratio, quick ratio, inventory turnover ratio is changing over time that means not stable over the year. company‘s overall internal liquidity position is not satisfactory; because of the entire ratio performance is not good. evaluate the operating performance, which measure the operating efficiency and operating profitability. an empirical research on beximco knitting ltd: ratio, dupont, valuation and pro-forma analysis k. m. anwarul islam 3 2.1.4 operating efficiency ratio 2.1.4.1 fixed asset turnover ratio year 2012 2013 2014 2015 fixed asset turnover ratio 1.20 0.62 0.79 0.78 fixed asset turnover decrease only in year 2013 because of decreasing the sales revenue in year 2013 but increase fixed asset turnover the rest of the years because of decreasing the average net fixed asset, which indicate the less efficiently usage of the fixed asset. 2.1.4.2 total asset turnover ratio total asset turnover ratio decrease in year 2013 and increase in year 2015 in order to decrease the sales revenue but increase the total net asset in year 2013. in year 2015 the total net asset increases as a result of increasing the total asset turnover ratio. fixed asset turnover and total asset turnover ratio is not satisfactory because it‘s not stable, that means the overall operating efficiency ratio is not good, indicates that lower efficiency generate capacity in terms of sale. 2.1.5 operating profitability ratio 2.1.5.1 gross profit margin ratio this ratio measure the rate of profit on sales, beximco ltd gross profit margin ratio is increase in year 2013 and 2015; according to decrease the cogs compare to the sales revenue. which indicate the company‘s non-efficient ability of production process because of not keeping the stability of performance? 2.1.5.2 net profit margin ratio net profit margin decrease more in year 2013, in order to face the most losses because of gross profit doesn‘t cover the total operating expenses, that improving the last two-year because of increasing the sales revenue. 2.1.5.3 operating profit margin year 2012 2013 2014 2015 total asset turnover ratio 0.50 0.29 0.29 0.32 year 2012 2013 2014 2015 gross profit margin 4.76 4.80 3.59 9.20 year 2012 2013 2014 2015 net profit margin -13.82 -32.27 -22.58 -13.77 year 2012 2013 2014 2015 operating profit margin 0.23 -4.71 -2.53 4.51 an empirical research on beximco knitting ltd: ratio, dupont, valuation and pro-forma analysis k. m. anwarul islam 4 operating profit margin ratio decrease in year 2013 in order to face the most operating losses because of increasing the operating cost and improve the ratio last two-year because of increasing the sales revenue, which cover the operating losses. 2.1.6 return on total asset ratio return on total asset ratio decrease in year 2013 in order to face the most income losses because of increasing the interest expense and improve the ratio last two-year, because of minimize the income losses which adjust the non stability of the total asset utilization. 2.1.7 return on equity ratio return on equity ratio is decreasing over the year because of increasing the financial leverage employed in the firm, which makes the firm more risky, and decline the return on equity capital. analysis all the ratio it is clear that beximco ltd faces worst position in year 2003,the last two-year firm trying to minimize the losses. that‘s why we can say the operating profitability is not satisfactory. 2.1.8 debt-equity ratio debt-equity ratio is increasing overtime in order to employ the more debt financing as long –term borrowing compare to the equity financing, which make the firm more risky. 2.1.9 debt ratio debt ratio is increasing overtime in order to employ the increasing amount of long term debt and borrowing. 2.1.10 sensitivity analysis of roe beximco knitting ltd is more sensitive to leverage compare to net profit margin and asset turnover. if company employs leverage more the roe would increase more, compare to other two factors. items of sensitivity average % change asset turnover -4.64% net profit margin 6.36% leverage 378.76% year 2012 2013 2014 2015 return on total asset -6.87 -9.30 -6.61 -4.47 year 2012 2013 2014 2015 return on equity ratio -24.80 -65.06 -137.60 -597.49 year 2012 2013 2014 2015 debt-equity ratio .14 .18 4.32 28.75 year 2012 2013 2014 2015 debt ratio 0.21 0.86 0.95 0.99 an empirical research on beximco knitting ltd: ratio, dupont, valuation and pro-forma analysis k. m. anwarul islam 5 2.2 dupont analysis dupont analysis 2012 2013 2014 2015 net profit at/sales -13.82% -32.27% -22.58% -13.77% sales/total assets 49.68% 28.81% 29.27% 32.47% roa -6.87% -9.30% -6.61% -4.47% net profit at/total assets -6.87% -9.30% -6.61% -4.47% total assets/stockholders. equity 361.10% 699.74% 2081.79% 13360.58% roe -24.80% -65.06% -137.60% -597.49% in the dupont analysis roa is calculated by the total operating margin into total asset turnover, which is decrease in year 2013, because of decreasing the total operating margin. the multiplied total asset turnover and financial leverage multiplier calculate roe, which is decreasing over the year because of increasing the financial leverage employed in the firm. 2.3 valuation of beximco knitting ltd there are number of model are available to estimate the value of target firm, because valuation is the process of converting a forecast into an estimate of the value of the firm or some component of the firm. we are using the discounted cash flow analysis model for valuation of the beximco knitting ltd‘s prospective analysis. under this approach the production of detailed, multiple-year forecast of cash flow. forecasting the cash flow i have to use 2016-2017 as the base year of foresting cash flow for 2018-2020. 2.3.1 the discounted cash flow analysis model for valuation therefore involves the following steps setp-1: forecasts free cash flow available to equity holders (or to debt and equity holders) over finite forecast horizons 4 years. to forecasts free cash flow available to equity holders we have to calculate the growth rate of the sales revenue, cogs average the revenue and cogs. find out the operating cash flow in adjust the general and administrative % of sales as 15%. doing so we finding out the operating cash flow for beximco of initial and forecasted year. now ebit was adjusted with depreciation /amortization and applying 30% tax we must get the unleveled net income, which is again adjusted with change in working capital, capital expenditure and depreciation /amortization that come out net cash flow before debt. step-2: forecast free cash flows beyond the terminal year based on some simplifying assumption. terminal values estimates for the abnormal earnings and roe methods tend to represent a much smaller fraction of total value than under the discounted cash flow methods. to calculate the terminal values we make one assumption‖beximco knitting ltd doesn‘t grow up to 2020.the terminal growth rate of free cash flow is 2%. the presents value of normal earnings is already reflected only the original book value of growth in book value over horizon. so the valuation formula would be the ‗exit multiple‘ of free cash flow. step-3: discount free cash flows to equity holders (debt plus equity holders) at the cost of equity (weighted average cost of capital), which is available to equity (debt and equity holders as a group) finally, net cash flow from debt owner is issues of the new debt less retirements less the after -tax cost of interest. free cash flow to equity is the combination change in book value of net asset (including change in working capital plus capital expenditure less depreciation expenses), change in book value of net deb. the forecasts are then discounted at the beximco knitting ltd‘s estimated cost of capital (10.77% adjusted tax an empirical research on beximco knitting ltd: ratio, dupont, valuation and pro-forma analysis k. m. anwarul islam 6 advantage) to arrive at an estimated present value of free cash flows available to equity (debt and equity holders as a group), which is also known as enterprise value that is adjusted with cash and interest debt to find out the equity value, which is available for equity holder, if we divide this amount by the out standing share of the company then we get the equity value per share (142.07).on the other hand , the market price of beximco knitting is 47.5tk per share, which indicates the share price is undervalued. 2.3.2 for proforma analysis for prospective analysis of the individual company, therefore involves the following steps step-1: prepare a common size financial statements (i/s, b/s) to prepare a common size balance sheet we have to calculate the all the items of balance sheet and income statement are converted based on the percentage of sales figure. the common size balance sheet and income statement was calculated at first individually based on the company‘s actual data. after converting the items of balance sheet and income statement based on the percentage of sales figure, we have to calculate the mean of the base year‘s item. and based on the mean we was forecast the next pro-forma of balance sheet and income statement as consolidated form. step-2: calculate some financial ratio under this step we have calculate the some ratio those are operating profit margin ratio, total asset turnover ratio, financial leverage multiplier and at last tax retention rate. after analysis the ratio result we found that beximco ltd‘s roe was unstable in the base year (2016-2017) but pro-forma year (2018-2020) roe was positive but declining year by year. because of losing company it has not paying any tax and there is not dividend payment, as a result the company‘s sustainable growth will be the equal to the eoe for the pro-forma year. step-3: make some assumption assumption is taken based on the company‘s current financial position and future prospect of the company. no. assumption 1 sales growth 5%, compound sales growth rate 2 other current account would be consistent with sales 3 the estimated inventory would change by 5% of average sales growth in every year. 4 planned investment 5000000 in year 2016, next two year there is no need for additional investment, because the year 2017, 2018 the investing amount would trying to come out. this additional investment is using purchasing the machinery that will be depreciated by 10% after the year 2018. 5 company would require additional financing in next year from debt financing and last two from equity financing by issuing 100000 shares. because the firms are become in risky by using debt financing. in year the borrowing at 14% will finance 2018.  step-4: prepare the pro-forma, financial statement to calculate the pro-forma financial statement we have to at first meet up the previous steps. based on the previous steps at first calculate the actual financial statement and based on the statement and other step we found the pro-forma statement. after analysis the pro-forma statement, its depicts that the income over the 2016 to 2020 its improving but not cover the losses position and not enjoying the positive income. the all other items of the financial statement is improving based on the assumption, but as investors perspective an empirical research on beximco knitting ltd: ratio, dupont, valuation and pro-forma analysis k. m. anwarul islam 7 we think investing in that company is not beneficial over the long run. because the company can‘t earn positive return until 2020. its really negative signs in accordance the investor‘s perspective, because its earnings per share are not attractive as much to invest. reference chu, n. c., taylor, r. n., chavagnac, v., nesbitt, r. w., boella, r. m., milton, j. a., ... & burton, k. (2002). hf isotope ratio analysis using multi-collector inductively coupled plasma mass spectrometry: an evaluation of isobaric interference corrections. journal of analytical atomic spectrometry, 17(12), 1567-1574. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. contents indian journal of finance and banking; vol. 1, no. 2; 2017 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business 17 turkey's e.u membership: perceptions, possibilities, and implications yusuf ibrahim gamawa1 1bauchi state university, gadau, nigeria correspondence: bauchi state university, gadau, nigeria.email: yusufgamawa@ymail.com received: october 14, 2017 accepted: october 28, 2017 online published: november 01, 2017 abstract the membership of turkey into the european union has remained as controversial as ever, even at this point when countries like u.k are leaving the eu, turkey's membership in the union is still being discussed in many circles. though at this point it is clear turkeys drive to join the eu appears to have dropped drastically and many believe that citizens of turkey may no longer be interested in being part of the eu, the truth, however, remains that turkey will always want to be in the eu, despite whatever disappointment. the pessimistic views are seen to be the result of previous disappointments and not that the turks have lost hope or interest in the eu project. this paper aims to analyze the possibilities and implications of turkey's membership of the eu and argues that membership of turkey into the union is still a possibility despite whatever implications it would have for europe, especially if one considers the change in perception on both the side of turkey and the eu regarding turkey's membership bid. keywords: capital structure, board size, board duality. 1. introduction turkey is generally seen to be a muslim country mainly as a result of its history. the history of a nation and its destiny always move hand in hand, though dynamic changes could always occur. that the ottoman empire had its roots in turkish soil makes it difficult for modern turkey to separate itself from ottoman culture, religion, and society in the eyes of the world. the turks can never separate themselves from the islamic empire that the ottoman was, nor deny that an islamic empire once flourished on turkish soil. it is a past that is still alive, and which kept hunting the advances that the modern republic of turkey has constantly been making to become a member of the european union amongst many other reasons. to many people, it was incomprehensible that turkey could aspire to become a member of the eu, owing mainly to its ottoman past. though sometimes this point is not clearly made but one can understand the rationale behind such thoughts. this thinking helped create a perception which is sometimes difficult to dismiss even among turks themselves, and also helped influence the thinking amongst many people and nations regarding turkey's eu membership bid. despite favored in terms of its interaction and location to europe, to many, it is unimaginable that turkey should be counted as part of europe or belonging to the eu. this more than anything else echoes each time the issue of turkey's membership in the eu is mentioned, it remained unsettled in the minds of many. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 18 the arab media from the early times remained critical of turkey's effort to be an eu member, this is mainly due to the fact that many people including arabs did not properly understand the concept of the european union, and as such turkey's 1987 application for membership had a bombshell effect on the arab world. to many arabs and muslims, it was impossible for turkey to be in the eu, seeing the eu membership as amounting to accepting christianity, and or betrayal of the islamic world. and there is no doubt that this perception exists with regards to turkey's eu membership, and may have contributed in a way to many of the fears of turkey being in the eu, despite the fact that religion isn't part of the conditions for membership. the membership application of turkey seemed to have raised the issue of identity in the debate for accession, though not openly. it is mainly the complex history of turkey that is making its candidature controversial though not impossible and has generated reactions from every part of the world, from leaders of nations in africa, the middle east to europe, which tended to preserve the status quo, owing mainly to reactions from the middle east. reactions continued to come from scholars and even from ordinary people across the globe, with different opinions mainly negative regarding the issue. while many disagreed with turkey's bid, yet others supported the bid of turkey, and another group remained indifferent, but yet followed the development the membership bid with keen interest, contemplating its reality or not. however, no matter the controversy the membership bid may have provoked, as well as the reactions it generated, the turks have indicated their interest to be part of the eu long before now, and have taken concrete steps which demonstrated their commitment to actualizing their long-term ambition of becoming members of the eu. and though there is a significant change in perception over the years regarding the issue, and many people and nations came to understand what membership of the eu actually means to member nations. in 2005 when turkey renewed its bid, the negative reactions could not be compared with that of 1987, and today there is a lot of improvement in the way many nations and people both within and outside europe regarding turkey's eu membership and many seemed to have come to terms with turkey's ambition in this globalised world. and what is important at this critical stage now is to look at how far turkey has progressed on the march towards its ambition over many years and why it has not yet become a member, despite several years of relationship with europe, and at present despite many years of negotiation with the european union. these are some of the questions we should be asking, and if we are able to find answers, and then probably more may come up, which may be futuristic in nature, such as; will turkey become an eu member?and when? this is apart from many other questions which we may not want to discuss in this paper. many have wondered why turkey wants to join the eu, and on the other many wonders why it is still not a member. the two questions cannot be dismissed easily because just as many argue that the turks haven't a place in europe, others argue that the turks have a prominent role and not just a place in the eu. while many see turkey as having much to offer to the eu, others see nothing at all. the us president barrack obama was quoted by yasser abu hilale of jordan's al-gad newspaper in april 2009 as saying "turkey must be part of the eu and that turkey's geo-strategic importance, its culture, and its influential foreign policy will enrich europe show his greatness". open society (2009) it is for these reasons that we as students must dig into the reasons and be able to come up with a concrete position on why on why turkey is aspiring to become a member of the eu, and then look at the possibility of membership despite whatever problems we may have discovered in the process of our study, that may have been staining the relationship between turkey and the eu and take a look at the future of this relationship. 2. membership bid of the republic of turkey the republic of turkey first made an application to join the european commission as a member in 1959. turkey as a nation, since it’s founding in 1923, continued steadily to follow a policy of political, economic and social www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 19 westernization under mustapha kemal with the aim of re-organizing their society to redefine turkeys position in the world. but certainly, this is not to say that the turks have not had relations with europe before the founding of the republic. relations between the turks and europe predate the republic, and relations with europe flourished even during the times of the ottomans. it is on record that the ottoman empire did participate in the paris peace conference of 1856 and the berlin conference of 1878 in the nineteenth century. alber jens (2007) not only that, during the first world war, the ottomans were part of an alliance that included germany and austria, which were european countries, after the war between turkey and greece. part of the explanation for turkey's application to join the ec in 1959, was to check greek influence in the region, it was a move that was necessitated by the dictates of the modern international system and politics. and in 1963, though membership was not granted to turkey, an agreement was signed in ankara, regulating turkey's association with the european commission. the ankara agreement as it came to be known dealt mainly with trade and financial matters, and also prospects of full membership was offered during the agreement, though at an unspecified date. this marked a significant step in the history of turkey's relationship with the european commission, then the eu had not been formed. turkey's intentions of joining europe had been clear right from the beginning and remain the same till today. it would appear that the turks have journeyed long to become part of the european community and have sacrificed their culture and identity by embracing that of europe, all in an effort to be accepted. the greek reason principally motivated the turks to move into the european community, being surrounded by european nations. apart from the ankara agreement, in 1970 an additional protocol establishing a twenty-two-year transitional period leading to a customs union was signed between turkey and the european commission. however, at this time relations between turkey and the ec received some setbacks as a result of turkey's intervention in cyprus in 1974, following a coup that was sponsored by the greeks. it was much after the tensions had eased that between the duo, that in 1987, turkey renewed its membership bid. turgut ozal, then turkish prime minister, realized that greek membership of the ec had put turkey in a disadvantaged position and hoped to re-establish turkey's position as a stable country and take advantage of membership to promote trade and turkish products in the mediterranean area. e.u center (2008) the 1987 bid did not succeed for a number of reasons; the first being that the ec was at the pre-occupied with the creation of a european single market and as a result was not ready to accommodate new membership. the second reason was the issue of human rights and rights of minorities, with regards to the kurdish people in the southern anatolia. the ec further raised reservations regarding the ability of turkey to implement the reforms required for membership and at the same time enlargement was suspended until 1993. it was the copenhagen summit of 1993 that gave turkey some hope of membership. it was at the summit that the decision to accept central and eastern european countries was taken since the collapse of communism in 1991, and a blueprint containing economic and political criteria for membership into the ec was also produced. in 1997, the european council summit in luxembourg did not consider the membership of turkey, it was however at the luxembourg summit that negotiations between turkey and the ec froze. the council was said to have refused turkey's membership because of the dispute on cyprus and the greeks. in turkey, the turks had a different opinion, and saw the decisions from mainly from religious and cultural angles. such opinion was further influenced by the remarks of the european christians democratic union to the effect that "the european union is in the process of building a civilization in which turkey has no place". e.u center (2008) it was at the helsinki summit in 1999 that the eu changed its position suddenly and reconfirmed turkey's candidature to the eu, so long as it fulfilled the copenhagen criteria of 1993 and resolved its long-standing conflict with greece. between 1991 and 2002 a lot of positive events took place and were favorable to turkey, among which are a www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 20 change of government in germany, which saw turkey now has the support of germany, and a new support from the us. turkey's relations with greece also improved considerably. other factors were within turkey, the coming of a new party to power as well as its commitment to continue with the reform program of the eu and ensuring stability in southern turkey which had been a volatile area for many years. at this time turkey offered to accept a un plan for settlement in cyprus. with these developments, an agreement was made in 2002 at the copenhagen european council that accession negotiations could start in mid-2005 if turkey could abide by the copenhagen criteria. the criteria actually outlined three major areas  a functional market economy with competitive pressures.  stability of institutions, guaranteeing democracy, the rule of law, good governance and human rights with respect for and protection of minorities.  capacity to take obligations of membership, including adherence to aims of a political, economic and monetary union. the republic of turkey had pursued a policy of reform long before the copenhagen summit, reforms began since the founding of the republic, and subsequent government after ataturk continued with these reforms in all areas. the significance of these reforms and policies embarked upon can be seen in the fact that when the copenhagen criteria came out, the republic of turkey already belonged to the camp of market economies. many new coming members of the eu did not have a better market functional economy than turkey, including greece and spain. looking at the second criteria, one would say that since 1982, ran a parliamentary system of government, with elections and multi-party democracy with separation of powers. two international nongovernmental organizations; freedom house and transparency international monitored the observance of good governance and human right, including corruption in turkey. and the ratings of these organizations show that turkey improved its rating year after year, steadily even though it was yet to meet the european standards of good governance. the progress turkey was making was also recorded in the eu progress report on the accession process in 2006. the report indicated that there was a progress in the fight against corruption, though it faulted issues of human right and minorities, including freedom of the press, independence of the judiciary and rights of trade unions which it said remained impaired, and wanted turkey to consider changes in these areas before full membership can be considered. it was however argued that there were countries which are members of eu whose rating in terms of political rights were far below that of turkey, a country like romania was rated as the eu worst by the freedom house in 2007 and transparency international in 1997 and 2007. alber jens (2007) 3. consequences of turkey's membership in the eu many writers and political observers both within and outside of europe that have been following turkey's accession process into the eu, have on many occasions seen another side regarding the reasons why turkey has failed to become a member of the eu. many mention the fears other eu nation concerning turkey and tended to look at the issues of reforms as mere excuses to stop the turks. it is reported that many countries did not understand why turkey wants to be in the eu, and it is generally agreed by many analysts with evidence that these fears do exist but the eu has never formally accepted and presented these reasons formally but has constantly used in full compliance with the copenhagen criteria as a formal reason with other informal reasons behind. some analysts see such criteria as deliberately crafted to block the membership bid of turkey and for this many have wondered as to the actual reasons why turkey is not considered in the eu, what are the fears if they really do exist? and the speculations are that www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 21  size: the population of turkey is about 70 million, and is projected to 100 million by 2020. if turkey is admitted, it will become second to only germany of 25 eu states, it may become the largest eu member state in future.  economic development: the position of the economy of turkey is seen as not very good, and below that of any of the ten eu states that joined in 2004, its gdp is just 2% of the eu25 gdp per capita which is 28.5%.  geographical location: turkey is geographically located in asia, and has long borders with states that are potentially unstable or hostile to the eu.  islamism: turkey is overwhelmingly an islamic country, turkey’s membership will increase the eu’s islamic population from 3% currently to around 20%. nugent neil (2005) the nature of turkey's threat to the eu is seen from different perspective by different analysts and political observers. they argue that turkey's accession would have a great impact on the eu and its institutions, it would have great effect also in other eu member countries, and many countries will lose presence in the eu. in fact even the decision making process in the eu is seen to change due to the influence of turkey if it becomes a member state. it is also thought that the size of turkey and its economic under development will result in turkey becoming the major beneficiary of eu's funding program. but also the nature of concerns vary among the individual eu states, though it generally agreed that there is stiff opposition to turkey's membership among the relevant actors within the eu. germany has been traditionally opposed to turkey's bid until recently, while france till now remains opposed to turkey joining the, sarkozy openly showed his strong opposition to turkey's membership. the uk and the u.s. have shown strong support for turkey. whereas greece was opposed to turkey's membership, but recently took a turn to support turkey, following pressure from uk and us. austria is also opposed to turkey's membership, and the current chancellor was quoted as saying "turkey in the eu would mean the end of eu". nugent neil (2005) but even as these fears are raised by eu member countries, of the threat of turkey, yet many analysts see the positive aspect of the implication of european integration of turkey. it is argued that, the population of turkey, which is about 70 million, is a large market for the eu, and as a result of the customs union, all barriers to trade have long been eliminated. yet another advantage is seen in terms of labor market. the turkish population is seen to have much younger workforce population than the eu 25. the commissions projections shows that the eu 25's total population will increase by 2% (449-458 million) between 2005 to 2025, its working population falling by 21%, from 2005 to 2030, the number over 65 years will rise by 52.3%, while 14 -64 age group will decrease by 6.8% resulting in the ratio of dependent and old people. in turkey the working age group will increase from 49% in 2005 to 66% in 2030 (european commission). the turkish workforce can complement human resource in many of the eu 25 nations in different fields. even the issue of islamism is viewed from another perspective. the uk's support for turkey stems from the thinking that admitting an islamic populated country like turkey to the eu will serve to demonstrate that islam, democracy and western capitalism can mix, to encourage moderate islamism, and may also help eu member countries have softer influence and understanding for other islamic populated countries. 4. the future of turkey’s eu membership the article published by the european commission in its progress report on turkey, on 10 october, 2012 by stefan fule, quoted fule from the beginning saying "orhan pamuk said that turkey's eu project has fallen apart. these words coming from a nobel prize winner and a writer of books i admire made a big impression on me. as european commissioner responsible for enlargement policy, i deal on daily basis with various aspects of www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 22 eu-turkey relations and i can certainly say that our joint project has not been abandoned; on the contrary, important initiatives have injected new energy and new hope. but i do think pamuk's words reflect the mood often felt on both sides and they come at the right moment. i see them as a wakeup call, at a time when the eu and turkey are at crossroads and need to take decisive steps forward on their common path". stefan went on to highlight many of the challenges facing the eu and turkey, but at the same time insisting that a lot of progress has been made in many areas and what remains to be finished should be finished saying "when i ask my turkish partners where they see turkey in five, ten, twenty years from now, they all say anchored in europe. when i put the same questions to my intercalators and politicians in the eu, the answer is the same; they see turkey's future as a modern european state. mr. stefan concluded his article with the following words "when i first came to turkey as eu commissioner nearly three years ago; i believed turkey can become a member of the european union. we have a joint commitment towards this goal". fule stefan (2012) based on the above, one can say with some confidence, that turkey becoming a member of the e.u is a possibility that cannot be ruled out, despite whatever problems that may exist. and many agree unlike before, that the resistance to turkey’s membership has reduced drastically over the years. in the pre 2000 period, many reasons including islamism were given, and there were stiff oppositions from all sides. as mentioned in the introduction a very strong perception was formed about turkey with regards to the eu, which many tried to see from a religious angle? even among muslim nations, turkey’s membership of the eu could not be entirely understood. an article by the tribune media services titled "does europe want turkey? posted on the internet in 2005, was quoted as saying "the paris october 11, 2005, european union's decision to open talks with turkey is another act of polite duplicity, another social lie, so to speak, in the eu's dealings with turkey". and in another part, it said "that is why it was no service to europe or to turkey for eu leaders to have encouraged a turkish bid for membership in a europe that does not want turkey. why not? turkey is not europe. it is intimately involved in europe's history, but the defining qualities of europe derive from attic greece and christianity to both which turkey is foreign. this clearly expresses such negative perceptions regarding turkey and the eu over the years. tribune media (2005) yet, another graduate student of mathematics, from idaho state university in u.s., back in 2005 posted an article on the internet titled "the real reasons why turkey is not allowed in the eu". in the article, this graduate student appeared to be attacking one mr. guaugliardo, who had earlier written an article on the 1st of october, 2004 giving reasons for turkey's nonadmittance into the eu to include religion. but the graduate student in his article on www.math.isu.edu dismissed the issue of religion and insisted that mr. guaugliardo's article was misleading, and maintained that the cyprus dispute and human right issues remain the only stumbling blocks to turkey’s membership in the eu. aristidou michael (2004) and today everything looks different. even in the arab world, today turkeys bid is seen in a positive light, and likewise in europe, considering the recent support from germany, uk and the u.s. as well as greece, the ancient old rivals, are now all in support of turkey's membership. the negotiating framework has made it clear that candidates whose accession could have substantial financial consequences (i.e. turkey) the talks could only be concluded after 2014, which is the date for the establishment of eu's new financial framework. this also gives more hope to the eu-turkey joint membership project. there are about four scenarios analyzed regarding the future of turkey and the eu. the first scenario sees popular disenchantment with enlargement ceding, and demographic pressure could convince eu member states to admit turkey.eu center (2008) the second is that poor economic projections in europe in the future will lead to strong opposition from eu member states that http://www.math.isu.edu/ www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 23 turkey is admitted. third, is that turkey implements in full all reforms, which may lead it to qualify for membership, economic reforms lead to a boom in turkey's economy and it becomes a regional power, with its neo-ottoman tendencies, rejects the eu membership. the final scenario is the rejection of the european project from the turkish society, arising from what it perceives as anti-muslim discrimination and chooses to no longer pursue eu membership. 5. conclusion in conclusion, as things stand now, there is no indication that in this time scenario four could happen, it appeared that scenario four had already been passed when turkey was turned down in 2004 that was when popular support for the membership dropped from within the turkish society, but that has not made the turks abandon the project. if any of the scenarios will come to play, it may likely be scenario one or three. scenario four can only be possible if another attempt is made by turkey and it receives a negative response from the eu, then it will be almost certain that the entire turkish society will withdraw from the membership project. if after all the reforms and careful adoption of the european agenda since the 1920's, and after being turned down in 2005, almost ten years ago, and it is certain that much progress has been made in meeting the membership criteria by now, and for this, no reason will be sufficient for the eu to give for rejecting turkey's membership from 2014-2015. there are no egalitarian societies in the world, and many have commended the turks for such grand transformation of their entire society over the last several decades, just to belong to the european community. after all the marxist philosophy was criticized as utopian in nature, for advocating a perfect society, and in the same vein, the eu criteria sometimes appear utopian to some countries and have remained a mirage for countries like turkey, perhaps it was created for them. the eu stands a better chance of making changes inside turkey if it is a member of the union, and all outstanding issues, including that of cyprus and the kurds, could be resolved within the framework of the eu, but then it is highly unlikely for the republic of turkey to cooperate in resolving both the kurdish issue and that of cyprus once it becomes a member of the eu. however, the words of stefan fule clearly show the possibility of turkey's membership despite the continued turbulence in the membership process and relations between turkey and the eu. despite the failure of the 2010 bid by turkey over the cyprus issue, the eu and turkey again opened talks in 2016, but as reported, again relations between the eu and turkey have turned sour after the crackdown by turkey's erdogan after the july 2016 coup in which hundreds of people were arrested in turkey. the eu maintains that the arrests made were unconstitutional. reuters (2016) references dorothee schimid, (2011) turkey, the eu and the middle east puzzle; cooperation or mutual testing ahead, atlantic council. european union center (2008) north carolina, eu briefings, turkeys quest for eu membership. gokhan saz, (2012) the political implications of european integration of turkey: political scenario’s and major stumbling blocks, vienna. ion berindan, (2010) when turkish greatness meets eu values; how the perceptions influence turkey-eu relationship, romania. jens alber, (2007) where turkey stands in europe and why it should be admitted into the eu. berlin. kemal kirisci, (2003) the kurdish question and turkish foreign policy. michael aristidou, (2004) the real reason’s why turkey is not allowed in the eu. neil nugent, (2005), turkey’s membership application for eu, florida. open society foundation, (2009) reflections of euturkey relations in the muslim world. istanbul. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 24 stefan fule, (2012) turkey and the eu: common challenges, common future, european commission. seyma akyol, eu membership process of turkey; the effects of human right violations and lack of democracy in turkey’s eu membership process. sule toktas, bulent aras, (2009) the eu and minority rights in turkey. political science quarterly, vol 124. tribune media services, (2005) does europe want turkey? zalmay khalilzad, ion o. lesser, stephen larrabee, (2000) the future of turkishwestern relations; towards a strategic plan, santa monica. ziya onis, (2004) turkey and the middle east after september 11: the importance of the eu dimension, istanbul. 29th meeting of the eu-turkey joint consultative committee, (2011) joint declaration, istanbul. factbox: (2016) turkey’s collapsing www.reuters.com 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 | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 76 non-performing loan in bangladesh: a comparative study on the islamic banks and conventional banks sonia rezina assistant professor department of business administration uttara university, dhaka, bangladesh e-mail: rezina.sonia@gmail.com rubaiyat shaimom chowdhury assistant professor department of business administration bangladesh university, dhaka, bangladesh e-mail: rubaiyat.shaimom@gmail.com nusrat jahan assistant professor department of business administration uttara university, dhaka, bangladesh e-mail: jn.nusrat@gmail.com abstract the banking business is one of the booming businesses in bangladesh. but at present, the sector is struggling to be on the growth path due to the growing proportion of non-performing loan (npl). the npl has instigated a negative influence on the growth of banking business. this study has compared the severity of the impact of operational modes between two mainstream banking systems, traditional banking and islamic banking, which may affect non-performing loans. other variables such as governance of the banks, bureaucracy, and size of the banks, the difference in reserve ratio, capital adequacy ratio, and interest rates have different impacts on npl. we have explained the impact of the variables on the bank performance as per mainstream banking operational model. finally, we have proposed some evocative measures through which the nonperforming loan can be minimized. 1. introduction the reasons behind loan default vary across countries which tend to upset commercial banks' financial results. commercial banks of bangladesh are licensed and regulated by its central bank named as bangladesh bank. there are currently 59 scheduled banks, 6 of which are state-owned commercial banks (socbs), 3 are specialized banks, 33 are traditional private commercial banks (pcbs), 8 are pcbs based on islamic shariah and 9 are foreign commercial banks (fcb). our banking industry is encountering a serious problem of npl because of ineffective lending practices despite taking many reform measures. it has become a challenged term in bangladesh as a majority portion of the loans has ceased to generate profit from the collection of principal and interest payments from the borrowers. for defining npl, till now we don't have any fixed global standard. based on their conditions and rules, there are differences in the classification scheme, scope, and contents across countries. normally by non-performing loan, we generally understand a loan which is already in default or going to be in default very soon. a non-performing loan is a loan that does not perform as planned, interest and principal payments have become due by 90 days or more, or in the case of interest, interest payments have been capitalized, refinanced or postponed by arrangement by at least 90 days. and if the payments have been overdue for less than 90 days, there is still doubt that full payment may not be made the loan is still under the non-performing loan. because of the increase in the npl, the banking sector is hampered. as of march 2019, the npl rose to tk 110,874 crore, which had been reported as the highest ever in the country (uddin, 2019). according to bangladesh bank reports, eight state-run banks accounted for more than 52 percent of the bad loans. the remaining banks are classified under private and foreign-owned banks. the defaulted loans were 11 percent of the total outstanding loans. the share of npl goes up to about 20 percent when restructured and rescheduled loans are included. (mahmood, 2019). if this scenario continues, then this might be a threat to this sector. as we know that the operational modes of islamic and conventional banks differ, so they might be affected differently due to the rise in npl. the reserve ratio and capital requirement for these banks are different, which might be a cause for the difference. but whatever the situation is, both the keywords: conventional bank, islamic bank, non-performing loan, operational mode of banks. . mailto:rezina.sonia@gmail.com mailto:jn.nusrat@gmail.com copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 77 criteria of banks are experiencing hassle caused by npl. so, to sustain in a market with intense competition, they need to come forward with effective measures to control npl, which may have a progressive impact on their financial performance. our motto is to find out the exact reasons for which npl differs in both the banks. suggestive measures will be given as well. as our economy depends on the banking sector to a great extent, so it is high time we focus on this issue. otherwise, it will have a huge adverse impact on our banking sector as well as on our economy. to decrease npl, the liquidity reserve ratio has already been decreased. the impact is yet to be observed. many other corrective measures are needed to be implemented. and if the gap between traditional banks 'npl and islamic banks is too high, then it needs to be reduced. 1.1 objectives of the research the broad purpose of this study is to conduct a comparative analysis of the islamic banks and traditional banks in bangladesh on non-performing loan (npl). the main goals are: ▪ to determine the factors related to banks that have an impact on the non-performing loan (npl) of commercial banks in bangladesh. ▪ to examine the effect of the factors related to banks on the non-performing loan (npl) by considering variables such as lending rate (lr), loan to deposit ratio (ltd), bank size (bs) and reserve ratio (rr). ▪ to identify the difference between the extent of the “impact of the factors related to banks” on npl of the two banking systems in bangladesh. 2. literature review though globally, there is no static definition of npl as there are variations exist in the term of the method of classification, the possibility, and subjects but we have tried to find some parameters to measure. imf‟s compilation guide on financial soundness indicators defined npls as follows: npl refers to the loans that stopped generating income for an extensive period (caprio & klingebiel, 2002). banks' performance can be decreased by npl as we can treat npl as undesirable outputs or costs of loaning for banks. if npl increases naturally there will be a downward trend of the bank's performance. (tesfaye, 2012). npls can be measured by non-performing loans net of the provision of capital. this is measured by considering the npl value minus the specific loan provisions divided by the capital (waweru & spraakman, 2012). another approach to calculating npls is by dividing non-performing loans to total gross loans. here we considered the npls as the numerator and the total loan portfolio (covering npls before any loan-loss provisions are deducted) as the denominator. kateregga (2013) found that despite being following the procedures and regulations on administering credit, commercial banks in uganda still tend increasing non-performing loans means a larger number of clients are not repaying the loans. after conducting a thorough study on the reasons for npls among commercial banks in kenya muriithi (2013) explained that, before the financial crises started in 2007-2008, over the past decade almost in every country the credit quality of the loan portfolio was relatively stable. as a result of the financial crisis, the average bank asset quality deteriorated sharply. he also acknowledged that, due to the nature of producing the largest portion of operating income, loans can be considered as the leading asset and advancing as the soul of the banking industry. this threat of npl can be mitigated by functional credit risk assessment and having enough facilities for prospective bad and doubtful debt. as described by karim et al. (2010) the key outcome of bad loans is the capacity to deter the bank to grow commercially. this is because bad loans cause liquidity problems and make the banks unqualified to extend their resources to potentially feasible concerns. moreover, they pointed out the unattainability of procreative venture prospects due to the capital that has been locked-up because of the bad loans. according to fofack (2005) the entire banking sector is facing this crisis because of the inefficient supervision of credit risk which has become the reason for economic failure. the study of rahman & jahan (2018) found an insignificant relationship between profitability and npis. the required slr (statutory liquidity reserve) of the islamic banks was 11.5%, which was lower than that of conventional banks. bhattarai (2016) identified that the npl ratio has an inverse effect on roa whereas it has an affirmative effect on roe in the nepalese commercial banks. the findings of akter & roy (2017) again identified an inverse effect of npl on profitability (net interest margin) while considering 30 bank data of bangladesh for the year 2008 to 2013. after analyzing the time series data lata (2015) found npl among the principal factors which influence banks' profitability having a considerable negative impact on net interest income of the nationalized commercial banks in bangladesh. adeusi et al. (2014) performed a study on the impact of credit risk over the financial result of the commercial banks in nigeria from 2008 to 2012. they found an inverse relationship that was not significant between loan ratio and total advances in terms of deposits and has revealed a negative and significant relationship between the rate of nonperforming loans and advances with the profitability of banks. haron (2004) considers internal bank factors as bank-specific factors that can be either financial factors such as bank size, capital ratios, liquidity, asset quality, deposits, operational performance, risk management, etc. or non-financial factors such as some branches, staff, atms, clients, bank age, ownership, etc. the internal factors are said to be the factors that are considered to be under the control and influence of the bank. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 78 earning ability, capital adequacy, and bank size; these all were recognized by langrin (2001) as significant factors of a bank’s non-performing loans. wheelock & wilson (2000) illustrated that the quality of the asset and bank size meaningfully govern the non-performing loan level. a study by waweru (2009) on kenyan commercial banks specified that higher interest rates may lead a bank to nonperforming loans. high-risk borrowers of the banks are also causing loan default (muriithi, 2013). as per gorter & bloem (2002) variations in interest rate has an influence to significantly increase in “bad loans”. again espinoza & prasad (2010) emphasized both external and internal features influence the non-performing loans and the gcc banking system. the study of awuor (2015) explored an inverse relationship between bank size and npls that was weak as well as insignificant. a unit rise in bank size may lead to a decrease in the levels of npls which is clarified by economies of scale in bank operations. (masood & ashraf, 2012) suggested that generally, the banks that are small in size tend to adopt lesser business loan underwriting practices though the risk associated is higher compared to larger banks. big banks get an advantage from diversification chances. salas & saurina (2002) also identified an inverse relationship lying within bank size and nonperforming loan means the bigger the bank size the lesser the npl. he contends that the bigger size of those banks permits them for having more diversified investment opportunities. hu et al. (2004) report the same evidence. mahmudur (2012) identified the basel capital accord (basel-ii) as the origin of npl as well as the credit crisis. the banks’ credit policy has been crucially influencing the non-performing loans. according to adhikary (2006) some of the reasons for the loans being non-performing are deficiency of efficient monitoring, effective lenders' options, and effective debt recovery strategies. it has been noticed that pre-election has a swaying control in the financial sector’s regulatory side. this is creating pressure on the government and bangladesh bank. this is not a smooth atmosphere for functioning and to save the banking sector from deteriorating, necessary steps should be taken (wallich, 2006). 3. methodology in this study, we have tried to examine the internal factors which influence npls and whether those factors have a different impact on islamic banks (ib) and commercial banks (cb). for this, we have used secondary data for 5 years (2014-2018) form 10 different banks. the data was retrieved from the bangladesh bank website and banks’ annual reports. we took 7 conventional cbs (dhaka bank limited, dutch bangla bank limited, eastern bank limited, mutual trust bank limited, ncc bank limited, one bank limited, prime bank limited) and 3 ibs (islami bank bangladesh limited, export-import bank of bangladesh limited, first security islami bank limited) for the analysis considering the random sampling. because of the higher market share of commercial banks we gave commercial banks more weight. table 1. list of selected banks private commercial banks islamic commercial banks dbl ibbl dbbl eibbl ebl fsibl mtbl nccbl obl pbl the research used statistical software 'stata' for panel data analysis. this research used the model of fixed-effect (fe) and the model of random-effects (re) to evaluate the relationship between dependent variables and independents. the fe model and the re model have been used over time to evaluate the effect of the explanatory variables. in our study, the dependent variable is nonperforming loan ratio (npl) and lending rate (lr), loan to deposit ratio (ltd), bank size (bs) and statutory liquidity rate ratio (slr) are used as the independent variable. 3.1 description of variables 3.1.1 non-performing loan ratio (nplr) for non-performing loan, we found loans where the debtor refused to pay the scheduled payments for a specified time. we divide total non-performing loan by total loan to determine the nplr. 3.1.2 lending rate (lr) generally for banks, the lending rate is an interest rate used by banks for their customers who are borrowing the money from the bank. as at present, banks are using several products to increase their income from time to time. it is very difficult to find a single lr for a bank for the whole year. we have used interest income from loans/ total loans as a proxy for lending rates. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 79 3.1.3 loan to deposit ratio (ldr) ldr is used to access the liquidity condition of a bank. those banks are considered as strong banks that have a good liquidity condition. we have calculated the total loan divided by total deposit to find out ldr. 3.1.4 bank size (bs) all the 10 banks we have considered our listed banks. so we consider the paid-up capital of the banks. to avoid the extreme effects, we consider a log of paid-up capital. 3.1.5 reserve ratio (rr) all banks have to maintain a minimum portion of cash, gold or other liquid assets to meet the need of their net demand and time liabilities (ndtl). reserve ratio is said to be the ratio of these liquid assets to the demand and time liabilities. we have taken slr as reserve ratio. 3.2 equation panel data is used for analysis. the results are found by fixed effect and random effect models. model the generic equation as follows for pulled ordinary least square (ols) 𝑵𝑷𝑳𝒊𝒕 = 𝜷𝟎 + 𝜷𝟏𝑳𝑹𝒊𝒕 + 𝜷𝟐𝑳𝑻𝑫𝒊𝒕 + 𝜷𝟑𝑩𝑺𝒊𝒕 +𝜷𝟑𝑺𝑳𝑹𝒊𝒕+𝜺𝒕 (1) for determining the fixed effect generic equation was used as below 𝒀𝒊𝒕 = 𝜷𝟏𝑿𝒊𝒕 + 𝜶𝒊 + 𝒖𝒊𝒕 (2) where 𝜶𝒊 (i=1….n) = unknown intercept for each entity (n entity-specific intercepts). 𝒀𝒊𝒕= dependent variable (dv) in the model where i = entity and t = time. 𝑿𝒊𝒕= one independent variable (iv), 𝜷𝒊= coefficient for that iv, 𝒖𝒊𝒕 = error term and for the random effect, we have used 𝒀𝒊𝒕 = 𝜷𝑿𝒊𝒕 + 𝜶 + 𝒖𝒊𝒕 + 𝜺𝒊𝒕 (3) 4. analysis and findings 4.1 pooled ols estimation to understand the relation with the overall picture of the independent variables we run the pooled ols for all the banks. the result was not very much convincing. table 2. the output of pooled ols number of obs 50 source ss df ms f( 4, 45) 3.34 prob > f 0.01 model 0.05 4 .01 r-squared 0.22 residual 0.18 45 .00 adj r-squared 0.16 root mse 0.06 total 0.24 49 .00 nplr coef. std. err. t p>t [95% conf. interval] bs -0.01 .00 -2.25 0.02 -0.02 -0.00 lr -0.01 .68 -0.02 0.98 -1.39 1.36 ltd 0.05 .11 0.45 0.65 -0.17 0.27 rr -0.06 .38 -0.18 0.85 -0.83 0.70 _cons 0.15 .15 0.94 0.35 -0.17 0.47 most of the dependent variables are not significant and also the coefficient is not explaining the relations properly. it is expected. because the pooled ols estimation is one of the ols techniques which runs on panel data. therefore all different copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 80 effects were ignored individually. for this reason, a lot of basic assumptions have been violated, such as orthogonality of the error term. therefore, the result is not very much accurate. so we have tried to find the issue and try to find a suitable model for the data. 4.2 fixed effects model we have tested the heteroscedasticity and normality of the data and have found that those are not as good expected. so we address the issue and then run the fe model where we have found the below result: table 3. the output of fixed-effects model fixed-effects (within) regression number of obs = 50 group variable: idbank number of groups = 10 r-sq: within = 0.36 obs per group: min = 5 between = 0.26 avg = 5.0 overall = 0.22 max = 5 f(4,36) = 5.07 corr(u_i, xb) = -0.99 prob > f = 0.002 nplr coef. std. err. t p>t [95% conf. interval] bs 0.27 0.09 2.98 0.005 .08 .46 lr 1.58 0.38 4.12 0.000 .80 2.37 ltd 0.16 0.08 1.92 0.063 -.00 .32 rr 3.05 1.15 2.65 0.012 .71 5.39 _cons -3.13 0.92 -3.38 0.002 -5.01 -1.25 sigma_u 0.79 sigma_e 0.02 rho 0.99 (fraction of variance due to u_i) f test that all u_i=0: f(9, 36) = 28.44 prob > f = 0.00 all the variables are positively related to the nplr though loan to deposit ratio plays an insignificant role to explain the npl of the banks in case of bangladesh. this is quite understandable as the loan to deposit ratio is not always maintained properly by the banks for making their plans to disburse the loans. the interesting result is that npl and bank size are positively related. that indicates the bigger the bank the more npl they have. it is rejecting the theory that big banks are more efficient. in the concept of bangladesh big banks have more npl as they have given a big amount of bad loans. that is a direct effect of inefficiency. loan to deposit ratio has a positive impact as per literature (wood & skinner, 2018). the justification regarding this is, if customers deposited more money in banks, the banks will perform more with their lending activities. but in our country, this activity is not performed efficiently. so npl increases. also when we have run the housman test we find that the fe is better than the random effect. 4.3 comparative analysis of conventional banks and islamic banks now we want to analyze the influence of these variables separately on commercial banks and islamic banks. so we have run two separate fe model to compare. the results are as below: table 4. fixed effect result for commercial banks only nplr coef. std. err. t p>t [95% conf. interval] bs .15 .03 4.21 0.000 .07 .22 lr .54 .14 3.86 0.001 .25 .82 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 81 ltd .03 .03 1.22 0.233 -.02 .10 rr .72 .41 1.74 0.004 -.13 1.57 _cons -1.67 .40 -4.14 0.000 -2.50 -.84 table 5. fixed effect result for islamic banks only nplr coef. std. err. t p>t [95% conf. interval] bs .49 .18 2.60 0.003 .08 .90 lr 2.98 .81 3.68 0.003 1.21 4.75 ltd .31 .18 1.72 0.112 -.08 .72 rr 6.39 2.62 2.44 0.001 .67 12.10 _cons -4.82 1.61 -2.98 0.011 -8.35 -1.29 from the result, we have seen that for both categories of banks separately, ltd has no significant impact on nplr. but in the case of other variables, those have a bigger effect on islamic banks than conventional banks. we have seen that bs and lr have almost four times higher impact on nplr of islamic banks compared to conventional banks. but the reserve ratio has the biggest difference compared to commercial banks. bangladesh's banking law may have a big impact on this. 4.4 hadri lm unit root test when we checked unit-roots through the hadri lm test for commercial banks, we find that we can accept the null hypothesis. this means we can say all panels are stationary. we also get the same result for the islamic banks though the p-value is smaller compare to conventional banks. so we can say our data is good. table 6. unit root test there is a common understanding about the islamic banks is islamic banks are less influenced by the bank's internal variables in case of npl. this study disagrees with this understanding and finds that islamic banks are even more influenced by the bs, lr, and rr compared to conventional banks. 5. policy implications and conclusion from this paper, we can say that the independent variables (bank internal variable) have some impact on nplr. but still, this impact is not as big as we think. also, the sample size both in sense of some banks and the observed year is small compared to the total industry. so we need to review the things before putting our final comments. in the case of comparing the ibs’ and cbs’ nplrs dependency on the selected variables, we have seen that islamic banks are more dependent on the variables compared to the commercial banks. but still, there is scope for further analysis. financial institutions in almost every country of the world face several risks of nonperforming loans; it is, however, prudent for these institutions to introduce monitoring mechanisms to follow up with the activities of borrowers. mcnulty et al. (2001) noted that npl is thought to be significant for individual bank performance and the economy’s financial setting. commercial banks islamic banks hadri lm test for nplr hadri lm test for nplr ho: all panels are stationary number of panels 7 ho: all panels are stationary number of panels 4 ha: some panels contain unit roots number of periods 5 ha: some panels contain unit roots number of periods 5 time trend: not included asymptotics: t, n -> infinity time trend: not included asymptotics: t, n -> infinity heteroskedasticity: not robust sequentially heteroskedasticity: not robust sequentially lr variance: (not used) lr variance: (not used) statistic p-value statistic p-value z 2.38 0.008 z 3.16 0.000 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 82 commercial banks are very disposed to the default risk from borrowers for the nature of their business. to reduce the bank risk, practical credit risk assessment and the creation of enough provisions are very important. the security of the fund funds of commercial banks should be taken care of from getting too much profit from risky investments. any kind of diversion of loan policy should be restricted, which may reduce the non-performing loan. 6. scope for further research this study has considered only four independent variables to define relationships. in a further study increased number of variables (i.e., the impact of credit information sharing, credit officers' demographic attributes) can be used to explain the model. we chose only five years of study. the paper, however, suggests that a study be done to increase the time under study. moreover, all the listed banks can be taken into consideration to achieve a more significant result. references adeusi, s. o., akeke, n. i., adebisi, o. s., & oladunjoye, o. (2014). risk management and financial performance of banks in nigeria. risk management, 6(31). adhikary, b. k. (2006). nonperforming loans in the banking sector of bangladesh: realities and challenges. bangladesh institute of bank management, 4(26), 75-95. akter, r., & roy, j. k. (2017). the impacts of non-performing loan on profitability: an empirical study on banking sector of dhaka stock exchange. international journal of economics and finance, 9(3), 126-132. awuor, f. (2015). effects of selected bank specific factors on none performing loans amongst commercial banks in kenya. unpublished mba project. bhattarai, y. r. (2016). effect of non-performing loan on the profitability of commercial banks in nepal. prestige international journal of management and research, 1-9. caprio, g., & klingebiel, d. (2002). episodes of systemic and borderline banking crises. managing the real and fiscal effects of banking crises, world bank discussion paper, 428, 31-49. espinoza, r. a., & prasad, a. (2010). nonperforming loans in the gcc banking system and their macroeconomic effects (no. 10-224). international monetary fund. fofack, h. l. (2005). nonperforming loans in sub-saharan africa: causal analysis and macroeconomic implications. the world bank. gorter, n., & bloem, m. (2002). the macroeconomic statistical treatment of npls. publication of the organization for economic corporation & development. haron, s. (2004). determinants of islamic bank profitability. global journal of finance and economics, 1(1), 11-33. hu, j. l., li, y., & chiu, y. h. (2004). ownership and nonperforming loans: evidence from taiwan's banks. the developing economies, 42(3), 405-420. karim, m. z. a., chan, s. g., & hassan, s. (2010). bank efficiency and non-performing loans: evidence from malaysia and singapore. prague economic papers, 2(1), 118-132. kateregga, s. k. 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(2012). bank‐specific and macroeconomic profitability determinants of islamic banks. qualitative research in financial markets, 4(2/3), 255-268. mcnulty, j. e., akhigbe, a. o., & verbrugge, j. a. (2001). small bank loan quality in a deregulated environment: the information advantage hypothesis. journal of economics and business, 53(2-3), 325-339. muriithi, m. w. (2013). the causes of non-performing loans in commercial banks in kenya (doctoral dissertation, university of nairobi). mahmudur, r. q. (2012). all about non-performing loans: the bangladesh scenario. the financial express, november. rahman, b., & jahan, n. (2018). roots of non-performing investments (npis) in islamic banks of bangladesh: an empirical study. world review of business research, 8(3), 12-23. salas, v., & saurina, j. (2002). credit risk in two institutional regimes: spanish commercial and savings banks. journal of financial services research, 22(3), 203-224. tesfaye, t. 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(2019). bad loans soar. retrieved from: https://www.thedailystar.net/frontpage/bangladesh-bank-reportsdefaulted-loans-soar-1755172. https://thefinancialexpress.com.bd/views/views/the-current-state-of-the-banking-industry-in-bangladesh-556380055?fbclid=iwar3zfnn3rpcd5ddgxsxoifusvynkwynexanb8epcrpop0pulzyn4o1hjo28 https://thefinancialexpress.com.bd/views/views/the-current-state-of-the-banking-industry-in-bangladesh-556380055?fbclid=iwar3zfnn3rpcd5ddgxsxoifusvynkwynexanb8epcrpop0pulzyn4o1hjo28 https://www.thedailystar.net/frontpage/bangladesh-bank-reports-defaulted-loans-soar-1755172 https://www.thedailystar.net/frontpage/bangladesh-bank-reports-defaulted-loans-soar-1755172 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 83 wallich, c. i. (2006). status of non-performing loans in banking sector in bangladesh. 1st edition. waweru, n. m. (2009). commercial banking crisis in kenya: causes and remedies. (unpublished mba thesis). new york university, united states. waweru, n., & spraakman, g. (2012). the use of performance measures: case studies from the microfinance sector in kenya. qualitative research in accounting & management. wheelock, d. c., & wilson, p. w. (2000). why do banks disappear? the determinants of us bank failures and acquisitions. review of economics and statistics, 82(1), 127-138. wood, a., & skinner, n. (2018). determinants of non-performing loans: evidence from commercial banks in barbados. the business & management review, 9(3), 44-64. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). indian journal of finance and banking; vol. 2, no. 2; 2018 issn 2574-6081 e-issn 2574-609x impact factor: 3.8 published by centre for research on islamic banking & finance and business, usa 42 a study on evaluation of capital structure g.d.v. kusuma 1 1 department of mba-sree kavitha institute of management, india. correspondence: dr. g.d.v. kusuma, department of mba-sree kavitha institute of management, india. received: october 20, 2018 accepted: october 28, 2018 online published: november 2, 2018 abstract capital is the back bone of any organization. everyone should utilize the capital in a proper way; otherwise their business will be washed away from the market. the present paper is an attempt to present the capital structure of my home industries ltd. in this paper the researcher/s made an attempt to evaluate the capital structure by considering different elements like debt and equity. keywords: capital, debt, evaluation, equity, structure, my home industries ltd., hyderabad. 1. introduction the financial decisions taken by the management of the companies is highly important while determining the optimal capital structure. it is responsibility of the management to design their capital structure in a way to maximize their firm value. however, firms have a different level of leverage and managers try to achieve the best set to attain an optimal capital structure. mm (1958) argues that under very restrictive assumptions of perfect capital markets, investor’s homogenous expectations, tax free economy and no transaction cost, capital structure is irrelevant in determining firm value. the present paper is arranged as follows. the next session presents the methodology of the study, and the last session projects the empirical results of the analysis, findings and suggestions that are based on the results of the study. primary data: primary data is data that has not been previously published, i.e., the data is derived from a new or original research study and collected at the source. secondary data: this type of data is generally taken from newspapers, magazines, bulletins, reports, journals etc. the present study is entirely based on secondary data i.e. financial reports of the company. 2. objectives of the study  to study different sources of finance available to the firm for its operations.  to study the eps under different years i.e. from 2010-11 to 2014-15.  to measure the liquidity of the firm through ratios  to project how to take account of a firm’s financing mix in evaluating investment decisions 3. results and discussion table -1 capital structure of my home industries limited (rs. in lakhs) particulars 2010-11 2011-12 2012-13 2013-14 2014-15 i. authorized capital equity shares 550 550 550 550 550 ii. issued sharers 550 550 550 550 550 iii. reserves &surplus www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol.2, no.2; 2018 43 1.share premium 1487.5 1487.5 1487.5 1487.5 1487.5 2.capital reserve 48.18 48.18 48.18 48.18 48.18 3.capital investment subsidy 30 30 30 30 30 4.general reserve 6059.7 4848.93 5848.93 5998.93 6228.93 the above table illustrates about the capital structure of the company from 2010-11 to 2014-15. the equity shares of the company are constant during the entire period of the study i.e. (rs. 550 lakhs), from 2010 – 2015, apart from that the capital reserves of the company are also consistent during the study period. the company is maintaining its reserves &surplus from 2010-2015 including share premium and capital reserves. the company’s general reserve is changing from year to year and the highest gr shows in the financial year 2014-15 i.e. rs. 6228.93lakhs. table – 2 debt capital of the company (rs. in lakhs) loans & funds 2010-11 2011-12 2012-13 2013-14 2014-15 i. secured loans a. term loans & w.c. borrowing from bank 7996.6 8228.6 10280 13077 15284 ii. unsecured loans 2283.4 2093.3 1432.1 4047.5 877.7 from the above data it is evident that the company’s secured loans are increasing continuously during the period of the study i.e. from 2010-15. it also projects that the unsecured loans are not consistent during the years 2010-15. these unsecured loans are changing from year to year. during the years 2013-15, the values of secured loans are very high (i.e. rs.13077 lakhs & rs. 15284). where as the unsecured loans are showing extremely high during the year 2013-14 i.e. rs. 4047.5 table – 3 growths of owners funds (rs. in lakhs) years equity share capital reserve & surplus net worth 2010-11 550 7685 8235 2011-12 550 6470 7020 2012-13 550 7559 8109 2013-14 550 8353 8903 2014-15 550 9225 9775 2010-11 550 7685 8235 the above represents the growths of owner’s funds for the years 2010-15. the company’s equity share capital is constant during the entire period of the study i.e. 2010-11 to 2014-15. it is observed from the above data that the net worth of the company is gradually increasing from 2011-15 (i.e. from rs. 7020 to rs. 977 lakhs), which indicates the good performance of the company. this indicates the earnings and savings potentiality of the company, and the company is suggested to maintain the same in the future. table – 4 growth of debt capital (rs. in lakhs) year secured loans unsecured loans total debt 2010-11 7996.55 2283.43 10279.98 2011-12 8228.56 2093.25 10321.81 2012-13 10280.35 1432.13 11712.4 2013-14 13077.04 4047.47 17124.51 2014-15 15284.48 877.71 16162.19 the above table represents the growth of debt capital of the company. the company’s debt capital is increased during the period of the study. it is not a good sign to the company because it increases the company’s risk. this shows that the liquidity position of the company is not in a good position and hence the company has to reduce its debt capital in order to maintain the desirable norm of current ratio i.e. 2:1 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol.2, no.2; 2018 44 table5 debt equity ratios (rs. in lakhs) years debt equity (net worth) ratio 2010-11 10279.98 8234.64 1.24838 2011-12 10321.81 7020.11 1.47032 2012-13 11712.48 8108.72 1.44443 2013-14 17124.51 8903.24 1.92340 2014-15 16162.19 8775.21 1.65340 it is clear from the above depicted graph that debt equity ratio of the net worth was approximately 1.24 times in the year 2012. and it is increased to 1.92 times in the year 2013-14 and suddenly decreased 1.65 in the year 2014-15. from this it is clear that debt equity ratio is not consistent and it is in unpredictable manner. table – 6 interest coverage ratio (rs. in lakhs) year ebit int i.c.r 2010-11 3352.86 1118.37 2.998 2011-12 3385.02 1038.45 3.260 2012-13 4240.58 896.83 4.728 2013-14 4185.45 1082.33 3.867 2014-15 4269.01 1159.13 3.683 the above information projects the interest coverage ratio of the company. interest coverage ratio has been calculated for the years 2010-11 to 2014-15. the calculated icr is very low from the starting year i.e. 2011-12 (2.998 lakhs), it is increased in the year 2012-13 (4.728 lakhs), and in the years 201314 and 2014-15 it was decreased (3.683 lakhs). table – 7 return on networth (rs. in lakhs) years net profit net worth r.o.n % 2010-11 781.47 8234.64 0.09 9 2011-12 888.74 7020.11 0.13 13 2012-13 1398.84 8108.72 0.17 17 2013-14 1042.71 8903.24 0.12 12 2014-15 1122.61 9775.15 0.11 11 the above chart illustrates the net worth position of the company for the years 2010-11 to 2014-15. here net profit & net worth bas been taken for calculating the ron. during the period of the study the ron is in fluctuating manner and is lowest in the year 2010-11 i.e. 9% and it is highest in the year 2012-13 i.e. 17%. table – 8 earning per share (rs. in lakhs) years net profit no of shares e.p.s % 2010-11 781.47 55,00,000 142.09 14.21 2011-12 888.74 55,00,000 161.59 16.16 2012-13 1398.84 55,00,000 254.33 25.43 2013-14 1042.71 55,00,000 189.58 18.96 2014-15 1122.61 55,00,000 204.01 20.04 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol.2, no.2; 2018 45 from the above table it is observed that net worth earnings per share in the year 2010-11 is (142.09), it is increased in the year 2012-13 (254.33), finally it decreased in the year 2013-14 (204.1) and there is a slight increase in the year 2014-15. 4. findings  debt equity ratio reveals that the company employed more amount of debt for raising the funds. the debt equity ratio was approximately 1.24 times and increased to 1.92 times in the year 2014-15 which is not a good sign to the company.  the interest coverage ratio in the year 2010-11 is 2.99 indicating that the firm has very low debt servicing capacity. the interest coverage ratio is high in the year 2012-2013 and indicates that the firm has sufficient earning to cover the interest charges. company’s ability to service the debt has increased over the period of study.  the return on net worth is high in the year 2011-13 by 17% indicating that the firm earned greater returns on their investment.  the company’s turnover position is gradually increasing every year from 2010-11 to 2014-15.  the net profit of the firm is growing during the period of the study and indicates the good operational efficiency of the firm.  the net worth of the firm is in increasing manner for the years 2010-2013, and it is in fluctuating manner from 2013 -2014 onwards. 5. suggestions  the company has to maintain the optimal capital structure so that it can contribute to the wealth of the shareholders in the coming years.  my home industries should exercise more to control over its outside purchases and overheads which have effect on the profitability of the company.  the company is advised to increase its profitability in order to meet various expenses.  my home industries ltd., reserves are increasing every year. therefore proper utilization of these reserves should be done by the management of the company, by giving bonus shares to the existing shareholders etc. references arbabiyan, ali-akbar & safari, mehdi, (2009), the effects of capital structure and profitability in the listed firms in tehran stock exchange, journal of management perspective, 33: 159-175. abor,j (2005), the effect of capital structure on profitability : an empirical analysis of listed firms in ghana, journal of risk finance, 6: 438-447. boodhoo, roshan (2009), capital structure and performance of mauritius listed firms: theoretical and empirical evidences, online web http://www.nyu.edu/classes/keefer/evergreenenergy/boodhoorebook.pdf bradley m. jarell ga, & kim eh (1984), on the existence of an optimal capital structure: the theory and evidence, .journal of finance, 39: 857-880. berger, a & bonaccorsi di patti, e (2006), capital structure and firm performance: a new approach to testing agency theory and an application to the banking industry, journal of banking and finance, 32: 1065-1102. chakraborty, i., (2010). capital structure in an emerging stock market: the case of india, research in international business and finance, 24: 295-314. champion, d. 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(2008), government ownership and performance: an analysis of listed companies in malaysia, corporate ownership and control, 6(2): 434-442. 166 mahfuzah salim and raj yadav / procedia social and behavioral sciences 65 ( 2012 ) 156 – 166 roden, d., lewellen, w. (1995), corporate capital structure decisions: evidence from leveraged buyouts, financial management, 24: 76-87. san, o.t. & heng, t.b. (2011), capital structure and corporate performance of malaysian construction sector, international journal of humanities and social science, 1(2): 28-36. 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 | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 109 liquidity and asset pricing: evidence from indian stock market sharad nath bhattacharya associate professor indian institute of management, shillong, india e-mail: snb@iimshillong.ac.in mousumi bhattacharya assistant professor indian institute of management, shillong, india e-mail: msb@iimshillong.ac.in sumit kumar jha research fellow indian institute of management, shillong, india e-mail: sumit.fpm14@iimshillong.ac.in abstract in this research article, we present a liquidity premium based asset pricing model and test it in the indian stock market. using high-frequency data of stocks listed in the national stock exchange, we show that observed illiquidity has a significant negative impact on realized stock returns even after controlling for the up and down market, volatility, and effects of derivatives trading. the illiquidity measure is modified for its time variations, and then the modified measure is used to assess its impact on returns. using a cross-section of stocks, we show the year wise results of the model and extend it to show that it has some role in explaining returns across industries. findings show that the down market has contemporaneous systematic risk at higher levels, and the market risk premium is higher in down markets. finance, utility and real estate sector companies have higher systematic risk in both up and down market and investors of these sectors has relatively higher expected higher returns in comparison to companies from the rest of the segments. 1. introduction liquidity is an underlying concept without a universal definition. the most accepted notion of liquidity is the capability of an asset to trade in a market with minimal price disruption. a liquid market is expected to have a considerable number of orders both sides, i.e. above and below the last traded price of an asset. investors of an illiquid asset face illiquidity risk, which is the possible inability to exit from the investment without incurring significant transaction costs. risk-averse investors are expected to demand an illiquidity premium to undertake such illiquidity risk and invest in illiquid assets. hence return on any asset is expected to include some illiquidity premium. in a seminal work (amihud & mendelson, 1986) found that excess returns include a premium for the quoted spread (bid-ask spread divided by price) at a declining rate, thus emphasizing a concave relationship due to clientele effect. datar et al. (1998) evidence that liquidity proxies like trading volume explains stock returns and conclude that the relationship between the size of an asset and the return generated out of that asset reflects the relationship between liquidity and return. garleanu & pedersen (2007) and brunnermeier & pedersen (2009) supported the idea that there is an asymmetric influence of illiquidity on different states of the market. they supported this on the grounds of liquidity tremors, margin-induced price spirals, and tighter risk management by institutions. garleanu & pedersen (2011) noted the importance of funding constraints in influencing risk and return dynamics. hameed et al. (2010) evidenced that enormous negative returns have a stronger relationship with variations in liquidity measures than positive market returns. it is argued that liquidity premium is dependent or conditional upon the state of return, and an investor is asymmetrically concerned about liquidity during periods of positive and negative returns. a market participant is more worried about the informational role of illiquidity during periods of negative returns for asset pricing than the periods of positive returns. alternative theories supporting critical roles of illiquidity in explaining asset returns generally lay their foundation on supply-side arguments. proponents of supply-side arguments evidence that during negative returns, the financial intermediaries especially market makers are impacted by their margin constraints due to a reduction in the value of the collaterals forcing them to liquidate their position and inducing an illiquidity spiral. liquidity measures also suffer from the day of the week effect, month effect, holiday effect, and are also affected by global keywords: asset pricing, down market, illiquidity measure, liquidity risk, liquidity premium, stock market. jel classifications: g10, g12. mailto:sumit.fpm14@iimshillong.ac.in copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 110 or local events (chordia et al., 2001a). chordia et al. (2001b) studied the time variations in liquidity, and they foresighted the role of unexpected liquidity in asset pricing models. they stressed the importance of understanding of nature of the relationship between liquidity and stock returns to improve the level of market participant's confidence in the stock market. acharya & pederson (2005) showed that liquidity risk is priced. they argue that both individual stock level and marketlevel liquidity have significant explanatory power in predicting stock returns and an adverse shock to a stock's liquidity leads to lower realized return. it is debated that measures of liquidity may have some influence in determining the level of liquidity of firms as well as of markets of different asset classes. the transaction cost-related measures like bid-ask spreads look for order processing, and execution costs present in the markets. in contrast, volume-based measures capture the number of trades or trading volume and try to understand the depth and breadth of the markets. the price impact measures changes in prices caused by the sudden changes in volume or imbalance of orders in the market. the effect of the arrival of new information is captured by the measures of resiliency. some measures are more suitable for low-frequency data while others are more robust when they are constructed using high-frequency data. across the choices available (amihud, 2002) measure of illiquidity is one of the most widely used measures across both the emerging and developed markets. ahn et al. (2018) provide a good summary of various liquidity measures available in the literature and document those influential in explaining stock returns in emerging markets. this research article evidences the contemporaneous relationship between indian security returns and illiquidity factor. the association exists even after controlling for local and global factors that are expected to influence stock returns. over the past decade, the social and economic prospects of india have improved, and it is not only one of the fastest-growing economies but also has one of the largest stock markets in the world. we use 30 minutes of stock price data, and we show that stock prices have a contemporaneous relation with market return, illiquidity, open interest, and volatility. we modify the illiquidity measure of (amihud, 2002) for time-varying effects and show that unexpected illiquidity negatively impacts stock return in the indian market. we evidence that market premium is higher during down market compared to up markets. we also show that an increase in volatility does not necessarily lead to an increase or decrease in coefficient of market risk premium (a measure of systematic risk) but an increase in open interest in the market increases in the coefficient of market risk premium. the remainder of the research article is prepared as follows. in section 2, we discuss the relevant literature, while in section 3, we describe the data and methodology. section 4 presents the results and findings. section 5 concludes the paper. 2. literature review in developed nations enormous amount of research on liquidity risk premium is available (amihud & mendelson, 1986; chordia et al., 2001b; acharya & pedersen, 2005) but the same for emerging nations are comparatively limited. numerous authors evidenced a significant positive association between expected security returns and illiquidity in us markets (datar et al., 1998; amihud, 2002). chordia et al. (2001a) evidence that time-varying illiquidity has a negative effect on stock returns in the us. using a price impact measure of liquidity (amihud, 2002) finds that realized liquidity risk and expected returns are positively related. however, unanticipated illiquidity is negatively related to excess returns in the us. easley et al. (2002) use volume and turnover as a measure of liquidity to support an adverse effect of liquidity on returns in developed stock markets. pástor & stambaugh (2003) show that stocks with higher sensitivities to market liquidity have higher returns on us stock exchanges; thus, supporting that market liquidity is an essential factor in asset pricing. extending the standard capital asset pricing model (capm) to include security-specific and market-level liquidity premiums (acharya & pedersen, 2005) explain how liquidity variations result in low realized returns and high expected returns using the data of nyse and amex. lee (2011) shows that covariance of a stock's illiquidity and us market return hurts the expected return. artikis (2018) showed that liquidity is a priced factor for asset pricing in the uk. findings for emerging markets often contrasts the conclusion from the developed markets. in a causality study across 27 emerging stock markets (jun et al., 2003) observe higher market illiquidity does not always lead to a higher return. dey (2005) notes that turnover, as a liquidity measure, positively affects stock returns in the emerging market, but it is no longer significant in developed markets. one of the issues with emerging markets is the availability of data for the construction of liquidity proxies, and most of the emerging markets are order-driven markets compared to their quote-driven peers in the developed world. amihud (2002) build an illiquidity measure (ai) that uses the ‘absolute value of the daily return-tovolume’ ratio to capture the price impact of liquidity. this measure allowed the study of the time-series effects of illiquidity shocks on realized stock returns. using ai (bekaert et al., 2007) describe a negative return-illiquidity relationship in 18 emerging markets. hearn (2010) reports the existence of illiquidity factor in stock markets of saarc countries like bangladesh, pakistan, and india but not in sri lanka. however, he could not support any time trends or unexpected changes in illiquidity. narayan & zheng (2011) conducted a study on the chinese stock market. they found mixed results on the relationship between liquidity and returns. they observe a negative relationship between stock return and liquidity, but the negative relation is more rooted in the shanghai stock exchange compared to the shenzhen stock exchange. lee (2011) and liang & wei (2012) added another dimension to the study of illiquidity-return nexus in emerging markets where they supported a more significant role of local illiquidity risk in emerging stock markets. in developed markets, they argued that global illiquidity risks outweigh local illiquidity risk. existence of more substantial illiquidity premium in the emerging copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 111 markets compared to their developed peers are reported by (amihud et al., 2015). bhattacharya et al. (2016) report that multiple dimensions of liquidity collectively explain variations in the indian stock market. bhattacharya et al. (2019) report that market liquidity and returns exhibit both long-term and short-term relationships in india and added that trading activity and market resiliency (measured by market efficiency coefficient) affect the stock market positively while the spread has a negative influence on returns. kumar & mishra (2019) provide empirical results of (acharya & pedersen, 2005) model. they used (fama & macbeth, 1973) regression in the indian context and shows that liquidity is a priced factor in indian market. stereńczak et al. (2020) investigated the influence of the absence of liquidity across frontier markets which are expected to be less integrated with other markets. they used a battery of liquidity proxies and covered both pre and post-global financial crisis period to conclude that there is no liquidity premium for investors investing in those stock markets. this finding is contrary to those observed in developed and emerging financial markets. the present work extends the earlier studies in the indian context. we build the daily measures of return and illiquidity using high-frequency firm-level data of the stocks consisting of the nifty500 to investigate the impact of illiquidity on returns during both up and down markets. we remove the time-varying components of ai to use the modified version of ai (ai.m) in the presence of global liquidity factors like market volatility (vix) and open interest as advocated by (donadelli & prosperi, 2012) in explaining stock returns. 3. data and methodology the firms covered in the nifty 500 index for 2008 to 2017 were considered. the average return for each day for each stock is computed by aggregation of fourteen 30 minutes return for each day. the daily ai𝑖 is constructed using the relation 𝐴i𝑖 = average ( rt vt ⁄ ), where 𝑟𝑡 denotes return on stock on day t and 𝑉𝑡 represents the volume of the stock (in inr) traded in the national stock exchange on day t. the modified version of (amihud, 2002) measure (aim) is obtained as a residual of the equation i after controlling for the day of the week, month, holiday, and other critical financial events. aii,t = ∑ di,k 4 𝑘=1 . dk,t + ∑ ei.k 11 k=1 . mk,t + β1,i . ht + β2,i. dcyt + β3,i. spt + β4,i. att + aii,t m … (i) as regressors, we considered weekday dummies (dk,t); month dummy (mk,t); weekends or holiday dummy (ht); time trend variables (dcyt and spt ). dcyt variable is introduced to capture the impact of dotcom mania (ofek & richardson, 2003) that resulted in significant regulatory changes with time. dcyt is calculated as the difference between the current calendar year and the year 2000 (dotcom year). the year 2000 is replaced by the year of listing for a stock if it was not listed in 2000. spt is expected to capture the impact of the sub-prime crisis and is calculated as the difference between the current year and the year 2008 (replaced by the year of listing for those stocks not listed in 2008). algorithmic trading (att) is allowed to capture the effect of algorithmic trading started at nse on 4th april 2008. the residual aii,t m is interpreted as abnormal or unexpected illiquidity, which is existing in the stock market. next, we run our asset pricing model as pooled ols: ri,t − rf,t = αi + βi,m(rm,t − rf,t) + βi,down(rm,t − rf,t). ddown i,t + βi,up(rm,t − rf,t). dup i,t + γi. aii,t−1 m + θi,m[(rm,t − rf,t). cvix,t] + φi,m[(rm,t − rf,t). coi,t] … . (ii) ri,t − rf,t is the excess return over risk-free rate while ri,t − rf,t represents the market risk premium. the risk-free rate is the annualized treasury bill rate applicable at time t. based on the suggestion of (donadelli & prosperi, 2012) open interest and volatility index are included as the two global liquidity factors. open interest is the number of outstanding derivatives contracts for options or futures contracts that have not been settled on the national stock exchange. both the open interest (oi) and volatility index (vix) values for the indian stock market are obtained from bloomberg. cvix,t and coi,t denotes changes in vix and oi respectively from period t-1 to t, ddown i,t and dup i,t denotes dummy variables to accommodate asymmetry. the dummy variable ddown i,t (dup i,t) is 1 if the ri,t is less (more) than 1.5 standard deviation of its unconditional mean. for the remaining values of ri,t, the dummy variables value is 0 (neutral market). 4. result the findings are presented in table i and table ii that reports market risk premium coefficients in three market scenarios (down, neutral, and up) through βdown, β, and βup respectively where all three are statistically significant. the, β + βdown (β + βup) represents the estimate of the sensitivity towards the market risk premium in down (up) market. https://www.tandfonline.com/doi/full/10.1080/23322039.2019.1573471 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 112 table i. year-wise parameter estimates of equation ii year 𝜶 𝜷 𝜷up 𝜷down θ φ γ all years -0.00423*** [0.0001] 0.9645*** [0.0017] 0.1025*** [0.002] 1.5*** [0.0019] 0.0454*** [0.037] 11.10*** [0.0482] -0.3134*** [0.065] 2008 -0.0187*** [0.0005] 0.8036*** [0.0064] -0.1138*** [0.0088] 1.314*** [0.0071] -0.0365*** [0.01] 9.119*** [0.1394] -0.3652* [0.2172] 2009 -0.0097*** [ 0.0003] 0.896*** [ 0.004] -0.1682*** [ 0.0052] 1.4855*** [ 0.0047] 0.1086*** [0.0181] 13.2908 [0.1172] -0.208** [ 0.0967] 2010 0.0044*** [ 0.0011] 1.0712*** [ 0.0147] 0.2371*** [ 0.0153] 1.5665*** [ 0.015] 0.087*** [ 0.0165] 11.3031*** [ 0.3981] 1.4474* [ 0.7476] 2011 0.0054*** [ 0.001] 1.0867*** [ 0.0118] 0.3147*** [ 0.0126] 1.5806*** [ 0.012] 0.0132 [ 0.0144] 12.2402 [ 0.3178] -1.2353*** [ 0.3425] 2012 -0.001 [ 0.0014] 1.0005*** [ 0.0166] 0.2182*** [ 0.0171] 1.5384*** [ 0.0169] 0.02 [ 0.0155] 9.8357*** [ 0.4582] 0.1912 [ 0.2725] 2013 -0.0057*** [ 0.0007] 0.9485*** [ 0.009] 0.1419*** [ 0.0095] 1.5029*** [ 0.0094] 0.0581*** [ 0.0153] 10.3473*** [0.2717] -0.416** [0.207] 2014 0.0083*** [ 0.0012] 1.1115*** [ 0.0146] 0.3351*** [ 0.015] 1.6332*** [ 0.0147] 0.0878*** [ 0.0126] 12.6862*** [0.4212] -0.1201 [ 0.3023] 2015 0.0145*** [ 0.0013] 1.206*** [ 0.0171] 0.3388*** [ 0.0177] 1.7472*** [ 0.0176] 0.0215 [ 0.0148] 14.9418*** [ 0.494] -2.4331 [ 1.577] 2016 0.0073*** [ 0.0007] 1.1173*** [ 0.0092] 0.2297*** [ 0.01] 1.6802*** [ 0.0096] -0.0088 [ 0.0169] 13.0725*** [ 0.3355] -56.3764*** [ 13.5369] 2017 0.0163*** [ 0.0012] 1.2623*** [ 0.018] 0.2728*** [ 0.0186] 1.971*** [ 0.0184] 0.2209*** [ 0.0248] 18.9006*** [ 0.7568] 3.7834 [ 13.531] table i presents the parameter estimates of equation ii. [.] shows the standard errors. *,**, and *** shows significance at 90%, 95% and 99% respectively. table i shows that aim co-efficient γ is significant and negative considering the entire period. by assuming that there is no association between market liquidity and corporate cash flow, it is established that unexpected illiquidity (aim) has an adverse influence on equity returns. following (amihud, 2002) we maintain that observed illiquidity raises expected illiquidity. furthermore, the compensation for an investor who accepts this expected illiquidity is reflected in higher expected returns and lower contemporaneous stock prices for the investors. downmarket beta (β + βdown) is consistently higher than upmarket beta (β + βup) in all the years. the down market has contemporaneous systematic risk at a higher level (measured by beta). this higher beta would lead to higher expected returns as investors would get into the market at lower levels (down market), making expected returns higher on the recovery of the market. the upmarket beta was lower than neutral beta during 2008 and 2009. it appears that pre-emptive actions by market regulators like sebi and rbi have some role in reducing the systematic risk during that time (subprime crisis and its aftermath). the yearly trends of varying marketing risk premium coefficient (beta) in different market conditions in the presence of the illiquidity factor is presented in figure 1. global liquidity factors coefficients θ (φ) is small (large), positive, and significant for the overall period. φvix turns negative and significant in 2008, 2009, and 2010 – that coincides with the years of government policy paralysis under the upa-ii regime in india. figure 1. trends of market risk premium sensitivity copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 113 next, we present the estimates from equation ii for industries. table 2. sector-wise parameter estimates of equation ii sector α β βup βdown φvix φoi γ cd -0.0062*** [ 0.0003 ] 0.941*** [ 0.0044 ] 0.0627*** [ 0.0051 ] 1.4939*** [ 0.0049 ] 0.0597*** [ 0.0094 ] 11.4521*** [ 0.1221 ] -0.5116*** [ 0.1181 ] cs -0.0117*** [ 0.0005 ] 0.8658*** [ 0.0062 ] 0.0139* [ 0.0074 ] 1.4245*** [ 0.0071 ] 0.0522*** [ 0.0134 ] 10.7922*** [ 0.1687 ] 0.2047* [ 0.1133 ] enr -0.0009 [ 0.0007 ] 1.0038*** [ 0.009 ] 0.1607*** [ 0.0114 ] 1.504*** [ 0.0104 ] 0.0206 [ 0.0196 ] 10.7814*** [ 0.2525 ] -234.4878*** [ 80.8294 ] fin 0.0004 [ 0.0003 ] 1.0216*** [ 0.004 ] 0.2015*** [ 0.005 ] 1.5088*** [ 0.0046 ] 0.0444*** [ 0.009 ] 9.82*** [ 0.1127 ] -2.653*** [ 0.6506 ] hc -0.0114*** [ 0.0004 ] 0.8692*** [ 0.0058 ] 0.0138** [ 0.007 ] 1.441*** [ 0.0069 ] 0.0531*** [ 0.0126 ] 11.5007*** [ 0.1604 ] 0.1803 [ 0.2682 ] ind -0.0029*** [ 0.0004 ] 0.9843*** [ 0.0046 ] 0.1201*** [ 0.0055 ] 1.525*** [ 0.0052 ] 0.0425*** [ 0.0101 ] 11.6142*** [ 0.1287 ] -0.6329*** [ 0.1426 ] it -0.0079*** [ 0.0005 ] 0.917*** [ 0.0067 ] 0.0369*** [ 0.008 ] 1.4783*** [ 0.0076 ] 0.0424*** [ 0.0146 ] 11.2432*** [ 0.1864 ] -45.4849*** [ 8.7994 ] mat -0.0038*** [ 0.0003 ] 0.9709*** [ 0.0042 ] 0.0996*** [ 0.005 ] 1.4941*** [ 0.0048 ] 0.0577*** [ 0.0091 ] 11.4719*** [ 0.1161 ] -0.3229 [ 0.24 ] re 0.007*** [ 0.0009 ] 1.1126*** [ 0.0112 ] 0.2303*** [ 0.0132 ] 1.6733*** [ 0.0121 ] -0.1246*** [ 0.0246 ] 9.8929*** [ 0.3232 ] -150.6398*** [ 37.2249 ] tel 0.001 [ 0.0011 ] 1.0411*** [ 0.0139 ] 0.1595*** [ 0.0166 ] 1.553*** [ 0.0156 ] 0.0003 [ 0.0306 ] 10.5171*** [ 0.3901 ] -21.023 [ 61.1635 ] util 0.0022*** [ 0.0006 ] 1.0444*** [ 0.0077 ] 0.2298*** [ 0.0096 ] 1.5323*** [ 0.0088 ] 0.068*** [ 0.017 ] 10.2193*** [ 0.223 ] -629.1086*** [ 92.4152 ] [.] shows the standard errors. *,**, and *** shows significance at 90%, 95% and 99% respectively. sector-wise regression coefficient estimates presented in table 2 reveal that finance, utility, and real estate exhibits maximum systematic risk (β) in normal market conditions. in an up-market too finance, utility and real estate sector have maximum β + βup compared to other industries. similarly, values of β + βdown reveal that in a down-market, investors of firms belonging to finance, industry, utility, telecom, and real estate sectors anticipate relatively higher returns in comparison to companies of the rest of eleven sectors. therefore, investments in utility and real estate firms give better excess returns to all three market conditions. it may be noted here that government is the majority shareholder in most of the utility companies. these are generally high dividend-paying companies, and they often play some role in reducing the fiscal deficit. the variation in risk premium can be visualized in figure 2. figure 2. trends of market risk premium sensitivities adjusted illiquidity co-efficient γ is negative and significant for aggregated data and sectoral data; it is negative and significant for all but three sectors (hc, mat, and tel). the global illiquidity factors (oi and vix) are impacting returns in indian stock market along with local liquidity parameter (γ). at least one of the three is significant in each year and each industry. to understand the interaction between market risk premium (mrp or rm-rf) and global liquidity factors (volatility index and open interest), we draw “interplots” as shown in figure 3. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 114 figure 3. interplot for an interaction effect between the coefficient of the market risk premium and “volatility” (left) and “open interest” (right) during 2008-2017 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 115 an increase in volatility leads to a decrease in the coefficient of market risk premium during 2008-2010, 2014, and 2016. 2008-2010 is the sub-prime crisis and recovery period from the crisis. in 2014 the indian stock market experienced high volatility during the general election. 2016 was the year of regulatory changes about financial inclusion initiatives by the government of india which culminated in demonization drive. millions of indians experienced banking for the first time during that period and banks used technology to reach a large number of customers in a short time. the findings are in line with (ang et al., 2009) where they supported the presence of broad non-diversifiable factors behind the phenomenon. supporting (bhuyan & chaudhury, 2005; fodor et al., 2011) figure 3 reveals that an increase in open interest in the market positively impacts returns through the increase in the coefficient of market risk premium. hence investors in the indian stock market need to keep an eye on the changes in open interest in the indian derivatives market as well as on changes in the volatility index. 5. conclusion the modified (amihud, 2002) measure is significant in explaining stock market liquidity in the indian context. it is successful in capturing variations in illiquidity fluctuations during periods of financial shocks like dotcom year, sub-prime crisis, and other india specific events. the realized excess stock returns are negatively related to contemporaneous illiquidity. in line with (amihud, 2002) we argue that higher illiquidity or ai raises expected illiquidity in the indian market resulting in lower stock prices. the negative impact of ai on excess return; i.e., significant and negative γ, in the indian stock market, appears to be the largest in 2016the year of financial inclusion drive by the indian government. the global illiquidity factors (volatility index and open interest) also impact returns in the indian stock market. the interaction effect of changes in volatility index with market risk premium shows an increase in volatility leads to a decrease in coefficient of market risk premium, especially during periods of exogenous shocks. the open interest impacts excess returns positively. the downmarket systematic risk is consistently higher than neutral and up-market systematic risks. across sectors, finance, industry, utility, telecom, and real estate has a higher systematic risk and thus higher expected return for investors in these sectors. modified (amihud, 2002) measure and consideration of this measure in portfolio construction strategies may help investors make better investment decisions. the study provides enough support in the lines of (claessens et al., 2012) and advocates liquidity-based asset pricing models for the financial markets. a further investigation into the different networks of liquidity risk after considering a large number of stocks for a relatively long period across different countries can give a possible future direction of research. references acharya, v. v., & pedersen, l. h. 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(2020). is there an illiquidity premium in frontier markets?. emerging markets review, 42, 100673. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess 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 | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 1 short-term economic indicators, stock market indexes and indian oil and gas stocks returns rama krishna yelamanchili phd associate professor of finance department of finance and accounting icfai business school, ifhe-hyderabad, india e-mail: yrk@ibsindia.org abstract in this paper we examine the causal relationship between short term economic indicators, stock market indexes and oil and gas stocks returns. we postulate that economic indicators positively and significantly cause and predict stock market indexes and oil and gas stock returns in short run. in addition, we posit that stock market indexes cause and predict oil and gas stock returns in short run. to test our hypotheses we chose four short-term economic indicators, two stock market indexes, and 10 oil and gas companies. our results indicate that there is no causal relationship between both short-term economic indicators and stock market indexes, and between short-term economic indicators and oil and gas stock returns. however, we receive support to one of our hypotheses that stock market indexes cause oil and gas stock returns. this causation is contemporaneous only and we observe that stock market indexes lack short-term predictive power of oil and gas stock returns. we conclude that investors need to be vigilant in considering coincident indicators as explanatory variables to predict stock returns. we suggest that stock market indexes are helpful to predict contemporaneous returns but not future returns of oil and gas stocks. 1. introduction traditionally, stock market index is viewed as a leading economic indicator and index of industrial production (iip) is viewed as a coincident or contemporaneous economic indicator. few studies examine the causal relationship between stock market index and industrial production. some argue that industrial production causes stock market movements, while others argue that stock market movements cause industrial production. we notice that most of the studies examine the relationship between economic factors and stock market movements rather than analyzing the influence of economic factors on individual stocks. we observe that there is limited research that examines the causal relationship between index of industrial production, stock market index, and individual stock returns. therefore, this paper attempts to see whether stock returns can be explained with economic indicators and stock market indexes, and also to see whether stock returns can be predicted with those economic indicators and stock market indexes. it can be seen that industrial production increases during economic expansion and decreases during recession and thus change in industrial production would signal a change in economy. similarly, stock market indexes reflect investors’ current and future expectations about companies’ performance. a positive movement in stock market represents investors optimistic outlook, and a negative movement indicates investors ’ pessimistic outlook. our proposition is that high industrial production raise companies sales and profits, enhances investors optimism and leads to positive movement in stock market which rightly result in rise in stock returns. we postulate that stock returns are influenced by stock market movements and also by iip which constitute the aggregate of manufacturing, mining, and electricity production. this paper assumes significance in the light that india is the world’s third largest consumer of primary energy and one of the fastest growing economies in the world. india produces less than one per cent of the world’s crude oil, however, consumes nearly five per cent of the world’s crude oil production. india imports 80 per cent of its crude oil. the oil and gas industry is among the eight core industries in india and plays main role in inducing decision making for all the other important industries of the economy. as a growing economy india’s appetite for energy is also growing. in addition, as indian households generating higher disposable incomes, there is significant boost in vehicle sales, transportation, tourism, and consumer goods. it is perceived that there exists a strong correlation between oil and gas companies’ financial performance and the iip, which is largely driven by economic activity. it is also observed that in the recent past there is a spurt in india’s natural gas consumption and natural gas imports. natural gas is seen to dominate the mainstay sectors of fertilizers, power, petrochemicals, steel, manufacturing industries, consumer goods manufacturers, domestic lpg and households. india’s economic growth is closely related to energy demand. therefore the need for oil and gas is projected to grow more, thereby making the sector quite favorable for investment. keywords: industrial production, oil companies, public sector undertakings, predictive analysis, stock markets. jel classification: b1, c32, d4, g2. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 2 in this paper, we argue that short-term economic performance indicators will influence stock market movements and stock returns. we also propose that short-term economic indicators and stock market indexes predict stock returns in short run. to examine our hypotheses we chose oil and gas stocks. we expect that positive economic indicators reflect increased business activity which in turn creates demand for oil and gas products because majority of industries directly or indirectly consume oil and gas in their production, operations and distribution of goods and services. furthermore, a high economic activity indicates higher income to workforce, which in turn boosts sales of certain goods and services like automobile, transportation etc., which in turn affect the financial performance of oil and gas stocks and their stock returns. in this paper we investigate the causal relationship between four short-term economic performance indicators namely, iip, manufacturing index, mining index, electricity index, and two broad market indexes namely s & p bse sensex, and stock market oil and gas sectorial index with 10 oil and gas companies of india during the period 2012-2019. our results show that there is no causal relationship between short-term economic indicators and broad stock market indicators and oil and gas stocks. similarly, we do not find any predictive power of short-term economic indicators. on the other hand we receive support for our hypothesis that stock market indexes cause oil and gas stocks returns. however, in contrast to our hypothesis stock market indexes fail to predict oil and gas stock returns in short-run during our study period. the reminder of the paper is organized as follows. section 2 presents literature review and theoretical relationship between index of industrial production, stock markets, and stock returns. in section 3 we present our data and methodology. section 4 presents empirical results. section 5 discusses our empirical findings. finally, section 6 provides a conclusion. 2. literature review over the past few decades, part of the literature has analyzed the relationship between oil prices and stock market returns, while another section of the literature has analyzed the connection between oil prices and index of industrial production. nevertheless, a small part of the literature has addressed the relationship among industrial production, the stock market indexes and oil and gas stocks returns. although changes in industrial production is considered an important factor for understanding the movements of stock markets and stock returns, there is still no definitive consensus regarding the relationship between iip, stock market indexes and individual stock returns. the role of industrial production as a variable in the determination of stock returns remains an open question, since the results of number of empirical studies do not definitively determine a significant and reliable statistical relationship between them (bilson et al., 2001; fama, 1981; gultekin, 1983). however, chen et al., (1986) identify industrial production as a vital factor for the determination of stock returns, while cutler et al., (1989) find that stock returns correlate significantly and positively with industrial production growth over the period 1926-1986. chen (1991) finds that macro-economic variables help forecast the market premium and future growth of the economy. stock & watson (2003) report that leading economic indicators forecast future performance of stocks returns, however, these forecasts are not consistent. comincioli (1996) suggests that stock prices do granger cause economic activity and stock market does predict the economy. flannery & protopapadakis (2002) report that macro-economic variables significantly increase stock market trading and have positive influence on stock returns. sadorsky (1999) find evidence for influence of oil prices on stock returns. they observed that oil prices and oil price volatility both play important roles in affecting stock returns. besides, errunze & hogan (1998) conclude that the volatility of industrial production has a negative impact on the stock market. chen et al., (1986) reveals that industrial production responds positively to shocks in stock returns. lamont (2001) finds that tracking portfolio returns track the growth rates of economic variable returns. ewing & thompson (2007); serletis & shahmoradi (2005) examine the relationship between industrial production and oil stocks. balver et al., (1990) show that iip is able to predict stock returns and find that the relationship between iip and stock returns is stronger with significant coefficient of determination. young (2006) finds there to be a statistically significant relationship using the seasonally adjusted index after a lag, with the explanation that increased industrial production leads to increased economic activity, thus resulting in higher earnings for companies. however, young (2006) find that for the sub-period from 1988-2000 indicate that industrial production can no longer predict stock returns which confirms the us economy’s transition from a manufacturing to a service oriented economy. chan et al., (1998) reports that the macroeconomic factors generally make a poor showing. in indian context patel (2012) reports stock market index granger cause index of industrial production (iip). in contrast, singh (2014) reports that indian stock market index does not granger cause index of industrial production. joshi (2015) reports that indian stock market influence the iip. the goal of this paper is to determine whether iip relate to oil and gas stock returns and can iip predict future stock returns. as well as we aim to assess whether relationship holds between stock market indexes and oil and gas stocks returns, and can market indexes predict future stock returns. 3. materials and methods 3.1 objectives and hypotheses in this paper we aim to measure causal relationship between economic indicators, stock market indexes and stock prices. to achieve this broad objective, we set specific objectives as, to examine the influence of short-term economic indicators on oil and gas stocks, to measure the impact of stock market indexes on stock returns, to evaluate the predictability of short-term economic indicators and stock market indexes of stock returns, and to understand the contemporaneous relationship among copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 3 oil and gas stocks to validate the objectives set in this paper, we postulate certain hypotheses as h1: short-term economic indicators have significant positive effect on stock returns, h2: stock market indexes have significant positive effect on stock returns, h3: short term economic indicators have short-term predictive ability of oil and gas stock returns. h4 stock market indexes have short-term predictive ability of oil and gas stock returns 3.2 data and methodology this paper uses a monthly data that spans from april 2012 to march 2019. using ols and var models, this paper analyzes the relationship among four short-term economic indicators, two stock market indexes, and 10 oil and gas stocks in india. the four short-term economic variables considered in this paper are index of industrial production (iip), manufacturing, mining, electricity index. index of industrial production (iip) has historically been one of the most wellknown and well-used short-term economic performance indicators. the all india iip is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period. the all india iip provides a single representative figure to measure the general level of industrial activity in the economy on a monthly basis. the iip is calculated with aggregation of manufacturing, mining, and electricity. manufacturing has 77.63% weightage; mining represents 14.37 % weightage, and electricity 7.99% weightage. use based classification of iip is primary goods (34.05%), capital goods (8.22%), intermediate goods (17.22%), consumer durables (12.84%), consumer non-durables (15.33%), and infrastructure / construction goods (12.34%). the two market indexes that are considered as explanatory variables in this paper are s & p bse sensex index, bse oil & gas index. we obtain list of oil and gas stocks from bse oil & gas index. this index has 10 oil and gas stocks listed in bombay stock exchange of india (bse).the 10 oil and gas stocks considered in this paper has 90 per cent of market share in refining, sales and distribution of petroleum products, natural gas, and lubricants. these companies cater oil and gas needs of all market segments in the country. of these 10 stocks seven are public sector units and three are private companies. four of the public sector units (bharat petroleum corporation limited (bpcl), hindustan petroleum corporation limited (hpcl), indian oil corporation (ioc), oil india limited (oil), are in the business of refinery, sales and distribution; two (gas authority of india limited (gail), oil and natural gas corporation (ongc) are in exploration and refinery of oil and natural gas; and one (indraprasta gas limited, igl) is in refinery and distribution of natural gas. one of the private companies (castrol) is in exclusive marketing of lubricants and one (petronet) is in production and distribution of natural gas, and the third one (reliance industries limited, ril) is a conglomerate. we source monthly data of short-term economic indicators from the indian government’s ministry of statistics and programme implementation database, whereas, market indexes data and stock prices data are taken from bse official website. this period (2012-2019) is specifically chosen due to change in base period of short-term economic indicators. in india iip and related indexes are available since 1937 and the base year changes occasionally to reflect current economic and market conditions. recent change in base-year happened in 2012. economic indicators considered in this study are measured on 100 points index, market indexes are measured on free-float market capitalization of index components in points and stock prices are measured in indian rupee. initially we run analysis on raw data and later on we calculate log returns of all the variables considered in this paper. 4. empirical results table 1 reports descriptive statistics of short-term economic indicators and market indexes on their raw data. in five variables skewness is positive and near to zero and excess kurtosis values is less than 3, in electricity index skewness is negative and excess kurtosis is less than 3. depending skewness and kurtosis the normality condition is not rejected at 5% significance level for all the series. we then proceed to check the normality of all series using jarque-bera (jb) test. the jb test rejects the hypothesis of normal distribution. from table 1 we learn that the short-term economic indicators and stock market index is all time low in the year 2012. these indicators reflect the events in international and domestic level during that period. during year 2012 there was sovereign debt crisis in the euro zone, political uncertainty in middle east, rise in crude oil prices, and japan was struck with earthquake are the few to mention. at domestic level the indian gdp estimation is below 7 per cent, slowdown in policy reforms, domestic demand is lowest in previous ten years. in addition, there is slowdown in the manufacturing and mining sectors, increased gap between demand and supply for electricity which in turn affected the industrial production and exports. all these factors are pertinently captured by short-term economic indicators. on the other hand the short-term economic indicators report highest values in the year 2018. during this period india witnessed gdp of 7.3 per cent, manufacturing sector registered robust growth, revival is seen in investment activity, and witnessed improvement in global demand for indian products. however, the iip is slightly hit by gold and jewelers industry due to banking fraud investigated in one of the leading public sector banks. we also notice that along with manufacturing sector, mining and electricity sectors report record growth during this period. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 4 table 1. descriptive statistics of raw data iip manufacturing mining electricity s & p bse sensex oil & gas index mean 115.83 117.23 99.32 131.78 26872.70 11068.93 median 115.40 116.25 98.30 133.60 26833.84 9898.69 maximum 140.30 140.20 132.60 167.20 38672.91 16552.40 minimum 98.30 99.00 82.50 94.10 16218.53 7587.84 std. dev. 10.31 10.09 11.14 19.10 6059.13 2629.40 skewness 0.30 0.28 0.80 -0.10 0.09 0.57 kurtosis 2.31 2.24 3.38 1.95 2.04 1.89 jarque-bera 2.97 3.13 9.43 4.02 3.34 8.79 probability 0.23 0.21 0.01 0.13 0.19 0.01 observations 84 84 84 84 84 84 we first analyze our series by plot the graphs and then draw correlogram to check whether any seasonality or cycles are present in the series. we then perform hodrick-prescott filter test to verify the seasonality. we do not find any seasonality in our series. we then try to identify whether the series are stationary or non-stationary at their level. to verify this, we use three unit-root tests in level by including intercept and trend in the test equation (adf, adf-gls, kpss) and present results in table 2. the adf and adf-gls tests for unit root and the null hypothesis is that the series is non-stationary. for the kpss test the null hypothesis is that the data is stationary. results present in table 2 indicate that we cannot reject the null hypothesis of a unit root for all series. all the three tests give similar results and confirm the presence of unit root or non-stationary of data. as unit root is present at level we compute log returns of the data, run descriptive statistics, and the three unit root tests with intercept once again. table 3 and 4 reports those results. the jb test results confirm the normality of stocks series at 5% significance level. we re-verified presence of unit root with three tests and if two out of the three tests confirm the presence of a unit root, then it is concluded that the series has a unit root. the unit root tests show that log return series of market indexes and stocks returns are stationary, therefore, we use log returns in the model for further analysis. table 2. results of stationarity tests on raw data adf df gls kpss variable t-statistic prob.* t-statistic prob. lm-stat iip 1.09 1.00 3.33 0.00 1.28 manufacturing (mgf) 0.90 1.00 3.35 0.00 1.28 mining (ming) 0.95 1.00 -0.31 0.76 0.84 electricity (elec) -1.24 0.65 -0.28 0.78 1.09 s&psensex (bse) -0.40 0.90 1.05 0.30 1.06 oil&gas (o&g) -0.80 0.81 -0.02 0.99 0.93 bpcl -1.84 0.36 -1.71 0.09 0.27 hpcl -2.02 0.28 -1.86 0.07 0.30 ioc -1.81 0.37 -1.79 0.08 0.25 oil -0.69 0.84 -0.56 0.58 1.05 ongc -1.18 0.68 -1.15 0.25 0.90 gail -3.23 0.02 -2.76 0.01 0.22 castrol -1.79 0.38 -1.03 0.30 0.42 igl -2.25 0.19 -1.96 0.05 0.41 petronet -1.73 0.41 -1.32 0.19 0.73 reliance -2.79 0.06 -1.98 0.05 0.88 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 5 table 3. descriptive statistics of log returns iip mgf ming elec bse o & g mean 0.42 0.41 0.35 0.53 0.97 0.78 median 0.22 0.17 1.02 0.88 1 0.65 max 12.76 11.9 17.84 15.52 9.69 12.82 min -13.49 -13.01 -25.66 -13.42 -7.81 -11.96 s d 5.54 5.42 9.07 6.02 3.93 5.43 skew -0.27 -0.38 -0.6 0.03 -0.09 -0.03 kurt 3.25 3.23 3.74 3.22 2.5 2.8 j-b 1.23 2.2 6.84 0.17 1 0.15 p 0.54 0.33 0.03 0.92 0.61 0.93 bpcl hpcl ioc oil gail ong castrol igl petro ril mean 1.04 1.25 1.08 -1.09 0.06 -0.63 0.35 2.34 1.55 1.56 median 2.11 2.48 0.47 -0.79 0.8 -0.33 -0.05 2.45 1.93 1.12 max 19.79 24.14 31.76 21.05 20.35 23.94 20.84 21.35 19.21 19.79 min -30.78 -28.47 -19.73 -48.66 -33 -41.18 -13.61 -17.34 -14.76 -17.01 s d 10.06 10.99 8.63 9.2 9.03 9 6.71 7.44 6.58 7.11 skew -0.61 -0.07 0.62 -1.84 -0.95 -0.87 0.44 0.21 0.02 0.22 kurt 3.86 2.92 4.18 11.5 5.77 6.73 3.71 3.08 3 3.29 j-b 7.63 0.09 10.15 296.85 38.94 58.48 4.45 0.66 0.01 0.98 p 0.02 0.96 0.01 0 0 0 0.11 0.72 0.99 0.61 obr 83 83 83 83 83 83 83 83 83 83 table 4. results of stationarity tests on log returns adf df gls kpss variable t-statistic prob.* t-statistic prob. lm-stat iip -4.03 0.00 -0.04 0.97 0.032 mgf -3.91 0.00 0.06 0.95 0.028 mining -3.98 0.00 -0.69 0.49 0.067 electricity -3.86 0.00 -0.27 0.79 0.025 s & p sensex -10.09 0.00 -1.89 0.06 0.05 oil & gas -9.50 0.00 -7.48 0.00 0.05 bpcl -10.67 0.00 -10.10 0.00 0.269 hpcl -9.38 0.00 -9.20 0.00 0.195 ioc -9.67 0.00 -9.15 0.00 0.101 oil -9.06 0.00 -8.80 0.00 0.162 ongc -8.99 0.00 -8.23 0.00 0.107 gail -10.26 0.00 -10.05 0.00 0.076 castrol -9.88 0.00 -9.75 0.00 0.239 igl -11.10 0.00 -1.74 0.09 0.086 petronet -8.13 0.00 -5.50 0.00 0.124 reliance -10.65 0.00 -8.29 0.00 0.396 we then perform cross-order correlation among series and present results in table 6. we find significant positive correlation among four short-term economic indicators. we also observe that economic indicators have negative correlation with oil and gas stocks and these correlations are low and statistically insignificant. on the other hand we observe significant positive correlations among 10 oil and gas stocks and these correlations range between 0.82 and 0.22 and statistically significant at 5% significance level. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 6 one of our aims in this paper is to measure the influence of short-term economic indicators on oil and gas stocks returns. in order to do this, we regress economic indicators on stocks. table 7 reports ols results. from table 7 we learn that there is no significant causation between short-term economic indicators and oil and gas stocks. however, we find significant negative causal relationship between four economic indicators and one of the 10 stocks (gail) at 10% significance level. in one another stock (ioc), electricity indicator is positively related. except these two causations economic indicators fail to cause any other oil and gas stocks. our results indicate that there is no causal relationship between short-term economic indicators and eight oil stocks returns. our result contradicts that of comincioli (1996), who suggests that stock market movements granger cause economic activity. to confirm our ols results we run pair-wise granger causality tests and fail to find any causation happening from short-term economic indicators to oil and gas stock returns or from oil and gas stock returns to short-term economic indicators. granger causality test results confirms the results of cross order correlation and ols results and indicate that there is no causation between economic indicators and oil and gas stock returns in any direction. results of pair-wise granger causality are present in table 5. we then employ cross-order correlation between market indexes and stocks. in this paper we use two stock market indexes, one is broad market index (s & p bse sensex) and the other is sectorial index (s & p oil & gas). result of cross-order correlations is present in table 8. from table 8, we learn that both the indexes have significant positive correlations with oil and gas stocks returns. further, these correlations are strong and range between 0.28 and 0.73 and statistically significant at 1% significance level. results of cross-order correlations among market indexes and stocks returns are in contrast with our earlier results of cross-order correlation among economic indicators and stocks returns. our results indicate that there is no correlation among economic indicators and stocks returns. whereas, we observe significant positive correlation among market indices and oil and gas stocks returns. table 5. pair-wise granger causality tests between iip and oil and gas stocks pairwise granger causality tests f-statistic prob. iip does not granger cause bpcl 0.00 0.99 bpcl does not granger cause iip 1.89 0.17 iip does not granger cause hpcl 0.47 0.50 hpcl does not granger cause iip 0.62 0.43 iip does not granger cause ioc 0.31 0.58 ioc does not granger cause iip 1.26 0.27 iip does not granger cause oil 0.01 0.91 oil does not granger cause iip 0.42 0.52 iip does not granger cause gail 0.43 0.52 gail does not granger cause iip 1.68 0.20 iip does not granger cause ongc 0.15 0.70 ongc does not granger cause iip 3.49 0.07 iip does not granger cause castrol 0.97 0.33 castrol does not granger cause iip 0.59 0.44 iip does not granger cause petro 0.16 0.69 petro does not granger cause iip 0.03 0.87 iip does not granger cause ril 0.01 0.94 ril does not granger cause iip 0.36 0.55 iip does not granger cause igl 0.18 0.68 igl does not granger cause iip 0.63 0.43 from cross-order correlations among market index, sectorial index and stocks returns we learn that these correlations are moderate, thus suggesting that multicollinearity should not be an issue during the estimation process. in continuation to correlation analysis, we run bivariate ols regression between each market indicator and individual oil and gas stocks returns. results present in table 9. from the results in table 9 we find that both market index and sectorial index cause stocks at 1% significance level. the results of causality test indicate that coefficients range between 0.55 and 1.21 and r2 value range between 0.10 and 0.37. these results suggest that broad market index and sectorial index have explanatory power about the variability in stock returns for contemporaneous period. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 7 table 6. cross-order correlations among short-term economic indicators and oil and gas stocks variable iip mgf mining elec bpcl castrol gail hpcl igl ioc oil ongc petro ril iip 1 mgf .99** 1 mining .86** .80** 1 elec .62** .57** .44** 1 bpcl .10 .08 .11 .18 1 castrol .10 .11 .02 .05 .18 1 gail -.20 -.18 -.18 -.20 .36** .04 1 hpcl .11 .10 .11 .15 .81** .32** .31** 1 igl -.02 .00 -.08 -.04 .16 .42** .37** .29** 1 ioc .11 .11 .04 .22* .61** .20 .24* .72** .25* 1 oil -.13 -.12 -.16 -.03 .18 .01 .39** .19 .35** .22* 1 ongc -.04 -.05 -.04 .12 .47** .17 .41** .39** .25* .31** .41** 1 petro -.03 -.03 -.06 .06 .24* .28* .42** .33** .49** .29** .27* .35** 1 ril -.07 -.06 -.12 .02 .24* .14 .26* .16 .32** .25* .33** .29** .23* 1 **. correlation is significant at the 0.01 level (2-tailed). *. correlation is significant at the 0.05 level (2-tailed). table 7. contemporaneous causal relation among short-term economic indicators and oil and gas stocks index iip mining manufacturing electricity stock beta r2 f sig. beta r2 f sig. beta r2 f sig. beta r2 f sig. bpcl 0.19 0.01 0.89 0.35 0.13 0.01 1.07 0.30 0.15 0.01 0.54 0.47 0.31 0.03 2.82 0.10 hpcl 0.23 0.01 1.14 0.29 0.13 0.01 1.01 0.32 0.21 0.01 0.90 0.35 0.27 0.02 1.87 0.18 ioc 0.18 0.01 1.12 0.29 0.04 0.00 0.14 0.71 0.18 0.01 1.00 0.32 0.32 0.05 4.20 0.04 oil -0.22 0.02 1.51 0.22 -0.17 0.03 2.38 0.13 -0.22 0.02 1.33 0.25 -0.06 0.00 0.12 0.73 ongc -0.07 0.00 0.13 0.72 -0.04 0.00 0.15 0.70 -0.10 0.00 0.28 0.60 0.19 0.02 1.38 0.24 gail -0.33 0.04 3.43 0.07 -0.18 0.03 2.77 0.10 -0.31 0.03 2.91 0.09 -0.30 0.04 3.39 0.07 igl -0.03 0.00 0.03 0.86 -0.07 0.01 0.65 0.42 0.00 0.00 0.00 0.98 -0.05 0.00 0.14 0.71 castrol 0.12 0.01 0.85 0.36 0.02 0.00 0.06 0.81 0.15 0.01 1.14 0.29 0.06 0.00 0.23 0.63 petronet -0.04 0.00 0.11 0.74 -0.04 0.00 0.29 0.59 -0.05 0.00 0.12 0.73 0.07 0.00 0.29 0.59 reliance -0.09 0.00 0.40 0.53 -0.09 0.01 1.18 0.28 -0.08 0.00 0.34 0.56 0.03 0.00 0.05 0.83 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 8 table 8. cross-order correlation among stock market indexes and oil and gas stocks returns bse sensex oilgas bpcl hpcl ioc oil gail ongc castrol igl petro ril bsesensex 1 oilgas .72** 1 bpcl .47** .65** 1 hpcl .43** .61** .81** 1 ioc .33** .63** .61** .72** 1 oil .33** .43** .18 .19 .22* 1 gail .40** .55** .36** .31** .24* .39** 1 ongc .51** .65** .47** .39** .30** .40** .41** 1 castrol .32** .27* .18 .32** .20 .01 .04 .17 1 igl .44** .45** .16 .29** .25* .34** .36** .24* .42** 1 petro .35** .45** .24* .33** .29** .22* .42** .35** .27* .49** 1 ril .61** .71** .24* .16 .25* .33** .26* .29** .14 .31** .22* 1 **. correlation is significant at the 0.01 level (2-tailed). *. correlation is significant at the 0.05 level (2-tailed). table 9. contemporaneous causal relationship among stock market indexes and oil and gas stocks returns explanatory variable bse sensex oil & gas stock beta r2 f sig. beta r2 f sig. bpcl 1.21 0.22 23.51 0.00 1.20 0.42 59.18 0.00 hpcl 1.21 0.19 18.72 0.00 1.24 0.37 48.11 0.00 ioc 0.73 0.11 9.97 0.00 1.00 0.40 53.21 0.00 oil 0.79 0.11 10.29 0.00 0.74 0.19 18.94 0.00 ongc 1.18 0.27 29.47 0.00 1.09 0.43 62.04 0.00 gail 0.92 0.16 15.56 0.00 0.93 0.31 36.33 0.00 igl 0.84 0.20 20.13 0.00 0.62 0.21 21.13 0.00 castrol 0.55 0.10 9.38 0.00 0.34 0.08 6.61 0.01 petronet 0.60 0.13 11.98 0.00 0.55 0.21 21.33 0.00 reliance 1.11 0.37 48.49 0.00 0.93 0.51 83.18 0.00 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 9 as we find causal relationship between market indexes and oil and gas stocks returns, we are curious to know whether these two market indexes can help predict short-term returns of oil and gas stocks. to know this we relate current returns of stocks with one-lag of market indexes. by doing this our objective is to assess the short-term predictability of market indexes of stock returns. results are present in table 10. to our surprise we do not find any predictability of s & p bse sensex and s & p oil & gas indexes of stock returns. this result indicates that current month market movement has no predictive power of next month stock returns. we make line estimation of s & p bse sensex on all the 10 stocks and present in figure 1. from figure 1 it is clearly evident that market index fails to predict next month stock returns and we also observe that observations scatter far away from estimation line. table 10. predictive regression of stock market indexes of oil and gas stocks explanatory variable bse sensex oil & gas stock beta r2 f sig. beta r2 f sig. bpcl 0.00 0.00 0.00 1.00 -0.20 0.01 0.90 0.35 hpcl 0.18 0.00 0.31 0.58 0.05 0.00 0.04 0.84 ioc 0.24 0.01 0.92 0.34 0.04 0.00 0.05 0.82 oil 0.21 0.01 0.63 0.43 0.25 0.02 1.73 0.19 ongc 0.10 0.00 0.14 0.70 0.04 0.00 0.05 0.83 gail -0.04 0.00 0.02 0.89 -0.02 0.00 0.02 0.90 igl -0.35 0.03 2.81 0.10 -0.04 0.00 0.06 0.80 castrol 0.11 0.00 0.30 0.59 0.07 0.00 0.27 0.61 petronet 0.32 0.04 2.92 0.09 0.35 0.08 7.24 0.01 reliance -0.18 0.01 0.80 0.37 -0.26 0.04 3.09 0.08 then we proceed for var model analysis. the vector autoregressive (var) model is usually employed for the purpose of forecasting systems of interconnected time series and studying the dynamic effects on the system of series arising from arbitrary disturbances. the var approach considers each variable to be endogenous in the model as a function of all endogenous variables lagged values, as a result of which the need for structural modeling is bypassed. the auto regressive term happens because of the appearance of the dependent variables lagged values on the right side of the model and because of the fact that a vector of two or more variables is included in the model, the vector term takes place (fayyad & dally, 2011). one of the main strengths of the var model is that it enables us to compute the dynamic relationships between the investigated variables. to further investigate the causal relationship among market indexes and stocks we estimate a var model. as we are interested in short-term causal relationships we use lag equal to 1 in our var model. table 11 displays the results of an unrestricted var model. result of lm test shows evidence of no autocorrelation problem in the model. results indicate that stocks have a negative and statistically significant influence of s & p bse sensex and s & p oil & gas indexes at 10% significance level. this result indicates that following month of increase or decrease in stock returns the markets decrease or increase. however, we learn that the coefficients are very weak. to confirm these results we run granger causality tests and find that no causality happens between study variables. as there is no causality in any direction between the variables, the estimation results indicate no predictive power of market indicators of stock prices. pair-wise granger causality test results are present in table 12. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 10 figure 1. line estimations of stock market indexes of oil and gas stocks -40.00 -20.00 0.00 20.00 40.00 -10.00 -5.00 0.00 5.00 10.00 15.00 b p c l bse500 bse500 line fit plot bpcl -40.00 -20.00 0.00 20.00 40.00 -10.00 -5.00 0.00 5.00 10.00 15.00 h p c l bse500 bse500 line fit plot hpcl -40.00 -20.00 0.00 20.00 40.00 -10.00 -5.00 0.00 5.00 10.00 15.00 io c bse500 bse500 line fit plot ioc -60.00 -40.00 -20.00 0.00 20.00 40.00 -10.00 -5.00 0.00 5.00 10.00 15.00o il bse500 bse500 line fit plot oil -60.00 -40.00 -20.00 0.00 20.00 40.00 -10.00 -5.00 0.00 5.00 10.00 15.00o n g c bse500 bse500 line fit plot ongc -40.00 -20.00 0.00 20.00 40.00 -10.00 -5.00 0.00 5.00 10.00 15.00 g a il bse500 bse500 line fit plot gail -20.00 -10.00 0.00 10.00 20.00 30.00 -10.00 -5.00 0.00 5.00 10.00 15.00c a st r o l bse500 bse500 line fit plot castrol -20.00 0.00 20.00 40.00 -10.00 -5.00 0.00 5.00 10.00 15.00 ig l bse500 bse500 line fit plot igl -20.00 -10.00 0.00 10.00 20.00 30.00 -10.00 -5.00 0.00 5.00 10.00 15.00 p et r o bse500 bse500 line fit plot petro -20.00 0.00 20.00 40.00 -10.00 -5.00 0.00 5.00 10.00 15.00 r il bse500 bse500 line fit plot ril copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 11 table 11. var results between stock market indexes and oil and gas stocks sensex oil_gas bpcl sensex oil_gas hpcl sensex(-1) 0.07 0.09 0.40 sensex(-1) 0.07 0.08 0.26 sig. -0.16 -0.22 -0.41 sig. -0.16 -0.22 -0.46 oil_gas(-1) -0.21 0.04 -0.16 oil_gas(-1) -0.18 0.03 0.07 sig. -0.13 -0.18 -0.34 sig. -0.13 -0.18 -0.37 bpcl(-1) 0.02 -0.14 -0.20 hpcl(-1) -0.01 -0.12 -0.13 sig. -0.06* -0.08* -0.15 sig. -0.05* -0.07* -0.14 sensex oil_gas ioc sensex oil_gas oil sensex(-1) 0.08 0.04 0.32 sensex(-1) 0.07 0.08 -0.07 sig. -0.16 -0.23 -0.37 sig. -0.16 -0.22 -0.38 oil_gas(-1) -0.20 0.00 0.01 oil_gas(-1) -0.17 -0.17 0.36 sig. -0.14 -0.20 -0.32 sig. -0.12 -0.17 -0.29 ioc(-1) 0.01 -0.09 -0.14 oil(-1) -0.03 0.07 -0.10 sig. -0.07* -0.09* -0.15 sig. -0.05* -0.07* -0.12 sensex oil_gas ongc sensex oil_gas gail sensex(-1) 0.07 0.08 0.13 sensex(-1) 0.07 0.09 -0.02 sig. -0.16 -0.23 -0.38 sig. -0.16 -0.22 -0.37 oil_gas(-1) -0.18 -0.15 0.02 oil_gas(-1) -0.25 -0.12 0.17 sig. -0.13 -0.19 -0.31 sig. -0.12 -0.18 -0.30 ongc(-1) -0.01 0.03 -0.04 gail(-1) 0.06 0.00 -0.19 sig. -0.06* -0.09* -0.15 sig. -0.06* -0.08* -0.14 sensex oil_gas igl sensex oil_gas castrol sensex(-1) 0.06 0.07 -0.54 sensex(-1) 0.08 0.12 0.13 sig. -0.16 -0.23 -0.30 sig. -0.16 -0.23 -0.28 oil_gas(-1) -0.20 -0.13 0.36 oil_gas(-1) -0.18 -0.11 0.05 sig. -0.12 -0.17 -0.22 sig. -0.11 -0.16 -0.20 igl(-1) 0.03 0.03 -0.18 castrol(-1) -0.03 -0.07 -0.14 sig. -0.07* -0.09* -0.12 sig. -0.07* -0.10* -0.12 sensex oil_gas petronet sensex oil_gas reliance sensex(-1) 0.06 0.08 -0.06 sensex(-1) 0.10 0.06 0.18 sig. -0.16 -0.22 -0.26 sig. -0.16 -0.23 -0.29 oil_gas(-1) -0.22 -0.19 0.40 oil_gas(-1) -0.14 -0.18 -0.26 sig. -0.12 -0.17 -0.20 sig. -0.13 -0.19 -0.24 petro(-1) 0.07 0.14 -0.04 ril(-1) -0.07 0.08 -0.10 sig. -0.07* -0.10* -0.12 sig. -0.09* -0.12 -0.16 table 12. pair-wise granger causality test results between stock market indexes and oil and gas stocks. panel a: pairwise granger causality tests (sensex vs. stock returns) f-statistic prob. bpcl does not granger cause sensex 0.30 0.58 sensex does not granger cause bpcl 0.75 0.39 hpcl does not granger cause sensex 0.76 0.38 sensex does not granger cause hpcl 0.80 0.37 ioc does not granger cause sensex 0.68 0.41 sensex does not granger cause ioc 1.60 0.21 oil does not granger cause sensex 1.02 0.32 sensex does not granger cause oil 0.78 0.38 gail does not granger cause sensex 0.07 0.79 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 12 sensex does not granger cause gail 0.15 0.70 ongc does not granger cause sensex 0.80 0.37 sensex does not granger cause ongc 0.23 0.63 igl does not granger cause sensex 0.01 0.93 sensex does not granger cause igl 0.98 0.33 castrol does not granger cause sensex 0.29 0.59 sensex does not granger cause castrol 0.77 0.38 petro does not granger cause sensex 0.14 0.71 sensex does not granger cause petro 2.25 0.14 ril does not granger cause sensex 2.28 0.14 sensex does not granger cause ril 0.00 0.94 panel b: pairwise granger causality tests (oil & gas index vs. stock returns) f-statistic prob. bpcl does not granger cause oil_gas 3.14 0.08 oil_gas does not granger cause bpcl 0.02 0.88 hpcl does not granger cause oil_gas 2.90 0.09 oil_gas does not granger cause hpcl 0.52 0.47 ioc does not granger cause oil_gas 1.05 0.31 oil_gas does not granger cause ioc 0.81 0.37 oil does not granger cause oil_gas 0.91 0.34 oil_gas does not granger cause oil 2.31 0.13 gail does not granger cause oil_gas 0.00 0.99 oil_gas does not granger cause gail 0.45 0.50 ongc does not granger cause oil_gas 0.14 0.71 oil_gas does not granger cause ongc 0.11 0.74 igl does not granger cause oil_gas 0.19 0.66 oil_gas does not granger cause igl 0.38 0.54 castrol does not granger cause oil_gas 0.45 0.51 oil_gas does not granger cause castrol 0.62 0.43 petro does not granger cause oil_gas 1.93 0.17 oil_gas does not granger cause petro 6.52 0.01 ril does not granger cause oil_gas 0.55 0.46 oil_gas does not granger cause ril 0.79 0.38 5. discussion in this paper we observe that stock market movements cause stock returns in contemporaneous periods. our results indicate that there is positive correlation between stock market movements and oil and gas stock returns, when stock markets increase stock prices of oil and stock prices also increase and vice-versa. however, we fail to find any predictive ability of stock market indexes in short term of oil and gas stock returns. our predictive regression analysis reveals insignificant coefficient of determination and not able explain the variability of market indexes of stock returns. our var models and granger cause models also do not provide any significant evidence for predictability of stock market indexes of stock returns. on the other side, we do not find any correlation or causation between short-term economic indicators and stock market indexes. our results are in contrast to results reported by cutler et al., (1989); chen et al., (1986) who find significant positive correlation between industrial production and stock market returns. in the indian context our results are similar to those of singh (2014) who reports no causation between iip and stock market indexes. from our results we interpret that indian stock markets and returns of oil and gas stocks are independent from industrial production. even though the indian manufacturing, mining, and electricity sectors are closely knitted with oil and gas industry, their impact on oil and gas stock returns is minimal. this is because financial performance and profitability of oil and gas companies are regulated by government of india’s policy decisions. seventy percent of the oil and gas stocks studied in this paper are owned and controlled by government and are still under government policy regulations. in addition, as these companies import crude oil, global level factors like crude oil prices, exchange rate fluctuations, demand and supply of crude oil may copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 13 have significant impact. as a coincident economic indicator industrial production rightly reflect indian economic situation but not able to influence the stock market indexes which are leading economic indicators. 6. conclusion the aim of this paper is four fold: i) to examine the influence of short-term economic indicators on stock prices ii) to investigate the impact of market indexes on oil and gas stocks; iii) to predict stock returns using economic and market indicators; iv) to study the relationship among stock prices of indian oil and gas companies over the period 2012-2019. we consider four short-term economic indicators, two stock market indexes and 10 indian oil and gas companies. we find no causal relation between short-term economic indicators and stock market indexes. similarly, we do not find any causation between short-term economic indicators and oil and gas stocks. these results indicate that stock markets and oil and gas stocks are independent from industrial production. on the other side we find significant positive correlation and causation between stock market indexes and stock returns. however, in contrast to this we fail to find any and predictive power of stock market indexes about stock returns in short run. leading economic indicators have contemporaneous relationship with stock returns, but are not able to predict the stock returns in short run. we conclude that industrial production will not help predict neither stock market movements nor stock returns. our empirical results suggest that stock market indexes help to understand contemporaneous stock returns but not future returns. in this paper we measure the impact of domestic economic indicators and ignored the global factors. future research can consider the influence of crude oil prices, and exchange rate fluctuations on oil and gas stocks returns. furthermore, future research can link monthly economic indicator values with quarterly financial results of oil and gas companies. references bilson, c. m., brailsford, t. j., & hooper, v. j. 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(2006). industrial production and stock returns (doctoral dissertation, faculty of business administrationsimon fraser university). copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess 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 | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 84 comparing the applications of management accounting between vietnamese public universities by the degree of autonomy oanh thi tu le phd university of labour and social affairs, hanoi, vietnam e-mail: oanhletu@gmail.com phong thi thu tran hanoi open university, vietnam e-mail: thuphonghou@gmail.com abstract this study was conducted based on a survey of 53 public universities in vietnam to evaluate the applications of management accounting in universities according to the following metrics: (i) cost classification; (ii) conducting and evaluating budgets; (iii) management responsibility; and (iv) using information to make short-term and long-term decisions. the results showed that public universities have some interest in management accounting information, especially responsibility accounting. however, management accounting information which has not been used much in vietnamese universities includes controllable and uncontrollable costs and variance analysis between actual results and estimates. regarding the degree of autonomy, fully or partially autonomous universities tend to apply management accounting more than non-autonomous universities in terms of the cost per student, the fees for repeat classes, and management responsibility. the research results showed the need to use management accounting information when universities increase their autonomy. jel classification: m40, m41, m49. 1. introduction the system of public universities plays an important role in the economics of each country by the higher education system development. along with the international integration trend, higher education is changing rapidly in all ways. university autonomy is inevitable for the development of education and training. therefore, universities in general and public universities in particular need to constantly improve the quality of training and branding. public universities are state-owned training institutions which are funded by the state budget to establish, finance operations. the activities of public universities must comply with the principles of authorized state agencies (vu, 2017). university autonomy is the freedom of a higher education institution for its operations neither the management nor influence of the government (anderson & johnson, 1998). according to vietnam’s education law (2005) university autonomy includes regulations on personnel, academic autonomy and finances. the degree of university autonomy is associated with the model of autonomy and is always changing to suit the socio-economic context of each country (nguyen, 2020). the models of autonomy classify different degrees of autonomy including (1) non-autonomous (state control); (2) semi-autonomous and (3) independent. as of december 2018, vietnam had 171 public universities (accounting for 72.45% of the total number of universities) (nguyen, 2020). facing the challenge of fierce competition of international integration, public universities in vietnam have been given autonomy in their operations. the assignment of university autonomy was stipulated in the vietnam’s education law (2005) conducted under resolution 77/nq-cp issued on october 24, 2014 on piloting the renovation of public tertiary during 2014 2017. furthermore, the decree 16/2015/nd-cp of the government which stipulates the autonomy mechanism of public institutions has marked a change in management goals of public university. according to this decree, the right of autonomy and self-responsibility of public universities includes (i) performing tasks; (ii) organizational structure and personnel; (iii) financial autonomy. autonomy in performing tasks includes the right to identify the missions, the visions, and autonomy in recruitment activities, training, scientific research and international cooperation. autonomy in organizational structure and personnel presents in the freedom to recruit, manage and use employees. financial autonomy means that a university has to take responsibility for finance issues, generate revenues and use financial resources instead of being granted by the state. recently, according to a report of the ministry of education and training (2018) university autonomy has made positive changes such as reducing administrative procedures, increasing initiative and flexibility in the implementation of universities’ activities. this transformation does not only stem from the objective demands and the change of the environment of education but it is also motivated by the regulations and policies issued by the party and the government. keywords: management accounting, public universities, autonomy, vietnam. . mailto:thuphonghou@gmail.com copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 85 thus, by shifting from a state control model to a more autonomous model, public universities must operate more effectively and efficiently. management accounting is one of the effective tools to help university administrators to have timely, complete and predictive information to support decision making (truong, 2010). management accounting has shifted from providing simple information to providing information for short-term and long-term decision-making. purpose of management accounting is to improve operational efficiency and profitability by providing information for planning, controlling, and decision making (sunarni, 2013). vietnam has overcome many difficulties since 1986, the innovation time and has accomplished great achievements of historical significance (le et al., 2020). the third and fourth industrial revolutions have brought not only tremendous opportunities, but also significant challenges. the 4.0 revolution has brought vietnam opportunities for development in all economic, cultural and educational fields. vietnam's education in general has achieved the certain achievements and (le, 2020). the university autonomy is indispensable to fit the challenges. this process still has many shortcomings that need to be improved. the paper aims to compare differences in the applications of management accounting among public universities in vietnam by the degree of autonomy. 2. literature review the applications of management accounting and changes of information regarding the assignment of autonomy in universities have received attention from many researchers. le (2017) considered management accounting as a tool for financial autonomy in public universities. the author proposed the classification of variable costs and fixed costs; identified cost objects according to training level and training system; assessed the impact of cost fluctuation on financial performance of the school. yasmiza et al. (2017) analyzed the role of management accounting in malaysian public universities. the research showed that administrators of malaysian universities were interested in the most important types of accounting information including reports, budgets and strategic management accounting. the research also showed that teamwork and willingness to take responsibility are the most demanding skills of accounting in malaysian public universities. the research on management accounting in public universities was investigated current situation of responsibility accounting in ugandan public universities (owino et al., 2016). the study found that there existed responsibility accounting systems in public universities in which costs and revenues were accrued and reported from faculty and from faculty to university management, the head of the department has the authority to manage their estimates of budget allocation. however, responsibility accounting which follows the model of decentralization in public universities is not emphasized. the reporting system of public university is mainly formal, which affects the use of information of the board of directors to make decisions. agasisti & johnes (2010) investigated the evaluation of efficiency in italian universities in the rapid changes of higher education environment in europe when the government delegated financial autonomy to universities. research results showed that changes in cost structure and technical efficiency reduce profitability in universities. horne & hu (2008) evaluated the performance of australian universities. by estimating the cost-effectiveness of 36 universities in the period of 1995-2002 by random marginal analysis, the results showed that universities do not work effectively when evaluating the use of costs. therefore, it suggested assigning responsibility to individual managers to have better costs control. agasisti & johnes (2010) evaluated the strategic management accounting in four major italian universities in the rapidly changing environment of european universities from the mid-1980s when the government gave financial autonomy to universities. this change created challenges for administrators and accounting systems of universities. the study analyzed and recommended strategic management accounting for these universities in two aspects of resource allocation and new training programs. cropper & cook (2010) pointed out that many universities are not satisfied with their cost accounting systems and are seeking ways to change them. as financial resources of universities become more limited due to financial autonomy, it is necessary for universities to offset the costs with the revenue from training courses to better manage resources. thus, the above studies have shown the importance of management accounting for universities in the context of the economy movement, the requirements of implementing autonomy mechanism. researches have also shown a link between management accounting information and the application of management accounting techniques to improve universities performance. to assess if there is a difference in management accounting by the degree of autonomy has not been mentioned and this is an urgent issue for vietnam while implementing the transition from state management to implement university autonomy. 3. methodology the study was conducted through sending questionnaires via email to 138 universities in vietnam. the questionnaire was divided into 5 main parts: (i) identification of operating costs; (ii) budgeting activities; (iii) assessment of management responsibility; and (iv) using information in decision making; (v) information of public university. the identification of operating costs was conducted using yes/ no questions. the remaining questions used 5 -point likert scale, in which 1 = strongly disagree and 5 = strongly agree. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 86 table 1. autonomy degree autonomy degree n % non autonomy 8 15.1% semi autonomy 29 54.7% full autonomy 16 30.2% total 53 100% source: compiled by the authors based on research results regarding characteristics surveyed public universities (table 1), the number of questionnaires sent was 138, and the number of answers received was 53 that are equal to 40% in the response rate. the number of samples needed to conduct the study is 41 (nguyen & nguyen, 2015) at this rate, so the collected sample is sufficiently reliable to implement the research. out of 53 surveyed universities, 16 were fully autonomous (30.2%), 29 were semi-autonomous (54.7%) and 8 universities were not autonomous. the structure of the surveyed universities is suitable for analysis because vietnamese public universities are in the process of becoming fully autonomous. the number of non-autonomous universities is less than the number of autonomous. table 2. years of establishment years of establishment n % < 10 years 3 5.7% 10 20 years 9 17.0% 20 50 years 16 30.2% > 50 years 25 47.2% total 53 100% source: compiled by the authors based on research results in terms of number of years of establishment (table 2), most of surveyed universities had been established for over 50 years (25; 47.2%). the next most common group was universities which had been established for between 20 and 50 years (16; 30.2%). the rest were universities which had been established for less than 20 years. specific characteristics of vietnamese public universities established early, with a long history of establishment and development. table 3. location of university location n % northern 30 56.6% central 11 20.8% southern 12 22.6% total 53 100% source: compiled by the authors based on research results regarding location, the majority universities were located in the north of vietnam (30; 56.6%). the number of universities located in the central and the south of vietnam were relatively equal (the rates are 20.8% and 22.6% respectively (table 3). regarding region, out of 138 public universities in vietnam, the number of universities in the north accounted for 54%; the number of universities in the central took up 20% and the number of universities in the south accounted to 27% (vu, 2017). the distribution rate of the sample of 53 public universities surveyed is equivalent to the overall. 4. research results 4.1 cost classification identifying the type of cost is always an important content of management accounting since it is the basis for evaluating and analyzing the effectiveness of cost control and providing information for managers to make decisions. therefore , the survey used the yes/no questions to investigate the current situation of cost classification of universities based on th e following classifications: (1) variable and fixed costs; (2) direct and indirect costs per student; (3) direct and indirect copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 87 costs per faculty or department; (4) cost factor (salary, scholarship, outside services); (5) controllable and uncontrollable costs. the results are shown in figure 1. figure 1. comparing the cost classificaion source: compiled by the authors based on research results according to figure 1, all universities had implemented cost classification by factor. however, non-autonomous universities and partially autonomous universities are more interested in variable costs and fixed costs, direct and indirect costs (from 50% to 70%) than fully autonomous universities are (40%). in contrast, fully autonomous universities tend to keep track of controllable and uncontrollable costs more than the other two groups do (88%). 4.2 conducting and evaluating budgets budgeting is a mandatory step for public universities to make reports to the government. therefore, 100% of public universities make annual budgets for this purpose. however, from the perspective of management accounting, the cost budgeting is for the purposes of cost control, comparing actual results with estimates; evaluating cost budgets by division (faculty, department); analysis of variances according to price and quantity factors; finding causes of variances to adjust for future budgeting. the survey used the 5-point likert scale (from “strongly disagree” to “strongly agree”) and compared mean values, actual budgeting situation of public universities. the results are shown in figure 2. figure 2. comparing budgeting by the degree of autonomy source: compiled by the authors based on research results 50% 63% 50% 100% 25% 60% 60% 67% 100% 43%41% 35% 41% 100% 88% 1. variable costs and fixed costs 2. direct and indirect costs/student 3. direct and indirect costs/department 4. factor costs 5. controllable and uncontrollable costs non autonomy semi autonomy full autonomy 3.88 3.38 2.88 3.00 4.20 3.40 3.63 4.00 4.12 3.59 3.24 3.82 1. estimates and actual variances (entire university) 2. estimates and actual variances (each department) 3. factor variance analysis 4. finding the varianve cause non autonomy semi autonomy full autonomy copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 88 figure 2 indicates that, in general, partially and fully autonomous universities tend to implement more budgets than non-autonomous universities. specifically, variances between the estimates and actual results (the entire university, each department) among these 3 groups of universities are relatively similar, (mean values ranging from 3.4 to 4.12, which correspond to a score of “agree”). there is a significant difference regarding variance analysis by factor and cause among 3 groups of universities, in which, partially and fully autonomous universities had similar results (mean values ranging from 3.8 to 4.0), non-autonomous universities had the lowest mean value. 4.3 management responsibility the management responsibility in public universities refers to the decentralization, the level of responsibility assigned to each department, the individual in charge of the department, thereby helping to control operational efficiency. to find out the difference in the management responsibility by the degree of autonomy of universities, a comparison of mean values were made. the results are shown in figure 3. figure 3. comparing management responsibility source: compiled by the authors based on research result the group of non-autonomous universities had lower mean values regarding the management responsibility (mean values ranging from 2.7 to 3.63) (figure 3). particularly, the assignment of cost responsibility to each department and individual in charge of each department had not received much attention. partially autonomous universities and fully autonomous universities had relatively similar results. specifically, partially autonomous universities had slightly higher mean values, especially regarding the responsibility to service centers. 3.63 2.75 3.50 3.50 4.07 3.73 4.13 3.97 4.24 3.65 4.35 4.24 1. obvious management decentralization 2. assign responsibility to segment 3. assign responsibility to service centers 4. leaders responsible for their department results non autonomy semi autonomy full autonomy copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 89 figure 4. comparing the evaluation criteria source: compiled by the authors based on research results base on criteria used to evaluate performance including controllable and uncontrollable costs/profits, segment profits, ri, roi (figure 4), groups of universities had similar results with mean values of approximately 3.0. the partially autonomous universities and partially autonomous universities had higher mean values than non-autonomous universities. partially autonomous universities used these criteria the most (mean from 3.13 to 3.37). autonomous universities tend to use these criteria less. 4.4 information for decision making regarding the use of management accounting information in making short-term decisions, 100% of universities’ leaders used management accounting information. the basic information used include breakeven point, class size, cost per student, implementation of joint training programs, tuition fees for short-term training courses, wage per teaching hour. a comparison of the use of information in decision making by the level of autonomy in is shown in figure 5. figure 5. comparing the use of information in making short-term decisions source: compiled by the authors based on research results 3.00 3.13 3.00 3.00 3.13 3.37 3.73 3.20 2.88 3.41 3.41 2.88 1. controllable and uncontrollable costs / profits 2. segment profit 3. residual income (ri) 4. return on investment (roi) non autonomy semi autonomy full autonomy 3.8 4.0 3.5 4.0 3.5 4.0 3.7 3.6 3.8 3.9 4.0 4.0 3.7 3.7 3.8 3.9 4.1 4.1 1. breakeven point / course 2. the again class scales 3.unit cost per student 4. joint training 5. short-term tuition fees 6. unit price of lecture hours non autonomy semi autonomy full autonomy copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 90 universities were relatively consistent when using the information to make decisions about the breakeven point analysis, wage per teaching hour and joint training programs (mean values ranging from 3.7 to 4.0, which correspond to a score of “agree”) (figure 5). fully autonomous universities tend to use management accounting information to make decisions more than the other two groups. partially autonomous universities and fully autonomous universities had similar results. the only significant difference is using information for making decisions about short-term training courses. nonautonomous universities used such information to varying degrees. particularly, they used the information to determine the class size joint training programs more than the other two groups and used the information about the cost per student and tuition fees of short-term courses less than the other two groups. when comparing the use of information for making long-term decisions such as the balanced scorecard, activitybased costing or responsibility accounting (figure 6), groups of universities had relatively similar results (mean values ranging from 3.5 to 4.1). responsibility accounting information was used the most, which was followed by activity-based costing. all groups did not support the balanced scorecard. fully and partially autonomous universities used this information more than non-autonomous universities. figure 6. comparing the use of information in making long-term decisions source: compiled by the authors based on research results 5. discussion and conclusion study on the applications of management accounting in public universities according to the degree of autonomy reflect the similarities of universities that they implement cost classification by factors, make annual budgets, compare the variance between the estimates and actual results. in addition, the board of administrators attaches great importance to management accounting information to make decisions. however, three groups of universities also had certain differences, namely: regarding cost classification, controllable and uncontrollable costs which are essential in cost control are used more by fully autonomous universities than the other two groups. however, fully autonomous universities did not pay much attention on cost classifications to prepare reports for decision making. namely, variable costs and fixed costs are used to make decisions regarding additional options; direct and indirect costs per student serve as a basis for determining breakeven points for training courses, training majors, joint programs; direct and indirect costs for each department serve as a basis for decision making, cost control for each department, faculty, and unit. regarding budgeting, fully autonomous and partly autonomous universities pay more attention on variance analysis by factors and finding the causes than non-autonomous universities. this limits the provision of appropriate information to find nature of the differences, responsible individuals or departments to make necessary adjustments in the next accounting period. in terms of management responsibility, autonomous universities (fully and partially) had similar assessments of management responsibility. however, they rated the management responsibility higher than non-autonomous universities. particularly, fully autonomous universities had the highest assessment of those management responsibilities, especially responsibility to service centers, which indicates that the autonomy requires universities to have efficient use of finances. the results of performance evaluation criteria are similar. specifically, fully and partially autonomous universities used evaluation criteria more than non-autonomous universities. the assignment of rights and responsibilities will help service centers improve their performance. 3.8 3.5 3.6 3.8 3.9 4.0 4.1 3.6 1. responsibility accounting 2. activities based costs (abc) 3. balance score card non autonomy semi autonomy full autonomy copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 91 in terms of the use of relevant information relevant for decision making, fully autonomous universities tend to provide and use more management accounting information. this means that management accounting information is more useful to the administrators when universities shift to the autonomy mechanism. non-autonomous universities provide information inconsistently. regarding information for making long-term decisions, the balanced scorecard is still a complex method that had not been used much by universities compared to responsibility accounting. with the autonomy mechanism, public universities in vietnam had paid great attention to responsible accounting information. the results reflected characteristics of vietnam universities in transition from the state's funded mechanism to autonomy. although universities need changes to adapt and improve the effectiveness, employees are no changes and their thinking still has the influence of the protection mechanism. this change needs a process. on the other hand, management accounting in universities is still quite new in vietnam. without autonomy, universities are used to providing information according to the requirements of the state, which is stereotypical. therefore, the importance of information in decision making has not been given. information on costs, cost classifications, variance analysis on implementation and budget for the adjustment in the next period, assigning management responsibilities to each department on costs and revenue, costvolume-profit analysis ... have not really been paid attention. when shifting to autonomy, universities must operate as businesses, self-balancing finance and management accounting. the comparison of the application of management accounting between vietnamese universities by the degree of autonomy has been different. accordingly, fully autonomous universities have focused on applying management accounting more than partially autonomous ones, while partly autonomous universities have also applied the management accounting better compared to non-autonomous universities. this finding indicates the necessity of using management accounting information when public universities are given autonomy. references agasisti, t., & johnes , g. (2010). heterogeneity and the evaluation of efficiency: the case of italian universities. applied economics, 42(11), 1365-1375. anderson, d., & johnson, r. (1998). university autonomy in twenty countries. cropper, p., & cook, r. (2010). developments: activity-based costing in universities—five years on. public money & management, 20(2), 61-68. horne, j., & hu, b. (2008). estimation of cost efficiency of australian universities. mathematics and computers in simulation, 78(2-3), 266-275. le, d. q. (2017). management accounting the tool to implement financial autonomy at public universities. finance magazine, part, 16, 78-79. le, t. q. (2020). orientation for an education . a new vision for future education in vietnam. international journal of innovation, creativity and change, 11(3), 513-526. le, t. q., bui, m. t., & phung, l. t. (2020). application of change management theory to command new teaching activities in high schools. international journal of innovation, creativity and change, 11(2), 557-568. ministry of education and training. (2018). report on implementation of resolution no. 77 / nq-cp. nguyen, m. t., & nguyen, h. v. (2015). textbook of survey methods: principles and practice. hanoi: national economics university publishing house. nguyen, n. t. (2020). financial autonomy when performing university autonomy research at university of law, hue university. owino, p., munene, j., & ntayi, j. (2016). does responsibility accounting in public universities matter? cogent business & management, 3(1), 1-10. sunarni, c. w. (2013). management accounting practices and the role of management accountant: evidence from manufacturing companies throughout yogyakarta, indonesia. review of integrative business and economics research, 2(2), 616-626. vu, t. t. (2017). financial governance in vietnamese public universities. hanoi: finance publishing house, vietnam. vietnam’s education law. (2005). education law no.38/2005/qh11 dated on 6/14/2005. yasmiza, l., ummi, h. j., syamsul, r. a., & madya, i. a. (2017). management accountant practice in malaysian public sector. world applied sciences journal, 35 (8), 1482-1489. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess 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 | ijfb indian journal of finance and banking; vol. 3, no. 2; 2019 issn 2574-6081 e-issn 2574-609x research article published by centre for research on islamic banking & finance and business, usa 43 impact of microcredit on living standard of dairy entrepreneurs: special focus on oddusuddan ds division in mullaitivu district saseela balagobei department of financial management faculty of management studies & commerce university of jaffna, sri lanka e-mail: saseelab@univ.jfn.ac.lk sankeetha aravinthakumar department of financial management faculty of management studies & commerce university of jaffna, sri lanka abstract microcredit is part of micro finance, which provides a wider range of financial services for low income people. micro credit serves as a vital role for living standard of poor people in the developing countries as well as in sri lanka. in this study oddusuddan ds division in mullaitivu district was selected as research area. after the 30 years conflict situation most people in the oddusuddan area in mullaitivu district are subordinate to the poverty line, because most of the displaced people who are female other than male staying here. women lost their male relatives in struggle, and forced to take a responsibility of their family in order to look after their children, aged parents and their male relatives. micro credit helps the poor people particularly women in effective ways in order to create income generating activities. the prime objective of this study is to investigate the impact of microcredit on living standard of dairy entrepreneurs in oddusuddan ds division in mullaitivu district. in the rural areas of mullaitivu, oddusuddan divisional secretariat divisions 100 dairy entrepreneurs were selected as the sample size of population. the selected entrepreneurs who have received loan from samurdhi bank for dairy farming activities in oddusuddan ds division. primary data were used for gathering information and quantitative analysis was carried out to find out the results. in the quantitative analysis the correlation and regression methods were employed to examine the hypotheses by using spss. the result of this study concluded that there is a positive impact of samurdhi micro credit on living standard of dairy entrepreneurs in oddusuddan ds division. in addition to this, using micro credit facilities create more job opportunities and variety of economic activities and improve household education, income, saving and heath condition of the people. the study recommends that micro credit institution should consider improve the living standard of dairy entrepreneurs through increase the loan amount with lower interest rate. 1. introduction microcredit plays a vital role in significant innovations in development policy of the past twenty-five years. microfinance is not a new concept; it comes from the development of grameen bank concept introduced by mohammad yunus in bangladesh. but it traced back to 1906 in latin america. thus, there was evidence for in the social banking, group-based lending, self-help group concepts, etc. normally rural financial market can identify as formal financial market and informal financial market which act as financial intermediaries. in developing country as a sri lanka formal financial institution doesn’t serve financial services to the rural sector efficiently. moreover, low income people cannot be satisfied regarding formal financial institution’s lending procedures. because they haven’t any fixed income way or any collateral to obtain financial services. so, the more people obtain the loans from informal financial institutions or informal money providers as low-income people are facing poorer situation and also, they save their funds in informal channels. so, they don’t provide any guarantee for that savings. the microfinance activities have given a financial solution for that kind of people. further microfinance comes with the main objective of providing financial services to the poor segments of the society, contributes its role in the form of financial development with a primary focus on enhancing the living standard through poverty alleviation. in the last two decades, there are several modifications in the microfinance sector such as, introduction of micro insurance, diversification of products, provide instructions and several types of collateral free flexible loan as the capacity of the borrowers. microcredit is part of micro finance, which provides a wider range of financial services, especially savings accounts, to the poor. many traditional banks subsequently introduced micro credit despite initial misgivings. the united nations declared 2005 as the international year of micro credit. as of 2012 microcredit is widely used in developing countries and is presented as having enormous potential as a tool that can be helpful to possibly reduce feminization of poverty in developing countries. keywords: microcredit, dairy entrepreneurs, living standard. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 44 it is the extension of very small loans (microloans) to impoverished borrowers who typically lack collateral, steady employment, and a verifiable credit history. the microcredit movement aims to extend small amounts of capital to poor borrowers throughout the world, typically to facilitate income-generating self-employment activities. thus, it has popularized creative, perhaps ingenious, lending techniques (ahlin & jing, 2008). on other hand improvement in living standard of low-income society in developing countries is achieved by improving health, education, income level, physical asset ownership and other living standards. this phenomenon diminishes poverty and foundations to achieve poverty alleviation objective gradually. poverty can identify as where people cannot meet their basic needs for survival, such as food, water, clothing, shelter, sanitation, education and health care. as per barr (2005) in the global situation, there are about three billion people, half of the world's population, living on the income of less than two dollars a day. among these poor communities, one child in five does not live to see his or her fifth birthday. to avoid this situation as early mentioned micro credit is the best mechanism for improving the living standard of the poor people. poverty is a mainly rural phenomenon in sri lanka and four sectors of poverty can be identified in sri lankan society, such as rural, coastal, urban and state sector. low level of living condition also affects the government policies and their development programs. currently, there is a wide range of institutions that are involved in providing microfinance services to low income groups. these include co-operative societies (e.g. tccss), hundreds of local and international non-governmental organizations (ngos), commercial banks (both state-owned and private) and development banks such as the regional development banks (rdbs) and the sanasa development bank (sdb). in addition, the government’s samurdhi savings and credit scheme established in 1996 is presently one of the largest social mobilization programmes in sri lanka. it was the national program for increase living standard of the low-income people under government supervision. it was a valuable certificate to low income people when engage with financial such poverty alleviation programs and when obtaining financial facilities for that program. mullaitivu is considered one of the more prosperous districts in comparison with other districts in the north. however, poverty raised by inequalities in income, employment, infrastructure, health and educational facilities is trickled within the post-war situation. prior to the explosion of the civil conflict, mullaitivu enjoyed a healthy economy. the foreign aids are used to develop the local economy in sri lanka most probably in the war affected areas specifically in mullaitivu because most of the displaced people who are female other than male staying here. this study deals with the empowerment of rural dairy entrepreneurs through the micro credit activities and the challenges and scenarios under the post war development in selected rural areas in mullaitivu district. therefore, this study id endeavour to investigate the extent to which these micro credit activities of sri lanka lead to enhance the living standard of poor people in oddusuddan ds division. 2. problem of the statement it is accepted from the researches that the microcredit is an important tool to enhance the entrepreneurship development in the developing countries as well as in sri lanka. in the post war context, it has been realized from the past experiences in sri lanka. however, there are some challenges and difficulties facing by entrepreneurs for their sustainable development. the most people in the oddusuddan area in mullaitivu district are subordinate to the poverty line. the economy of the district mainly depends on agriculture and fishing. the agriculture sector is the main income generating source in this district and the livestock is an important sector of the people of oddusuddan division. livestock as a high priority sector for future growth, investment and poverty alleviation. livestock farming is traditional activity of the oddusuddan people. livestock provides not only the supplementary income but also a main source of animal protein. however, people faced various tribulations on livestock framing in this area such as death of the cattle due to the war context and continuous climate changes, due to the high temperature and urbanization the water has been drained and grazing lands have been destroyed thus maintenance cost of the livestock increased. as well higher cost of cattle feed and increase in the cost of labour have an impact on the development of dairy farming. so, the people need capital to manage the maintenance cost and purchase the new cattle. after the resettlement people faced lot of hardship to mobilize capital to start and continue to run the self-employment activities. the micro credit becomes a major tool for development of entrepreneurs in sri lanka. micro finance institutions as part of their core business provide credit facilities to the entrepreneurs. in addition to the financial services, it provides social intermediations, enterprise development and social services like business and skill training, financial and business management and capacity building to improve their capacity on managing the resources granted them to facilitate the self-employment activities. further, the numbers of micro finance institutions in mullaitivu district growing rapidly. however, their wide existence does not match with the extent of reduction in the major challenges that affect the growth of self-employable activities in mullaitivu. so, there is a way to mobilize such capital through the micro credit. however, the most of the researches have been done regarding the women empowerment, entrepreneurship development and micro credit programmes in worldwide, it is very little bit in sri lanka especially in mullaitivu district. this study attempts to fill this research gap and raising the following research question as a research problem: how does micro credit impact on living standard of dairy entrepreneurs (special focus on oddusuddan ds division in mullaitivu district)? copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 45 3. objective of the research  the prime objective of this research is to investigate the impact of microcredit on living standard of dairy entrepreneurs in oddusuddan ds division in mullaitivu district. 4. literature review and hypotheses development kaluarachchi & jahfer (2014) investigated micro finance and poverty alleviation in sri lanka using selected microfinance beneficiaries from polonnaruwa district. attention was mainly given to identify the contribution of microfinance for the poverty alleviation. accordingly, loan amount, repayment ability, accessibility of getting loan and interest rate were identified as significant factors that lead to reduce poverty among people. finding further indicated that microfinance initiatives of the area had significantly uplifted lives of the poor. jayasuriya (2007) investigated the impact of microfinance on poverty alleviation in sri lanka through the impact of samurdhi saving and credit programme for uplifting living condition of the poor. the study collected data from five samurdhi bank and 20 samurdhi holders randomly from kegalle district. findings of the study indicated that samurdhi credit scheme helps poor people to sustaining their current survives. further in sri lankan context the microfinance and livelihood development in poor coastal communities in eastern sri lanka was examined by thilepan & thiruchelvam (2011). this study investigated the effectiveness of microfinance support for coastal communities’ livelihood development in trincomalee district. the study found that there is a significant impact of microfinance on people’s income and saving level. abel, grace, willie (2014) investigated factors influencing poverty alleviation amongst microfinance adopting households in zambia. findings specified that majority of respondents could improve their well-being through microfinance initiatives. a study done by awele oguejiofor & unachukwu (2014) identified interest rate, small size of loans, short loan repayment cycles, and very frequent group meeting as factors that affect successful graduation of microfinance clients from microfinance programs in philippines. the impacts of microfinance institutions on eradication of poverty in meru south sub county were examined by makunyi (2017). the target population for this study comprised of all beneficiary households of microfinance institutions (mfis) in meru south sub country and sample was 30% of the target population. findings of the study highlighted microfinance institutions as a very strong tool in poverty alleviation process at household level. in this process micro credit empowers the poor, enables them to cope with and overcome many of problems that they face. further, microfinance loans were found to have led to establishment and expansion of businesses, acquisition of shelter, education, access to health care and opening up of opportunities for the poor to improve their living standard. idowu & salami (2011) also examined impact of microfinance bank has on standard of living of hairdressers in oyo state. a total of 49 hairdressers who registered with ogbomosho north lga were used as study sample. the findings of the study indicated that there is a significant relationship between microfinance bank efforts and standard of living of hairdressers in ogbomoso north lga. similarly, a positive impact of microfinance on living standard was found in nigerian context by imoisi & opara (2014). kenduiwa & jahfer (2016) investigated the influence of smallholder dairy farmers’ participation in microfinance on breed improvement in dairy farming in longisa sub-country, bomet country, kenya.using ordered logistic regression this study revealed that the amount of microfinance credit accessed influenced the type of breeds kept by smallholder dairy farmers. dairy breeds kept could be attributed to the amount of mfi’s credit accessed. the most common type of dairy cattle breed in the study area was indigenous cattle. smallholder dairy farmers should take advantage of the available and upcoming microfinance institutions in their effort to obtain the necessary finances for breed improvement. taj et al., (2012) found that micro credit significantly increased livestock population in agriculturally landless and land owning families. the special emphasis of the study was on the women livestock raisers. the study revealed the impact of institutional credit in terms of women empowerment, improved households’ income and consumption. boney bose (2017) investigated the effect of microfinance on dairy sector for poverty alleviation in kerala. this study indicates that micro finance has made rapid changes for the beneficiaries of dairy sector and it has improved their standard of living. although the dynamics underlying the micro finance industry have shifted to a new phenomenon that many decision makers still do not fully understand, the risks need to be managed efficiently in the industry of micro finance. the members working under micro finance are able to lead a better life compared to when they were before. they are able to provide better facilities for their family and also provide better education to their children. the next decade will most probably see a continuation of this growth. such growth is not only sought by many mfis but also needed in most countries because the unnerved and underserved markets continue to remain large. there should be also good support from government side. further schemes should be introduced to support the dairy farmers, proper market and training programmes should be given for them. proper awareness also should be given for dairy farmers to increase production and improve the productivity of milk. khandker (1998) conducted a study on income and employment effects of micro-credit programmes in bangladesh. the article has attempted to quantify the village level impacts of the three most important micro-credit programmes of bangladesh, namely grameen bank, bangladesh rural advancement committee (brac), and bangladesh rural development board's (brdb) rd-12 project. descriptive and econometric analyses showed that these programmes have copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 46 positive impacts on income, production, and employment, particularly in the rural non-farm sector. also, growth in selfemployment was achieved at the expense of wage employment, which implied an increase in rural wages. khan & rahaman (2007) investigated impact of microfinance on living standards, empowerment and poverty alleviation of poor people in the bangladesh. from analysis of data, the study found that microfinance has a positive impact on the standard of living of the poor people and on their life style. study further indicated that microfinance has not only helped the poor people to come over the poverty line, but has also helped them to empower themselves in the bangladesh. based on the literature review the following hypotheses have been developed in order to conclude the results. h1: there is a significant impact of micro credit on living standard of dairy entrepreneurs 5. conceptual framework the conceptual model which is developed based on the literature review represents the association between micro credit and living standard of dairy entrepreneurs. in this research the main problem is that how micro credit impact on living standard of dairy entrepreneurs. this problem could be conceptualized based on the factors assumed that can cause for this problem. figure 1. conceptual model micro credit is measured by loan size, loan repayment period and loan interest whereas the living standard considers income, saving, employment status, educational level and health care. 6. methodology research methodology focuses on the research process a kind of tools and procedures to be used. it describes research design, sampling procedure, data sources, instrumentation, and mode of analysis 6.1 data collection data collection is important stage to gather the required information and maintains the integrity of research. in this study the primary data has been collected by using questionnaire to identify the impact of micro credit on living standard of dairy entrepreneurs in oddusuddan ds division. questionnaires were issued to get the data from selected 100 samurdhi beneficiaries from 27 gramaniladhari divisions in oddusuddan ds division. 6.2 population and sample two-stage random sampling technique is suitable for selecting samples to achieve the research objective. in the first stage of random sampling, samurdhi bank had been selected randomly for data collection purpose.in the second stage, the dairy entrepreneurs who live in the oddusuddan ds divisions were selected. mullaitivu district consist of 6 divisional secretariat division, 136 gramaniladhari divisions and 632 villages. the population of this study is 257 dairy entrepreneurs and the information has been collected from 100 respondents who were selected randomly. 6.3 empirical model to determine the impact of micro credit on living standard, an empirical model was used and stated as follows: y =β0+β1x1+ β2x2+β3x3+ɛ micro credit living standard loan size loan repayment period loan interest saving income employment status educational level health care copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 47 where, β0, β1,β2,β3 are the regression coefficient y living standard (dependent variable) x1 loan size x2 repayment period x3 interest rate ɛ error term 7. results and discussion 7.1 correlation analysis the pearson correlation coefficient is presented to illustrate the relationship as well as the statistically significant between independent variables and dependent variables. in addition, pearson’s correlation analysis method is chosen because the correlation can be compared without regarding to the amount of variation exhibited by each variable separately. purpose of the correlation analysis in this study is to find out the significant relationship between micro credit and living standard. table 1. correlations between micro credit and living standard source: survey data 2019 table 1 represents the correlation coefficient between micro credit and living standard of dairy entrepreneurs in oddusuddan ds division. the value of correlation between micro credit and living standard is 0.715 (p=0.000 < 0.01) which represents a significant and positive association between microcredit and living standard at 0.01 levels. therefore, microcredit is strongly positive associated with living standard of dairy entrepreneurs. 7.2 regression analysis regression analysis which is a statistical process used to examine the impact of independent variable on dependent variable. in this study regression analysis is employed to examine impact of micro credit on living standard of dairy entrepreneur in oddusuddan ds division. the results of the regression analysis are given below. table 2. regression analysis coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 2.363 5.743 .411 .682 micro credit 1.783 .176 .715 10.130 .000 r=0.715 adjusted r square=0.507 f=102.610 sig=.000b dependent variable: living standard source: survey data 2019 the above table 2 indicates that the summary of coefficient of regression between the micro credit and living standard. the coefficient of regression (β) 1.783 for micro credit which indicates if micro credit increased by 1 or 1% then living standard also will increase by 1.783. the pvalue for two tailed test is 0.000, which is less than 0.01 significant levels therefore there is a significant positive impact of micro credit on living standard of dairy entrepreneurs. living standard micro credit living standard pearson correlation 1 .715** sig. (2-tailed) .000 n 100 100 micro credit pearson correlation .715** 1 sig. (2-tailed) .000 n 100 100 **. correlation is significant at the 0.01 level (2-tailed). copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 48 8. conclusion and recommendation the results demonstrate that the samurdhi micro credit plays an important role on reducing poverty, improving income of household, improves access to children’s education and also supports improving self-employment activities of poor people. it is found that interest free loans could be used as a powerful tool against poverty. education and training should be provided for micro credit beneficiaries on how to efficiently utilize the funds. interest charged on micro credit should be reduced. further management and staff of micro credit institutions must be given the needed training and education to help build and strengthen the skill, competencies and abilities for effective service delivery. efforts should also be made to reach the poor who are the target of micro credit policies and programs. loan products should be of a longer duration to give beneficiaries opportunities to generate future income out of the borrowed money. loans should not be callable by the financial institution prior to maturity. nowadays samurdhi programme has increased their level of credit for the purpose of beneficiaries. as the micro credit institutions are developing very rapidly, which are increasingly concerned with developing new products and services. the microcredit institutions have experienced dramatic growth during the last two decades, in general and the last decade, in particular. this study indicates that samurdhi micro credit has made rapid changes for the beneficiaries of dairy sector and it has improved their standard of living. the members under the samurdhi credit are able to lead a better life compared to when they were before. they are able to provide better facilities for their family and also provide better education to their children. there should be also good support from government side. further schemes should be introduced to support the dairy farmers, proper market and training programmes should be given for them. proper awareness also should be given for dairy farmers to increase production and improve their living standard. references ahlin, c., & jiang, n. (2008). can micro-credit bring development?. journal of development economics, 86(1), 1-21. awele oguejiofor, d. p. a., & unachukwu, u. (2014). achieving poverty reduction through microfinance: evidences from the philippines. barr, s. (2005). microfinance and financial development. michigan journal of international law, 26, 271. bose, b. (2017). the impact of microfinance on employees of dairy sector: a study in kottayam district, kerala. international journal of advanced scientific research & development. 4(3),01-10. idowu, a., & salami, a. o. (2011). impact of microfinance bank on standard of living of hairdresser in ogbomoso north local government of oyo state, nigeria. american journal of social and management sciences, 2(1), 34-40. imoisi, a. i., & opara, g. i. (2014). microfinance and its impact on poverty allevation: a case study of some micfrofinance banks in edo state nigeria. american journal of humanities and social sciences, 2(1), 27-41. jayasuriya, p. k. (2007). lmpact of the micro finance on poverty alleviation in sri lanka: special reference to sammurdhi programme. kaluarachchi, d. g. p., & jahfer, a. (2014). micro finance and poverty alleviation in sri lanka. kenduiwa, a., mwonya. r., & kinuthia, l. (2016). influence of smallholder dairy farmers’ participation in microfinance on breed improvement in dairy farming in longisa sub-county, bomet county, kenya. journal of agriculture and veterinary science, 9(7), 66-75. khan, m. a., & rahaman, m. a. (2007). impact of microfinance on living standards, empowerment and poverty alleviation of poor people: a case study on microfinance in the chittagong district of bangladesh. khandker, s. r. (1998). fighting poverty with microcredit: experience in bangladesh. oxford university press. makunyi, d. g. (2017). impact of micro finance institutions on poverty eradication in meru south sub-county, kenya. american journal of finance, 1(5), 14-30. taj, s., bashir, a., shahid, r., & shah, h. (2012). livestock development through micro-credit. a hope for poor resource women in rural areas of faisalabad, punjab. journal of agricultural research, 50(1), 135-143. thilepan, m., & thiruchelvam, s. (2011).microfinance and livelihood development in poor coastal communities in eastern sri lanka. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess 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 | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 33 corporate governance practices and bank performance: evidence from indian banks brahmaiah bezawada phd professor of finance and accounting icfai business school (ibs), ifhe, hyderabad, india e-mail: brahmaiahb@ibsindia.org abstract the study examines the corporate governance practices and analyzes the role of the board characteristics (size of the board, the composition of the board, and functioning of the board) on the performance and asset quality of banks. we use a sample of 34 commercial banks consisting of 19 public sector banks and 15 private sector banks from 2009 to 2018 accounting for 93 percent of the total banking industry in india. the study finds that busy directors and the number of meetings have a positive significance on bank performance. the percentage of independent directors and the percentage of busy directors influence a significant negative relationship on the net non-performing assets ratio. the board size and number of meetings are associated negatively with tobin's q significantly and the percentage of busy directors is a significantly positive impact on tobin's q. the board size has a significantly negative impact on bank performance. the research findings provide some insights into corporate governance to the rbi for considering appropriate policy guidelines on corporate governance in the banking industry in india. the paper adds to the existing literature on corporate governance mechanisms and banking industry performance. 1. introduction the role and importance of the board of directors in the corporate governance of financial and banking institutions have become more important during the post-global financial crisis of 2008. the basel committee on banking supervision (bcbs, 2015) emphasizes the importance of corporate governance. the primary objective of corporate governance would be safeguarding stakeholders' interest in conformity with public interest on a sustained basis. good corporate governance practices in banking institutions are essential conditions for achieving and maintaining public trust and confidence in the banking, financial and economic systems of the country. corporate governance deals with the organizational structure through which the objectives of the firms are achieved. good corporate governance will enable better financial performance and provide fair return and treatment to all stakeholders and incentives for management to pursue objectives that are in the best interests of the institution and its shareholders. the indian banking sector is the largest and most complex among emerging economies of the world. the banking industry supported commerce, industries, trade, and personal segments of the economy by providing different types of banking products. the nature of the banking business enhances the information asymmetry and reduces stakeholders' ability to monitor bank managers' decisions. banks do business with other people's savings and money and trust of depositors' forms the cornerstone of their existence. therefore, the banking industry is subject to more intense regulation than other industries, as they are responsible for safeguarding and protecting the depositors' rights, guaranteeing the stability of the financial system, and reducing systemic risk. regulation may be considered as an additional measure of corporate governance mechanism and occasionally it diminishes the effectiveness of other mechanisms in the corporate governance of banks. the reserve bank of india (rbi) widened highly and deepened banking reforms and strengthened structurally the banking industry. most of the banks from the public and private sectors are listed on the stock exchanges and are actively trading at the stock exchanges. the securities and exchange board of india (sebi) introduced a sound corporate governance system to improve the functioning of the banking system. corporate governance in banks plays an important role due to the complexity and uniqueness of banking institutions. boards are expected to take proper control and fair decisions on various strategies and policy choices. regulators may discourage competition and discipline banks by imposing restrictions on ownership structures and business operations. the size, composition, and functioning of boards might show directors' motivation and their ability to adequately supervise and advise managers' decisions. sebi introduced a sound corporate governance system not only to improve the functioning of the banking system but also to ensure full and fair disclosures by the banking industry. the boards of directors of indian banks are responsible and accountable for the operations and performance of the banks and to monitor and advise top management and operational management of banks. sebi lays more importance on the board through a comprehensive and effective regulatory framework for corporate governance of banks. the rbi introduced "fit and proper" criteria for the constitution of the bank board and selection of the board of directors. the sebi issued keywords: corporate governance, board characteristics, performance of banks, indian banking. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 34 guidelines for the board of directors under the clause-49 listing agreements making corporate governance practices mandatory for all listed companies in india. we examine a comprehensive set of board characteristics (size, composition, and functioning of the board) that might affect directors' incentives and abilities to effectively advise and monitor top management. most of the previous studies focus on non-bank firms and a lot of studies are on corporate governance related to the developed countries. there is little work carried out on the corporate governance of the banking sector of emerging economies in general and india in particular. the role of the board of directors in the banking sector is not well explored even in developed countries. the existing literature on bank corporate governance in india mainly focuses on the impact of ownership structure on bank performance. only a few studies focused on corporate governance in emerging economies (garg, 2007; fu & heffernan, 2009; liang et al., 2013). we study the corporate governance framework in the indian banking industry, the role of the board of directors (size, composition, independence and functioning of the board) and investigate the influence of board characteristics on banks' performance. the paper is organized as follows. section 2 reviews the literature on the corporate governance of banks. section 3presents the research methodology and description of variables. section 4 discusses the empirical results and the last section concludes the paper. 2. literature review this section covers literature on board size, board independence, the proportion of executive directors, the proportion of busy directors and the number of meetings held on bank performance. the role of the independence of directors is the main focus of corporate governance in banks. the corporate governance literature on banks offers no conclusive results on the role of independent directors on the performance of the banks. one strand of the literature finds that the presence of independent directors on the board tends to lessen the conflict of interests and be more effective in reducing the agency problem. a lot of studies find that, while independent directors increase the quality of monitoring, while few studies find that they may lack sufficient knowledge of bank-specific information and lead to inferior decision making which leads to the poor performance of banks. 2.1 literature review on independence of directors rosenstein & wyatt (1990) report that stock prices move favorably and positively to the nomination of independent directors on the board. bhagat & black (2002) conclude that corporate governance literature offers no conclusive evidence on the effect of appointing outside directors. klein (2002) reports that earnings quality increases with the increasing proportion of independent directors. rowe et al. (2011) use a sample of 41 banks and examine the impacts of board size, percentage of executive directors and independent directors, on chinese bank performance. they find that the percentage of executive directors on the boards indicates a significantly negative impact on bank performance. nguyen & nielsen (2010) find that the stock price drops following the sudden death of independent directors. francis et al. (2013) report that a board with strong independent directors shows a positive and significant relationship with firm performance. liang et al. (2013) study a sample of 50 large chinese banks; find that the proportion of independent directors has a significant impact on both bank performance and asset quality. muniandy & hillier (2015) examine the impact of board independence on firm performance using a sample of 151 south african firms and find a positive relationship between firm performance and independent directorship. liu et al. (2015) conclude that independent directors have an overall positive effect on firm operating performance in china. fuzi et al. (2016) study a sample from different countries, report a mixed association between the proportions of independent directors and firm performance. independent directors have incentives to promote and protect the interests of shareholders and to be effective monitors of managers. they find that the appointment of outside directors is considered positively and provide excess stock returns. 2.2 literature review on board size jensen (1993) argues that large corporate boards are less effective due to the problems of coordination, control, and decision-making and give excessive control to ceos. yermack (1996) finds that firms with small boards had a better financial performance. adams & mehran (2005) report that board size is positively and significantly related to the performance of the banks. however, other researchers argue that larger boards improve firm performances by facilitating manager supervision and bringing more human capital to advise managers. de andres & vallelado (2008) find that an inverted u-shaped relationship between bank performance and board size, and between the proportion of non-executive directors and performance. their results show that bank board composition and size are related positively significant to directors' ability to monitor and advise management. fu & heffernan (2009) study the relationship between market structure and performance in china’s banking and finds that the private sector banks have higher efficiency and profitability than the state-owned government banks. garcía-herrero et al. (2009) investigate a panel data of 87 chinese banks from 1997 to 2004 and find that less concentrated banking ownership increases bank performance and profitability. pathan (2009) examines a sample of 212 large us banks and finds that small and less restrictive boards positively affect bank risktaking. adams & mehran (2012) investigate the relationship between board governance and performance and the study reports that board size is positively correlated with performance. francis et al. (2013) find that better corporate governance reduces the dependence of emerging market firms on internally generated cash flows, and lowers financing costs. liang et al. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 35 (2013) investigate a set of board characteristics such as size, composition, and functioning of the board, and analyze their impact on bank performance. they find that the board of directors plays a significant role in bank governance in china. malik et al. (2014) report a significant positive relationship between board size and bank performance. however, several researchers (jensen, 1993; yermack, 1996; liang et al., 2013) conclude a negative association between board size and firm performance. hermalin & weisbach (1991); yermack (1996); hermalin & weisbach (2001); francis et al. (2012) find no significant impact between independent directors of the boards and firm performance. empirical evidence on board independence and firm performance is inconclusive concerning banks. (hermalin & weisbach, 1991; agrawal & knoeber, 1996; bhagat & black, 2002) and some other studies find no effect (adams & mehran, 2012) and some other studies find a positive effect (liang et al., 2013). 2.3 literature review on busy directors we define busy directors as the director who serves on three or more boards. fich & shivadasani (2006) find that when a majority of outside directors serve on three or more boards, firms show lower market-to-book ratios and lower operating profitability. fich & shivdasan (2006) find that firms with busy boards are associated with weak corporate governance. these firms experience lower market-to-book ratios and weaker profitability. when directors become busy as a result of acquiring an additional directorship, other companies in which they hold board seats experience negative annual returns. busy outside directors are more likely to depart boards following poor performance. ahn et al. (2010) find that directors serving on multiple boards allow value-destroying acquisitions 2.4 literature review of indian studies the following studies are undertaken in india by (garg, 2007; kumar & singh, 2013; gafoor et al., 2018; sarkar & sarkar, 2018). garg (2007) examines the board size and board independence on a firm's performance and finds that there is an inverse association between board size and firm performance of indian firms. the study finds independent directors have failed to perform their monitoring role effectively and improve the performance of the firm. kumar & singh (2013) examine the relationship of board size on the firm value of listed companies in india and find a negative correlation between board size and performance. gafoor et al. (2018) study a sample of 36 indian commercial banks for the period 2001 to 2014. they find a significant positive relationship between board size and bank performance and report a positive and significant relationship between board independence and bank performance. sarkar & sarkar (2018) examine the effect of board governance on the performance of indian psbs and pvbs for the period from 2003 to 2012. they find strong ownership effects with board independence and positive correlation with the performance of pvbs significantly and a significant but negative correlation with the performance of psbs. they conclude that governance implications for strengthening the composition of the board of directors of psbs. 3. data, methodology, and description of variables we use a sample data of 34 scheduled commercial banks (scbs) of india. the total sample 34 scheduled commercial banks consisting of 19 government-owned public sector banks (psbs), 15 private sector banks (pvsbs) comprise 7 new generation technology-oriented banks (npbs) and 8 old private sector banks (opsbs), for a period of 10 years ranging from 2009 to 2018. so, the panel data are built with 340 bank-year observations. data on board characteristics such as board size, number of directors, the proportion of independent directors, busy directors, executive directors and the number of meetings held are mainly collected from cmie. the performance variables include return on assets (roa), net nonperforming assets (nnpas) ratios are taken from statistical tables relating to banks (strb) from rbis website, and shareholders’ annual market returns are calculated from yearly closings prices of respective banks’ shares, data published by the bombay stock exchange (bse) ltd. the variables used for the study are three broad categories such as performance variables, board characteristics variables and control variables. performance variables are used as the proxy for dependent variables, and board variables as the proxy for independent variables. the control variables are used to control the potential effects on performance. 3.1 dependent variables: performance measures we measure bank performance by using tobin's q, the return on assets (roa), the annual market return of a shareholder (sr), and asset quality is measured by nnpas. we calculate tobin's q as the book value of total assets minus the book value of common equity plus the market value of common equity divided by the total book value of total assets as the usual proxy for tobin's q. we use two other bank performance ratios to examine the return on assets (roa), and annual market return of a bank shareholder (sr). we measure roa as the income before, interest, and taxes (ebit), divided by the total assets. we calculate the shareholder yearly return for each year from the opening price and closing price of the year, and asset quality is measured by net non-performing assets (nnpas). the nnpa ratio is measured by nnpas and is divided by the net advances. sr, on the other hand, measures market performance but might be biased by market sentiment and market manipulations. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 36 3.2 independent variables: board characteristics measures three board characteristics are taken for the study such as board size, board composition, and board functioning. the board characteristics variables include the number of directors serving on the board (bs); the percentage of independent directors on the board (pid) where the independent director is defined as such director that has no other position in commercial banks, the percentage of executive director (ped), the percentage of busy directors on the board (pbd). the busy director is defined as the director who serves on three or more boards and several meetings per year (nom). 3.3 control variables we use total bank assets (in inr billions) to measure the size of the bank, (ta) and capital adequacy ratio (car) as a proxy for measuring the strength of banks' capital. car is measured as equity to total assets. table 1 describes variables. table 1. description of variables nature of variables description of variable panel a: dependent variables: bank performance variables 1 tobin’s q market value of equity plus book value of debt divided by the book value of total assets 2 return on assets (roa) ebit over total assets 3 shareholders’ market returns (sr) yearly stock market returns of respective banks 4 assets’ quality (nnpa) net npas to net advances 5 panel b: independent variables: board characteristics variables 6 board size number of directors in the board 7 independent director percentage of directors who are independent 8 executive director percentage of directors who are executives 9 busy director percentage of directors who serve on 3 or more other boards 10 meetings number of board meetings panel c: control variables 11 bank size total assets of the bank 12 capital ratio capital adequacy ratio (car) (equity/ total assets) 4. econometric model the main regression equation1 𝑷𝒆𝒓𝒇𝒐𝒓𝒎𝒂𝒏𝒄𝒆 𝑴𝒆𝒂𝒔𝒖𝒓𝒆𝒊,𝒕 = 𝜶 + ∑ 𝛽𝑗 𝑗 𝐵𝑜𝑎𝑟𝑑 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠𝑖,𝑡 𝑗 + ∑ 𝛾𝑘 𝑘 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑠𝑖,𝑡 𝑘 + 𝜀𝑖,𝑡 where board variables are 𝐵𝑆𝑖𝑧𝑒 = board size 𝐵𝑀𝑒𝑒𝑡𝑖𝑛𝑔 = number of board meetings 𝐸𝑥𝑒 𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑖,𝑡 = percentage of executive director 𝐼𝑛𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑖,𝑡 = percentage of independent directors 𝐵𝑢𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑖,𝑡 = = percentage of directors who serve on more than or equal to 3 other boards. control variables used in the above equation are: bank size= natural log of total asset of the bank capital adequacy ratio (car) = equity to total assets performance variables are: 𝑇𝑜𝑏𝑖𝑛′𝑠 𝑄𝑖,𝑡, 𝑅𝑂𝐴𝑖,𝑡 , 𝑆𝑀𝑅𝑖,𝑡 , and 𝑁𝑁𝑃𝐴 𝑅𝑎𝑡𝑖𝑜,𝑡 1𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 𝑀𝑒𝑎𝑠𝑢𝑟𝑒𝑖,𝑡 = 𝛽0 + 𝛽1𝐵𝑆𝑖𝑧𝑒𝑖,𝑡 + 𝛽2𝐵𝑀𝑒𝑒𝑡𝑖𝑛𝑔𝑖,𝑡 + 𝛽3𝐷𝑢𝑎𝑙𝑖𝑡𝑦𝑖,𝑡 + 𝛽4𝐼𝑛𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑖.𝑡 + 𝛽5𝐵𝑢𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑖,𝑡 + 𝛽6𝐹𝑖𝑛𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑖,𝑡 + ∑ 𝛾𝑗𝑗 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑖,𝑡 + 𝜀𝑖,𝑡 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 37 variables i, t, where i denotes individual bank from 1 to bank 34 and t represents the period from 2010 to 2018. the β parameters capture the potential impacts of various board characteristics on bank performance. table 2 presents the descriptive statistics of all the variables. panel a, panel b, and panel c report bank performance variables, board characteristics variables and control variables respectively. the average of tobin's q is 1.04 times, roa is 0.70 percent, stock market return is 20 percent and the ratio of nnpa is 2.63 percent of our sample banks for the ten years 2009-2018. the average size of our sample indian bank boards is 14, which is smaller compared to those in developed countries. the average number of meetings per year is 12 which is higher compared to the other developed countries. table 2. descriptive statistics variables n mean std min max panel a: bank performance variables tobin's q 340 1.04 0.12 0.94 1.82 roa 340 0.70 0.88 -2.46 2.02 smr (%) 340 20.00 43.00 9.00 156.00 nnpa 340 2.63 3.04 0.01 16.69 panel b: board characteristics variables board size 340 14.33 2.90 8.00 24.00 no meetings 340 12.33 4.11 4.00 28.00 independent directors (%) 340 36.77 19.20 0.00 75.00 busy directors (%) 340 14.00 17.00 0.00 64.00 exe directors (%) 340 24.21 11.31 0.00 61.90 panel c: control variables bank size (assets in rs. billion) 340 2571 3619 56 34500 car 340 13.32 2.32 8.67 22.04 table 3 presents the correlation matrix for all the variables. however, we do observe that there is a mild and weak correlation between performance measure tobin's q (dependent variable) and several meetings held (independent variable) at 0.40 and there is a positive correlation between performance measure roa and nnpa. we find that there is a weak positive correlation between car and nnpas. the results report there is no correlation between the variables used in the study. we tested for the vif and all the models are free from the problems of multicollinearity as the variance inflation factor (vif) of each independent variable and the results report less than 3 vif for all variables. hence, we conclude that overall, there is no multicollinearity among the variables used for the study. table: 3. correlation matrix bs pind nom ped pbd lta car sr npa roa tq bs 1 pind -0.262 1 nom 0.280 -0.154 1 ped 0.251 -0.157 0.083 1 pbd -0.062 0.201 -0.457 -0.013 1 lta 0.392 -0.246 0.005 0.622 0.161 1 car 0.001 0.177 -0.062 -0.037 -0.014 -0.123 1 sr 0.015 0.053 -0.061 -0.078 0.103 -0.118 0.057 1 npa -0.066 -0.230 0.043 0.209 0.012 0.219 -0.498 -0.034 1 roa 0.073 0.160 -0.027 -0.147 -0.077 -0.183 0.664 0.049 -0.818 1 tq -0.220 0.193 -0.397 -0.046 0.418 0.029 0.114 0.091 -0.002 0.006 1 5. ols estimators table 4 provides the ols results of four regressions results on tobin’s q, roa, sr and nnpas on all five board variables. the panel data analysis is used since the sample data is a mixture of time series and cross-sectional data. this copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 38 allows the analysis to take into account the unobservable and constant heterogeneity, that is, the specific nature of each bank's business models, and strategy, management quality, and style, market perception, etc. we use ols regressions at the bank level. we regress each bank performance variable on board variables, (board size, percentage of independent directors, percentage of executive directors, percentage of busy directors, and several meetings. the results show that board size and several meetings are negatively associated with tobin's q whereas the percentage of busy directors is positively associated with tobin's q. we find that board size and board independence are positively related to roa whereas the percentage of executive directors negatively contributed to the roa. the control variables size of the bank (total assets) and car are positively associated with roa. we find that the percentage of executive directors is negatively significant with the bank performance of roa. board size and percentage of independent directors are negatively associated significantly with nnpas (at 1% level), whereas the percentage of executive directors is positively associated with nnpa (at 1% level). bank size is positively associated with nnpas and car is negatively associated with nnas. both are at a significant 1% level. none of the variables is having any influence on sr including control variables. table 4. ols regression results of tobin's q, roa, smr, and nnpas variables: dependent tobin's q roa stock return nnpas intercept 1.091 (0.000) -2.931 (0.000) -0.199 (0.328) 13.836 (0.000) independent variables board size -0.006 (0.008) 0.048 (0.000) 0.012 (0.195) -0.230 (0.000) percentage of independent directors 0.000 (0.518) 0.005 (0.034) 0.000 (0.854) -0.029 (0.001) number of meetings -0.006 (0.000) -0.010 (0.299) -0.002 (0.726) 0.025 (0.496) percentage of executive directors 0.000 (0.987) -0.008 (0.012) -0.002 (0.382) 0.044 (0.001) percentage of busy directors 0.198 (0.000) -0.312 (0.194) 0.293 (0.074) -0.360 (0.697) control variables total assets 0.000 (0.386) 0.000 (0.019) 0.000 (0.125) 0.000 (0.000) capital adequacy ratio 0.005 (0.082) 0.241 (0.000) 0.008 (0.455) -0.652 (0.000 f value 16.68 38.47 1.76 20.93 r-squared 0.260 0.483 0.040 0.336 adjusted r squared 0.245 0.476 0.176 0.320 number of observations 340 340 340 340 5. regressions results: fixed effect and random effect table 5 presents random effect model and fixed effect model using tobin's q, nnpas, roa, and sr. since our final model is fixed-effect model for tobin's q and nnpas and random effect model for roa and stock market return, we explain the results of fixed effect for two variables and random effect model for the other measures of performance. we use hausman's test, which was rejected for roa and sr and hence we used a random effect model for these two variables. the regressions results show that board size and several meetings have a significantly negative relationship with tobin's whereas the percentage of busy directors is associated positively significant with tobin's q. the results report that board size and percentages of independent directors are having a negative association with nnpa significantly (at 1% level) and the number of meetings held is insignificant and associated positively with nnpas. as reported in ols results, in this model also, no board variable is reported to have any association with the stock market return. however, board size and percentage of independent directors are positively significant with roa and the percentage of executive directors is associated negatively with roa significantly (adams & mehran, 2005; de andres & vallelado, 2008). the results support the hypothesis that a large board contributes to better bank performance. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 39 but this has a negative association with tobin's q, which measures the overall performance of banks. adams & mehran (2012); liang et al., (2013) we find that board independence is having a significantly positive impact on roa which is consistent with previous studies (baysinger & butler, 1985; cornett et al., 2009; de andres & vallelado, 2008; garg, 2007; hermalin & weisbach, 1998; liang et al., 2013). this finding supports the hypothesis that independent directors are better monitors of the managers. the results also report a significant negative relationship between the number of board meetings and bank accounting performance as measured in roa. this negative relationship indicates that conducting a larger number of board meetings results in poor performance of the bank. lipton & lorsch (1992); jensen (1993); yermack, (1996); barnhart & rosenstein (1998) the effectiveness of the board meetings depends on the number of decisions taken in them in the larger interest of the bank but the implementation of these decisions is weak. this result is consistent with previous studies (de andres & vallelado, 2008; liang et al., 2013). we also find the percentage of busy directors has a positive relationship with the performance measure of tobin's q and stock returns significantly. table 5. regression results with fixed and random effects model fixed effect model random effect model variables tobin's q nnpas stock return roa intercept 1.144 (0.000) 15.306 (0.000) -0.199 (0.328) -2.931 (0.000) ind variables bs -0.006 (0.016) -0.218 (0.000) 0.012 (0.195) 0.048 (0.000) pid 0.000 (0.347) -0.039 (0.000) 0.000 (0.854) 0.005 (0.034) nom -0.006 (0.001) 0.017 (0.651) -0.002 (0.726) -0.010 (0.299) ped 0.000 (0.926) 0.049 (0.000) -0.002 (0.382) -0.008 (0.012) pbd 0.155 (0.000) -0.715 (0.457) 0.293 (0.074) -0.312 (0.194) cont variables lta 0.000 (0.208) 0.000 (0.000) 0.000 (0.125) 0.000 (0.019) car 0.002 (0.511) -0.748 (0.000) 0.008 (0.455) 0.241 (0.000) r-sq. 0.126 0.229 0.04 0.477 f-stastics 8.22 19.62 13.81 236.48 noo f obs. 340 340 340 340 note: the table reports regression results with fixed and random effects. the values are regression co-efficient and p-values are in parentheses. 6. conclusions the objective of this paper is to examine empirically the impact of various set of board characteristics on bank performance and asset quality. we use ols regressions with bank performance and asset quality. we have regressed bank performance variables on widely used board characteristics (board size, number of meetings, percentage of independent directors, percentage of executive director and percentage of busy directors). we use a panel data of 34 commercial banks from public and private sectors, accounting for 93 percent of total banking assets and banking business of indian banks, for the period of ten years from 2010 to 2018, a recent period following the major changes in terms business environment such deteriorating profitability, falling credit growth rate, and eroding asset quality of indian banks. the study finds that two variables:1) a percentage of busy directors, and 2) several meetings have a significant positive impact on bank performance. the percentage of independent directors and the percentage of busy directors has a significantly negative relationship with nnpas. the board size and number meetings are associated negatively with tobin's q significantly and the percentage of busy directors is a significantly positive impact on tobin's q. the board size has a significantly negative impact on bank performance. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 40 there is strong evidence that board size and several meetings have significantly negative impacts on bank performance and asset quality (tobin's q and nnpas). we also find evidence that the percentage of busy directors have a significantly positive impact on bank performance and asset quality. our findings suggest that board independence and busy directors contribute to better performance and asset quality. the results report that board size and percentages of independent directors are having a negative association with nnpa significantly (at 1% level) and the number of meetings held is associated positively with nnpas significantly (at 1% level). as reported in ols results, in this model also, no board variable is reported to have any association with stock market return. executive directors contribute negatively to the performance of the banks. overall, we find that the board characteristics play a significant role in bank governance and certain characteristics of the bank board's impact on bank performance and asset quality. the paper adds to the existing literature on corporate governance mechanisms and banking industry performance references adams, r. b., & mehran, h. 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(1996). higher market valuation of companies with a small board of directors. journal of financial economics, 40(2), 185-211. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). contents indian journal of finance and banking; vol. 1, no. 2; 2017 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business 25 an empirical analysis on the future economic and financial growth of the banking sector in nepal nisa.s1 kushal krishna kharel1 1tkm institute of management, india. correspondence: nisa.s, tkm institute of management, musaliar hills, karuvelil p.o, kollam, kerala, india email: s.nisa@tkmim.ac.in received: november 14, 2017, accepted: november 20, 2017 online published: november 22, 2017 abstract the nepalese economy always experiences the trade deficit.only, listed few goods are exported to foreign in cheap price whereas most of basic and all of luxurious items are imported from overseas at a high price. india is an immediate neighbor with whom most of the transactions of import and export are done.again, the purchasing power of common nepalese is comparatively high than other underdeveloped nation. the increasing openings of a bank account by people in every bank are a kind of surprise. if we observe the financial statement of every bank the number of the consumer of each product is increasing year by year. banks are earning more than previous, some are doing good by earning double benefit than previous fy financial statement. though the country political, economic and social current structure is not so supportive, it is very unusual fact to see the progress of banks and financial institutions. this creates a kind of curiosity to the researcher to find the reason behind it. this topic "increasing access of general people of nepal to the banking sector is selected to analyze the reason behind in depth that will kind the different dimensions and level of society to formulate their own policies. keywords: economics, financial growth, banking sector, nepalese economy. 1. introduction himalayan nation nepal is a landlocked country whose southern, western and eastern border is shared with india whereas northern border is shared with china, having a population of 2.85 crores approx. the undeveloped infrastructure of a nation like unpaved road, wooden bridge, low-quality schools and lacking different accessories, as well as poor hdi (human development index), resulted from interim political instability and foreign influence are the main reason of the nepal that is dragging nation far from the pace of the development. but, the one interesting fact that economic and financial community of world should accept and learn that despite numerous drawbacks the banking access of general people of the country is increasing day by day or say, year by year.the nepalese version of classification of depository financial institutions according to the nrb, the central bank of nepal is shown in the table below: www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 26 table 1: showing the category of bfis and minimum capital required in nepal category component minimum paid up capital requirement ka (a) commercial banks 2 billion kha (b) development banks 64 crore ga (c) finance companies 20 crore gha (d) micro credit institutions, co-operatives 1 crore source: nepal rastra bank 1.1 financial service industry the financial system is a set of institutional arrangements through which funds are transferred from surplus units (which has excess funds) to deficit units (which lack funds). a financial system composed of financial institutions, financial markets, and financial instruments. in nepal, the financial system is in developing stage. nepal stock exchange (nepse) is only an organized stock exchange in nepal. the capital market is not performing well. stock prices and nepse index is decreasing several times than previous years. banks are the dominant financial institution in nepal as well as other institutions like a pension fund, provident fund, insurance company, mutual funds etc also plays a major role in the financial sector. however, financial services are not reaching to poor and remote area people. they are concentrating their service only to town focus. table 2: showing banking and non-banking institutions banking systems non-banking systems commercial banks, development banks, development banks, finance companies, and micro-finance financial institutions, and nrb permitted cooperatives and fingos. citizen investment fund (cit), employees provident fund (epf), postal saving bank, insurance companies, cooperatives, nepse, and merchant banking institutions these together total 285 banking and financial institutions (bfis) and other financial institutions. bfi total 162 and represent 88.7% of total assets and liabilities. total assets of nepal bank limited (nbl), rastriyabanijya bank (rbb), agricultural development bank (adb)the three state-owned commercial banks are equivalent to 15.9% of gdp. they serve 26% of total deposit account holders and 44% of total borrowers. their combined branch network covers 33.9% of total commercial bank branches. however, they just have 80 atms. 1.2 kumari bank limited (kbl) kumari bank limited came into existence as the fifteenth commercial bank of nepal by starting its banking operations from chaitra 21, 2057 b.s (april 03, 2001) with an objective of providing competitive and modern banking services in the nepalese financial market. the bank has paid up capital of rs. 2,699,166,532 of which 51% is contributed from promoters and remaining from the public. the bank is listed on nepal stock exchange limited. table 3: showing the kbl at a glance capital branches atms authorized capital rs. 5,000,000,000.00 50 outside valley total57 issued & paid-up capital rs. 2,699,166,532.00 24 inside valley the mission of kbl is to deliver innovative products and services to their customers, use innovative products to achieve financial inclusion, and do so by exemplifying good corporate governance, proactive risk management www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 27 practices, and superior corporate social responsibility. whereas, the vision of this bank is to be the preferred financial partner to our customers, a center of career growth to its employees, and to maximize its shareholders' value while contributing to nation's financial sector and to its economic welfare. 2. objectives of the research  an analysis on the access of banking sector in nepal.  to analyze the performance of kumari bank.  to create a roadmap for future economic and financial growth based on the research report findings.  to suggest ways to help banks to reach in rural nepal more widely. 3. scope of the research although this project is based on whole banking sector of nepal, the project was carried in a commercial bank (kumari bank ltd.) assuming overall good stand of banks in nepal. money and monetary goods are the lifeblood of the economy. the commercial banks in the country have a strong position in the contribution of an economy. the analysis of financial statements, two-month-long observation inside and outside the bank, talks with the bankers, professors, and economist, study of different reports issued by nrb and wings of united nation are the reasons behind the result in the following pages of this paper. this research clearly mentions the financial progress as well as increasing customers inside the nepal only. it is believed that conclusion drawn in the following will help the economist, intellectual, professors as well as people of the financial world as a good case which gives an essence of good governance that will work effectively despite depressing economic growth rate. 4. literature review a literature review is a "stock-taking" of available literature on the selected research topic. it helps the researcher to review the stock of relevant literatures to understand what aspects relating to the topic have been already explored or studied and what needs further study. for this topic "increasing access of general people of nepal in the banking sector" different national and international journal articles, working papers and research reports are reviewed. financial inclusion which ensures the access of general people in financial service has become an important topic to be discussed in the international arena in past decade with the united nations (un) declared 2005 the year of microfinance, and the pittsburg and korea g-20 communiqués in 2009 and 2010 all have stressed on working towards improving the global state of financial inclusion.even the nobel institute recognized the importance of financial inclusion by awarding the founders of microfinance, muhammad yunus and the grameen bank, the nobel peace prize in 2006. now let's see some of the conclusion drawn by experts in this sector. schumpeter (1934): better financial intermediaries are considered to influence growth primarily by raising domestic savings rates and attracting foreign capital.the financial intermediary sector alters the path of economic progress by affecting the allocation of savings and not necessarily by altering the rate of savings. mckinnon (1973): an increased use of financial intermediation by savers and investors and the monetization of the economy allow efficient flow of resources among people and institutions over time. this encourages savings, reduces constraint on capital accumulation and improves allocated efficiency of investment by transferring capital from less productive to more productive sectors. peachy and roe (2006): they argues that there is clear and well-established evidence that bigger and deeper banking systems go hand in hand with more advanced economic development and that a vibrant microfinance sector can augment this but not substitute for it. access to financial services in nepal (2007)by ferrari, jafrin, &shrestha: they viewed in recent years financial www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 28 intermediation in nepal has been stagnation. over the past 10 years, despite the negative real interest rate on deposits, deposit volumes have grown faster than credit volumes. the ratio of credit to deposits fell from 71 percent in 1996 to 63 percent in 2005. banks have also increased their investments in government securities, from 9 percent of total assets in 1996 to 12 percent in 2005. morduch and karlan (2009): they suggest financial access will not, on its own, be enough to take children out of the reach of poverty on a massive scale. nor does the evidence suggest that finance alone is necessarily as powerful as finance coupled with other interventions – like training and healthcare. nara haridhakal (2011): this study reveals that net access to financial services in nepal is considered 1.667 million savings clients and 1.207 million loan clients among 28 million populations. the study conducted in nepali context suggests financial institutions to employ business strategies and plans for promoting access of their services to low-income group treating it both a business opportunity as well as a corporate social responsibility in order to promote financial inclusion. there exists potential that financial inclusion may emerge as the commercial and profitable business but this requires that financial institutions consider access to finance outside the conventional thinking and in an innovative way. world bank's financial inclusion data (2011): it revealed 25 percent of the adult nepali population has a bank account in a formal financial institution. likewise, 10 percent of the adults have saved in a formal financial institution in the past year while 11 percent has borrowed from the formal financial institution. furthermore, 33 percent have borrowed loan from family or friends in the past year, which demonstrates the prevalence of informal channels as the major source of financing for a majority of nepalis. aslidemirguc-kunt and leoraklapper (april 2012): this report shows that 50% of adults worldwide have an account at a formal financial institution, though account penetration varies widely across regions, income groups and individual characteristics. among the most commonly reported barriers are high cost, physical distance, and lack of proper documentation, though there are significant differences across regions and individual characteristics. mustafa k. mujeri (january 2015): here bangladeshi scholar presents some of the suggestion which ensures increment in financial access in the country. suggestions are:  promoting a competitive financial system.  learning from mfis and informal market.  the partnership between formal and quasi-formal institutions.  the reduced transaction cost of borrowing.  financial literacy program.  documentation of best practices in mobilizing financial resources bharat ram dhungana and dr. prashant kumar (2015): the reports of this two academician conclude that financial inclusion in nepal is not satisfactory. they conclude lack of willingness among policymakers and financial institutions are the main reason behind non-financial inclusion. this paper clears the poor access of general people in the banking sector. making access possible (map) funded by government of denmark and dfid (2016): this well-accepted report forwards positive direction of nepalese economy which shows increasing access of general people in financial services. some of the financial facts among many are as follows:  salaried workers and msmes are the most banking sectors.  remittance flow inside the country is increasing year by year. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 29  digitization of scrips and transactions is enabling faster and more cost-effective clearance of transactions.  commercial banks (class a) are the biggest providers, in terms of both assets and market share 5. research methodology research methodology is a way to systematically solve the research problem. the research methodology using for find out the solution of the research problem is analytical research reason methodology and some extend description and analytical research methodology. 5.1 research design the present study is based on analytical design. analysis of financial performance of kumari bank limited and different internationally well accepted research report of nepalese economy are considered. 5.2 population size and sampling method employing sample population in this kind of study is considerably tough. there is no exact number of populations introduced in this study. judgmental sampling method is used in this study. 5.3 data collection method 5.3.1 primary data the primary data is collected from the discussion with the manager of kumari bank limited, macchapuchre bank limited as well as assistant director of nepal rastra bank, central bank of nepal. inputs of professor from central department of economics, tribhuvan university are also the primary source of data. the queries to visitors in kbl during this two month long research project and expression of their expectations are also the strong source of data mentioned here. 5.3.2 secondary data it is the data collected from any published source of data. here the researcher has given more priority to secondary data. data were collected mainly from the internet, published research papers, journal publications, annual reports of nrb and kbl, different progress report and summary of un agencies as well as the european union. 5.4 tabulation and chart it is done with the view of giving quick information to a reader. this will help them to understand the financial facts of nepal. 5.5 tools used in the study different tools are used in this study to analysis the kbl’s annual performance as well as whole financial trend of nepal. they are:  company analysis  financial statement  percentage analysis  average 5.6 period of study this study covers the multiple years’ financial information. for example, in respect of kbl’s performance it has mentioned last five years numerical facts. researcher here presents the date of transaction in b.s in place of a.d. since nepal records their fiscal year in b.s. starting from shrawan first of first year and ends at ashad last of second year. for the general information of whole country’s financial trend the limitation of time is not mentioned. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 30 6. data analysis and interpretation in nepal, nepal bank limited was the first bank in the modern banking system which was established in year 1937 a.d. the central bank of the country was established in 1956 a.d. in these years of absence of central bank in the country, nepal bank limited played a role of central bank. in 1968 a.d. another bank named agricultural development bank was established with the view of assisting farmers. after declaration of free economy and privatization policy in 1990, the government of nepal encouraged the foreign banks for joint venture in nepal. 6.1 financial transactions of kbl table 4: showing financial performance of bank’s past five year particulars fiscal year (npr million) 068/69 069/70 070/71 071/72 72/73 paid-up capital 1603.80 1828.33 2431.68 2699.17 3265.99 deposit 21985.20 25318.57 27578.38 33421.91 37950.53 loans, borrowing 18101.34 20119.79 22808.50 27070.39 30111.45 and advances investments 3261.80 4888.55 3672.10 5299.47 7742.97 fixed assets (net) 277.27 255.86 235.78 259.46 265.41 total assets 25131.40 28222.57 31020.60 37374.51 42416.51 net interest income 819.09 978.03 835.47 925.77 1175.43 other income 203.36 237.05 330.83 297.55 338.61 operating expenses 406.32 434.27 461.82 538.08 581.11 operating profit 616.13 780.81 704.48 685.24 932.94 before loan loss provision net profit (loss) 275.5 291.45 341.65 394.79 716.06 non-performing 2.21 2.89 4.03 2.49 1.15 loan ratio (%) note: paid-up capital includes bonus share looking at the past year's performance, it is evident that the bank's financial business had a significant growth. non-performing assets have been well managed in these years and the business activities of the bank have been increased at a limited rate on the basis of risk valuation. the bank has been planning for balanced and long-term business growth despite fluctuating condition of nepal's financial market, political context, industries, etc. in fiscal year 2071/72, additional loan loss provision was npr 55.8 million whereas the write-back of loan loss provision in fiscal year 2072/73 was npr 254 million. in fiscal year 2072/73, loan of npr 40 million was stated during enlistment of non-banking assets. during the period, although the other operating income had declined by 10.06%; due to the incremental impact of net interest income by 10.81%; the total operating income of the bank had increased by 4.89. net loan loss provision has been decreased by 65.16% in fiscal year 2071/72 than that of previous fiscal year. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 31 non-performing loan (npl) is the default loan or loan which is close to default. generally, loan turns to npl after it reaches or crosses the 90 days of default, but it depends upon the kind of contract. the npl ratio measures the effectiveness of a bank in receiving repayments on its loans. the calculation method for the npl ratio is simple: divide the npl total by the total amount of outstanding loans in the bank's portfolio. the ratio can also be expressed as a percentage of the bank's nonperforming loans. here in above-furnished information, the bank in fy 68/69 observed 2.21%. this rate goes increasing in fy 69/70 as well as 70/71, i.e. 2.89% and 4.03% respectively. this condition started to come under control from fy 71/72 as well as fy 72/73 showing 2.49% and 1.15% respectively. figure 1: showing the amount of deposit and loan & borrowings deposit is the sum of money which is kept in an entity (banks) by the depositor that may be taken back, paid fees as well as transferred to others account. the deposit amount in kbl in fy 2068/69 was npr 21985.20 million which increased to npr 25318.57 in fy 69/70 making 15.16% of increment. again, in fy 70/71 we can see 8.93% of an increment than previous fy. this increment is seen continuous in kbl since the percentage of deposit increases by 21.19% and 13.55% in the fy 71/72 and 72/73 respectively. deposit is considered as a liability of bank that they need to return it back to the owner. loan and borrowings is the fund that the banks and financial institute give to the individual person, group or the organization whenever they are in need o fund and applies in the bfi for support. after completing the requirement the funds are disbursed according to the rule and provision of a particular bank. loan and borrowings are the assets of the bank. according to the above-furnished information, the amount at kbl under the heading of loan and borrowings in fy 68/69 was npr 18101.34 million which later increase by 11.15% in fy 69/70. with the increment of deposits in kbl, the increment of loan and borrowings can also be seen. in support of this, the loan and borrowings of kbl increase by 13.36% and 18.69% in the fy 70/71 and fy 71/72 respectively. the increment of loan and borrowing continues in fy 72/73 giving 11.23% of the increase. figure 2: showing total assets and net interest income of kbl www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 32 the final amount of all gross investments, cash and equivalents, receivables, and other assets as they are presented on the balance sheet is called total assets. given information speaks; kbl had total assets of npr 25131.40 million in fy 68/69 which increased by 12.30% in the following fy 69/70. in fy 70/71 and 71/72 kbl observed the growth of 9.91% and 20.48% respectively. in the recent fy 72/73, it observed the growth of 13.49%. net interest income is the difference between the revenue that is generated from a bank's assets and the expenses associated with paying out its liabilities. a typical bank's assets consist of all forms of personal and commercial loans, mortgages, and securities. the liabilities are the customer deposits. the excess revenue that is generated from the interest earned on assets over the interest paid out on deposits is the net interest income. figure 3: showing operating expense and operating profit before loan loss provision of kbl the expense which is incurred while operating the bank is known as operating expenses. here, capital expenditure does not come. marketing expenses, salary to staff, rent charge; legal expenses, etc. are the operating expense of the bank. with growing operation of the bank, the operating expense also seems to increase year by where. this is a normal business which happens when a volume of a transaction as well as an area of operation increase. the operating expense of kbl of fy 68/69 was npr 406.32 million which increased by 6.87% in fy 69/70. bank observed increment the of 6.34%, 16.51% and 8% in the fy 70/71, fy 71/72 and fy 72/73 respectively. loan loss provision is an expense set aside as an allowance for uncollected loans and loan payments. this provision is used to cover a number of factors associated with potential loan losses including bad loans, customer defaults and renegotiated terms of a loan that incur lower than previously estimated payments. loan loss provisions are an adjustment to loan loss reserves and can also be known as valuation allowances. in the fy 69/70, it observed the growth of 26.73% under the same heading of pbllp. but, in the fy 70/71 kbl observed the 9.78% less pbllp than the previous fiscal year of the bank. figure 4: showing investment of kbl www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 33 investment is the fund or amount put by the bank with the view of getting extra benefits out of it. buying the bonds, shares of other company many other like this is called investment and the benefit from this is called a return, the return may consist of capital gain or investment income, including dividends, interest, rental income etc., or a combination of the two. the kbl observed the npr 3261.80 million of investment in fy 68/69 which increased by in the fy 69/70. the investment in fy 70/71 is 24.88% less than the previous fy. kbl increases its investment in following fy 71/72 increasing 44.317% more than the previous year’s investment. this rate increases considerably while coming to the fy 72/73 which is 46.11% of previous year. figure 5: showing other operating income of kbl the other operating income is the amount received out of core business of the bank. income from allowance, government grants, gains less losses on disposal of financial assets (available for sale and loans and receivables), dividend income, gains arising on assets fair valued at acquisition, rental income from operating lease assets, gains on disposal of property, plant and equipment and gain arising on change of control are items comes under other operating income. the other operating income for fy 68/69 is npr 203.26 million which in following fy 69/70 increased by 16.63%. the kbl observed the big increment in fy 70/71 since it gained 39.56% of growth in operating than the previous year. but, in the following fy 71/72, it observed the 10.06% less gain than the previous year. the other operating income of fy 72/73 remained npr 338.61 million showing 13.80% growth than the previous fiscal year. figure 6: showing net profit of kbl net profit is the net gain of the bank derived after calculating all the expenses that bank obliged to pay. net profit is the something that every bfis looks for to increase. this comes at the end of every financial statement after cutting all the obligations. the bank had npr 275.5 million of net profit in fy 68/69 which increased only by 5.79% in fy 69/70. kbl observed 17.22% and 15.22% of growth than the previous fiscal year in fy 70/71 and 71/72 respectively. kbl observed the very attractive growth in net profit in fy 72/73 making it npr www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 34 716.06% showing the growth of 81.38%. 6.2 financial performance summary of kbl 6.2.1 capital management as per nepal rastra bank's capital requirement, the bank had formulated following capital plan to adhere to a requirement of central bank obligations. table 5: showing the capital plan of kbl amount in npr million fiscal year opening balance addition to paid-up of bank closing balance share dividend right share acquisition 2072/73 2,699 567 3,266 fiscal year opening balance kumari bank’s 50% right share acquired through acquisition right share after acquisition share dividend closing balance 2073/74 3,266 1,350 1,640 900 844 8000 out of bank's current paid-up capital of npr 2.69 billion, total capital would reach npr 4.61 billion after distribution of the share dividend of 21% i.e. npr 566.8 million and 50% right share i.e. npr 1.35 billion, in the fiscal year 2072/73. similarly, additional paid-up capital of npr 1.64 billion from 4 acquiring financial institutions would be added up in the bank's capital. in the current fiscal year 2073/74, share dividend from joint operation after acquisition would be npr 840 million and right share would be npr 900 million. the above mentioned right share is targeted to be included in the consolidated capital after an acquisition. 6.2.2 deposit the total deposit amount reached npr 37.95 billion in asadh end 2073, which increased by 13.55 as compared to the last fiscal year. this is shown below: table 6: showing the kind of deposit and increment in kbl amount in npr million deposit fy 072/73 % of total deposit fy 071/72 % of total deposit increased amount increased rate current 2,070 5.45 1,666 4.98 404 24.25 savings 9,581 25.25 8,005 23.95 1,576 19.69 call 8,771 23.11 9,281 27.77 -510 -5.49 fixed 17,528 46.19 14,470 43.29 3.058 21.13 total 37,951 100 33,422 100 4,529 13.55 6.2.3 lending and its management in fiscal year 2071/72, the bank's total loan was npr 27.7 billion, while at the end of review year, it increased by 11.23% reaching npr 30.11 billion. the bank has diversified its lending into the personal loan, education www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 35 loan, small and medium scale business loan, agricultural and productive loan, deprived sector loan, organizational loans and development projects loan. during the review period, bank's nonperforming loan is 1.15%, but the gross non-performing loan ratio was only 0.12%. certain improvements were noted in real estate sector lending in the current review period. in the current review period along with recoveries, certain non-performing loans were taken as the non-banking asset of the bank, which resulted in the decline in non-performing loan ratio in comparison to the previous year. 6.2.4 investment in accordance with the bank's objective of getting returns from overall resources by maintaining balanced liquidity, the bank has given continuity to its policy of investing in nepal government and nepal rastra bank's risk-free securities (treasury bill, development bond, etc). the bank has been carefully investing in the local and international market and various organizations' share and bonds. the bank has invested npr 1.28 billion in ng's treasury bills, npr 2.51 billion in development bonds; making the total investment of the bank to be npr 7.74 billion by the end of fy 2072/73. the bank has invested in shares of few institutions also. 6.2.5 profit in the review year, there was good growth in revenue from every sector along with growth in the bank's overall business. besides this in the review year, growth in operating expenses has been limited to 8% and huge bad debts have been recovered. interest income from loan and investment in the fiscal year 2072/73 increased by 11% and reached npr 2.69 billion and interest expenses increased by 0.64% to npr 1.52 billion as compared to the fiscal year 2071/72. bank's net interest income increased by 27% and reached npr 1.18 billion in the fiscal year 2072/73. bank's loan, deposit, and income through fee and commission for other services increased by 14% and reached npr 230 million in fiscal year 2072/73 whereas foreign exchange income increased by 14% and reached npr 110 million. similarly, in the fiscal year 2072/73, bank's total operating income has reached npr 1.51 billion which increased by 24% than the previous year.besides this, bank's staff expenses and other operating expenses increased by 11% and 4% to npr 320 million and npr 260 million respectively. in fiscal year 2072/73, operating profit before loan loss provision increased by 36% than last fiscal year and reached npr 930 million. in the review year, there was additional loan loss provision npr 180 million and npr 430 million was returned for loan loss provision. there were few loans which were required to be converted into non-banking assets with a book value of npr 40 million. the bank's net income in fiscal year 2072/73 increased by 81% and reached npr 716 million as compared to the fiscal year 2071/72 which was npr 390 million. 6.2.6 contribution to government revenue in the fiscal year 2071-72, the bank paid npr 173.7 million as a corporate tax to the government and during the review period npr 356 million was paid as advance corporate tax to the government. 6.3 analysis of financial access in nepal table 7 : showing the different indicators of financial access s. no particulars class “a” class “b” class “c” overall 1. no. of branches 2,116 805 805 3,726 2. no. of deposit accounts 14,929,948 34,37,203 4,76,454 18,843,605 3. no. of loan accounts 8,41,206 3,05,111 37,315 11,83,632 4. no. of branchless banking centers 976 0 0 976 5. no. of non-operated 142 0 0 142 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 36 branchless banking centers 6. no. of branchless banking customers 2,24,003 0 0 2,24,003 7. no. of mobile banking customers 22,08,046 20,5,735 12,900 24,26,681 8. no. of internet banking customers 7,12,336 20,649 1,939 73,4,924 9. no. of atms 1,817 201 29 2,047 10. no. of debit cards 4727384 353099 27730 5108213 11. no. of credit cards 64136 0 0 64136 12. no. of prepaid cards 99933 0 0 99933 source: banking and financial statistics report, nrb. mid-june 2017 the information mentioned in above table talks about the access of bfis in nepal. it shows that commercial banks have 2116 branches until mid-june 2017 in nepal. similarly, development banks and financial institutions have 805 each branch in a different part of the country till the date mid-june 2017. the total number of deposit accounts in class "a", "b" and "c" is 18,843,605 where 11,83,632 is the number of loan account holder till the date. from the above information, we observe that only commercial banks have the facility of the non-operated branchless banking center and the number of it in nepal is 976. the number of customers who are benefited from this same facility is 2, 24,003. the number of non-operated branchless banking centers are 142. nowadays, mobile banking and internet banking are also becoming famous in nepal. mobile has 24,26,681 customers whereas, internet banking has 73,4,924 number of customer. the concept of cashless economy is found moving quickly in nepal. till mid-june 2017, the number of atms, debit card holders, credit card holders and prepaid cardholders are 2047, 5108213, 64136 and 99933 respectively. 6.4 comparative study of financial access in nepal table 8: showing the comparative progress in financial access s. no particulars 2015 (mid-july) 2016 (mid-dec) 2017 (mid-june) 1. no. of branches 2864 2949 3726 2. no. of deposit accounts 15,755,857 17,519,287 18,843,605 3. no. of loan accounts 10,38,166 11,01,240 11,83,632 4. no. of branchless banking center 503 812 976 5. no. of branchless banking customers 1,97,493 2,15,094 2,24,003 6. no. of mobile banking 9,97,463 17,54,566 24,26,681 7. no. of internet banking customers 3,96,362 5,15,465 7,34,924 8. no. of atms 1,483 1,908 2,047 9. no. of debit cards 41,46,237 46,57,125 51,08,213 10. no. of credit cards 43,895 52,014 64,136 11. no. of prepaid cards 69,322 92,349 99,933 source: banking and financial statistics report, nrb. the above table displays the progress made the bfi in nepal towards the access to its service in nepal. the number of branches in the year 2015 (mid-july) was 2864 which is found increased by 2.97% in mid-dec, 2016 making a number of branch 2949. this was again found increased in 2017, mid-june by 26.35% making number 3726. the number of deposit accounts is also seen increased considerably. in an amount of deposit in 2015, mid-july was reported 15,755,857 which increased by 11.19% making number 17,519,287 in mid-dec, 2016. this number in 2016 increased in 2017, mid-june by 7.56%. the number of loan account holders is also seen www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 37 increased. it was 10, 38,166 in mid-july, 2015 which increased by 6.08% till mid-dec 2016. again, the number of the loan account holders found increased by 7.48% in mid-june, 2017. the number of the branchless banking center and customers were also seen increased as the number of centers increased. in the mid-july, 2015 the number of branchless banking center was 503 which increased to 812 till mid-dec, 2016. this number of centers increased till mid-june, 2017 to 976 making the growth of 20.19%. in nepal, the concept of cashless economy is increasing day by day, more in the educated circle. the demand for mobile banking and internet banking are increasing day by day. in mid-july, 2015; 9, 97,463 numbers of customers all over the nepal are found using the facility of mobile banking. in the same way, 17, 54,566 numbers of customers all over the nepal are found using the same facility showing the growth of 75.90%. the number of mobile banking customers reached to 24, 26,681 until mid of june 2017 making the growth of 38.31%. the number of internet banking customers is also seen increased considerably. in mid of july 2015, the number of customers using this facility was 3, 96,363 which increased by 30.05% till mid of december 2016. the number of the customers using the internet banking services in overall nepal reached to 7,34,924 making the growth of 42.57% than previous calculation. from the above table, we can observe a net increase in the number of atms in all over nepal. in mid-july, 2015, the nrb records 1,483 atms all over the nepal which again they have recorded in another report of mid-december, 2016; 1,908 atms. the number of atms found again more in the survey reported at mid of june 2016, and it is found country has increased the number by 7.28% making number to 2,047. the number of the debit card in mid-june, 2017 was reported at 51,08,213 which were only 46, 57,125 in mid-dec, 2016.from above table shows that the number of the debit card in mid-july, 2015 was 41, 46,237 in all over the country. the same increment can see in credit card too. the number of credit card holder was 43,895 in the mid-july, 2015 which increased by 18.50% in mid-december, 2016. the number of credit card user reaches to 64,136 in mid-june, 2016 showing the increment of 23.31%. we can also observe the increment in user of the prepaid card which was only 69,322 numbers in mid-july, 2015. this number increases by 33.22% as reported in mid-december, 2016. the nrb observed only little increment in mid-june, 2017 in the numbers of the prepaid cardholder. only 8.21% of overall user's number is increased till the date. from the above information, we came to know that the volume of nepalese financial sector is increasing day by day. every dimension of financial access discussed above is found heading in a positive direction. these data imply not only increasing access of general people in the banking sector but also the level of awareness. 6.5 comparative study of population per branch of bfis in nepal table 9: showing the comparison of population per branch of bfis in nepal year total population total branches of bfi population per branch mid-jul, 2015 2,80,44,096 4047 6930 mid-dec, 2016 2,84,31,494 4514 6299 mid-jun, 2017 2,84,31,494 4894 5809 source: banking and financial statistics report. nrb from the above record, we observe the decreasing number of population per branch of bfis in nepal. the report on mid-jul, 2015 records the 6930 people per branch with the full population of 2,80,44,096. the total branches of bfi at that point were 4047. these statistics found the change in the record of mid-dec, 2016. the number of people using the single branch reached to 6,299. here, we can see two differences in data provided: change in total population and total branches of bfis. the population of nepal reached to 2,84,31,494 and at the same www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 38 time, total branches are also found increased i.e. 4514. the recent publication also showed the progress in financial access. the number of people per branch in the record on mid of june 2017 records 5,809 people. here the population remains same to the mid-dec, 2016 record whereas, the number of branches of bfi 7. findings and suggestions the above discussion not only forwards the developmental trends in nepalese banking sector but, also stresses on the need of banks and financial institutions to increase the quality of life. though the nepal lacks in a wide distribution of industrialization and the wealth, it is constantly observing increased financial transactions every year. presently, most of the youth are outside the nation, mainly in gulf like dubai, saudi arab, malaysia, qatar, etc. educated youth circle is in developed countries like australia, usa, canada, etc. and this number is not naming to stop. this migrated population mostly uses to send their earnings in-country rather than spending in outside. remittances have 28% of contribution in the gdp of the nepal. it is very true that most of goods and services consumed in nepal are not produced inside. india is the major business partner as well as supplier to nepal. any changes in indian business trend have a direct or indirect impact on the availability and price of the goods and services in the country. the given below are the main findings of the financial analysis of kbl and nepalese economy towards financial inclusion. 7.1 findings of this research  salaried workers and msmes are the most banked group. 72% of msmes have access to formal financial services, in the same way, 83% of salaried workers have access to same. the nature of occupation they hold made them financially inclusive group.  28% of gdp is contributed from remittance. the rate of contribution in gdp under remittance is increasing since the rates of immigrants are increasing every year.  poor banking infrastructure and the high cost of operation is restricting bfi from spreading their reach in rural areas.  informal channels of financial service providers have widespread usage among all target market segments. landlords, goldsmith, and pawnbroker are widely visited group for financial support. no cumbersome procedure and no strict legal compliance are the reason behind the wide presence of this informal group.  there is a single stock exchange, dominated by scrips of banking and financial institutions (bfis).  digitization of scrip’s and transactions is enabling faster and more cost-effective clearance of transactions.  sophisticated financial technology and services introduction is increasing in the country.  a number of branches are increasing more each year. bfi is seen more interested to open a branch in an urban area than rural.  the rate of net profit of kbl is very progressive despite the poor economic condition of nepal.  the numbers of the account holder (both deposit and loan) are seen increased every year. comparatively, deposit account holder is seen more than loan account holder.  the user of debit, credit and prepaid card are increasing. every time the record made by the particular bfis and nrb record reports the increased number.  mobile and internet banking are getting more popular. the user of mobile banking service user was found 38.31% more in mid-june, 2017 than the mid of the dec. 2016. in the same way, the internet www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 39 banking users are also found more than the previous record. 42.57% of growth is seen in mid of june 2017 than the mid of dec. 2017 record.  every immigrant with different motto has at least one bank account in nepal since they need to deposit the amount and send it to home.  the number of atms counter in all five development region of nepal is found increased.  mostly remittance is received from money transfer agency. nowadays most of the banks have their own remit agency.  almost all financial transactions and volume of banks is seen increased. the comparative financial statement of kbl and record of nrb are the proof.  the government of nepal is found motivating bfi for merge which helps them financially more capable.  people of nepal are seen little more financially aware than past years. the increased number of atms, branch of bfis and many others like this proves it.  ngos and ingos have a strong presence in nepal. program by them is also seen one of the reasons that poor people of nepal are visiting bfis. especially, far western development region where the presence of bfis is seen comparatively less, the ngos and ingos are found more active.  the increasing number of customer and branches of bfi shows that they are earning more trust than local money lenders. the number of customer per branch is decreasing as the number of the new branch is opening at a different part of the country. the recent record on mid of june 2017 shows per branch cover 4,894 people of nepal which are decreasing every year. 7.2 suggestions  the government of nepal needs to develop the infrastructure so that bfi can be motivated to reach remote region.  banks and banking institutions should decrease their service cost so that more people can be attracted.  more branch needs to open, especially should focus on rural nepal.  people should be encouraged to purchase more financial products which benefit them.  insurance other than life and automobile has weak presence in the country. importance of remaining product is needed to highlight by financial institutes.  account opening process need not be cumbersome and time-consuming. this discourages people to enjoy the financial service of bfis.  frequent change in an interest rate of savings/loan needs to review on an interval.  social security fund should be disbursed to the individual in their individual account. this compels them to have the bank account so that they can be habited to banking service. this benefits both bank and customer.  nrb should regulate the banking service with the stricter parameter.  nrb should stop giving agreement to small financial institutions to operate as banks in the remote region.  nrb should make a rule and policy which ensures a number of bfi presence in rural nepal. the present number i.e. at least one branch in rural nepal need to be increased.  telecom companies should make wide access to the internet with low cost and strong network range coverage so that people have no difficulties in using mobile and internet banking. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 40 8. conclusion kumari bank limited is really doing a great job in the banking business. the increasing rate of customers, branches, and services, as well as the net profit, are the proof of its best performance. the condition of other bfis is also the same, only a few are an exception to this. the dimensions we talked above showed clearly the increasing presence of bfis in nepal. more and more branches are found opened in every review period. previously, kbl too only had 36 branches all over the nepal but, after the acquisition, it came with 38 new branches. this does not only indicate the rising business of kbl but also the trust they have earned or, the willingness of the customer to associate with them. they have 50 branches outside the kathmandu valley and 24 inside it. the monthly, quarterly and annual progress report prepared by nrb has stated the clear picture of the increase in financial bfis with strong financial backup. the number of an account holder, atm center all over nepal is found more than the previous report each time it is prepared. the user of mobile banking facility and internet banking is also found increased. the card holders are found considerably more than the previous record. if we see the record of the presence of bfis development region wise, we observe the clear progress in a number of bfi branches in each region than a previous latest record. the decreasing population per branch is also the witness of increasing financial access in nepal. nepal records 28% of gdp contribution from remittance. the presence of industries is like equal to no in nepal. out of total import goods and services, more than 60% comes from india alone. nepal exports the low price goods whereas imports the goods and services of the high price. trade, as well as the budget deficit, is common in nepal. these national records depict the overall performance of nepal and efficiency of government to bring prosperity to the nation. foreign subsidies, grants, and discounts are the major part of nepalese budget since it lacks the capital to invest, political stability and major goods industries. the increased inflation rate is the major reason behind increased in the budget every year. the increasing financial access in nepal among the general people is the outcome of the collective effort of ministry of finance, gon, nrb and all it regulators as well as bfi. this shows the effective implementation of fiscal and monetary policy in nepal.here we conclude that though the nepal lacks the strength of capital and investment, business environment, political stability and skilled manpower, it has segregated its performance towards progress in term of financial inclusion. each data and interpretation is the witness to its increasing access. references dhungana b. r & kumar p.(2015).the status of financial inclusion in nepal.pacific business review international.7(8). kant a. d & klapper l (2012) “measuring financial inclusion: the global findex database, the world bank development, and research group. mujer m.k .(2016).improving access of the poor to financial servicesa report prepared for the general economics division of the planning commission to serve as a background study for preparing the 7th five plan (2016-2020) of bangladesh. making access possible (map); 2016; funded by government of denmark and dfid dhakal, n.h. (2011). financial inclusion: state of the art in nepal. washington dc: consultative group to assist poor: microfinance gateway. ferrari, a. jafrin, g. and shrestha, s.r (2007). access to financial services in nepal, washington dc: the world bank. mckinnon, r. (1973). money and capital in economic development, washington: brookings institution. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 41 morduch, j. &karlan, d. (2009). handbook of development economics. in d. r. rosenzweig, access to finance (pp. 1-84). elsevier. peachy, s. & roe, a. (2006). access to finance: what does it mean and how do savings bank foster access. oxford: oxford policy management. schumpeter, j. (1934). the theory of economic development, cambridge: harvard university 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 2020, cribfb | ijfb indian journal of finance and banking; vol. 4, no. 2; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 38 evaluating rainfall risk profile of indian subcontinent based on index metrics bharath v phd research scholar dos in commerce university of mysore, mysuru, karnataka, india e-mail: bharathv@commerce.uni-mysore.ac.in kotreshwar g phd professor (rtd.) senior fellow, icssr, new delhi, india e-mail: kotreshwar@commerce.uni-mysore.ac.in received: july 09, 2020 accepted: july 20, 2020 online published: august 09, 2020 doi: 10.46281/ijfb.v4i2.700 url: https://doi.org/10.46281/ijfb.v4i2.700 abstract floods and droughts represent an embedded monsoon factor impacting the indian economy. evaluating monsoon risk based on rainfall index metrics could help design appropriate alternative risk transfer products. this study proposes a new set of rainfall indices that can be used to explore the excess rainfall risk profile of the indian subcontinent. the study proposed a new set of indices for evaluating excess rainfall risk profiles which are defined as excess rainfall days (erds). the methodology proceeds in a step-wise form: empirical values of erds over 50 years for selected msds of india are derived, and then these index values are analyzed for determining the degree of variability and volatility, followed by the examination of the degree of inter-correlation amongst indices of selected meteorological sub-divisions. the research is based on the applications of econometric models such as the augmented dickey-fuller (adf) test followed by the garch model. the results revealed that several of the statistical properties of erd indices support the idea that these indices could be used as building blocks for designing rainfall derivatives similar to hdds/cdds underlying temperature derivatives. keywords: rainfall indexation, floods, excess rainfall days (erds), rainfall derivatives. jel classification codes: f37, g19, g29, g22, q59. 1. introduction india is exposed to a wide range of weather-related risks such as droughts, floods, storms, landslides, and extreme temperatures. india‟s economic losses from weather-related events have doubled over the last thirty years (singh, del rio, soundarajan, nath, & shivaranjani, 2018). a report of mckinsey global institute has found that economic damage incurred by mumbai (india) from flash floods could be almost double by 2050. therefore, floods are the most economically damaging weather-related events, costing more than all other disaster events combined. from 1998 to 2017, 10 out of 14 extreme weather-related disasters were floods, causing economic damage of approximately us $45 billion and killing over 27000 people and affecting more than 370 million people (singh et al., 2018) in india. therefore, effective management of excess rainfall risk is essential for achieving sustainable development of the economy. traditional risk management tools like crop insurance programs are found to be grossly inadequate. a recent innovation in the financial markets involves the development of a rainfall-index based on derivative products as a risk management tool to hedge excess rainfall. rainfall derivatives (rds) represent new alternative risk transfer tools that could be used in the capital market to minimize the adverse impact of floods on the indian economy. india has well-developed financial markets and it has been experiencing hassle-free trading from the past two decades. even the securities and exchange board of india (sebi) has actively been considering a proposal to allow trading in weather derivatives. therefore, india too needs such derivative products, as investors are more mature now, this product would be a game-changer for many stakeholders. this study introduces a new set of rainfall indices that can be used as building blocks for designing rainfall derivatives contracts. the proposed study aims to determine rainfall indices for selected meteorological sub-divisions (msds) of india based on a new methodology. the statistical properties of computed indices will be analyzed to assess the rainfall risk profile. the study also intends to examine the relationship of rainfall indices among the selected meteorological subdivisions of india. mailto:bharathv@commerce.uni-mysore.ac.in mailto:kotreshwar@commerce.uni-mysore.ac.in https://doi.org/10.46281/ijfb.v4i2.700 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 39 2. floods in india most of the losses faced by india are due to an increase in flood events and cyclones, which are projected to increase in magnitude and frequency in the near future. hence, india has high exposure to weather-related events. in 2018, a prolonged southwest monsoon over the state of kerala resulted in one of the worst floods in 100 years, causing estimated losses of us $4.25 billion. over 8 lakh people were displaced and 400 lives lost over a span of 2 weeks (chacko, ranadive, sachdeva, hede, bhati, nainan, & jagasheth, 2018). in 2019, many states across the country have witnessed severe drought conditions, followed by a delayed monsoon, which was made up for by spells of high-intensity rainfall resulting in heavy flooding across the country. therefore, indian summer monsoon volatility could adversely impact agriculture, water resources, power generation, and the overall economy (mooley, parthasarathy, sontakke, & munot, 1981; mooley & parthasarathy, 1983; parthasarathy, munot, & kothawale, 1994). kumar and parikh (2001) found that there was a strong relationship between agricultural performance and climate; and there will be a significant loss in net revenue due to global warming. however, drought impacts less frequently in some areas of india, floods cause severe damage to livelihood and agriculture in other areas; one-third of the average flood-prone area in the country constitutes agricultural land (ipcc, 1995). figure 1. total crops damages due to floods in india from 1970-2017 source: flood damage statistics report, central water commission, government of india (2019) figure 1 shows the year-wise total crop damage due to floods from 1970 to 2017. from 1970 to 2017, india suffered damages due to floods and heavy rains. the year 2015 was the most catastrophic for india. the data from the central water commission show the country‟s total crop loss due to floods in 2015 was rs. 17043.98 crore. moreover, crop damage due to floods and heavy rainfall has increased exponentially in the last two decades (figure 1). india is among the countries most affected by weather-related risk. most of the studies have found that floods will become more frequent in india. cwc report shows the year-wise area affected due to floods. it shows that the area affected by floods in india does not follow any pattern. the lowest area affected by floods in india was 1.09 million hectares in 2006 and the highest was in 1978 with an area of 17.5 million hectares. the most recent and devastating example was 2013 in kedarnath, 2015 in chennai, 2018 in kerala, 2019 in karnataka and maharashtra. according to the central water commission report on state-wise flood damage statistics show that west bengal was the highest damage to crop due to floods and heavy rain followed by andhra pradesh, karnataka, uttarakhand, uttara pradesh, kerala, and arunachal pradesh. 3. rainfall derivatives developments in global financial markets provide unique opportunities for managing catastrophic risks. the two promising innovations that could provide for effective management of monsoon risk are (1) index-based insurance contracts and (2) rainfall derivatives. index-based insurance is an alternative form of insurance that makes payments based not on measures of farm yields, but rather on some objective weather event such as rainfall. agricultural insurance is an industry that is still in its evolution stages in india. rainfall index (ri) insurance introduced by leading insurance companies in india in the recent past holds better prospects over traditional crop insurance. the development of ri insurance just marks the beginning of a journey towards the creation of full-fledged rainfall markets for absorbing monsoon risk to meet the hedging needs of a wide range of stakeholders including agri-insurers, agri-finance companies, commodity trading enterprises, hydropower utilities, agro-processing companies, etc. designing such a derivative requires determination of rainfall index metrics 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 1 9 7 0 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 0 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0 2 0 1 2 2 0 1 4 2 0 1 6 r s in c r o r e years crop damage in values (rs. in crore) copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 40 which could be used as building blocks. in 2011 chicago mercantile exchange (cme) pioneered trading rainfall futures and options on monthly and seasonal rainfall indices. 4. research questions  what should be the framework for the standardization of measures of rainfall indices for quantifying excess rainfall risk?  what should be the approach for deriving empirical values of excess rainfall indices of meteorological subdivisions of india?  what are the statistical properties of the empirical values of excess rainfall indices? 5. research methodology the following methodology is adapted to analyze the rainfall time series data. the research is based on the applications of econometric models such as the augmented dickey-fuller(adf) test followed by the garch model. 5.1 study area the high intensive monsoon rain and melting of himalayan glaciers is a major source of flood in india. according to central water commission (cwc) report on state-wise flood damage statistics show that west bengal has the highest damage to crop due to floods and heavy rain followed by andhra pradesh, karnataka, uttrakhand, uttar pradesh, kerala, arunachal pradesh, gujarat region and saurashtra region. the sample consists of the top 10 floods damaged meteorological sub-division of india based on the central water commission report. 5.2 data and methodology a standard methodology for rainfall indexation is yet to emerge. stoppa and hess (2003) developed a rainfall index on several aggregated weights of average rainfall in ten-day periods in each growth stage. national commodity derivative exchange (ncdex) proposed a rainfall index based on historical cumulative rainfall. first rainfall index for mumbai city was launched in 2005. rainfall index (ri) for a stated location is determined as: ri location = 𝑟𝑖𝑡 𝑅𝑖𝑡 𝑋 𝑠𝑐𝑎𝑙𝑒 𝑣𝑎𝑙𝑢𝑒 (1) where rit represents actual rainfall of ith day of the tth season; rt represents long period average daily rainfall of ith day of the tth season; scale or multiplier value was assumed 1000 (rainfall is measured equivalent to 1/1000 th of a met, i.e., in millimeter). ri location indicates what percentage of cumulative normal expected rainfall is realized, which means a higher the rainfall index value meaning that compared to the cumulative average rainfall up to the date of an index, there has been more rainfall. similarly, in 2005, multi commodity exchange (mcx) and weather risk management services pvt. ltd. jointly developed rainfall indices based on historical annual cumulative rainfall and it adjusted with excess and deficit of actual cumulative rainfall as of that data. the adjustment factor takes into account the impact of historical and actual rainfall during the period. kotreshwar (2006), kotreshwar & kanakasabai, (2006), kotreshwar & arunkumar (2006), shivkumar & kotreshwar (2013), kotreshwar (2015) proposed process of rainfall indices based on a ticker value defined as monsoon outcome index (mox) and estimated their statistical properties of mox series across time and subdivisions, and the study examined the potential of mox as a new asset class for inclusion in the portfolio for risk hedging. later, kotreshwar (2015) has modified their suggested methodology to compute rainfall indices as deficit rainfall days (drds) and excess rainfall days (erds). this approach appears to be more relevant to define and evaluate rainfall variability using drd/erd measures as standard metrics. the present study is based on this new approach for rainfall indexation. two important characteristics within the rainfall time series are highly skewed and volatility clustering. a series with some periods of low volatility and some periods of high volatility is said to exhibit volatility clustering. volatility clustering can be thought of as clustering of the variance of the error term over time that is if the regression error has a small variance in one period; its variance tends to be small in the next period, too. in other words, volatility clustering implies that the error exhibits time-varying heteroscedasticity, that is, unconditional standard deviations are not constant. these characteristics can be captured by the garch family models. the residuals can be modeled with arch dynamics. the conditional variance allows for two types of volatility dynamics that are relevant in rainfall. they include seasonal volatility and autoregression effects in which shocks to the conditional variance may have effects that persist for several periods. campbell and diebold (2005) use an autoregressive moving average (arma) time series model for temperature and observe seasonality in the autocorrelation function for the (squared) residuals when modeling the temperature in us cities. they propose a seasonal autoregressive conditional heteroskedastic (arch) process to model volatility. a similar method adopted by anastasiadou and lópez-cabrera (2013) proposed a garch model to identify volatility in weather indices. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 41 5.3 methodology excess rainfall at a given location needs to be quantified using a standard metric. for this purpose, the historical daily average rainfall for the selected location would serve as the „base‟ rainfall for calculating the metric. rainfall at a locat ion equivalent to being above a defined normal rainfall by one millimeter for one day can be denoted „excess rainfall day‟ (erd). for example, given the historical daily average rainfall for june for a location is 3 mm and if the actual daily average rainfall is 5 mm, we can approximate the erd for june as 60 (2 x 30 days). a south-west monsoon season of 4 months (june-sept) might accumulate a seasonal minimum of zero or a maximum of over 100 erd for a location. a zero erd means that all the four months recorded deficit rainfall. the underlying variable being rainfall, let ri denote the rainfall (in millimeters) measured on ith day, and rx denotes the average daily rainfall (in millimeters). the average daily rainfall, rx, should serve as the reference level of rainfall in millimeters. the value of rx is based on the past rainfall data for any chosen length of the period. the standard underlying variable, then, would be simply the difference between the daily average value of rainfall (in millimeters), i.e., rx and the actual value of rainfall (in millimeters) on ith day, i.e., ri. the erd generated on a given ith day then is given by: erdi = max. {ri – rx, 0} (2) in equation (2) above, it can be seen that the number of erd for a specific day is just the number of millimeters that the rainfall deviates from a reference level. the methodology adopted in this paper comprises the following steps:  estimation of reference level of rainfall for each of the selected meteorological sub-divisions(msds) of india  estimating the erd for each month of the south-west monsoon  taking the sum of erd for all the four months the number of accumulated erd (en) for a period of „n‟ days can be determined as follows: 𝐸𝑛 = 𝐸𝑅𝐷𝑖 𝑛 𝑖=1 (3) monthly erd facilitates to capture the element of variability in each month of the south-west monsoon. the values of erd based on equations (2) & (3) for the selected 10 of the 36 msds of india are determined for each of the 50 years from 1970-2019 (appendix-1). the sample data is drawn from the official website of the indian meteorological department (imd) of india. the study is based on secondary data. the rainfall data is collected from the india meteorological department (imd). the study covered monthly average rainfall data of the south-west monsoon season (june to september) for the analysis. the study covers the past 50 years (1970 to 2019) rainfall data of selected 10 of the 36 meteorological subdivisions of india is considered. 5.4 statistical tests the homogeneity test is to test whether a given data is said to be homogenous over time. in other words, if there is a significant break in the trend of particular time series it is classified as inhomogeneous. this inhomogeneity in historical data will impact the outcome of data analysis and forecasts. hence, it is important to test the homogeneity of the rainfall data series by applying four methods pettitt, snht test, buishand, and von neumann test. most of the statistical procedures including correlation, regression, and analysis of variance are parametric tests. these parametric tests are based on the assumption that the data follows a normal distribution. to test the normality of the data series shapiro-wilk test and jarque-bera test have been applied. the null hypothesis is that sample distribution is normal. if the computed p-value is lower than the significance level alpha=0.05, it is indicated that the data series is not normally distributed. augmented dickey-fuller (adf) test suggested by dickey and fuller (1979, 1981) is applied for the null hypothesis that a series (yt) is non-stationarity by calculating at-statistics for 𝛽 = 0 in the following equation: ∆𝑌𝑡 = 𝛼1 + 𝛽𝑌𝑡−1 + 𝛾𝑡 + 𝛿𝑘 ∆𝑌𝑡−𝑘 + 휀𝑡 𝑛 𝑡−1 (4) where k =2,3,…..n. while,𝛼,𝛽,𝛾, 𝑎𝑛𝑑 𝛿 are the parameters to be estimated and 𝜺𝒕 is a white noise error term. if the value of the adf statistic is less than the critical value at the conventional significance level (usually at 5% significance level) then the series (yt) is said to be stationary and vice versa. if (yt) is found to be non-stationary then it should be determined whether (yt) is stationary at first differences ∆yt i(0) by repeating the above procedure. the first difference of the series is stationary then the series (yt) may be concluded as integrated of order one i.e.yt i(0). to analyze the existence of autocorrelation, if any, the following autocorrelation function (acf) for rainfall time series 𝑟𝑡 is applied: corr (𝑟𝑡 ,𝑟𝑡−𝑘),𝑘 = 1,2… . . 𝑛 (5) where the value of k is the time gap is considered. a lag 1 autocorrelation (i.e,., k=1 in the above) is the correlation between values that are one time period apart. the acf is a way to measure the linear relationship between an copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 42 observation at time t and the observations at previous times. if the coefficient of correlation falls between the upper and lower limits of a confidence interval, then the data is considered auto correlated. to analyze the variability of rainfall amongst meteorological subdivisions, the garch model has been applied. under garch (bollerslev, 1986) model the forecasts of time-varying variance depend on the lagged variance of any asset. this garch (1,1) can be expressed as; 𝜎𝑡 2 = 𝑘 + 𝛼 𝑝 𝑖=1 𝜖𝑡−1 2 + 𝛽 𝑞 𝑗=1 𝜎𝑡−1 2 + 𝜖𝑡 (6) where the conditional volatility (𝜎𝑡 2) is specified in the above model is determined by three effects namely, k is a constant term, 𝛼 ∈𝑡−1 2 indicates yesterday‟s news about volatility illustrated by the arch term, and 𝛽 𝜎𝑡−1 2 explains the forecasted volatility from the previous period called as garch component, 𝜖𝑡 is the error term. p is the degree of arch term and q is the degree of garch term. the parameters α and β define as short-run dynamics of the resulting volatility time series. the coefficient is close to the one we assume that there is a high persistence of volatility. 6. results and discussion the preliminary analysis for this study included computing statistical parameters like mean, median, maximum, minimum, standard deviation, skewness, and kurtosis for excess rainfall days (erd) in the south-west rainfall series of selected meteorological sub-divisions for 50 years the period from 1970 to 2019 as shown in table-1. table 1. summary of descriptive statistics of erd values of selected msds in india regions sub-divisions mean median maximum minimum sd skewness kurtosis north himachal pradesh 110.86 106.03 472.90 0.00 107.90 1.02 4.12 uttaranchal 156.70 138.50 673.00 0.00 153.24 1.32 4.56 west up 122.51 131.00 443.88 0.00 104.46 0.71 3.44 south costal ap 81.65 75.58 272.8 0.00 75.02 0.79 2.76 south interior kar 85.59 78.08 239.57 0.00 68.41 0.42 2.14 east bihar 138.07 153 553.7 0.00 111.58 1.19 5.34 gangetic wb 152.82 141.38 465.88 0.00 127.85 0.59 2.41 odisha 124.04 99.00 483.00 0.00 121.02 1.39 4.55 west gujrat 198.51 159.00 663.52 0.00 171.42 0.91 3.19 saurashtra 161.94 104.54 1173.47 0.00 197.89 2.94 14.86 source: e-views output of the data sourced from imd reports -1970 to 2019 the mean of excess rainfall days (erds) values is highest in the west region followed by east and north. the highest and lowest mean values are 198.51and 81.65 for gujarat and coastal andhra pradesh respectively. it is observed that mean values in the erd are different in all subdivisions. the maximum erd value is in the west region followed by the north and east regions. saurashtra region (1173.47) has the highest erd values and the lowest is in south interior karnataka (239.57). the standard deviation method is used to measure the volatility in the erd values. west region has the highest volatility in the erd values followed by the east and north region. moreover, the south region has the lowest standard deviation values. saurashtra (197.89) has the highest volatility among the selected msds while south interior karnataka(68.1) has the lowest. the rainfall derivatives contracts payoff is based on an underlying index (erd) which is observed from rainfall data at a specific geographic location. based on this, the mean erds values for the selected regions would serve as the 'base' for calculating the payoff of the contract. for example, from the above table-1, the mean erds values of south-west monsoon season for gujarat were 198.51 mm, this value indicates that every year gujarat has been facing a minimum of 193.84 mm of excess rainfall from the south-west monsoon season. these erds values of the gujarat region would serve a benchmark for designing rainfall options and futures contracts for trading in the markets. skewness is a measure of the abnormality of the distribution of the data series around its mean. all sub-divisions were positively skewed, which means the distribution has a long right tail. kurtosis measures the flatness or peakedness of the data series. out of 10 sub-divisions, the kurtosis value of 3 sub-divisions was less than 3, indicating that the distribution is flat (platykurtic) relative to the normal. seven sub-divisions have a kurtosis value of more than 3; the distribution is peaked (leptokurtic) relative to the normal. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 43 table 2. summary of homogeneity test regions sub-divisions pettitt snht test buishand von neumann north himachal pradesh 0.258 0.431 0.230 0.239 uttaranchal west up 0.082 0.111 0.046 0.874 south costal andhra pradesh 0.892 0.641 0.364 0.916 south interior karnataka 0.222 0.391 0.896 0.675 east bihar 0.359 0.330 0.291 0.276 gangetic west bengal 0.406 0.453 0.341 0.339 odisha 0.838 0.491 0.258 0.297 west gujrat region 0.328 0.521 0.726 0.057 saurashtra 0.066 0.019 0.073 0.034 note: tested at 5% significance level. source: e-views output of the data sourced from imd reports -1970 to 2019 the results of the homogeneity test of erd values have been tested using pettitt, snht test, buishand, and von neumann test. if an erd series may be considered as homogeneous over time, or if there are some years at which a change occurs. the null hypothesis is that a time series is homogenous between two given times. the above results indicating that all the msds follow homogeneously. as the computed p-value is greater than the significance level alpha=0.05, one cannot reject the null hypothesis. therefore, the erd values considered as homogenous over time. table 3. result of the stationary test from augmented dickey-fuller test (adf) test regions sub-divisions level data 1st difference order decision north himachal pradesh 0.0000** i(0) stationary at level uttaranchal 0.1412 0.0000** i(1) stationary at difference west up 0.3433 0.0000** i(1) stationary at difference south costal andhra pradesh 0.0052** i(0) stationary at level south interior karnataka 0.0000** i(0) stationary at level east bihar 0.0000** i(0) stationary at level gangetic west bengal 0.0000** i(0) stationary at level odisha 0.0000** i(0) stationary at level west gujrat region 0.0000** i(0) stationary at level saurashtra 0.0003** i(0) stationary at level note **denote rejection of the hypothesis at a 5% significance level. source: e-views output of the data sourced from imd reports -1970 to 2019 table 3 shows the stationary test of selected metrological sub-divisions of india. rainfall series is said to be stationary if the mean and variance of the series do not change over time, significance that stationery can be defined as no trend, constant variance over time, and no seasonality in the data series. to identify the stationarity in the rainfall series, augmented-dickey fuller (adf) test has been applied. the results display that south, west, and east regions are stationary at level data, only north sub-divisions are stationary at first difference. south, west, and east region series are stationary, indicating that these regions erd values have no trend and no seasonality in the series. north region is nonstationarity at level data, indicating that north region erd values have long-term trend and seasonality (fluctuations) in series. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 44 table 4. results of normality test regions sub-divisions shapiro-wilk jarque-bera north himachal pradesh 0.000 0.003 uttarachal <0.0001 <0.0001 west up 0.001 0.095 south costal andhra pradesh 0.001 0.069 south interior karnataka 0.006 0.216 east bihar 0.001 <0.0001 gangetic west bengal 0.004 0.162 odisha <0.0001 <0.0001 west gujrat region 0.001 0.029 saurashtra <0.0001 <0.0001 note: tested at 5% significance level. source: spss output of the data sourced from imd reports -1970 to 2019 several statistical methods can be used to identify the normal distribution. the results of the normality of erd values have been tested using shapiro-wilk and jarque-bera test. table4 shows that all the msds do not follow a normal distribution. as the computed p-value is lower than the significance level alpha=0.05, it is observed that the erd values of selected sub-divisions are not normally distributed, and hence, the non-parametric test can be used for further analysis. table 5. results of autocorrelation function (acf) of selected msds of india north south east west lags (k) himachal pradesh uttaranch al west up costal ap sik bihar gangetic wb odisha gujrat saurasht ra 1. 0.095 -0.491 -0.635 -0.193 -0.120 0.064 0.039 0.066 0.187 -0.011 2. 0.151 -0.161 0.106 0.001 0.020 0.013 -0.132 0.057 -0.024 0.065 3. -0.001 0.406 0.237 0.046 -0.141 0.230 -0.109 -0.046 0.053 -0.032 4. -0.116 -0.318 -0.473 -0.377 -0.120 -0.004 -0.006 -0.131 -0.067 0.028 5. 0.020 0.024 0.494 0.242 -0.007 -0.155 -0.205 0.094 -0.217 -0.115 6. -0.039 0.034 -0.339 -0.218 0.135 -0.004 0.149 -0.080 -0.080 0.046 7. 0.161 0.084 0.043 0.100 -0.150 -0.181 0.090 0.123 0.032 -0.105 8. 0.202 -0.047 0.242 0.095 0.110 0.031 -0.050 -0.089 -0.077 0.005 9. -0.027 -0.100 -0.386 0.076 -0.035 -0.007 0.113 -0.130 -0.134 0.252 10. 0.064 0.215 0.344 0.124 -0.001 -0.025 -0.074 -0.137 -0.124 0.014 11. -0.189 -0.149 -0.146 -0.144 -0.062 -0.001 -0.004 -0.080 -0.007 -0.034 12. -0.196 0.040 -0.087 0.155 -0.105 0.016 0.077 0.203 -0.059 0.033 13. -0.181 0.014 0.231 -0.098 0.108 0.026 0.002 0.124 0.073 0.095 14. -0.222 -0.138 -0.265 -0.018 0.045 -0.041 -0.119 0.053 0.003 0.045 15. 0.068 0.129 0.282 -0.048 -0.077 -0.211 0.070 0.002 0.004 0.020 note: tested at 5% significance level. source: e-views output of the data sourced from imd reports -1970 to 2019 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 45 north region south region himachal south pradesh uttaranchal west up costal ap interior kar east region west region bihar gangetic wb odisha gujarat saurashtra figure 2. autocorrelation function (acf) plot of erd values source: e-views output the autocorrelation function (acf) figure 2 illustrates the correlation of the erd series at various lags. the lag refers to the order of correlation. each spike that rises above or falls below the dashed lines is considered to be statistically significant. this means the spike has a value that is significantly different from zero. if a spike is significantly different from zero, which is the evidence of autocorrelation. if a spike that is close to zero is the evidence of no autocorrelation in the series. the acf plots show that 7out of 10 sub-divisions are not statistically significant and within the 95% confidence interval. this indicating that there is no autocorrelation in the erd values. the erd values of these sub-divisions tend to fluctuate randomly around zero and they are independent of each lag. acf plot of uttaranchal, west up, and coastal andhra pradesh are statistically significant. this indicates that the erd values have strong autocorrelation and they are dependent on each lag. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 46 table 6.the results of the garch model regions sub-divisions α 𝛃 garch(1,1) (α+β) p-value volatility north himachal pradesh -0.0769 0.7985 0.7216 0.0329 high uttaranchal 0.4522 0.3545 0.8067 0.1477 high west up 0.4330 -0.0524 0.3806 0.9515 low south costal andhra pradesh -0.3380 1.2847 0.9467 0.0000 high south interior karnataka -0.4369 1.3366 0.9066 0.0000 high east bihar -0.3059 1.3135 1.0076 0.0005 high gangetic west bengal -0.3671 1.3222 0.9551 0.0000 high odisha -0.3787 1.4042 1.0255 0.0000 high west gujrat region -0.2425 1.1717 0.9292 0.0000 high saurashtra -0.4583 1.3265 0.8682 0.0000 high note: tested at a 5% significance level. source: e-views output of the data sourced from imd reports -1970 to 2019 the results of garch models are reported in table 6. garch model is used to test the volatility in the erd series in selected msds of india. table 6 represents two coefficients are α and β indicating the estimated arch and garch coefficients. this coefficient is a measure of the persistence of volatility. the coefficient value is close to 1(one) which indicates a high persistence of volatility in the erd values. the results indicating that all 10 subdivisions have high volatility expect west up. it is observed that the sum of arch and garch coefficients (α+β) is very close to 1(one) for all selected msds expect west up sub-division as the computed p-value is lesser than the significance level alpha=0.05. therefore, the study concludes that the selected subdivisions have high volatility persistence levels in the erd values. table 7. results of the correlations matrix among selected msds. spearman's rho correlation coefficient sig. (2-tailed) gangetic wb bihar west up uttaranchal odisha gujarat region saurashtra himachal pradesh coastal ap south interior kar gangetic wb 1 bihar .313* 1 (0.027) west up .029 -.085 1 (0.843) (0.557) uttaranch al .041 -.074 .382** 1 (0.779) (0.610) (0.006) odisha -.031 -.005 .081 .091 1 (0.830) (0.975) (0.576) (0.52) gujarat region -.060 -.064 .270 .314* .180 1 (0.680) (0.658) (0.058) (0.026) (0.21) saurashtra -.128 -.164 .061 .290* .130 .565** 1 (0.374) (0.254) (0.673) (0.041) (0.36) (0.00) himachal pradesh .091 -.046 .488** .240 .050 .165 .240 1 (0.528) (0.754) (0.000) (0.093) (0.73) (0.25 2) (0.093) coastal ap -.024 .140 .110 .080 -.126 .139 .354* .197 1 (0.868) (0.331) (0.447) (0.580) (0.38) (0.33 7) (0.012) (0.170) south -.093 .045 .039 -.051 .230 .041 .293* -.104 .304* 1 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 47 interior kar (0.520) (0.758) (0.787) (0.723) (0.10) (0.77 7) (0.039) (0.474) (0.032) **. correlation is significant at the 0.01 level (2-tailed). *. correlation is significant at the 0.05 level (2-tailed). source: e-views output of the data sourced from imd reports -1970 to 2019 table 7 depicts the degree of inter-sub division dependency in erd values of rainfall data. the pair-wise correlation analysis amongst ten selected sub-divisions has been carried out. it is found that the correlation value range between a maximum of +0.565 and a minimum of – 0.164. the result shows that out of 45 pair-wise interrelationships, 31 out of 45 pairs have a very weak positive correlation. the remaining 14 pairs have a negative correlation. it is observed that erd values among the sub-divisions have a weak correlation. the majority of the inter-sub divisions have a weak (i.e., near to zero and negative) correlation with 5% and 10% significance value. hence, excess rainfall days (erds) indices across inter-meteorological sub-divisions are significantly uncorrelated. erds can be used as a distinct asset class. stakeholder like agri-insurance companies, having sold rainfallbased index insurance policies across a wide geographical area, can minimize their exposure by building a diversified portfolio of erd indices. hence, there exists a vast scope for trading erd index-based financial derivatives for hedging across msds. 7. scope for designing rainfall derivatives the increasing popularity of temperature-based weather derivatives in the u.s. and europe has brightened the prospects of innovating with rainfall based weather derivatives, particularly in some agro-based developing economies. the indian situation with monsoon is the perfect opportunity to design derivative products. the monsoon has an enormous impact on many enterprises, including agriculture, commodity trading, agro-processing, energy, and insurance. the stakeholders in these markets have the need to manage monsoon related risks through rainfall derivatives. from a boarder perspective, risk markets have the potential to yield additional benefits too. they can promote the integration of markets by expanding the horizon of asset classes for investment. from the perspective of markowitz's mean-variance efficiency, as long as the market is not complete, a new asset class will always improve the risk-return trade-off (cao & wei, 2004). erds could be used as building blocks for designing rainfall derivatives similar to hdds/cdds underlying temperature derivatives. several of the statistical properties of erd indices fully support this idea. the risk underlying seasonal rainfall is indicated by the degree of volatility in erd indices. the results of garch models have shown that all the 10 sub-divisions have volatility except west up. another interesting property of erd indices is that indices across inter msds are significantly uncorrelated. this is particularly useful when erds are used as a distinct asset class, by building a diversified portfolio by such stakeholders like general insurance companies having sold rainfall-based index insurance policies across a wide geographical area. 8. conclusion india faces most of the losses from an increase in flood events and cyclones, which are projected to increase in magnitude and frequency in the near future. hence, india has high exposure to weather-related events. in this background, the study aims to develop the framework of standard indexation that could serve as a basis for designing rainfall-index based insurance and derivatives contracts. flood index, i.e., excess rainfall days (erds) index has been developed to measure the flood risk with special reference to south-west monsoon. the research is based on the applications of econometric models such as the augmented dickey-fuller (adf) test followed by the garch model. several of the statistical properties of erd indices support the idea that these indices could be used as building blocks for designing rainfall derivatives similar to hdds/cdds underlying temperature derivatives. 9. research implications research has a major implication for policymaking in the field of rainfall risk management. the research inputs of the study, to help the creation of the market for trading rainfall derivatives like futures and options that could be used by stakeholders for minimizing the exposure monsoon adverse events. the sebi has initiated a discussion on proposing new standardized weather derivative products that can be used to minimize the weather-related risk in india. so, the study would provide some inputs to develop standard metrics for measuring excess rainfall as erds. this rainfall indexation would serve as a benchmark for designing rainfall options and futures contracts for trading both in over-the-counter and organized markets. 10. limitations of the study the study is based upon monthly rainfall data collected from indian meteorological department (imd). instead, if the rainfall data is collected on daily basis results could be more accurate. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 48 11. scope for further research the present study was analyzed on the statistical properties of excess rainy days (erds) for only 10 out of 36 meteorological subdivisions. further study can also be taken to consider the statistical properties of excess rainy days (erds) of all 36 meteorological sub-division. acknowledgment the authors thank the indian meteorological department (imd) for providing cost-free rainfall data for this study. the authors received financial support from icssr, new delhi for the research, authorship, for the publication of this article. references anastasiadou, z., & lópez-cabrera, b. 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2020 49 appendixa erd values for south-west monsoon for 50 years (1970-2019) (for selected meteorological sub-divisions (msds) of india) north south east west years himachal pradesh uttarachal west up costal ap sik bihar gangetic wb odisha gujrt saushtra 1970. 149.14 44 161.92 91.11 13.2 45.07 271.01 98 523.95 304.12 1971. 320.54 171 151.38 20.26 55.44 212.46 386.95 136 45.63 55.49 1972. 0 28 0 7.55 25.31 0 222.86 71 0 0 1973.1 0 103 87.73 4.76 99.76 93.27 144.55 152 337 0 1974. 0 24 118.26 44.56 148.04 175 92.67 0 0 0 1975. 0 250 251.38 87.39 239.57 95.64 44.42 94 353.85 150.46 1976. 124.47 0 14.67 100.94 0 178.73 0 29 663.52 95.26 1977. 175.24 142 245.66 0 31.47 38.87 270.45 39 417.32 86.19 1978. 170.61 503 443.88 111.55 136.07 59.97 348.85 105 153.13 75.01 1979. 0 0 2.46 37.36 119.44 98.87 29.82 0 153.71 538.31 1980. 239.48 118 268.98 78.61 152.27 158.03 107.89 214 125.73 283.64 1981. 0 127 97.21 106.34 207.21 284.23 147.55 20 178.96 108.37 1982. 0 83 172.87 0 46.83 59.5 0 109 0 0 1983. 4.37 136 310.58 222.05 160.44 21.64 45.06 109 249.15 240.96 1984. 9.38 148 89.42 31.38 96.07 339.34 465.88 193 135.21 30.35 1985. 68.7 163 141.56 5.18 33.73 218.04 47.58 201 0 0 1986. 5.16 49 14.15 72.56 90.54 69.54 250.49 96 48.63 78.09 1987. 0 0 0 0 0 553.7 234.23 3 0 0 1988. 472.9 178 270.48 272.8 161.94 228.33 255.72 55 299.54 370.9 1989. 52.23 38 27.95 188.3 68.83 224.14 146.28 137 43.66 118.94 1990. 103.54 162 214.06 10.52 0.1 148.87 216.88 66 329.6 100.72 1991. 27.93 0 189.07 184.01 136.16 121.33 47.85 204 124.15 0 1992. 175.8 35 121.47 26.24 134.33 0 59.07 82 101.29 158.45 1993. 168.44 263 194.15 0 0 190.63 267.37 100 248.64 0 1994. 206.04 185 183.43 26.78 144.96 10.37 139.29 483 578.02 381.49 1995. 358.7 179 159.87 100.64 32.43 128.13 303.62 9 113.35 70.35 1996. 201.64 0 160.72 152.25 82.84 138.46 301.38 23 50.84 56.39 1997. 234.36 0 0 136.86 107.56 192.43 161.83 123 293.63 183.74 1998. 186.68 0 145.33 150.9 96.44 235.33 23.79 40 204.49 22.79 1999. 107.24 0 129.4 0 73.33 223.33 327.34 44 21.73 0 2000. 118.68 198 83.48 218.41 148.34 202.97 160.39 21 0 46.95 2001. 145.84 205 132.61 23.11 43.01 171.97 115.62 445 178.8 79.04 2002. 152.93 255 160.87 10.71 0 68.97 115.11 0 133.93 129.69 2003. 269 373 358.96 89.48 0 176.53 14.92 118 362.4 248.66 2004. 0 333 1.77 20.69 5.33 159.77 55.56 6 262.51 85.91 2005. 158.84 376 165.06 146.24 136.63 66.16 0 201 528.12 253.14 2006. 0 48 6.46 53.57 11.13 81.67 220.36 462 580.46 216.07 2007. 0 509 6.35 213.97 198.47 390.1 444.22 346 315.85 361.51 2008. 109.48 122 174.41 78.94 65 236.43 173.92 296 164.3 137.75 2009. 69.87 12 0 0 204.14 48.56 31.25 275 78.65 241.85 2010. 171.81 673 157.53 256.25 45.34 0 0 0 200.95 495.42 2011. 121.37 411 86.65 49.74 6.23 150.23 320.57 122 188.2 257.52 2012. 104.83 171 2.37 99.7 20.6 6.57 0 64 108.29 133.65 2013. 144.87 390 158.22 7.18 148.57 20.4 78.46 108 335.82 309.49 2014. 0 94 0 0 126.34 37.06 0 233 147.94 28.95 2015. 16.17 35 0 118.47 60.64 12.45 276.17 30 50 121.19 2016. 32.27 162 114.16 149.61 13.33 161.54 96.36 29 17.21 55.72 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 50 2017. 54.47 145 11.65 105.49 98.61 110.86 143.47 15 284.62 180.25 2018. 227.94 141 136.93 70.89 29.03 0 0 204 13.95 30.85 2019. 82.46 53 0 99.3 224.61 258.44 34.05 192 179.1 1173.47 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). indian journal of finance and banking; vol. 2, no. 2; 2018 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 1 financial deepening and deposit mobilization of commercial banks in nigeria: a time variant model azu-nwangolo 1 & blessing ogechi 1 1 department of banking and finance, rivers state university, port harcourt, nigeria correspondence: azu-nwangolo, department of banking and finance, rivers state university, port harcourt, nigeria received: may 20, 2018 accepted: may 28, 2018 online published: june 13, 2018 abstract the purpose of this study was to examine the effect of financial deepening on customer deposit of nigerian commercial banks. time series data was sourced from central bank of nigeria statistical bulletin, from 1981-2017. percentage of total customers’ deposit to total assets was used as dependent variables while percentage of narrow money supply, broad money supply, money market development, money outside the bank and private sector credit to gross domestic product was used as independent variables. multiple regression with ordinary least square properties of cointegration, augment dickey fuller unit root test, granger causality test and vector error correction model was used to examine the relationship between the dependent and the independent variables. the regression result found that narrow money supply and money market development have negative effect on total customer’s deposit of commercial banks while private sector credit, broad money supply and money outside the bank have positive effect on customer’s deposit of commercial banks in nigeria. the unit root test shows that the variables are stationary at first difference; the cointegration test validates the existence of long run relationship while the causality test found no causal relationship. the study concludes that financial deepening has significant impact on total customer deposit. we recommend that policies should be deepened to enhance the performance of the nigeria financial market. keywords: financial deepening, commercial banks, deposit mobilization, broad money supply, narrow money supply. 1. introduction commercial banks are the institutional transmission mechanism for monetary policy. they facilitate the realization of the monetary policy goals and enhance the functionality of the payment system in nigeria. interest rates are the most influential auto-pilot instrument used to achieve set monetary policy and macroeconomic goals (ngerebo-a and lucky, 2016). the demand side of the financial intermediation function represents the deposit mobilization function of a typical financial institution. financing function, according to finance theory, is the function of the firm geared toward the sourcing and/or raising of funds from alternative sources in such a cost-effective and time-efficient manner as to enable the firm to achieve its objectives. deposit mobilization is one of the primary functions of a commercial bank. deposits mobilized by banks play a key role not only as an important source of funds for banks but also as instrument for promoting saving and banking habit among the people. deposits are essential raw material for the banking industry. commercial banks are expected to make efforts in both the rural and urban areas for mobilizing savings in the form of their deposits which are beneficial to them and the country as well. commercial banks deposits can be short term, long term or medium term. it can also be government or private sector deposit. in nigeria, significant proportion of commercial banks deposit is from government and agencies. financial sector deepening enable the financial intermediaries perform their functions of mobilizing, pooling and channeling domestic savings into productive capital more effectively thereby contributing to economic growth of a country (ndege, 2012). in addition to mobilizing savings and improving capital allocation (boyd and prescott, 1986), financial deepening reduces the extent and significance of information asymmetries (stiglitz and greenwald, 2003) and allows for risk transformation and monitoring (diamond 1984). financial sector deepening has been seen www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 2 to lead to access of long term capital which deemed crucial for economic development as evidenced by the positive relationship between long term capital and economic growth (klapper & panos, 2007). financial deepening generally entails an increased ratio of money supply to gross domestic product (nnanna and dogo, 1998; and nzotta, 2004). conceptually, defines financial deepening refers to the improvement or increase in the pool of financial services that are tailored to all the levels in the society (shaw and mckinnon, 1973). it also refers to the increase in the ratio of money supply to gross domestic products or price index which ultimately postulates that the more liquid money is available in the economy, the more opportunities exist in that economy for continued and sustainable growth. it basically supports the view that development in financial sectors leads to development of the economy as a whole. increase financial deepening in the emerging financial market affect banking efficiency and productivity through competition and ultimately a more efficient capital allocation which increases the productivity of investment, and mobilizes savings into investment projects, which normally are passed on by the banking sector (merton and bodie, 1995). financial deepening also increases the marginal productivity of capital through the intermediation function of well-informed financial institutions (king and levine, 1993a; beck, levine, and loayza, 2000).on the other hand, more efficient and profitable banks may increase the degree of financial deepening by increasing competition, improving their services, increasing their network penetration, enhancing transaction processes, and providing consumers with more financial products. the effect of financial deepening has well been examined in literature, however significant proportion of the literature focused on financial deepening and economic growth (chotareas et al., 2011, sindani, 2013, ocanda, 2014). there is no known study on financial deepening and deposit mobilization in commercial banks most especially developing countries of africa and nigeria in particular. therefore, this study examined the effect of financial deepening and deposit mobilization in nigeria. 2. literature review 2.1 concept of financial deepening the concept of financial deepening varies among scholars. financial deepening has been defined as an increase in the supply of financial assets in the economy (hamilton and godwin, 2013). it includes the aggregate or wide range of financial assets that are available in the economy. financial deepening also implies the ability of financial institutions to effectively mobilize savings for investments. the growth of domestic savings provides the real structure for the creation of diversified financial claims. financial deepening generally entails an increased ratio of money supply to gross domestic product (christian, 2013). financial deepening/development thus involve the establishment and expansion of institutions, instruments and growth process. osinsanwo (2013) describes financial deepening as increased financial services geared to all levels of the society. onyemachi (2012) defined financial deepening as an effort aimed at developing the financial system that is evident in increased financial instrument/assets in the financial markets-money and capital markets, leading to the expansion of the real sector of the economy. obviously, it is the effort of developing countries to achieve growth through financial intermediation. 2.2 theoretical foundation mckinnon/shaw theory of suggested that any distortion and limitation on the banking sector, such as interest rate controls, reserve and liquidity requirement, and government rationing of available credit to so-called priority sectors, inhibit financial development mainly by depressing the interest rate mckmnon (1973), shaw, (1973), galbis, (1997) ,mathiesun (1980), capannelli (2009). the deficiency in the amount of savings due to such repressive measures thwarts economic development through the perverse effects on the volume and the quantity of investment. thus, the main argument of mckinnon and shaw is that financial repression has a detrimental effect on financial development, hence on bank performance. mckinnon and shaw believes that financial repression needs to end in emerging countries and advocate for financial liberalization. they opined that countries need to develop its financial sphere to increase its real growth. financial repression implies a series of constraints: the necessity for banks to have no remunerated reserves in the central banks, too low interest rates for savers etc. that are so strong that financial sphere cannot be developed. for this economists are of the opinion that financial repression leads to domestic agents to prefer having unproductive assets or no monetary assets rather than depositing assets in the bank. based on this reason there are not enough funds to be lent in the economy, which create an obstacle for investment and thus for growth. the supply leading hypothesis suggests that financial deepening fuels growth. the existence and development of the financial markets brings about a higher level of savings and investment and enhance the efficiency of capital accumulation. the contention of this hypothesis is that, a well-functioning financial institutions can promote overall economic efficiency, create and expand capital accumulation, transfer resources from traditional (non-growth) sectors to the modern growth inducing sectors and also promote a competent entrepreneur response in these modern sectors of the economy. early economists have strongly supported the view of finance led caused relationship www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 3 between finance and economic growth. these authors are of the opinion that causality proceeds from financial to economic development, it is only at a later stage that financial development leads on to growth. demand-following hypothesis was of the opinion that economic activity propels banks to finance enterprises. thus, where enterprises lead, finance follows. this hypothesis view is that the development of the financial markets is merely a lagged response to economic growth. this implies that any early efforts to develop financial markets might lead to a waste of resources which could be allocated to more useful purposes in the early stages of growth. as the economy advances, this triggers an increase demand for more financial services and thus leads to greater financial development. some research work postulate that economic growth is a casual factor for financial development. according to them, as the real sector grows, the increasing demand for financial services stimulates the financial sector. 2.3 empirical review beck and levine (2002) employ a cross-country panel data to test the relationship between financial structure, industry growth, and new establishment formation. they find that an efficient legal system and financial development are both strong determinants of industry growth, new establishment formation and efficient capital allocation. fisman and love (2003) test how financial deepening affects productivity growth. they found that in the long-run more financially developed countries allocate a higher share of resources towards sectors that rely primarily on external finance. these industries which depend on external financing are most likely to invest in r&d and technology, and access to increased credit may stimulate greater productivity growth. bossone& lee (2004) examined the relationship between production efficiency and financial system size. the study was carried out on 875 banks in 75 countries. the data covered 1995-1997. absolute size of the financial system was measured as a constructed comprehensive indicator for open economies by summing domestic credit, domestic deposits, foreign assets, and foreign liabilities of the banking system, expressed in billions of u.s. dollars. relative size of the financial system was measured using financial depth. the study found that financial depth was positively related to scale efficiency. this suggests that financial deepening has a positive influence on bank productivity. ndebbio (2004) examined the effect of financial deepening on economic growth and development. the study used growth rate of per capita (real/nominal) money balances (gprmb/gpmb) and degree of financial intermediation/development (m2/gdp) as proxies for financial deepening. data was collected for 34 countries in sub-sahara africa (ssa) from 1980-1989. the study found that financial deepening had apositive effect on per capita growth of output. this implies that financial deepening influenced economic growth and development of ssa countries. hartmann et al. (2007) show that financial deepening in eastern european countries has led to faster capital reallocation; they conclude that deeper credit markets enhance capital reallocation by contributing to an increase in economic productivity growth. lower tfp has been explained in developing countries by misallocation of resources across productive units. thus, the presence of financial frictions increases the misallocation of resources (g.e. chortareas et al, 2008). contrastingly, as the financial system develops, information and transaction costs associated with capital reallocation decrease while tfp increases (hsieh and klenow, 2007; restuccia and rogerson, 2007). odhiambo (2009a) examined the impact of interest rate reforms on financial deepening and economic growth in kenya. the study used financial depth as a measure of financial deepening and it was measured using the ratio of broad money stock to gross domestic product (m2/gdp). annual time series data from 1968 to 2004 was utilised. using co-integration and error-correction models, the study found a positive impact of interest rate reforms on financial deepening in kenya. the study also revealed that financial deepening granger cause economic growth in kenya. interest rate liberation therefore moderated the effect of financial deepening on economic growth in kenya. odhiambo (2009b) examined the inter-temporal causal relationship between financial deepening and poverty reduction in zambia. annual data from 1969 to 2006 was used in the study. the study used three proxies of financial deepening namely broad money supply ratio (m2/gdp), domestic credit to the private sector as a ratio of gross domestic product (dcp/gdp) and domestic money bank assets (dmba). poverty reduction was measured using private per capita consumption. the study found that financial sector development leads to poverty reduction. this shows that financial deepening leads to poverty reduction. chortareas, et al., (2011) examined the possible effects of financial deepening on bank productivity changes as well as the possibility of a two-way causality in latin america. the authors obtained bank productivity estimates using the non-parametric malmquist methodology. the data was obtained for 9 latin american countries for the period 2000-2006 with a total of 973 observations. the dependent variable was total factor productivity while financial deepening was measured using the ratio of credit to the private sector to gdp. the study found strong evidence of causality from financial deepening to bank productivity and also evidence of reverse causality. the results suggested that a virtuous circle between financial deepening and financial institutions’ productivity may exist. sanchez, hassan, & bartkus (2013) investigated the determinants of productivity across latin american banking industries. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 4 dea was used to estimate the malmquist index as a proxy for efficiency (productivity) for the banks for the period 1996-2007. one of the independent variables was a vector for financial development: domestic credit to the private sector provided by banks as a percent of gdp, the total value of stocks traded as a percent of gdp, the total assets of the threelargest banks divided by the total assets in the country, interest rate spread (lending rate minusdeposit rate), and the number of banks in the country. proxies for financial development showed mixed results. for instance, concentration, measured as total assets of the three biggest banks over the country’s total bank assets, was negatively related to efficiency. also, economic efficiency and allocative efficiency were negatively related to both credit provided by banks to the private sector and stocks traded as percentage of the gdp. kenyoru (2013) examined the effect of financial innovations on financial sector development (financial deepening). financial deepening was measured as number of depositors with commercial banks and other institutions per 1000 adults. financial innovations were measured as number of mobile money transactions, number of agency banking transactions, and value of m-banking transactions. the data was collected for the period 2007-2012. the results showed that mobile money transactions had a negative effect on financial deepening while value of m-banking transactions had a positive effect on financial deepening. the effect of agency transactions was not shown. however, none of the effects were significant suggesting no significant effect of financial innovations on financial deepening. sindani (2013) examined the impact of financial sector deepening on economic development in kenya. the study used 44 commercial banks using data from 2007 to 2011. financial deepening was measured using atm network and deposit accounts. the results showed a negative effect of atm network and positive effect of deposit accounts on economic development, measured as the gdp. this reveals that the consequences of financial deepening on economic development are mixed depending on the measure used. ochanda (2014) examined the effect of financial deepening on growth of small and medium-sized enterprises (smes) in kenya with a specific focus on nairobi county. survey data was collected from 100 smes. financial deepening was measured using financial innovations and credit access. the results showed that both credit access and financial innovations had positive effects on growth of smes. these suggest that financial deepening positively influence growth of smes in kenya. ayadi et al (2013) explore the relationship between financial sector development and economic growth across the mediterranean, using data covering the period of 1985 – 2009. the study found that credit to the private sector and bank deposits are negatively associated with growth, which in the authors’ opinion, portend deficiencies in credit allocation in the region and suggest weak financial regulation and supervision. abou-zeinab (2013) reviews patterns of bank credit allocation and economic growth in sweden over the period of 1736 – 2012, and found that banking system exhibits tendency of reallocating bank credit toward service and trade activities for onward economic growth in the country.the results of granger causality test and estimated regression models conducted by akpansung and babalola (2012) indicated that private sector credit impacts positively on economic growth in nigeria over the period 19702008. the study established that lending rate impedes growth, and recommends the need for more financial market development that favours more credit to the private sector to stimulate economic growth. bhusal (2012) investigates the impact of policy reforms on financial development and economic growth in nepal, using exogenous break test, and time series data ranging from 1965 to 2009. the study could not establish positive relationship between bank domestic credit and economic growth. the study suggests that the finding might be due to some problems which inhibit the banking sector in the country, such as inadequate expansion of commercial banks and their branches in the rural non-monetized sector, non-performing loans that discouraged credit allocation, among others. were et al (2012) investigate the impact of access to bank credit on the economic performance of key economic sectors using sectoral panel data for kenya. the study found a positive relationship between bank credit access and sectoral gross domestic product measured as real value added. also, they found that provision of private sector credit to key economic sectors of the economy holds great potential to promoting sectoral economic growth. the study emphasizes on financial deepening and intermediation, as of utmost importance in providing real sector with credit facilities. fafchamps and schundeln (2011) investigate whether firm expansion is affected by local financial development in moroccan manufacturing enterprises from 1998 to 2003, using regression analysis test. the study found that local bank availability is robustly associated with faster growth for small and medium size firms in sectors with growth opportunities. avinash and mitchell-ryan (2009) investigated the impact of the sectoral distribution of commercial bank credit on economic growth and development in trinidad and tobago. the study employs vector error correction model to ascertain the relationship that exists between credit and investment. the study found that credit and growth tends to demonstrate a demand following relationship, while further analysis revealed a ‘supply leading relationship between credit and growth within key sectors of the non-oil economy. nazmi (2005) studied the impact of deregulation and financial deepening on the real sector, using general equilibrium model to analyze data from four (4) latin america www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 5 countries, for the period covering 1960 – 1995. the study found that deregulation and a more developed banking sector prompt firms to increase the capital intensity of production, mostly, portends rapid economic growth. toby and peterside (2014) analyzed the role of banks in financing the agriculture and manufacturing sectors in nigeria for the period of 1981-2010. the study found that increment in availability of credit to those sectors, which are inclusive in the real sector of the economy, has potential of increasing gross domestic products (gdp). thereby, the study recommended mandatory credit allocation to real sector of the economy. abubakar and gani (2013) in their study on impact of banking sector development on economic growth, using vector error correction modelling (vecm) with data covering the period of 1970 – 2010, found a negative relationship between credit to the private sector and economic growth, due to unfavourable feat of credit going into real sector. the study emphasized on financial deepening towards real sector. imoughele et al (2013) carried out a study on the impact of commercial bank credit accessibility and sectoral output performance in nigeria economy for period of 1986 to 2010, using ols techniques. the study found that cumulative supply and demand for credit in the previous period has direct and significant impact on the growth of agriculture, manufacturing and the service sector output. the study attributed the development to the importance of credit facility as an input in the production process and persistent inflow to the manufacturing, agriculture and services sectors. the study further encourage continuous credit accessibility in a deregulated financial market economy as it has the capacity to induce the national real sector outputs, which would subsequently result to economic growth and development. obilor (2013) empirically investigated the impact of commercial banks’ credit to agricultural sector under the agricultural credit guarantee scheme fund in nigeria. the study found that joint action of commercial banks credit to the agricultural sector, agricultural credit guarantee loan by purpose, government financial allocation to agricultural sector and agricultural products prices are significant factors that can influence agricultural production in the country. the study recommends that farmers should be encouraged to be applying for loans from participating banks to enhance agricultural activities and productivity. ikenna (2012) studied the long and short run impact of financial deregulation and the possibility of a credit crunch in the real sector, using autoregressive distributed lag (ardl), and time series data ranging from 1970 – 2009. the study found that deregulating the nigerian financial system had an adverse effect on the credit allocation to the real sector in the long run and in the short run. the study suggested mandatory credit allocation even in the long run as of utmost necessity as it had started with the latest banking reform. omankhanlen (2012) examined the financial sector reforms and its effect on the nigerian economy from 1980 – 2008, using ols method. financial intermediation was found to be necessary condition for stimulating investment, raising productive capacity and fostering economic growth. fadare (2010) investigated the effect of banking sector reforms on economic growth in nigeria over the period of 1999 – 2009, using ols regression technique. the study found that interest rate margins, parallel market premiums, total banking sector credit to the private sector, inflation rate, size of banking sector, capital and cash reserve ratios account for a very high proportion of the variation in economic growth in the country. tomola et al (2010) investigated the effect of bank lending and economic growth on the manufacturing output in nigeria, using time series data covering the period of 36 years. they also employed co-integration and vector error correction model (vecm) techniques to analyse the data. it was found that manufacturing capacity utilization and bank lending rates significantly affect manufacturing output in nigeria. the study recommended that policies that would foster investment friendly lending and borrowing by the financial institutions should be put in place by the appropriate authority. nwanyanwu (2009) investigated the role of bank credit in economic growth of nigeria. the study found that bank credit did not exhibit positive relationship towards economic growth. the study claimed that this was due to apathy exhibited in lending to the private sector for productive purposes. the study recommended that the regulating body such as central bank of nigeria (cbn) should adopt a direct credit control that will be beneficial to the real sector of the economy, which is the latest reform in the banking sector, where there is mandatory credit allocation to critical sectors of the economy. nabar (2011) assesses how interest rate affects household savings in chinese 31 provincial level administrative units between 1996 and 2009. a strong positive correlation between household savings and interest rates was established; suggesting that chinese save to meet a number of needs e.g. retirement consumption and durables purchases. as such high savings rates enable them to meet their target savings. mohan (2012) examined deposit mobilization by cooperative banks in india. the study showed that cooperative banks should rely on individual’s depositors as well as cooperative societies. their efforts should be oriented towards the mobilization of more savings and current accounts deposits through continuous publicity, effective marketing management and providing good service to the clients. das & das (2002) discuss the relationship deposit interest rates and the interest amount. they observed that the method of calculating the interest amount can substantially affect the interest paid. depositors should take into consideration the interest rate computation over and above the www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 6 quoted nominal rates. since 89% of the customers are depositors, a high degree of transparency is needed in regard to effective rates offered to customers. laurenceson (2004) drawing on a panel data of 101 countries between 1994 and 2001 examined the relationship between bank franchise values and deposit mobilization. results showed a negative relationship between franchise value and a decrease in deposits; suggesting that increased competition leads to improvements in service quality which tempts households to raise their holdings of savings deposits. in this regard it can be argued that high interest rate on deposits leads to higher deposits (ceteris paribus). oluitan (2009) is of the opinion that policy makers should focus less on measures leading to increase in bank lending and concentrate more on legal, regulatory and policy reforms that boost the functioning of markets and banks. muhsin& eric (2000) in their study on turkey concluded that economic growth lead to financial sector development. however, the proponents of supply-leading hypothesis are of the belief that bank lending is a veritable tool for attainment of economic growth and development. anthony (2012) investigated the determinants of bank savings in nigeria as well as examined the impact of bank savings and bank credits on nigeria’s economic growth from 1970-2006. the study adopted two impact models; distributed lag-error correction model (dl-ecm) and distributed model, the empirical results showed a positive influence of values of gdp per capita (pcy), financial deepening (fsd), interest rate spread (irs) and negative influence of real interest rate (rir) and inflation rate (infr) on the size of private domestic savings. also a positive relationship exists between the lagged values of total private savings, private sector credit, public sector credit, interest rate spread, exchange rates and economic growth. the study therefore recommend, among others, that government’s effort should be geared towards improving per capita income by reducing the unemployment rate in the country in a bid to accelerate growth through enhanced savings. jelilov (2015) in his study on the impact of interest rate and economic growth in nigeria from posited that the nigerian economy faced numerous challenges which impacted on the overall economic activity and has witnessed crises with devastating consequences on the world commodity prices as a result of global economic. this subsequently created structural imbalances occasioned by the collapse of oil prices which adversely affected the nation’s revenue. study examined the impact of interest rate on economic growth in nigeria from 1990 to 2013. the result found that the interest rate has a slight impact on growth; however the growth can be improved by lower the interest rate which will increase the investment. as a result of study was found out that nigerian authorities should set interest rate policies that will boost the economic growth. therefore, proper measure should be taken in order to have a more rapid economic growth. akabom-ita, (2012) examined the impact of interest rate on net assets of multinational companies in nigeria from 1995 2010. the regression analysis showed that an increase in interest rate results in reduction in net assets. okoye and richard (2013) examined the impact of bank lending rate on the performance of nigerian deposit money banks between 2000 and 2010. the study specifically determined the effects of lending rate and monetary policy rate on the performance of nigerian deposit money banks and analyzed how bank lending rate policy affects the performance of nigerian deposit money banks. it utilized secondary data econometrics in a regression, where time-series and quantitative design were combined and estimated. the result confirmed that the lending rate and monetary policy rate has significant and positive effects on the performance of nigerian deposit money banks. the implication of these is that lending rate and monetary policy rate are true parameter of measuring bank performance. they therefore recommend that government should adopt policies that will help nigerian deposit money banks to improve on their performance and that there is need to strengthen bank lending rate policy through effective and efficient regulation and supervisory framework. enyioko (2012) also looked at the impact of interest rate policy on performance of deposit money banks in nigerian. the study observed that the current credit crisis and the transatlantic mortgage financial turmoil have questioned the effectiveness of bank consolidation programme as a remedy for financial stability and monetary policy in correcting the defects in the financial sector for sustainable development. many banks consolidation had taken place in europe, america and asia in the last two decades without any solutions in sight to bank failures and crisis. the study attempts to examine the performances of banks and macro-economic performance in nigeria based on the interest rate policies of the banks. the study analyses published audited accounts of twenty (20) out of twenty-five (25) banks that emerged from the consolidation exercise and data from the central banks of nigeria (cbn). it denoted year 2004 as the pre-consolidation and 2005 and 2006 as post-consolidation periods for our analysis. the study noticed that the interest rate policies have not improved the overall performances of banks significantly and also have contributed marginally to the growth of the economy for sustainable development. 3. research methodology this study adopted ex-facto research design to explore the relationship between financial deepening indicators and customers deposit mobilization in nigeria commercial banks. the data employed in this study are secondary data. the data were extracted from relevant publications of the central bank of nigeria (cbn) such as: cbn statistical bulletin, annual published financial statement of the selected banks and national bureau of statistics (nbs). www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 7 secondary data was employed as it is useful to the researcher in answering research questions about social issues and significantly aid advancement of the social sciences. the choice of secondary data was made as it is faster, reduces time wastages in data gathering, it is non-reactive, often available for re-analysis, it also provides a broad background and readily improves one’s learning curve. secondary data is neither better nor worse than the primary data; it is simply different. the source of the data is not as important as its quality and its relevance for particular purposes. for this purpose, the theoretical model of lucky and uzah, (2016) was adapted by taking into account the influence of financial deepening variables on deposit mobilization in nigeria commercial banks. the model explains the theoretical link between monetary policy transmission mechanism and domestic real investment in nigeria. due to the assumed linearity of the model specified; ordinary least squares (ols) estimation method was employed to obtain the intercept and coefficients of the model. the estimates were used to determine the relationship between financial deepening and deposit mobilization. also the estimates and relevant statistics were used to evaluate the models for consistency or otherwise with expectations, statistical significance and explanatory power. 3.1 model specification econometric models used in this research work include the regression analysis and the vector auto-regression (var) model. the choice of multiple regression models is based on the use of more than single independent variables in a regression model. the study adopts modified model of owuor (2013) on the relationship between real interest rate and financial deepening in kenya. components of financial deepening have implication on commercial bank liquidity management. in this study, increase in liquidity management is conceptualized as the function of variation in financial deepening. we have therefore, chosen a combination of deductive and inductive analytical framework to achieve the objective of the study. cd= f(fd) (3.1) the focus of this study is to evaluate the effect of financial deepening on customer deposit of commercial banks. in other words, changes in customer deposit depend on changes in components of financial deepening. cd = f(fd) (3.2) h0: α = 0 (3.3) h1: α ≠ 0 (3.4) at 5% level of significance note: h0 is the null hypothesis that the parameter of financial deepening is not significant and ha is the alternative hypothesis that the financial deepening parameter influences changes in commercial bank customer deposit. 3.2 variables in the model this research adopts the econometric approach of vector auto-regression (var) model of the form; u (var) = (liqm) (3.5) where: fd= liqm, (3.6) we assumed that the economy is described by a system of equations where: tcd = (m1/gdp, m2/gdp, psc/gdp, mob/m2, mmd/m2) (3.7) where tcd/ta = total customer deposit mobilized by commercial banks to total assets m1/gdp = narrow money supply to gross domestic product m2/gdp = broad money supply to gross domestic product psc/gdp = private sector credit to gross domestic product mob/gdp = money outside the bank to gross domestic product mmd/gdp = money market development to gross domestic product 3.3 unit root test given the non-stationarity characteristics of most macroeconomic variables, testing the properties of these variables has become relevant to avoid spuriousness of empirical result. in this view this study commenced its econometric analysis by conducting the stationary properties of the variables using the augmented dickey-fuller tests. the adf test is based on estimating the equation below: δyt = β1 + β2t + δyt-1 +δyt-1 + μt (3.9) where, μt is pure white noise error; n is the maximum lag length on dependent variable to ensure that μt is the stationary random error. δyt-1 = (yt-1 yt-2), δyt-2 = (yt-2 yt-3) and so on. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 8 note; that the number of lagged difference terms to include is often determined empirically, the idea is to include enough terms so that the error term is serially uncorrelated. and the adf unit root test null hypothesis δ = 0 is rejected if the t – statistics associated with the estimated coefficient exceeds the critical values of the test. 3.4 cointegration test given that the empirical model specified in the study is a multivariate model, the engle – granger (1987) cointegration test is inappropriate for testing co-integration among the variables. this is because the engel – granger approach is based on the assumption that there exist only one co-integrating vector that connect the variables and since our model is multivariate there is the possibility of having more than one cointegration vector. in the light of the above weakness the johansen cointegration test was applied. johansen and juselius (1990) test proposes the use of two likelihood ratio tests namely, the trace test and the maximum eigen-values test. the trace statistic for the null hypothesis of cointegrating relations is computed as follows: гtrace (r\k) = t (1λt) (3.10) where k is the number of endogenous variables, for r = 0, 1, . . . , k 1. maximum eigen-value static tests the null hypothesis of r cointegrating relation against r + 1 cointegrating relations and is computed as follows: гmax (r|r + 1) = tlog (1λr + 1) (3.11) = гtrace (r|k) гtrace (r + 1|k) (3.12) for r = 0, 1, . . . , k 1. the error correction mechanism (ecm) from the cointegrating equations, is obtain by including the lagged errorcorrection term obtain from residual of the long run static model. this process helps in capturing the long-run information that might have been probably lost during the differencing. for the result to be consistent with theory, the coefficient of the error term should be negative and range between zero and one in absolute term. the errorcorrection term to be estimated represents the short-run to long-run adjustment equilibrium trends. it is a measure of the speed of adjustment of the short run relation to unexpected shocks. it is measured as the effects of residual from the long run model. 3.5 granger causality test the granger causality approach measures the precedence and information provided by a variable (x) in explaining the current value of another variable (y). in other words, the lagged values of x are statistically significant. if otherwise, then one concludes that x does not granger-cause y. to determine whether causality runs in other direction, from x to y, one simply repeats the experiment, but with x and y interchanged. the null hypothesis h0 tested is that x does not granger-cause y and y does not granger cause x. the test involves estimating the following pairs of regressions: cdt = α1fdt – i + α2cdt i + u1t (3.13) cdt = β1cd i+ β2fdt i + u2t (3.14) where: α1, α2, β1 and β2 are parameter to be estimated. from equation (1) a certain component of fd is said to granger cause a selected cd if the coefficient of the lagged values of the selected fd is significantly different from zero. feedback relationship occurs, when fd granger cause cd and liqm granger cause fd. the hypothesis that either fd granger causes a given cd, if supported by the data, should imply that the null hypothesis should be rejected. 3.6 priori expectation a rise in the ratio of fd (m2/gdp) was expected to have a positive effect on deposit mobilization, such that as the ratio of money supply rises, deposit mobilization increases since the ability of banks to mobilize deposit mobilization depends on the availability of stock of money held by these banks for transactions. symbolically, the expectations were represented, thus: β 0 > 0, β 1 > 0, β2 > 0,β3> 0, β4> 0, β5> 0. 4. analysis and discussion of findings table1. short run dynamic results on the effect of financial deepening on customers’ deposit of commercial banks variable coefficient std err. t-statistics prob. psc_gdp 0.168555 0.964893 0.174687 0.8625 mob_gdp 2.995304 2.839526 1.054861 0.3002 mmd_gdp -0.012153 0.330659 -0.036755 0.9709 m2_gdp 1.622905 1.916366 0.846866 0.4040 m1_gdp -3.782777 2.598420 -1.455799 0.1562 c 48.13160 8.259770 5.827232 0.0000 r2 0.699451 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 9 adj. r2 0.555816 f-statistics 4.640516 f-prob 0.000640 durbin-watson stat 0.936894 source: extracts from e-view the estimated regression model reveals the impact of the independent variables on the dependent variables. the regression summary shows that the independent variables can explain 69.9 and 55.5 % variation on the dependent variable (adjusted r 2 ) while the remaining 30.1% and 45.5% can be explained by exogenous variables not captured in the regression model. the f-statistics and the f-probability coefficient show that the model is significant; this led to the acceptance of alternate hypothesis. the durbin watson statistics of 0.936 is less than 1.00 but greater than 0.5 which shows the presence of serial auto correlation. the β coefficient of the variable shows all the independent variables have positive relationship with the dependent variable except money market development. the presence of serial autocorrelation enables us to test for stationarity of the variables using the augmented dickey fuller statistics. table 2. unit root test summary results at level variable adf statistics mackinnon prob. order of intr. 1% 5% 10% tcd/ta -4.711927 -3.661661 -2.960411 -2.619160 0.0007 1(0) m1_gdp -2.316793 -3.639407 -2.951125 -2.614300 0.1727 1(0) m2_gdp -2.078209 -3.639407 -2.951125 -2.614300 0.2542 1(0) mmd_gdp -1.543145 -3.639407 -2.951125 -2.614300 0.5000 1(0) mob_gdp -1.602823 -3.639407 -2.951125 -2.614300 0.4703 1(0) psc_gdp -1.902770 -3.639407 -2.951125 -2.614300 0.3272 1(0) unit root test summary results at first difference tcd/ta -5.597566 -3.679322 -2.967767 -2.622989 0.0001 1(1) m1_gdp -5.215673 -3.646342 -2.954021 -2.615817 0.0002 1(1) m2_gdp -5.471094 -3.646342 -2.954021 -2.615817 0.0001 1(1) mmd_gdp -5.169993 -3.646342 -2.954021 -2.615817 0.0002 1(1) mob_gdp -5.688768 -3.646342 -2.954021 -2.615817 0.0000 1(1) psc_gdp -5.833811 -3.653730 -2.957110 -2.617434 0.0000 1(1) source: extracts from e-view the stationarity test as shown in the table above proved that the variable are not stationary at level as the adf statistics is less than the mackinnon critical values of 1%, 5% and 10% and the probability coefficient is greater than 0.05 critical value. therefore we conclude that the variable are not stationary at level, this implies the acceptance of null hypothesis. the acceptance of alternate hypothesis enables us to test for stationarity at first difference. from the result, it is evidence that the adf statistics of the variables are greater than the mackinnon critical values and the probability coefficient is less than the 0.05 critical values, we therefore conclude that the variables are stationary at first difference, we therefore rejects the null hypothesis. the result in the stationarity test permits us to test for cointegration using the johansen cointegration test. table 3. johansen co-integration test results: maximum eigen hypothesized no. of ce(s) eigen value maximum-eigen 0.05 critical value prob.** decision none* 0.654936 9 8.24354 95.75366 0.0036 reject h0 at most 1* 0.547877 77.13074 69.81889 0.0060 reject h0 at most 2* 0.230094 60.93533 47.85613 0.0050 reject h0 at most 3* 0.189396 32.30625 29.79707 0.0007 reject h0 at most 4 0.150299 5.377045 15.49471 0.7675 accept h0 at most 5 7.04e-05 0.002324 3.841466 0.9595 accept h0 trace statistics none* 0.654936 75.11280 40.07757 0.0002 reject h0 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 10 at most 1* 0.547877 56.19541 33.87687 0.0090 reject h0 at most 2* 0.230094 38.629077 27.58434 0.0467 reject h0 at most 3 0.189396 6.929206 21.13162 0.9566 accept h0 at most 4 0.150299 5.374721 14.26460 0.6940 accept h0 at most 5 7.04e-05 0.002324 3.841466 0.9595 accept h0 source: extracts from e-view the cointegration test presented in the above table test the presence of long run relationship among the variables. in the cointegration test, we adopt the maximum eigen value coefficient and the trace statistics. the coefficient shows three cointegrating equation from the trace statistics and two from maximum eigen value. we therefore rejects the null hypothesis and concludes that the presence of long run relationship between the dependent and the independent variables table 4. normalized co-integrating equation tcd_ta psc_gdp mob_gdp mmd_gdp m2_gdp m1_gdp 1.000000 -9.734320 -50.27920 0.000445 -6.253786 26.56908 (2.90327) (8.56693) (0.71517) (5.62676) (8.17859) source: extracts from e-view from the normalized cointegration equation, it is evidence that private sector credit, money outside the bank and broad money supply have negative long run relationship with total customers deposit while money market development and narrow money supply have positive long run relationship with total customers’ deposit. table 5. over-parameterized result variable coefficient std err. t-statistics prob. c -0.388963 1.408921 -0.276072 0.7876 d(tcd_ta(-1)) 0.502663 0.256670 1.958399 0.0760 d(tcd_ta(-2)) 0.960814 0.303538 3.165386 0.0090 d(tcd_ta(-3)) 0.851189 0.361808 2.352600 0.0383 d(psc_gdp(-1)) -0.585038 1.205189 -0.485432 0.6369 d(psc_gdp(-2)) 0.735534 1.365231 0.538761 0.6008 d(psc_gdp(-3)) -0.308005 1.476179 -0.208650 0.8385 d(mob_gdp(-1)) -6.912298 4.427858 -1.561093 0.1468 d(mob_gdp(-2)) 2.531386 4.871861 0.519593 0.6136 d(mob_gdp(-3)) 4.805131 5.626703 0.853987 0.4113 d(mmd_gdp(-1)) 1.152277 0.904125 1.274467 0.2288 d(mmd_gdp(-2)) 0.564251 0.706833 0.798281 0.4416 d(mmd_gdp(-3)) -0.370141 0.675910 -0.547619 0.5949 d(m2_gdp(-1)) 0.276736 1.894229 0.146094 0.8865 d(m2_gdp(-2)) 0.449567 2.216291 0.202846 0.8430 d(m2_gdp(-3)) 0.455371 2.770931 0.164338 0.8724 d(m1_gdp(-1)) 2.899752 2.855215 1.015599 0.3316 d(m1_gdp(-2)) -1.894221 3.236970 -0.585183 0.5702 d(m1_gdp(-3)) -1.608165 4.461279 -0.360472 0.7253 ecm(-1) -1.355823 0.386215 -3.510540 0.0049 r2 0.709080 adj. r2 0.206582 f-statistics 2.411109 f-prob 0.003352 durbin-watson 2.425073 source: extracts from e-view print the over parameterized result on the effect of financial deepening on customers’ deposit shows that the independent www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 11 variables 70.9% and 20.6% variation on the dependent variable, the f-statistics and f-probability shows that the model is significant while the durbin watson statistics shows the presence of serial negative auto correlation. the β coefficient of the variables shows that the independent variables at the various lag have positive relationship with the dependent variable except money market development at lag 3, broad money supply at lag 1 and lag 2, money outside the bank at lag 2 and private sector credit at lag 2. the error correction model ecm (-1) is negative which confirm the a-priori expectation, this means that the variables can adjust to equilibrium at the speed of 135% annually. the presence of serial auto correlation in the above result enables us to test for parsimonious error correction model. table 6. parsimonious error correction results variable coefficient std err. t-statistics prob. c 0.107424 1.648579 0.065162 0.9488 d(tcd_ta(-1)) 0.298682 0.274872 1.086623 0.2915 d(psc_gdp(-2)) -1.282698 1.402075 -0.914857 0.3724 d(psc_gdp(-3)) -0.627060 1.431850 -0.437937 0.6666 d(mob_gdp(-1)) 1.409765 3.851281 0.366051 0.7186 d(mob_gdp(-2)) 1.174352 3.238169 0.362659 0.7211 d(mob_gdp(-3)) -2.218628 3.700021 -0.599626 0.5562 d(mmd_gdp(-1)) -0.031231 0.894682 -0.034907 0.9725 d(m2_gdp(-1)) 0.087538 1.293760 0.067662 0.9468 d(m2_gdp(-2)) 1.203299 1.513621 0.794980 0.4370 d(m2_gdp(-3)) 1.117702 1.767288 0.632439 0.5351 d(m1_gdp(-1)) -0.579035 2.676208 -0.216364 0.8311 ecm(-1) -0.567608 0.257732 -2.202320 0.0409 c 0.107424 1.648579 0.065162 0.9488 r2 0.322084 adj. r2 0.129860 f-statistics 0.712663 f-prob. 0.721768 durbin-watson 2.204684 source: extracts from e-view print out and author’s computation the parsimonious error correction model on the effect of financial deepening shows that private sector credit have negative effect at lag 1 and lag 2, money outside the bank have positive effect at lag 1 and lag 2 but negative at lag 3, money market development have negative impact at lag 1 while broad money supply have positive effect at lag 1 and lag 2 but negative effect at lag 3. the model summary prove that the independence variable 32.2% and 12.9%, the error correction model shows that the variables can adjust to equilibrium at the speed of 57.9% annually. the tstatistics and the probability shows that broad money supply is significant at lag 2 while other variables are statistically not significant. table 7. pair wise causality test psc_gdp does not granger cause tcd_ta 33 0.80343 0.4578 tcd_ta does not granger cause psc_gdp 2.39933 0.1092 mob_gdp does not granger cause tcd_ta 33 0.06015 0.9417 tcd_ta does not granger cause mob_gdp 0.21594 0.8071 mmd_gdp does not granger cause tcd_ta 33 0.04973 0.9516 tcd_ta does not granger cause mmd_gdp 0.88795 0.4228 m2_gdp does not granger cause tcd_ta 33 0.40649 0.6699 tcd_ta does not granger cause m2_gdp 2.44138 0.1054 m1_gdp does not granger cause tcd_ta 33 0.24104 0.7874 tcd_ta does not granger cause m1_gdp 2.74219 0.0817 source: extracts from e-view www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 12 in the granger causality t-test, the result shows that there is no causal relationship that exists between the dependent and the independent variables or the independent to the dependent variable. we therefore accept the null hypothesis, this contrary to the expectation of the result. 5. discussions of findings financial sector development is a prerequisite for achieving desired monetary and macroeconomic goals. the study found that narrow money supply have negative but insignificant effect on total customer deposit of commercial banks such that a unit increase on the variable will lead to 3.7% decrease on the total customer deposit of commercial banks this finding is contrary to the expectation of the results and contradicts the objective of financial sector reforms. narrow money supply which includes currency in circulation and demand deposit is expected to have a positive impact on the liquidity of commercial banks. the negative impact of narrow money supply is contrary to the findings of (hlatshwayo et al., 2013 and vazquez and federico, 2012) on the impact of financial market development and the liquidity position of commercial banks in pakistan. the negative impact of narrow money supply on the liquidity position of commercial banks in nigeria can be traced to the fact that demand deposit is prone to frequent withdrawal. it could also be traced to the fact that the significant proportion of the currency in circulation is outside the banking system, this implies that increase in narrow money supply will significantly reduce the liquidity of commercial banks in nigeria. the impact of broad money supply is positive and insignificantly related to total customers deposit such that a unit increase will lead to 3.6%, the positive effect of broad money supply on customers deposit confirm the a-priori expectation of the result and validates the monetary policy objective and the regulatory functions of the monetary authorities which is to achieve banking system stability while the positive effect confirm the findings of bundi (2013) on the effect of financial sector liberalization on the liquidity of commercial banks and odhiambo (2008) on the effect of interest rate on liquidity of commercial banks, the negative impact confirm the findings of fallah (2012) on the effect of nonperforming loans on liquidity of commercial banks. findings reveal that money market development has negative relationship with customer deposit of commercial banks. this finding is contrary to the expectation of the results and various policies formulated by the regulatory authorities to deepen the operational efficiency of the nigerian money market such as the increase in the money market instruments and the reforms in the money market institutions such as the banking sector reforms. toby (2006) noted that the banking sector consolidation was aimed at repositioning nigerian commercial banks to become a player in the international financial market and not a spectator. the negative effect of the variables could be traced to poor implementation of policies and conflict of monetary policy with the liquidity of objectives of commercial banks such as the withdrawal of all public funds from the banking sector in 1990s and the introduction of the single treasury account system the policy that threatened the liquidity of nigerian commercial banks and motivates the industry into the international financial market in source for liquidity. the study found that money outside the bank have positive and significant effect on customer deposit such that a unit increase on the variable will lead 29.9% on total customers’ deposit, this finding is contrary to the expectation of the result as money outside the bank is expected to have a negative impact on the liquidity position of commercial banks. it is contrary to the opinion of former central bank governor prof charles soludo that money outside the bank constitutes a lot of nonsense to the financial market and the economy at large. the finding of this study validates the existence of informal financial institutions esusu and other methods of informal savings. the positive impact could be traced to the lost of public confidence in the banking sector in the 1980s and 1990s as a result of frequent banking sector distress. it could also be traced to information asymmetric between the depositors and the lenders of fund in the financial market. the study found that private sector credit has positive but insignificant impact on total liquid assets of commercial banks and total customers’ deposit. this finding confirms the a-priori expectation of the results and justifies the positive findings above. 6. conclusion this study established that the components of financial deepening play key roles in determining the customers’ deposits of commercial banks in nigeria and were found to be statistically significant. the study also established the relevance of specified components of financial deepening on customer’s deposit of quoted commercial banks. it was discovered that the contribution to financial deepening was positive and significant customers deposit liabilities. result of the analysis and finding thereof has provided some interesting insights that will enhance clearer understanding of financial deepening and deposit mobilization of commercial banks in nigeria. this study concludes financial deepening significant effect on the deposit mobilization. 7. recommendation from the findings of the study, there is need to sustain a higher level of financial deepening in nigeria. incidences of poor liquidity should be minimized and private sector credits channeled to the real sector of the economy should be enhanced through monetary and macroeconomic policies. moreover, policy oriented measures should take into consideration the positive causality between money outside the banks and liquidity of commercial banks in nigeria. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 13 bank managers should identify and monitor key business drivers such as loan and deposit margins as these are the outcome of financial sector development to enhance effective liquidity policy of the banking industry. bank officials should be trained in the areas of liquidity management and liquidity changing conditions and should be forward looking, and focus on operational efficiency of the banking industry to leverage the negative impact of narrow money supply and broad money supply of commercial banks in nigeria. high quality liquidity assets buffer sufficient to hedge sudden liquidity outflows should be maintained and there should be regular review of prudential guidelines for efficiency to hedge against the negative impact of financial deepening measures on liquidity of nigeria commercial banks. 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(2010). bank lending, economic growth and the performance of the manufacturing sector in nigeria. european scientific journal, 8(3), 19-36. were, m., nzomoi, j., & rutto, n. (2012). assessing the impact of private sector credit on economic performance: evidence from sectoral panel data for kenya. international journal of economics and finance, 4(3), 182190. 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 | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 20 understanding cognitive dissonance of indian customers for financial products: a multi-dimensional scale development approach brajesh bolia phd assistant professor of marketing k j somaiya institute of management studies & research, mumbai, india e-mail: brajeshbolia@hotmail.com sumi jha phd associate professor of general management nitie, mumbai, india e-mail: sumijha05@gmail.com manoj k jha phd professor of general management nitie, mumbai, india e-mail: manojkjha40@yahoo.co.in abstract the aim of the study was to understand the dynamics of cognitive dissonance in the context of financial product purchase. a mixed methodology research approach was undertaken to explore the attitudinal and behavioural dimensions (qualitative) and subsequent empirical validation (quantitative) with a sample of customers of financial products. qualitative research was conducted through focus group discussions to arrive at a pool of 99 items which were then pruned and validated with the help of academic and industry experts. the items were empirically tested and validated with the help of appropriate statistical tools to arrive at a “5 factor and 25 items” measurement scale for cognitive dissonance. the study found two factors “emotional gain” & “financial concern” as distinguishing factors emerging out as key findings. the arousal of cognitive dissonance after the purchase decision taken by consumer can be a major concern for marketers as it might result in order cancellations, loss of trust for the brand as well as loss of loyal customers. measuring dissonance in financial product context post purchase can help marketers devise appropriate strategies to reduce dissonance, thereby retaining and attracting customers. keywords: cognitive dissonance, mixed method, financial product, purchase decision. 1. introduction the term cognitive dissonance (festinger, 1957) has been researched exhaustively since its inception. with declining focus during 1970s-80s, it regained the attention of the researchers during 1990s (aronson, 1992). cognitive dissonance (festinger, 1957) post-purchase in services (hill, 1977) has been marketers’ subject of curiosity and importance, as it directly affected the post-purchase behavior of the customer. marketers have used the theory of cognitive dissonance (festinger, 1957) mainly to investigate the dissonance experienced by customers’ post-purchase of a product (segerguttmann, vilnai-yavetz, wang & petruzzellis, 2018; telci, maden & kantur, 2011; wilkins, butt & heffernan, 2018). cognitive dissonance has been primarily studied by western researchers (aronson, 1992; brehm & cohen, 1962; cooper, 2007; cooper & fazio, 1984; cummings & venkatesan, 1976; egan, santos & bloom, 2007; harmon-jones & harmonjones, 2007; hinojosa, gardner, walker, cogliser & gullifor, 2017; hunt, 1970; o'neill & palmer, 2004; kim, 2011; oshikawa, 1968; powers & jack, 2013; wilkins, beckenuyte & butt, 2016) with very few indian studies reported (bawa & kansal, 2008; george & edward, 2009; viswesvaran & deshpande, 1996; viswesvaran, deshpande & joseph, 1998). india being an emerging economy and going through extreme market changes regarding customers’ product choice, the gap between customer perception regarding a product and producer’s imagination of product is widening . hence, the indian customers who are learning from their western counterparts are becoming more and more demanding (gupta, 2013; jaiswal, 2008). while there had been enough research in customer behavior in consumer goods with respect to cognitive dissonance (charron & redondo, 2018; telci et al., 2011) ever since the festinger came up with his theory of cognitive dissonance, little research had been done on the application of cognitive dissonance to the service industry (kim, 2011). service sector comprises almost 70% of gdp in developed countries and more than 50% of the gdp in india and other developing countries (services-report, september, 2019). the services sector of india remains the engine of growth for india’s economy and contributed 54.17 percent of india’s gross value added in 2018-19 and the sector grew at 12.75 percent growth in 2018-19 (services-report, september, 2019). the growth in services (gopalan & singhi, 2015) had generally mailto:brajeshbolia@hotmail.com mailto:sumijha05@gmail.com mailto:manojkjha40@yahoo.co.in copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 21 not been due to marketing developments in the service industries, but rather to the maturation of economy and rising living standards. service industry making a huge impact on today’s economy calls for a more intense research in the field of cognitive dissonance in service industry especially the financial sector. the rate of growth and the size of the f inancial services sector as a proportion of the economy (gross national savings as percentage of gdp is 30% as on march 2018) was a good reason to single out the sector for special consideration (arnold et al., 2016; financial-services-report, september, 2019). there seems to be a wide difference in the treatment of financial products in the indian market and western market (costanzo & ashton, 2006; fünfgeld & wang, 2009; gait & worthington, 2008; vyas & raitani, 2014). indian customers being more conservative in financial matters, therefore, might feel more dissonance post-purchase (bawa & kansal, 2008). the study attempted to develop a scale on cognitive dissonance capturing concerns of indian customers from emerging market context. a mixed method approach (using qualitative methods as well as quantitative methods) was used to develop and validate the measurement scale. 2. literature review the concept of cognitive dissonance was introduced by festinger (1957; 1962) who stated that if an individual holds two cognitions/cognitive elements (“knowledge” about himself, his environment, his opinions, his attitudes and his past behavior) that are inconsistent with one another, the individual will experience dissonance and will try to reduce it in one of the three ways: remove dissonant cognitions, add new consonant cognitions, or reduce the importance of dissonant cognitions. the cognitive dissonance theory assumes a drive like motivation to maintain consistency among the relevant thoughts and actions. the theory of cognitive dissonance is one of the groups of cybernetic theories called consistency theories, all of which begin with the same premise: people are more comfortable with consistency than inconsistency (heider, 1946). the evolution of the theory of cognitive dissonance seems to have developed with the notion that people are more comfortable with consistency than inconsistency and try to resist, avoid or change the contradictory information and knowledge. the literature review suggested that enough research had been carried out and published since festinger (1957) formulated the theory of cognitive dissonance (aronson, 1992; bolia et al., 2016; brehm & cohen, 1962; cummings & venkatesan, 1976; egan et al., 2007; gbadamosi, 2009; harmon-jones & harmon-jones, 2007; hinojosa et al., 2017; hunt, 1970; kim, 2011; liao, 2017; o'neill & palmer, 2004; oshikawa, 1968; oshikawa, 1972; powers & jack, 2013; shahin & rahim, 2014; soutar & sweeney, 2003; sweeney et al., 2000; telci et al., 2011; yamaguchi & abe, 2016; wilkins et al., 2016; wilkins et al., 2018). researchers have used the theory of cognitive dissonance in the marketing area extensively to address post-purchase behavior of the customers at various stages as how it was controlled or reduced (cao & just, 2010; gbadamosi, 2009; hunt, 1970; liao, 2017; soutar & sweeney, 2003; wilkins et al., 2016; yamaguchi & abe, 2016). post-purchase communications affected the customers either ways (hunt, 1970); hence organizations must carefully choose the type of post-purchase communication mode to connect with the customers. the customer’s decision of purchase should get strengthened rather than create a doubt in mind due to the post-purchase communications (hunt, 1970). researchers also studied assurance from celebrities, local opinion leaders and reputed citizens which caused strengthening of attitudes towards a brand thereby ensuring the customers did not feel regret post-purchase (dzisah & ocloo, 2013). researchers attempted to devise measures for cognitive dissonance in past (bell, 1967; hawkins, 1972; hunt, 1970; korgaonkar & moschis, 1982), while (montgomery & barnes, 1993; sweeney et al., 2000) developed the measure with a higher number of items through a thorough literature review and proper empirical validation. montgomery & barnes (1993) developed a measure of ten items and validated the same by assessing content validity, predictive validity and construct validity. the scale was named as postdis by the researcher which was explained by two factors – “correctness of decision” (an individual’s concern if he has taken the right decision and not got influenced by the salesperson) and “support” (an individual looking for reinforcing its decision by supportive information and actions in favor of the decision). the scale was not used by many researchers (bose & sarker 2012; sweeney et al., 2000). a 22-item scale for assessing cognitive dissonance, felt immediately after purchase, was developed by sweeney et al., (2000) conceptualizing the constructs recognizing that dissonance was not only cognitive, but also had an emotional component, consistent with festinger’s early description of dissonance as a psychologically uncomfortable state. researchers concluded with a three dimensional model having following constructs –“emotional” (a person’s psychological discomfort subsequent to the purchase decision), “wisdom of purchase” (a person’s recognition after the purchase has been made that they may not have needed the product or may not have selected the appropriate one) and “concern over the deal” (a person’s recognition after the purchase has been made that they may have been influenced against their own beliefs by sales staff). the scale had been used by various researchers in their studies (bolia et al., 2016; soutar & sweeney, 2003; sweeney et al., 2000; kim, 2011). the theory of cognitive dissonance (festinger, 1957) was widely accepted, however the measurement had been an issue in services sector in the indian context where the significance of post purchase decision carries high importance due to increasing purchasing power of customers (country forecast india august, 2018). financial products’ purchase might be associated with high dissonance and higher confusion due no clear differences between competing brands and customers’ involvement is higher (assael, 2005). copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 22 3. research methodology the systematic way to develop and validate a construct, following predetermined principles and procedures, is known as scale development (farooq, 2016). the study conducted a research methodology that combined both the perspectives, qualitative and quantitative, known as the mixed methodology (sreejesh & mohapatra, 2013; teddlie & tashakkori, 2011). the mixed methodology research was undertaken to explore the attitudinal and behavioral dimensions (qualitative), and their empirical validation (quantitative) and these two approaches were applied in sequential form (first qualitative followed by quantitative). the central premise of the study was to understand the concept of cognitive dissonance, an idea which had strong literature support, however, required empirical validation of the scale in the indian financial sector context. the study started with extensive literature review on cognitive dissonance. this understanding helped the researchers in categorizing the scale development process into three different phases. phase –i was a qualitative study (focused group discussion) that explored the attitudes and feelings of customers just after making a purchase decision, the findings were subjected to face validity. phase-ii looked at empirical scale development using quantitative techniques (factor analysis) to arrive at a suitable measure for cognitive dissonance. phase –iii comprised of validation of the measure derived from phase-ii using quantitative techniques (factor analysis). all the three phases and their sampling details are explained in the subsequent sections. 3.1 phase-i scale development (qualitative research) four focus group discussions (fgd) were conducted as a part of qualitative research of phase i. the fgds (bryman & bell, 2011) were conducted with different groups of students as well as working individuals to understand the concept of cognitive dissonance, its causes, and subsequent effects. the data obtained from the focus group discussions were analyzed using attribution analysis, a part of the semantic content analysis (janis, 1965). authors examined the frequency with which certain characterizations or descriptors were used. it was a simple counting exercise, but the emphasis was on adjectives, adverbs, and descriptive phrases. the quotes from the participants were used to extract 99 important words from the analysis of the focus group discussions (table 1). the pool of important words was converted into items for the development of questions. the questionnaire developed based on these items, was subjected to face validity by taking inputs from experts in the field of behavioral science and marketing, both from academia as well as industry. total seven expert opinions were considered, three were from academia, and four were from industry. their suggestions based on the relevance, repetition, framing of statements, appropriateness for cognitive dissonance, were incorporated and the item list was reduced to 53. table 1. important quotes from focus group discussions quotes of participants imp words "when i do some purchase, then it feels like the task has been accomplished, my to do list is reducing and feeling of satisfaction" participant 7 fgd 4 accomplishment, satisfaction "when i purchase anything which i wanted to buy for a long time it gives a kick, feel happy and emotionally uplifted. also, there is a feeling of concern about the performance of the product like in electronics" participant 8 fgd 4 happy, kick, emotionally uplifted, "am i making the right choice in the view of several brands which are available in the market "participant 8 fgd 4 right choice " soon after purchase decision again we compare if the decision was right" participant 9 fgd 3 compare "after taking the decision to purchase, seek review and suggestions about the deal" participant 1 fgd 3 review, suggestions "think of resale of exchange"participant 6 fgd 3 resale, exchange "was it a paisa vasool or good value for money?"participant 3 fgd 3 value for money "flaunt the product after taking the decision to purchase" participant 2 fgd 3 flaunt "have we spent more" participant 1 fgd 2 spend "have i got a bad deal" participant 3 fgd 2 bad, deal "regret after purchasing a premium product" participant 8 fgd 2 premium product, regret "after impulse buying feeling of regret comes if done right or not "participant 6 fgd 2 impulse, regret, buying copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 23 " feel cheated sometimes"participant 8 fgd 2 cheating, "feel frustrated"participant 9 fgd 2 frustration feel dissatisfied"participant 9 fgd 2 dissatisfied "blame self " participant 1 fgd 1 blame "when stressed out, looking for stress busters and just roaming around and ended up buying something then it gives enjoyment" participant 10 fgd 4 stress buster, enjoyment "if buying a personal care thing for me, kids and family then i feel very happy but when i buy for others than it is ok…like a neutral feeling" participant 11 fgd 4 happy, ok "price plays role value for money companion in shopping affects no feeling of a wrong decision, but with family, a thought comes if the decision was right or not" participant 5 fgd 4 price, value for money, wrong decision, thought, right, wrong 3.2 phase-ii scale development (quantitative analysis) questionnaire for cognitive dissonance, based on the 53 items obtained from focus group discussions and face validation analysis (phase –i), was floated to respondents who had bought any financial product in the past. the questionnaire was self-administered and was also distributed through a web-based form, and the research used 135 responses for analysis. purposive sampling method was used, and the sample was chosen based on a judgmental basis. all respondents were either working executives or earning members and had bought some financial product in the past. sample characteristics – phase-ii scale development (quantitative analysis) gender  male 56% female 44% average age / max age / minimum age / mode age  28.30 / 44 / 23 (years) education – post graduate & graduates  97% employment  84% private sector employees exploratory factor analysis was conducted on initial 53 items of cognitive dissonance. missing value treatment was done for three items by replacing the missing values with a mean of the series method (figure 1 & appendix). principal component analysis method and the rotated component extraction method were used to extract five factors containing 25 items with the criterion of eigenvalues greater than 1. these five factors containing 25 items explained 71.395% of the variance which was above the desired levels of 60% (malhotra & dash, 2014). the statistics associated with sample adequacy were also satisfactory with kmo value as 0.906 and bartlett’s test of sphericity value as 0.000 (hair jr, black, babin & anderson, 2013). the result obtained from the exploratory factor analysis was subjected to confirmatory factor analysis (cfa) to confirm the latent structure (figure 1). factor 1 had nine items and explained 24.397% of the variance. this factor explained the feelings of discomfort and concerns (gregory-smith, smith & winklhofer, 2013) like “i felt horrible,” “i felt cheated.” factor 2 consisted of 8 items explaining 21.68 % of the variance. this factor explained about the sense of accomplishment and achievement (heckhausen, 2013) with items constituting this factor like “i felt relieved,” “i felt satisfied.” factor 3 had four items explaining 12.467 % of the variance. the items constituting this factor “i should have waited,” “i should have sought suggestions” explained the dilemma and the regret about the wisdom of the decision. customers are often faced with thoughts of uncertainties, and lack of knowledge (berger, 2013) about the purchase and hence after thoughts may pop up post-purchase decision. factor 4 comprised of two items explaining 6.604% of the variance. the items explaining this factor “it was a stress buster” and “i felt emotionally uplifted” showed the sense of emotional gratification (cassotti et al., 2012) the individual obtained after deciding consonance with thinking and feeling. factor 5 was comprised of 2 items explaining 6.385% of the variance. the items under this factor “i paid a higher price” and “i spent more” explained the concerns about the financial wisdom (klontz, sullivan, seay & canale, 2015) of the customer after purchase decision was made. while reviewing the fit indices for confirmatory factor analysis, we observed that the hypothesized scale was well fitting as indicated by value of normed chi-square as 1.539 (segars & grovers, 1993), cfi value of 0.942, tli value of 0.934, rmsea value of 0.063, rmr value was 0.040, which were well within the recommended range of acceptability (byrne, 2013; hair et al., 2013). construct reliability (hair et al., 2013) was found appropriate (factor 1= 0.95, factor 2= 0.92, factor 3= 0.86, factor 4= 0.78 & factor 5= 0.64). the statistics associated with goodness of fit appeared to be explaining the well-fitting scale. hence, the model with five factors and 25 items was accepted for further validation. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 24 figure 1. cfa scale development (phaseii) notethe nomenclature for the observed & latent items are being explained in appendix 3.3 phase-iii – scale validation (quantitative analysis) this phase considered validation of the scale developed in the phase-ii analysis. a questionnaire based on the 25 items obtained after phase-ii analysis was administered to the respondents from various fields in person and through web-based forms. the questionnaire was again administered to respondents who had bought any financial product in the past. purposive sampling method was used; the sample was chosen on a judgmental basis and forms were sent to individuals who were earning members and had bought some financial product in the past. total 125 respondents were considered for analysis for the validation of the measure. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 25 sample characteristics – phase-iii scale validation (quantitative analysis) gender  male 57.6% female 42.4% average age / max age / minimum age  28/ 44 / 23 (years) education – post graduate & graduates  98.4% employment 90.4% salaried confirmatory factor analysis was performed on the 25 items obtained in the phase-ii analysis; principal component method and the rotated component matrix were used. the extraction method used was forced factor method keeping the 5factor structure. forced factor method of extraction was performed as the scale developed in the previous phase with five factors and 25 items needed validation (hair et al., 2013). all the items could be retained based on the confirmatory factor analysis (cfa) with 25 items and five factors explaining 71.831% of the variance (figure 2). construct reliability (hair et al., 2013) was measured for all the factors obtained after validation and was found appropriate (f1cd=0.95, f2cd=0.93, f3cd=0.86, f4cd=0.79 & f5cd=0.64). the statistics associated with factor analysis indicated the appropriateness of the data. the kmo value found was 0.900 which indicated sampling adequacy appropriateness (values should be above 0.50). bartlett’s test of sphericity was performed and the significance value found was 0.000 (should be less than 0.05) which indicated significant correlations among the variables being tested (hair et al., 2013). while reviewing these fit indices, it was observed that the scale was wellfitting as indicated by value of normed chi-square as 1.664 (segars & grovers, 1993), cfi value of 0.923, tli value of 0.913, rmsea value of 0.073 and rmr value of 0.044, which were well within the recommended range of acceptability (byrne, 2013; hair et al., 2013). the statistics associated with goodness of fit appeared to be explaining the well-fitting model with five factors and 25 items (appendix). the five factor measurement model values showed better model fit in comparison to 3 factors (combining factors 5, 4, and 3) and 4 factors (combining factors 4 & 5) (table 2). the emerged five factors were named as emotional concern, achievement, decision concern, emotional gain and financial concern. the underlying philosophy behind naming and retaining factor has been mentioned in discussion section. table 2. comparative models – scale validation – phase-iii (cd) cfa analysis 3 factor model 4 factor model 5 factor model normed chi-square 2.172 1.837 1.664 cfi 0.860 0.902 0.923 gfi 0.740 0.773 0.794 agfi 0.689 0.724 0.746 rmr 0.070 0.085 0.044 rmsea 0.097 0.082 0.073 tli 0.846 0.890 0.913 ecvi 5.618 4.891 4.529 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 26 figure 2. cfa scale validation (phaseiii) notethe nomenclature for the observed & latent items are being explained in appendix 4. discussion and contribution there had been very few focused studies on scale development for the concept of cognitive dissonance. this study aimed to develop a scale for measurement of the concept of cognitive dissonance in the context of the indian financial sector. this study used the mixed method (sreejesh & mohapatra, 2013; teddlie & tashakkori, 2011) approach to arrive at a final measure consisting of 25 items covered under 5 distinguishing factors in confirmation with the existing literature (montgomery & barnes, 1993; sweeney et al., 2000) as well as emphasizing on the 2 aspects of “emotional gain” and “financial concern” relevant to the indian financial sector context. the statistics related to the model provided a very good explanation for a fit model specifying factors within desirable limits to satisfy the suitability of the model explaining cognitive dissonance. the research proposed five factors based on the empirical scale building and validation exercise. these are “emotional concern,” “achievement,” “decision concern,” “emotional gain” and “financial concern.” 4.1 emotional concern research in emotions has witnessed an increase in numbers suggesting that emotions played an integral role in organizational efforts to connect with their customers. it has also been demonstrated that understanding of emotions, both self, and others, played an important role in the organization’s life, in how people communicated, how people motivated copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 27 others to do what they wanted (berman & brooks, 2002). buyers do not like to be duped as feeling duped produces an aversive self – conscious emotional response with peril of self-blame (vohs et al., 2007). lakomski & evers (2010) proposed a substantial revision in herbert simon's modified model of rational choice that sharply demarcates emotions and values from rationality and rational decision making (simon, 1955), and concluded that emotion has a central role to play in rational decision making. a negative emotion after purchase decision which violates one’s values and norms might result in consumer guilt (burnett & lunsford, 1994) and frustration (kandra et al., 2004). therefore, “emotional concern” formed an important factor for marketers to respond to customer needs and the first factor consisted of 9 items explaining 24.02% of the variance. this factor elucidated the feelings of discomfort and concerns (gregory-smith et al., 2013) such as “i was fooled,” “i felt cheated,” and “i felt guilty” etc. 4.2 achievement the second factor “achievement” consisted of 8 items explaining 22.085% of the variance explaining the sense of accomplishment and achievement (heckhausen, 2013). the items constituting this factor were “i felt relieved,” “i felt satisfied,” and “i felt happy” in congruence with what was suggested by woodruff et al., (1983) and walters & bergiel (1989) that customers anticipated and expected satisfaction out of a planned purchase. however, woodruff et al. (1983) also stated that both satisfaction (cognitive evaluations) and feelings (emotions) could be anticipated. past research also indicated the importance of anticipated satisfaction or the utility of the purchase before consumption (modigliani & brumberg, 1954); however, marketing academicians have neglected the same to a larger extent. research has emphasized the importance of a sense of feel and experience as a feeling of accomplishment (tomkins & eatough, 2013) and the association of utilitarian and hedonic shopping values resulting in satisfaction, repeat buying intentions, loyalty for a brand and word of mouth activities (vieira et al., 2018). 4.3 decision concern customers also felt dissonant if the thoughts of uncertainty occurred due to doubts about the transaction process such as procuring the product in good physical shape and from, legally compliant and in the right time as per the specified features expected. anderson et al., (2015) referred transaction uncertainty as “easy-to-use procedures for doing business, processing orders accurately, and providing reliable and timely deliveries.” customers are also exposed to dilemma and regret due to uncertainties and lack of knowledge (berger, 2013) about the wisdom of the decision taken, causing concerns about the purchase decision taken. participants in the focus group quoted “soon after purchase decision again we compare if the decision was right" participant 9 fgd 3” and “after taking the decision to purchase, seek review and suggestions about the deal" participant 1 fgd 3” thereby strengthening the premise that customers might feel concerned about the purchase decision is made. customers might also experience dissonance due to counterfactual thinking post purchase decision (mannetti et al., 2007). this study proposed the factor “decision concern” as third factor that explained 12.502% of the variance and consisted of 4 items as “i should have waited more”, “i felt incongruence with the decision”, “i felt like reviewing my purchase decision” and “i felt i should have sought suggestion”. 4.4 emotional gain the fourth factor “emotional gain” explained the sense of emotional gratification (cassotti et al., 2012) the individual got after deciding consonance with thinking and feeling. this factor explained 6.804% of the variance and comprised of 2 items as “it was a stress buster” and “i felt emotionally uplifted.” post-purchase and pre-consumption experience of customers has attracted many researchers in recent years (kim & mattila, 2010; menon & dube, 2007; weber & sparks, 2009), thereby indicating strong explanation for the factor “emotional gain” experienced by customers after making a purchase decision. a focus group respondent expressed a feeling of joy after making a purchase ("when i purchase anything which i wanted to buy for a long time it gives a kick, feel happy and emotionally uplifted and there is a feeling of concern about the performance of the product like in electronics" participant 8 fgd 4) (table 1). customers indulged in impulse buying (hausman, 2000) might feel a sense of emotional fulfillment (meadows, 2013) after purchase. various factors could contribute, towards customers feeling a sense of emotional victory and emotional satisfaction after taking a purchase decision, such situation such as discount availed, the ambience of the store, emotional attachment to a product, being the first to buy, and peer influence (mishra, 2012). according to mattila & enz (2002), understanding of customers’ emotional expressions during the purchase transaction could also help sales and service personnel to customize their products to the target segments. 4.5 financial concern the fifth factor “financial concern” depicted the psychology of indian customers as suggested by kopalle & lindseymullikin (2003) that when customers experienced unexpected price encounter, they adopted one of the three methods of reducing dissonance such as; engaging in biased or filtered information to support prior belief; search for information about other retailers and substitute products that are consistent with their state; re-evaluate the price in relation to the external reference prices. customers are also influenced by competitors’ prices (wagner, 1987), price knowledge (aalto-setälä & raijas, 2003), and price perception (munnukka, 2008) which might affect the post-purchase feelings about the pricing concerns in the form of spend and price comparison (jung et al., 2014; mcmahon, 2005). one of the focus group copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 28 participants expressed a feeling of concern “have we spent more" participant 1 fgd 2” and another stated “was it a “paisa vasool” or good value for money?"participant 3 fgd 3”, which confirms the presence of financial concern and interest among indian customers. this factor explained 6.42 % of the variance and was comprised of 2 items as “i paid a higher price” and “i spent more” explaining the concerns about the financial wisdom (klontz et al., 2015) of the customer. being conservative, customers in india take extra precautions while choosing any financial products. extending the research of (sweeney et al., 2000) the study contributes to understanding the dissonance indian customers are facing in dealing with financial products. indian customers being more traditional and believe in taking calculated risk in financial matters, might feel more dissonance post-purchase. the research contributes to the aspects of “emotional gain” and “financial concern” relevant for indian context. previous studies noted the role of emotions, concern for deal and wisdom of purchase in facing dissonance (sweeney et al., 2000). this study contributes with reference to financial concerns and emotional gain as distinguishing factors of cognitive dissonance. 4.6 managerial implications the study could help managers evaluate their sales customer interface dynamics and look for improvements towards higher customer orientation (mukerjee, 2013). the ability to provide superior customer experience is essential while making efforts to establish and sustain long‐term customer relationships (berry et al., 2002). customers in search to make buying and consuming tasks simpler, improve information processing, shrink perceived risks, and maintain cognitive uniformity and a state of psychological ease look for assurance during the sales –customer interface (mccoll-kennedy et al., 2015). the willingness and ability of marketers to engage with customers and provide assurance during the sales-customer interface can help reduce post-purchase dissonance, increase customer satisfaction and positive word of mouth for the brand. the scale would help managers in identifying specific areas where organization shall focus given a set of customers. if the concern is emotional the sales person will take decisions to enhance emotional gains. if the concern is financial, the sales personnel will focus the discussion on providing sufficient justification to satisfy financial concerns. measuring dissonance post-purchase could help marketers devise appropriate strategies to retain and attract customers. financial product sales are largely dependent on sales personnel and customer interface if not purchased online (easingwood & storey, 1991). financial product sales require the sales personnel to be more focused towards an understanding of the product details of self as well as competitor products, to assure and help the customer take the right decision and reducing dissonance. 5. limitations & future directions the purpose of the study was to develop a scale for cognitive dissonance in the indian context. factors proposed in this study covered all the aspects of the cognitive dissonance measures developed by previous authors and provided a valuable explanation by expanding the role played by emotions in a purchase decision. the scale also captured the price-sensitive indian customer mind-set by extracting a factor financial concern. the factors emerged in the study also explained and corroborated with the existing factors in literature such as “correctness of decision” & “support” (montgomery & barnes, 1993), “emotional parameters”, and “wisdom of purchase” and “concern for deal” (sweeney et al., 2000). while the study brought the important aspects of emotional gains and financial concerns, the scale could be further validated by conducting similar studies on different samples. the suitability for the scale could be empirically tested with products other than financial products like; shopping and specialty goods (kaish, 1967). a study involving self-employed segment may be conducted for understanding the robustness of the scale in a variety of sample. though cross-sectional studies provide valuable insights (liu & wang, 2016) a longitudinal study covering changes in dissonance levels with age might give an insight regarding differences in perception among different generation respondents. references aalto-setälä, v., & raijas, a. 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(2016). analyzing antecedent factors of cognitive dissonance using e-commerce data. acr north american advances, 44, 369-373. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 32 appendix final scale items – cognitive dissonance f1cd = emotional concern cd 25 i felt my purchase decision was horrible cd 27 i felt i was fooled cd 28 i felt i was cheated cd 29 i felt frustrated cd 46 i cursed myself cd 47 i felt guilty cd 48 i felt withdrawing my purchase decision cd 50 i tried to forget the purchase decision cd 53 i felt it was not my taste f2cd = achievement cd 6 i felt relieved cd 7 i felt happy cd 8 i liked what i bought cd 9 i felt satisfied cd 10 i felt positive cd 11_1 i felt i took the right decision cd 17_1 i accomplished what i wanted cd 31_1 i felt confident f3cd = decision concern cd 33 i felt some incongruence with the decision cd 34 i felt i should have waited for more before making a purchase decision cd 35 i felt like reviewing my purchase decision cd 36 i felt i should have sought suggestion before making a purchase decision f4cd = emotional gain cd 51 it was a stress buster cd 52 i was emotionally uplifted f5cd = financial concern cd 1 i felt i paid higher price cd 4 i felt i spent more copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess 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 | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 134 impact of foreign exchange reserve, exchange rate and crude oil price on dhaka stock exchange index: an empirical evidence from vector error correction model uttam golder lecturer department of finance and banking jashore university of science and technology jashore-7408, bangladesh e-mail: uttamgolder@gmail.com md. nazrul islam assistant professor department of finance and banking jashore university of science and technology jashore-7408, bangladesh e-mail: nazrul@just.edu.bd md. shahidullah kayser assistant professor department of finance jagannath university dhaka-1100, bangladesh e-mail: kayser.shahid@outlook.com abstract the supreme thrust of the present analysis is to explore the influences of foreign exchange reserve, exchange rate, and crude oil price on the stock index of the dhaka stock exchange (dse) of bangladesh. moreover, this study evaluates the identity of any unpremeditated relationship among the variables from the viewpoint of an emerging country like bangladesh. through using monthly time-series data, this study tries to discover the evidence of a long-run affiliation among the variables by using johansen’s cointegration test and vector error correction model (vecm). besides, the granger causality technique is introduced to examine the casualty among variables where the empirical results show a causal linkage between the dhaka stock exchange index, foreign exchange reserve, and exchange rate, moving only in one way from dhaka stock exchange index to foreign exchange reserve and exchange rate. in contrast, no causal link was identified between dhaka stock exchange indexes and crude oil prices. lastly, impulse response function suggests a permanent effect of all selected macroeconomic factors on the dhaka stock exchange index in the long run and variance decomposition analysis settles that, the reform in dhaka stock exchange index can be caused by the innovation in foreign exchange reserve, exchange rate, and crude oil price. 1. introduction stock market indices are useful overall scores that show a clear historical record of market prices and thus allow investors, advisors, and the public to measure what the present state of stock price trend happens to be. it is also noticeable that company stock price may not always in the identical path as per the market index, rather it can be opposite to the trend. indices are subject to fluctuation, so it is of great importance to determine the factors that play an imminent role in deciding the trend (khan & yousuf, 2013). among some significant macroeconomic factors that affect market index, this paper cautiously picked up foreign exchange reserve, exchange rate, and crude oil price as the explanatory variables and explored the relationship pattern among them. in general, one country differs from another in different points of view, such as its population, geography, level of education, development status. it is expected that bangladesh will be a developing country from the least developed country (ldc) in 2024, where three indicators require proper positioning of gross national income, index of the human asset, and economic vulnerability. for bangladesh, it is a difficult challenge, and the most pressing need to meet this challenge is to achieve economic viability. in this case, the foreign exchange reserve can play a significant character in maintaining the confidence of a country's economic market. however, nowadays, it is a debating issue whether excess foreign exchange reserve is good for the economy of any country or creates some opportunity and social costs for the country (mezui & duru, 2013). the exchange rate is another problematic issue that often leaves policymakers in a dilemma. no country in the world is self-sufficient; therefore, one country has to relay on another for making both import and export, which requires the keywords: crude oil price, dse index, exchange rate, foreign exchange reserve, vecm. mailto:uttamgolder@gmail.com mailto:nazrul@just.edu.bd mailto:kayser.shahid@outlook.com copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 135 exchange of currencies. indeed, the increase of the exchange rate (devaluation of the currency) discourages the importer, just as it encourages the exporter and vice versa. therefore, different countries decrease or increase their exchange rate according to their different policies, which in sequence influences the capital market in different ways through the production and sale of the products. without energy, the whole world is untouchable, and hence every country has to rely on crude oil for irrigation in agriculture and production in the industrial sector. not all the countries in the world have oil reserves, and for this reason, many countries have to manage their production depending on the oil imported from other countries. the real situation of the stock market of countries in which countries conduct agricultural operations and industrial activities with imported oils is generally different from those countries which do not need to import oil. previously, numerous macroeconomic variables were used by many researchers to unveil the connection of these variables with the stock returns in different stock exchanges of different countries, including the dhaka stock exchange (dse) of bangladesh. the impact of these variables is not same always due to the different contexts and nature of the market (chauque & rayappan, 2018). several theories are applied to explore the intensity of the linkage among the variables. the time frame was also an essential factor to be considered as the researchers pondered different time range to conduct their study. however, authors of this paper are highly persuaded to inspect the influence of foreign exchange reserve, exchange rate, and crude oil price on the stock index and also inspect the cointegration among the variables in the context of dse, bangladesh. although many other scholars have already explored the influence of the chosen variables in different stock markets (hasan, 2018; kibria et al., 2014; zaidi, ahmed, & siok, 2017) the nature and context of dhaka stock exchange (dse) vary from their observed markets which is the ultimate motivation of the authors in conducting this study. this study aims to know whether the foreign exchange reserve, exchange rate, and the crude oil price have a long-term consequence on dse index. the status of a causal linkage between the variables is another exploratory question that leads to determining the aim of the paper. another query that comes to the authors' investigative mind is that, if the background of the stock market changes, then what will be the difference in the result comparing to the past literature? the researchers, therefore, find interest in re-examining the long-run influence of foreign exchange reserve, exchange rate and crude oil price on the stock index in a different setting by exerting johansen's cointegration test and vecm. besides, the paper observes the presence of any causal affiliation among the dependent and explanatory variables via the granger causality approach. this study has some practical implications in the real field and is equally essential for students, academicians, and policymakers of government. the adverse effects of foreign exchange reserve and crude oil prices are shown here with the finger-pointing. in short, the results of the study can help one to easily perceive how an importer and exporter can be benefited or suffered due to adverse fluctuations in the exchange rate. 2. literature review 2.1 foreign exchange reserve and stock index foreign exchange reserve includes the deposits of foreign currency and bonds. however, in the broader sense, it is a country’s holdings of gold, sdr, and reserve of imf for meeting its short to medium term international financial liabilities (maheshwari, upamannyu, bhakuni, & saban, 2013). generally, this reserve is used to settle the payment of imported goods and services and repayment of international loans taken by individuals and government. moreover, multinational companies send their royalty and profit to their parent firms in international currencies. the importer can easily open l/c with a minimum cost because the foreign exporters consider the importing country less risky and are assured of receiving their money in time. it stimulates the stock index of the importing nation as it can import raw materials and capital goods for its production, which increases the firm’s profit by selling produced goods and thereby flourishing stock index. there is a maxim, “nothing excess is good.” though adequate reserve is considered blessings for any country, the excess reserve also has some adverse effects. if an import-oriented country can repay its import payment for the next three months, it is expected that the country has a standard reserve. the most troublesome negative impact of the excess reserve is the opportunity cost (mezui & duru, 2013). the central bank has to hold reserve either in direct currency or in extremely liquid financial assets that can be converted into cash with a little cost. furthermore, direct currency does not earn any interest, and the extremely liquid financial asset earns low yield. if the excess reserve were possible to invest in another productive sector, it would profit more, and the economy would be more flourished. besides, the excess reserve is shaped when import payment is decreased continuously due to the decline in the import of raw materials and machinery used in the local industry. 2.2 exchange rate and stock index the interrelation between exchange rate and stock performance has long continued a topic of debate. several scholars consider the exchange rate as a double-edged blade as it converts one currency into another and displays an incongruous effect at the same time. there are two popular theories of the exchange rate, namely the flow-oriented and stock-oriented models (fauziah, moeljadi, & ratnawati, 2015). flow oriented theory (dornbusch & fischer, 1980) postulates that the exchange rate influences the nature of competitiveness of a business in international markets by affecting the rate of interest, profit, production, and mostly on the worth of the share of the respective firm. the influence of the movement of the exchange rate is different from the organization, which is operated in the international market from that of the local market. if the firm is export-oriented, an upsurge in the exchange rate (devaluation of local currency) will appreciate the exporter, and higher growth in export will copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 136 lead to higher profit and, ultimately, the share price will increase. khan, khan, ahmad, and bashir (2018) studied the monthly stock price data of 15 firms of pakistan from the period of 2008 to 2012, and they confirmed a positive influence of the exchange rate on stock yields through using the ols regression model. similar findings were shown by khalid and khan (2017) who found a positive impact of the exchange rate by analyzing time series data from 1991 to 2017 in pakistan. however, it will create a burden for import dominated industry by increasing the cost of imported raw material and thereby increasing the cost of production. it decreases the earnings of the firm, which also makes a decline in the stock price. ndlovu, faisal, resatoglu, and türsoy (2018) inspected the affiliation between stock yield and macroeconomic indicators in the context of south africa from 1981 to 2016 by using a vector error correction model. they concluded that the exchange rate possesses a negative impact on share values. a downturn in the exchange rate (encouragement of local currency) will encourage importer, and thus the cost of production will be lower. it will create a high demand for domestic products, and the firm will earn more profit, which results in an upsurge in the share price. however, this arrangement will hamper the earnings of export-oriented firm and thus decreases the price of stocks. stock oriented theory (frankel, 1993) states that there is a high capital inflow if the stock return is increased. investor’s insight into the capital market is very much crucial for the fluctuation of the stock price. if the price of the stock is increased, it will make a positive perception about the domestic stock market, and individuals will tend to invest in the local market by selling their foreign stocks and thus there will be a high demand for the local currency which will decrease the exchange rate by appreciating the worth of the domestic currency. 2.3 crude oil price and stock index changes in the international oil price are measured as a vital issue for analyzing the change of the stock market index (giri & joshi, 2017). the influence of crude oil prices on the stock index is mixed that depends on the ground that whether the state is an oil-exporting or importing one. if the nation is an exporting one, a rise in oil price will upsurge cash inflow, and thereby the earnings of the company will be expanded, which will be reflected in the stock index. consequently, income from exporting oil will increase public expenditure and create new investment opportunities. as per the findings of many researchers, the oil price possess a positive reaction on the stock index (shafi, hua, idrees, & nazeer, 2015). the effect of the crude oil price was also found positive in china (hosseini, ahmad, & lai, 2011). on the contrary, some others suggested that in the oil-importing state, there is an inverse relationship. the country whose production activities largely depend on imported oil, an upsurge in oil price, makes a significant contraction in its economic progress and decreases the stock index (khan & yousuf, 2013). extensive shipping and production costs may lower the demand for the produced goods and lower the company profits, which can disincline the investor to purchase the share of the particular firm, and consequently, the stock index decreases (miller & ratti, 2009). similar findings were reported in the stock exchange study, showing an adverse outcome of the oil price on stock return covering the year 1979 to 2014 (giri & joshi, 2017). 3. methodology 3.1 characterization of data this study has been conducted adopting monthly historical data ranged from july 2008 to october 2019. the index of dhaka stock exchange is extracted from the authorized database of the company and the other two macroeconomic variables out of three, e.g., foreign exchange reserve and exchange rate were collected from the monthly publications (monthly economic trends) of the central bank of bangladesh (bangladesh bank, 2019). the data of the latter variable (crude oil price) was taken from the ifm’s primary commodity prices (international monetary fund, 2019). for handling extreme values, all the variables have been converted into their natural log procedure and ensured the steadiness of the variables. however, the variables are symbolized by logdsei (natural log of all share price index of dhaka stock exchange), logfer (natural log value of foreign exchange reserve), loger (natural log of the exchange rate of bdt for us dollar), and logcop (natural log of per barrel crude oil price in us dollar). 3.2 conceptual outline this review emphasizes on the estimation of any long-run affiliation between the index of dse and particular macroeconomic factors as well as defining the causal relationship among them. for fulfilling the objectives, the econometric model (1) was used: 𝐿𝑂𝐺𝐷𝑆𝐸𝐼𝑡 = 𝛽0 + 𝛽1𝐿𝑂𝐺𝐹𝐸𝑅𝑡 + 𝛽2𝐿𝑂𝐺𝐸𝑅𝑡 + 𝛽3𝐿𝑂𝐺𝐶𝑂𝑃𝑡 + 휀𝑡 (1) here, the variables have already been defined. 휀𝑡 indicates error terms. 𝛽0 is constant, and 𝛽1, 𝛽2, and 𝛽3 signify long term parameters. at first, unit root methods were carried to confirm if the data is stationary. the regression outcomes will not be valid unless the time series data is stationary. there are several methods for testing the stationarity of the data, and each of these has been using widely in the modern econometric arena. however, this study used both augmented dickey-fuller (adf) (dickey & fuller, 1981)and phillips-peron (pp) (phillips & perron, 1988) unit root methods to verify the stationarity of the data and to cross-check the results. after that, the optimum number of lags was selected for conducting johansen’s cointegration test, and vecm as those determine whether there is any long-run linkage between the index of dhaka stock exchange and foreign exchange reserve, exchange rate, and crude oil price. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 137 maximum likelihood process is applied for examining the existence of a cointegrating vector for non-stationary time series data (johansen & juselius, 1990). however, the johansen-juselius technique is indirectly implemented in vector autoregression to assess the integrating association (masuduzzaman, 2013) which is based on the equation (2): 𝒛𝒕=𝑨𝟏𝒛𝒕−𝟏 + 𝑨𝟐𝒛𝒕−𝟐 + ⋯ ⋯ ⋯ + 𝑨𝒑𝒛𝒕−𝒑 + 𝜺𝒕 (𝟐) where, 𝒛𝒕 is a “n” vector of i(1) variables, 𝜺𝒕 is an innovation vector. however, var can be rewritten as follows: ∆𝒛𝒕 = ∏ 𝒛𝒕−𝟏 + ∑ γ𝒊 𝒑−𝟏 𝒊=𝟏 ∆𝒛𝒕−𝒊 + 𝜺𝒕 where, ∏ = ∑ 𝐴𝑖 𝑝 𝑖=1 − 𝐼 and γ𝑖 = − ∑ 𝐴𝑗 𝑝 𝑗=𝑖+1 here, ∏ matrix discloses disequilibrium adjustment and γ matrix indicates an adjustment of short-run dynamic. johansen & juselius (1990) propose two tests to check hypothesis viz. 𝑇𝑟𝑎𝑐𝑒 𝑇𝑒𝑠𝑡 = 𝜆𝑡𝑟𝑎𝑐𝑒 = −𝑇 ∑ 𝑙𝑛(1 − �̂�𝑗) 𝑘 𝑗=𝑟+1 𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝐸𝑖𝑔𝑒𝑛 𝑉𝑎𝑙𝑢𝑒 𝑇𝑒𝑠𝑡 = 𝝀𝒎𝒂𝒙 = −𝑇 𝑙𝑛(1 − �̂�𝑟+1) where, t= size of sample and �̂�𝑗= eigenvalues. equation (3) shows the estimation of vecm with dhaka stock exchange index as the target variable: ∆ log 𝐷𝑆𝐸𝐼𝑡 = 𝛼0 + 𝛼1𝑡 ∑ ∆𝑙𝑜𝑔𝐷𝑆𝐸𝐼𝑡−1 𝑝 𝑖=1 + 𝛼2𝑡 ∑ ∆𝑙𝑜𝑔𝐹𝐸𝑅𝑡−1 𝑝 𝑖=1 + 𝛼3𝑡 ∑ ∆𝑙𝑜𝑔𝐸𝑅𝑡−1 𝑝 𝑖=1 + 𝛼4𝑡 ∑ 𝑙𝑜𝑔𝐶𝑂𝑃𝑡−1 𝑝 𝑖=1 + 𝛿1𝐸𝐶𝑇𝑡−1 + 𝜇1𝑡 (3) where, 𝛼1 to 𝛼4 denote elasticity of the short run, 𝐸𝐶𝑇𝑡−1 depicts error correction term, and 𝛿1 is the coefficient of ect which depicts the swiftness of modification in the equilibrium if there is any shock in the system. however, the cointegration test only estimates whether the variables are correlated or not, but it does not specify any information about the path of their causality (hossain, hossain, & sadi, 2013). granger causality test identifies whether the historical values of one variable significantly affect in determining the forthcoming value of another variable. this study tries to inspect whether the selected macroeconomic factors help predict the fluctuation of the dse index. besides, it attempts to inspect whether the selected macroeconomic variables are affected by the fluctuations of the dse index. finally, impulse response function and variance decomposition analysis were applied to reveal some insights about the variables. for validating the selected model and ensuring its accuracy, this study applies heteroskedasticity and autocorrelation test. 4. results and arguments the outcomes of the unit root method set out in table 1 demonstrate that both in the adf and pp unit root test, all the variables are non-stationary at the level. however, the variables are stationary at first difference both in adf and pp unit root method, indicating the refutation of the null hypothesis that evidenced the nonexistence of unit root issue in variables at i(1). table 1. results of unit root test variables from adf pp c ct c ct t-stat t-stat t-stat t-stat logdsei i (0) -2.4214 -2.1311 -2.4297 -2.1436 i (1) -11.4345*** -11.4997*** -11.4345*** -11.4997*** logfer i (0) -2.0635 -2.2474 -1.7199 -1.4113 i (1) -3.4092** -3.8031** -16.9305*** -17.0957*** loger i (0) -1.2528 -1.8446 -1.1579 -1.6675 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 138 source: researchers' calculation table 2 exhibits the outcomes of lag selection norms where the fpe and aic recommend lag 3 as optimum; however, sc and hq signpost lag 2 as optimum. moreover, the sequential modified lr test statistic indicates 10 as the optimum number of lags. this study adopted the aic for selecting the optimum number of lag and used lag 3 as optimum lag for further studies. table 2. choosing of lags lag logl lr fpe aic sc hq 0 585.5250 na 1.15e-09 -9.230556 -9.140515 -9.193975 1 1416.823 1596.620 2.76e-15 -22.17179 -21.72159 -21.98889 2 1492.146 139.8859 1.08e-15 -23.11343 -22.30306* -22.78420* 3 1515.961 42.71574 9.54e-16* -23.23748* -22.06695 -22.76193 4 1527.525 20.00750 1.03e-15 -23.16706 -21.63637 -22.54519 5 1536.454 14.88128 1.16e-15 -23.05482 -21.16397 -22.28663 6 1554.249 28.52830 1.13e-15 -23.08331 -20.83230 -22.16879 7 1563.920 14.89060 1.27e-15 -22.98286 -20.37168 -21.92201 8 1582.394 27.27064 1.24e-15 -23.02212 -20.05078 -21.81496 9 1606.342 33.83190 1.12e-15 -23.14829 -19.81678 -21.79480 10 1627.403 28.41507* 1.06e-15 -23.22861 -19.53694 -21.72880 note: * designates lag order selected by the criterion. source: researchers' calculation the evaluations of the johansen cointegrating approach are depicted in table 3 to check the long-run connection of the variables. this test is much responsive to slight changes to the lag length, so this study uses one lag less than the optimum lag length selected by the information criteria. table 3. results of the johansen cointegrating test ce(s) trace statistics (𝝀𝒕𝒓𝒂𝒄𝒆) 5% critical value max eigen statistic (𝝀𝒎𝒂𝒙) 5% critical value r=0* 62.46252 47.85613 34.52087 27.58434 r≤1 27.94165 29.79707 14.86852 21.13162 r≤2 13.07313 15.49471 9.420578 14.26460 r≤3 3.652552 3.841466 3.652552 3.841466 note: r denotes the number of cointegrating linkages, ce(s) indicates cointegrating equations and * signifies refusal of the hypothesis at the 0.05 level. source: researchers' calculation the result identifies that the null hypothesis (no cointegration between variables) cannot be accepted up to the level of zero both in trace statistics and max eigen statistics at a 5% level of significance. it infers at least one cointegrating equation that exists between the index of the dse and other selected macroeconomic factors. table 4 shows the coefficient of the long-run model with t statistics. table 4. long-run model exploratory variables coef. std. err. t-stat constant -5.925886 foreign exchange reserve (logfer) -0.439875 0.10268 -4.28395*** exchange rate (loger) 2.688054 0.78237 3.43576*** crude oil price (logcop) -0.514410 0.10774 -4.77445*** note: ***, ** and * represent 1%, 5% and 10% level of significant respectively. source: researchers' calculation i (1) -7.3832*** -7.3678*** -7.3351*** -7.3188*** logcop i (0) -2.3052 -2.4450 -2.3404 -2.3415 i (1) -7.7746*** -7.7378*** -7.4110*** -7.3694*** note: *** and ** represent 1% and 5% level of significant respectively, c and ct refer to constant and constant plus trend respectively. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 139 based on cointegrating outcomes, this study derives the following long-run relationship among variables: 𝐿𝑂𝐺𝐷𝑆𝐸𝐼 = −0.439875𝐿𝑂𝐺𝐹𝐸𝑅 + 2.688054𝐿𝑂𝐺𝐸𝑅 − 0.514410𝐿𝑂𝐺𝐶𝑂𝑃 − 5.925886 foreign exchange reserve is identified to have a significantly negative (p<0.01) relationship with the dhaka stock exchange index. this result is coherent with the theory of opportunity and social cost (mezui & duru, 2013) which postulates the negative impact of the excess reserve on the economy of a country. bangladesh is an agrarian country, and till 31st october 2019, it has a total reserve of 32437.7 million u.s dollar (bangladesh bank, 2019) and by using this, it can meet it's up to seven months import payment which is four months extra than usual. nevertheless, bangladesh bank does not invest those excess reserves in any productive sector; thus, the opportunity cost is swelling day by day. generally, most of the foreign currency of bangladesh comes from remittance, and most of this through whom is earned is the working class. the local beneficiary uses that remittance in different unproductive sectors, e.g., building the house, purchasing land, flat and consumer goods. as a result, this excess reserve is not using for productive purposes and thus creating opportunity cost. due to lower import payment, the excess reserve is increasing, which is not good news for the economy of bangladesh, thus reducing the country's production and enfeebling the stock market simultaneously. however, these findings are conflicting with (abakah & abakah, 2016; akinlo, 2015; hasan, 2018; ray, 2012) where they concentrated only on reserve and did not pay attention to excess reserve and recognized that foreign exchange reserve has a noteworthy positive influence on stock index. the exchange rate occupies a positive and significant (p<0.01) association with the index of the dhaka stock exchange, which supports the flow-oriented theory of dornbusch and fischer (1980). currently, an upsurge in the exchange rate of bangladeshi taka (devaluing the money) in contradiction of the u.s. dollar encourages native exporters; thus, an expansion of export upsurges company’s profit. higher profit hints to an increase in the value of a firm and thereby increase the stock index. this finding is consistent with (giri & joshi, 2017; keat, ling, yi, & yee, 2017; kibria et al., 2014). however, an opposite outcome is identified by (ali, 2013; chauque & rayappan, 2018; hsing, 2014; khan & khan, 2018; khan & yousuf, 2013) who elucidate that increase of exchange rate (currency devaluation) forces the import dominated industry to raise the price of the products. this action negatively influences the cash inflow and thereby decreases the firm's profit, which negatively impacts the stock index. besides, the stock oriented theory of frankel (1993) states that if some stocks give a high return, investors tend to purchase those stocks by selling foreign stock, which also appreciates local currency, and thus exchange rate demonstrates a negative relationship with stock index. the result ascertains a significant long-run negative association (p<0.01) between dhaka stock exchange and crude oil price. this finding is certainly consistent with (dhaoui & kheraief, 2014; giri & joshi, 2017; kamande, 2015) where it has been concluded that oil-importing country faces high importing cost due to raises of crude oil price. as bangladesh is an oil-importing country, the increased price of crude oil in the global market puts pressure on the country’s economy. if the price of crude oil in the international market rises, the losses in the domestic market increases. the price has to be adjusted in the local market, which has a negative impact on all types of products. besides, crude oil is used not only in transportation, agriculture, and production of goods as factory fuel but also in electricity generation. it may lead to upsurges in the price of both agricultural and manufacturing products of the country and negatively influences the stock market by decreasing the stock index. however, this result is inconsistent with (aigbovo & izekor, 2015; khan & yousuf, 2013) who investigated a long-run positive linkage between crude oil price and stock index where the business cycle and the global economic boom in energy, industrial and material sectors were thought to be the primary motives. table 5 represents the results of the error correction mechanism. as this study has a coefficient of error correction term -0.099064, it signposts a 9.91 percent speed of adjustment, which is significant at a 1 percent level. finally, it postulates that if there is an exogenous shock, it will make a 9.91 percent adjustment per month to reach in the long-run equilibrium. table 5. results of vecm exploratory variables coef. std. err. t-stat speed of adjustment -0.099064 0.037143 -2.667100*** ∆𝐿𝑂𝐺𝐷𝑆𝐸𝐼𝑡−1 0.001053 0.088684 0.011875 ∆𝐿𝑂𝐺𝐷𝑆𝐸𝐼𝑡−2 0.051320 0.087986 0.583270 ∆𝐿𝑂𝐺𝐹𝐸𝑅𝑡−1 0.062330 0.203014 0.307024 ∆𝐿𝑂𝐺𝐹𝐸𝑅𝑡−2 0.090643 0.203210 0.446059 ∆𝐿𝑂𝐺𝐸𝑅𝑡−1 -0.695179 1.063916 -0.653415 ∆𝐿𝑂𝐺𝐸𝑅𝑡−2 2.175796 1.044064 2.083967** ∆𝐿𝑂𝐺𝐶𝑂𝑃𝑡−1 0.082852 0.078487 1.055608 ∆𝐿𝑂𝐺𝐶𝑂𝑃𝑡−2 -0.067637 0.075673 -0.893807 constant -0.000498 0.003602 -0.138181 note: *** and ** represent 1% and 5% and level of significant respectively. source: researchers' calculation the outcomes of table 6 show the effect of both heteroskedasticity and breusch-godfrey serial correlation lm test, where the prob. value of chi-square is 0.1017 in heteroskedasticity test that is more than 0.05; hence this study confirms the copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 140 presence of homogeneity in residuals. on the other hand, in the lm test, the prob. value of chi-square is 0.2589, which is more than 0.05; hence this study also confirms the absence of serial correlation in our model. table 6. results of heteroskedasticity and serial correlation test heteroskedasticity test: arch f-statistic 2.313901 prob. f(2,128) 0.1030 obs*r-squared 4.571003 prob. chi-square(2) 0.1017 serial correlation test f-statistic 1.254885 prob. f(2,121) 0.2888 obs*r-squared 2.702616 prob. chi-square(2) 0.2589 source: researchers' calculation the empirical results of table 7 demonstrate that there stands a causal bond between dhaka stock exchange index, foreign exchange reserve and exchange rate, moving only in one way from dhaka stock exchange index to foreign exchange reserve and the exchange rate which indicate that if there is an upsurge or decline in the index of dse, it will affect in foreign exchange reserve and exchange rate. however, no causal linkage is identified between dhaka stock exchange indexes and crude oil prices. table 7. results of pairwise granger causality tests causality direction f-statistic prob. logfer ~ logdsei 0.43723 0.6468 logdsei → logfer 15.9099*** 7.e-07 loger ~ logdsei 0.75989 0.4698 logdsei → loger 3.37123*** 0.0374 logcop ~ logdsei 0.87809 0.4180 logdsei ~ logcop 0.66622 0.5154 note: *** represents 1% level of significant. source: researchers' calculation figure 1 represents the shape of the irf of the dhaka stock exchange index to an innovation in foreign exchange reserve, exchange rate, and crude oil price. along with their impacts, this figure forecasts 36 months or 3 years of data plotted on irf. the figure shows, a one standard deviation innovation to its own stock index indicates a substantial decrease in the dhaka stock exchange index primarily. however, this impact decreases with time and settles at a permanent level of 0.011 units above the baseline. the impulse response of the dhaka stock exchange index of 1 percent increased shocks coming from foreign exchange reserve leads to a permanent increase in the dhaka stock exchange index of 0.024 from the 24th month, indicating a long-term positive relationship. a one standard deviation innovation to exchange rate initially decreases the dhaka stock exchange index, and after the second month onward, it increases and settles at 0.001 units above the baseline at a permanent level from 15th month. lastly, a one sd innovation to crude oil price causes the dhaka stock exchange index primarily to fluctuate positively, and it goes to a permanent level from 15th month at 0.011 units above the baseline. so, in the long run, all the selected macroeconomic factors have a permanent consequence on the dhaka stock exchange index. .00 .01 .02 .03 5 10 15 20 25 30 35 response of logdsei to logdsei .00 .01 .02 .03 5 10 15 20 25 30 35 response of logdsei to logfer .00 .01 .02 .03 5 10 15 20 25 30 35 response of logdsei to loger .00 .01 .02 .03 5 10 15 20 25 30 35 response of logdsei to logcop response to cholesky one s.d. (d.f. adjusted) innovations figure 1. impulse response function (irf) for dhaka stock exchange index source: researchers' computation copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 141 table 8 limns the consequences of variance decomposition analysis up to the 20 months, where it shows how much of the dhaka stock exchange index’s individual innovation is explicated by movement in its individual variance along with foreign exchange reserve, exchange rate, and crude oil price. the results show 20 months of forecast where it demonstrates that most of the dhaka stock exchange index variations are elucidated by itself. in the 5th month, the dhaka stock exchange index explains 92.56 percent of variation by shocks to itself, 3.44 percent by foreign exchange reserve, 1.18 percent by the exchange rate, and 2.81 percent by the crude oil price. in the 10th month, the dhaka stock exchange index explains 76.95 percent of variation by shocks to itself, 14.41 percent, 1.19 percent, and 7.44 percent by foreign exchange reserve, exchange rate, and crude oil price respectively. so, it can be marked that in the long run, the oscillation in the dhaka stock exchange index can be caused by the shock in foreign exchange reserve, exchange rate, and crude oil price. table 8. variance decomposition of logdsei period s.e. logdsei logfer loger logcop 1 0.031080 100.0000 0.000000 0.000000 0.000000 2 0.042843 98.42375 0.326756 0.209064 1.040433 3 0.051253 97.02071 1.247897 0.432370 1.299023 4 0.057761 94.87791 2.300499 0.906790 1.914802 5 0.062980 92.56092 3.441694 1.182578 2.814805 6 0.067530 89.87707 5.007936 1.285298 3.829694 7 0.071705 86.93744 6.904513 1.304643 4.853406 8 0.075712 83.69416 9.218202 1.282202 5.805436 9 0.079590 80.36040 11.72187 1.243664 6.674061 10 0.083417 76.95072 14.41125 1.194920 7.443114 11 0.087172 73.62932 17.09730 1.143225 8.130148 12 0.090899 70.38924 19.78931 1.089306 8.732140 13 0.094568 67.32482 22.37082 1.036709 9.267651 14 0.098209 64.41157 24.86704 0.985325 9.736061 15 0.101792 61.69762 27.21236 0.936924 10.15309 16 0.105340 59.15295 29.43719 0.891030 10.51883 17 0.108829 56.79925 31.50659 0.848450 10.84571 18 0.112276 54.60755 33.44992 0.808625 11.13391 19 0.115663 52.58553 35.24971 0.771888 11.39288 20 0.119003 50.70796 36.93158 0.737727 11.62273 source: researchers' calculation 5. conclusion this study attempts to visualize the empirical linkage between the dhaka stock exchange index and three designated macroeconomic factors, namely foreign exchange reserve, exchange rate, and crude oil price with monthly time series data ranging from july 2008 to october 2019. adf and pp unit root tests were applied to ensure the same integrating order of the variables and for cross-checking of the outcomes. the johansen cointegration test was applied and found a long-run equilibrium linkage between the dhaka stock exchange index, foreign exchange reserve, exchange rate, and crude oil price. it was observed that both foreign exchange reserves and crude oil prices have a significant negative consequence on the dhaka stock exchange index in the long run, and the exchange rate was found to have a positive influence on the dhaka stock exchange index, which was also statistically significant. this result confirms that the dhaka stock exchange index can be projected by past data. the coefficient of ect exposed that a 9.91 percent of disequilibrium in the long-run model is rectified per month as the dhaka stock exchange index goes back to its equilibrium. the results of the granger causality test divulged a causal association running in one direction from the dhaka stock exchange index to foreign exchange reserve and exchange rate, indicating that if there is any change in the index of dse, it will affect in foreign exchange reserve and exchange rate. the impulse response function supported the long-run model of the study, and the outcomes of variance decomposition specified that the dhaka stock exchange index is determined by foreign exchange reserve, exchange rate, and crude oil price. from the above discussion, it can be said that the bangladesh government, policymakers, and economists should be cautious in adopting any new economic policy as these selected macroeconomic factors have a significant consequence on the capital market of bangladesh. for keeping the stock market afloat, the authorities need to be aware of economic progress, sound fiscal policy, and, above all, proper management of different macroeconomic factors that influence the stock market. since the stock index has a deep connection with the exchange rate, and both importers and exporters are affected by it, the government should try to stabilize the exchange rate. the authority needs to adopt a policy that will stabilize the value of bangladeshi taka against the us dollar, and at the same time, prevent unforeseen fluctuations in the stock market. bangladesh is an oil-importing country, so it is time to think about how to reduce the dependence on crude oil and increase domestic energy production and become more dependent on renewable energy. the use of locally produced and renewable energy can improve the dynamics of the stock market by reducing the cost of production. this paper also discusses the detrimental copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 142 aspects of excess reserve that may create social and opportunity cost. the government should keep enough money from the foreign exchange reserve, and the rest should be used for filling the funding gap of the infrastructure of the country. however, this study has uncovered some new avenues of future research for investigators. only the detrimental aspects of the excess reserve are discussed, but no guidance has been given on how these excess reserves can be used in some productive sectors. 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(2017). examining the relationship between economic growth, energy consumption and co2 emission using inverse function regression. applied ecology and environmental research, 15(1), 473– 484. https://doi.org/10.15666/aeer/1501_473484 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). indian journal of finance and banking vol. 5, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 10 examination of related party disclosure and compliance among listed ghanaian banks dr. john kwaku mensah mawutor dean school of graduate studies university of professional studies, accra p.o. box 149 legon, ghana e-mail: john.mensah@upsamail.edu.gh abstract this study examined the compliance level of ias 24, “related party disclosures” of banks in ghana and determined some firm specific characteristic that influence the level of disclosure. using the quantitative research approach, the study was conducted on thirteen banks in ghana constituting 56% of the entire population. secondary data was obtained from annual reports of the banks and related published articles. the study again identified the most common type of related party transactions done by banks in ghana. findings revealed that the level of compliance with ias 24 among banks in ghana is relatively low. the study again found that board size, company size, type of auditor, listing, and profitability has a positive influence on the level of disclosure. findings also revealed that only company size is statistically significant with the level of compliance of ias 24 among banks in ghana. keywords: compliance, related party, transactions, banks, ias 24, disclosures, failures. jel classification codes: a19, b10, b25, c10, c53. introduction background the failure of several firms across the world has been attributed to the unavailability and nondisclosure of information regarding related party transactions (rpts) (rahman, 2018). firms such as enron were found to have used special purpose entities to manipulate income and transfer cash, guaranteed related party debt and provided extensive loans to its executive (mayhew & kohlbeck, 2004). in the case of several failed financial institutions in ghana, a recent assessment conducted by the bank of ghana in the banking sector found that 85% of these institutions used depositors’ funds to finance personal and related party business on noncommercial basis which led to the collapse of these financial institutions (bank of ghana, 2019). according to cheung, rau, & stouraitis (2009), non-disclosure of related party transactions can affect the assessment of a company’s operation and eventually encourage possible conflict of interest among stakeholders of organizations. to address these possible conflicts of interests, the international accounting standards board (iasb) formulated standards (related party transactions ias 24) to provide vital information and data regarding entity’s outstanding balances and different transactions related to mailto:john.mensah@upsamail.edu.gh https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 11 several parties (rahman, 2018). according to abdul (2015), though all listed firms in ghana were mandated to adopt ifrs in 2007, not all the listed firms after the adoption have wholly complied. a recent report by the bank of ghana (bog) into the collapse of some commercial banks in ghana has revealed some directors of the collapsed banks used a carefully spun web of related party transactions to grant huge loans to themselves and their associates without disclosing such transactions (mustapha, 2018). this could be possibly attributed to the lack of inadequacy of comprehensive ias compliance mechanisms in the country. evidence on the level and extent of compliance of ias 24 in ghana remains limited despite its adoption several years ago (appiah, vitor, mireku, & ahiagbah, 2016). studies on compliance with ifrs in ghana are mostly focused on general compliance without comprehensively assessing individual ifrs standards compliance and the few studies on rpts in ghana tends to identify the factors and determinants of rpts, not assessing their disclosures. no prior study has conducted a comprehensive examination on the extent of compliance with ias 24, related party disclosure by banks in ghana. in view of this phenomenon, this study assessed the extent to which banks in ghana comply with the disclosure requirements of international accounting standards (ias 24), related party disclosures. this study has been composed into five main sections. the first section introduced the background of the study whiles the second section reviewed scholarly articles on the topic into empirically and theoretically theories. the third section of the study discussed the methodology, data analysis and the findings. finally, the last segment of this study presented the summary of findings, recommendations and drew conclusions from the findings. literature review over the decades, there have been studies on the level of compliance to ias/ifrs, particularly on ias 24 related party disclosures. several articles on related party transactions have been published in academic journals, however only few focused on the feature if related party transactions are properly disclosed. some prior studies also tend to focus on the nature and extent of related party transaction based on the supposition that the disclosure on related party transactions capture the full extent of the transactions. those studies examine either comprehensive related party transactions, for instance, the number of related party transactions (gordon, henry, & palia, 2004). specific related party transactions such as transfer of assets, related party sales, purchases and payments. these studies did not focus on related party disclosures and level of compliance of the standard. gordon et al. (2004), investigated 112 firms that are publicly listed on the us stock market that disclose related transactions for the period 2000 to 2001. those firms operate in the manufacturing, wholesale and retail industries. their finding indicated that on average, each firm discloses 3.9 rp transactions. the natures of these transactions are commonly real estate transactions, rp loans and rp sales. mayhew and kohlbeck (2004) conducted a study on the assessment of firms that disclose related party transactions. they expressed on the view that rp transactions disclosures provide information needed by investors to discipline insider’s opportunistic behavior. following rp disclosures, they identified that investor’s ability is limited to selling or refusing to buy the stocks firms that do not disclose rp transactions, or prompting ex-pose litigation against opportunistic behavior. barokah (2013) assessed and discussed the institutional factors that hypothetically influence rp disclosures and the extent of ias 24 adoption in selected asianpacific countries, a https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 12 sample of 582 listed companies were used for this study. she found that rp transactions are common across asianpacific countries, with rp loans been the common type of transaction. she also found that other factors such as strength of enforcement by accounting regulatory bodies, the control for corruption, the protection of minority shareholders against self – dealing actions impacts rp disclosure transparency. adequate disclosure of sensitive information in a financial statement is paramount to the protection of investors’ interest (tanwar, vaish, & rao, 2020; waleru & beauty, 2018; bidabad, 2019). arshad, darus, and othman (2009), investigated the effects of ifrs adopted standard, board members with accounting profession affiliations, board interlocks, family members, governmentownership and the independent non-executive directors on the extent of rp transactions in two disclosure periods 2002 and 2007. they used the annual reports of 144 malaysian listed companies to conduct the study. they measured related party disclosure as the set/aggregate number of words related to rp disclosures in the annual reports. their findings indicated that the extent of rp discloses has a positive relationship with professional affiliation and company size, but they did not find any influence of the other variables (i.e. family ownership and independent of non-executive directors) on the extent of rp disclosures. in his study rahman (2018), he assessed the present status of related party disclosure and practice level of ias 24, related party disclosures in annual reports by 10 listed banks in bangladesh. he found that there is poor application and compliance of ias 24 among listed banks in bangladesh. agyei-mensah (2012), also conducted a study to investigate the influence of firm specific characteristics such as firm size, profitability, debt equity ratio, liquidity and audit firm size on voluntary disclosures of financial information and found that profitability is positively related to the disclosure level, while debt equity ratio, liquidity, firm size and audit firm size were insignificantly related to disclosure level of the banks. bakkeri & ali (2020) also found other regulatory variables as critical factors that determine the profitability of banks. according to bidabad and allahyarifard (2019), adequate disclosure of firms’ financial statement has positive impact on the profitability of firms. from the above reviews it is evidenced that much of the studies on ias 24 were done in foreign countries. little has been done in ghana concerning related party disclosures, most of which focused on the implications of related party transactions but not their disclosures or the compliance level of related party disclosures (ias 24). it is therefore prudent for the researchers to assess the compliance level of this standard. methodology the study adopted the quantitative research approach to examine the relationship between dependent and independent variables. data required for this study were collected from secondary sources. the targeted population for the study was banking financial institutions in ghana. there are currently twenty-three (23) banking institutions in ghana. the sampling technique used for this study was judgmental sampling. judgmental sampling is the sampling technique use by a researcher to exercise judgment to select cases that enable the researcher achieves the objectives of the study and more so to answer the research questions. out of the twenty banks in, thirteen of them were used for the study which constitutes 56.5% of the targeted population. the researchers decided to conduct the study on thirteen out of the twenty-three banks in ghana due to limited time factor, availability of data and also because of the researchers believe that thirteen out of twenty-three is illustrative enough. 3.2 dependent and independent variables https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 13 the dependent variable used for this study is the extent of compliance to ias 24, related party disclosures by banks in ghana. on the other hand, the independent variables used to explain the dependent variable are board size, company size, type of auditor, profitability, listing status and ownership concentration. choosing these variables is informed by prior disclosure literature as they were identified to be related to disclosure. the relationship between the independent variable and dependent variable is the basis of most statistical test, which establishes whether there is a significant relationship between the two types of variables. the results of these tests allow the researcher to accept or reject the null hypothesis, and draw conclusions (shuttleworth, 2008). to assess the influence of the independent variables on dependent variable the following hypothesis was developed. ho: board size is not significantly associated with the level of rp disclosures of banks in ghana. ho: company size is not statistically significant with the level of rp disclosures of banks in ghana. ho: type of auditor does not have a significant influence on the level of rp disclosures of banks in ghana. ho: profitability does not have a significant influence with the level of rp disclosures of banks in ghana. ho: listing status does not have a significant influence on the level of rp disclosures of banks in ghana. ho: ownership concentrations do not significantly influence the level of rp disclosures of banks in ghana. data analysis to assess the extent of compliance of ias 24, related party disclosures by listed banks, a selfstructured compliance checklist was developed by the researchers in accordance to the disclosure requirements mandated by ias 24. to validate the checklist, it was presented to a proficient auditor to crisscross the comprehensiveness and applicability to ias 24. in order to measure the relationship between variables; correlation, regression analysis model and descriptive analysis was employed. in describing the association between two or more variables in terms of magnitude and direction, correlation was used. the regression analysis allowed modeling the relationship between a dependent variable and one or more independent variables of numerical data (stuart & headlam). models development in order to measure the level of disclosure of ias 24, a disclosure index was employed. this was used as the dependent variable and the firm specific characteristics (board size, company size, type of auditor, profitability, listing status and ownership concentration) as independent variables. the disclosure index is in the functional formula: di = number of items disclosed in the annual reports total number of disclosed items where,  di = disclosure index https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 14  di = di  d = 1 if item is disclosed  i = 1 0= if item is not disclosed  n = number of items to estimate the relationship between the dependent variable and the independent variables the following regression model and equation was applied. di = f (board size, company size, type of auditor, profitability (roe), listing status and ownership concentration) to measure the relationship between variables the following equation was developed. diit = β0 + β1 bsizeit + β2 csize+ β3 audit + β4 roeit + β5 listit + β5 ownit +ҿ where,  di = disclosure index  β0 = the intercept  bsize = board size (the number of directors on the board)  csize = company size (the banks total asset at year end)  aud = type of auditor (dummy variable 1 if bank is audited by big 4 (kpmg, deloitte, pwc, ernst and young) and 0 if otherwise)  roe = profitability of bank measured in return to equity (net profit/ total shareholders’ equity)  list = listing status: dummy variable 1 if bank is listed on gse and 0 if not listed)  own = largest shareholder percentage  e=the error term analysis and disclosure requirements of ias 24, related party disclosures. inference to research question one (rq1) captured in chapter 2, on the disclosure requirements of ias 24, table 1 identified these requirements as per stated by the iasb. data obtained after surveying the annual reports of thirteen banks in ghana for the period of ten years indicated the following status of ias 24, related party disclosures by banks in ghana. 1. a reporting entity shall disclose the name of its parent company; referring to table 1, the study found that 66% of the sample banks disclosed the name of their parent company. 2. the entity shall disclose the name of its ultimate controlling party if different to its parent; it can be seen from table 1 that 17% of the sample banks the name of its ultimate controlling party different to its parents. 3. disclose the name of the next most senior parent (where neither the entity’s parent nor the ultimate controlling party produces consolidated financial statements available for public use); from the table 1, none (0%) of the sample banks disclosed the name of the most senior parent that is neither the entity parent nor the ultimate controlling party produces consolidated financial statement available for public use. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 15 4. disclose key management personnel compensation in total for each of the following categories: (a) short-term employee benefits; the table 1 below indicated that 72% of the sample banks disclosed the key management compensation for shortterm employee benefit. (b) post-employment benefits; it can be seen in the table 1 that 61% of the selected banks disclosed postemployment benefits for key management compensation. (c) other long term benefits; from the table 1, this item has been disclosed by 3% of the selected banks. (d) termination benefit; has been disclosed by 26% of the sample banks. (e) share based payment; referring to table 1, this item was disclosed by 26% of the selected banks. 5. disclose the nature, amount, and outstanding balances of related party transactions by separate categories for each of the following: (a) parent company: referring to the table 1, 37% of the sample banks disclosed transactions with parent companies. (b) entities with joint control or significant influence over the entity; none of the sample banks disclosed this item (c) subsidiaries; 44% of the sample banks disclosed transactions with subsidiaries (table 1) (d) associates; 42% of the selected banks disclosed transactions with associates. (e) joint venture in with the entity is a venture; none of the selected banks over the ten years period disclosed transactions with joint ventures. (f) key management personnel of the entity or its parent; 92% of the selected banks disclosed transactions with key management personnel. (g) other related parties; 53% of the sample banks disclosed transactions with other related parties (table 1) 6. government-related entity taken exemption where the government related entity applies the exemption in paragraph 25 of ias 24 (2009) (a) the reporting entity shall disclose the name of the government; from table 1, on average 17% of the selected banks for the ten years period disclosed information on government related parties. (b) disclose the nature of its relationship with the reporting entity (i.e. control, joint control or significant influence); in reference to table 1, 17% of the selected banks disclosed the nature of government related relationships. c) disclose the nature of and amount of each individually significant transaction in sufficient detail to enable users of the entity’s statements to understand the effect of related party transactions on its financial statement; from table 1, 13% of the selected banks disclosed transactions with government related parties. d) disclose other transactions that are collectively, but not individually, significant a qualitative or quantitative indication of their extent; none of the banks disclosed this item (table 1) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 16 table 1. frequency of disclosure of ias 24, related party disclosures disclosure requirement under ias 24 sample observation disclosure level disclosure percentage 1 a reporting entity shall disclose the name of its parent company 119 79 66% 2 the entity shall disclose the name of its ultimate controlling party if different to its parent 119 20 17% 3 disclose the name of the next most senior parent (where neither the entity’s parent nor the ultimate controlling party produces consolidated financial statements available for public use). 119 0 0% 4 disclose key management personnel compensation in total for each of the following categories: (i) short-term employee benefits; 119 86 72% (ii) post-employment benefits 119 72 61% (iii)other long-term benefit 119 3 3% (iv)termination benefit 119 31 26% (v)share base payment 119 31 26% 5 disclose the nature, amount and outstanding balances of related party transactions by separate categories for each of the following: (a) the parent 119 44 37% (b) entities with joint control or significant influence over the entity 119 0 0% (c) subsidiaries 119 52 44% (d) associates 119 50 42% (e) (e) joint ventures in which the entity is a venture 119 0 0% (f) key management personnel of the entity or its parent; and 119 105 92% (g) ) other related parties 119 63 53% 6 government-related entity taken exemption where the government related entity applies the exemption in paragraph 25 of ias 24 (2009); (a) the reporting entity shall disclose the name of the government. 119 17 14% https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 17 (b) ) disclose the nature of its relationship with the reporting entity (i.e. control, joint control or significant influence); 119 17 14% c) disclose the nature of and amount of each individually significant transaction in sufficient detail to enable users of the entity’s statements to understand the effect of related party transactions on its financial statement. 119 13 11% d) disclose other transactions that are collectively, but not individually, significant a qualitative or quantitative indication of their extent. 119 0 0% source: research results the nature and extent of related party transactions by banks in ghana answering the second research question (rq2), findings from the survey of yearly annual reports of the banks and other published related articles indicated that the most common related party transactions by banks in ghana are related party loans. these related party loans include loans to directors, executives and other employees other than directors. lending to insiders may become a significant source of financial risk to the banks as most of these loans are granted at interest rates different from market rates. dependent variable to the research question (rq3), what is the disclosure level of ias 24 in banks in ghana; data collected from yearly annual reports of thirteen banks for a period of ten years, inference to table 2 indicated that the dependent variable; the extent of compliance with ias 24, related party disclosures had an average score of 30.5%. this implies that the extent of ias 24 disclosures among banks in ghana is moderately low. the findings also indicated a maximum compliance level of 63% among some banks and a minimum compliance level of 5%. table 2. descriptive analysis of disclosure compliance of ias 24 mean standard deviation maximum minimum 30.5% 13% 63% 5% source: research results disclosure compliance of ias 24 by banks from the survey of yearly annual reports of the selected banks, compliance on bank basis found the following results, inference from figure 1 shows that standard chartered bank had the highest disclosure score of 49% followed by cal bank with a score of 48% and ghana commercial bank (46%). national investment bank had the minimum score of 18%. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 18 figure 1. disclosure compliance of ias 24 by banks source: research results table 3. range of disclosure items with ias 24, related party disclosures ca l gbc ec b ad b ac b sc b rb fb pb sg zb ni b at b total tdr per yr 19 19 19 19 19 19 19 19 19 19 19 19 19 obs(yrs) 10 10 10 10 8 10 10 10 10 10 10 5 5 118 tdr (10yrs) 190 190 190 190 152 190 190 190 190 190 190 95 95 2242 total disclosed items 91 90 43 50 32 94 46 35 47 66 52 17 22 685 disclosure index 0.48 0.46 0.2 3 0.26 0.21 0.49 0.2 4 0.1 8 0.2 5 0.3 5 0.2 7 0.1 8 0.23 0.305 source: research results independent variables this section answers the research question (rq4) and discusses the descriptive analysis of the firm specific characteristics that influence disclosure compliance of ias 24; represented as the independent variables: board size, company size, profitability (roe), ownership concentration, listing status and type of auditor. table 4. descriptive analysis of independent variables n mean maximum minimum std. deviation bsize 118 9.39 15 6 1.612 csize 118 2.46e+10 1.06e+10 1324350 2.13e+09 roe 118 0.22 0.57 -0.27 0.129 own 103 0.48 0.93 0.21 0.189 source: research results regression analysis and hypothesis testing the last research question (rq5) aims to investigate the influence of the firm specific characteristics on the level of compliance. this section discusses the regression results of the model developed in chapter 3 to test the study hypothesis. random effect estimation was used to generate the regression results after a hausman test conducted indicated a p>0.05, which implies that random effect regression model is the appropriate method for generating the regression results. table 4 shows the results of the model using the independent variables to explain the 48% 46% 23% 26% 21% 49% 24% 18% 25% 35% 27% 18% 23% cal gcb ecb adb acb scb rb fb pb sg zb nib atb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 19 level of compliance. the results also indicated that the model used for the analysis is statistically significant (prob (f-stat) = 0.00 < alpha = 0.05). it can be seen from table 5 that the r-squared is 0.16 and the adjusted r-squared of is 0.1, this implies that 10% of the variations in the dependent variable is explained by the dependent variables. table 5. regression results dependent variable: di method: panel egls (cross-section random effects) variable coefficient std. error tstatistic prob. c 0.088877 0.113592 0.78242 0.4359 bsize 0.011252 0.007254 1.551144 0.1242 csize 9.97e-12 4.57e-12 2.182805 0.0315 aud 0.056791 0.055437 1.024416 0.3082 roe 0.033755 0.077444 0.435864 0.6639 list 0.057369 0.040402 1.419969 0.1589 own -0.028606 0.089001 -0.32141 0.7486 observations: 103 r-squared 0.16207 mean dependent var 0.0655 adjusted r-squared 0.1097 s.d. dependent var 0.07236 s.e. of regression 0.069029 sum squared resid 0.45744 f-statistic 3.094678 durbin-watson stat 1.18342 prob(f-statistic) 0.008174 source: e-views hypothesis testing the regression result generated the model shown below. di = 0.88877+ 0.011252bsize+ 9.97e-12csize+ 0.056791aud +0.033755roe +0.057369list – 0.028606own. hypothesis one (h1) predicts that board size is not significantly associated with the level of rp disclosures, in reference to table 5 board size coefficient shows a positive relationship with the level of rp but does not support at a significant level of 0.05 (p value 0.12 > alpha 0.05), in view of this the hypothesis one (h1) is accepted. hypothesis two (h2) predicts that company size is not significantly associated with the compliance level of rp disclosures, contrary to table 5 company size has a positive statistically significant relationship with the level of rp disclosures (p=0.03 < alpha 0.05). this implies that a unit increase in the size of the company will increase compliance level by 9.9. in view of this, hypothesis two (h2) is rejected. hypothesis three (h3) predicts that type of auditor do not have a significant influence on the level of rp disclosures, table 5 indicates that type of auditor has a positive relationship with the level of compliance but proves statistically insignificant, hence hypothesis three (h3) is accepted. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 20 hypothesis four (h4) predicts that profitability (roe) do not have a significant relationship with the level of compliance, in reference to table 5, roe shows a positive relationship with the level of compliance but is statistically insignificant (p=0.30 > alpha=0.05), hence the null hypothesis four (h4) is accepted. hypothesis five (h5) states that listing status is not significantly associated with the level of disclosure compliance, it can be seen in table 5 that it is statistically insignificant (p=0.15 > alpha= 0.05), hence hypothesis five (h5) is accepted. hypothesis six (h6) predicts that ownership concentration do not have a significant relationship with the level of ias 24 compliance, in reference to table 5, ownership concentration is negatively associated with the level of compliance and does not support at a significant level (p= 0.74 > alpha=0.05). hence hypothesis six (h3) is accepted. summary of findings the main objective of this research is to assess the level of compliance of related party disclosure (ias 24) by banks in ghana. the main objective came along with five specific objectives, research questions and hypothesis. the study employed descriptive analysis to capture the mean, maximum, minimum and standard deviation of the dependent and independents variables. the findings were presented in tables and figures to provide clarity to the findings. a panel data regression was conducted using e-views software which enabled the hypothesis testing of the study. the study surveyed on 118 annual reports of banks for a period of ten years. on the main objective of the study, findings revealed that compliance level of ias 24, related party disclosures had an average score of 30.5% which implies a low level of compliance by the selected banks in ghana. the results also indicate a maximum compliance level of 58% and a minimum compliance level of 5%. the study also revealed that standard chartered bank limited had the highest compliance level of 49%, followed by cal bank limited (48%) and ghana commercial bank limited with a score of 46%. furthermore, the study again identified that fidelity bank ghana and national investment bank had the lowest compliance level of 18%. in relation to the nature and extent of rp transactions in ghana, findings revealed that the most common related party transactions conducted by banks in ghana is related party loans. thus loans to directors, executives and others staffs other than directors. results from the self-contracted contracted checklist indicated that the most frequent disclosures of ias 24 by banks in ghana are transactions with key management personnel followed by short term compensation to key management personnel and the disclosure of company parent name. transactions with joint ventures are the least disclosed item. the panel data regression conducted to identify the relationship between the dependent and independent variable found that board size, type of auditor, listing status and roe has a positive insignificant relationship with the level of compliance while company size had statistically significant positive relationship with the level of disclosure compliance. moreover ownership concentration had a negative relationship with the level of ias 24 compliance and was insignificant. conclusion it can be deduced from the findings of study that compliance level of ias 24 by banks is poor in ghana. related party transactions if not properly disclosed can lead to fraudulent activities and if https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 21 it continues can pose a financial risk to the company. due to the desire to satisfy statutory rules and regulations, the banks do not comprehensively provide adequate information as prescribed by the standard ias 24 and therefore completely ignoring the detailed requirement of the standard. out of the six firm specific characteristics that were identified to influence compliance level of the standard (ias 24), only company size had a statistically significant impact on the level of compliance. the study also identified that all the firm specific characteristics has a positive relationship with the level of rp disclosures except ownership concentration that has a negative relationship with rp disclosures. based on the data collected from the selected banks for the study, it can be concluded that banks in ghana over the ten year period had an average score of 30.5% approximately 31% compliance with ias 24, related party disclosures. even though the findings addressed the research questions, the study had some limitations. the study initially targeted 130 annual reports from thirteen banks but due to the failure of some banks to consistently publish their annual reports, the researchers obtained only 118 annual reports. one of the independent variables used for the study; ownership concentration were not included at all in the annual reports of one of the selected banks over the entire period of study. this same variable was inconsistently disclosed in the annual reports of some banks included in the sample. these left the researchers with no other choice than to run the analysis of the research on unbalanced data. references abdul, m. 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(2020). profitability of islamic banks: a panel data analysis. indian journal of finance and banking, 4(3), 26-38. https://doi.org/10.46281/ijfb.v4i3.811 bidabad, b., & allahyarifard, m. (2019). the executive mechanism of rastin profit and loss sharing (pls) banking. indian journal of finance and banking, 3(1), 23-39. https://doi.org/10.46281/ijfb.v3i1.308 bidabad, b. (2019). insurance products in rastin profit and loss sharing banking. indian journal of finance and banking, 3(1), 40-54. https://doi.org/10.46281/ijfb.v3i1.344 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 22 bank of ghana. (2019). notice of revocation of licences of insolvent savings and loans companies and finance houses. accra: bank of ghana. cheung, y., rau, r., & stouraitis, a. (2009). buy high, sell low: how listed firms assets transfer is related party transaction. journal of banking and finance, 914-924. gordon, e., henry , e., & palia, d. (2004). related party transactions and corporate governance. emerald, 1-27. mayhew, b., & kohlbeck, s. (2004). related party transactions. working paper. university of wisconsin. mustapha, s. (2018). directors of the collapsed banks granted huge loans to themselves. accra: daily graphic business. rahman, m. (2018). compliance of ias 24, related party disclosure in listed commercial banks: evidence from bangladesh. journal of banking and finance management, 19-27. shuttleworth, m. (2008, july 4). dependent variable. retrieved october 17, 2014, from explorable.com: https://explorables.com/dependent-variable tanwar, j., vaish, a. k., & rao, n. v. m. (2020). mathematical modeling of asset liability management in banks using goal programming and ahp. indian journal of finance and banking, 4(4), 1-19. https://doi.org/10.46281/ijfb.v4i4.899 waleru, a. h., & beauty, o. (2018). determinants of commercial banks credit to the domestic economy in nigeria: examinations of dynamics principles. indian journal of finance and banking, 2(2), 26-41. https://doi.org/10.46281/ijfb.v2i2.96 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 | ijfb indian journal of finance and banking; vol. 3, no. 2; 2019 issn 2574-6081 e-issn 2574-609x research article published by centre for research on islamic banking & finance and business, usa 14 articles review on forward and reverse supply chain/ closed loop supply chain practices diriba ayele gebisa department of business management hariyana school of business, gjust, india e-mail: dirayele@gmail.com abstract despite the increasing popularity of research in supply chain management significant number of research focused on forward supply chain management by neglecting one of the most important part of supply chain that is reverse supply chain management, which complete supply chain management as closed loop. large numbers of prior research consider only one variable at a time to see performance of forward or reverse supply chain on organizational performance. however, supply chain performance is the function of different combination of variables. therefore, this paper review the effects of transportation, inventory management, facility location and information sharing in closed loop supply chain practices on organization performance. keywords: forward supply chain, backward supply chain, closed loop supply chain. 1. introduction for a long period of time companies tried to be competent by operating alone assuming working and sharing information with other partners in the supply chain and competitors erode their profitability by exposing their source of competitive advantage to competitors. these fault assumptions become bottleneck for all supply chain partners from enhancing their efficiency and effectiveness. to overcome these fault assumptions and to reap the lost opportunity by practicing effective and efficient supply chain practices, firms had started to practice supply chain practices by closely working with suppliers, marketing intermediaries and consumers. the origin of supply chain management goes back to the 1940s and 1950s when logistics was stressed on how to use mechanization to improve the very labor intensive processes, while 1980s marked the beginning of a change in the history of supply chain management and the term supply chain management was introduced first time by consultants in the early 1980s (oliver and webber, 1992). the logistics boomed in the 1990s by the emergence of enterprise resource planning (erp) systems and the term supply chain management got widespread recognition as a result of the globalization of manufacturing since the mid1990s (council of supply chain management professionals, 2005). the intensified competition in the 1990s and globalization of the markets forced the whole supply chain partners for fundamental collaboration of supply chain partners (gligor, holcomb, gligor, & holcomb, 2012) and that is why firms had integrated their physical distribution and logistics functions into the transportation and logistics perspective (tan, 2001; & childerhouse, aitken, & towill, 2002). georgise, thoben, & seifert, (2014) also stated that firms forced to adopt and use supply chain practices for the reasons they failed to upgrade and overcome pressure from globalization through improving their own operations using techniques of total quality management, enterprise resource planning, business process reengineering and lean technology. all these issues pushed the development of supply chain management. from thorough overview of supply chain management literature large number of former studies examined only one directional flow of supply chain management that restrict optimality of supply chain practices. however, pishvaee and torabi, (2010) described forward and reverse supply chain as interdependent activities where one cannot fully succeed without the other. therefore, to overcome the limitation of one directional flow and for optimality of the supply chain management practices this paper focused on bidirectional flow of supply chain management. forward logistics are all functions within and outside a firm that support the value chain system to make and offer products to the customer (cox, blackstone, spencer, 1995); and the network of entities through which material flows by adding certain value for each partners (lummus and alber, 1997). later on reverse supply chain or reverse logistics has started to attract the attention of increasing numbers of scholars and experts for the rising concern of sustainable growth, environmental concern, government legislation, corporate social responsibility, rising of products return, and high competition among firm. reverse logistics is activities of designing, implementing and controlling the reverse flow of goods or end of life products and package of the products from consumption centers back to initial manufacturing center or to the centers of proper disposal (de brito and mailto:dirayele@gmail.com copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 15 dekker 2002); and process of actions by which a manufacturer collects back products and its components for effective reusing, rebuilding, or disposing purpose (dowlatshahi, 2000). significant number of past review literature focused on forward logistics practices and its benefits and only limited number focused on reverse supply chain practices and its benefits on performance. there is total absence of review that integrated both forward and backward supply chain practices on organizational performance from the angles of major variables of supply chain practices such as facility location, transportation, inventory management and information sharing on economic, marketing, environmental and corporate social responsibility performance of an organization. therefore, this study reviews literature related to facility location, transportation, inventory management, and information sharing on the forward and reverse supply chain performance from four dimensions of performance measures; including environmental, economic, marketing and corporate social responsibility aspects. the rest of this paper is organized as follow: the first section reviews the evolution of bidirectional supply chain/ forward and reverse logistics. the second section deals with evolution supply chain management; the third section examines detail definitions of forward and reverse logistics from different. the forth section examines supply chain practices from view of facility location, inventory management, transportation and information sharing in relation to forward and reverse supply chain practices; the fifth section discussed the supply chain performance and its measurement from the view of marketing, environmental, and economic performance subsequently. the final section summarizes all the discussion made and concludes by proposing direction for future research. 2. the evolution supply chain management the origin of supply chain management goes back to the 1940s and 1950s when logistics was stressed on how to use mechanization to improve the very labor intensive processes. the intense global competition of the 1980s forced world class organizations to offer low cost, high quality and reliable products. the 1980s marked the beginning of a change in the history of supply chain management; it was the time when the term supply chain management was introduced for the first time by consultants in the early 1980s (oliver and webber, 1992). the intensified competition of the 1990s and globalization of the markets forced the firms to be flexible and responsive to sustain an effective competitive edge (chan et al., 2003; li et al., 2006); and the development different philosophy also contributed their parts for the success of supply chain management activities. the extensive review of supply chain management literature shows that different philosophy, techniques and technology such as jit, tqm, lean, agile, total quality management, enterprise resource planning, and business process reengineering had practiced to overcome the market challenge of the time, however failed to overcome by improving their internal operation and at the same time meeting the market demand (georgise, thoben, & seifert, 2014). jit is a philosophy that advocates the elimination of waste and improvement of quality by cutting non value adding activities or parts (harrison and hoek, 2011); and jit technique aims inventory optimization by reducing or eliminating holding of excess inventory (sungard, 2007). jit and scm is not totally two different unrelated techniques, but they differ in their scope and the way they tried to achieve the objectives. jit focused on process improvement while scm focused on integration throughout supply chain for quality improvement. similar to jit philosophy, tqm is an approach of using different principles and practices to meet and delight customers besides the ultimate objectives of quality improvement. tqm support scm in achieving its objective by improving product quality, customer satisfaction and achievement competitive advantage; and tqm also reduce process variance, that affect cycle time and delivery dependability of supply chain performance (flynn et al., 1995). another, practices that supported the development of scm includes: the lean supply chain management. lean is an approach of internally value adding through automation and jit is technique of waste reduction, customers’ satisfaction and profits (taiichi ohno, 1998). however, the lean supply chain failed on external responsiveness (vonderembse et al., 2006); and unable to act in the highly flexible and changing environment (reichhart & holweg, 2007). however, lean supported scm in achieving its objectives through minimization of inventory cost, improvement of customer satisfaction and making profit from satisfied customers. similar to lean, the concept agility in supply chain management started to overcome the drawback of lean approach. philosophy of agility focused on continuous respond to the market requirements. the agile supply chain is an approach to respond rapidly and cost effectively to unpredictable and changes in markets (agarwal et al., 2007; christopher, 2000). enterprise resource planning is another significant system that supported the success and development of supply chain management. an erp system is configurable information systems packages that integrate information and information-based processes within and across functional areas in an organization (kumar and van hillegersberg 2000). to enables supply-chain partners to work in close coordination with their supply chain partners they need information sharing to facilitate suppliercustomer interactions and minimize transaction cost (lawrence, 1999; lee and whang, 2000). therefore, supply chain partners need to integrate their business process through erp to enhance communication and cooperation among functional departments; and firms. finally, the introduction of recent concept of green supply chain management broadened and advanced the scope of supply chain management for emergence of reverse supply chain. green supply chain is a philosophy that enables copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 16 firms to consider multi objective at a time; profitability objective, environmental risks and ecological efficiency (zhu et al., 2008). generally, the development of supply chain management started with the distribution management in the 1970s when organizations focused on to reduce inventory and distribution costs without any coordination among functional units. then after, in the 1980s firms started to reengineer organizational cost structures to form an integrated logistics management in the 1980s through coordination among functional units and achievement of organization wide objective. further, the increased global completion in the 1990s caused supply chain management with strong coordination among several independent companies to reduce cost & redundancies, and to create higher customer value. finally, early 21st century environmental and social concerns pushed supply chain management to broaden its scope to be sustainable supply chain by behaving in a social and environmental responsive way by including the interests of all stakeholders, society, and government. 3. definition of forward and reverse supply chain management 3.1 definitions of forward supply chain management there are no clear cut definitions of forward and reverse supply chain management; however the core concepts of all definitions are same. to make the study more manageable and meaningful this paper will discuss some of the relevant definitions of forward and back ward supply chain management. traditionally everyone can consider the term supply chain management as forward supply chain management neglecting the reverse supply chain management. however, the true concepts of supply chain basically represent forward supply chain and backward supply chain management. in the definitions of forward supply chain management, researchers can interchangeably use the term traditional or forward supply chain. the definition of forward supply chain management is given by different authors from diverse perspectives; however the core meaning of all the definitions encircled around the same topic. to start from the earliest definition of forward supply chain, lee and billington, (1995) point out that forward supply chain as set of activities that connect together all supply chain partners from suppliers of inputs from upstream to consumers in downstream of supply chain network; cox, blackstone, & spencer (1995) defined forward supply chain as all functions within and outside a firm that support the value chain system to make and offer products to the customer. similarly, schary (2001) defined forward supply chain as activities that deal with the smooth flow of raw materials, finished products and information within supply chain network starting from suppliers to final consumers; and chopra and meindl, (2010) indicated forward supply chain as combination of activities to be undertaken by suppliers, producers, carriers, agent, wholesalers, retailers to fulfill demand of customer other scholars also defined forward supply chain as network. among the definitions given from the perspective of network; lummus and alber, (1997) defined forward supply chain as the network of entities through which material flows by adding certain value for each partners; although tan ( 2001) defined forward supply chain as a network relating to two environments; internally within an organization, and externally along the supply chain partners. from all these definition, one can observe that the classical supply chain management only focused on the way to better serve customer requirement and generate financial benefit, regardless of no considerations for corporate social responsibility and environmental concern. generally, forward supply chain management defined from variety point of view; for example from resource utilization view, forward supply chain management is a system of effective utilization of resource, technology, coordination of the manufacturing and logistics achievement for competitive advantage, ferrell, rogers, ferrell, & sawayda, (2013); and mentzer and et al., (2001) viewed forward supply chain as systematic and strategic decisions of organizing the traditional business functions within an organization and across supply chain partners for improving profitability of an organization. 3.2 definitions of reverse supply chain management competition in the business environment, government legislation, and environmental concern has forced firms to shift from simple un-directional supply chains to sophisticated bi-directional supply chain. in contrast to forward supply chain, reverse supply chain focus on the reverse flow of raw materials, finished goods and information for different purposes. just like forward supply management, reverse supply chain management defined from different point of view, but all the given definitions compromise on the core meaning of the concepts. from the extensive review of prior researches, the definitions of reverse supply chain are organized as follows: the first perspective is functions of management. rogers and tibben-lembke, (1999) defined reverse supply chain as the process of planning, implementing and controlling the efficient and cost-effective flow of raw materials, in process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing or creating value or for proper disposal. similarly, de brito and dekker, (2002) defined reverse logistics as activities of designing, implementing and controlling the reverse flow of goods or end of life products and package of the products from consumers back for recycling or for proper disposal. the forward supply chain management is also defined as activities of bringing back end-of-use products that no longer serve the consumers for recapturing value by recycling or safe disposal of harmful products (fleischmannet al., 1997). also, copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 17 dowlatshahi (2000) defined reverse logistics as a process of actions by which a manufacturer collects back products and its components for effective reusing, rebuilding, or disposing purpose. similarly, carter & ellram, (1998) defined reverse logistics as a process of returning back the product or its package to reuse, recycle, or for safe disposal. generally, the definitions of reverse supply chain given by different scholars have closely the same meaning. for example, pokharel and mutha (2009) defined reverse logistics as management of used products, discarded products, excess inventory for recycling or recovery of value; reverse logistics is all actions related with product and materials reuse through collection and processing of used products to maintain sustainable environment; and murphy and poist (1988) referred as activity of taking back products from customers for different purposes. 4. supply chain practices this section deals with review of both directional logistics practices, i.e forward logistics practices and reverse logistics practices. logistics is one part of supply chain management practices that impact competitive advantage and overall organizational performance. supply chain management practices are a set of activities undertaken in an organization to promote effective management of its supply chain. a well-managed logistics practices are expected to improve supply chain performance through cost, quality, delivery dependability, time to market, and product innovation ( fernie, & mckinnon, 2011). logistic became very important sector for the international sustainability of the companies. if a logistic company works with high performance, it will create competitive advantage for both the company and country (akdoğan & durak, 2016). the idea of logistics and supply chain management is an interaction of different processes and functions within a firm’s network for the purpose of cost reduction and customer satisfaction (bichou & gray, 2007). logistics is a multi-dimensional practice. it is a process of planning, implementing, and controlling the efficient and effective flow and storage of goods and related information. at the same time logistics deal with selection and arrangement of vehicles for transportation of materials and finished goods, and handling/holding of inventory in warehouse/storage until needed for production/consumption. an effective logistics practices shorten procurement time; minimize stock maintenance costs and shipment cost and time, offer secured and reliable services (onay & kara, 2009; aziz, hillegersberg, & kumar, 2010). the components of logistics are so broad but based on its relevance only four broad factors affecting both forward and reverse logistics practices covered in this study including inventory management, facility locations, transportation and information sharing. 4.1 transportation transportation plays the key role in moving and integrating people and raw materials. transportation activities have the potential to integrate and improve the overall national and international economic growth through supply chain linkages by making the products available from the surplus area to shortage area. effective and efficient transportation also improve the perceived value of particular firm’s products by making easily available everywhere, and offering faster delivery. the scope of transportation issue is comprehensive and complicated. a transportation issue includes decisions relating to selections of the right modes of transportation minimization of transportation cost and time, shortening lead time, loading time and unloading time for on time delivery, flexible delivery, and overall customer satisfaction. from variety of transportation system, this paper focused on freight transportation segment since it play a significant roles in coordinating and integrating all the supply chain partners from upper stream to lower stream in forward supply chain and its reverse in backward supply chain practices. freight transportation is the key component in integrating supply chain partners by extracting raw materials and moving to producers; and move finished products from production site to consumption center; and reverse back fault products, excess inventory or defective products from mass consumption to manufacturers for desired purposes. freight transportation support flow of commodity in the global market and supply chain partners from extraction of raw materials to distribution of final products to market (nijkamp 2003). transportation issue is one of the most important topics in closed loop supply chain practices since without efficient and effective means of transportation it is not possible to achieve the ultimate objective both in forward and reverse supply chain practices. effective means of transportation make raw materials and finished goods to be available at the right place and right time for manufacturers, distributors and consumers. the main actors in the transportation systems are shippers and carriers. as friesz, gottfried, and morlok (1986) specified the difference between shippers and carriers; shippers are entities that desired specific products to be arrived at a particular destination, whereas carriers are entities that move the products for shippers at profit. the movement of raw materials, and finished goods in the forward flow; and defective products or end of life products in the reverse flow takes place either through private carriers or public carriers. every carrier use different modes of transportation, including road, rail, air water, and pipe lines (chopra & meindl, 2004). the mode of transportation is an important consideration when desiring certain target level of supply chain performance. besides costs, the urgency of the shipment, the value of the goods to be shipped as well as the physical size and weight of the goods to be transported need to be considered when determining the mode of transportation. transportation mode compounded with uncertainties that seriously affect performance of supply chain (sheu et al., 2005). the most important copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 18 consideration in the selection of a particular mode of transport is its cost since nearly one third of the total cost of logistics operations is transportation cost (alan, phil, & peter, 2006). similarly, another study show that a one third to two third of the expenses of enterprises’ logistics costs are spent on transportation and the cost of transportation on average account 6.5% of market revenue and 44% of logistics costs and a fall in transportation cost by one unit leads to inventory costs to be dropped in triple and similarly (wilson, 2004). the right mode of transportation is the modes that results the shortest time and minimum cost path between source and consumption point. transportation model have a critical impact on supply chain performance since the adopted modes of transportation affect reliability and dependability on the mode, quality of service to be offered, capacity to be loaded, delivery time, and cost of transportation. in freight transportation the main concern is cost minimization. as swenseth & godfrey (2002) stated transportation costs account nearly half of the total logistics costs that need consideration. in operation research large numbers of researchers employed different model with objective function of cost minimization. the popular model frequently used include north west corner method, stepping stone method, and least cost method under the assumptions of certainty of unit cost of transportation, and certainty of demand and supply capacity of every sources. the right path with minimum cost (ben-tal et al, 2011; & safeer et al., 2014), minimum time (yuan and wang, 2009) and minimum risk of transportation (safeer et al., 2014), and minimum loading and unloading time (barbarosoglu et al., 2002) enhances the overall performance of the firms. mason, & lalwani, (2007) also concluded that transport highly affected by inefficient loading and unloading, capacity loss, infrastructure loss, and congestion loss. another factor to be considered under the shade of transportation is the lead time. lead time is a time between placements of an order to acceptance of product ordered. it is a function of order processing time and time to be taken by carrier on delivery. lead time reductions improve speed of delivery (treville, shapiro, & hameri, 2004). unexpected delays at loading or unloading points, failures within the distribution network and unforeseen situations negatively affect efficiency of supply chain management (stajniak, hajdul, foltynski, & krupa, 2008). an increase in average lead time increase delivery time, decrease customers dependency and reliability that negatively affect overall supply chain performance. generally, sustained and effective freight transport is fundamental for the economic development, where transport cost and supply chain performance is highly correlated (kuse, endo, & iwao, 2010). kotler & wong, (n.d.) also specified a progresses in physical distribution yield great improvement in supply chain performance. therefore, an effective mode of transportation has the potential to reduce cost of a product, facilitate economic growth, and satisfy customers by making available the products at the right place and right time. 4.2 facility location regardless of the nature of their business all types of organization’s objective is to satisfy and delight customers with its product and services. achievement of this objective highly based on location of the facility such as warehouse/storage, and plant location from suppliers’, distributors and consumers. as krajewski, (2007) defined facility location decision as the process of determining the right geographic site for a firm’s operations. decision of facility location is one of the critical issues that need strategic decision making in supply chain management practices. this decision plays a critical role in the efficiency of closed loop supply chain management since facility location can be a vital importance for limiting production capacity, for expansion to new market, and for cost minimization (thanh, bostel and péton, 2008). the basic issues to be answered in the facility locations are where to locate and how to size facilities? how to meet customer demands from the facilities? which facilities serve each customer? how much customer demand is met by each facility? different researchers proposed different model with the objective of minimization or maximization, or combination of these in forward and reverse supply chain. as boonmee, arimura, & asada, (2017) stated many researchers used facility location model with an objective of cost minimization besides maximization of consumers satisfaction. in closed loop supply chain management selecting and fixing the right location at different hierarchy on the basis of cost, distance, time, and accessibility of the location needs strategic decision making. effective and efficient movement from upper stream to lower stream in the forward flow needs the right location for ware house and storage to be arranged for storing raw materials until required in the production process and finished goods until distributed to wholesalers or agents at the manufacturers’ levels. similarly, warehouse needed to be located in the right place at the distributors’ and retailers level until needed to be resold by wholesalers to retailers or retailers to consumers. in the same way, for the backward movement of end of life products from downstream to upper stream, proper site for warehouse establishment is highly needed in the reverse logistics due to complexity of the process than forward logistics. in reverse logistics facility location decision is more complicated and challenging than forward logistics since forward logistics is more formal and well integrated than reverse supply chain. in forward supply chain the distribution is from single or few manufacturers’ to many distributors, then to large numbers of consumers. therefore, distribution of products in forward logistics is less complicated and simpler than reverse logistics. however, in reverse logistics the end of life products movement for remanufacturing, repairing or for proper disposition requires collection of variety of end of life products from large numbers copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 19 of consumers located in different locations back by few individuals with limited capacity to few local storage and then forward to far located manufacturers. therefore, for the smooth flow and cost effectiveness of all these activities locations of the networked facilities have significant impact (wang, & yang, 2014). the need for highly dealing with facility location decision in the supply chain management and considering the issue as part of the firm’s strategic issue is for the long-term impact of the decision on the firm performance. facility location influence efficiency of supply chain management by influencing inventory level and cost, delivery cost and time, and for quick response to customer request. research shows strong relationship between location problem and inventory (shen, kremer, ulieru, and norrie, 2003) and the existence of linear relationship between transportation cost and location (shen and qi, 2007). generally, for right locations decisions there is a need to consider availability infrastructure, raw materials, nearness to consumer, and availability of cheap and skilled labor to offer quick service delivery at minimum cost and to offer quality service to improve supply chain performance. 4.3 inventory control inventory is the unused raw materials, working process inventory or finished good kept in storage or warehouse for future consumption, reselling or further processing. inventory is an integral and essential aspect of supply chain decisions. therefore it needs reasonable management. as jessop (1999), inventory management is an art and science of maintaining optimum level of stock at the least cost without negatively affecting other ob jectives, and stevenson (2010), also defined inventory management as a framework to be employed by organizations in achieving interest in inventory. it is an operational planning of holding optimum level of inventory for overcoming shortage and excess inventory. holding optimum level of inventory enables a firm to satisfy customers by fulfilling the order to be placed immediately. the ultimate objective of inventory management is to increase organizations’ profitability by reducing total logistics costs through better inventory management and better customer services (gourdin , 2008). in logistics activities having optimized inventory levels within the company and across all supply chain partners are crucial decision since inventory management influence firm’s basis of competitive advantage as quality and delivery of customer orders on time (gunasekaran, williams, & mcgaughey, 2005); and wang & zhang, 2010). effective inventory management is very critical for success of supply chain performance. vast majority of supply chain literature is concerned with minimizing operation cost or maximizing profit but research on effects of inventory management on performance of supply chains has only recently received significant attention (melo et al., 2009). effective reverse logistics increase customer satisfaction by allowing the firms to hold optimal inventory and minimum distribution cost (sarkis and talluri, 2004; and mollenkopf et al., 2007). efficient inventory management in supply chain reduces the operating cost and improves level of customers’ services cetinkaya and lee (2000). the alternative system for reducing level of inventory in the supply chain is the adoption and implementation of transshipment policy. transshipment is system of replacing inventories from nearer warehouse locations rather than filling the order from upper and far location to reduce lead times schwarz (1989); and other similar finding made by grahovac and chakravarty (2001) also show inventory holding costs and waiting costs of inventory reduced by inventory sharing and lateral transshipments. inventory management need to consider the tradeoff between holding and ordering inventory cost and the opportunity cost of the stock out. for the optimum operation of supply chain performance the tradeoff these costs needs management. the common inventory management techniques to be seen in this paper are: economic order quantity (eoq), just in time technique, vendor managed inventory and abc analysis. eoq determines the optimum order quantity that minimize the variable inventory costs., i.e annual holding cost and ordering cost for replenishment of an inventory chopra & meidl (2001); eoq levels minimizes the balance of cost between inventory carrying costs and re-order costs schroeder (2000); eoq balance conflicting cost of holding and placing a new order for replenishment orders; eoq estimate the economic order quantity by balancing the two conflict costs schaider (2001), and eoq finds the quantity that minimizes the sum of the two variable costs of inventory lyson & farrington (2006). therefore, the eoq of inventory management technique enable an organization to know rationally when to place an order and how much to order bowersox (2002). the jit is another technique of inventory management. it is a philosophy derived from japan to refer to an operations system in which materials are delivered just as the order placed. jit technique defined as the uninterrupted flow of 100% acceptable materials delivered on the right time. the implementation of a jit inventory system requires a full facility, strong capacity and long-term relationship with suppliers in order to fill order as soon as it placed. the third technique inventory control technique is abc analysis. abc analysis is a classical approach to categorize inventory items as a, b, c category based on their economic value (gupta, jain, & garg, 2007). the abc analysis only got management attention for control on the basis of their economic value irrespective of the necessity of the items. generally, for a better supply chain performance an effective inventory management is essential since inventory account large percentage of assets of an organization. therefore, while designing a warehouse attention should be given to ware house design, size and location to reduce transportation cost, holding cost, spoilage cost, insurance cost and leading time. similarly, during the warehouse design as james, tompkins, jerry & smith (1998) stated considerations should be made to: effective copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 20 utilization of the space, loading and unloading areas, and equipment required to perform certain processes, flexibility of moving products within the warehouse facility and protection of the items from damaging. 4.4 information sharing the scope of information technology is widening starting from the early introduction of computers. in the early 1950s information system was considered well for technical and a few technicians running; in the 1960s & 1970s information system mainly used for managerial control purpose only, and in the 1980s and 1990s information technology started to be used for running the institutional core activities. late 1990s information technology started to integrate the whole company through supply chain management. at this time the trend of business are changing and every industry are continuously attacked by new technology, new tools and new methods of doing business. therefore, company needs to invest huge capital in hard ware and software by purchasing and training people for data collection, processing and sharing right quality and quantity of information in the supply chain. the smooth flow of information is the heart of efficient and effective supply chain coordination and integration. communication can fasten and integrate the supply chain partners to work together as a unit rather than as an individual. also, information can help an organization to achieve competitive advantage and improve their performance. the role and impact of information sharing broadly studied in supply chains management (li et al., 2005; fawcett et al., 2007; yang & maxwell, 2011; lotfi et al., 2013). however, gathering, processing and dissemination of right quality and quantity of information in the supply chain require high cost of investment for technological facility and expert, this discourage extended information sharing within supply chains (fawcett et al., 2007). therefore, there is a need to significantly consider the information quality due to the constraints that affect information quality and quantity (naumann, 2001). the emergence of new thinking in managing supply chain partners has been largely facilitated by developments of information technology supported techniques (mason et al., 2007). to work closely in supply chain, supply chain partners need information sharing, where strong supply chain integration achieved through information sharing (lotfi, sahran, mukhtar, & zadeh, 2013) and strong supply chain integration make dependable and quick delivery of product. information sharing has quantity and quality aspects and both aspects are important for the efficiency of supply chain management (moberg, et.al 2002). quantity aspect refers to the extent to which critical and proprietary information is communicated to one’s supply chain partner (monczka, petersen, handfield, &, ragatz; 1998). information to be shared vary from long term plan at strategic level to short term plan at operational level or from information about logistics activities to general market and customer information (monczka, et.al; 1998). supply chain partners who exchange quality information at regular time are able to work as a single entity by fully integration (sukati, bakar, baharun, & yusoff, 2012). further, smooth flow of information in the supply chain enables partners to collectively understand the needs of the end customer better and to respond to market change faster (childhouse and towil, 2003). similar to the amount of information, quality of information is another aspect of information for decision maker. quality of information measured from the dimension of accuracy, timeliness, adequacy, and credibility of information (monczka. et.al; 1998). also, the quality of information is measured from the aspects of its impacts on efficiency of supply chain (chizzo; 1998). the qualities of information in supply chain management affected by the divergent interests and opportunistic behavior of supply chain partners, and information asymmetry across supply chain. sometimes the firms intentionally distort the quality of information due to the perception of information disclosure as takeover of market opportunity by competitors (mason-jones, towill; 1997); and feldmann, & müller, (2003) marked ensuring the quality of the shared information becomes a critical aspect of effective supply chain management due to perceived assumption of information disclosure on firms. generally, ketchen et al., (2008), highly pointed the potential of innovation and time from information technology in creating sustainable competitive advantage as the next key areas of competitive advantage than the traditional basis of competitive advantage. therefore, it is essential for supply chain partners to view information as a strategic asset for foundation of competitive advantage by improving performance, market responsiveness, better customer relationship and customer satisfaction. 5. forward and reverse supply chain performance and measurement in this section of this paper, performance measures and metrics for both forward flow and reverse supply chain discussed on the basis of past research result. performance measurement is frequently discussed issue nevertheless hardly defined. the idea of measuring the supply chain performance emerged a long time ago; however only few supply chains are often managing performance measurement in critical supply chain contexts (gunasekaran & kobu, 2007). performance measurement is the systematic way of quantifying the productivity of resources emption system. companies can measure their supply chain performance for variety of reasons. some measure to increase consciousness, relationship and integration among supply chain participants (cuthbertson & piotrowicz, 2008); and others measure performance to check whether arrived on planned objectives or not, for controlling purposes (lohman, fortuin, & wouters, 2004). controlling is one of the management functions that use performance result as inputs for controlling functions since copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 21 controlling is function of comparing predefined desired performance against actually measured performance result. therefore, performance measures and metrics is a core activity for evaluation or comparison. as (tetik, 2003) indicated performance is a degree of achievement attained by an enterprise within a specific period, whether expressed in quantitative or qualitative way. also, supply chain performance measurement offer sufficient information concerning finance, innovation and improvement of a system for internal and external stakeholders (fawcett & magnan, 1996). in all types of firms the primary basis of performance measurement is the objective of the organization. therefore, just like other firms, firms in forward and reverse supply chain practices measure their performance on the basis of their predefined objectives. supply chain performance measures broadly classified as: qualitative and quantitative; or financial and non-financial measures. traditionally the focus of an organization is profit maximization by revenue expansion and cost minimization. therefore, in the early period supply chain performance is more measured and expressed by financial instruments, but criticized for its drawback to measure the important non-financial measured performance. however, today to overcome the drawback of financial measurement basis alone, multi-dimensional measurement is adopted by incorporating non-financial performance metrics (basat, 2010). the advanced multi-dimensional performance measure proposed by different scholars to measure supply chain performance from different angles include, cost, activity time, customer responsiveness and flexibility identified as supply chain performance by beamon, (1998); customer service and flexibility beamon, (1999); delivery reliability, responsiveness, cost reduction, lead times, conformance to specifications and process improvements and time-to-markets (panayides and lun, 2009) and delivery time, quality consistency, productivity, production time, delivery, service quality, flexibility, market share, customer loyalty, efficiency and conformance to standards (morgan et al., 2009; & aziz et al., 2010), and delivery cycle, delivery speed, dependability on supplier, manufacturing lead time, quick confirmation of orders, quick customer complaints handling, and frequency of new product development proposed as performance measurement instruments (jayaram et al. 1999). the impact of the traditional/forward supply chain practices on organization performance studied by so many researchers as discussed above; from the financial, non-financial, operational, and marketing point of view. however, the studies made on the effect of reverse supply chain practices on organizational performance were very limited. on the other hand, the scope of the reverse logistics effect on organizational performance is seen from broader perspectives; in addition to the forward logistics perspectives include environmental, legal, and corporate social responsibility point of view. however, the dimensions of performance measurement of supply chain practices are difficult to be specified and measured due to the overlapping nature of the items of performance measure. among the other dimensions, items for measuring firm performance do often overlap; items for measuring financial, economic and marketing performance pooled together and studied under economic performance (rao, 2002; rao and holt, 2005); and profitability, cost savings and market share under economic performance (giovanni, 2012; zailani et al., 2012). therefore, items may belong to more than one dimension depending on perception of the individual and to overcome the problem of the measurement dimensions, this paper only focused only on three broad scopes, including marketing, economic and environmental scopes of performance measure of an organization. from the review of the past studies, yet no agreement made among researchers regarding the impact of reverse logistics on organizational performance, (zhu et al., 2005; hazen et al., 2011; zhu et al., 2012; green et al., 2012a). some researchers say, reverse logistics have significant positive relationship with organizational performance (waithaka (gitau, 2010; 2012; langat, 2012), while others say reverse logistics have negative impact organizational performance, and still limited researchers say there is no tangible relationship between organization performance and reverse supply chain practices (de giovanni and vinzi,2012). some of the articles that shown positive relationship between reverse supply chain and organizational performance explained the effects of reverse supply chain on organizational performance by directly relating to financial and marketing performance/operational performance of an organization; and others explained in indirect way. from marketing dimension, azevedo et al., (2011) explored the positive influence of reverse supply chain practices on organizational performance through enhancement in quality, customer satisfaction and efficiency. reverse supply chain give chance of feedback for consumers, and information flow from this reverse supply chain enable the firm to satisfy the customers by adjusting the product design or improving the quality of the product based on the real demand of users; and satisfied customers can buy more of the organization’s product by being loyal. therefore, an organization can earn profit in sustainable way from the satisfied and loyal customers. similarly, reverse logistics enables a firm to offer better customer service by recapturing value from earlier used, or defective offered products (tan, yu, arun, 2003); other study done by ongombe (2012) in the kenya also indicated the existence of strong relationship between reverse logistics and competitive advantage in water bottling companies. the economic benefits of reverse supply chain activities on organization performance suggested by numerous benefits. reverse logistics reduce the amount of inventory to be disposed and this reduces the amount of raw materials to be extracted or to be purchased from suppliers and reduce the amount of energy needed to process. review of prior research described that practicing reverse supply chain reduce the amount of the end of final products, surplus inventory, or defective products to be disposed as waste. reverse supply chain can decrease the consumption of raw materials and energy to be used by decreasing amount of waste (neto et al., 2010; zhao et al., 2018; rogers & tibben-lembke, 2001); reverse supply chain also increase copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 22 profit margin resulting from reduction in production costs (ongombe, 2012; eltayeb et al., 2011); recapture value from the scarce resources in cost effective and sustainable way (melbin, 1995; eltayeb et al., 2011) and create green supply chains that build positive image that advance the competitive advantage and overall economic performance of a firm (rao and holt, 2005); and reduce production costs by using less power, and cheaper raw materials from end of finished products (laosirihongthong et al., 2013). environmental performance of an organization is commitment of an organization to environmental quality just to meet legislation imposed by government or to build positive image by meeting what society expect form the organization on the maintenance of ecological balance (judge and douglas, 1998). successful adoption and implementation of reverse logistics enhance ecological performances which further support achievement of improved organizational performance (green et al., 2011); promote an image of environmental responsibility that advance organizational sales by fostering good will (rao and holt, 2005); save pollution of the environment by decreasing amount of hazardous end of life products to be disposed or proper disposition (rogers & tibben-lembke, 2001); save the environment by reducing raw materials to be extracted, and decreasing emissions of polluted air to the environment (hervani et al., 2005; veleva et al., 2007); and save the environment from air and water pollution, from consumption of harmful and toxic materials, and reduce solid waste (zhu et al., 2008; maxwell and van der vorst, 2003). generally, environmental performance of an organization from practicing reverse supply chain is seen from the ability of an organization to contribute or to maintain quality environment or restricting activities that pollute the environment. generally, setting a well-defined supply chain goal and performance indicators enhance complexity of supply chain performance measurement (panayides and lun, 2009). as (maskell, 1989) indicated whatever the proposed system of measurement, a system needs to follow performance measurement principles that directly related to firm’s strategy, using nonfinancial measures, using varying criteria that fit the departments or companies, varying the performance measurement base as situations needs, suing simple and easy criteria to overcome complexity, providing fast feedback to timely adjustment or correction if necessary and using performance measurement principle that inspire continuous improvement. 6. conclusion and future research directions we have no longer isolate and talk about suppliers, producers, distributors and consumers separately as an independent entity because of their interdependence in supply chain partners. not only this; isolating and dealing with only one side of supply chain practices make supply chain practices incomplete and inefficient. forward supply chain is all activities that deal with the smooth flow of raw materials, finished products and information within supply chain network starting from suppliers to final consumers, while reverse supply chain is the process of planning, implementing and controlling the efficient and cost-effective flow of raw materials, end of life products, defective products or surplus inventory and feedback information from the point of consumption to the point of origin for the purpose of recapturing or creating value or for right disposal. therefore, there is a need to focus on closed loop supply chain practices for sustainability of economy and environment. based on the above literature review the following direction forwarded as future research directions: more research has been carried out in limited dimension of supply chain management; transportation, inventory, facility location or information sharing alone. however, supply chain performance is a function of combination of different variables. therefore, it is advisable for researcher to fill this gap by further considering more than one variable to measure the effects of supply chain practices. similarly, large number of previous research measured only limited dimensions of supply chain performance. therefore, it is advisable for future researcher to measure supply chain performance from multi dimension, especially in case of reverse supply chain, considering simultaneously economic performance, environmental performance and marketing performance. finally, almost all previous researcher only focused on forward logistics, even those that focused on reverse supply chain neglected and concentrated only reverse flow, but forward and reverse supply chains are interdependent on one another and dealing only on one sided flow make supply chain inefficient. therefore, it should be the future research direction to conduct on closed loop supply chain to understand the real performance of supply chain performance. references aburadi, n. 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(2011). the effect of supply chain integration on information sharing : enhancing the supply chain performance, 24, 1630–1649. https://doi.org/10.1016/j.sbspro.2011.09.016 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 | ijfb indian journal of finance and banking; vol. 4, no. 2; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 79 antecedents of financial inclusion: evidence from tripura, india ranjit singh phd associate professor department of management studies indian institute of information technology allahabad prayagraj-211-15, india e-mail: ranjitsingh13@gmail.com sankharaj roy phd assistant professor icfai university tripura, india e-mail: sankharajroy@iutripura.edu.in bhartrihari pandiya phd assistant professor asia pacific institute of management, new delhi, india e-mail: bhartrihari.nits@gmail.com received: august 06, 2020 accepted: august 19, 2020 online published: september 03, 2020 doi: 10.46281/ijfb.v4i2.745 url: https://doi.org/10.46281/ijfb.v4i2.745 abstract the present research assesses the determinants of financial inclusion of members of self help groups (shgs). the research work is done with primary data collection from around 380 members who are beneficiaries of 95 shgs in tripura, india. after performing factor analysis, six major factors named physical infrastructure, financial awareness, it infrastructure, suitability of financial products, ease of banking and economic status of members of shgs were identified as major factors that play a pivotal role in bringing financial inclusion of the members of shg. in these 6 factors, some other factors were also added such as age, income, education, landholding, the regularity of income, earning members count, gender, caste, location, religion, etc. fitting ordinal logistic regression model, it was found that, the important factors that have an impact on financial inclusion on the members of the shgs are financial awareness, ease of banking and economic status of the members, the relevance of financial products, physical infrastructure, monthly income, landholding, education, age and their status with respect to the bpl category. the decision-makers in power should collaborate with financial institutions should consider and apply this finding during the disbursement of loans. keywords: financial inclusion, credit, financial institutions, self help group (shg). jel classification code: g2, g28, i3. 1. introduction exclusive financing concern is a grave issue that has a repercussion on a huge segment of the world populace. financial inclusion deals with providing necessary ingress to relevant products and services relating to finance which is required by almost every section in the populace. but the more needy and vulnerable groups are the weaker section of the society whose income is low. they are the recipients who should be targeted by financial institutions and get the loans at a rate which they can afford (nair & tankha, 2015). financial inclusion is also meant by increasing the reach of these financial services by mitigating the barriers faced by them resulting in their inability to have access to formal financial arrangements (camara, pena, & tuesta, 2014). it is even discussed to include financial inclusion in the list of next millennium development goals (mdgs) (sinclair & gamser, 2013) and in the 2030 agenda for sustainable development (fu, queralt, & romano, 2017). in the indian subcontinent, there is a system of low intensity of banking accounts because only 35% have accounts as per the 2011 census but the household savings add to the national savings in a significant manner (kant, 2014). the families who don‟t have access to the conventional insurance and credit system can be beneficiaries as the formal savings as it “enables the building of safety nets to smooth shocks” (karlan & morduch, 2009). after demonetization in india in 2016, there is a tremendous push for digital payments but there needs to be a readiness for digital transactions and requisite infrastructure for adapting it (sinha, pandey, & madan, 2018). mailto:ranjitsingh13@gmail.com mailto:sankharajroy@iutripura.edu.in mailto:bhartrihari.nits@gmail.com https://doi.org/10.46281/ijfb.v4i2.745 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 80 the institutions having administrative roles and regulatory authorities with the support of financial institutions and non-government organizations (ngos), self-help groups along with organizations of microfinance nature are in tandem in strategizing objectives for the underprivileged lot. to attain inclusive financing, certain programs by banks like linkage programs were initiated to give financial services targeting the poor to alleviate their economic situation rather than their dependence on informal systems of credit (abiad, cuevas, & graham, 1988). the scenario in bangladesh regarding financial inclusion is that the extreme underprivileged populaces have the least reach to services related to finances. few financial institutions in the african continent are present to serve the poorest by the program named village savings and loans associations (vslas) which focuses on reducing debt and increasing savings (hendricks & chidiac, 2011). so, the organizations have to accordingly understand the factors which have a role in the inclusive financing for the members of shgs. the better individuals and groups in society have the better fortune to make use of the financial services instruments like insurance, online banking and credit system, etc. it helps to improve the chances of usage of products and services by reducing the risk of immediate emergency financial (en, demirguc-kunt, klapper, & peria, 2012). in the indian scenario, the financial institutions are willing to help these shgs in mitigating their poor economic condition and improve their livelihood (harper, 1996) and with the advent of shg bank linkage programme as retail marketing channel development programs, financial inclusion can be attained (harper, 2002). the current study explores and identifies the antecedents that impact the financial inclusiveness of shg members in the formal banking sector. therefore, the objectives of the present study are given as follows:  to assess the level of inclusive financing of shg members;  to categorize the antecedents of inclusive financing having an impact on the usage of financial products and services by shg members and thus, this research work tries to answer the below research questions:  what is the present condition of inclusive financing for shg members?  what are the antecedents of inclusive financing having an impact on the usage of financial products and services by shg members the present study is significant in exploring the antecedents of the financial inclusion of the members of the shgs. these shgs are created to empower women especially in the economically backward class which who don‟t have the reach to conventional financial products and services and remain in destitution (raheem, 2012). the study of antecedents affecting access to inclusive financing has attained a momentum across the globe as the worldwide regulatory bodies are aiming and struggling to include more and more populace under the ambit of formal financial structure. so, the people working in various shgs, considered to be coming from poor households, are mostly in need of banking and financial services but dependent on informal sources (kumar & mishra, 2011). the study becomes significant because it is based on empirical evidence. 2. literature review a thorough and nearly comprehensive literature review in the field of inclusive financing was done to understand the underlying antecedents which have a role in its impact on the populace. the various underlying antecedents were identified and studied to have an understanding of the scenario in this sector. nation sample survey organization (nsso) in its report reported that around 76% of the rural populace has a credit requirement which is satiated by moneylenders. the process of financial exclusion can take place only when individuals or groups don‟t use or have a meager use of financial services (ford & rowlingson, 1966; kempson & whyley, 1998). the very perception of financial exclusion is the inability to have an access to required financial products and services the reason for which is price, marketing, non-access, various conditions or self-exclusion (beck, asli, & soledad, 2008). the usage of conventional financial services and products such as insurance, online banking, savings schemes help to improve the chances of consumption and reduce the risk of emergency requirements (en et al., 2012; choudhury & singh, 2015). the underlying socio-economic circumstances of the rural populace are huge restrictions and blockage for them is motivating them to seek out the formal financial services (demirgüc-kunt & klapper, 2013). but, there is a huge scope for using information and communication technology (ict) to bring the banking services to the house of the consumers that too at a lesser cost (gupta, 2011; brynjolfsson & hitt, 2000; das, 2010; gangopadhayay, 2009). moreover, the probability of inclusion of financial needs in the official banking system is high and it leads to saving capacity (beck, demirgüç-kunt, & martines peria, 2006). however, the economic status of the people such as possession of landed property or possession of a house increases the chances of usage of the available products and services in banking (collins & daryl, 2009; bhattacharyay, 2016; sahoo, pradhan, & sahu, 2017). asset endowment is also one of the essential factors of reducing poverty (donovan & poole, 2013). despite the above factors, it is seen that many people are still not using banking services due to the reason that they do not consider is convenient to use and afraid of going to any bank and therefore, some farmers in the rural areas are using mobile devices to do book-keeping, making payment as well as receiving money (rogers, 2003). however, nwuke (1997) found that there is a positive effect of bank density and urbanization on the mobilization of savings. thus, banking services can be provided to the poor‟s using ict and other latest technology (hishigsuren, 2006) with proposed it governance framework to improve service quality (singh, pandiya, upadhyay, & singh, 2020). it needs to be monitored as the ability to access and usage sufficiency is not always the signs of success (porteous & zollmann, 2016). copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 81 fernandes, lynch jr., and netemeyer (2014) and clarke, xu, and zou (2006) have identified that being financially educated is a good sign of inclusive financing. those people who are financially literate are in a better position to manage their personal budgeting and finance and making financial decisions (moore, 2003; campbell, 2006; perry & morris, 2005; lusardi & olivia, 2011). in addition to the above, physical infrastructure comprising road conditions to bank branches, distance of individuals‟ house from the branches of banks/atms, or the present post offices. linking market to shg products, and accessing information about various financial products has a noteworthy role in enabling an individual to access various banking and financial products (kumar, 2013; fungáčová & weill, 2013; tuesta, sorensen, haring, & camara, 2015; kedir, 2003). various variables of demography and also socio-economic nature also affect the level of inclusion financing. the traditional microfinance schemes are of advantage to „the economically active poor individuals‟ and they are not the „poorest of the poor‟ if the basic definition is considered (premchander & harper, 2018). these are age and education (johnson & nino-zarazua, 2007; sahoo, pradhan, & sahu, 2017), income (aslan, delchet, & monique, 2012; kumar, 2013), number of adult family members (roy, singh, & singh, 2017a; sinclair, 2013), economic status (wangwe, 2004; harris, loundes, & webster, 1999), location, gender and religion (akpandjar, quartey, & abor, 2013; yadav & sharma, 2016; demirgüçkunt, klapper, & randall, 2013; bhattacharyay, 2016). regarding age, it is the aim to develop the generation which is upcoming having economic knack and educating the youth regarding its usefulness (billimoria, penner, & knoote, 2013). from the literature discussed above, it is observed that most of the empirical research works relevant to the topic are done in the various parts of india and other countries. though many studies have been done in respect of microfinance, limited studies are conducted to understand and categorize the antecedents of financial inclusion of the members of shgs in a state like tripura of india which is one of the smallest states of indian union. it is a landlocked state having very limited connectivity from the rest of the india and world. hence, to bridge the above research gaps, it is therefore needed to conduct a study identifying the antecedents of inclusive financing for shg members. 3. methodology of the study the present research work is confined to the boundary of tripura state of india. one member form one household who is also a member of any shg operating in tripura consisted of the sampling unit. the responses were conducted from october 2018 to december 2018. there are more than 150 numbers of shgs in the state of tripura. from all these shgs, there are approximately 37123 members in all these shgs which constitute the universe of the study. using simple random sampling, at a 5% level of significance and 5% confidence interval sample size is determined to be 384. the data was collected using a structured interview schedule administered to the members of shgs. a structured interview schedule was prepared to measure the level of financial inclusion of the members of shg. based on study made by sahoo, pradhan, and sahu (2017); zins and weill (2016) and roy, singh, and singh (2017b), a pilot study done by the researcher, opinion of the experts and observation during the study, 25 items, as given in table 2 of the paper, were identified. the respondents were asked to provide their responses by way of rating on a five-point scale where 5 indicates the highest order of agreement with the stated item and 1 indicates the least order of agreement with the stated item. besides, information about gender, age, education, caste, family income, land-holding, status about bpl category, religion, etc. was also sought. statistical tools such as mean, standard deviation, principal component analysis, and ordinal logistic regression were used. the factors are reduced using the principal component analysis (tabachnik & fidell, 2007; harman, 1976). the reliability of the items in the interview schedule was assessed by computing cronbach‟s alpha. regression analysis was also done to fit in the regression model. the profile of the respondents is given in table 1. table 1. demographic profiling of the respondents gender of the respondents gender frequency percentage male 50 13.0 female 334 87.0 total 384 100.0 age of the respondents age frequency percentage 15 to 20 years 002 00.50 21 to 30 years 051 13.30 31 to 40 years 158 41.10 41to 50 years 159 41.40 51 to 60 years 014 03.60 total 384 100.0 education of the respondents non-matriculate 179 46.6 matriculate 065 16.9 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 82 12th 092 24.0 graduate 048 12.5 total 384 100.0 category of the respondents st 055 14.3 sc 075 19.5 obc 073 19.0 general 181 47.1 total 384 100.0 monthly income of the respondents (in usd) < usd 60 037 9.6 usd 60 to usd 100 164 42.7 usd 100 to usd 150 087 22.7 usd 150 to usd 200 061 15.9 usd 200 to usd 300 024 6.3 more than usd 300 011 2.9 total 384 100.0 monthly expenditure of the respondents (in usd) < usd 30 041 10.7 usd 30 to usd 60 196 51.0 usd 60 to usd 90 100 26.0 usd 90 to usd 115 033 8.6 usd 115 to usd 150 010 2.6 more than usd 150 004 1.0 total 384 100.0 source: compiled from the questionnaire 4. analysis and findings the further analysis of the underlying factors which have a role in inclusive financing of shg members is discussed in this section. for the measurement of the level of the inclusive financing level, a scale was developed. there were 25 items on the scale. the reliability of the scale was done by using cronbachs alpha. cronbach‟s alpha has a value of 0.797. in the existing norms of reliability, if a cronbach‟s alpha has a value of more than 0.70 then it is considered as an acceptable measure of reliability (nunnaly, 1978; george & mallery, 2003). this is proof of reliability for the used scale with the underlying fact that the items in it are highly correlated and aiming towards the measurement of the latent variable. 4.1 measuring inclusive financing of shg members for the measurement of inclusive financing of the shg members, mean value and standard deviation of the 25 items chosen for constructing the scale in the measurement of inclusive financing as portrayed in table 2: table 2. item statistics items mean value standard deviation awareness about banking and other financial products 2.1667 1.45904 satisfied with the features of insurance product 2.2734 1.39215 condition of the road reaching to a bank branch 2.3646 1.50799 terms and conditions attached to loan products are stiff 2.4115 1.37584 shg having linkage to market 2.4349 1.4988 monthly household expenditure 2.5312 1.59767 financial counseling by banks 2.638 1.58706 access to information through newspaper 2.6589 1.57519 monthly household income 2.6875 1.49717 the distance of branch/atms from their house 2.776 1.61159 insufficient collateral security for availing bank loan 2.849 1.64089 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 83 non-availability of business correspondents 2.9219 1.34383 satisfied with the features of credit products 2.974 1.48424 the documentation process for availing banking services are lengthy 3.0729 1.33829 the distance of post-office from their house 3.125 1.75079 time taken in getting a service is lengthy 3.1432 1.36835 fear of rejection by banks/financial institutions 3.2812 1.30836 non availability of the internet for online banking 3.3177 1.04374 satisfied with the features of savings bank product 3.3307 1.12066 prefer taking a loan from informal sources than banks 3.4531 1.5858 non-availability of smartphone for mobile banking 3.5234 1.49306 land-holding of the members of the shgs 3.9089 0.82679 the economic status of the members of the shgs 3.9792 0.83624 regularity of income for paying emi 4.1589 0.97663 satisfied with the services rendered by bank staffs 4.4375 0.86791 total of mean values of all the considered items 76.4193 34.08808 source: compiled from the questionnaire as shown in above table 2, it is evident that awareness about banking and other financial products features of insurance products and conditions of the road reaching the bank branches are the least contributing factors in overall inclusive financing of the shg members. on the other hand, the economic status of the shg members, the regularity of income for paying emi, satisfied with the services rendered by bank staffs are the highest contributing factors in bringing inclusive financing among the shg members. there were 25 antecedents in the scale considered for the study. the questionnaire was distributed to the respondents asking them to rate the statements in the likert scale having 5 points. the scale had the scores of 5,4,3,2 and 1 which commensurate the response of the individuals as strongly agree, agree, neutral, disagree and strongly disagree respectively. further, this total score for inclusive financing would be attained by adding the overall scores of the antecedents. the maximum possible score of financial inclusion was 125 (25x5) and the minimum possible score was 25 (25x1). logically, the differentiation between the maximum and minimum potential score was 100 (125-25). for ascertaining the level of inclusive financing at three levels, the discussed range was divided by 3. it was established to be 33.33. so, adding 33.33 to 25 (lowest probable score), the score range for the low level of inclusive financing was obtained which was 25 – 58.33. similarly, adding 33.33 with succeeding values, the upcoming higher range could be calculated singh and bhowal (2011); singh (2012) singh and bhattacharjee (2019) also used similar kinds of interpretation tables to interpret their result. the table 3 below shows the interpretation for the inclusive financing score: table 3. interpretation of financial inclusion score scale value interpretation of scale value 25 – 58.33 low level of financial inclusion 58.33 – 91.66 moderate level of financial inclusion 91.66 125 high level of financial inclusion source: compiled from the questionnaire on the basis of interpretation table given in table 3, level of financial inclusion is calculated and presented in table 4. table 4. layers of financial inclusion based on the survey source: compiled from the questionnaire levels number of members percent low level of financial inclusion 250 65.1 moderate level of financial inclusion 84 21.9 high level of financial inclusion 50 13 total 384 100 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 84 as per the analysis, the majority of respondents that is, 65.1% are in the low layer of inclusion. the overall mean for all the 25 items considered in the scale is 76.4193 which fall in the range of moderate layer of inclusive financing according to table 4. thus, the overall level of inclusive financing of the shg members falls in moderate level. 4.2 identifying factors affecting financial inclusion through factor analysis the prerequisite for performing factor analysis is the sample size adequacy. for testing the sample size adequacy, the kmo measurement of sample adequacy and bartlett‟s test had to be performed. the value of kmo was 0.848. as per the norms, a kmo value which falls between 0.7 and 1 signifies sample adequacy (cerny & kaiser, 1977) and is sufficient for performing exploratory factor analysis (child, 2006). the bartlett‟s test of sphericity 𝑥2 300 = 3341.062 , ρ<.001 indicated that there existed a relationship pattern among the items. the table 5 below shows that the 6 factors, whose eigenvalue is more than 1, extracted amidst the mentioned 25 variables explaining 63.94% of the possible variance in the dependent variable. table 5.total variance explained component initial eigenvalues extraction sums of squared loadings squared loadings rotation sums of squared loadings total % of variance cumulative % total % of variance cumulative % total % of variance cumulative % 1 4.909 19.636 19.637 4.909 19.636 19.637 3.897 15.588 15.588 2 3.561 14.244 33.881 3.561 14.244 33.881 3.771 15.084 30.672 3 3.129 12.516 46.397 3.129 12.516 46.397 2.469 9.876 40.548 4 1.953 7.812 54.209 1.953 7.812 54.209 2.049 8.196 48.744 5 1.727 6.908 61.117 1.727 6.908 61.117 1.957 7.828 56.572 6 0.707 2.828 63.945 0.707 2.828 63.945 1.843 7.372 63.945 7 0.705 2.820 66.765 8 0.701 2.804 69.569 9 0.696 2.784 72.353 10 0.685 2.740 75.093 11 0.665 2.66 77.753 12 0.587 2.348 80.101 13 0.584 2.336 82.437 14 0.576 2.304 84.741 15 0.574 2.296 87.037 16 0.561 2.244 89.281 17 0.492 1.968 91.249 18 0.452 1.808 93.057 19 0.444 1.776 94.833 20 0.435 1.740 96.573 21 0.346 1.384 97.957 22 0.187 0.748 98.705 23 0.165 0.660 99.365 24 0.097 0.388 99.753 25 0.062 0.247 100.00 extraction method: principal component analysis, source: compiled from the questionnaire the factors can explain the observed common covariance matrix between the 25 factors for dimensionality reduction is attained by applying the principal component analysis (bartholomew & child, 1980). it is shown in table 6. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 85 table 6. rotated component matrix factors component 1 2 3 4 5 6 satisfied with the features of insurance product .791 .129 .184 -.209 .216 .218 satisfied with the features of credit products .682 .180 .330 -.184 .194 .122 satisfied with the features of savings bank product .642 .157 .132 .309 .142 .163 terms and conditions attached to loan products are stiff .660 .198 .293 -.150 -.207 .094 the documentation process for availing banking services are lengthy .209 .798 .183 .444 .137 .044 time taken in getting a service is lengthy .184 .745 .401 .209 .108 -.152 prefer taking a loan from informal sources than banks .309 .718 .136 -.184 .141 .211 fear of rejection by banks/financial institutions .150 .610 .211 .309 -.116 -.019 non-availability of business correspondents .117 .654 .220 .445 .061 .106 insufficient collateral security for availing bank loan .444 .704 .250 .178 .001 .084 satisfied with the services rendered by bank staffs .368 .636 .151 .078 -.251 .218 condition of the road reaching to the bank branch .117 .444 .728 .058 .279 .122 the distance of branch/atms from their house .370 .368 .926 .347 .225 .432 shg having linkage to market .301 .117 .914 .398 -.128 .079 the distance of post-office from their house .120 .370 .892 .349 -.045 -.336 access to information through newspaper .115 .530 .865 .187 .271 .077 monthly household expenditure .285 .116 .309 .642 .208 -.138 monthly household income .375 .194 .184 .673 -.357 .323 the economic status of the members of the shgs .301 .342 .209 .684 .075 .004 landholding of the members of the shgs .211 .207 .150 .555 -.093 .446 the regularity of income for paying emi .220 .151 .217 .658 .256 .070 non-availability of the internet for online banking .250 .137 .209 .359 .687 .432 non-availability of smartphone for mobile banking .151 .208 .285 .261 .669 .079 level of awareness about banking and other financial products .211 .141 .129 .321 .223 .519 financial counseling by banks .312 .241 .169 .235 .066 .612 extraction method: principal component analysis rotation method: varimax with kaiser normalization. source: extraction method: principal component analysis, note: factor loadings over .50 appear in bold rotation method: varimax with kaiser normalization the process of assigning names to the components was based on the literature review and expert feedback. it is presented in table 7 below. table 7. name of the component sr. no variables/factors mean of individual items factors obtained after pca mean of the pca factors 1 features of insurance product 2.27 suitability of financial products 2.7474 2 features of credit products 2.97 3 features of savings bank product 3.3307 4 terms and conditions attached to loan products 2.4115 5 the documentation process for availing banking services are lengthy 3.0729 ease of banking 3.3084 6 time taken in getting a service is lengthy 3.1432 7 prefer taking a loan from informal sources than banks 3.4531 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 86 8 fear of rejection by banks/financial institutions 3.2812 9 non-availability of business correspondents 2.9219 10 insufficient collateral security for availing bank loan 2.849 11 satisfied with the services rendered by the bank staffs 4.4375 12 condition of the road reaching to a bank branch 2.3646 physical infrastructure 2.67188 13 the distance of bank/atms 2.776 14 shg having linkage to market 2.4349 15 the distance of post-office 3.125 16 access to information through newspaper 2.6589 17 monthly household expenditure 2.5312 economic status of members of shgs 3.45314 18 monthly household income 2.6875 19 the economic status of the members of the shgs 3.9792 20 landholding of the members of the shgs 3.9089 21 the regularity of income for paying emi 4.1589 22 availability of internet for online banking 3.3177 i.t. infrastructure 3.42055 23 availability of smartphone for mobile banking 3.5234 24 awareness about banking and other financial products 2.1667 financial awareness 2.40235 25 enhancement of financial counseling of issues that span regulators 2.638 total of the mean value 76.4193 18.00372 source: renaming factors on the based on factor loading the mean of the factors has been shown in table 7 above. the factor „economic status of the members of shgs‟ has the highest mean which truly depicts how the economic condition of the individual and family matters the most for bringing financial inclusion of people. the factor „i.t. infrastructure‟ ranks 2nd as it is the medium of transaction. with the growing usage of digital media such as mobile phones and the internet it is very obvious that more and more individuals will use it gradually. a user-friendly interface is very important to target and attract more rural customers. ease of banking has the 3rd rank. the formalities required by the banks such as documentation process and the overall time taken for a transaction matters as should be quick and safe as much as possible. the services rendered by the bank should be congenial such that the customers don‟t face problems. suitability of financial products ranks 4th as the features and characteristics of the financial product like loan etc also catches the eye of the consumer. physical infrastructure matters in the least magnitude to the consumers. financial awareness stands last with a mean score of 2.4. 4.3 impact of these factors on financial inclusion after identification of the six factors which affect inclusive financing of shg members, the next objective of the research was to find the impact of demographic and socio-economic factors along with the six factors identified after data reduction on the overall inclusive financing of shg members. the demographic variables identified in this study are gender, age, education, caste and religion. the socio-economic variables considered in the study are income, landholding, family members, caste and their status regarding the bpl category. deb and singh (2018) adopted a similar way of identifying the antecedent factors. the measure of multicollinearity affects the parameter of the model of regression. the biasness in logistic regression is somewhat prone to collinearity hence it is mandatory to do collinearity test before performing a logistic regression analysis (field, 2005). this condition can be crosschecked by variance inflation factor (vif) along with the tolerance level using the outcome and predictor variables. the tolerance value if less than 0.1 points toward a severe collinearity problem with the multiple predictor variables (menard, 1995). if the vif value is greater than 10, then it is a matter of apprehension that resembles collinearity (myers, 1990). the same acceptable level is recommended by other authors such as hair, anderson, tatham, and black (1995) and kennedy (1992). table 8. coefficient of vif and tolerance factor exploratory variables collinearity statistics tolerance vif suitability of financial products .872 1.147 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 87 ease of banking .685 1.461 physical infrastructure .949 1.054 economic status of the members .721 1.386 it infrastructure .927 1.078 financial awareness .958 1.044 monthly income .401 1.495 land holding .786 1.273 education .588 1.701 age .828 1.207 regularity of receiving income .685 1.461 earning family members count .835 1.198 gender .884 1.132 caste .842 1.187 location .748 1.337 religion .869 1.151 a. dependent variable: level of financial inclusion the above table showing the multicollinearity statistics shows the vif of each independent variable. as per the standard, the acceptable vif is less than 5. in this analysis, all the vif is near to one that suggests the absence of collinearity between the exploratory variables. therefore, the assumption for performing logistic regression is met and the same can be used for the model. to find out the impact, the model has used the financial inclusion index constructed using the interpretation table given in table 3 as an ordinal dependent variable. ordinal logistic regression is used to predict the output with one or more independent variables (predictor variable) when the dependent variable is in the ordinal scale. singh and bhattacharjee (2010a) and singh and bhattacharjee (2010b) have sued similar analysis to draw the analogy. the model of the study is where, ease of banking financial awareness economic status of the members suitability of financial products physical infrastructure = it infrastructure = monthly income = land holding = education = age = regularity of receiving income = adult family member count = gender = bpl category = location = religion before proceeding with the ordinal logistic regression model to discuss the impact of every explanatory antecedent existing in the model, it‟s suggested to check if the model adds improvement regarding the capacity to predict the result. a comparison between the final model (having explanatory variable) and the intercept only or the baseline model (without any explanatory variable) is done to check if whether the model improves the fit to the data in a significant manner. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 88 table 9. model fitting information model fitting information model -2 log likelihood chi-square df sig. intercept only 373.783 final 163.668 310.116 16 .000 link function: logit. source: compiled from data analysis table 9 shows the information regarding the model fitting gives the -2 log-likelihood value regarding the intercept only or the baseline model and the final model. log of likelihood is a measure of error or variation. this likelihood ratio test follows the chi-square distribution (hosmer & lemeshow, 1989). further, the chi-square value of 310.116 is statistically significant (p-value<.05) and it indicates that the nature of the final model. it shows that the final model provides a significant enhancement over the intercept only model. the significance indicates that the model provides a better prediction. the logistic regression model shows the strength of association and is measured by pseudo-r-square which is given in table 10. table 10. pseudo r-square cox and snell .540 nagelkerke .670 mcfadden .346 source: compiled from questionnaire here the pseudo-r-square, as given shown in table 10, (e.g. nagelkerke = 67%) shows that the 16 variables explain 67 percent of the variation in the level of financial inclusion. table 11. ordinal logistic regression result of financial inclusion explanatory variables estimated coefficients sig. value ease of banking 4.090 .000* financial awareness -4.031 .000* economic status of the members 2.874 .000* suitability of financial products 2.031 .000* physical infrastructure 1.653 .000* = it infrastructure 1.125 .398 = monthly income 0.747 .000* = land holding 0.553 .003* = education -0.469 .002* = age -0.429 .001* = regularity of receiving income 0.242 .467 = adult family member count 0.131 .495 = gender 0.123 .735 = bpl category 0.112 .004* copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 89 = location -0.077 .579 = religion 0.039 .860 dependent variable: level of financial inclusion, link function: logit. *significant at 5% level of significance table 11 shows that ease of banking, financial awareness, economic status of the members, suitability of financial products, physical infrastructure, monthly income, landholding, education, age and their bpl status is affecting the degree of inclusive financing. thus, these are the factors that should be finally studied deeper for inferences. 5. conclusion and policy implications the conclusion of the research work starts from an observation that the overall level of inclusive financing of the shg members is of moderate level. the important issue for all the policy-makers starts from planning to provide the available banking services to the poor populace for their upliftment. the financial services need to be within reach of the underprivileged for their economic betterment. in the case of the indian state of tripura, it is even more important because the banking penetration is quite low. the research work has enumerated six factors found after factor analysis that have an effect on inclusive financing for shg members. the factors found are “suitability of financial products, ease of banking, physical infrastructure, and economic status of the shg members, i.t. infrastructure and financial awareness”. the findings are quite similar in nature with the conclusions reached by allen, demirgüç-kunt, klapper, soledad, and peria, (2012); kumar (2013). leyshon and thrift (1995); kempson and whyley (1999); clamara, peña, and tuesta (2014) also ended up with related findings in their research work. the identification of the factors has the potential to help the financial institutions and regulators to comprehend the rationale behind individual‟s likeness towards financial services which are informal in nature instead of conventional ones (buera & shin, 2013). it was also seen in the research work that the ease of banking and financial awareness/education has the highest impact on overall inclusive financing for members of shg. thus, it can be inferred that if banking rules are simplified for the common and poor people, it will help them to avail the banking facilities to the best of their needs and benefits. the conventional financial services and products for example banking transactions, overdrafts, savings, insurance, etc should be user friendly. there is also a need for financial counseling for the shg members which will help them to recognize and rate the formal financial services. the banking sector under the aegis of government should work in tandem to set their priorities in removing the barriers of communications and usage as discussed above. these efforts will make the financial services and products more accessible to the weaker section of the society. the scenario of success in the case of pradhan mantri jan dhan scheme in india is a testimony in this regard. similarly, spreading awareness about various financial products and services is expected to increase the level of inclusive financing (feldstein & horioka, 1980; bhattacharjee & singh, 2017; singh & bhowal, 2010; bordoloi, singh, bhattacharjee, & bezborah, 2020). it has been also reiterated that the present time is feasible for the government to leverage and protect the poor rural individuals socially by enabling them to save more and get financially included along with the rest (zimmerman & holmes, 2012). this can better be done by giving them the experience of banking and modern financial instrument so that they can feel the benefit of these products (choudhury, singh & saikia, 2016). the use of these financial products will expose them to the current market scenario and consequently, they will learn the science and art of managing the modern financial products (singh, 2011). age and education are seen as significant factors and are consistent with other studies where similar findings were derived (singh & bhattacharjee, 2010a). young and educated people are less likely to be excluded than older and less educated members (johnson & nino-zarazua, 2007). ordinal logistic regression shows that it infrastructure is not a significant factor for bringing financial inclusion among the members of the shgs. tiwari and singh (2018) have got similar findings. it also reveals that regularity of receiving income, number of adult family members; gender, location and religion have no noteworthy impact on inclusive financing. as discussed above, the collaboration and joint efforts of government and financial institutions must process this information and understand the patterns in it to simplify the process of banking and disbursement of credit to the underprivileged populace. the principles of cooperative development can also be thought of in this direction (donovan, blare, & poole, 2017). the process of disbursing credits to the underprivileged section in the society should be in synchronization with the government policies. governments and ngos can think of the development of a value chain for improving economic growth leading to reduced poverty in rural areas (donovan, franzel, cunha, gyau, & mithöfer, 2015). this will help in bringing inclusive financing to the section of that society which is excluded from it. 6. scope of future research the present research work has been conducted in the indian state of tripura; hence for a broader generalization of the findings to have an impact in the entire country, a comprehensive study should be done on a broader geographical area. moreover, the impact of these determinants with their relative weight on financial inclusion can also be undertaken. more components can be extracted from the literature which might have a comparatively lesser impact on financial inclusion. a thorough ground survey and focus group discussion (fgd) can be conducted to understand the problems and the current copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 90 situation in the areas. the fgd will provide the scope and atmosphere for unabated and open-ended answers which can depict the future areas of action. references abiad, v.g., cuevas, c. e. & graham, d. h. 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(2016). the determinants of financial inclusion in africa. review of development finance, 6 (1), 46-57. url: http://www. sciencedirect. com/science/article/pii s. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). http://creativecommons.org/licenses/by/4.0/ copyright © cc-by-nc 2020, cribfb | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 117 the role of internal control and firm-specific characteristics on firm value: evidence from indian financial services sector anju kalluvelil janardhanan phd lecturer crown institute of higher education north sydney, new south wales, australia e-mail: anju.kj@cihe.edu.au uma v r phd associate professor department of commerce christ (deemed to be university) bengaluru, karnataka, india e-mail: uma.vr@christuniversity.in abstract this research determines the role of firm-specific characteristics such as firm size, firm age, liquidity, firm complexity, board independence, institutional ownership, non-performing assets, annual volatility of stock returns, leverage and internal control represented by enterprise risk management (erm) and big4 auditor on the firm value measured using tobin’s q, return on equity (roe) and return on assets (roa). this proposition is addressed with the sound statistical investigation of 67 companies listed in the nse financial services sector by utilizing annual panel data for 11 years from 2007-17. the important findings of the study are that the purchasers consider firm size, firm age, liquidity, the volatility of stock returns, and non-performing assets. roa shows that the management has to focus on firm size, firm age, and volatility of stock returns. roe informs that the investors will look into firm size, firm age, institutional ownership, non-performing assets, leverage, firm complexity, and volatility of stock returns. 1. introduction firm value is considered as a vital aspect in analyzing a company’s financial health. it is an estimate of the total value of a company. firm value is measured using a three-dimensional approach – from the purchasers, investors, and operational perspective (adetunji & owolabi, 2016). tobin's q incorporates market performance into the measurement of firm performance and shows the firm's effectiveness from a purchaser’s perspective. the return on equity (roe) shows the return that the investors get for their capital investments to the company. from the investor’s perspective, it is an essential component that helps in measuring a firm’s performance against its competitors. the return on assets (roa) shows the efficiency of a company to utilize its assets to make profits unaffected by management financing decisions. to enhance the firm value, it is imperative to understand the factors that play a major role in affecting it. the concept of internal control has gained attention among the public and worldwide regulators because numerous international organizations have declined due to incompetent risk management (beasley, branson & hancock, 2010). many businesses have collapsed and the economic crisis in 2008 could be connected with inadequate internal control mechanisms and risk management (mcconnell, 2009). through internal control, an organization diagnoses threats to explore alternatives and alleviate its risks. consequently, in any dynamic business environment, internal control is a vital and challenging concern for the organization in each sector (gordon, loeb & tseng, 2009). as per the committee of sponsoring organizations of the treadway commission (2004) an essential part of the internal control is enterprise-wide risk management and external audit. the presence of enterprise risk management (erm) and external audit by big4 auditors can help the organization in the potential improvement of firm value to recognize and prevent numerous risks and to accommodate sustainability (beasley, clune & hermanson, 2005). external auditors of a firm will critically review the quality of internal control. deloitte, pwc, ernst & young, and kpmg are the big4 auditor firms. a robust internal control mechanism lies in the proper analysis of the enterprise’s risk appetite (walker, shenkir & barton, 2003). the purchasers will be interested in acquiring a firm with high tobin’s q, the investors will prefer a company with high roe, and a greater roa will reveal the managerial efficiency of a firm. the financial services sector contributes 21% to india’s gross domestic product. so, to enhance the firm value, it is essential for the management to know the numerous factors affecting it. keywords: firm value, internal control, tobin’s q, erm, roa, roe, big4 auditor, firm-specific characteristics. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 118 2. review of empirical findings 2.1 effect of erm on firm value one of the objectives upon the inception of a firm is to create value by giving priority to its owners. it is a reward for their investments in the firm. studies establish that a reasonable increment of the firm value is the organization's long term objectives. owners required affirmation upon their investment that they have contributed and return on their investments. the organization will endeavor to expand the firm value, by extending the financial performance. the review of prior studies on erm and firm value came up with mixed results. the following studies didn’t find any evidence that risk management is value-creating. danisman and demirel (2019) investigated turkish non-financial companies for the five years using mixed research methods and established that erm doesn't influence q. they identified the reasons as inadequate risk management disclosure, managerial risk version motives, no clarity on risk management concepts, misuse of financial hedging instruments, and no support from management for effective implementation of erm. sayilir and farhan (2017) focused on 26 firms in the manufacturing industry of turkey during the period 200813 and regression analysis established that there is no connection between q, roa and erm. they mentioned that there was resistance to change, and the organizational structure did not support erm implementation. the path analysis study conducted by agustina and baroroh (2016) from 2011 to 2013 in the indonesian banking companies revealed that erm doesn't influence roe as they consider it as a compliance requirement with banking regulations. sprčić, žagar, šević and marc (2016) showed that erm does not add to the q of an organization in the long term. regression results supported that the market reaction for the erm announcement had a positive effect only for a shorter period. the study was conducted from 2003 to 2012 on 258 non-financial us companies. research conducted in the netherlands on 39 insurance companies from 2005 to 2008 by eikenhout (2015) proved that erm didn't affect roa and roe. further, the results of multiple regression identified the negative impact of erm on roa. laisasikorn and rompho (2014) identified that the erm system and performance management system (pms) have a weak significant correlation with the roa and roe in thailand. structural equation modeling (sem) technique was used. they found evidence that firms that had erms and pms achieved good financial performance. but as the implementation of erms and pms requires a substantial amount of a firm’s resources, it does not generate more financial benefits in the short run. manab and ghazali (2013) were of the view that though erm affected firm value, it isn’t the prime factor that prompted value creation (eps). the regression results revealed that erm helped in better corporate governance in the financial companies when compared to non-financial companies. the sample consisted of 417 public listed malaysian companies. ballantyne (2013) also supported that erm adoption isn’t related to q, roa and roe. they used mixedmethod research and collected data from 137 public listed companies in the us. their study identified that the effectiveness of erm depends on business leadership and cultural integration. lin, wen and yu (2011) observed that insurers who had adopted erm incurred a decrease of 11.1% in q and 5.35% in roa. they investigated 85 pc insurer firms in the us during 2000-07. the identified that it is because the implementation costs of erm are higher than the benefits derived from it. on the other hand, the following studies could substantiate that erm creates value. bohnert, gatzert, hoyt and lechner (2019) supported that erm increased q. the regression results also showed that companies with erm had on an average 6.5% higher tobin’s q than non-erm integrated companies. this empirical study focused on 41 european insurance companies from 2007 to 2015. lechner and gatzert (2018) regressed 160 german listed firms from 2009 to 2013 and exhibited that firms with erm had an increase in q. one of the significant impediments of the examination was the nonappearance of erm implementation disclosure. florio and leoni (2017) believed that firms with more level of erm practices had more prominent roa and q from the financial and market perspective in italy. they conducted a study on non-financial companies from 2011 to 2013. the data collected by ping and muthuveloo (2015) through questionnaire and quantitative analysis on 103 public listed malaysian firms in 2015 showed that the usage of erm impacted q. the data was analyzed by using pls and sem. gates, nicolas and walker (2012) collected data through a questionnaire in 2004 and conducted partial least squares (pls) analysis on 150 companies. the conference board members in the us. the reflective method suggested that the use of erm has multifold benefits such as better managerial decisions, risk awareness and enhanced accountability. studies conducted by mcshane, nair and rustambekov (2010) in 2008 among us 82 publicly traded insurers showed that erm positively impacted q. they also observed that firms with higher erm ratings did not have any additional increase in q. silva, silva and chan (2019) revealed the erm impacted q positively in brazilian stock exchange during 200413. the regression study used the generalised linear model (glm) and focused on 80 publicly-traded companies listed on the ibrx100 index. a large portion of the organizations considered erm as a part of internal control which upgraded the standard of strategic decisions made and subsequently improve firm value. they observed that this could be a reason for the absence of cro in firms with erm. as per the regression study done in 68 publicly-traded taiwanese financial industry between 2001-2016 by chen, chuang, huang, and shih (2019), q of financial companies with erm was 5.37% more thanerm financial companies. they also found that erm improves revenue and creates cost efficiency too. hoyt and liebenberg (2011) focused on 275 publicly-traded insurance firms in the us from 1995 to 2005 and found that erm improved q. the regression coefficient results supported that erm insurers had approximately 20% more firm value than non-erm insurers after controlling endogeneity bias and other determinants of firm value. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 119 2.2 effect of audit committee and big4 auditor on firm value without an audit committee (ac), it is complicated for the success of any organization in the current hostile environment (lloyd & fanning, 2007). independent members in ac were observed to be more accountable and transparent as they are free from management intervention. a large number of members in ac might be ineffective when compared to smaller committees (garcía, barbadillo & parez, 2012). ac is crucial to overseeing the risk management systems, and they play a vital role in risk management (turley & zaman, 2004), and they can influence the board for the successful implementation of risk management (paape & speklé, 2012). the ac must elevate corporate governance standards to secure public interest (vasile & croitoru, 2013). external auditors report their opinions on the internal control quality of a firm. more specifically, they examine and express their views on annual accounts, consolidated financial statements, as well as the board of directors and administration of ceo. the panel data regression results of the study conducted by chan and li (2000) in the fortune 200 companies showed that experts and independence of the audit committee increased q whereas research led by yermack (1996) revealed a negative connection between ac size and q of an organization. the study was conducted on 452 large scale us industrial companies from 1984-91. on the other hand, the size of the audit committee revealed a positive relationship with firm value in the study conducted by szczepankowski (2012). the results of audit committee activity in 69 polish public stock companies during 2009-10 were presented in the study. the big4 (deloitte, pwc, ernst & young and kpmg) are classified as excellent audit quality in most of the previous studies. deangelo (1981) identified big4 auditors to have better monitoring power that facilitates greater credibility of the information. this gives positive signals to stakeholders about the goodwill of the company and greater market response from the users of financial statements. big4 auditors are considered to identify and report any misrepresentation of financial statements diligently (gounopoulos & pham, 2017). 2.3 effect of firm-specific characteristics on erm and firm value beasley et al. (2005) and ghosh (2013) revealed that the independence of the board would bring better risk governance and thus enhance the scope of erm implementation. florio and leoni (2017) found that board independence negatively impacts roa but has a positive impact on q. the more the number of subsidiaries, the more is the firm complexity. mcshane, nair and rustambekov (2010) identified a positive impact of firm complexity on firm value. gordon, loeb and tseng (2009) found that firm complexity can influence the relationship between erm and firm value. capasso, gallucci and rossi (2015) found that firm value is positively related to firm age in the italian wine industry, which contradicted the findings of adetunji and owolabi (2016) and rajesh kumar and sujit (2018) found out that firm size is an essential determinant of firm value. most prior studies find that size is negatively associated with the firm value (lang & stulz, 1994; sekerci, 2016; sayilir & farhan, 2017) while studies conducted by (jin & jorion, 2006; hoyt & liebenberg, 2011; ballantyne, 2013; mohamad, 2018) found a positive relationship between firm size and firm value. florio and leoni (2017) and adetunji and owolabi (2016) identified that firm size is negatively related to q and has a positive relation to roa. institutional investors act as a monitoring agent for a company. the presence of large outside ownership will pave way for the implementation of erm as they will pressurise the management to publish all the information (liebenberg & hoyt, 2003). studies conducted by marcia, marcus, saunders and tehranian (2007), and chaganti and damanpour (1991) identified that institutional ownership has a positive impact on firm value. organizations with higher financial leverage instigate greater deficit risk and thus more significant financial distress. studies conducted by hoyt and liebenberg (2011), mcshane, nair and rustambekov (2010), mohamad (2018) and adetunji and owolabi (2016) revealed that leverage negatively impacts firm value while winarto (2015) found a positive influence to firm value. ballantyne (2013) found that leverage didn't impact firm value. jin and jorion (2006), and sekerci (2016) find that leverage is positively related to firm value. an organization that has a higher volume of cash produced from its internal activity is probably going to have more prominent slack accessible which it can use for erm implementation. along these lines, ghosh (2013) supported that higher liquidity can encourage a firm to embrace erm winarto (2015) found liquidity posits a negative impact on firm value while mohamad (2018) proved a positive influence on firm value. an organization may flag more severe risks connected with its performance due to instability in stock returns. in this way, they might have higher motivating factors to put resources into erm to minimize the risks which can upset the accomplishment of organizational objectives. many studies have hypothesized the relationship between the volatility of stock returns and erm implementation (liebenberg & hoyt, 2003). the volatility of stock returns is negatively related to firm value (mcshane, nair & rustambekov, 2010). 2.4 research gap prior literature shows that the relationship of firm value with erm, big4 auditor, firm-specific characteristics such as firm size, firm age, liquidity, firm complexity, board independence, institutional ownership, non-performing assets, annual volatility of stock returns, and leverage are contentious. the companies act 2013 requires each organisation to have a risk management committee and audit committee for better internal control. this cost will influence firm value. so, it is essential to consider the role of internal control and firm-specific characteristics on firm value. moreover, in emerging economies like india, only a few empirical studies are available on the influence of internal control and firmspecific characteristics on firm value. this investigation along these lines endeavours to fills the gap in the existing empirical literature on indian financial services from the perspective of purchasers, management and investors. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 120 3. research objectives ▪ to identify the companies which have adopted erm and big4 auditor in the indian financial services sectors. ▪ to explore the changes in the firm value based on the adoption of erm during the study period. ▪ to investigate the changes in firm value based on the big4 auditors. ▪ to analyze the impact of the adoption of erm, the big4 auditor and the firm-specific characteristics on firm value. 4. hypotheses development the relationships explored in the existing literature were used to formulate the following research hypotheses ▪ h01 there is no significant difference in q between erm and non-erm observations. ▪ h02 there is no significant difference in roa between erm and non-erm observations. ▪ h03 there is no significant difference in roe between erm and non-erm observations. ▪ h04 there is no significant difference in q between big4 and non-big4 observations. ▪ h05 there is no significant difference in roa between big4 and non-big4 observations. ▪ h06 there is no significant difference in roe between big4 and non-big4 observations. 5. conceptual framework figure 1. conceptual framework 6. methodology ▪ research design the research is empirical in nature, quantitative approach, deductive logical reasoning. ▪ paradigm positivist philosophy. ▪ secondary data – necessary data support was taken from secondary sources of information such as annual reports, company websites, journals, articles and online databases like cmie prowess and ace analyser. ▪ population study – out of the 76 companies in nse financial services sector, nine companies were excluded due to the unavailability of data. this population study comprises of 67 companies with 737 firm-year observations. ▪ the frequency of data – annual ▪ type of data – panel ▪ statistical analysis – descriptive statistics such as frequency, percentage, mean and standard deviation, content analysis, trend analysis, one-way anova, correlation analysis, hausman test, multicollinearity test, likelihoodratio test, wooldridge test and panel data regression analysis. ▪ statistical software packages – spss, eviews and stata. ▪ period of study – this study covers the period of 11 years from april 2007 to march 2017. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 121 table 1. description of variables source. prepared by author 7. model specification the multivariate ols regression models (general form) developed from anju and uma (2017) is used to test the impact of firm value and its determinants. in this study, firm value is measured using tobin’s q, roa and roe as in adetunji and owolabi (2016). model 1 qit = α + β1 ermit + β2 acit + β3 sizeit + β4 ageit + β5 liqit + β6 bodit + β7 insownit + β8 npait + β9 levit + β10 fcit + β11 volit + εit model 2 roait = α + β1 ermit + β2 acit + β3 sizeit + β4 ageit + β5 liqit + β6 bodit + β7 insownit + β8 npait + β9 levit + β10 fcit + β11 volit + εit model 3 roeit = α + β1 ermit + β2 acit + β3 sizeit + β4 ageit + β5 liqit + β6 bodit + β7 insownit + β8 npait + β9 levit + β10 fcit + β11 volit + εit where, α = coefficient of intercept (constant) β1 – β11 = regression coefficients εi = error term t = sub-indices represent firm and time respectively 8. analysis and interpretation 8.1 descriptive statistics the summary statistics of all the 14 variables, i.e., independent, dependent and firm-specific variables, have been shown in table 2. it consists of 737 firm-year observations of 67 companies across 11 years. acronym type of variable measurement dependent variables qit tobin’s q (total assets + market capitalization net worth) / total assets roait return on asset net income / average total assets roeit return on equity net income / shareholder’s equity independent variables ermit the existence of erm/rmc/cro dummy variable. value = 1 if the firm has erm/rmc/cro, 0 otherwise acit the existence of big 4 auditor dummy variable. value = 1 if the firm has big4 auditor, 0 otherwise firm-specific characteristics sizeit firm size natural log of the book value of total assets ageit firm age number of years from inception to date liqit liquidity net cash flow from operating activities divided by the total assets bodit board independence percentage of independent directors over the total number of directors on the board of the company insownit institutional ownership percentage of shares held by institutional investors npait the net value of nonperforming assets (gross npa’s – provisions) / (gross advances provisions) levit leverage total assets/net worth fcit firm complexity number of subsidiaries volit volatility in daily stock returns (standard deviation of daily returns) x 365 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 122 table 2. descriptive statistics of the variables variable mean std. dev. min max dependent variables tobin’s q (q) 1.40 1.40 0.02 16.99 return on assets (roa) 2.86 6.87 -45.30 120.20 return on equity (roe) 14.90 13.22 -124.65 133.71 independent variables enterprise risk management (erm) 0.93 0.25 0.00 1.00 big 4 auditor (ac) 0.10 0.30 0.00 1.00 firm-specific characteristics (control variables) firm size (size) 12.50 2.07 6.65 17.12 firm age (age) 45.42 35.24 2.00 152.00 liquidity (liq) -0.10 0.90 -12.91 5.58 board independence (bod) 41.07 26.19 0.00 100.00 institutional ownership (insown) 26.88 20.05 0.00 88.39 non-performing assets (npa) 15873.41 50812.88 0.00 582774.00 leverage (lev) 11.41 7.76 1.00 42.67 firm complexity (fc) 4.99 7.80 0.00 62.00 volatility of stock returns (vol) 2.46 1.11 0.00 6.93 source. authors’ compilation 8.2 findings for objective 1 content analysis of 737 annual reports and 67 company websites were used to identify the existence of erm and the presence of big4 audit firms in the audit committee in the financial services sector. the keywords ‘risk management’, ‘chief risk officer’, ‘enterprise risk management’, ‘coso’ were searched to identify the existence of erm and to determine the presence of big4 auditors, deloitte, kpmg, ernst & young, and pwc were searched. figure 2. number of companies with erm figure 3. number of companies with big4 auditors 61 61 61 61 62 62 64 64 64 66 66 58 60 62 64 66 68 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 c o m p an ie s year erm in financial services sector 4 6 6 5 6 6 7 6 7 9 8 0 2 4 6 8 10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 n o . o f co m p an ie s year big4 auditors in financial services sector copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 123 there is an increase in the existence of erm during the study period. sixty-one banks were having erm for the past 11 years, i.e., 2007-17. the reserve bank of india had released a notification in 2007 on compliance function in banks which emphasized on enterprise-wide risk management framework. in 2017, 66 banks had erm. on the other hand, though there is an increasing trend in the presence of big4 audit firms in the audit committee, only eight companies had a big4 auditor in 2017. 8.3 findings for objective 2 a one-way anova was performed to decide if the firm value measured by q, roa and roe differed between erm (n = 689) and non-erm (n = 48) companies. table 3. descriptive statistics of q, roa, roe and erm n mean std. deviation std. error 95% confidence minimum maximum lower bound upper bound q 0 48 1.78 1.40 0.20 1.37 2.18 0.33 7.55 1 689 1.38 1.40 0.05 1.27 1.48 0.02 16.99 total 737 1.40 1.40 0.05 1.30 1.51 0.02 16.99 roa 0 48 6.53 17.39 2.51 1.48 11.58 0.40 120.20 1 689 2.60 5.36 0.20 2.20 3.00 -45.30 36.30 total 737 2.86 6.87 0.25 2.36 3.35 -45.30 120.20 roe 0 48 17.86 19.27 2.78 12.27 23.46 0.48 133.71 1 689 14.69 12.69 0.48 13.74 15.64 -124.65 63.31 total 737 14.90 13.22 0.49 13.94 15.85 -124.65 133.71 source. authors’ research table 4. comparison of firm value among erm and non-erm observations note. *significant at 10% source. authors’ compilation during the study period, ▪ there is a difference in q between erm and non-erm observations [f(1,735)=3.65,p=0.05] ▪ there is a difference in roa between erm and non-erm adoption [f(1,735)=14.94,p=0.00] ▪ there is a difference in roe between erm and non-erm observations [f(1,735)=2.59,p=0.10] of all the three measures, roa has a higher value than all other measures of firm value. roa indicates how profitable are the firm’s assets in generating income. erm helps to safeguard the assets and create firm value to their owners. anova table suggests that there is a significant difference in the roa among the companies that have integrated erm and not integrated erm. non-erm observations have a higher mean than erm observations. it means that the companies that do not have erm in place can generate better roa. implementation of erm will reduce the net income as it involves a large amount of investments. roe is a measure that indicates how well a company uses its investments in generating earnings. tobin’s q is the measure of market capitalization on the replacement value of assets. the firm value measured by q and roe is different between the erm and non-erm observations. it implies that the investors and purchasers of the company consider the presence of erm before making an investment or calculating the market value of the firm. firm value anova sum of squares df mean square f sig. q between groups 7.14 1.00 7.14 3.65 .05* within groups 1438.35 735.00 1.96 total 1445.49 736.00 roa between groups 691.32 1.00 691.32 14.94 .00* within groups 34013.06 735.00 46.28 total 34704.37 736.00 roe between groups 451.47 1.00 451.47 2.59 .10* within groups 128230.29 735.00 174.46 total 128681.75 736.00 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 124 8.4 findings for objective 3 a one-way anova was administered to determine if the firm value measured by q, roa and roe varied among big4 (n = 73) and non-big4 (n = 664) companies. table 5. descriptive statistics of q, roa, roe and big4 n mean std. deviation std. error 95% confidence interval for mean minimum maximum lower bound upper bound q 0 664 1.41 1.46 0.06 1.30 1.52 0.02 16.99 1 73 1.34 0.67 0.08 1.18 1.50 0.03 5.11 total 737 1.40 1.40 0.05 1.30 1.51 0.02 16.99 roa 0 664 3.02 7.09 0.28 2.48 3.56 -45.30 120.20 1 73 1.41 4.05 0.47 0.47 2.36 -23.00 6.70 total 737 2.86 6.87 0.25 2.36 3.35 -45.30 120.20 roe 0 664 15.15 13.44 0.52 14.13 16.18 -124.65 133.71 1 73 12.57 10.80 1.26 10.05 15.09 -30.00 30.47 total 737 14.90 13.22 0.49 13.94 15.85 -124.65 133.71 source. authors’ research table 6. comparison of firm value among big4 and non-big4 observations source. authors’ research during the study period, ▪ there is no difference in q between big4 and non-big4 observations [f(1,735)=0.16,p=0.686] ▪ there is no difference in roa between big4 and nonbig4 observations [f(1,735)=3.61,p=0.58] ▪ there is no difference in roe between big4 and nonbig4 observations [f(1,735)=2.52,p=0.113] in table 6 firm value is not different between the big4 and non-big4 observations. only 9% of the firms (73 firmyear observations) showed the presence of big4 auditor in the audit committee. it implies that investors and purchasers of the company are not dependent on whether the company has incorporated big4 in the audit committee for making investment decisions. so, in the long term, when more firms include big4 audit firms in their audit committee, it may affect firm value. 8.5 findings for objective 4 8.5.1 correlation analysis pearson product moment correlation has been utilized to gauge the linear connection between the variables. table 7. pearson correlation coefficients of the variables q roa roe erm ac size age liq bod ins npa lev fc vol q 1 roa 0.46* 1 roe 0.19* 0.65* 1 erm -0.07* -0.14* -0.06* 1 ac -0.02 -0.07* -0.06 0.09* 1 firm value anova sum of squares df mean square f sig. q between groups 0.32 1 0.32 0.16 0.686 within groups 1445.17 735 1.97 total 1445.49 736 roa between groups 169.58 1 169.58 3.61 0.58 within groups 34534.8 735 46.99 total 34704.37 736 roe between groups 439.17 1 439.17 2.52 0.113 within groups 128242.58 735 174.48 total 128681.75 736 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 125 size -0.37* -0.38* -0.11* 0.26* -0.02 1 age -0.18* -0.18* -0.07* 0.09* -0.14* 0.49* 1 liq 0.05 -0.00 -0.07 -0.02 0.02 -0.00 0.07 1 bod 0.07* 0.02 0.00 -0.08* 0.10* -0.21* -0.28* -0.01 1 ins -0.03 -0.05 0.06 0.02 0.26* 0.38* 0.06* 0.15* 0.35* 1 npa -0.06* -0.09* -0.22* 0.07* -0.05 0.40* 0.22* 0.07* -0.20* 0.05 1 lev -0.32* -0.32* -0.03 0.14* -0.18* 0.66* 0.63* 0.10* -0.40* -0.01 0.24* 1 fc 0.14* 0.00 -0.15* -0.01 0.21* 0.04 -0.19* 0.09* 0.11* 0.15* 0.18* -0.40* 1 vol -0.02 -0.11* -0.14* -0.18* -0.06* 0.03 0.05 0.03 0.24* 0.20* -0.02 0.05 0.08* 1 note. results computed using stata14; * significant at 10% source. authors’ compilation 8.5.2 specification test table 8. hausman test dependent variable chi-square statistics degree of freedom p-value q 65.794388 11 0.0000* roa 30.2713 11 0.0014* roe 97.935982 11 0.0000* note. * denotes statistically significant at 10% level. source. authors’ analysis table 8 shows the results of the hausman test, which rejects the null hypothesis and concludes that the fixed effects model (fem) is appropriate for each of the models under study. table 9. co-linearity statistics variance inflation factor variable vif tolerance = 1/ vif leverage (lev) 3.17 0.315593 firm size (size) 3.03 0.329679 institutional ownership (insown) 1.71 0.584355 firm age (age) 1.71 0.585256 board independence (bod) 1.51 0.660176 firm complexity (fc) 1.37 0.731093 non-performing assets (npa) 1.28 0.779768 big4 auditor (ac) 1.18 0.849524 volatility of stock returns (vol) 1.15 0.865915 enterprise risk management (erm) 1.11 0.900284 liquidity (liq) 1.1 0.907586 mean vif 1.67 source. authors’ analysis table 9 shows the vif statistics of the independent variables. the vif mean is 1.67, which indicates that there is no multicollinearity. table 10. likelihood-ratio test for panel level heteroskedasticity dependent variable chi-square statistics degree of freedom p-value q 819.718773 66 0.0000* roa 359.215112 66 0.0000* roe 405.919127 66 0.0000* note. * significant at 10%. source. authors’ analysis table 10 confirms the presence of heteroskedasticity at a 1% level of significance, rejecting the null hypothesis. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 126 table 11. wooldridge test for autocorrelation in panel data dependent variable f-statistics df p-value q 5.938 66 0.0175* roa 1.111 66 0.2958 roe 4.539 66 0.0369* note. * significant at 10% source. authors’ analysis table 11 shows the results of autocorrelation in panel data. the wooldridge test for autocorrelation rejects the null hypothesis that there is no first-order autocorrelation in model 1 and model 3. there is the first-order autocorrelation in model 2. hence the panel data regression model uses cluster-robust standard errors to control autocorrelation in model 1 and model 3. 8.5.3 regression analysis table 12 shows the results of panel data regression estimated using ols, fem, and rem models using q, roa, and roe as the dependent variable. the hausman test shows a significant p-value that indicates fem is appropriate for model 1, 2, and 3. table 12. regression results using q as the dependent variable model 1q model 2 roa model 3 roe variables ols fem rem ols fem rem ols fem rem enterprise risk management (erm) 1.27 0.86 1.66 -1.23 0.25 -0.64 -1.09 0.45 -0.81 -0.205 -0.393 (0.098)* -0.22 -0.804 -0.524 -0.28 -0.66 -0.42 big4 auditor (ac) -2.61 -0.89 -0.21 -3.64 0.3 -1.11 -2.8 1.38 -0.97 -0.009 -0.378 -0.831 (0.00)* -0.767 -0.269 (0.01)* -0.17 -0.33 firm size (size) -7.74 -2.84 -1.24 -6.37 1.85 -3.43 -2.9 1.75 -3.38 (0.000)* (0.006)* -0.214 (0.00)* (0.065)* (0.001)* (0.00)* (0.08)* (0.00)* firm age (age) 1.55 2.62 1.2 1.11 -3.32 -0.21 -1.64 -3.88 -2.21 -0.122 (0.011)* -0.23 -0.27 (0.001)* -0.832 (0.10)* (0.00)* (0.03)* liquidity (liq) 0.29 -2.3 -0.65 -0.32 -0.52 -0.57 -2.34 0.01 -1.53 -0.768 (0.025)* -0.519 -0.75 -0.602 -0.566 (0.02)* -0.99 -0.13 board independence (bod) -1.62 1.06 2.2 -2.85 -0.47 -0.68 -1.43 0.74 0.15 (0.105)* -0.295 (0.027)* (0.01)* -0.635 -0.498 -0.15 -0.46 -0.88 institutional ownership (insown) 3.4 -0.05 -0.26 3.71 1.48 2 5.28 2.98 4.42 (0.001)* -0.961 -0.797 (0.00)* -0.14 (0.045)* (0.00)* (0.00)* (0.00)* non-performing assets (npa) 1.74 -1.69 0.31 1.51 0.31 -0.22 -4.55 -2.3 -7.23 (0.083)* (0.096)* -0.754 -0.13 -0.756 -0.824 (0.00)* (0.02)* (0.00)* leverage (lev) -1.45 0.97 -2.61 -3.14 -0.99 -1.37 2.34 2.17 5.47 -0.148 -0.337 (0.009)* (0.00)* -0.324 -0.171 (0.02)* (0.03)* (0.00)* firm complexity (fc) 3.56 -0.33 1.45 -0.39 0.08 -0.3 -1.56 2.61 -0.02 (0.000)* -0.74 -0.147 -0.7 -0.933 -0.768 -0.12 (0.01)* -0.98 volatility (vol) -0.68 2.14 1.71 -2.97 -2.65 -2.14 -4.84 -2.52 -4.14 -0.498 (0.036)* (0.088)* (0.00)* (0.008)* (0.032)* (0.00)* (0.01)* (0.00)* r-squared 0.1868 0.7326 0.03227 0.2005 0.509 0.0513 0.1243 0.4952 0.1502 hausman test 65.80 (0.00)* 30.27 (0.00)* 97.935982 (0.000)* copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 127 f test 23.45 (0.00)* 8.88 (0.00)* 8.3944 13 (0.000 * note. results computed using stata14; p-value is in parenthesis with * significant at 10%; ols – ordinary least square, fem – fixed effects, rem – random effects. source. authors’ analysis table 13. fixed effect (within) regression adjusted for robust standard error variable coef. robust std. err. p-value enterprise risk management (erm) 0.2314 0.2695 0.39 big4 auditor (ac) -0.0667 0.0752 0.38 firm size (size) -0.3360 0.1182 0.01* firm age (age) 0.1212 0.0463 0.01* liquidity (liq) -0.0992 0.0432 0.03* board independence (bod) 0.0031 0.0029 0.30 institutional ownership (insown) -0.0002 0.0043 0.96 non-performing assets (npa) -1.7800 0.0000 0.09* leverage (lev) 0.0108 0.0111 0.34 firm complexity (fc) -0.0045 0.0135 0.74 volatility (vol) 0.1516 0.0709 0.04* constant -0.6843 1.0752 0.53 note. * significant at 10%. source. authors’ analysis panel data fixed effect model 1 is significant and has explanatory power with a good fit as f-statistic = 23.45 and p-value = 0.000, r-squared = 0.73 indicating that the dependent variables predict 73% of the variances in q. in table 13, the results of the fem show that there is a significant relationship between the firm size, firm age, liquidity, non-performing assets, volatility and the firm value measured using q. the results show that the npa has the highest impact as it decreased the firm value by 1.78. if npa rises, they cannot recover their interest income as borrowers do not pay interests and installments. this creates a negative impression in the minds of the purchasers and reduces the market value of the company. the size of the firm measured by total assets has a negative impact on q by 0.34. this is consistent with the findings of florio and leoni (2017) and adetunji and owolabi (2016). if the total assets are more in a financial services company, it signals the purchasers that the company does not have investment opportunities, so that it is assessed as unfavorable. the volatility of stock returns increases q by 0.15 from 2007-17. in this study, there are 372 firm-year observations in the financial services sector with high volatility in daily stock returns that indicate the demand for the firms’ share. this creates a positive impression in the minds of the purchasers and influences the market estimation of the company. as the financial service sector firm grows old, it can create a better image in the minds of purchasers and thus improve market value. firm age has a positive approach to q throughout the study. it increases q by 0.12. financial firms' liquidity is affected if npa increases. the results show that liquidity decreases the firm value by 0.09 during the study period. so, to improve liquidity, firms should make regular efforts to reduce bad debt and mobilize additional resources. table 14. fixed effect (within) regression using roa variable coef. std. err. p-value enterprise risk management (erm) 0.3577 1.4432 0.80 big4 auditor (ac) 0.3915 1.3181 0.77 firm size (size) 0.9717 0.5254 0.07* firm age (age) -0.4229 0.1275 0.00* liquidity (liq) -0.1900 0.3643 0.60 board independence (bod) -0.0063 0.0132 0.64 institutional ownership (insown) 0.0361 0.0244 0.14 non-performing assets (npa) 0.0000 0.0000 0.76 leverage (lev) -0.0832 0.0843 0.32 firm complexity (fc) 0.0043 0.0503 0.93 volatility (vol) -0.6576 0.2483 0.01* constant 11.330 4.0730 0.01 note. * significant at 10%. source. authors’ compilation copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 128 panel data fixed effect model 2 is significant and has explanatory power with a good fit as f-statistic = 8.88 and p-value = 0.000, r-squared = 0.51 indicating that the dependent variables predict 51% of the variances in roa. in table 14, the results of the fem show a significant relationship between the firm size, firm age, volatility and roa. as the assets of the firm increases, the management can generate greater profits. that is why firm size has a positive impact on roa. it increases the firm value by 0.97 during the study period. there are 372 firm-year observations with the high volatility of stock returns indicating that any change in the value of the share will negatively affect the roa by 0.66. firm age has decreased roa by 0.42. in this study, there are 470 firm-year observations with less than 45 years of mean industry age. only when the company grows older, it will be able to understand the business environment better and manage the assets more efficiently. on the contrary, the existence of erm, the presence of big4 auditor, board independence, firm complexity, institutional ownership and leverage have an insignificant impact on roa. it means that the total assets and net income of the company are not affected by the presence of erm, big4 audit firms in the audit committee, number of independent directors on the board, number of subsidiaries, the percentage of institutional investors and the percentage of debt-equity for the period 2007 to 2017. table 15. fixed effect (within) regression adjusted for robust standard error variable coef. robust std. err. p-value enterprise risk management (erm) 0.9118 2.0459 0.66 big4 auditor (ac) 1.7912 1.2976 0.17 firm size (size) 4.1562 2.3728 0.08* firm age (age) -2.0476 0.5278 0.00* liquidity (liq) 0.0052 0.9743 1.00 board independence (bod) 0.0321 0.0432 0.46 institutional ownership (insown) 0.1856 0.0623 0.00* non-performing assets (npa) -0.0001 0.0000 0.03* leverage (lev) 0.4798 0.2208 0.03* firm complexity (fc) 0.1831 0.0700 0.01* volatility (vol) -3.1104 1.2325 0.01* constant 50.7192 13.0070 0.00 note. * significant at 10%. source: authors’ compilation panel data fixed effect model 3 is significant and has explanatory power with a good fit as f-statistic = 8.3944 and p-value = 0.000, r-squared = 0.49 indicating that the dependent variables predict 49% of the variances in roe. in table 15, the results of the fem show that there is a significant relationship between firm size, firm age, institutional ownership, non-performing assets, leverage, firm complexity, volatility, and firm performance measured using roe. on the contrary, the existence of erm, the presence of big4 auditor, board independence, and liquidity has an insignificant impact on firm value. for firm size, the beta values show an increase of 4.16 in roe during the study period. investors look forward to investing in firms with a large asset base, as it will generate more returns for their investment. that is why firm size has the highest impact on roe. there are 372 firm-year observations that high volatility in daily stock returns. it has decreased the roe of 3.11. investors prefer low-volatility stocks to minimize risk in their portfolios. when the company grows old, it can create a better image in the minds of the investor. but here, there are 470 firm-year observations with less than 45 years of mean industry age. hence it decreases the roe by 2.05. there are 407 firm-year observations with low leverage, indicating that there is more equity than borrowings, which signals the investors that the company can generate more income from its investments in the long run. hence leverage increases roe by 0.48 during the study period. the number of subsidiaries indicates the company’s vision for growth and expansion to the investors. so, these have a positive effect on roe. during the study period, the percentage of institutional investors and the number of subsidiaries increase the roe by 0.19 and 0.18 respectively. npa creates a negative effect on the minds of investors. hence it decreases roe. table 16. results of hypotheses testing hypotheses p-value results h01 0.05 rejected h02 0.00 rejected h03 0.10 rejected h04 0.69 accepted h05 0.58 accepted h06 0.11 accepted source. authors’ compilation copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 129 the results of hypotheses testing are shown in table 16. thus, in the financial services sector, it is evident there are differences in firm value for erm and non-erm companies. but on the other side, there is no difference in firm value for big4 and non-big4 companies. the firm value measured by q showed that the purchasers consider firm size, firm age, liquidity, the volatility of stock returns, and non-performing assets. roa indicated that the management has to focus on firm size, firm age, and volatility of stock returns. roe pointed out that the investors will look into firm size, firm age, institutional ownership, non-performing assets, leverage, firm complexity. and volatility of stock returns. 9. discussion and conclusions this research determined the role of firm-specific characteristics and internal control represented by erm and big4 auditor on the firm value measured using a three-dimensional approach – from the purchaser, management and investor perspective. 9.1 purchaser’s perspective for erm, the study reveals that there is an increase in the beta coefficient, which means the adoption of erm, increased the q value by 0.23. it implies that the existence of erm will improve the confidence of purchasers in shares of the company and thus boost the market value of the company. the volatility of stock returns increases q by 0.15. in this study, there are 372 firm-year observations in the financial services sector with high volatility in daily stock return, which indicates the demand for the firms’ share. this creates a positive impression in the minds of the purchasers and thus affects the market value of the company. the findings are consistent with that of fang, noe and tice (2009). as the financial service sector firm grows old, it can create better confidence in the minds of purchasers and thus improve market value. firm age has a positive approach to q throughout the study. it increases q by 0.12. leverage has a positive impact on the minds of the purchasers as it helps to expand the firm’s asset and generate returns on risk capital. it increases q by 0.01. similarly, as with any other organization, banks with high leverage ratio is viewed as more secure. the bank needs to utilize its cash-flow to provide loans or sell its risky assets or make investments. this will create less impact if, in future, the creditors fail to repay their loans or the economy faces depression. the presence of big4 audit firms in the audit committee seems to have a negative impact on q. the huge resource commitment reduces the firm value by 0.07. it implies that the purchasers consider other factors apart from the audit quality by the big4 auditors. financial firms' liquidity is affected if npa increases. the results show that liquidity decreases the firm value by 0.09, which is similar to the findings of winarto (2015). so, to improve liquidity, firms should make regular efforts to reduce bad debt and mobilize additional resources. the size of the firm measured by total assets has a negative impact on q by 0.34. this is consistent with the findings of florio and leoni (2017) and adetunji and owolabi (2016). if the total assets are more in a financial services company, it signals the purchasers that the company does not have investment opportunities, so that it is assessed as unfavorable. the results show that the npa decreased the firm value by 1.78. if npa rises, they cannot recover their interest income as borrowers do not pay interests and installments. this creates a negative impression in the minds of the purchasers and reduces the market value of the company. results show that the purchaser does not consider the number of independent directors on the board, the number of subsidiaries and the percentage of institutional investors in the financial services sector. so, it does not help to increase the market value of a company measured by q. 9.2 management’s perspective as the assets of the firm increases, the management can generate greater profits. that is why firm size has a positive impact on roa. it increases the firm value by 0.97 during the study period. this result is consistent with that of florio and leoni (2017) and adetunji and owolani (2016). the regression coefficients indicate that the existence of erm and the presence of big4 auditors have a positive impact on roa during the study period. when erm is in place, the management can anticipate risks, prevent losses and increase profits. also, the big4 auditor ensures audit quality. though the implementation of erm and big4 auditor involves huge resource commitment, it is observed that it will help the management to increase roa in the long run by 0.36 and 0.39, respectively. on average, institutional investors hold 0.27 of the shares. the institutional investors have more resources than the individual investor. during the study period, institutional investors help to increase roa by 0.04. the presence of prudent and effective institutional investors will motivate the management to perform efficiently, which will help to increase the roa. npa indicates the inefficiency of management to prevent bad debts. it doesn't seem to affect roa. 243 firm-year observations have subsidiaries more than the industry mean. it has increased roa. it shows the management’s efficiency to expand and grow. the number of independent directors on the board helps to improve the efficiency of management through better monitoring and governance. there are 330 firm-year observations, which is highly leveraged, indicating that there are more borrowings than equity, which will affect the net income and assets of the firm. hence leverage decreases roa by 0.08. negative operating cash flow indicates the inefficiency of the management in meeting its operating expenses by generating profits from total assets. in this study, liquidity denotes the net cash flow from operating activities divided by the total assets. 278 firm-year observations are denoting negative liquidity. for liquidity, the study reveals that there is a decrease in roa by 0.19. firm age has decreased roa by 0.42. in this study, there are 470 firmyear observations with less than 45 years of mean industry age. only when the company grows older, it will be able to understand the business environment better and manage the assets more efficiently. this supports the findings of capasso et al. (2015), dogan (2013) and coad, segarra and teruel (2012). there are 372 firm-year observations with the high volatility of stock returns indicating that any change in the value of the share will negatively affect the roa by 0.66. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 130 9.3 investor’s perspective for firm size, the beta value shows an increase of 4.16 in roe. investors look forward to investing in firms with a large asset base, as it will generate more returns for their investment. that is why firm size has the highest impact on roe. though erm and big4 auditors do not ensure guaranteed return on equity, it is evident from the results that their presence in the organization gains the trust and confidence of investors. the study period shows it will increase roe by 0.91 and 1.79, respectively. there are 407 firm-year observations with low leverage, indicating that there is more equity than borrowings, which signals the investors that the company can generate more income from its investments in the long run. hence leverage increases roe by 0.48 during the study period. the investors look into the number of independent directors on the board and the percentage of institutional investors before investing in the company. it implies the safety of their investments, as there are good governance and monitoring in the firm. the number of subsidiaries indicates the company’s vision for growth and expansion to the investors. so, these have a positive effect on roe. during the study period, the percentage of institutional investors improved the roe by 0.19. this supported the findings of masry (2016). also, the number of institutional investors and the percentage of independent directors on the management board increases the roe by 0.18 and 0.03, respectively. the capacity to pay estimated expenses like providing loans or paying debts using liquid assets decides a bank's liquidity. here liquidity decreases roe by 0.005 during the study period. investors will be interested when a bank maintains a liquidity level that allows it to pay unexpected expenses without liquidating other assets. so, a negative operating cash flow indicates the investors that the company doesn't have sufficient liquid assets to meet its operating expenses. npa creates a negative effect on the minds of investors. adebisi and matthew (2015), sharifi and akhter (2016) and nyarko-bassi (2018) also agreed on the negative effect of npa on roe. as the company grows old, it can create a better image in the minds of the investor. but here, there are 470 firm-year observations with less than 45 years of mean industry age. hence it decreases the roe by 2.05. this finding is consistent with susanti and restiana (2018) and ilaboya and ohiokha (2016). 372 firmyear observations have high volatility in daily stock returns. it has decreased the roe of 3.11. when the value of the share fluctuates erratically with a rapid increase and immediate falls, it is a high stock. low volatility stocks help to minimize risks in investor’s portfolios as it is steady thus investors prefer it. 10. implications of the study the findings of this study are more reliable, accurate, and represent all firms in the financial services sector. the results from the analysis respond to the study’s research questions and are of particular interest to investors, researchers and practicing managers in the above sector. ▪ this study helps to understand that the amendments in the companies act led to an increase in q and a decrease in roa and roe. stringent internal control through erm and big4 auditor in the audit committee builds confidence in the purchasers. but the huge resource commitment in implementing erm and the adoption of big4 auditors reduce the net income, which affects the returns for management and investors. ▪ from this study, it is clear that there is an increase in the adoption of erm from 61 to 66 firms and from 4 to 8 in the adoption of big4 auditors. ▪ the outcome of this study explained that are differences in the firm value among companies that have integrated erm and not integrated erm. the companies that do not have erm in place have higher roa. implementation of erm will reduce the net income as it involves a large number of investments. the investors and purchasers of the company do not consider the presence of erm before making an investment or calculating the market value of the firm. ▪ the investors and purchasers of the company are not dependent on whether the company has incorporated big4 in the audit committee for making investment decisions. so, in the long term, when more firms include big4 audit firms in their audit committee, it may affect firm value. ▪ the study showed that the age of the firm and the number of subsidiaries creates confidence in the minds of the purchasers and thus influence q. ▪ the outcome of this study indicated that the volatility of stock returns and the firm age influenced roa. ▪ the results of the study indicated that the firm size, volatility and firm age affected roe. ▪ data from this study shows that npa has the highest impact on q, and firm size has a major effect on roa and roe. 11. recommendations this study has contributed to the existing literature by identifying the factors that will impact firm value from three dimensions – purchaser, management and investor in the financial services sector. ▪ npa had the highest impact on firm value (q). to build the confidence of a prospective purchaser, the bankers have to focus on stringent credit policies and debt collection policy to reduce the bad debts. the firm value of the banks will increase if there are fewer bad debts written off from the profits of the banks. ▪ the companies should invest in erm even it involves large investment as it helps to increment firm value (q, roa and roe). ▪ the purchaser, management and investor are interested in a firm with a huge asset base. hence, every firm should try to increase its size as it helps to improve firm value. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 131 ▪ the review done by big4 auditor helps to enhance the credibility of financial statements, which in turn improve the report quality. it increases the firm value (roa and roe) from the management and investor perspective. 12. limitations ▪ this research study is restricted to companies in the nse financial services during the period 2007-2017 only. ▪ the findings are based on the financial statements and annual reports published by the organizations. ▪ the dichotomous erm variable neglects to measure the varying level of erm implementation across organizations. 13. scope for further research ▪ a prospective direction for future investigations would be to extend this study to different sectors or stock exchanges of other countries or different 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vol. 4, no. 2; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 51 ethiopian women economic empowerment through microfinance belay mengstie phd student punjabi university, india e-mail: belaybelay40@gmail.com amanpreet singh phd assistant professor punjabi university, india e-mail: amanpreet@pbi.ac.in received: july 13, 2020 accepted: july 29, 2020 online published: august 15, 2020 doi: 10.46281/ijfb.v4i2.708 url: https://doi.org/10.46281/ijfb.v4i2.708 abstract women's economic empowerment a strategy helping women to participate in the process of making decisions, supporting income increment, asset possession. the main aim of this study is to investigate the microfinance impact on women economic empowerment considering age and education as moderators. data for this study have been collected from 346 respondents of microfinance beneficiary women. for data analysis multiple regression and moderated regression with hayes (2018) process macro software were used in the study. regression results showed that credit amount, age, number of training, marital status, education level, have a significant impact on the development of women's economy. however, the business experience has an insignificant impact on the development of women's economy. moderated regression results revealed that age and education did not have a moderation role in the relationship between microfinance service and on the economic empowerment of women. microfinance affects women's economic empowerment by improving women's independent income, increasing asset possession levels, and improved monthly saving amount. moreover, the study proved that the microfinance institution has a vital role in women entrepreneurs' development and business exposure. keywords: microfinance, women economic empowerment, moderating effect. 1. introduction microfinance institutions considered an important development program in ethiopia for the last twenty years. the legal foundation for the microfinance movement and expansion in ethiopia was started after the 1996 proclamation. in the development of microfinance, this proclamation considered a benchmark to start and develop microfinance in the country. women's participation in microfinance is growing gradually though all microfinance industry has a shared vision of poverty alleviation and women economic development. according to yousuf and dawit (2014) and rahman, khanam, and nghiem (2017) study, microfinance institutions are effective instruments providing basic services like saving, microcredit, and training. microfinance institutions are important economic development agent intended to benefit women and lower-income people (duflo, 2012). microfinance institution has a great role in alleviating women the economic problem, creating self-employment opportunities, developing businesses for female entrepreneurs. different studies reported women’s benefits from the microfinance institution, participation leads to economic freedom, and business practices improvement (addai, 2017; belay & amanpreet, 2019). however, women's involvement in economic activities is very low in ethiopia (yousuf & dawit, 2014; wassie, kusakari, & sumimoto, 2019). economic empowerment improves women’s opportunity for resources and non-financial resources. moreover, it creates a good opportunity for skill development and market information (alshebami & khandare, 2015; addai, 2017). the economic participation of women is base to exercise their right and helping them to improve decision making roles over their household and in the community. according to wanjiku and nijiru (2016) study, women's economic empowerment is creating equitable societies. there are controversies on the impact of microfinance economic development of women clients. odell (2010) study identified the problem of generalization taking into consideration the difference between microfinance programs. stewart, van rooyen, dickson, majoro, and de wet (2010) study in africa found little impact of microfinance on the income of beneficiaries. according to rathiranee & semasinghe (2015) study, microfinance service proved a positive impact on women's income increment in sri lanka. addai (2017) and rahman el al. (2017) study indicated that microfinance mailto:belaybelay40@gmail.com https://doi.org/10.46281/ijfb.v4i2.708 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 52 affects the economy of women in ghana and bangladesh respectively. different researchers confirmed the significant effect of microfinance (kato & kratzer, 2013; swapna, 2017; sell & minot, 2018). the main objective of this research is to analyze ethiopian women's economic empowerment through microfinance by considering the moderating effect of age and education. we aim to deepen recent research, by considering economic empowerment through microfinance. moreover, the moderating effect of age and education are investigated deeply. 2. microfinance and women economic empowerment microcredit services are considered a society based strategy to give different finance-related resources for the poor and disadvantaged society to enhance the lives of clients (sinha, 2006). the microfinance sector supports the community in its transition towards the country's development and peace and building. according to rahman et al. (2017), the microfinance industry supports local economic development by providing the needed financial and non-financial services for small enterprise development. some researchers consider microfinance as a survival strategy in a time of disaster and sustainable peace development (yousuf & dawit, 2014; khanday, shah, mir, & rasool, 2015; sell & minot, 2018). in ethiopia context, supervision and licensing microfinance proclamation no. 626/2009 define microfinance as “financial services providers including credit, savings, drawing, transferring money, and related services.” this microfinance business definition does not confine the microfinance institution to only credit. in this article microfinance considered as finance-related services provision to poor people and small enterprises that lack financial institution service. microfinance is not limited to borrowing activities but also includes savings, transfer facilities, training, insurance, and others. the microfinance sector supports women financially by providing seed money and supports women to get constant income to their families (tandon, 2016; rashid, john, consolatta, & stephen, 2015). according to gundappa (2014), many women were clients of microfinance in different countries. women's economic development generated self-esteem and respect for women microfinance beneficiaries (khanday et al., 2015). microfinance provides finance to women who helped them to start or expand the business. microfinance institution service of credit and training gives women confidence and a participating role in society and household decisions. microfinance institutions create self-employment opportunities, improving labor productivity, and increasing wage rates (wanjiku & njiru, 2016). microfinance impact mostly measured using variation in independent income, employment rate, and household consumption on a sustained basis. microfinance institution service impact could also be directly known by considering increment in outcomes such as literacy rate, fertility rate, and housing pattern, and other related factors. microfinance helps to protect from different risks and diversify the business to increase sources of income as a vital instrument for women's economic development (littlefield, morduch, & hashemi, 2003; addai, 2017). many researchers’ results showed that income played a significant role in consumption, capital formation, and other indicators of human wellbeing. when the income level increases access to balanced food, access to medical services, and children's education are positively affected (hussain, mahmood, & scott, 2019; wassie et al., 2019). moreover, microfinance institutions provide services that seek to minimize the risk from adverse effects for the poor society. for example, savings programs are operating to help microfinance institution clients to gradually accumulate working capital for the times of crises and when there is capital need for different purposes. efficient microfinance services decrease the unemployment rate, sources of income diversification. the economic empowerment of women could be achieved as a result of microfinance service. 2.1 conceptual framework based on the evidence available in the literature conceptual framework was developed. more than thirty articles reviewed to develop this framework of the research. according to (sinha, 2006), assessing the impact of microfinance will be helpful for the betterment of services. ledgerwood (1999) divides the impact of microfinance into three categories namely economic, socio-political, and personal. economic empowerment may be influenced by both women’s demographic characteristics and access to financial resources from microfinance institutions. the result expected is empowering economically which is manifested through ownership in income-generating activities, ownership of assets, increased income, savings, and decision making (naeem, khan, ul hassan, & muhammad, 2018; selvaraj, 2016). microfinance service (access to credit and training) and demographic variables (age and education) leads to women's economic empowerment. addai (2017) study clearly showed that microcredits have an impact on women's economic developments but the relationship mainly takes into account education and. according to rehman, moazzam, and ansari (2015), research finding education and age affect the economic development of women beneficiaries. the main independent variables which microfinance institution provides are access to credit and training. according to yousuf and dawit (2014) and rehman et al. (2015) finding women's involvement in business raises women's independent incomes and savings, increases their family monthly income, and other household resources which are the basis for women's economic empowerment. 3. data and methodology we conducted this research in ethiopia in the year 2019. from the literature review, 35 items that would women income, asset, saving, and decision making, credit, training was identified. the questionnaire was used to collect data from samples copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 53 of 346 microfinance client respondents. the questionnaire focused on demographic characteristics, economic empowerment, and microfinance service. the researcher takes 3 zone administrations from the amhara regional state of ethiopia. based on the proportion of clients sample respondents were selected in each town administrations. finally, by using simple random sampling respondents were selected. as a result, 51.5 % of the respondents were from dessie town administrations. 27% of the respondents were from the debrebirhan town administration. the remaining 21.5 % were from woldia town administrations. regression data analysis technique was employed to examine independent variables: age, education, marital status, business experience, training, amount of credit that has a positive effect on the economic empowerment of women. moreover, moderated regression with hayes process macro software (hayes, 2018) was used to examine the moderating effect that age and education may have upon women's economic empowerment and microfinance. the econometrics model used is: ceei= β0 + β1 (age) + β2 (marital) + β3 (education) + β4 (experience) + β5 (training) + β6 (credit) +έ for measuring the economic empowerment of women, a cumulative economic empowerment index (ceei) was used as a dependent variable .it is developed by commuting up the individuals’ scores obtained from asset, income, saving, control over the resource. other researchers (parveen & leonhauser, 2004; parveen & chaudhury, 2009; kaur, 2012; samad, 2014; yousuf & dawit, 2014; mohapatra, & sahoo, 2016) also used similar methods to measure women economic empowerment by developing a cumulative women economic empowerment index. for moderated regression, the following model was used. ee= β0 + β1 (mf) + β2 (age) + β3 (mfx age) +έ ………………….. age as moderator ee= β0 + β1 (mf) + β2 (education) + β3 (mfx education) +έ……… education as moderator the proxy variable for microfinance service is credit amount and for economic empowerment is total asset including cash. 4. results and discussions this section of the study was conducted to contribute new information about the impact of microfinance on women's economic empowerment. multiple regression and moderated regression were employed for data analysis. 4.1 assumptions of multiple regressions 4.1.1 test of normality the regression model assumption is based on variables of normal distributions. for this research, the histogram was checked and the result indicates that data used in the study is normally distributed. figure 1. normality test using histogram figure 2. linearity test 4.2.2 test of linearity multiple regressions assume linearity. this assumption was tested by using a scatter plot and the result of the test indicated that there is a linear relationship between microfinance service and women's economic empowerment. as depicted in the figure above (figure 2), it can be noted that all observations do lie on the straight line of the graphs. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 54 4.2.3 test of multicollinearity multicollinearity occurs when independent variables correlated highly (usually above r= 0 .9). the existence of multicollinearity can be diagnosed by analyzing the values of tolerance and variance inflation factors. a tolerance of < 0.10 and a vif>10 shows that there is a multicollinearity problem. the result from the regression analysis of this current study (see table 1 below) vif and tolerance are indicating that there is no multicollinearity problem. table 1. multicollinearity test table 2. independence test result 4.2.4 independence of error independence of error assumes that the behavior of one participant should not affect the behavior of a participant. table 2 above shows the results of the test of independence of errors. durbin watson statistic is used to test the independence of error. an acceptable range is from 1.5 to 2.50. the results in table shown above that the durbin watson statistic is 1.677 which falls under acceptable range. 4.2.5 homoscedasticity the residuals at each level of the independent variables must be the same variance, if unequal this is called heteroscedasticity. levene’s test is used to check the homoscedasticity assumption. therefore, the assumption homogeneity of variances has been fulfilled (see table 3). table 3. test for homogeneity test of homogeneity of variance levene statistic df1 df2 sig. cumulative economic empowerment index based on mean 1.475 7 338 .175 based on median 1.106 7 338 .359 based on median 1.106 7 316.121 .359 based on trimmed mean 1.531 7 338 .156 4.2 regression result table 4. regression result coefficients a model unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) 4.412 1.320 3.342 .001 age 1.330 .228 .285 5.835 .000 marital status 1.941 .704 .125 2.759 .006 education 1.394 .249 .260 5.598 .000 business experience .200 .160 .064 1.252 .212 credit amount .698 .153 .225 4.573 .000 training number 1.354 .285 .224 4.757 .000 a. dependent variable: cumulative economic empowerment index model summary b r r square adjusted r square std. error of the estimate durbinwatson .616a .380 .367 6.17635 1.677 variables collinearity statistics tolerance vif age .737 1.357 marital status .675 1.481 education .781 1.280 business experience .669 1.495 number training .822 1.217 amount of credit .751 1.332 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 55 the result of regression in above table shows that that age of women( p = 0.00 ); marital status ( p = 0.006 ), education ( p=0.00 ); training ( p = .00) ; credit amount ( p=0.00 ) , are significant independent variables that impact women economic. business experience ( p = 0.212) variable was insignificant predicator on economic development of women. the result of this study showed that age plays a significant effect on women's development economically. most women got better exposure to business and skill about different household and economic matters, as women age increased (yousuf & dawit, 2014). business and skill experience helped them a better decision about their households, and in a society which leads them better economic position and empowerment. a similar result was found by rehman et al. (2015) study that age played a significant role in women’s economic empowerment. in burma, a field study was conducted and the result of the study clearly shows that age affects positively women's economic empowerment (ringkvist, 2013). marital status has a vital role in women's economic empowerment. most married women economically empowered than divorced or single women. according to addai (2017) findings, most married women have got support from their husbands and children which are important for women's economic empowerment. however, yousuf and dawit (2014) finding shows that marital status has got as such a significant impact on the development of women economically. the result of the study showed that educated were better on efficient usage of training and credit service and achieve economic empowerment. moreover, educated women microfinance clients were proved to have a significant effect on improving the economic position of women. women's level of education has a direct relationship with control over resources. moreover, women's education affects her decision on contraception, better employment opportunity, and income which are the basic indicator of women's economic development and empowerment. training and credit have a significant impact on female empowerment economically. as the amount of credit amount increased, the use of credit for income-generating activities increased. training attended women more likely to enhance business skills and knowledge than women did not attend training. the number of training significantly affects the economic empowerment of women. most of the respondents reported that all members of microfinance participated in training before they got credit (parveen & leonhauser, 2004; korkmaz, goksuluk, & zararsiz, 2014). 4.3. moderated regression result to examine the moderated effect of age and education, moderated regression with hayes (2018) process macro software was employed. hayes's process macro result indicated that age has no moderation effect on the relationship between microfinance service and women entrepreneurship in the study area (see table 5). research conducted by addai (2017) in ghana shows that microfinance has a positive effect on women's economic development, but such a relationship is dependent on the age and education level of the women. table 5. hayes process macro result age as a moderator model coeff se t p llciulci constant 377397.811 16178.608 23.327 .000 345575.704 409219.918 microfin 1.419 .219 6.489 .000 .989 1.849 age 12072.198 1945.598 6.205 .000 8245.354 15899.043 int_1 .042 .030 1.398 .163 -.017 .102 based on table 6 below the moderating effect of education on relationship microfinance service and women entrepreneurship is insignificant. the result of the study is different from former researchers like laha and kuri (2014). their study only focused on merely establishing the relationship between microfinance service and women's economic status paying attention to other women's economic development attributes such as age and educational background which affect the relationship existing between microfinance service and women entrepreneurship. contrary to this finding, kabeer (2005) study in south asia revealed that microfinance has a vital contribution to women's economy but it does not automatically empower them. table 6. hayes process macro result education as moderator creating a conducive environment for clients for income generation is one among different amhara credit and saving institution activities. through advice, the organization enables clients to spend the money on profitable business activities . model coeff se t p llciulci constant 377707.360 17216.917 21.938 .000 343842.977 411571.743 microfin 1.401 .237 5.922 .000 .935 1.866 educatio 7879.470 4647.290 1.695 .091 -1261.401 17020.341 int_1 .025 .058 .428 .669 -.090 .140 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 56 from the study, it is clear that most clients’ income increased from year to year. the microfinance industry played a significant role in enhancing the monthly income of female microfinance clients. 5. conclusion access to microfinance institutions like credit, saving, and training helps women in economic development and decision making role on savings and credit and other business activities. investing in women's economic development activities will dramatically improve for ethiopian women's employment and other sections of society. from the study result, it is clear that microfinance has a significant impact on women's assets, income, saving, and control over the resource. women microfinance clients have higher levels of income, better asset position, high saving amount, and better control over the resource in households and the surrounding community. whatever is done to improve the microfinance service of credit provision and training will improve women entrepreneurship development. the regressions result shows that the age of women, education, marital status, training, amount of credit, have a significant positive impact on women's economic empowerment. however, women's business experience has no significant impact on the economic development of women. moreover, age and education have no moderation effect on the study. 6. limitations and future research directions in this research, some limitations were identified. the study was limited to the amhara credit and saving the institution of ethiopia. future research should include other microfinance working at the regional and national levels for better representation and generalizability. moreover, this study investigates only age and education as moderator. the future study requires including other demographic variables such as marital status, number of the household as a moderator. references addai, b. 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(2014). women’s economic empowerment through microcredit intervention: the case of chinaksen woreda, oromiya national regional state (doctoral dissertation). copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). https://doi.org/10.1108/h-12-2013-0085 http://creativecommons.org/licenses/by/4.0/ copyright © cc-by-nc 2019, cribfb | ijfb indian journal of finance and banking; vol. 3, no. 1; 2019 issn 2574-6081 e-issn 2574-609x research article published by centre for research on islamic banking & finance and business, usa 40 insurance products in rastin profit and loss sharing banking bijan bidabad1 abstract purpose: this paper aims to explain new insurance products and policies in rastin profit and loss sharing (pls) banking. rastin banking is a full islamic banking system with all necessary parts for banking operations that can be installed in conventional and islamic banks both. in this paper, we are going to explain the milestones of new insurance products and policies. design: rastin banking complies with the nature of the intermediary financial activity and has a new type of banking operations. the systems and instruments of this type of banking have different risk treatments, and new insurance policy and measures should be defined to cover the risks of the operations in order to fulfill this goal, appropriate insurance policies are described. findings: some new insurance products are defined such as certificate insurance, insurance of market value of certificate, responsibility/engineering insurance, insurance of accidents concerning the article of sharing, collateral insurance, loss margin insurance, profit margin insurance, merchandise transportation insurance, production equipment and installations insurance, product quality insurance, insurance of commodity under production, inventory insurance, production limited loss insurance, transaction limited loss insurance to handle rastin banking. research limitations: many of these insurance policies are new and require more elaborations for further practical development and adjustment. practical implications: these insurance products can be used both in rastin banking operations as well as conventional business and finance arrangements. these insurance policies have no conflict with indisputable legal principles, and insurance companies can supply these insurance products based on their own actuary calculations. social implications: the introduced insurance policies actually change profit and loss sharing activity to just profit sharing. originality/value: approach of this system and the designed insurance policies is entirely different and new. article type: technical paper keywords: rastin banking, profit and loss sharing (pls), insurance, insurance products, insurance policy, islamic banking introduction insurance in persian is called “bimah” derived from the word “bima”, and has sanskrit root2 and also has the same root of the verb “bim” (to fear) in persian. some others believe that this term comes from the translation of a russian word of “astrakhan” from a philological point of view that means as opposite of fear; this is because russians introduced insurance in iran for the first time. some others believe “bimah” is the name of a town in tabaristan and deilam.3 daily applied the meaning of bimah is the organized grouped guarantee or coverage for facing the aftermaths of perils and losses or future unwelcoming events in socioeconomic life. insurance is defined as a contract according to which the insurer underwrites to indemnify another (insured person) in the event of loss or damage. an insurer is a person or company offering insurance policies in return for premiums. an insured person is a person whose interests are protected by an insurance policy. on the other hand, he is an individual who contracts for an insurance policy that indemnifies him against loss of property or life or health, etc. (insured article).4 in other words, the insurer and 1 (b.a., m.sc., ph.d., post-doc.) professor of economics and chief islamic banking advisior, bank melli iran. bijan@bidabad.com http://www.bidabad.com 2 moin, mohammad (1971) moin persian dictionary. amirkabir publishing institute. in persian. 3 salehi, jan ali mahmoud, (2002). insurance law. bimeh markazi, iran. training and publication department. in persian. 4 http://www.thefreedictionary.com/insurance mailto:bijan@bidabad.com mailto:bijan@bidabad.com http://www.bidabad.com/ http://www.thefreedictionary.com/insurance copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 41 the insured person will transact and share the costs of a particular risk of the item insured.5 insurance products economic/business insurances have a long previous record of about 6500 years. according to discovered papyrus, stonecutters of ancient egypt had established a joint fund to protect themselves in the case of an accident. hammurabi, the king of babylon, enacted a law in which those in charge of transportation were responsible for the safeguarding of merchandises in 2250 bc. also, in greece, there were associations, which helped their members who paid fees to an established fund if they had suffered any loss in 588-640 bc. similar activity has also been seen in ancient rome.6 many similar activities have also been observed in medieval times.7 business insurances today are as more or less in the following context: 1. life insurance 2. personal accident insurance 3. medical and medicare insurance 4. fire insurance and subordinate dangers such as explosion, theft, earthquake, flood, air crash and even terrorist attack 5. transportation insurance 6. civil responsibility of transportation means (marine, air and land transports) 7. general responsibility (legal and professional) insurance 8. full risk coverage insurance of contractual works, installing and related civil responsibly 9. money in the fund and in action insurance 10. staff’s honesty and trust insurance 11. oil exploration and extraction and related industries insurances 12. agricultural products insurance 13. export insurances in all the above-mentioned insurances, by receiving insurance fee, the insurer will provide financial risk coverage for the insured person about the article insured. risk nature in rastin banking operations and instruments rastin profit and loss sharing is an activity in rastin banking8 and is based on the participation of depositors9 in economic activity and investment of entrepreneur10 based on the real yield of projects in order to land real interestfree banking according to islamic commandments and ethics. in rastin profit and loss sharing (pls) banking, the bank is a unit, which after assessment11 of the project proposal12; allocates resources from depositors to the project13 5 see: mehr, robert i., (1985) principles of insurance. richard d irwin; 8th edition. vaughn, emmett j.(1989) fundamentals of risk and insurance.5th edition, wiley. 6 salehi, janali mahmoud, (2002). insurance act, bimeh markazi iran. training and publication department. in persian, pp. 6573. 7 various insurances, at least, commercial insurances were used in arabian peninsula before islam. this may be the reason why the holy prophet has not mention about it explicitly because he only entered economic subjects whenever necessary. 8 rastin banking is operational true islamic bank bidabad, bijan. (2014). new operational islamic banking system, volume one, theoretical foundations, lap lambert academic publishing, omniscriptum gmbh & co. kg, isbn: 978-3-659-54463-7. bidabad, bijan. (2014). new operational islamic banking system, volume two, applicational issues, lap lambert academic publishing, omniscriptum gmbh & co. kg, isbn: 978-3-659-55210-6. 9 depositor is a real person or legal entity with a certain amount of fund (cash) requests rastin pls bank to participate in rastin pls banking products through direct contact with rastin pls bank, or via internet and purchases rastin certificate of one of the rastin pls banking products of a project. 10 entrepreneur is a real person or legal entity who proposes a project to pls bank for financing through pls banking system and executes the project until the end. in addition to have legal, financial, technical and performance capabilities, the entrepreneur should have the other capabilities and facilities/possibility to carry out the job. 11 assessments are actions which are done by bank for protection of depositor’s interests, identification of the entrepreneur’s skills, and economic, financial, executive, and technical justifiability of the concerned project in rastin banking. 12 project proposal: is a written document covering a collection of necessary information about the proposed project that describes analytical justification of the project from economic, technical and financial points of view, with enclosed necessary legal licenses and documents; which is submitted to rastin pls bank by entrepreneur. after evaluation of the bank if be copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 42 of those looking for financing (entrepreneur) and according to contract; the obtained profit or loss is divided between depositor and entrepreneur. by receiving a commission, the bank provides capital management services for depositors, and invest their financial resources according to their choices and in return, provides them by rastin certificate. the bank should use all his specialized potentialities to protect depositors' rights. so the bank starts monitoring 14 the project by the trustee unit 15 of the pls office 16 . rastin pls base system17 is the primary process and includes the general rules of rastin profit and loss sharing banking system. 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 most of the rules of rastin pls base system are extended to its financial subsystems as well. these subsystems have their own financial and regulatory processes and are as follows: a. joalah financial sharing (jfs)18 b. mudarabah financial sharing (mfs)19 c. installment financial sharing (ifs)20 d. rent financial sharing (rfs)21 e. bail financial sharing (bfs)22 f. rastin group funding (rgf)23 g. rastin personal security (rps) 24 h. rastin social takaful25 (rst)26 approved, proposal will be a reference source against entrepreneur executive operations. 13 project is a collection of economic activities with specified and concrete plan with defined cost and terms for making profit through rastin pls banking offered to pls bank. 14 monitoring is an action which is done by bank for protection of depositor’s interests and good performance of executive operation in rastin banking. bank is obliged to take measures for good operational performance. standards for monitoring are based on rastin banking articles of the executive bylaw. 15 trustee unit is a unit at pls office of rastin pls bank for supervision and control of rastin pls proposed projects on behalf of bank regarding good performance of project in comparison to initial proposal through key indicators and financial reports and supervision for final delivery of the project. 16 pls office: it is a bank department that along with subordinate units manages participation processes in rastin banking. 17bidabad, bijan (2013) rastin profit and loss sharing (pls) base system. journal of islamic economics, banking and finance, pp. 32-57, vol. 9 no. 4, oct dec. http://ibtra.com/pdf/journal/v9_n4_article2.pdf 18 bijan bidabad, joalah financial sharing (jfs). journal of islamic economics, banking and finance, volume-12, no. 1, january-march, 2016, pp. 33-48. http://www.bidabad.com/doc/jfs-paper-en.pdf http://ibtra.com/pdf/journal/v12_n1_article2.pdf 19 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 20 bidabad, bijan, instalment financial sharing (ifs). journal of islamic economics, banking and finance, 2014. http://www.bidabad.com/doc/ifs-paper-en.pdf 21 bidabad, bijan, rent financial sharing (rfs). journal of islamic economics, banking and finance, 2014. http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf 22 bidabad, bijan, bail financial sharing (bfs). journal of islamic economics, banking and finance, 2014. http://www.bidabad.com/doc/bfs-paper-en.pdf 23 bijan bidabad, rastin group funding (rgf). bank melli iran, tehran, 2014. http://www.bidabad.com/doc/rgf-paper-en.pdf 24 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 25 takaful: is the humanistic duty of the society to fulfill the basic needs of the individuals and is devided into two parts: public takaful: is the humanistic duty of the individuals to fulfill other propels’ needs. zeman ialah: is the duty of the http://ibtra.com/pdf/journal/v9_n4_article2.pdf http://ibtra.com/pdf/journal/v12_n1_article2.pdf http://www.bidabad.com/doc/mfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n1_article3.pdf http://ibtra.com/pdf/journal/v10_n1_article3.pdf http://www.bidabad.com/doc/ifs-paper-en.pdf http://www.bidabad.com/doc/ifs-paper-en.pdf http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf http://www.bidabad.com/doc/bfs-paper-en.pdf%20%0d http://www.bidabad.com/doc/rgf-paper-en.pdf http://www.bidabad.com/doc/rgf-paper-en.pdf http://www.bidabad.com/doc/rps-paper-en.pdf copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 43 i. sponsor crowd funding (scf)27 j. peer to peer loan (ppl)28 k. rastin swap bond (rsb)29 l. rastin swap deposit (rsd)30 m. rastin swap card (rsc) 31 rastin certificates is a collection of designed certificates in rastin pls banking base system and its financial subsystems. these certificates are issued and delivered to depositor or financer instead of the received fund (deposit). rastin certificates (except guarantee certificate) are transferable and negotiable online through the rastin certificate market (rcm) 32 of the bank and are issued with a nominal price and for a specified period. the owners of these certificates share the results of the project proportional to nominal price and participation period of the certificate. 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 used asset will be bound to rastin banking regulations. these certificates can be anonymous or named papers, except guarantee certificate that must be named. these certificates are: 1partnership (musharakah) certificate: is an anonymous or named paper which expresses the participation of depositor in one of the pls banking products with a defined value and is issued by bank for a specified period and its owner shares the profit and loss of the subject of participation proportional to its nominal value and duration of participation according to rules and regulations of rastin pls banking. this certificate is used in rastin pls base system. 2subscripted (pazireh) certificate: is an anonymous or named paper which expresses the participation of depositors in one of the first or second kinds of pls banking products with a defined value which is issued by bank for construction period for infinitude projects and its owner shares the profit and loss of the subject of participation proportional to its nominal value and duration of participation by becoming the shareholder of the company according to rules and regulations of rastin pls banking. this certificate is used in rastin pls base system. 3future certificate: is an anonymous or named paper that cites a commitment to deliver the commodity that is issued by the bank and can be negotiated and transferred to another purchaser. by this certificate, the entrepreneur or producer is committed to delivering the commodity to the certificate holder at maturity or sales the commodity and refund the sold amount to financer according to the contract. this certificate is used in joaleh financial sharing (jfs) subsystem. government to provide the sustenance of the individuals in the society. 26 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 27 bidabad, bijan, rastin crowd funding, 2014. http://www.bidabad.com/doc/rcf-paper-en.pdf 28 bidabad, bijan, rastin crowd funding, 2014. http://www.bidabad.com/doc/rcf-paper-en.pdf 29 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.234241. http://www.ccsenet.org/journal/index.php/ijef/article/download/11665/8300 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 30 bijan bidabad, rastin swap deposit. tehran, 2015. http://www.bidabad.com/doc/rsd-paper-en.pdf 31 bijan bidabad, rastin swap card. tehran, 2015. http://www.bidabad.com/doc/rsc-paper-en.pdf 32 rastin certificate market is a web-based settlement system for transaction and transfer of rastin certificates and valuable papers of rastin bank. http://ibtra.com/pdf/journal/v11_n1_article1.pdf http://www.bidabad.com/doc/rst-paper-en.pdf http://www.bidabad.com/doc/rst-paper-en.pdf http://www.bidabad.com/doc/rcf-paper-en.pdf%0d http://www.bidabad.com/doc/rcf-paper-en.pdf%0d http://www.bidabad.com/doc/rcf-paper-en.pdf%0d http://www.bidabad.com/doc/rcf-paper-en.pdf%0d http://www.ccsenet.org/journal/index.php/ijef/article/download/11665/8300 http://www.ccsenet.org/journal/index.php/ijef/article/download/11665/8300 http://www.sesric.org/jecd/jecd_articles/art10102201-2.pdf http://www.sesric.org/jecd/jecd_articles/art10102201-2.pdf http://www.bidabad.com/doc/rsd-paper-en.pdf http://www.bidabad.com/doc/rsd-paper-en.pdf http://www.bidabad.com/doc/rsc-paper-en.pdf%0d copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 44 4mudarabah certificate: is an anonymous or named paper which expresses the participation of depositor in profit and loss of a particular project (product i) of the pls banking products with a defined value and is issued by bank for specified period and its owner shares the profit and loss of the subject of participation proportional to its nominal value and duration of participation according to rules and regulations of rastin pls banking. this certificate is used in mudarabah financial sharing (mfs) subsystem. 5periodic mudarabah certificate: is the same as mudarabah certificate, but the return of the project is paid to depositor periodically. this certificate is used in mudarabah financial sharing (mfs) subsystem. 6mughasatah certificate: is an anonym negotiable document issued by rastin pls bank with a nominal price for real financial participation (sharing) for a specified period. the bearer of this paper receives periodic payments relative to his share and the period of participation. payments will be paid at the end of each period. in the end, the entrepreneur will own the project. this certificate obtains installment until the end of the contract, and after the settlement of the contract, the entrepreneur becomes the owner of the project. the settlement is after the payout of the last installment. this certificate is used in instalment financial sharing (ifs) subsystem. 7rental mughasatah certificate: is an anonym negotiable document with a defined nominal price for a defined period of time (rental tenure) issued by rastin pls bank, which conducts rastin pls activity. the owners of these certificates have right on the results of the sharing project which is proportional to the nominal value of the certificate and the duration of holding certificate until the end and receive periodic rent and installment of the valuation of the project at the end of each period. the settlement is after the payout of the last installment and rents for the certificate. at the end of the contract, the entrepreneur will become the owner of the project. this certificate is used in instalment financial sharing (ifs) subsystem. 8musharakah mughasatah certificate: is an anonym negotiable document with a defined nominal price for a defined period of time (musharakah tenure) issued by rastin pls bank, which conducts pls activities. the owner of this certificate has right on the result of the sharing project proportional to the nominal value of the certificate and the duration of holding the certificate until the end of the contract, and receive periodic installment plus income (positive/negative) yields of the project at the end of each period. after the payout of the last installment and the profit or loss (yield), the settlement takes place. in the end, the entrepreneur will become the owner of the project. this certificate is used in instalment financial sharing (ifs) subsystem. 9mortgage sharing certificate: is an anonym (nameless) negotiable document with a nominal price, which is issued for a specified period by a rastin pls bank. the holder of these certificates shares in the yield of the asset of the project proportional to his share to the nominal price of the assessed value of the asset considering his participation period. the principal and return of sharing of these certificates will be paid to the depositor at the end of the contract. this certificate is used in rent financial sharing (rfs) subsystem. 10periodic mortgage sharing certificate: is the same as mortgage sharing certificate, but the return of the certificate is periodically paid to the certificate holder. this certificate is used in rent financial sharing (rfs) subsystem. 11mortgage mudarabah certificate: is similar to mortgage sharing certificate, but this certificate is used for commercial financing services. this certificate is used in rent financial sharing (rfs) subsystem. 12periodic mortgage mudarabah certificate: is similar to periodic mortgage sharing certificate, but this certificate is used for commercial financing services. this certificate is used in rent financial sharing (rfs) subsystem. 13mortgage muzaraah certificate: is similar to mortgage mudarabah certificates but for agricultural financing. this certificate is used in rent financial sharing (rfs) subsystem. 14periodic mortgage muzaraah certificate: is similar to periodic mortgage mudarabah certificate but for agricultural financing. this certificate is used in rent financial sharing (rfs) subsystem. 15mortgage mugharasah certificate: is similar to mortgage muzaraah certificate but for planting and restoring tree gardens financing. this certificate is used in rent financial sharing (rfs) subsystem. 16periodic mortgage mugharasah certificate: is similar to periodic mortgage muzaraah certificate but for planting and restoring tree gardens financing. this certificate is used in rent financial sharing (rfs) subsystem. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 45 17mortgage musaqah certificate: is similar to mortgage muzaraah certificate but for maintaining and harvesting fruit gardens financing. this certificate is used in rent financial sharing (rfs) subsystem. 18periodic mortgage musaqah certificate: is similar to periodic mortgage muzaraah certificate but for maintaining and harvesting fruit gardens financing. this certificate is used in rent financial sharing (rfs) subsystem. 19mortgage istisna certificate: is similar to mortgage muzaraah certificate but for financing industrial and agricultural firms. this certificate is used in rent financial sharing (rfs) subsystem. 20periodic mortgage istisna certificate: is similar to periodic mortgage muzaraah certificate but for financing industrial and agricultural firms. this certificate is used in rent financial sharing (rfs) subsystem. 21rent certificate: is an anonym negotiable document, which is issued with a defined nominal price and for a certain period by rastin pls bank. the owner of this certificate shares the rent of asset proportional to its assessed asset nominal price. the rent will be paid to depositor periodically, but the original fund plus the rent will be paid to the depositor at the end of the contract period. this certificate is used in rent financial sharing (rfs) subsystem. 22guarantee certificate: is a named document which shows the guarantee of a certain amount of money and is issued by notary upon the mortgaged asset and if the obligation is not fulfilled, the owner must compensate it. otherwise, the mortgaged asset will be sold through auction, and the claim of the acceptor will be settled. this certificate is used in mortgage securitization system (mss). 23bail certificate: is an anonym negotiable paper with a defined face value and duration issued by rastin pls bank branch. the owner of this certificate will receive the commodity or its price (at market price) from the entrepreneur who is obliged for this certificate. this certificate is used in bail financial sharing (bfs) subsystem. 24social security certificate: is an anonym or named negotiable document with defined nominal price issued and for a specified period given to the insured person by rastin pls bank on behalf of the security fund in exchange for payment of insurance premium to the security fund. the holder of this certificate shares the fund capital proportionate to the value and shares the fund returns proportionate to the amount and duration of his certificate. this certificate is used in rastin personal security (rps) subsystem. 25personal security certificate: is an anonym or named negotiable document with defined nominal price and maturity, and is issued by rastin pls bank on behalf of the pension fund for depositor by the request of the pension fund and equal to the amount of the deposited deposit. the holder of this certificate shares the capital of the fund in proportion to his deposit and shares the return of the pension fund proportional to the amount and duration of the deposit and receives his share (principal and profit) from the fund at maturity. this certificate is used in rastin personal security (rps) subsystem. 26pension security certificate: is an anonym or named negotiable document, which is issued from changing the share of the depositor into several small lots at maturity, so that the holder can receive continuous pension payments from the fund. the return of this certificate will be calculated and paid to depositor according to rastin participation accounting procedures for joint stock company with variable capital (jscvc).33 on the other hand, if depositor or the owner of the certificate does not want to receive back his share and return from the fund in a lump sum at maturity, he can ask the fund to change his certificate into several smaller certificates with continual maturities and amounts via the agent bank. this certificate is used in rastin personal security (rps) subsystem. 27takaful certificate: is an anonym or named negotiable document with a defined face value and term, which is issued by rastin pls bank branch. the owners of these certificates give a choice to rastin pls bank to use their deposits for granting to needy people graciously for a certain period and report his activities to the 33 joint stock company with variable capital (jscvc): 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 fund. these funds can facilitate the operations of mutual funds, credit unions and bank sharing activities. bijan bidabad, joint stock company with variable capital (jscvc), international journal of law and management, vol. 56, iss: 4, pp.302 – 310, 2014. http://dx.doi.org/10.1108/ijlma-09-2012-0031 http://dx.doi.org/10.1108/ijlma-09-2012-0031 copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 46 depositor and supervisory authorities. this certificate is used in rastin social takaful (rst) subsystem. 28loan certificate: is an anonym or named negotiable document with a defined face value and term that is issued by rastin pls bank. the owners of these certificates give a choice to the bank to use their deposits for extending interest-free loans to needy people for a specific period, and return the principal money back to the depositor after that period and report his activity to the depositor and supervisory authorities. this certificate is used in rastin social takaful (rst) subsystem. the complementary systems in rastin banking refer to innovations, systems, and complementary methods to solve specific shortages in the banking process as follows: a. rastin certificate market (rcm)34 b. crowd funding system (cfs)35 c. operation control and monitor (ocm) d. collateral registration system (crs) e. serial commitments clearance (scc)36 f. mortgage securitization system (mss)37 g. interbank withdrawal protocol (iwp)38 h. non-usury scripless security settlement system (nssss)39 i. money laundering detection system (mld)40 all the above systems and instruments have different risk treatments and should be used by insurance measures to cover the risks of the projects failure and hedge the financial resources and benefits of the sides of the contracts. insurance products in rastin banking financial activities of rastin banking need new insurance products and policies. in addition to prevailing insurances, some new insurance products were mentioned here. to safeguard the interests of depositors and to decrease risk and cover the probable losses of financial activities and also to alleviate confidence of the parties to rastin pls banking contracts, some insurance coverage has been anticipated as follows: 1. rastin certificate insurance: by paying a fee, bank or depositors can ask insurer companies to insure the total or a portion of the nominal value of their rastin certificate according to the request of the depositor or rastin certificate holder in charge and interest and name of the depositor or rastin certificate holder. bank and insurance company can offer rastin certificate insurance rate and policy in rastin certificate market web portal. insuring rastin certificate is optional for the depositor in rastin banking. 2. insurance of market value of rastin certificate: rastin certificate holder can insure his certificate against market price fluctuations at a higher price than nominal value in his charge and interest and name. this insurance is also optional. 34bidabad, bijan (2013) rastin certificate market (rcm), complementary system of rastin banking http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf 35 bidabad, bijan, rastin crowd funding, 2014. http://www.bidabad.com/doc/rcf-paper-en.pdf 36 bijan bidabad, serial commitments clearance (scc) in rastin banking. international journal of law and management, vol. 57, iss: 6, 2015, pp. 600-609, emerald group publishing limited. http://dx.doi.org/10.1108/ijlma-02-2015-0007 37 bijan bidabad, mortgage securitization system (mss), a complementary system of rastin banking. international journal of law and management, vol. 59 iss: 3, 2017. http://www.bidabad.com/doc/mss-paper-en.pdf 38 bidabad, bijan, mahmoud allahyarifard. interbank withdrawal protocol (iwp), complementary system of rastin banking, 2013. http://www.bidabad.com/doc/iwp-paper-en.pdf 39 bidabad, bijan, 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. http://www.bidabad.com/doc/non-usury-finance-it-en.pdf 40bidabad, bijan, (2017) money laundering detection system (mld), complementary system of rastin banking, journal of money laundering control, emerald group publishing limited. http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf http://www.bidabad.com/doc/rcf-paper-en.pdf%0d http://www.bidabad.com/doc/rcf-paper-en.pdf%0d http://dx.doi.org/10.1108/ijlma-02-2015-0007 http://dx.doi.org/10.1108/ijlma-02-2015-0007 http://www.bidabad.com/doc/mss-paper-en.pdf http://www.bidabad.com/doc/mss-paper-en.pdf http://www.bidabad.com/doc/iwp-paper-en.pdf http://www.bidabad.com/doc/iwp-paper-en.pdf http://www.bidabad.com/doc/non-usury-finance-it-en.pdf http://www.bidabad.com/doc/non-usury-finance-it-en.pdf copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 47 3. responsibility/engineering insurance: responsibility/engineering insurance for covering probable losses of unexpected technical and human accidents during the execution of the project period is compulsory for entrepreneurs of rastin pls projects. the entrepreneur must buy corresponding insurance policies to cover the unexpected accidents in his charge and interest and name. 4. insurance of accidents concerning the article of sharing: entrepreneur must insure the article of sharing against natural calamities, fire accident, explosion, and other unexpected accidents at least equal to the amount of provided and used sources in charge of the project, and in interest and name of the bank. this insurance fee is an acceptable cost item for the project. 5. collateral insurance: entrepreneur must insure his provided collaterals in charge of himself and interest and name of the bank at least equal to the value of bank share in the project during the project execution period. the entrepreneur must reinsure the collateral until the end of the execution period so that the collaterals should be insured for all times of the execution period. 6. loss margin insurance: entrepreneur can insure the project against probable loss equal to the amount of loss he expects. this insurance is optional or compulsory in various rastin pls banking subsystems. in the case of being compulsory, the entrepreneur is responsible for compensating the occurred losses according to the regulations of that subsystem if he had not bought the necessary insurance policy. 7. profit margin insurance: in order to guarantee the probable profit margin, an entrepreneur can insure this margin in his charge and interest and name. this insurance is optional or compulsory according to different rastin pls banking subsystems applications. 8. merchandise transportation insurance: contract parties can insure the merchandises of the article of contract against probable risks of transportation, by mutual agreement. the assessment unit41 of the pls department of the bank will determine the necessity of this insurance, according to the financial subsystem used. if the transported commodity, raw material, and intermediate goods comprise the interests of both parties, this insurance will be compulsory for both sender and receiver of the goods. the parties should provide this insurance policy at a specified time determined by the assessment unit in charge of sender and receiver and in name and interest of the bank. 9. production equipment and installations insurance: for better safety and performance of rastin pls banking activity, an entrepreneur can insure his production equipment and installations against fire accidents, explosion, natural accidents, and calamities, and the risk concerns of the second party at his own charge, interest, and name. according to the applied financial subsystem, assessment unit of the pls department of the bank will determine the compulsion or optionality of this insurance. 10. product quality insurance: in order to ensure the quality of the produced goods and attracting buyers, an entrepreneur can insure the quality of his products according to conventional standards. the subject of this insurance policy is compensation of probable vital and financial losses to consumers, and a third party regarding the produced commodities because of unsafe, defective, and shortcomings processes of production. this insurance policy is optional. 11. insurance of commodity under production: entrepreneur must insure the producing commodity at least equal to the nominal value of the raw material bought or delivered, besides an insurer company confirmed by the bank for production period, in charge of entrepreneur and in name and interest of the bank. 12. inventory insurance: for better safeguarding of performance of rastin pls banking activities, an entrepreneur can insure the raw materials and products inventories against risks of a fire accident, explosion, natural accidents and calamities, theft and also other party’s risk concerns at his charge, name, and interest. according to the applied financial subsystem, the assessment unit of the pls office of the bank will determine the compulsion or optionality of this insurance. 13. production limited loss insurance: if the market or estimated price of the construction project (at the end of construction period) is less than its cost price, “production limited loss insurance” can be used to compensate the loss. 41 assessment unit is a unit in pls office of rastin pls bank which assesses the competence and capabilities of entrepreneur and his proposal. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 48 14. transaction limited loss insurance: entrepreneur can insure the risk of transaction activities equal to the amount he is concerned about probable failure in his transaction activity at his own charge, name, and interest. if an entrepreneur does not insure this risk, he will bear the likely risk. 15. transfer of money insurance: bank can insure the risk of transfer of money equal to the amount he is concerned about probable failure in money transaction at his own charge, name, and interest. if the bank does not insure this risk, he will bear the probable risk. it is possible to use coinsurance and reinsurance in all above cases. the insurer can use these kinds of insurances to pro rata the aftermaths of the occurred risks. in coinsurance, several companies will jointly insure a risk. this insurance is usually used to cover large risks such as fire accident or explosion and similar things in factories, and each insurer company bears a portion of the risk. in reinsurance, the first (direct) insurer company covers a portion of the risk, and the second insurer company will cover the remaining risk. in other words, the direct insurance company will insure a portion of the risk in another company. complementary insurances are a kind of insurance used by insuring companies to obtain more support for other accidents concerning the article insured. this is different from double insurance, which is referred to as multiple coverages of an item insured. by considering the applied financial subsystem, the assessment unit of the pls office will define the necessity and kind of needed insurance before signing contracts. several types of insurances as complementary insurances can be used. the necessary insurances for various financial subsystems are documented in draft of operational bylaw of rastin banking 42 . the listed insurance products have no conflict with well-known legal principles. insurer companies can supply these insurance policies according to their actuary calculations to the bank, depositor, and entrepreneur.43 references bidabad, bijan. 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2019 52 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 bidabad, bijan, (2014) insurance products in rastin banking, 2014. http://www.bidabad.com/doc/rastin-insurance-en.pdf bidabad, bijan, (2019) rastin crowdfunding (rcf): a financial subsystem of rastin banking. international journal of islamic banking and finance research, 3(1), 13-20. https://www.cribfb.com/journal/index.php/ijibfr/article/view/265 http://www.bidabad.com/doc/rcf-paper-en.pdf bidabad, bijan, (2019) rastin group funding (rgf): a financial subsystem of rastin banking. international journal of islamic banking and finance research, 3(1), 43-48. https://www.cribfb.com/journal/index.php/ijibfr/article/view/268 http://www.bidabad.com/doc/rgf-paper-en.pdf bidabad, bijan, mahshid sherafati, (2019) bank information disclosure, financial transparency and corporate governance in rastin banking, international journal of shari’ah and corporate governance research, 2(1), 113. https://www.cribfb.com/journal/index.php/ijscgr/article/view/257 http://www.bidabad.com/doc/shafafiyat-en.pdf bidabad, bijan, mahshid sherafati, (2015) 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 bidabad, bijan, azarang amirostovar, mahshid sherafati, (2019) financial transparency, corporate governance and information disclosure of the entrepreneur’s corporation in rastin banking. international journal of law and management (ijlma), vol:59, iss:5, pp.636-651, 2017. https://doi.org/10.1108/ijlma-01-2016-0003 bidabad, bijan, saeid abdollahi, mahshid sherafati, rohollah mohammadi, (2019) proposed regulations for enforcement of purports of binding banking documents in rastin banking. international journal of small and medium enterprises, 2(1), 23-49. https://www.cribfb.com/journal/index.php/ijsmes/article/view/321 http://www.bidabad.com/doc/rastin-bank-ejraye-asnad-en.pdf bidabad, bijan, saeed abdollahi, mahshid sherafati, (2017) enforcement of the purports of binding banking documents in rastin banking – part i. international journal of law and management (ijlma), vol:59, iss:1, pp. 52-65, 2017. https://doi.org/10.1108/ijlma-07-2015-0041 bidabad, bijan, saeed abdollahi, mahshid sherafati, (2017) enforcement of the purports of binding banking documents in rastin banking – part ii. international journal of law and management (ijlma), vol:59, iss:2, pp.178-191, 2017. https://doi.org/10.1108/ijlma-10-2015-0055 bidabad, bijan, mahshid sherafati, (2017) sustainable financing and anti-squandering measures in rastin banking. international journal of law and management (ijlma), 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 bidabad, bijan, (2015) serial commitments clearance (scc) in rastin banking. international journal of law and management (ijlma), vol. 57, iss: 6, 2015, pp. 600-609. http://dx.doi.org/10.1108/ijlma-02-2015-0007 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 http://www.bidabad.com/doc/rastin-insurance-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/265 http://www.bidabad.com/doc/rcf-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/268 http://www.bidabad.com/doc/rgf-paper-en.pdf https://www.cribfb.com/journal/index.php/ijscgr/article/view/257 http://www.bidabad.com/doc/shafafiyat-en.pdf%20%0d 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 copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 53 http://www.bidabad.com/doc/scc-paper-en.pdf bidabad, bijan, (2019) rastin swap deposit (rsd): a financial account of rastin banking. international journal of islamic banking and finance research, 3(2), 17-23. https://www.cribfb.com/journal/index.php/ijibfr/article/view/270 http://www.bidabad.com/doc/rsd-paper-en.pdf bidabad, bijan, (2019) rastin swap card (rsc): a financial instrument of rastin banking. international journal of islamic banking and finance research, 3(2), 24-31. https://www.cribfb.com/journal/index.php/ijibfr/article/view/271 http://www.bidabad.com/doc/rsc-paper-en.pdf bidabad, bijan, mahshid sherafati, (2016) operational ethical banking in rastin banking (professional ethics, audit, inspection, control, monitoring and preservation). international journal of law and management (ijlma), 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 bidabad, bijan, 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-partnership-accounting-i-en.pdf https://doi.org/10.1108/jiabr-04-2016-0049 bidabad, bijan, (2019) rastin partnership accounting, part ii: mudarabah financial sharing (mfs). http://www.bidabad.com/doc/rastin-partnership-accounting-ii-en.pdf bidabad, bijan, (2019) rastin partnership accounting: part iii: instalment financial sharing (ifs). http://www.bidabad.com/doc/rastin-partnership-accounting-iii-en.pdf bidabad, bijan, abul hassan, (2017) 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 bidabad, bijan, (2018) general regulatory framework in rastin profit and loss sharing banking (part ioperational 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 bidabad, bijan, (2018) 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. 109126, nov. 2018. issn 2580-5568. https://doi.org/10.32770/jbfem.vol1109-126 http://www.bidabad.com/doc/rastin-regulatory-en-ii.pdf bidabad, bijan, (2018) general regulatory framework in rastin profit and loss sharing banking (part iiiauxiliary provisions). journal of business and finance in emerging markets, jbfem, may 2019, vol 2, no. 1, pp. 51-65. issn 2580-5568. https://doi.org/10.32770/jbfem.vol251-66 http://www.bidabad.com/doc/rastin-regulatory-en-iii.pdf bidabad, bijan, rohollah mohammadi, mahshid sherafati, (2019) organizational design and rules in rastin profit and loss sharing banking. international journal of small and medium enterprises, 2(1), 9-22. 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/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-partnership-accounting-i-en.pdf http://www.bidabad.com/doc/rastin-partnership-accounting-ii-en.pdf http://www.bidabad.com/doc/rastin-partnership-accounting-iii-en.pdf 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 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 copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 54 bidabad, bijan, azarang amirostovar, saeid abdollahi, mahmoud allahyarifard, eskandar pordel, maryam heidari, alireza shafiei, mohammad ali pourbehrouz (2012) draft of rastin banking bill, bank melli iran. http://www.bidabad.com/doc/rastin-banking-bill.pdf bidabad, bijan, azarang amirostovar, saeed abdollahi, mahmoud allahyarifard, eskandar pordel, maryam heidari, alireza shafiei, mohammad ali pourbehrouz. (2012) draft of rastin banking executive regulation, bank melli iran. http://www.bidabad.com/doc/rastin-banking-regulation.pdf erfani, tofigh, (1992) insurance contract in islam and iran, kayhan publications. in persian moin, mohammad (1971) moin persian dictionary. amirkabir publishing institute. in persian. mehr, robert i., (1985) principles of insurance. richard d irwin; 8th edition. salehi, jan ali mahmoud, (2002). insurance law. bimeh markazi, iran. training and publication department. in persian. vaughn, emmett j. (1989) fundamentals of risk and insurance.5th edition, wiley. 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/rastin-banking-bill.pdf http://www.bidabad.com/doc/rastin-banking-regulation.pdf http://www.bidabad.com/doc/rastin-banking-regulation.pdf copyright © cc-by-nc 2020, cribfb | ijfb indian journal of finance and banking; vol. 4, no. 1; 2020 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business, usa 42 a study of gross and net non-performing assets of select public sector banks in india for the period 2007-2008 to 2017-2018 abhay korde phd advocate high court bombay mumbai, india & alumni, jbims, mumbai, india e-mail: abhaykorde14@jbims.edu kavita laghate phd professor & director jamnalal bajaj institute of management studies university of mumbai mumbai, india e-mail: kavitalaghate@jbims.edu abstract the non-performing assets (npas) are considered as one of the important parameters for anlysing the health of the indian banks. the authors have taken a look at the literature reviews related to the non-performing assets related studies looked into by other research scholars. the authors in this research study has made an attempt to study the secondary data related to gross and net non-performing assets or loans of select banks in india, which is available in the public domain of the regulators of indian banks i.e. reserve bank of india (rbi) from april 2007 to march 2018 and has performed the abc analysis as per cumulative (decreasing method) to study the performance and the management and governance of those banks. finally, the authors conclude that some of the select indian banks taken for study appear in the various groups formulated for study i.e. group a (poor performance), group b (satisfactory performance) and group c (good performance) are thus a matter of great concern to the economy of the country. 1. introduction the entire world has accepted that the country is galloping towards being the third largest economy of the world in the near future and therefore, the financial and banking system or sector in india is required to play an important role to shape up its economy. the main business of the banking system is to cater to the financial needs of the business and individuals, but now it has also been vested with the responsibility to support other activities like the insurance and supporting various schemes announced by the government from time to time. the banks are required not only to safeguard the deposits of the customers but also required to ensure that the loans or advances given are not defrauded by the business community or certain individuals for their own vested interest, as it has been observed in the recent past. therefore, to arrive at the strength of the banking system in india the non-performing assets (npas) are considered as one of the important parameter for analysis. a sound banking and financial system is therefore, needs now. 2. literature review the objective of study of sanjeev (2007) was to identify critical factors, which were responsible for the loans of the banks to go bad in the indian commercial banking system. the methodology adopted for the study was mainly related to primary data collected from credit managers of banks operating in india. their study revealed that the external factors have a higher influence compared to the internal factors, which was also very surprising. the economic downturn and willful default have been found to be most critical factor. also the poor credit scoring skill of managers, absence of suitable administrative penalties and target completion have been found to have a significant influence amongst factors related with the loan appraisal mechanism of the banks. the seizure and disposal of collateral have found to be the toughest challenges amongst the factors related with the loan monitoring and controlling mechanism. the level of loan manager’s motivation,, manpower, skill to appraise collateral, effort to reduce costs, government and political intervention and soft budget constraints have been found to have a lower influence. however, the objective of study of khushpatand & rahul (2012) was to analyze the trends in non-performing assets (npas) in the indian banking sector from 2004-2011, to assess the contributing factors to the npa in the indian banking sector and to suggest measures to halt and curtail the rising burden of npas. they mainly dealt with the rising burden of npas in indian financial system and their likely impact and measures to minimize such adverse impact on the indian keywords: assets, banks, governance, gross, indian, loans, management, net, performance. . copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 43 banking system in particular and indian economy in general. they were also of the view that the factor contributing to the rising npas is the upward shift in interest rates due to the reserve bank of india’s (rbi) tight monetary policy for controlling inflation. the increased interest rate (floating interest) has increased the repayment burden of borrowers which is compelling them to default their interest payments and repayments. the authors concluded that the banks should focus on recovery of existing loans and be more circumspect in their credit appraisal, rescheduling of large corporate loans as rising interest cost and falling sales revenue may result in widespread defaults of corporate loans, phasing out of priority sector loans to 10% of the total loans so as to reduce the burden of npas in priority sector, making priority sector loans need-based rather than target based which results in poor credit appraisal and loan default. the authors arrived at a conclusion that the major contributor to the npas in banking sector was agricultural sector. npas in non-priority sectors are likely to increase due to decelerating trends in major sectors like manufacturing and infrastructure and slowing down of economy during 2012. 3. definitions 3.i non-performing assets (npa) or non-performing loans (npl) the non-performing assets or loans in the books of the banks are the loan that has been defaulted by the borrower. as per the regulators of banks in india the loan becomes non-performing it is in default for 90 days. 3.2 gross non-performing assets (gnpa) or gross non-performing loans (gnpl) it is the total number of non-performing assets or loans of the banks added together. 3.3 net non-performing assets (nnpa) or net non-performing loans (nnpl) net non-performing assets or nnpl is the total of actual bad assets minus the provision left aside. the indian banks regulator defines net npa or npl as net npa or npl = gross npa or npl – (balance in interest suspense account + deposit insurance and credit guarantee corporation (dicgc)/export credit guarantee corporation of india (ecgc) claims received and held pending adjustment + part payment received and kept in suspense account + total provisions held. 4. objective of research study  to study and analyze select indian bank’s gross non-performing assets or loans and net non-performing assets or loans from april 2007 to march 2018.  to do comparative analysis of the select indian bank’s gross non-performing assets or loans and net nonperforming assets or loans from april 2007 to march 2018.  to analyse the management and governance or performance of directing and controlling of the select indian bank’s from april 2007 to march 2018. 5. methodology adopted for research banking sector is analysed using secondary data available from reserve bank of india (rbi) and money control websites. it is an analytical research. the data was collected for the period of april 2007 to march 2018 i.e. 2007-2008 to 20172018. assuming that the figures are given by the apex body of the banking sector, i.e. reserve bank of india and therefore, abc analysis is attempted on that. 6. analysis of data 6.1 the defaulted loans of the select indian bank’s from april 2007 to march 2018 were done according to the increasing method as given in appendix a and respectively. 6.2 the group ranking of the select indian bank’s defaulted loans from april 2007 to march 2018 was as per the results arrived from the abc analysis method as given in appendix a, b and c, d respectively. table 1. ranking of gross non-performing assets or loans of the select indian banks from april 2007 to march 2018 (bank with highest gross non-performing loans is rated i). name of the select indian banks 20072008 20082009 20092010 20102011 20112012 20122013 20132014 20142015 20152016 20162017 20172018 state bank of india 1 1 1 1 1 1 1 1 1 1 1 punjab national bank 2 2 4 3 2 2 2 2 2 2 2 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 44 central bank of india 3 4 7 11 3 4 5 9 9 9 9 bank of baroda 4 8 8 5 7 5 3 4 4 5 4 bank of india 5 3 2 2 4 3 4 3 3 3 3 syndicate bank 6 9 10 10 12 15 16 15 14 14 14 union bank of india 7 7 5 4 5 9 7 7 8 8 6 uco bank 8 10 11 6 8 6 12 10 10 11 10 idbi bank 9 11 9 9 6 8 6 8 7 4 5 oriental bank of commerce 10 13 12 12 11 12 14 21 12 10 13 canara bank 11 5 6 8 9 10 10 6 5 7 7 allahabad bank 12 12 14 13 14 11 9 11 11 12 12 indian overseas bank 13 6 3 7 10 7 8 5 6 6 8 bank of maharashtra 14 15 15 16 18 21 18 16 16 15 16 united bank of india 15 14 13 14 13 16 11 14 17 18 17 corporation bank 16 18 17 19 19 17 15 12 13 16 15 dena bank 17 17 18 18 20 20 19 18 19 17 18 vijaya bank 18 16 16 15 17 19 21 20 20 20 21 indian bank 19 19 19 20 15 14 17 17 18 19 19 andhra bank 20 20 20 17 16 13 13 13 15 13 11 punjab and sind bank 21 21 21 21 21 18 20 19 21 21 20 figure 1. ranking of gross non-performing assets or loans of the select indian banks from april 2007 to may 2018 table 2. ranking of net non-performing assets or loans of the select indian banks from april 2007 to march 2018 (bank with highest net non-performing assets or loans is rated i). name of the bank 20072008 20082009 20092010 20102011 20112012 20122013 20132014 20142015 20152016 20162017 20172018 state bank of india 1 1 1 1 1 1 1 1 1 1 1 0 5 10 15 20 25 st at e b an k… p un ja b … c en tr al … b an k o f… b an k o f in d ia sy n d ic at e… u n io n b an k… u c o b an k id b i b an k o ri en ta l… c an ar a b an k a lla h ab ad … in d ia n … b an k o f… u n it ed b an k… c o rp o ra ti o n… d en a b an k v ija ya b an k in d ia n b an k a n d h ra b an k p un ja b & … 20072008 20082009 20092010 20102011 (bank wise gnpas or gnpls) copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 45 uco bank 2 6 7 5 9 8 13 9 10 14 11 idbi bank 3 5 5 7 7 11 10 10 7 4 3 central bank of india 4 3 11 11 2 5 4 8 9 9 9 canara bank 5 2 4 2 5 4 6 5 4 5 4 punjab national bank 6 17 6 3 3 2 2 2 2 2 2 syndicate bank 7 7 9 9 13 17 17 16 14 15 13 bank of india 8 8 2 4 4 3 3 3 3 3 5 oriental bank of commerce 9 11 12 10 8 12 12 12 12 10 10 bank of baroda 10 10 14 12 11 6 5 6 5 8 7 allahabad bank 11 12 16 15 14 7 7 11 11 11 15 indian overseas bank 12 4 3 8 10 9 8 4 6 6 8 united bank of india 13 9 10 13 15 16 11 15 16 18 16 bank of maharashtra 14 16 13 16 21 21 20 14 15 13 17 dena bank 15 14 17 17 19 19 19 19 19 17 18 vijaya bank 16 15 15 14 16 20 21 21 20 21 20 union bank of india 17 13 8 6 6 10 9 7 8 7 6 corporation bank 18 18 18 18 17 16 15 13 13 12 12 indian bank 19 19 19 19 12 14 16 18 18 19 19 punjab and sind bank 20 21 20 21 20 18 18 20 21 20 21 andhra bank 21 20 21 20 18 13 14 17 17 16 14 figure 2. ranking of net non-performing assets or loans of the select indian banks from april 2007 to march 2018 6.3 select indian banks – gross and net non-performing assets or loans –analysis for the purpose of analyzing the select indian banks, and deciding the management performance and governance, it was decided to have abc analysis of three groups from the cumulative (decreasing method) gross & net npas or npls of the select indian banks. group a – 1 70 – poor management and governance or performance of directing and controlling. 0 5 10 15 20 25 st at e b an k… u c o b an k id b i b an k c en tr al … c an ar a b an k p un ja b … sy n d ic at e… b an k o f in d ia o ri en ta l… b an k o f… a lla h ab ad … in d ia n … u n it ed b an k… b an k o f… d en a b an k v ija ya b an k u n io n b an k… c o rp o ra ti o n… in d ia n b an k p un ja b & … a n d h ra b an k 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 (bank wise nnpa or nnpl) with highest npa is rated 1) copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 46 group – b 71 90 – satisfactory management and governance or performance of directing and controlling. group – c 91 – 100 good management and governance or performance of directing and controlling. 6.3.1 group – a state bank of india, punjab national bank, bank of india and central bank of india were in group a i.e. 1-70% (poor performance) most the years in gross non-performing assets or loans and net non-performing assets or loans from april 2007 to march 2018. an analysis of this four bank’s movement is studied and it is observed as below: 6.3.1.1 state bank of india from august 2008 to april 2017, along with its seven subsidiary banks and bhartiya mahila bank were merged into state bank of india. however, it can be observed from appendix a and b that there was not much impact on the nonperforming assets or loans during that period. table 3. gross & net non-performing assets or loans as on march 2018 rs. million gross non-performing loans net non-performing loans year last year’s out standing added during the year reduced during the year written-off present year last year present year 2017-18 1123430 1603037 90238 401954 2234275 582774 1108547 source: https://www.rbi.org.in table 4. details of chairman of state bank of india from april 2007 to march 2018 sl.no. name period from to 1. shri o.p.bhatt july 2006 march 2011 2. shri pratip chaudhari april 2011 september 2013 3. smt. arundhati bhattacharya october 2013 october 2017 4. shri rajnish kumar october 2017 till date it can be observed from table 3 that the gross non-performing assets or loans during the previous year ending i.e. march 2017 was rs.1123430 million and during the year april 2017 to march 2018 rs.1603037 million were added. during the year bank had reduced rs.90238 million and written off rs.401954 million. the gross non-performing assets or loans of the bank at the end of march 2018 stood at rs.2234275 million. as regards the net non-performing assets or loans during the previous year ending was rs.582774 million and during the year ending march 2018 it stood at rs.1108547 million. it can also be observed that during the study period april 2007 to march 2018 the bank topped in group a, during the entire period. 6.3.1.2 punjab national bank it is interesting to note that there were no other banks merged into punjab national bank from april 2007 to march 2018. the gross and net non-performing assets or loans of the bank were amongst the top two for the study period i.e. april 2007 to march 2018 as can be seen from appendix a,b,c and d. table 5. gross & net non-performing assets or loans as on march 2018 rs. million gross non-performing assets or loans net non-performing assets or loans year last year’s out standing added during the year reduced during the year written-off present year last year present year 2017-18 553705 442743 56175 74072 866201 327021 486843 source: https://www.rbi.org.in copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 47 table 6. details of chairman and managing director and chief executive officer–punjab national bank from april 2007 to march 2018 sl.no. name period from to 1. dr. k.c.chakravarty 2007 june 2009 2. mr. k.r.kamath october 2009 october 2014 3. mr. gauri shankar, executive director (acting chairman and managing director) february 2015 august 2015 4. mrs. usha ananthasubramanian august 2015 may 2017 5. mr. sunil mehta may 2017 september 2019 it can be observed from table 5 that the gross non-performing loans during the previous year ending i.e. march 2017 was rs.553705 million and during the year april 2017 to march 2018 rs.442743 million were added. during the year the bank had reduced rs.56175 million and written off rs.74072 million. the gross non-performing assets or loans of the bank stood at the end of april 2018 to rs.866201 million. as regards the net non-performing assets or loans during the previous year ending was rs.327021 million and during the year ending march 2018 it stood at rs.486843 million. it can also be observed that during the study period april 2007 to march 2018 the bank was mostly in group a. 6.3.1.3 bank of india the gross and net non-performing assets or loans of the bank were amongst the top three for the study period i.e. april 2007 to march 2018 as can be seen from appendix a,b,c and d. table 7. gross & net non-performing assets or loans as on march 2018 rs. million gross non-performing assets or loans net non-performing assets or loans year last year’s out standing added during the year reduced during the year written-off present year last year present year 20172018 520445 255805 62518 90448 623285 253050 282073 source: https://www.rbi.org.in table 8. details of chairman and managing director and chief executive officer bank of india from april 2007 to march 2018 sl.no. name period from to 1. mr. alok k. misra august 2003 september 2012 2. mrs. v.r.iyer november 2012 may 2015 3. mr. melwyn rego february 2015 august 2015 4. mrs. usha ananthasubramanian august 2015 may 2017 5. mr. dinabandhu mohapatra may 2017 june 2019 it can be observed from table 7 that the gross non-performing loans during the previous year ending i.e. march 2017 was rs.520445 million and during the year april 2017 to march 2018 rs.255805 million were added. during the year the bank had reduced rs.62518 million and written off rs.90448 million. the gross non-performing assets or loans of the bank at the end of march 2018 stood at rs.623285 million. as regards the net non-performing assets or loans during the previous year ending was rs.253050 million and during the year ending march 2018 it stood at rs.282074 million. it can also be observed that during the study period april 2007 to march 2018 the bank was mostly in group a. 6.3.1.4 central bank of india the gross and net non-performing assets or loans of the bank were amongst the top four for the study period i.e april march 2007 to march 2018 as can be seen from appendix a,b,c and d. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 48 table 9. gross & net non-performing assets or loans as on march 2018 rs. million gross non-performing assets or loans net non-performing assets or loans year last year’s out standing added during the year reduced during the year written-off present year last year present year 20172018 272513 170712 32683 29236 381307 142178 173779 source: https://www.rbi.org.in table 10. details of chairman and managing director and chief executive officer central bank of india from april 2007 to march 2018 sl.no. name period from to 1. ms. h.a.daruwalla june 2005 december 2008 2. mr. s. sridharan march 2009 may 2011 3. mr. m.v.tanksale june 2011 july 2013 4. mr. rajeev rishi 1 august 2013 31 august 2018 5. mr. pallav mohapatra september 2018 till date it can be observed from table 9 that the gross non-performing assets or loans during the previous year ending i..e march 2017 was rs.272513 million and during the year april 2017 to march 2018 rs.170712 million were added. during the year the bank had reduced rs.32683 million and written off rs.29236 million. the gross non-performing assets or loans of the bank at the end of march 2018 stood at rs.381307 million. as regards the net non-performing assets or loans during the previous year ending was rs.142178 million and during the year ending march 2018 it stood at rs.173779 million. it can also be observed that during the study period april 2007 to march 2018 the bank was mostly in group a. 6.3.2 group – b canara bank and bank of maharashtra were in group b i.e. 71 – 90% (satisfactory performance) most of the years in gross npas and net npas during the period of study i.e. 2007-2008 to 2017-2018. an analysis of movement of two banks i.e. canara bank and bank of maharashtra is studied and it is observed as below: 6.3.2.1 canara bank the gross and net non-performing assets or loans of the bank were fluctuated in various rankings and was mostly in group b during the period march 2007 to april 2018, can be seen from appendix a,b,c and d. the gross and net non-performing assets or loans of the bank were amongst the top three for the study period i.e. april 2007 to march 2018 as can be seen from appendix a,b,c and d. table 11. gross & net non-performing assets or loans as on march 2018 rs. million gross non-performing assets or loans net non-performing assets or loans year last year’s out standing added during the year reduced during the year written-off present year last year present year 20172018 342020 247608 31847 83097 474685 216490 285424 source: https://www.rbi.org.in copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 49 table 12. details of chairman and managing director and chief executive officer canara bank from april 2007 to march 2018 sl.no. name period from to 1. mr. m b a rao june 2005 june 2008 2. mr. a.c.mahajan july 2008 july 2010 3. mr. s. raman september 2010 september 2012 4. mr.r.k.dubey january 2013 september 2014 5. mr. shri d.n.manoharan 2014 july 2015 6. mr. rakesh sharma august 2015 july 2018 7. ra sankara narayanan april 2019 january 2020 it can be observed from table 11 that the gross non-performing assets or loans during the previous year ending i.e. march 2017 was rs.342020 million and during the year march 2017 to april 2018 rs.247608 million were added. during the year bank had reduced rs.31847 million and written off rs.83097 million. the gross non-performing assets or loans of the bank at the end of march 2018 stood at rs.474685 million. as regards the net non-performing assets or loans during the previous year ending was rs.216490 million and during the year ending march 2018 it stood at rs.285424 million. it can also be observed that during the study period april 2007 to march 2018 the bank was mostly in group b. 6.3.2.2 bank of maharashtra the gross and net non-performing assets or loans of the bank were fluctuated in various rankings and was mostly in group b during the period april 2007 to march 2018, as can be seen from appendix a,b,c and d. table 13. gross & net non-performing loans as on march 2018 rs. million gross non-performing assets or loans net non-performing assets or loans year last year’s out standing added during the year reduced during the year written-off present year last year present year 20172018 171887 54349 20300 24603 184332 113312 96412 source: http://www.rbi.org.in table 14. details of chairman and managing director and chief executive officer bank of maharashtra from april 2007 to march 2018 sl.no. name period from to 1. mr. allen pereira 2007 2011 2. mr. narendra singh february 2012 september 2013 3. mr. sushil muhnoot september 2013 september 2016 4. mr. ravindra marathe september 2016 june 2018 it can be observed from table 13 that the gross non-performing assets or loans during the previous year ending i.e. march 2017 was rs.171887 million and during the year april 2017 to march 2018 rs54349 millions were added. during the year bank had reduced rs.20300 million and written off rs.24603 million. the gross non-performing assets or loans of the bank at the end of march 2018 stood at rs.184332 million. as regards the net non-performing assets or loans during the previous year ending was rs.113312 million and during the year ending march 2018 it stood at rs.96412 million. it can also be observed that during the study period april 2007 to march 2018 the bank was mostly in group b. http://www.rbi.org.in/ copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 50 6.3.3 group – c united bank of india and punjab and sind bank were in group c i.e. 91 – 100% (good performance) most of the years in gross non-performing assets or loans and net non-performing assets or loans during the period of study i.e. april 2007 to march 2018. an analysis of these two banks movement is studied and it is observed as below: 6.3.3.1 united bank of india the gross and net non-performing assets or loans of the bank were fluctuated mostly in group c during the period april 2007 to march 2018, as can be seen from appendix a,b,c and d. table15. gross & net non-performing assets or loans as on march 2018 rs. million gross non-performing assets or loans net non-performing assets or loans year last year’s out standing added during the year reduced during the year written-off present year last year present year 20172018 109520 86063 11391 18669 165521 65919 103163 source: https://www.rbi.org.in table 16. details of chairman and managing director and chief executive officer united bank of india from april 2007 to march 2018 sl.no. name period from to 1. mr. p.k.gupta november 2008 february 2010 2. mr. bhaskar sen march 2010 2013 3. mrs. archana bhargava april 2013 february 2014 4. mr. peturi srinivasan december 2014 june 2016 5. mr. pawan kumar bajaj august 2016 september 2018 6. mr. ashok kumar pradhan october 2018 till date it can be observed from table 15 that the gross non-performing assets or loans during the previous year ending i.e. march 2017 was rs.109520 million and during the year april 2017 to march 2018 rs. 86063 millions were added. during the year bank had reduced rs.11391 million and written off rs.18669 million. the gross non-performing assets or loans of the bank at the end of march 2018 stood at rs.165521 million. as regards the net non-performing assets or loans during the previous year ending was rs.65919 million and during the year ending march 2018 it stood at rs. 103163 million. it can also be observed that during the study period april 2007 to march 2018 the bank was mostly in group c. 6.3.3.2 punjab and sind bank the gross and net non-performing assets or loans of the bank were mostly in group c during the period april 2007 to march 2018, as can be seen from appendix a, b, c and d. table 17. gross & net non-performing assets or loans as on march 2018 rs. million gross non-performing assets or loans net non-performing assets or loans year last year’s out standing added during the year reduced during the year written-off present year last year present year 20172018 62976 25918 6279 4598 78017 43751 46079 source: https://www.rbi.org.in https://www.rbi.org.in/ copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1; 2020 51 table 18. details of chairman and managing director and chief executive officer united bank of india from april 2007 to march 2018 sl.no. name period from to 1. mr. s.r.p.singh 2007 august 2009 2. mr. s.g.s.vedi august 2009 june 2010 3. mr. d.p.singh november 2011 january 2014 4. mr. jatinder singh february 2014 december 2017 5. s harisankar september 2018 till date it can be observed from table 17 that the gross non-performing assets or loans during the previous year ending i.e. march 2017 was rs.62976 million and during the year april 2017 to march 2018 rs. 25918 millions were added. during the year the banks had reduced rs. 6279 million and written off rs.4598 million. the gross non-performing loans of the bank at the end of march 2018 stood at rs.78017 million. as regards the net non-performing assets or loans during the previous year ending was rs.43751 million and during the year ending march 2018 it stood at rs. 46079 million. it can also be observed that during the study period march 2007 to april 2008 the bank was mostly in group c. 7. conclusion the study of select indian banks for the period from april 2007 to march 2018 of all the groups together concludes that some of the banks net performing assets or loans were very high and beyond the control of the banks. the banks have also been defrauded by large borrowers which have brought more strain on its assets. in some cases from the study it indicates that the performance of the bank’s management was one of the reasons for rise in non-performing assets or loans and also it can be seen that there were no heads in respect of some banks during the study period and it is a matter of great concern. it is therefore, concluded that there should be a strong management for better results and governance and the regulators must also have strong supervisory control and policies put in place for better results. since the banks under study are formed under the law of the government, it becomes necessary for the government to have in place heads for all the banks, so that decision making becomes easier and also those large borrowers who are defrauding their loans should be also strictly dealt with. it is necessary to have a sound financial and banking system to strengthen the economy of the country. 8. limitations only few selected banks are analyzed. only the government banks were taken up for study and other type of banks i.e. private, co-operative and foreign are not part of study. the qualitative aspect of the banking sector and the political environment prevailing in the country is also not part of the research study. it will be therefore, interesting to study the performance and management of the banks after another five years after the merger of government banks into 4 to 5 big banks. references sanjeev, g. m. (2007). non-performing assets in commercial banks. journal of management research, 7(1),south asia publications. khushpatand j. s., & rahul, c. g. (2012). managing business in turbulent times. jbims, mumbai journal, excel india publishers, new delhi retrieved from https://www.rbi.org.in retrieved from http://www.moneycontrol.com retrieved from select indian banks websites and annual reports. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 52 appendix – a abc analysis of gross non-performing assets (gnpa) or loans of select indian public sector banks for the period april 2007 to march 2018 rs. million name of bank 20072008 percentage of total gross npa cumulative name of bank 20082009 percentage of total gross npa cumulative name of bank 20092010 percentage of total gross npa cumulative state bank of india 128373 33.95 33.95 state bank of india 157140 37.19 37.19 state bank of india 195349 34.93 34.93 punjab national bank 33193 8.78 42.73 punjab national bank 25069 5.93 43.12 bank of india 48827 8.73 43.66 central bank of india 23500 6.22 48.94 bank of india 24709 5.85 48.97 indian overseas bank 36111 6.46 50.11 bank of baroda 19814 5.24 54.18 central bank of india 23160 5.48 54.45 punjab national bank 32144 5.75 55.86 bank of india 19309 5.11 59.29 canara bank 21680 5.13 59.58 union bank of india 26709 4.78 60.64 syndicate bank 17687 4.68 63.97 indian overseas bank 19234 4.55 64.13 canara bank 25903 4.63 65.27 union bank of india 16566 4.38 68.35 union bank of india 19234 4.55 68.68 central bank of india 24580 4.39 69.66 uco bank 16520 4.37 72.72 bank of baroda 18429 4.36 73.04 bank of baroda 24007 4.29 73.96 idbi bank 15647 4.14 76.86 syndicate bank 15945 3.77 76.82 idbi bank 21294 3.81 77.76 oriental bank of commerce 12801 3.39 80.24 uco bank 15395 3.64 80.46 syndicate bank 20068 3.59 81.35 canara bank 12726 3.37 83.61 idbi bank 14357 3.40 83.86 uco bank 16664 2.98 84.33 allahabad bank 10105 2.67 86.28 allahabad bank 10783 2.55 86.41 oriental bank of commerce 14688 2.63 86.96 indian overseas bank 9970 2.64 88.92 oriental bank of commerce 10581 2.50 88.91 united bank of india 13723 2.45 89.41 bank of maharashtra 7663 2.03 90.94 united bank of india 10200 2.41 91.33 allahabad bank 12218 2.18 91.59 united bank of india 7610 2.01 92.96 bank of maharashtra 7984 1.89 93.22 bank of maharashtra 12098 2.16 93.76 corporation bank 5844 1.55 94.50 vijaya bank 6988 1.65 94.87 vijaya bank 9945 1.78 95.54 dena bank 5726 1.51 96.02 dena bank 6208 1.47 96.34 corporation bank 6509 1.16 96.70 vijaya bank 5115 1.35 97.37 corporation bank 5592 1.32 97.66 dena bank 6420 1.15 97.85 indian bank 4869 1.29 98.66 indian bank 4592 1.09 98.75 indian bank 5101 0.91 98.76 andhra bank 3724 0.98 99.64 andhra bank 3681 0.87 99.62 andhra bank 4879 0.87 99.63 punjab & sind bank 1355 0.36 100 punjab & sind bank 1610 0.38 100 punjab & sind bank 2062 0.37 100 total: 378117 100 total: 422571 100 total: 559299 100 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 53 name of bank 20102011 percentage of total gross npa cumulative name of bank 2011 2012 percentage of total gross npa cumulative name of bank 2012 2013 percentage of total gross npa cumulative state bank of india 253263 36.41 36.41 state bank of india 396765 36.48 36.48 state bank of india 511894 33.49 33.49 bank of india 48116 6.92 43.33 punjab national bank 87196 8.02 44.50 punjab national bank 134658 8.81 42.29 punjab national bank 43794 6.30 49.63 central bank of india 72730 6.69 51.19 bank of india 87653 5.73 48.03 union bank of india 36228 5.21 54.84 bank of india 58940 5.42 56.61 central bank of india 84560 5.53 53.56 bank of baroda 31525 4.53 59.37 union bank of india 54499 5.01 61.62 bank of baroda 79826 5.22 58.78 uco bank 31504 4.53 63.90 idbi bank 45514 4.19 65.80 uco bank 71301 4.66 63.44 indian overseas bank 30896 4.44 68.34 bank of baroda 44648 4.11 69.91 indian overseas bank 66080 4.32 67.77 canara bank 30892 4.44 72.79 uco bank 40862 3.76 73.67 idbi bank 64500 4.22 71.99 idbi bank 27847 4.00 76.79 canara bank 40318 3.71 77.37 union bank of india 63138 4.13 76.12 syndicate bank 25990 3.74 80.53 indian overseas bank 39201 3.60 80.98 canara bank 62602 4.10 80.21 central bank of india 23940 3.44 83.97 oriental bk of comm. 35805 3.29 84.27 allahabad bank 51370 3.36 83.57 oriental bank of commerce 19205 2.76 86.73 syndicate bank 31827 2.93 87.20 oriental bank of commerce 41840 2.74 86.31 allahabad bank 16479 2.37 89.10 united bank of india 21764 2.00 89.20 andhra bank 37145 2.43 88.74 united bank of india 13558 1.95 91.05 allahabad bank 20890 1.92 91.12 indian bank 35655 2.33 91.07 vijaya bank 12592 1.81 92.86 indian bank 18508 1.70 92.82 syndicate bank 29785 1.95 93.02 bank of maharashtra 11737 1.69 94.55 andhra bank 17980 1.65 94.47 united bank of india 29638 1.94 94.96 andhra bank 9956 1.43 95.98 vijaya bank 17185 1.58 96.05 corporation bank 20482 1.34 96.30 dena bank 8422 1.21 97.19 bank of maharashtra 12970 1.19 97.25 punjab & sind bank 15369 1.01 97.30 corporation bank 7902 1.14 98.33 corporation bank 12742 1.17 98.42 vijaya bank 15329 1.00 98.31 indian bank 7403 1.06 99.39 dena bank 9565 0.88 99.30 dena bank 14525 0.95 99.26 punjab & sind bank 4243 0.61 100 punjab & sind bank 7634 0.70 100 bank of maharashtra 11376 0.74 100 total: 695492 100 total: 1087543 100 total: 1528726 100 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 54 name of bank 2013 2014 percentage of total gross npa cumulative name of bank 2014 2015 percentage of total gross npa cumulative name of bank 2015 2016 percentage of total gross npa cumulative state bank of india 616054 29.47 29.47 state bank of india 567253 22.26 22.26 state bank of india 981728 19.02 19.02 punjab national bank 188801 9.03 38.50 punjab national bank 256949 10.08 32.35 punjab national bank 558183 10.81 29.83 bank of baroda 118759 5.68 44.18 bank of india 221932 8.71 41.06 bank of india 498791 9.66 39.50 bank of india 118686 5.68 49.86 bank of baroda 162614 6.38 47.44 bank of baroda 405210 7.85 47.35 central bank of india 115000 5.50 55.36 indian overseas bank 149225 5.86 53.30 canara bank 316378 6.13 53.48 idbi bank 99620 4.77 60.12 canara bank 130400 5.12 58.42 indian overseas bank 300486 5.82 59.30 union bank of india 95637 4.57 64.70 union bank of india 130309 5.11 63.53 idbi bank 248751 4.82 64.12 indian overseas bank 90205 4.31 69.01 idbi bank 126850 4.98 68.51 union bank of india 241709 4.68 68.80 allahabad bank 80680 3.86 72.87 central bank of india 118730 4.66 73.17 central bank of india 227210 4.40 73.20 canara bank 75702 3.62 76.49 uco bank 102651 4.03 77.20 uco bank 209077 4.05 77.25 united bank of india 71180 3.40 79.90 allahabad bank 83580 3.28 80.48 allahabad bank 153846 2.98 80.23 uco bank 66214 3.17 83.07 corporation bank 71067 2.79 83.27 oriental bank of commerce 147017 2.85 83.08 andhra bank 58576 2.80 85.87 andhra bank 68765 2.70 85.97 corporation bank 145443 2.82 85.90 oriental bank of commerce 56179 2.69 88.56 united bank of india 65529 2.57 88.54 syndicate bank 138322 2.68 88.58 corporation bank 47368 2.27 90.82 syndicate bank 64424 2.53 91.07 andhra bank 114436 2.22 90.80 syndicate bank 46111 2.21 93.03 bank of maharashtra 64021 2.51 93.58 bank of maharashtra 103859 2.01 92.81 indian bank 45622 2.18 95.21 indian bank 56704 2.23 95.81 united bank of india 94710 1.83 94.64 bank of maharashtra 28599 1.37 96.58 dena bank 43930 1.72 97.53 indian bank 88270 1.71 96.35 dena bank 26160 1.25 97.83 punjab & sind bank 30822 1.21 98.74 dena bank 85605 1.66 98.01 punjab & sind bank 25535 1.22 99.05 vijaya bank 24432 0.96 99.70 vijaya bank 60271 1.17 99.18 vijaya bank 19859 0.95 100 oriental bank of commerce 7662 0.30 100 punjab & sind bank 42291 0.82 100 total: 2090547 100 total: 2547849 100 total: 5161593 100 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 55 source: https://www.rbi.org.in and https://www.moneycontrol.com name of bank 2016 2017 percentage of total gross npa cumulative name of bank 2017 2018 percentage of total gross npa cumulative state bank of india 1123430 18.14 18.14 state bank of india 2234275 24.95 24.95 punjab national bank 553705 8.94 27.09 punjab national bank 866201 9.67 34.62 bank of india 520445 8.40 35.49 bank of india 623285 6.96 41.58 idbi bank 447526 7.23 42.72 bank of baroda 564804 6.31 47.88 bank of baroda 427187 6.90 49.62 idbi bank 555883 6.21 54.09 indian overseas bank 350983 5.67 55.28 union bank of india 493699 5.51 59.60 canara bank 342020 5.52 60.81 canara bank 474685 5.30 64.90 union bank of india 337123 5.44 66.25 indian overseas bank 381802 4.26 69.17 central bank of india 272510 4.40 70.65 central bank of india 381307 4.26 73.42 oriental bank of commerce 228593 3.69 74.35 uco bank 305499 3.41 76.84 uco bank 225410 3.64 77.99 andhra bank 281244 3.14 79.98 allahabad bank 206878 3.34 81.33 allahabad bank 265628 2.97 82.94 andhra bank 176700 2.85 84.18 oriental bank of commerce 261336 2.92 85.86 syndicate bank 176093 2.84 87.02 syndicate bank 257586 2.88 88.74 bank of maharashtra 171887 2.78 89.80 corporation bank 222134 2.48 91.22 corporation bank 170452 2.75 92.55 bank of maharashtra 184332 2.06 93.27 dena bank 126187 2.04 94.59 united bank of india 165521 1.85 95.12 united bank of india 109520 1.77 96.36 dena bank 163614 1.83 96.95 indian bank 98651 1.59 97.95 indian bank 119901 1.34 98.29 vijaya bank 63818 1.03 98.98 punjab & sind bank 78017 0.87 99.16 punjab & sind bank 62976 1.02 100 vijaya bank 75261 0.84 100 total: 6192094 100 total: 8956014 100 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 56 appendix – b abc analysis of net non-performing assets (nnpas) or loans of select indian public sector banks for the period april 2007 to march 2018. rs. million name of bank 20072009 percentage of total net npa cumulative name of bank 20082009 percentage of total net npa cumulative name of bank 20092010 percentage of total net npa cumulative state bank of india 74243 44.32 44.32 state bank of india 96774 48.47 48.47 state bank of india 108702 39.27 39.27 uco bank 10923 6.52 50.84 canara bank 15073 7.55 56.03 bank of india 22075 7.97 47.24 idbi bank 10829 6.46 57.30 central bank of india 10630 5.32 61.35 indian overseas bank 19950 7.21 54.45 central bank of india 10600 6.33 63.63 indian overseas bank 9991 5.00 66.35 canara bank 17997 6.50 60.95 canara bank 8990 5.37 69.00 idbi bank 9490 4.75 71.11 idbi bank 14063 5.08 66.03 punjab national bank 7538 4.50 73.50 uco bank 8127 4.07 75.18 punjab national bank 9817 3.55 69.57 syndicate bank 6227 3.72 77.22 syndicate bank 6318 3.16 78.34 uco bank 9663 3.49 73.06 bank of india 5920 3.53 80.75 bank of india 6282 3.15 81.49 union bank of india 9653 3.49 76.55 oriental bank of commerce 5384 3.21 83.96 united bank of india 5250 2.63 84.12 syndicate bank 9632 3.48 80.03 bank of baroda 4936 2.95 86.91 bank of baroda 4490 2.25 86.37 united bank of india 7786 2.81 82.84 allahabad bank 3998 2.39 89.30 oriental bank of commerce 4424 2.22 88.59 central bank of india 7270 2.63 85.47 indian overseas bank 3632 2.17 91.46 allahabad bank 4221 2.11 90.70 oriental bank of commerce 7238 2.61 88.08 united bank of india 3060 1.83 93.29 union bank of india 3259 1.63 92.33 bank of maharashtra 6624 2.39 90.48 bank of maharashtra 2540 1.52 94.81 dena bank 3134 1.57 93.90 bank of baroda 6023 2.18 92.65 dena bank 2154 1.29 96.09 vijaya bank 2923 1.46 95.37 vijaya bank 5818 2.10 94.75 vijaya bank 1816 1.08 97.18 bank of maharashtra 2719 1.36 96.73 allahabad bank 4702 1.70 96.45 union bank of india 1276 0.76 97.94 punjab national bank 2639 1.32 98.05 dena bank 4275 1.54 98.00 corporation bank 1269 0.76 98.70 corporation bank 1383 0.69 98.74 corporation bank 1973 0.71 98.71 indian bank 976 0.58 99.28 indian bank 938 0.47 99.21 indian bank 1449 0.52 99.23 punjab & sind bank 670 0.40 99.68 andhra bank 792 0.40 99.61 punjab & sind bank 1166 0.42 99.65 andhra bank 537 0.32 100 punjab & sind bank 780 0.39 100 andhra bank 957 0.35 100 total: 167518 100 total: 199637 100 total: 276833 100 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 57 name of bank 20102011 percentage of total net npa cumulative name of bank 20112012 percentage of total net npa cumulative name of bank 20122013 percentage of total net npa cumulative state bank of india 123469 36.73 36.73 state bank of india 158189 28.87 28.87 state bank of india 219565 26.20 26.20 canara bank 23299 6.93 43.67 central bank of india 46000 8.40 37.27 punjab national bank 72365 8.63 34.83 punjab national bank 20386 6.07 49.73 punjab national bank 44542 8.13 45.40 bank of india 59473 7.10 41.93 bank of india 19450 5.79 55.52 bank of india 36564 6.67 52.07 canara bank 52781 6.30 48.23 uco bank 18246 5.43 60.95 canara bank 33863 6.18 58.25 central bank of india 49880 5.95 54.18 union bank of india 18034 5.37 66.31 union bank of india 30250 5.52 63.78 bank of baroda 41920 5.00 59.18 idbi bank 16779 4.99 71.31 idbi bank 29109 5.31 69.09 allahabad bank 41268 4.92 64.11 indian overseas bank 13284 3.95 75.26 oriental bank of commerce 24590 4.49 73.58 uco bank 40693 4.86 68.96 syndicate bank 10308 3.07 78.32 uco bank 22639 4.13 77.71 indian overseas bank 40272 4.81 73.77 oriental bank of commerce 9382 2.79 81.12 indian overseas bank 19074 3.48 81.19 union bank of india 33534 4.00 77.77 central bank of india 8470 2.52 83.64 bank of baroda 15436 2.82 84.01 idbi bank 31004 3.70 81.47 bank of baroda 7909 2.35 85.99 indian bank 11968 2.18 86.19 oriental bank of commerce 29027 3.46 84.93 united bank of india 7574 2.25 88.24 syndicate bank 11854 2.16 88.36 andhra bank 24092 2.87 87.81 vijaya bank 7412 2.21 90.45 allahabad bank 10917 1.99 90.35 indian bank 23843 2.84 90.65 allahabad bank 7364 2.19 92.64 united bank of india 10756 1.96 92.31 united bank of india 19700 2.35 93.00 bank of maharashtra 6190 1.84 94.48 vijaya bank 9980 1.82 94.13 corporation bank 14109 1.68 94.68 dena bank 5490 1.63 96.11 corporation bank 8694 1.59 95.72 syndicate bank 11248 1.34 96.03 corporation bank 3977 1.18 97.30 andhra bank 7559 1.38 97.10 punjab & sind bank 11104 1.32 97.35 indian bank 3970 1.18 98.48 dena bank 5717 1.04 98.14 dena bank 9172 1.09 98.45 andhra bank 2737 0.81 99.29 punjab & sind bank 5476 1.00 99.14 vijaya bank 9097 1.09 99.53 punjab & sind bank 2379 0.71 100 bank of maharashtra 4696 0.86 100 bank of maharashtra 3929 0.47 100 total: 336109 100 total: 547873 100 total: 838076 100 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 58 name of bank 20132014 percentage of total net npa cumulative name of bank 20142015 percentage of total net npa cumulative name of bank 20152016 percentage of total net npa cumulative state bank of india 310961 25.99 25.99 state bank of india 275906 18.36 18.36 state bank of india 558070 18.16 18.16 punjab national bank 99170 8.29 34.28 punjab national bank 153965 10.25 28.61 punjab national bank 354226 11.53 29.69 bank of india 74172 6.20 40.48 bank of india 135176 9.00 37.60 bank of india 279964 9.11 38.80 central bank of india 66500 5.56 46.04 indian overseas bank 98133 6.53 44.13 canara bank 208329 6.78 45.58 bank of baroda 60348 5.04 51.08 canara bank 87401 5.82 49.95 bank of baroda 194065 6.32 51.89 canara bank 59655 4.99 56.07 bank of baroda 80695 5.37 55.32 indian overseas bank 192126 6.25 58.15 allahabad bank 57218 4.78 60.85 union bank of india 69190 4.60 59.93 idbi bank 146434 4.77 62.91 indian overseas bank 56581 4.73 65.58 central bank of india 68070 4.53 64.46 union bank of india 140259 4.56 67.48 union bank of india 53403 4.46 70.04 uco bank 63306 4.21 68.67 central bank of india 132420 4.31 71.79 idbi bank 49023 4.10 74.14 idbi bank 59925 3.99 72.66 uco bank 114436 3.72 75.51 united bank of india 46641 3.90 78.04 allahabad bank 59789 3.98 76.64 allahabad bank 102925 3.35 78.86 oriental bank of commerce 39044 3.26 81.30 oriental bank of commerce 48162 3.21 79.84 oriental bank of commerce 99322 3.23 82.09 uco bank 35564 2.97 84.27 corporation bank 44650 2.97 82.81 corporation bank 91601 2.98 85.07 andhra bank 33425 2.79 87.07 bank of maharashtra 41266 2.75 85.56 syndicate bank 90149 2.93 88.01 corporation bank 31806 2.66 89.73 united bank of india 40814 2.72 88.27 bank of maharashtra 68320 2.22 90.23 indian bank 27637 2.31 92.04 syndicate bank 38437 2.56 90.83 united bank of india 61107 1.99 92.22 syndicate bank 27206 2.27 94.31 andhra bank 36886 2.45 93.29 andhra bank 60357 1.96 94.18 punjab & sind bank 19186 1.60 95.91 indian bank 31470 2.09 95.38 indian bank 54194 1.76 95.95 dena bank 18189 1.52 97.43 dena bank 30143 2.01 97.39 dena bank 52305 1.70 97.65 bank of maharashtra 18073 1.51 98.94 punjab & sind bank 22660 1.51 98.90 vijaya bank 42768 1.39 99.04 vijaya bank 12624 1.06 100 vijaya bank 16597 1.10 100 punjab & sind bank 29495 0.96 100 total: 1196426 100 total: 1502641 100 total: 3072872 100 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 59 name of bank 2016-17 percentage of total net npa cumulative name of bank 2017-18 percentage of total net npa cumulative state bank of india 582774 16.92 16.92 state bank of india 1108547 24.39 24.39 punjab national bank 327021 9.50 26.42 punjab national bank 486843 10.71 35.10 bank of india 253050 7.35 33.77 idbi bank 286651 6.31 41.41 idbi bank 252058 7.32 41.08 canara bank 285424 6.28 47.69 canara bank 216490 6.29 47.37 bank of india 282073 6.21 53.90 indian overseas bank 197493 5.73 53.11 union bank of india 243263 5.35 59.25 union bank of india 188321 5.47 58.57 bank of baroda 234827 5.17 64.42 bank of baroda 180802 5.25 63.82 indian overseas bank 203997 4.49 68.91 central bank of india 142180 4.13 67.95 central bank of india 173779 3.82 72.73 oriental bank of commerce 141178 4.10 72.05 oriental bank of commerce 142829 3.14 75.87 allahabad bank 134335 3.90 75.95 uco bank 140821 3.10 78.97 corporation bank 116922 3.40 79.35 corporation bank 140770 3.10 82.07 bank of maharashtra 112296 3.26 82.61 syndicate bank 132395 2.91 84.98 uco bank 107034 3.11 85.72 andhra bank 126369 2.78 87.76 syndicate bank 104110 3.02 88.74 allahabad bank 122291 2.69 90.45 andhra bank 103548 3.01 91.75 united bank of india 103163 2.27 92.72 dena bank 77351 2.25 93.99 bank of maharashtra 96412 2.12 94.85 united bank of india 65919 1.91 95.91 dena bank 78388 1.72 96.57 indian bank 56066 1.63 97.53 indian bank 59596 1.31 97.88 punjab & sind bank 43751 1.27 98.80 vijaya bank 50212 1.10 98.99 vijaya bank 41182 1.20 100 punjab & sind bank 46079 1.01 100 total: 3443881 100 total: 4544729 100.00 source: https://www.rbi.org.in and https://www.moneycontrol.com www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 60 appendix – c details of group ranking of select indian public sector banks as per percentage of gross non-performing assets (gnpa) or gross non performing loans (gnpls) for the period april 2007 to march 2018 (groups for studying the management and governance of select banks from the cumulative (decreasing method) i.e. group – a 1-70 (poor performance), group – b 71-90 (satisfactory performance) and group – c 91-100 (good performance). group 2007-2008 highest gnpas a (1-70%) (poor performance) state bank of india, punjab national bank, central bank of india, bank of baroda, bank of india, syndicate bank, canara bank. medium gnpas b (71-90%) (satisfactory performance) uco bank, idbi bank, oriental bank of commerce, allahabad bank, indian overseas bank, bank of maharashtra. lowest gnpas c (91-100%) (good performance) united bank of india, corporation bank, dena bank, vijaya bank, indian bank, andhra bank, punjab & sind bank. group 2008-2009 highest gnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, central bank of india, canara bank, indian overseas bank, union bank of india. medium gnpas b (71-90%) (satisfactory performance) bank of baroda, syndicate bank, uco bank, idbi bank, allahabad bank, oriental bank of commerce. lowest gnpas c (91-100%) (good performance) united bank of india, bank of maharashtra, vijaya bank, dena bank, corporation bank, indian bank, andhra bank, punjab & sind bank. group 2009-2010 highest gnpas a (1-70%) (poor performance) state bank of india, bank of india, indian overseas bank, punjab national bank, canara bank, central bank of india. medium gnpas b (71-90%) (satisfactory performance) bank of baroda, idbi bank, syndicate bank, uco bank, union bank of india, oriental bank of commerce, united bank of india. lowest gnpas c (91-100%) (good performance) allahabad bank, bank of maharashtra, vijaya bank, corporation bank, dena bank, indian bank, andhra bank, punjab & sind bank. group 2010-2011 highest gnpas a (1-70%) (poor performance) state bank of india, bank of india, punjab national bank, union bank of india, bank of baroda, uco bank, indian overseas bank. medium gnpas b (71-90%) (satisfactory performance) canara bank, idbi bank, central bank of india, oriental bank of commerce, allahabad bank. lowest gnpas c (91-100%) (good performance) united bank of india, vijaya bank, bank of maharashtra, andhra bank, dena bank, corporation bank, indian bank, punjab & sind bank. group 2011-2012 highest gnpas a (1-70%) (poor performance) state bank of india, punjab national bank, central bank of india, bank of india, union bank of india, idbi www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 61 bank, bank of baroda. medium gnpas b (71-90%) (satisfactory performance) uco bank, canara bank, indian overseas bank, syndicate bank, united bank of india. lowest gnpas c (91-100%) (good performance) allahabad bank, indian bank, andhra bank, vijaya bank, bank of maharashtra, corporation bank, dena bank, punjab & sind bank. group 2012-2013 highest gnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, central bank of india, bank of baroda, uco bank, indian overseas bank. medium gnpas b (71-90%)(satisfactory performance) idbi bank, union bank of india, canara bank, allahabad bank, oriental bank of commerce, andhra bank. lowest gnpas c (91-100%) (good performance) indian bank, syndicate bank, united bank of india, corporation bank, punjab & sind bank, vijaya bank, dena bank, bank of maharashtra. group 2013-2014 highest gnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of baroda, bank of india, central bank of india, idbi bank, union bank of india, indian overseas bank. medium gnpas b (71-90%) (satisfactory performance) allahabad bank, canara bank, united bank of india, uco bank, andhra bank, oriental bank of commerce, corporation bank. lowest gnpas c (91-100%) (good performance) syndicate, indian, bom, dena, p&sb, vijaya group 2014-2015 highest gnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, bank of baroda, indian overseas bank, canara bank, union bank of india, idbi bank. medium gnpas b (71-90%) (satisfactory performance) central bank of india, uco bank, allahabad bank, corporation bank, andhra bank, united bank of india. lowest gnpas c (91-100%) (good performance) syndicate bank, bank of maharashtra, indian bank, dena bank, punjab & sind bank, oriental bank of commerce, vijaya bank. group 2015-2016 highest gnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, bank of baroda, canara bank, indian overseas bank, idbi bank, union bank of india. medium gnpas b (71-90%) (satisfactory performance) central bank of india, uco bank, allahabad bank, oriental bank of commerce, corporation bank, syndicate bank, andhra bank. lowest gnpas c (91-100%) (good performance) bank of maharashtra, united bank of india, indian bank, dena bank, vijaya bank, punjab & sind bank. group 2016-2017 highest gnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, indian overseas bank, canara bank, union bank of india, central bank of india. medium gnpas b (71-90%) (satisfactory performance) oriental bank of commerce, uco bank, allahabad bank, andhra bank, syndicate bank, bank of maharashtra. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 62 lowest gnpas c (91-100%) (good performance) corporation bank, dena bank, united bank of india, indian bank, vijaya bank, punjab & sind bank. group 2017-2018 highest gnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, bank of baroda, idbi bank, union bank of india, canara bank and indian overseas bank. medium gnpas b (71-90%) (satisfactory performance) central bank of india, uco bank, andhra bank, allahabad bank, oriental bank of commerce, syndicate bank. lowest gnpas c (91-100%) (good performance) corporation bank, bank of maharashtra, dena bank, indian bank, punjab & sind bank, vijaya bank. appendix – d details of group ranking of select indian public sector banks as per percentage of net non-performing assets (nnpa) or net non-performing loans (nnpls) for the period april 2007 to march 2018 (groups for studying the management and governance of select banks from the cumulative (decreasing method) i.e. group – a 1-70 (poor performance), group – b 71-90 (satisfactory performance) and group – c 91-100 (good performance). group 2007-2008 highest nnpas a (1-70%) (poor performance) state bank of india, uco bank, idbi bank, central bank of india, canara bank. medium nnpas b (71-90%) (satisfactory performance) punjab national bank, syndicate bank, bank of india, oriental bank of commerce, bank of baroda, allahabad bank. lowest nnpas c (91-100%) (good performance) indian overseas bank, united bank of india, bank of maharashtra, dena bank, vijaya bank, union bank of india, corporation bank, indian bank, punjab & sind bank, andhra bank. group 2008-2009 highest nnpas a (1-70%) (poor performance) state bank of india, canara bank, central bank of india, indian overseas bank. medium nnpas b (71-90%) (satisfactory performance) idbi bank, uco bank, syndicate bank, bank of india, united bank of india, bank of baroda, oriental bank of commerce, allahabad bank. lowest nnpas c (91-100%) (good performance) union bank of india, dena bank, vijaya bank, bank of maharashtra, punjab national bank, corporation bank, indian bank, andhra bank, punjab & sind bank. group 2009-2010 highest nnpas a (1-70%) (poor performance) state bank of india, bank of india, indian overseas bank, canara bank, idbi bank, punjab national bank. medium nnpas b (71-90%) (satisfactory performance) uco bank, union bank of india, syndicate bank, united bank of india, central bank of india, oriental bank of commerce, bank of maharashtra. lowest nnpas c (91-100%) (good performance) bank of baroda, vijaya bank, allahabad bank, dena bank, corporation bank, indian bank, punjab & sind bank, andhra bank. group 2010-2011 highest nnpas a (1-70%) (poor performance) state bank of india, canara bank, punjab national bank, bank of india, bank of india, uco bank, union www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 63 bank. medium nnpas b (71-90%) (satisfactory performance) idbi bank, indian overseas bank, syndicate bank, oriental bank of commerce, central bank of india, bank of india, united bank of india, vijaya bank. lowest nnpas c (91-100%) (good performance) allahabad bank, bank of baroda, dena bank, corporation bank, indian bank, andhra bank, punjab & sind bank. group 2011-2012 highest nnpas a (1-70%) (poor performance) state bank of india, central bank of india, punjab national bank, bank of india, canara bank, union bank of india, idbi bank. medium nnpas b (71-90%) (satisfactory performance) oriental bank of india, uco bank, indian overseas bank, bank of baroda, indian bank, syndicate bank, allahabad bank. lowest nnpas c (91-100%) (good performance) united bank of india, vijaya bank, corporation bank, andhra bank, dena bank, punjab & sind bank, bank of maharashtra. group 2012-2013 highest nnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, canara bank, central bank of india, bank of baroda, allahabad bank, uco bank. medium nnpas b (71-90%) (satisfactory performance) indian overseas bank, union bank of india, idbi bank, oriental bank of commerce, andhra bank, indian bank. lowest nnpas c (91-100%) (good performance) united bank of india, corporation bank, syndicate bank, punjab & sind bank, dena bank, vijaya bank, bank of maharashtra. group 2013-2014 highest nnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, central bank of india, bank of baroda, canara bank, allahabad bank, indian overseas bank, union bank of india. medium nnpas b (71-90%) (satisfactory performance) idbi bank, united bank of india, oriental bank of commerce, uco bank, andhra bank, corporation bank. lowest nnpas c (91-100%) (good performance) indian bank, syndicate bank, punjab & sind bank, dena bank, bank of maharashtra, vijaya bank. group 2014-2015 highest nnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, indian overseas bank, canara bank, bank of baroda, union bank of india, central bank of india, uco bank. medium nnpas b (71-90%) (satisfactory performance) idbi bank, allahabad bank, oriental bank of commerce, corporation bank, bank of maharashtra, united bank of india, syndicate bank. lowest nnpas c (91-100%) (good performance) andhra bank, indian bank, dena bank, punjab & sind bank, vijaya bank. group 2015-2016 highest nnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, canara bank, bank of baroda, indian overseas bank, idbi bank, union bank of india. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 1 2020 copyright © cc-by-nc 2020, cribfb | ijfb 64 medium nnpas b (71-90%) (satisfactory performance) central bank of india, uco bank, allahabad bank, oriental bank of commerce, corporation bank, syndicate bank, bank of maharashtra. lowest nnpas c (91-100%) (good performance) united bank of india, andhra bank, indian bank, dena bank, vijaya bank, punjab & sind bank. group 2016-2017 highest nnpas a (1-70%) (poor performance) state bank of india, punjab national bank, bank of india, idbi bank, canara bank, indian overseas bank, union bank of india, bank of baroda, central bank of india. medium nnpas b (71-90%) (satisfactory performance) oriental bank of commerce, allahabad bank, corporation bank, bank of maharashtra, uco bank, syndicate bank. lowest nnpas c (91-100%) (good performance) andhra bank, united bank of india, indian bank, punjab & sind bank, vijaya bank. group 2017-2018 highest nnpas a (1-70%) (poor performance) state bank of india, union bank of india, bank of baroda, indian overseas bank. medium nnpas b (71-90%) (satisfactory performance) central bank of india, oriental bank of commerce, uco bank, corporation bank, syndicate bank, andhra bank, allahabad bank. lowest nnpas c (91-100%) (good performance) united bank of india, bank of maharashtra, dena bank, indian bank, vijaya bank, punjab & sind 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/). indian journal of finance and banking vol. 4, no. 3; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 39 critical dimensions of well-being in selangor, malaysia dr. nor azilah husin associate professor & deputy dean faculty of business and accountancy university of selangor 40000 shah alam, selangor darul ehsan, malaysia e-mail: nor_azilah@unisel.edu.my fahmi ngah smart selangor delivery unit selangor state government, malaysia astri yulia senior lecturer language education department faculty of education and social science university of selangor, malaysia zainal azhar zainal azim lecturer faculty of business and accountancy university of selangor 40000 shah alam, selangor darul ehsan, malaysia amirul syafiq mohd ghazali lecturer faculty of business and accountancy university of selangor 40000 shah alam, selangor darul ehsan, malaysia abstract selangor is leading the other thirteen states in malaysia in the economy, making it one of the most preferred places to stay for its economic flourish, employment prospect, great infrastructure, and excellent facilities. selangor is ranked the highest by contributing 23% of its national gross national product to malaysia. nevertheless, for social indicators, selangor ranked fourth in the country. social development was not at par with the fast-growing economy and the extensive physical developments that take place. thus, the objective of this paper is to identify the critical dimensions of selangorians’ well-being. we adapted a questionnaire from a gallup survey and distributed it about 1500 questionnaires to people in selangor using random mailto:nor_azilah@unisel.edu.my https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 40 and non-proportionate stratified sampling in twelve (12) municipalities of the state. we employed spss 22.0 for descriptive results and smart pls 3.0 for the structural equation modeling. the finding revealed that the economic dimension (t-values =5.141), environment dimension (t-values =6.668), health dimension (t-value=5.092), and spiritual dimension (tvalues= 4.969) were significant to well-being except for emotion dimension (t-values =0.283). this finding provides insights to practitioners, local authorities, and policymakers of the state government in enhancing selangorians’ quality of life and well-being. keywords: critical dimension, well-being, economic, environment, health, spiritual, emotion. jel classification codes: i31, i38. introduction selangor has three international airports, numerous important highways, and ports, placing it the most developed state in malaysia. its gross national product (gnp) which is almost 30 percent of the whole nation, making it one of the preferred places to stay and work (abdullah, 2017). by having great infrastructure, a conducive environment, and good facilities, is selangor having great well-being? even though selangor is ranked the highest by contributing 23% national gdp, followed by wilayah kuala lumpur, dan sarawak (statistics department, 2016). nevertheless, for social indicators, selangor ranked the lowest among these top four states. it indicated that social development was not tally with the fast-growing economy and the wideranging physical development that take place (hashim & shuib, 2016). it is quite crucial to find out the scenario of social development as well as the well-being in this golden state of malaysia. well-being is now getting a lot of attention from academicians, physicians, practitioners, and policymakers locally and globally. what is well-being? well-being may refer to living well together at a community that aspects of living have in facilitating local individual well-being. it is also central to place sustainability and quality of life (husin et al. 2020). previous researchers have conceptualized well-being in different definitions. for instance, kim and ludwigs (2017) utilized cultural, social, human, political, economic, and physical capital to measure well-being. meanwhile, tonon (2017) concentrated more on fulfillment with life, satisfaction with people around them, involvement in the community group, mutual support among neighbors, the society of the neighbors, and the accessibility of public spaces. in a similar front, rath, harter, and harter (2010) reckoned that five crucial elements in well-being for general people are career, social, physical, financial, and public, whereas world leaders place too much emphasis on economic measures of performance. this case might not adequately represent other dimensions that shape well-being like environmental and social dimensions, for example, the gross domestic product (gdp) and gross national product (gnp) are common key drivers for assessing growth and development. the increase in gdp and gnp is a measurement for the policies and decisionmaking to keep on growing. many researchers cannot come into a conclusive definition of wellbeing. instead of defining it, researchers come up with the dimensions that explain well-being. dodge, daly, huyton, and sanders (2012) presume that it would be proper for a fresh definition of well-being to centre on a state of equilibrium or balance that can be influenced by life episodes or challenges. another common definition of well-being is the combination of social, economic, environmental, cultural, and political conditions identified by individuals and their https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 41 communities as essential for them to flourish and fulfill their potentials (wiseman & brasher, 2008). though cunningham, de la rosa, and jex (2008) perceived that the well-being is a “messy” dimension. there are some agreements that well-being dimension is broad, likely multidimensional or multifaceted, and demonstrative of something more generalized than good physical health (prescott-allen, 2001). he further argued that any well-being assessment should revolve around people’s well-being of people, the ecosystem, and how do these people behave and react to each other. there is another similar study on well-being by musa, yacob, abdullah, and ishak, (2018) in putrajaya. these researchers formulated a framework of community happiness index that holistically combines wide-ranging sustainability dimensions from human well-being to environment-friendly well-being sub-index with four sustainability domains, namely social, economic, environmental, and urban governance, to tackle individual subjective perceptions of the community involvement and development orientation. the finding revealed that putrajaya dwellings performed good environmental-friendly well-being and human well-being, they possess a moderate sustainability, and a medium-high level of community happiness. most literature on well-being emphasizes the importance of people’s experience concerning where they are living, health condition, income, education, relationship, and family. malaysian well-being index 2013 defines well-being as “…the various direct and indirect benefits acquired and enjoyed by the citizen as well as contributed to the life satisfaction of individuals, families, and communities.” in malaysia's scenario, bakar, osman, bachok, and ibrahim, (2016) analyzed 14 components that assess social and economic well-being. the malaysia plan aligned all the dimensions unswervingly to which aimed to achieve a good quality of life and sustainable well-being by improving the economy of individuals and craft an opportunity for the citizens to achieve sound well-being. the only drawback of this study lacks an environmental component. such a dimension is also fundamental to measure the extent and readiness of the malaysian citizens in shaping sustainable well-being. well-being research is gaining much bigger attention nowadays from people from all walks of life for sustainable and smart cities. in this study, therefore, we examined the reflection of well-being based on five (5) domains, namely environment, economic, health, spiritual, and emotion. this paper is to examine well-being and its determinants in malaysia’s smart state, selangor. we formulated the questionnaire as such on the selangor people’s perception and feeling about staying in selangor. it is important for the state government to enable its people to have good access now and in the future to the social, economic, and environmental resources required to shape its sound well-being. an understanding of the consequence of policy on the way people perceive their beliefs lives and behaviors is crucial for designing and, at the same time, prioritizing them. since selangor state is having a robust development and moving towards a smart state by the year 2027 (selangor blueprint, 2016), thus the objective of this study is to identify the critical dimensions of people of selangor’s well-being. we are adapting the gallup survey (1992) that has five (5) dimensions that relate to well-being. this study is specifically looking into the community’s well-being in selangor. the finding would shed light on the real scenario of its well-being, which can benefit the people in selangor and its governance. well-being dimensions: economic, emotion, environment, health, and spiritual the well-being of an individual can be affected by many factors. a lot of studies have welldocumented on the significant relationship between economic factors such as income, savings, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 42 bills, debts, and materials belongings. (povey, boreham, & tomaszewski, 2016; di tella, macculloch & oswald, 2001; and tsai, dwyer, & tsay 2016). money is the crux of all devils as well as the root of happiness and well-being. economic factors affect the way individuals’ physical requirements are satisfied and can also influence their intellectual, feeling, and social needs too. however, the evidence for any relationship between gdp/capita growth and growth in well-being in wealthier countries is sometimes arguable. kenny (2005) investigated both reasons for expecting the relationship to be stronger in developing countries, and those for a weak link that might still apply in less developed countries. he discovered that at least in middleincome countries, there is little strong evidence in favor of a relationship between economic growth and well-being. meanwhile, dolan, peasgood & white (2008) postulated that poor health, separation, unemployment, and lack of social contact are all strongly negatively associated with well-being. another important domain that associates with well-being is emotion. townsend (2016) outlines emotional geography is concerned with the association between feelings themselves and the representations and accounts of these feelings that are experienced through the body and within particular spaces. not just that, he found out that therapeutic landscape literature is to guide linkages between the volunteering landscape and the other forms of physical and emotional and well-being. sound well-being will make the people live in a harmonious and sustainable community. a positive environment can also influence people’s attitudes and behave rationally. numerous studies on the environment are positively related to great community well-being. phillips and wong (2017) documented that the domain of well-being should represent values and goals for the community even though it is difficult to measure well-being as there are varieties of values that depend on the characteristics of the place. newton (2007) defined well-being as “people’s positive evaluations on their lives which consist of positive emotion, engagement, satisfaction, and meaning.” one important study by gatzweiler, zhu, roux, capon, donnelly, salem & hanaki, (2017) who studied a 10-year plan for improving life in wales confirmed that wales’ well-being comprises health, opportunities for learning, quality of life a stronger economy, and also better, a simpler government which these five determinants are in the country’s plan. we now look at the relationship between health and well-being. unfortunately, khairani afifi (2019) reported that malaysia is the unhealthiest nation in asia. two-thirds of malaysian adults are at risk of chronic diseases. almost half of its population is overweight, and half of the working population have mental health. strachan, wright, and hancock (2007) confirm that government initiatives of health programs are fundamental to have better well-being. not only that, as a pro-active action by the government, it is also imperative to know that the relationship of health to well-being is undeniable. marks, cave, hunter, and mason (2011) discovered the influence of governance and incentive programs on commissioning for health and well-being and the governance towards deterrence. these researchers discovered that contracting health and well-being involves working through partnerships, performance management regimes preferred community success and well-being. community well-being is a function of many determinants working together to promote an optimal quality of life for all residents of a community. however, the promotion of lifelong learning among older adults can significantly contribute to community well-being is debatable. the aging society is a global phenomenon presenting both opportunities and challenges to community well-being. merriam and kee (2014) suggested that the more active, healthier, and educated older adults are, the less problematic, they are one family, relatives, and community resources and services. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 43 spiritual is another important domain for community well-being. religion and spirituality are some of the key drivers of happiness in psychology, as spirituality plays a very important role in one’s life. nevertheless, coleman, mckiernan, mills, and speck (2002) pointed out that spiritual well-being is a neglected aspect of quality of life in british research. doodman and safari (2017) carried out a study in iran and found out that spiritual well-being positively and significantly predicted happiness in adolescents. as a construct domain, spirituality provides diverse options for researchers seeking to describe and understand stress, well-being, and related phenomena. indicators of personal experiences with religions/ spirituality can be descriptive and functional, as they are deeply connected to the basic human need for managing the aspects of life that are dynamic, ambiguous, and uncontrollable. the psychological, philosophical, and behavioral aspects of spirituality make this form of demographic variance incredibly valuable for future consideration in occupational stress research. gallup (1999) suggested that religion/spirituality, more than any other background or demographic characteristic, maybe the key to understanding how people think and act but also quite likely among individuals in other countries and cultures. as presented by pargament, smith, koenig, & perez (1998) and aburaiya (2013), the association with religion or spirituality is always related to positive outcomes, but not necessarily always true. spirituality is multivalent, meaning that one’s religious or spiritual experiences and involvement can lead to negative results as well as positive ones. everyone needs to explore what they believe is their sense of meaning and purpose. spiritual wellness may include meditation, prayer, affirmations, or specific spiritual practices that support one’s connection to a higher power or belief system. research indicates that spirituality is related to better health results (utsey, bolden, williams, lee, lanier, & newsome, 2007). spirituality may help people cope with illness, suffering, and even death. spirituality also influences end-of-life decisions. many people reckon that spirituality and religion are the same things, and so they bring their beliefs and prejudices about religion to discussions about spirituality. spirituality and religiosity are sometimes interchangeably explained concepts related to god or a higher power, things sacred or divine, or a heightened level of human consciousness. therefore, specifically, this study investigated the reflection of well-being on the wellbeing domains, namely economic, emotion, environment, health, and spiritual. based on the literature reviewed, this study is expected to have positive linkages between well-being and all five dimensions. indirectly, this paper would contribute to the body of knowledge towards the realization of the smart city of selangor. methodology this study aims to investigate the formative second order of five (5) dimensions of community well-being among people who live in selangor. this research design includes a cross-sectional and a quantitative approach. we adapted a set of a questionnaire from gallup (1992). the population is people who live in selangor and come from all walks of life. the researchers administered the questionnaires themselves. a total of 1306 out of 1500 questionnaires were received (84.4% response rate). the data is collected using random and non-proportionate stratified sampling as the targeted respondents. hence, 1306 of the data collections were further analyzed the causal relationship using partial least square (pls) by measure on measurement and structural model of this study. items under each construct and present the descriptive statistics for each item with a 5-point scale. before the analysis, we analysed the data of the demographic factors aimed to understand the characteristic of the respondents in this study. the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 44 study analyzed the data using smart pls 3.0. pls-sem method is on iterative techniques approach that maximizes the stated variances of endogenous constructs. it also well behaved, such as multiple regression techniques (hair, black, babin, anderson & tatham, 1998). this characteristic approaches pls-sem is important for exploratory research. we assessed the measurement model in pls in terms of consistency and validity, which consists of item loading, composite reliability (cr), and average variance extracted (ave). item loadings must be greater than 0.70 to be satisfactory for the constructs to represent the variable. also, the value of composite reliability, which is greater than 0.70, is to be acceptable in terms of its reliability. the average variance extracted (ave) determine the amount of variance captured by the construct from each of the variables due to measurement errors. as suggested by fornell and lacker (1981), the construct should be a minimum of 50% of the variance. this value implies that the values of ave should be more than 0.50. we examine the structural model in pls by evaluating the path coefficients value at a 5% level of significance to see the nature of the relationship between the constructs. to validate the model, we conducted the diagnostic checking onto the model by observing the value of r2, which determines the strength of the model. besides, we also examine the effect size by using f 2 value, and the value determines the magnitude or strength of the relationships among the constructs. this result helps the researchers to assess the overall contribution of the study. a value of effect size of 0.02 indicates small effects, 0.15 indicate medium effects, and more than 0.35 indicate large effects, respectively (cohen, 1988). findings and discussion in table 1 shows 1306 of selangorians from 12 of local authorities and the higher respondents participated in this study from majlis perbandaran kajang (n=113), followed by majlis perbandaran selayang, majlis perbandaran kelang, majlis perbandaran sepang, majlis daerah sabak bernam with a total of 110 of respondents. next is majlis bandaraya petaling jaya (n=109) majlis daerah hulu selangor (n=109), majlis perbandaran ampang jaya (n=108), majlis daerah kuala selangor (n=108), majlis perbandaran subang jaya (n=107), majlis bandaraya shah alam (n=106), and majlis daerah kuala langat (n=106). also, the number of males with a total of 656 is slightly above females, with a total of 650. however, malay respondents were highly dominant in this study, with a total of 724, followed by indian was 291, chinese was 251, and others were 40. additional information revealed the income level of 796 of the respondents were range between rm1001 to rm5000, followed by 198 respondents who were less than rm1000, followed by 197 respondents who earn rm50001 to rm10,000 and only 115 of them from those earning more than rm10,000 a month. those the results interpret that most of the respondents were a group of b40 with the income household within rm6,275 and rm3,000. table 1. demographic factors demographic factors n % majlis bandaraya petaling jaya 109 8.3 majlis perbandaran ampang jaya 108 8.3 majlis bandaraya shah alam 106 8.1 majlis perbandaran kajang 113 8.7 majlis daerah hulu selangor 109 8.3 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 45 majlis perbandaran kelang 110 8.4 majlis daerah kuala langat 106 8.1 majlis perbandaran selayang 110 8.4 majlis daerah kuala selangor 108 8.3 majlis perbandaran sepang 110 8.4 majlis daerah sabak bernam 110 8.4 majlis perbandaran subang jaya 107 8.2 gender male 656 50.2 female 650 49.8 race malay 724 55.4 indian 291 22.3 chinese 251 19.2 others 40 3.1 income less than 1,000 198 15.2 1,001-5,000 796 60.9 5,001-10,000 197 15.1 above 10,000 115 8.8 first order reflective measurement model from the finding, table 2 indicates all the indicator loadings of constructs were greater than 0.5. furthermore, the composite reliability (cr) and average variance extracted (ave) values found greater than 0.5. moreover, as indicated in table 2, all constructs do not highly correlate with each other. thus, the results are implying that the constructs are unique from and unrelated to each other. hence the result confirmed there is no issue on discriminant validity as the indicators load more strongly on their construct, and the ave share between each construct and its measure is greater than the variance shared between the construct and another construct. table 2. convergent validity factors indicators factor loading composite reliability (cr) average variance extracted (ave) economic c2d 0.825 0.860 0.671 c2e 0.805 c2f 0.828 emotion c4a 0.849 0.923 0.801 c4b 0.907 c4d 0.926 environment c1a 0.870 0.899 0.641 c1b 0.813 c1c 0.759 c1d 0.794 c1e 0.761 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 46 health c3a 0.778 0.842 0.571 c3c 0.757 c3d 0.736 c3e 0.752 spiritual c5a 0.880 0.913 0.724 c5b 0.806 c5c 0.877 c5e 0.837 c5a 0.880 well-being d2a 0.728 0.825 0.541 d3a 0.725 d4a 0.770 d5a 0.719 for the next consequent test, we run the discriminant validity test. as recommended by hair et al. (2017), we use the lacker criterion to assess the discriminant validity between reflective constructs. table 3 showed that bolded values on the diagonal were greater than the corresponding row and column values indicating the measure was discriminant, and thus we conclude that the constructs have discriminant validity. table 3. discriminant validity constructs economic emotion environment health spiritual well-being economic 0.819 emotion 0.093 0.895 environment 0.510 0.071 0.800 health 0.425 -0.008 0.458 0.756 spiritual 0.229 0.024 0.254 0.292 0.851 well-being 0.413 0.044 0.464 0.417 0.306 0.736 figure 1. first order reflective measurement model https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 47 second-order formative measurement model as in figure 1, the r square (r2) of the model was 31.1 percent of the variance of well-being explained by the economic, environment, health, and spiritual factors. according to the suggestions of hair et al., (2011), the r2 values of 0.75, 0.50, and 0.25 in the structural model can represent the strong, medium, and weak determination coefficient. these results showed that all those constructs moderately presented the constructs of well-being. table 4 is a multicollinearity analysis. it revealed there were no issues of multi-collinearity as the vif values were less than 10, economic (vif=1.459), emotion (vif=1.014), environment (vif=1.515), health (vif=1.402), and spiritual (vif=1.121). table 4. multicollinearity analysis constructs vif values economic 1.459 emotion 1.014 environment 1.515 health 1.402 spiritual 1.121 next is the significance of weight based on the t-values, and standard error. based on table 5, the associated coefficients for the formative relationships so-called as outer weights in the model presented the outer weight of economic factor was (0.260), followed by emotion (0.253), environment (0.342), health (0.304), and spiritual (0.007). the results interpreted that all those dimensions were at a moderate level of well-being excepted for spiritual was found was weak. furthermore, to assess the significance of the weight, a bootstrapping was conducted, and the t-values should be greater than 1.96. the finding revealed that the economic (t-values =5.141), environment (t-values =6.668), health (t-value=5.092), spiritual (t-values= 4.969), exception for emotion (t-values =0.283) found less than 1.96. the emotional dimension is not significant to well-being. recommended by sarstedt, ringle, & hair, (2017) when an indicator has no significant weight, and the outer loading is below 0.50, the study should decide whether to retain or delete the indicator by examining its theoretical relevance and potential content overlap with other indicators of the same construct. in this study, the emotion was not significant, and but the prior study remained as the construct for well-being, then this study included the emotion factor as a determinant for well-being. table 5. significance values well-being relationship outer weight se t-value result economic -> well-being 0.260 0.172 5.141 supported emotion -> well-being 0.253 0.013 0.283 not supported environment -> well-being 0.342 0.252 6.668 supported health -> well-being 0.304 0.188 5.092 supported spiritual -> well-being 0.007 0.149 4.969 supported https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 48 figure 2. second-order formative measurement model conclusion in conclusion, this study aimed at data analysis used to estimate and interpret formative secondorder constructs of five constructs of well-being in figure 2 with a study among 1306 of residents in selangor. the finding revealed that the economic dimension, environment dimension, health dimension, and spiritual dimension were significant to well-being except for the emotion dimension was not significant to well-being. the environment showed the most significant factor (t-value =6.668), followed by economic (t-value =5.141), health (t-value =5.092), spiritual t-value =4.969). the implication of the findings highlights the assessment for the study might use the formative second order of measurement model. a step and interpretation of this study guide the researcher to further explained the result of the study. discussion the most significant dimension found in this study is the environment dimension. most of the respondents agree that a conducive environment is vital in determining community well-being, which in line with musa et al. (2018) study. the questions that we probed are on the respondents’ perceptions of having a great environment, such as the availability of space for the young and the senior citizens. we also do not forget to mind the issues of the poor regardless of their ethnic and minorities. besides, recycling centers are of importance in determining the selangor community's well-being. secondly, there is no doubt; the economic dimension is also paramount. povey et al., 2016; di tella et al., 2001; and dwyer, 2016) have the same opinion. based on the questions asked in the questionnaire, the selangorians agreed that they should have some savings, life insurance, health insurance, and good pay that commensurate with their qualifications. these matters are important to ensure their economic status to embrace wellbeing. the next crucial dimension is health. if one is not healthy, the community's well-being is https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 49 hard to achieve. the study indicated that most of the respondents are satisfied with their health status; they have enough energy to get things done daily and generally have health problems. this scenario could be due to a wonderful environment that they feel, and selangor claims to have world-class medical centers. the fourth key dimension is spiritual. our finding is concurrent with phillip and wong (2017) and gatzweiler et al. (2017) study. the majority of the selangorians are muslims, followed by buddhists, hindus, and christians. most of them admitted that they pray and have fulfilled their responsibilities as required by their religions. they also believed that they have a strong belief in their respective religion that they should not only think good but do good. having a strong religious belief is key to great community wellbeing. despite the caution and controversy about the ‘robustness’ of proof and reluctance to publish non-significant findings that have undergone rigorous statistical tests, the number, and variety of different studies showing the different ways in which interaction with nature has a positive impact on well-being should be critical. interestingly, our study found out that the emotional dimension is not significant to the well-being dimension. this study contradicts with townsend (2016) study. this scenario probably is due to the questions asked about their emotional elements, such as whether or not they experienced anger, worry, or stress lately. they could have felt all those emotions due to personal issues that are not necessarily related to the overall well-being. as long as everyone understands and respects each other, well-being is accessible across a large range of possible domains of life, but almost always includes some variances of environment, economy, health, and security. the most important first step in assessing well-being is always to consider its purpose in terms of the choices for action that it can measure or distinguish. whether the objective is to identify how community-scale activities might affect or impact, normative preferable individual behavior, to reduce inequalities between and within states or across generations, this is not a technical decision but an idea and political one which needs to be formulated by the local governance. thus, we strongly recommend scholars, policymakers, and state governments to pay closer attention to these variables that enhance selangorians’ well-being. limitations of the research well-being can be seen as evaluations of conditions in a community, specifically here in selangor, which involves various community processes, action, and government. however, it is equally important to assess subjective perceptions of community well-being and resilience in quality of life research (turksever & atalik, 2001) because perceptions have their authenticity. although perceived well-being is only modest in this research, it is not necessarily selangorians are not actively engaged with the well-being. future research and implications while the current research examines well-being in terms of economics, emotion, environment, health, and spirituality, future research should address other factors that influence the well-being of a state. here, we do not specifically look into the culture. probably, future research can include other potential determinants of well-being. researchers could also tap on a specific community well-being study. research on social well-being could also be of interest. moreover, a comparative study of well-being from other developing countries might provide insights into the enhancement of overall well-being in selangor. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 50 acknowledgement we would like to thank the selangor state government for funding of this paper under grant no: suk gppsti/2017/002. references abdullah, m.f. 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(2008). community well-being in an unwell world: trends, challenges, and possibilities. journal of public health policy, 29(3), 353-366. 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/10.1177/0022022106297296 contents indian journal of finance and banking; vol. 2, no. 1; 2018 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business 1 development and terrorism in nigeria: co-integration and causality analysis of macroeconomic factors emmanuel o. okon1 1department of economics, kogi state university, anyigba, kogi state, nigeria correspondence: department of economics, kogi state university, anyigba, kogi state, nigeria, e-mail: tonydom57@yahoo.com. tel: +2348023275716 received: january 20, 2018 accepted: january 20, 2018 online published: january 27, 2018 abstract this paper is a cointegration and causality analysis of macroeconomic factors and terrorism in nigeria using time series data spanning between 1970 and 2016. the stochastic characteristics of each time series was examined using augmented dickey fuller (adf) test. the result reveals that log(govx), log(intr), polx, dlog(gdpc) and dlog(open) were in line with the apriori expectation. with this development, some recommendations were made amongst which are that trade openness rate should be all time kept at peak benchmark by adopting tight trade openness while strategic macroeconomic policies should be instituted in order to encourage domestic private investment to enhance the growth of the economy. nigerian political system has to be stabilized and the government should step up its intelligence gathering capacity as well as training security agents to forcefully combat terrorist group. keywords: terrorism, economic deprivation, cointegration, causality, nigeria. 1. introduction economic development is a broader concept than economic growth. development reflects social and economic progress and requires economic growth. growth is a vital and necessary condition for development, but it is not a sufficient condition as it cannot guarantee development(economic online, 2017).one of the most compelling definitions of development is that proposed by amartya sen. according to sen (2001), development is about creating freedom for people and removing obstacles to greater freedom. greater freedom enables people to choose their own destiny. obstacles to freedom, and hence to development, include poverty, lack of economic opportunities, corruption, poor governance, lack of education and lack of health. economic development in nigeria has been rocked back and forth by various political, socio-cultural, financial and infrastructural setbacks (nigerian finder, n.d.). however, since her return to civil rule in 1999, it has faces some national security challenges across the six geo-political zones in the country. the spate ofbomb blasts, kidnapping, pipeline vandalisation and other forms of criminalities in recent times in various parts of the country are emerging trends of domestic terrorism (abimbola and adesote, 2012). a number of analysts have variously attributed the disturbing trend to political dissatisfaction, ethnic and religious differences, perceived societal neglect and pervasive poverty among the people. nigeria is rich but its people are poor(world bank, 1996). the unfortunate trend of rapidly growing population of poor people is further exacerbated by the worsening of www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 2 the conditions of living of poor people, i.e., the poor are becoming poorer than they used to be(manson et al, 2004). poverty is caused by both microeconomic and macroeconomic as well as social-cultural factors. the conventional wisdom is that poverty creates terrorism but several empirical studies have challenged this view. the primarily aim of this paper is to provide some empirical evidence regarding macroeconomic factorsand their effects ondomestic terrorism in nigeria. the paper shall attempt to provide a plausible answer to the question: does economic deprivation lead to terrorism? the paper is structured as follows: section 2 reviews related literature. an overview of the nigeria‟s is presented in section 3. the methodology of the study is discussed in section 4. an econometric analysis is presented in section 5. section 6 then summarizes and concludes. 2. review of related literature quantitative studies of terrorism have increased dramatically in the past decade. many articles in this body of literature sought to explain terrorism as the result of poor economic development in a country. factors such as poverty, employment, and development are frequently employed as economic variables in empirical terrorism research. based on a sample of 112 countries from 1975 to 1997, li and schaub (2004) findings show that the economic development of a country and greater trade openness reduce the number of terrorist incidents inside the country. their finding that economic development decreases the likelihood of terrorism is an interesting example of an economic indicator‟s effect on terrorism. revolutionary communiqués frequently justify violence based on altruistic motives to rectify grievances on others' behalf (ehrlich and liu, 2002; goldman, 1978; hoffman, 2006; sageman, 2008) in this case the impoverished. public consensus and terrorist rhetoric both contend poor economic conditions within a state produce motivating grievances. although terrorist ideology may explain economic deprivation with a global narrative, virtual perceptions do not replace more corporal, proximate knowledge and opponents. violent reactions are posited to occur. gurr (1970) suggests that collective violence emerges as a result of relative deprivation theory. specifically, he holds that “the greater the intensity and scope of relative deprivation, the greater the magnitude of collective violence.” blomberg and hess (2008) provide a more nuanced empirical analysis of economic development as a determinant of terrorism. they find that economic development is positively correlated with transnational terrorism, particularly in higher income countries. however, in lower income countries this trend reverses, and economic development is negatively related to transnational terrorism. the authors point to the importance of considering terrorist groups' political motivations. they say “interestingly, radicalism, separatism, and other ideological motivations for terrorism that appear to be intrinsically noneconomic may actually stem from underlying economic conditions” (richardson, 2011). they make the case that economic factors are important in different ways for higherand lower-income countries. this could be due to a phenomenon similar to relative deprivation theory, in which those of different economic brackets view changes in economic factors differently. the authors provide two theories for this phenomenon. the “take-off” effect suggests that good policies deter terrorism for the most disadvantaged. as countries develop, blomberg suggests that terrorism becomes a “luxury good” enjoyed by dissident groups for political purposes. however, the authors do not look at economic changes within a given country (richardson, 2011). economic recessions can increase the probabilities of internal and external conflicts and visa versa (elbakidze and jin, 2007). blomberg, hess and weerapana (2004) find that economic recessions, represented by negative per capita gdp growth, could increase the probability of terrorist activities in democratic high-income countries. they argue that during economic recessions in high-income countries groups that are unhappy with current socio-economic status quo, but are unable to influence political and institutional situation, resort to terrorist www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 3 activities to increase their voice in the economy. li and schaub (2004) study the effects of economic globalization on the frequency of transnational terrorist incidents within a country‟s borders. they find that trade, foreign direct investment, and portfolio of investment of a country have no direct positive effect on the number of terrorist events initiated within the country. however, economic development of a country and its trading partners has a negative effect on the number of international terrorist incidents within a country. therefore, if trade and foreign direct investment promote economic development, then these variables must indirectly reduce transnational terrorism. li (2005) shows that democratic participation and economic development measured by gdp per capita reduces transnational terrorism while government constraints increase the number of terrorist incidents. alesina et al. (1996) find that to some extent low economic growth measured by gdp per capita could lead to government turnovers through coups. a number of papers examine public opinion surveys in middle eastern countries to measure the public support for terrorism in light of an individual‟s economic standing (krueger and maleckova (2003), tessler and robbins (2007)). other studies investigate the economic status and level of educational attainment of terrorists themselves to test the hypothesis that poverty and ignorance drive men to violent professions. berrebi (2003) and krueger and maleckova (2003) examine biographies of terrorists to assess their educational and economic background. from the above it is observed that most of the studies focused on the relationship between economic variables and terrorism. however, these studies failed to examine the issue ofcausality between the variables. this is important because causality enable us to have a comprehensive view of whether the direction of causality runs in both directions one direction between the variables. the paper attempt to look at the direction of causation between economic factors and terrorism in nigeria from 1970 to 2015.this paper seeks to provide new evidence on this topic in the light of country level economic characteristics and domestic terrorism. 3. overview of terrorism and economy performance: nigeria in nigeria today, many terrorist networks have sprouted in many parts of the country, mend, boko haram and massob to mention just but a few, have been unleashing terror to the nigerian public. the government is extremely concern in curtailing the activities of these extremist as well as other crime perpetrators ranging from mobile phone theft, cult activities, drug trafficking, gang related offences, fraud, kidnapping for ransom, organized crime and others (okonkwo and enem, 2011). table 1 (see appendix) shows categories of militia groups in the niger delta where mend and massob originated. table 2 and 3 (see appendix) show attacks blamed on two terrorist groups in nigeria and images of terrorism are shown in appendix. the economist intelligence unit (eiu) 2008 country profile on nigeria states that the country displays the characteristics of a dual economy: an enclave oil sector with few links to the rest of the economy, except via government revenue, exists alongside a more typical developing african economy, heavily dependent on traditional agricultural, trade and some limited manufacturing. during the colonial era cash crops were introduced, harbours, railways and roads were developed, and a market for consumer goods began to emerge. at independence in 1960 agriculture accounted for well over half of gdp and was the main source of export earnings and public revenue, with the agricultural marketing boards playing a leading role (eiu, 2008). however, the rapid development of the oil sector in the 1970s meant that it quickly replaced the agricultural sector as the leading engine of growth. according to official nigerian government estimates, the oil sector accounts for 70-80% of federal government revenue (depending on the oil price), around 90% of export earnings and about 25% of gdp, measured at constant basic prices(eiu, 2008). agriculture (including livestock, forestry and fishing), which is still the main activity of the majority of nigerians, constitutes about 40% of gdp(eiu, www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 4 2008). in recent years it has become clear that the manufacturing sector has also continued to decline, to well under 5% of gdp, while the services sector and the retail and wholesale sectors have continued to grow and now account for the majority of the remaining 30% of gdp(eiu, 2008). the international crisis group report „nigeria: want in the midst of plenty‟, published in july 2006, adds that the country has abundant human and natural resources but still struggles with mass impoverishment. agriculture, once its primary hard currency earner, has collapsed, and food imports now account for a sixth of the trade bill. manufacturing is a smaller proportion of the economy – about 6 per cent – than at independence. the landscape is dotted with oversized industrial projects of limited utility and capacity. despite the country‟s oil wealth, extreme poverty – defined by the world bank as living on less than $1 per day – now affects 37 per cent of the population. nine out of ten nigerians live on less than $2 daily. corruption, a boom and bust cycle of oil prices and failure to diversify the economy have left the country in „a development trap‟ (icg, 2006).nigeria's macroeconomic performance from 1990 to 2012 is illustrated in table 4. table 4: nigeria's macroeconomic performance from 1990 to 2012 economic indicators 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 gdp growth (%) 8.2 5.4 4.6 3.5 9.6 6.6 5.8 5.3 5.7 6.0 6.7 7.67 8.6 7.8 oil sector growth (%) 5.6 11.1 5.2 -5.2 23.9 3.3 -1.7 -3.7 -5.9 -6.2 -1.3 non-oil sector growth (%) 8.6 4.4 2.9 4.5 5.2 7.8 8.4 9.5 9.2 9.0 8.3 external reserves (% of gdp) na na na na 7.7 11.4 24.4 36.5 42.6 52.99 62.48 external debt/gdp 106. 5 64.9 57.3 72.1 61.1 84.5 69.2 7.4 4.0 17.5 9.28 domestic debt/gdp 31.3 32.2 36.6 26.1 28.6 25.3 20.8 18.6 19.2 15.23 12.85 overall bop/gdp –2.1 6.9 0.5 -10. 3 -2.3 5.2 10.5 12.7 1.4 8.02 9.12 inflation rate (%) 7.5 6.9 18.9 12.9 22.2 15 17.9 8.2 5.9 11.6 11.5 13.40 11.20 12.70 average official exchange rate (naira/us$) 7.9 101. 7 111. 9 121 127. 8 132. 8 132. 8 128. 5 127. 4 139.2 7 142.8 9 150.3 0 155.3 0 155.23 sources: (i) cbn annual reports and statement of accounts (various years) (ii) cbn statistical bulletin vol. 17, december 2006. (iii) national bureau of statistics (nbs), 2005 (iv)trading economics (2013). 4. methodology and data source granger causality tests and impulse response analysis of vector autoregressive models (var) are used to assess the relationshipbetween macroeconomic variables and terrorism in nigeria. the data set consists of time series www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 5 spanning 1970 through 2016. the choice of the period is due to data availability. the variables under consideration aregdp per capita (gdpc), inflation rate (infl), trade openness(open), government total expenditure (govx), interest rate (intr), macroeconomic policy index (polx) and terrorism (dummy variable). the data were obtained from the publication of central bank of nigeria, journals, newspapers and websites. 4.1 specification of model and analytical procedure the general model of the study hypotheses that terrorism in nigeria is a function of economic variables such as gdp per capita, inflation rate, trade openness, government total expenditure, interest rate, macroeconomic policy. the specification is given by: terr = ƒ(gdpc, open, infl, govx, intr, polx) ………...(1) where terr is a dummy variable which takes the value of 1 if terrorist attack occurs in a year and 0 if otherwise, gdpc is per capita gdp, infl is inflation rate, open stands for degree of openness, govx is government expenditure, intr is interest rate, polx is policy index. the policy index dummy took on the value of unity in civilian rule years and zero in military rule years. hereafter, a vector autoregressive (var) model is specified to examine the effects of shocks from economic variables to terrorism from which variance decomposition and impulse responses are derived to provide information on impulse responses of one variable over the other (adrangi and allender, 1998; adebiyi and oladele, 2005;omojimite, 2012). following adebiyi (2006), let‟s consider a bivariate autoregression (ar (1)) model. let yt be a measure of economic variables and zt be terrorism. a var system can be written as follows: = a0+ a1[l] + ……….(2) a0 is s vector of constants, a (l) a 2 x 2 matrix polynomial in the lag operator l, and uitserially independent errors for i. suppose the structural equations can be represented as follows: yt= b10 b12zt + b11yt-1 + b11yt-1 + uyt …………(3) zt= b20 b21yt + b22yt-1 + b23zt-1 + uzt …………(4) which can be rewritten as: yt +b12zt = b10 + b11yt-1 + b13zt-1 + uyt …………(5) zt + b21yt = b20 + b22yt-1 + b23zt-1 + uzt …………(6) and in matrix form: = + + .………(7) let b = ; z = ; v0 = ; and v1 = this allows for a more compact form of the structural equation as follows: bzt =v0+v1zt-1+uit assuming that b is invertible, we pre-multiply the equation by b-1to obtain: www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 6 zt=a0 +a1z t-1+ it ……………(8) where a0 = b-1v0 ; a1= b-1v1 ; and et = b-1uit given the aij is the element of the ith row and jth column, we can now write our var instandard form: yt= a10 + a11yt-1 + a12zt-1 +εyt …………….(9) zt= a20 + a21yt-1 + a22zt-1 + εzt …………….(10) and the matrix form: = + + …………..(11) note that the errors are a composite of two errors uytand uzt since εt = b-1uit i.e. = -1 so that: εyt =uyt –b12uzt ...…………(12) 1-b12b21 εzt =uyt –b12uzt …..……….(13) 1-b12b21 since the uits are white noise, so are the ets (adebiyi,2006). from equations 12 and 13, we can see that policy errors can be caused by exogenous y and policy disturbances. let ∑u be the 2x2 variance-covariance matrix of uit and ∑e that of eit. then ∑e = b∑u b1. to determine the impact of policy on output, we need tolook at the effect of uzt but unless b21 =0, ezt is not equal to uzt and therefore does notprovide a measure of the policy shock. if we estimate our var in equations 6 and 7 as itis, b and ∑u will not be identified without further restrictions since estimation of thereduced form in equations 9 and 10 will yield less parameters than the structural form inequations 1and 2. one of the most common restrictions is to assume that the structural shocks are uncorrelated so that the off diagonal elements in the covariance matrix are zero (simatele, 2003). two results obtained from vars that are useful for analyzing transmission mechanisms are impulse response functions and forecast error variance decompositions. the impulse responses tell us how growth rate of gross domestic product responds to shocks in real educational expenditure and other policy variables, while the variance decompositions show the magnitude of the variations in growth rate in real gdp due to real capital educational expenditure and other policy variables. if we assume a stable system (like simatele, 2003), we can iterate equation 5 backwards and let n approach infinity and solve to obtain: zt= λ + a1 i t-1 where the λs are the means of yt and zt and use equation 8 to get = + ……………… (15) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 7 we define the 2x2 matrix as f (i) with elements fjk(i) such thatf(i) = and we write in moving average form as = + or in a more compact formzt=  + f(i)ut-i …..(16) fjk(i) are the impulse response functions. as we vary (i), we get a function describing theresponse of variable j to an impulse in variable k (simatele, 2003).to derive the forecast error variance decompositions, we use equation 12 to make a forecast of zt+1. the one-step-ahead forecast error is fut+1and in general the n-periodforecast error zt+netzt+nis: zt+netzt+n= f(i)ut-1 ..……….(17) and the mean square error (mse)(zt+netzt+n) 2= z f(i) ………………(18) where is the variance of zt+n. to show that the decomposition more explicitly, let us narrow down on yt, (yt+netyt+n) 2= f(i)2. the share of due to uyt and uzt are:  y[f11(0)2 + f11(1)2 + ….+ f11(n-1)2] ….……..(19)  (n) 2  z[f11(0) 2 + f11(1) 2 + ….+ f11(n-1) 2 ] ……….(20)  (n) 2 since the variance decomposition tells us the share of the total variance attributed to agiven structural shocks, for an exogenous sequence y, uzt will not explain any of the forecast error variance of yt. granger causality tests are conducted to determine whether the current and lagged values of one variable affect another. one implication of granger representation theorem is that if two variables, say xt and yt are co-integrated and each is individually 1(1), then either xt must granger-cause ytor yt must granger-cause xt. this causality of co-integrated variables is captured in vector error correction model (vec). however, in order to avoid spurious regression results, stationarity of variables and cointegration among them are tested prior to estimation of var models and granger causality regressions. the augmented dickey-fuller (adf) test for order of integration was adopted. the adf test relies on rejecting a null hypothesis of unit root in favour of the alternative hypothesis of stationarity. the general form of the adf is estimated by the following regression: ∆yt = a0 + a1yt-1 + a∆yi+ et ……………(21) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 8 ∆yt = a0 + a1yt-1 + a∆yi+ δt + et ……………(22) where: yt = time series, it is a linear time trend; δ = first difference operator; a0 = constant; n = optimum number of lags in dependent variable; et = random error term. 5. empirical result and discussion tables 5a and 5b show unit root tests for the variables in levels and in differences. variables are expressed in logarithms form. according to the tests, time series are integrated processes of first order, i(1). the cointegration relationship between variables was also established using two likelihood ratio tests, a trace test and maximum eigenvalue test. the result of the cointegration test is reported in table 6. trace test indicates 4 cointegrating equation(s) at the 5% level and 3 cointegrating equation(s) at the 1% level. on the other hand, max-eigen value test indicates 2 cointegrating equation(s) at the 5% level and 1 cointegrating equation(s) at the 1% level. since there is growing evidence in favour of the trace statistics compared to the maximum eigen value statistics (kasa, 1992) as such the trace test result is accepted. the evidence of cointegration among the variables, indicate that there is a long-run relationship among the variables. since the variables are cointegrated the equations of the vars also include lagged values of the variables to capture their long-run relationships. table 7 shows the estimate of an unrestricted var. the var estimates do not present the p-values for testing the corresponding parameters. however, based on each value of the t-statistics, it is easy to conclude whether or not a lagged variable has a significant adjusted effect on the corresponding dependent variable, by using a critical point of |t0| >2 or 1.96. corresponding to the exogenous variable terr(-1) h0: is accepted based on the t-statistic of 2.78723. hence, it has a significant adjusted effect on terr. in order words, one year previous terrorism has a positive significant effect on current year terrorism. this is applicable to log(infl(-1)) and log(infl); log(gdpc(-1)) and log(gdpc). on the other hand, log(infl(-2)) has a negative significant effect on log(govx) and log(intr). similarly, log(govx(-1)) has a negative significant effect on log(infl) but log(govx(-2)) has a positive significant effect on log(infl) rather. log(intr(-2)) showed also a positively significant relationship with log(infl). a closer examination of the var results in table 7, polx(-1) depicted a positive effect on log(gdpc) and negative effects on log(govx) and log(open). log(open(-1)) showed an inverse effect on log(govx) and positive effect on log(open). still from the results, log(open(-2)) showed a positive significant effect on polx. the remaining endogenous variables in table 7showed insignificant effects. in analyzing the appropriateness of the estimated var in table 7, figure 1 reports inverse roots of the characteristic ar polinominal. var model is stationary if all roots have absolute value less than one and lie inside the unit circle. as shown on the graph, all roots are lying inside the unit circle, so this suggests that the model is stable, e. g. the influence of the shock for some variables may decrease over time. pairwise granger causality tests was carried out to tests if the endogenous variable can be treated as exogenous. according to that test all variables in the var model may be treated as exogenous.the lag exclusion tests suggests that jointly all two lags of some of the endogenous variables were not statistically significant. a major requirement in conducting johansen (1995) co integration tests and estimation of a var system, either in its unrestricted or restricted vector error correction (vec) forms, is the choice of an optimal lag length. in this paper, this choice was made by examining the lag structure in an unrestricted var originally specified with three lags, using a combination of var lag order selection criteria. table 8 presents the evidence based on the var lag order selection criteria, while figure 2 presents the inverse roots of the ar characteristic polynomial associated with the lag orders specified by the selection criteria. as shown in table 3, while the lr, fpe, sc www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 9 and hq criteria suggests the use of one lag, the aic criterion suggests that three lags should be accommodated in the var. the correct lag length will depend on the criteria or measure we use. this is typical of these tests and researchers often use the criterion most convenient for their needs. the sc criterion is generally more conservative in terms of lag length than the aic criterion. here in this paper a lag length of 3 is assumed for convenience. figure 2 displays pairwise cross-correlograms for the estimated residuals using 12 lag intervals. the dotted lines in the plots of the autocorrelations are the approximate two standard error bounds computed as +2 /(√t). if the autocorrelation is within these bounds, it is not significantly different from zero. note that figure 2 presents 49 correlograms, which show that five or six of the corresponding population autocorrelations (or autocorrelation parameters) are significant. for example, the first graph shows that one of the autocorrelations is outside the interval with two standard error bounds and the second graph shows that two of the autocorrelations are outside the interval. table 9 reports the multivariate extensions of the jarque-bera residual normality test, which compares the third and fourth moments of the residuals to those from the normal distribution. concerning factorization of the residuals that are orthogonal to each other, a cholesky was chosen. this is the inverse of the lower triangular cholesky factor of the residual covariance matrix. the resulting test statistics depend on the ordering of the variables in the var. the results show that halve the components in table 8 displaced negative skewness while the rest showed positive skewness. the skewness of a symmetric distribution, such as the normal distribution, is zero. positive skewness means that the distribution has a long right tail and negative skewness implies that the distribution has a long left tail. the kurtosis of a normal distribution is 3. the result shows that most of the components have kurtosis less than 3, that is, the distribution is flat (platykurtic) relative to the normal.although a very few of the component have small probability values,generally, the jarque-bera statistic shows that most of the component are insignificant meaning that the hypothesis that residuals are normally distributed is accepted. an impulse response function traces the effect of a one-time shock to one of the innovations on current and future values of the endogenous variables as seen in tabel 10 (see appendix). a shock to the i-th variable not only directly affects the i-th variable but is also transmitted to all of the other endogenous variables through the dynamic (lag) structure of the var. table 10 reveals that past terrorism shocks in the 10 year period has a positive relationship with current terrorism. log(infl) shocks has a negative relationship with current terrorism in the early five years, thereafter turns positive. on the other hand, log(gdpc) shocks showed a positive relationship with terrorism up to the third year. beyond this period, a one standard shocks from log(gdpc) attracted significant negative response to terrorism. at first log(govx) displayed negative relationship till the fourth year with terrorism. beyond the fourth period log(govx) showed positive significant relationship, thereafter, the relationship became insignificant. log(open) shocks started with a negative significant relationship with terrorism. along the line it produces a negative insignificance and later turned negatively significant in the fourth period. it displayed positive significant relationship with terrorism in the fifth period but the relationship positively insignificant all through till the tenth period. an interesting observation in the result is that past log(intr) shocks throughout the periods showed a positive significant relationship with terrorism. although polx started off in the first four years with a positive significant relationship with terrorism, thereafter, it turned negative.see table 10(in appendix) for more of the shocks and impulse response of other endogenous variables. while impulse response functions trace the effects of a shock to one endogenous variable on to the other www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 10 variables in the var, variance decomposition separates the variation in an endogenous variable into the component shocks to the var. thus, the variance decomposition provides information about the relative importance of each random innovation in affecting the variables in the var. tables 11 shows the results of the variance decomposition within a future 10-period horizon. the columns give the percentage of variance in the variables that are due to innovations associated with specified variables, with each row adding up to 100. terr own innovation accounted from 100% to 70% of the variation in terr within the ten year period. for the later part of the ten year period, especially the eighth period, its own innovation accounted for 71.8% variation in terr, log(gdpc) accounts for as much as 17.2%, log(intr) accounted for 7.3%, log(open) accounted for 2.1%, log(infl) accounted for 1.4%, log(govx) accounted for 0.3% and polx accounted for 0.1% of variation in terr in the same period. this dominance in variations was also exhibited by log(infl), log(gdpc) and log(govx)due to their own innovations. other interesting features of the results in table 11 are noted.for example, shocks to log(intr) variable in the first year accounted for 91.4% variation in log(intr) while 5.1%, 0.1%, 0.8% , 2.1%, 0.4%, 0.0% were accounted for by terr, log(infl), log(gdpc), log(govx), log(open) and polx respectively. from the fifth year upward, variation in log(intr) is determined mostly by terr. this result supports the fact that a unidirectional causality runs from terr to log(intr).variations in log(open) are largely due to its own innovations up to the seventh period, thereafter, terr, log(infl), log(gdpc), log(govx), log(intr) and polx accounted for most of the variation in log(open).apart from its own innovation that accounts for over 53.8% of the variation in polx in the first year, terr, log(infl), log(gdpc), log(govx), log(open) and log(open) respectively accounted for 22.8% , 0.0%, 0.1%, 20.1% , 0.1% and 3.2% of variation in polx in the same period. it is however worthy of note, that most (over 50%) variation in terr from the second year upward were mostly due to variations in log(govx), log(gdpc), log(infl) and terr. the results of the pairwise granger causality tests alternated between bi-directional, no causality and uni-directional between the variables, depending on the lag length allowed. the outcome in respect of two-lag length is presented in table 12 (see appendix). it reveals that causality runs from log(intr) to log(govx) and there is no evidence of bi-directional causality between these two variables. the probability values and f-statistics are given; the low probability values suggested that the nullhypothesis can be rejected. this result can be attributed to the fact that interest rate policy in nigeria is perhaps one of the most controversial of all financial policies. the reason for this may not be farfetched because interest rate policy has direct bearing on many other economic variables which in turn influence government spending. interest rates play a crucial role in the efficient allocation of resources aimed at facilitating growth and development of an economy and as a demand management technique for achieving both internal and external balance. consequently, a unidirectional causality runs from terr to log(govx). this is because fighting terrorismhas become one of the major concerns in nigeria and the government isspending more on combating the scourge. government spending has continued to rise due to the huge receipts from production and sales of crude oil, and the increased demand for public (utilities) goods like roads, communication, power, education and health. besides, there is increasing need to provide both internal and external security for the people and the nation. the war against terror in nigeria raised military expenditure to a staggering $2.327 billion(n372.3 billion) in 2012 alone (naij,2013), ranking nigeria among countries at war in africa. causality results between polx and log(govx) reveals that a bi-directional causality runs from polx to log(govx). this finding implies that macroeconomic policies ( government fiscal (expenditure and www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 11 revenue) policies and the monetary policy (inflation management, interest rate policy and foreign exchange management) influences government expenditure.generally, as observed by sanusi (2002),macroeconomic policies in nigeria have been inconsistent over the long-run as periods of internal and external imbalances were more pronounced than periods of strong underlying macroeconomic fundamentals. also, a unidirectional causality was found running from log(intr) to log(open). this result aligns with de fiore and liu (2002) that showed the conditions under which inflation-targeting interest rate rules lead to equilibrium uniqueness in an open economy.in an open economy, an increase in the real interest rate is transmitted to aggregate demand through an inter-temporal substitution effect and also through terms of trade effect. the behaviour of interest rate is important for economic growth of nigeria in view of the empirical nexus between interest rates and investment, and investment and growth. additionally, unidirectional causality was found running from terr to log(intr) implying that terror variable exerts a positive and significant impact on macroeconomic variable like interest. this accords cukierman (2004) that by raising the probability of death; an increase in terror reduces investment, production and consumption. in parallel the increase in death raises the interest rate and reduces total wealth. however,causality was also seen to runs from log(open) to polx. but interestingly there is was no causality found between terr and polx. also, granger causality does not run either-way, from polx to log(intr), indicating non-existence causation. generally, it could be noted that there is existence of dynamic relationship existing amonglog(open), polx , log(intr), log(govx). however, worthy of note is that causality ran from terr to log(govx) andlog(intr). since the results in table 6 (see appendix)showed that the variables have a long run relationship, a long runstatic regression is then estimated by applying error correction. the results of unit root test shows that the error correction term (ecm) is stationary at level 1(0)). table 13 contains the multivariate regression results of the overparameterised model. the results indicate that dlog(infl) is statistically insignificant. this necessitates the dropping of the variable from the model and hence the results contained in table 14(see appendix), which is the focus of the discussion. the improved results as contained in table 14 show that with the exception of the constant term, all the coefficients are statistically significant. a closer look at the result reveals that log(gdpc), log(open), log(infl), dlog(govx) and dlog(intr) went contrary to the theoretical expectation. on the other hand, log(govx), log(intr), polx, dlog(gdpc) and dlog(open) were in line with the apriori expectation. the result shows that 1 percent increase in log(govx), reduces the occurrence of terrorism (ter) by 0.18 percent and it is significant at 1% level. on the other hand, log(intr) shows a positive relationship with terrorism. terrorism rises by 0.616936 percent given a 1 percent increase in log(intr). likewise, a 1 percent increase in polx increase the occurrence of terrorism by 0.340240 percent and statistically significant at 1 percent level. the result from table 14 also revealed an inverse relationship between dlog(gdpc) and terrorism. precisely, a 1 percent increase in dlog(gdpc) is associated with a 0.142587 percent decline in terrorism. similarly, a 1 percent increase in dlog(open) leads to a 0.075312 reduction in the occurrence of terrorism. the r2 0.937818 (93.78%) implies that 93.78 percent of total variation in terrorism explained by the regression equation. coincidentally, the goodness of fit of the regression remained high after adjusting for the degrees of freedom as indicated by the adjusted r2 (r 2=0.912088 or 91.21%). the f-statistic 36.44775, which is a measure of the joint significance of the explanatory variables, is found to be statistically significant at 1 percent as indicated by the corresponding probability value (0.000000). the durbin-watson statistic of 1.80 seems to suggest lesser degree of autocorrelation. the results of the error correction models as contained in www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 12 tables 14 provides evidence for equilibrium to be restored after short-run disturbances as indicated by the statistically significant coefficients of the error correction terms (ecm). but the error correction term happened not to be correctly signed. 6. conclusion this paper is a cointegration and causality analysis of macroeconomic factors and terrorism in nigeria. the econometric investigation was based on a cointegration approach and the granger causality test, using time series data from 1970 to 2016. the analysis starts with examining stochastic characteristics of each time series by testing their stationarity using augmented dickey fuller (adf) test. then, the effects of stochastic shocks to one of the innovations on current and future values of the endogenous variables are explored, using var models and impulse response analysis. since the results of johansen cointegration revealed that there is a long-run relationship among the stationary variables, a long run static regression was then estimated by applying error correction. the result reveals that log(gdpc), log(open), log(infl), dlog(govx) and dlog(intr) went contrary to the theoretical expectation. on the other hand, log(govx), log(intr), polx, dlog(gdpc) and dlog(open) were in line with the apriori expectation. this implies that log(govx) has an inverse relationship with terrorism. on the other hand, log(intr) shows a positive relationship with terrorism. so also is log(intr). likewise, a 1 percent increase in polx increase the occurrence of terrorism by 0.340240 percent and statistically significant at 1 percent level. the result also revealed an inverse relationship between dlog(gdpc) and terrorism. similarly, a 1 percent increase in dlog(open) leads to a 0.075312 reduction in the occurrence of terrorism. the main limitation of the var modeling approach used in this paper is its consumption of degrees of freedom in the model estimation. a future extension of the study could be to use the bayesian var (bvar) approach in order to reduce the number of parameters that need to be estimated. however, from a policy perspective, the results suggest that government expenditure should be properly managed and directed at more productive sectors rather than non-productive ventures. this can bring about employment and foster economic growth which will in turn reduce poverty and lead to reduction of the occurrence of terrorism. in addition, a mechanism should be provided for small and medium enterprises to have access to loans with long payback period. in this vein, policy to promote access to microfinance services can be promoted by making access to microcredit less difficult for the poor people by reducing the interest rate charged. also, trade openness rate should be all time kept at peak benchmark by adopting tight trade openness in order to ensure economic growth via fiscal sustainability. in addition, strategic macroeconomic policies should be instituted in order to encourage domestic private investment to enhance the growth of the economy. nigerian political system has to be stabilized and the government should step up its intelligence gathering capacity as well as training security agents to forcefully combat terrorist group. references abimbola, j. o., and adesote, s. a. 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(1995). likelihood based inferences in cointegrated vector autoregressive models. oxford university press. oxford. kasa, k. (1992). common stochastic trends in international markets.journal of monetary economics., 29(1), 95 – 124. krueger, a.b., and maleckova, j. (2003). education, poverty, political violence and terrorism: is there a causal connection? journal of economic perspectives, 17(4), 119-144. li, q. (2005). does democracy promote or reduce transnational terrorist incidents?journal of conflict resolution, 49(2), 278-297. li, q., and schaub, d. (2004). economic globalization and transnational terrorism: a pooled time-series analysis, journal of conflict resolution, 48(2), 230-258. manson, n., oguijiuba,o., and adeola, a. (2004).the impacts of trade liberalization on poverty in nigeria: microsimulations in a cge model. a proposal for the poverty and economic policy(pep) research network. naij(2013).nigeria's anti-terror war gulped n372 billion in 2012 – report. available online: http://news.naij.com/34638.html. accessed on 2nd , may, 2016. national bureau of statistics (nbs) (2005). nigerian statistics.available online: http://www.nigerianstat.gov.ng/pages/download/71. accessed on 23rd , march, 2016. nigerian finder (n.d.). economic development in nigeria. http://nigerianfinder.com/economic-development-in-nigeria/ nigerians report (2011). islamic terrorists attacking christians on christmas day in nigeria.available online: http://www.nigeriansreport.com/2011/12/islamic-terrorists-attacking-christians.html#sthash.28cm4rwa. dpuf. accessed on 4th , april, 2016. okonkwo, r. o., and enem, f. o. combating crime and terrorism using data mining techniques.nigeria computer society (ncs): 10th international conference – july 25-29, 2011. available online: http://www.ncs.org.ng/wp-content/uploads/2011/08/iteped2011-paper10.pdf. accessed on 23rd , march, 2016. omojimite, b. u. (2012).public education and defence spending in nigeria: implications for economic growth. journal of educational and social research, 2 (1),59-72 onuoha, f. c. (2013). jama'atuansarulmusilimina fi biladis sudan: nigeria‟s evolving terrorist group. report aljazeeral centre for studies.available online: http://studies.aljazeera.net/resourcegallery/media/documents/2013/3/14/2013314103734423734niger ias%20evolving%20terrorist%20group.pdf. accessed on 23rd , march, 2016. richardson,c. (2011).relative deprivation theory in terrorism: a study of higher education and unemployment as predictors of terrorism.politics.as.nyu.edu/docs/io/4600/clare_richardson_terrorism.pdf sageman, m. (2008).leaderless jihad: terror networks in the twenty-first century. philadelphia: university of pennsylvania press. http://www.indiavision.com/news/article/international/271520/ http://www.crisisgroup.org/ http://news.naij.com/34638.html http://www.nigerianstat.gov.ng/pages/download/71 http://www.nigeriansreport.com/2011/12/islamic-terrorists-attacking-christians.html#sthash.28cm4rwa.dpuf http://www.nigeriansreport.com/2011/12/islamic-terrorists-attacking-christians.html#sthash.28cm4rwa.dpuf http://www.ncs.org.ng/wp-content/uploads/2011/08/iteped2011-paper10.pdf http://studies.aljazeera.net/resourcegallery/media/documents/2013/3/14/2013314103734423734nigerias%20evolving%20terrorist%20group.pdf http://studies.aljazeera.net/resourcegallery/media/documents/2013/3/14/2013314103734423734nigerias%20evolving%20terrorist%20group.pdf www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 15 sanusi, j. o. (2002).central bank and the macroeconomic environment in nigeria. being a lecture delivered to participants of the senior executive course no. 24 of the national institute for policy and strategic studies (nipss), kuru.available online: http://www.cenbank.org/out/speeches/2002/govadd-19aaug.pdf. accessed on 3rd , july, 2016. sen, a. (2001). development as freedom (2nd ed.). oxford new york: oxford university press. isbn 9780192893307. simatele, m.c.h. (2003). financial sector reform and monetary policy in zambia. ph.d dissertation. economic studies, department of economics, school of economics and commercial law, gotebora university. tessler, m., and michael, d. h. r. (2007).what leads some ordinary arab men and women to approve of terrorist attacks against the united states?journal of conflict resolution, 51(2), 305-328. trading economics (2013).nigeria gdp growth rate. http://www.tradingeconomics.com/nigeria/gdp-growth world bank(1996). nigeria:poverty in the midst of plenty: the challenge of growth with inclusion.available online: http://web.worldbank.org/wbsite/external/topics/extpoverty/ extpa/0,,contentmdk:20204610~menupk:435735~pagepk:148956~pipk:216618~thesitepk:43036 7~iscurl:y,00.html. accessed on 23rd , march, 2016. appendix table 1: categories of militia groups in the niger delta. private militia ethnic militia pan-ethnic militia niger delta people volunteer force (ndpvf) the meinbutusarugbo freedom fighter movement for the emancipation of the niger delta (mend) adaka marines iduwini volunteer force (ivf) the coalition for militant action in the niger delta (coma) martyrs brigade egbesu boys of africa the niger delta people salvation front niger delta volunteers niger delta militant force squad (ndmfs) niger delta coastal guerillas (ndcgs) source: forest (2012) table 2: attacks blamed on the jambs date location target(s) description remarks 26 nov. 2012 garki, abuja headquarters of the special anti-robbery squad (sars) attack and freeing of some inmates in the detention facility of the sars headquarters jamb claimed that the attack was in compliance with a quranic injunction that urged believers to fight for the oppressed andthe feeble. it promised similar attacks against detention centres across the country https://en.wikipedia.org/wiki/international_standard_book_number https://en.wikipedia.org/wiki/special:booksources/9780192893307 http://www.tradingeconomics.com/nigeria/gdp-growth http://web.worldbank.org/wbsite/external/topics/extpoverty/extpa/0,,contentmdk:20204610~menupk:435735~pagepk:148956~pipk:216618~thesitepk:430367~iscurl:y,00.html http://web.worldbank.org/wbsite/external/topics/extpoverty/extpa/0,,contentmdk:20204610~menupk:435735~pagepk:148956~pipk:216618~thesitepk:430367~iscurl:y,00.html http://web.worldbank.org/wbsite/external/topics/extpoverty/extpa/0,,contentmdk:20204610~menupk:435735~pagepk:148956~pipk:216618~thesitepk:430367~iscurl:y,00.html http://web.worldbank.org/wbsite/external/topics/extpoverty/extpa/0,,contentmdk:20204610~menupk:435735~pagepk:148956~pipk:216618~thesitepk:430367~iscurl:y,00.html www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 16 19 dec. 2012 katsina state francis colump kidnapping of francis, a french citizen working for the french company vergnet jambs claimed that the reason for kidnapping colump is the stance of the french government and the french people on islam, specifically citing france‟s major role in the (planned) intervention in northern mali 19 jan. 2013 okene, kogi state convoy of mali-bound nigerian soldiers ambushing of a truck conveying mali-bound nigerian soldiers, resulting in the death of two soldiers and injuring of five others jambs claimed it attacked the soldiers because of nigeria‟s contribution of troops to mali 17 feb. 2013 jamaare (bauchi state) seven expatriates working with a lebanese construction company, setraco nig. ltd those abducted were four lebanese, one briton, a greek citizen and an italian jambs claimed responsibility for the kidnapping, citing „the transgressions and atrocities done to the religion of allah by the european countries source: onuoha(2013) table 3: cases of domestic terrorism arising from bomb explosions in nigeria 1986-2012 date place state terrorist group casualty 19/10/1986 parcel bomb, lagos lagos nil 1 31/5/1995 venue of launching of family support ilorin kwara nil no record 18/1/1996 durbar hotel kaduna kaduna nil 1 19/1/1996 aminu kano airport, kano kano nil no record 11/4/1996 ikeja cantonment lagos nil no record 25/4/1996 airforce base lagos nil no record 14/11/1996 mmia lagos nil 2 16/12/1996 col. marwa convey lagos nil no record 18/12/1996 lagos state task force on environment bus in lagos lagos nil no record 7/1/1997 military bus at ojuelegba, lagos lagos nil no record www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 17 12/2/1997 military vehicle fakka d608 at ikorodu road, lagos lagos nil no record 7/5/1997 nigerian army 25 seater bus at yaba, lagos lagos nil no record 12/5/1997 eleiyele, ibadan oyo nil no record 16/5/1997 onitsha anambra nil 5 6/8/1997 port harcourt rivers nil 1 2/9/1997 col. inuabawa convey, akure ekiti nil no record 18/12/1997 gen. oladipodiya at abuja airport abuja nil 1 22/4/1998 evan square lagos nil 3 23/4/1998 ile-ife osun nil 5 27/1/2002 lagos lagos nil 1000 31/7/2002 port harcourt rivers nil 1 25/11/2006 25/11/2006 pdp secrtariat, yenagoa bayelsa nil 1 5/12/2006 goodluck jonathan campaign office bayelsa nil no record 23/12/2006 port harcourt rivers nil no record 12/7/2009 atlas cove, lagos lagos mend 5 2/5/2010 yenagoa bayelsa mend no record 1/10/2010 eagle square abuja mend 8 12/11/2010 alaibe house opokuma bayelsa mend 1 24/12/2010 jos plateau boko haram 38 27/12/2010 barkinladi plateau boko haram no record 29/12/2010 yenagoa bayelsa mend 1 31/12/2010 mugadishu barracks abuja boko haram 32 2/2/2011 aba abia nil 2 3/3/2011 suleja niger boko haram 16 16/3/2011 yenagoa bayelsa nil no record 1/4/2011 butshen-tanshi bauchi boko haram no record 6/4/2011 kaduna kaduna boko haram 4 7/4/2011 unguwardoki, maiduguri borno boko haram 10 8/4/2011 inec office suleja niger boko haram 14 8/4/2011 kaduna kaduna boko haram 1 9/4/2011 unguwandoki polling station kaduna boko haram 5 9/4/2011 inec collating centre borno boko haram no record 22/4/2011 kaduna kaduna boko haram 3 14/5/2011 london chiki maiduguri borno boko haram 2 19/5/2011 lagos road maiduguri borno boko haram no record 28/5/2011 lagos park zuba/mammy market abuja & bauchi boko haram 18 29/5/2011 zuba near abuja abuja boko haram 8 3/6/2011 maiduguri borno boko haram no record 7/6/2011 beside st. patrick church maiduguri borno boko haram 10 10/6/2011 kaduna kaduna boko haram no record 16/6/2011 police force headquarters abuja boko haram 3 16/6/2011 damboa maiduguri borno boko haram 3 26/6/2011 beer garden maiduguri borno boko haram 25 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 18 3/7/2011 beer garden maiduguri borno boko haram 20 10/7/2011 all christian fellowship church suleja niger boko haram no record 26/8/2011 united nations office abuja boko haram 23 6/9/2011 baga road & ward maiduguri borno boko haram no record 17/12/2011 shuwai area of maiduguri borno boko haram 3 22/12/2011 pompomari near emir of damaturupalaca yobe boko haram 2 22/12/2011 timber shed along bada road maiduguri borno boko haram no record 25/12/2011 st. theresa catholic church, madalla near suleja niger boko haram 43 25/12/2011 near mountain of fire ministry, jos plateau boko haram 12 25/12/2011 sss office damaturu yobe boko haram 4 26/12/2011 near islamic school in sapele delta nil no record 28/12/2011 near a hotel in gombe gombe boko haram no record 6/1/ 2012 attack on some southerners in mubi adamawa boko haram 13 21/1/ 2012 multiple bomb blasts rocked kano city kano boko haram over 185 people killed 29/1/ 2012 bombing of a police station at naibawa area of yakatabo kano boko haram no record 8/2/ 2012 bomb blast rocked army headquarters kaduna boko haram no record 15/2/ 2012 attack on kotonkarfe prison which 119 prisoners were freed kogi boko haram 1 warder killed 19/2/ 2012 bomb blast near christ embassy church, in suleija niger boko haram 5 people injured 26/2/ 2012 bombing of church of christ in nigeria, jos plateau boko haram 2 people killed and 38 injured 11/2/ 2012 bombing of st. finbarr‟s catholic church rayfield, jos plateau boko haram 11 people killed and many injured 29/2/ 2012 attack on bayero university kano boko haram 16 people killed and many injured 30/2/ 2012 bomb explosion in jalingo taraba boko haram 11 people killed and several others wounded source: chinwokwu (2012), ajayi (2012) table 5a: unit root test results: levels variable infl gdpc govx open intr polx terr ecm unit root adf adf adf adf adf adf adf adf www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 19 trend, constant -4.001558* -2.014036 -3.089160 -2.237038 -1.104306 -3.075318 -1.645215 -4.666189* constant -4.131647 * -1.993456 -1.495412 -1.479380 -1.506191 -2.282445 -1.840175 -4.650278* without trend, constant -0.747000 0.194820 4.693380 -0.791717 0.658856 -1.380933 0.000000 -4.724776* source: authors‟ computation from computer output. note: * null hypothesis rejection at 1%; ** * null hypothesis rejection at 5%; and *** null hypothesis rejection at 10% table 5b: unit root test results: first difference variable infl gdpc govx open intr polx terr ecm unit root adf adf adf adf adf adf adf adf trend, constant -6.302564* -5.861418* -0.985064 -7.243676* -10.30788* -7.597783* -6.492103* -10.28363* constant -6.361749 * -5.898550* -6.976280* -7.277774* -10.25756* -7.695598* -6.403124* -10.15246* without trend, constant -6.446588 -5.933521* -1.133636 -6.969205* -10.20175* -7.745967* -10.41274* source: authors‟ computation from computer output. note: * null hypothesis rejection at 1%; ** * null hypothesis rejection at 5%; and *** null hypothesis rejection at 10% table 6: johansen cointegration test unrestricted cointegration rank test hypothesized no. of ce(s) eigenvalue trace statistic 5 percent critical value 1 percent critical value none ** 0.829696 199.4871 124.24 133.57 at most 1 ** 0.666851 128.6802 94.15 103.18 at most 2 ** 0.542003 84.71358 68.52 76.07 at most 3 * 0.485237 53.47791 47.21 54.46 at most 4 0.266711 26.91597 29.68 35.65 at most 5 0.246280 14.50736 15.41 20.04 at most 6 0.076837 3.197961 3.76 6.65 *(**) denotes rejection of the hypothesis at the 5%(1%) level trace test indicates 4 cointegrating equation(s) at the 5% level trace test indicates 3 cointegrating equation(s) at the 1% level hypothesized no. of ce(s) eigenvalue max-eigen statistic 5 percent critical value 1 percent critical value www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 20 none ** 0.829696 70.80688 45.28 51.57 at most 1 * 0.666851 43.96663 39.37 45.10 at most 2 0.542003 31.23567 33.46 38.77 at most 3 0.485237 26.56194 27.07 32.24 at most 4 0.266711 12.40861 20.97 25.52 at most 5 0.246280 11.30940 14.07 18.63 at most 6 0.076837 3.197961 3.76 6.65 *(**) denotes rejection of the hypothesis at the 5%(1%) level max-eigenvalue test indicates 2 cointegrating equation(s) at the 5% level max-eigenvalue test indicates 1 cointegrating equation(s) at the 1% level source: researchers‟ computation, 2013, adapted from regression result using e-view 4.1 table 7: unrestricted var standard errors in ( ) & t-statistics in [ ] terr log(inf l) log(gdp c) log(gov x) log(ope n) log(int r) polx terr(-1) 0.648374 -0.876486 -0.083424 0.216857 1.441724 0.234786 0.173192 (0.23262) (0.87056) (0.44221) (0.19225) (1.11221) (0.26842) (0.42412) [ 2.78723] [-1.00681] [-0.18865] [ 1.12801] [ 1.29626] [ 0.87468] [ 0.40836] terr(-2) -0.085913 0.233596 -0.006201 0.001090 -1.687271 0.394876 -0.595555 (0.27010) (1.01080) (0.51345) (0.22322) (1.29139) (0.31167) (0.49245) [-0.31808] [ 0.23110] [-0.01208] [ 0.00488] [-1.30655] [ 1.26698] [-1.20938] log(infl(-1)) -0.024428 0.537972 0.021890 0.044991 0.033758 0.076149 -0.098971 (0.04438) (0.16607) (0.08436) (0.03667) (0.21217) (0.05121) (0.08091) [-0.55046] [ 3.23935] [ 0.25948] [ 1.22676] [ 0.15911] [ 1.48710] [-1.22325] log(infl(-2)) -0.014808 -0.164937 0.099237 -0.075244 0.033552 -0.120743 -0.131330 (0.03966) (0.14843) (0.07540) (0.03278) (0.18964) (0.04577) (0.07231) [-0.37334] [-1.11119] [ 1.31617] [-2.29549] [ 0.17693] [-2.63820] [-1.81611] log(gdpc(-1) ) 0.122650 0.018809 0.723194 0.108755 -0.275171 0.025742 0.322924 (0.09075) (0.33963) (0.17252) (0.07500) (0.43391) (0.10472) (0.16546) [ 1.35147] [ 0.05538] [ 4.19197] [ 1.45004] [-0.63417] [ 0.24582] [ 1.95167] log(gdpc(-2) ) 0.074634 0.186357 -0.179784 -0.007099 0.589393 0.048637 0.038924 (0.08964) (0.33547) (0.17041) (0.07408) (0.42859) (0.10344) (0.16343) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 21 [ 0.83259] [ 0.55551] [-1.05503] [-0.09582] [ 1.37519] [ 0.47021] [ 0.23816] log(govx(-1 )) -0.082239 -2.578577 0.084675 0.709434 0.473362 -0.166581 0.196477 (0.26951) (1.00859) (0.51233) (0.22273) (1.28856) (0.31098) (0.49137) [-0.30515] [-2.55662] [ 0.16528] [ 3.18518] [ 0.36736] [-0.53565] [ 0.39986] log(govx(-2 )) -0.018075 2.458224 0.085219 0.328262 -0.032975 0.150961 -0.327225 (0.29360) (1.09875) (0.55812) (0.24264) (1.40375) (0.33878) (0.53529) [-0.06156] [ 2.23730] [ 0.15269] [ 1.35288] [-0.02349] [ 0.44560] [-0.61130] log(open(-1) ) 0.030028 0.260626 -0.165487 -0.073313 0.495004 -0.042773 -0.029550 (0.04005) (0.14990) (0.07614) (0.03310) (0.19151) (0.04622) (0.07303) [ 0.74967] [ 1.73870] [-2.17339] [-2.21475] [ 2.58478] [-0.92545] [-0.40464] log(open(-2) ) 0.030169 -0.313288 0.057226 0.036928 0.005242 0.076727 0.194024 (0.04406) (0.16489) (0.08376) (0.03641) (0.21066) (0.05084) (0.08033) [ 0.68472] [-1.89996] [ 0.68322] [ 1.01413] [ 0.02488] [ 1.50913] [ 2.41526] log(intr(-1)) 0.180906 0.373271 -0.478087 0.065513 0.367369 0.273585 0.247065 (0.15685) (0.58697) (0.29816) (0.12962) (0.74991) (0.18098) (0.28596) [ 1.15340] [ 0.63593] [-1.60346] [ 0.50542] [ 0.48989] [ 1.51165] [ 0.86398] log(intr(-2)) 0.140221 1.225664 0.294857 0.173627 1.008236 0.248524 -0.026945 (0.13828) (0.51750) (0.26287) (0.11428) (0.66115) (0.15956) (0.25212) [ 1.01402] [ 2.36844] [ 1.12168] [ 1.51930] [ 1.52497] [ 1.55752] [-0.10687] polx(-1) -0.027296 1.031574 0.278190 -0.391291 -1.433729 -0.135993 0.227890 (0.13009) (0.48686) (0.24731) (0.10751) (0.62201) (0.15012) (0.23719) [-0.20981] [ 2.11884] [ 1.12488] [-3.63943] [-2.30501] [-0.90591] [ 0.96080] polx(-2) 0.063025 -1.156955 -0.209922 -0.065763 0.325293 -0.191429 0.334786 (0.18562) (0.69464) (0.35285) (0.15340) (0.88746) (0.21418) (0.33842) [ 0.33954] [-1.66555] [-0.59493] [-0.42870] [ 0.36654] [-0.89376] [ 0.98927] c -0.392792 -0.853405 1.143827 -1.230586 -8.831539 0.628751 -0.264580 (0.66329) (2.48225) (1.26090) (0.54816) (3.17130) (0.76537) (1.20931) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 22 [-0.59219] [-0.34380] [ 0.90715] [-2.24493] [-2.78483] [ 0.82150] [-0.21879] r-squared 0.888515 0.547731 0.819996 0.997768 0.945602 0.912387 0.765947 adj. r-squared 0.828485 0.304201 0.723070 0.996566 0.916311 0.865211 0.639919 sum sq. resids 0.717852 10.05363 2.594115 0.490287 16.40990 0.955814 2.386196 s.e. equation 0.166162 0.621834 0.315870 0.137321 0.794450 0.191734 0.302947 f-statistic 14.80115 2.249132 8.460071 830.1494 32.28278 19.34008 6.077576 log likelihood 24.74733 -29.36089 -1.589779 32.56343 -39.40489 18.87819 0.122885 akaike aic -0.475480 2.163946 0.809258 -0.856753 2.653897 -0.189180 0.725713 schwarz sc 0.151437 2.790862 1.436174 -0.229836 3.280814 0.437737 1.352630 mean dependent 0.804878 2.724202 6.101589 11.69422 1.451717 2.326163 0.463415 s.d. dependent 0.401218 0.745474 0.600238 2.343343 2.746197 0.522244 0.504854 determinant residual covariance 1.57e-08 log likelihood (d.f. adjusted) -38.85718 akaike information criteria 7.017423 schwarz criteria 11.40584 source: researchers‟ computation, 2013, adapted from regression result using e-view 4.1 table 8: results of var lag order selection criteria. lag logl lr fpe aic sc hq 0 -233.0032 na 0.000384 12.00016 12.29571 12.10702 1 -17.89726 344.1694* 9.86e-08* 3.694863 6.059294* 4.549767* 2 24.46435 52.95201 1.73e-07 4.026783 8.460091 5.629727 3 86.07665 55.45107 1.83e-07 3.396167* 9.898353 5.747153 source: researchers‟ computation, 2013, adapted from regression result using e-view 4.1 * indicates lag order selected by the criterion lr: sequential modified lr test statistic (each test at 5% level) fpe: final prediction error aic: akaike information criterion sc: schwarz information criterion hq: hannan-quinn information criterion table 9: var residual normality tests orthogonalization: cholesky (lutkepohl) component skewness chi-sq df prob. 1 1.900810 24.68936 1 0.0000 2 0.060026 0.024621 1 0.8753 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 23 3 -0.302136 0.623788 1 0.4296 4 0.163287 0.182194 1 0.6695 5 -0.061474 0.025824 1 0.8723 6 -0.302005 0.623247 1 0.4298 7 -0.198038 0.267996 1 0.6047 joint 26.43703 7 0.0004 component kurtosis chi-sq df prob. 1 8.607204 53.71126 1 0.0000 2 1.124734 6.007561 1 0.0142 3 1.719795 2.799830 1 0.0943 4 1.525991 3.711702 1 0.0540 5 1.372508 4.524916 1 0.0334 6 2.142370 1.256530 1 0.2623 7 1.748928 2.673851 1 0.1020 joint 74.68565 7 0.0000 component jarque-bera df prob. 1 78.40062 2 0.0000 2 6.032182 2 0.0490 3 3.423618 2 0.1805 4 3.893896 2 0.1427 5 4.550740 2 0.1028 6 1.879776 2 0.3907 7 2.941846 2 0.2297 joint 101.1227 14 0.0000 source: own computations using e-view 4.1 note: variables are as defined in equation 2 table 10: impulse response response of terr: period terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 0.166162 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 2 0.126029 -0.018968 0.028931 -0.005092 0.020525 0.031695 -0.006066 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 24 3 0.102592 -0.024122 0.055941 0.003605 0.024617 0.044336 0.002790 4 0.085424 -0.015267 0.068273 -0.003002 0.014174 0.034688 -0.003369 5 0.068695 -0.006630 0.061605 -0.005506 0.017739 0.030102 0.000835 6 0.054544 0.001900 0.049156 -0.006652 0.014151 0.027564 -0.001585 7 0.040870 0.008096 0.038236 -0.008960 0.013367 0.027399 -0.000888 8 0.032848 0.008929 0.029206 -0.009668 0.011324 0.027005 -0.001115 9 0.027275 0.007712 0.022966 -0.010127 0.008641 0.025329 -0.002735 10 0.024195 0.006140 0.018273 -0.010257 0.006939 0.022357 -0.003693 response of log(infl): period terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 -0.148760 0.603779 0.000000 0.000000 0.000000 0.000000 0.000000 2 -0.007438 0.329946 -0.044796 -0.157136 0.181346 0.123998 0.229260 3 0.001847 -0.030133 -0.012030 0.030640 0.030094 0.296118 0.054848 4 -0.097648 -0.008060 0.101258 -0.044233 -0.092023 0.118495 -0.051405 5 -0.001751 -0.037987 0.039894 -0.041258 0.006248 0.014694 -0.000359 6 0.042238 -0.023995 -0.025055 -0.021557 -0.015133 -0.024945 -0.064057 7 0.024141 0.024594 -0.036773 -0.030234 0.017519 -0.013131 -0.033526 8 0.045206 0.024472 -0.030720 -0.022399 0.023174 0.013294 -0.007036 9 0.046134 0.010538 -0.004130 -0.017838 0.011899 0.033379 -0.002104 10 0.044438 -0.002056 0.018607 -0.014835 0.008066 0.033514 0.005844 response of log(gdpc): period terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 0.082616 -0.037369 0.302575 0.000000 0.000000 0.000000 0.000000 2 0.067582 -0.020141 0.255855 0.010231 -0.120873 -0.072661 0.061826 3 0.002302 0.015403 0.165251 0.050263 -0.102575 -0.013325 0.077488 4 -0.048731 0.043408 0.086279 0.034868 -0.079764 -0.039731 0.080645 5 -0.063092 0.001040 0.021461 0.045654 -0.022203 -0.019878 0.068881 6 -0.086869 -0.014257 -0.008357 0.043689 -0.023701 -0.032904 0.020735 7 -0.098118 -0.010816 -0.025904 0.033185 -0.009091 -0.042981 0.004095 8 -0.090709 -0.002963 -0.041704 0.026852 -0.011624 -0.048628 -0.010959 9 -0.084251 0.007662 -0.047899 0.019889 -0.015624 -0.043164 -0.017256 10 -0.072286 0.012772 -0.047184 0.015254 -0.020546 -0.034574 -0.017069 response of log(govx): period terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 -0.024546 0.004700 -0.006364 0.134878 0.000000 0.000000 0.000000 2 -0.029482 0.020033 0.045199 0.033115 -0.052215 -0.009067 -0.086962 3 -0.027846 0.007354 0.026643 0.039570 -0.030826 0.007409 -0.059023 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 25 4 -0.008551 0.028622 0.018458 0.024778 -0.081486 0.005581 -0.107233 5 0.004265 0.048190 0.010693 0.004804 -0.070433 0.012838 -0.093220 6 0.043495 0.041261 0.004275 0.003096 -0.073631 0.029153 -0.096814 7 0.067518 0.036838 0.014497 -0.003541 -0.075964 0.042553 -0.102075 8 0.096122 0.029478 0.027664 -0.007588 -0.070221 0.051683 -0.099310 9 0.123269 0.022822 0.041131 -0.010217 -0.066358 0.058793 -0.100836 10 0.143827 0.020642 0.054337 -0.013421 -0.059687 0.065333 -0.099350 response of log(open) : period terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 -0.045176 0.063459 -0.192661 0.154316 0.751099 0.000000 0.000000 2 -0.013464 0.057147 -0.174053 -0.044014 0.380632 -0.009881 -0.318636 3 -0.151163 0.140510 -0.070392 -0.053173 0.247581 0.196247 -0.228333 4 -0.074011 0.232530 0.003951 -0.122192 -0.021738 0.161599 -0.215346 5 0.029897 0.186480 0.014645 -0.132110 -0.063159 0.193406 -0.140353 6 0.130999 0.116849 0.019134 -0.108032 -0.121304 0.179284 -0.146326 7 0.199771 0.065525 0.040467 -0.096523 -0.104726 0.160976 -0.135382 8 0.267563 0.024076 0.058923 -0.078489 -0.076049 0.139186 -0.125935 9 0.305960 0.004643 0.084020 -0.065717 -0.047670 0.131053 -0.119569 10 0.322252 0.001896 0.110546 -0.058151 -0.022487 0.130262 -0.103788 response of log(intr) : period terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 0.043168 -0.005858 -0.017607 0.028029 -0.012630 0.183328 0.000000 2 0.027994 0.039441 0.013606 -0.039853 -0.034304 0.042830 -0.030223 3 0.092404 -0.036117 -0.002917 -0.022373 0.058573 0.056085 -0.011959 4 0.089367 -0.025967 0.007814 -0.016397 0.007141 0.029150 -0.067815 5 0.077161 0.007044 0.023857 -0.029319 0.027355 0.031164 -0.036444 6 0.092422 0.012453 0.026060 -0.024726 0.018174 0.037435 -0.023341 7 0.085064 0.013551 0.036595 -0.023798 0.011151 0.049375 -0.016579 8 0.080385 0.009570 0.043933 -0.021969 0.009035 0.050361 -0.007120 9 0.077499 0.002755 0.045774 -0.019160 0.008004 0.047096 -0.005713 10 0.071136 0.000315 0.043846 -0.017446 0.009191 0.040706 -0.005477 response of polx: period terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 0.144480 0.003490 -0.009804 0.135691 -0.009399 0.053867 0.222243 2 0.110283 -0.073428 0.095567 0.059788 -0.027457 0.057570 0.050647 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 26 3 0.041309 -0.115834 0.104902 0.060037 0.053259 0.005059 0.067032 4 0.021320 -0.088181 0.076422 0.057105 0.023322 -0.034085 -0.012137 5 -0.033962 -0.009615 0.040039 0.025782 0.029286 -0.052772 -0.011752 6 -0.043804 0.025223 -0.000161 0.018049 0.027346 -0.030615 -0.000459 7 -0.057441 0.037561 -0.014018 0.009586 0.003746 -0.006494 -0.005258 8 -0.059090 0.031428 -0.015357 0.003847 -0.008716 0.006055 -0.002934 9 -0.046889 0.017171 -0.015842 0.002371 -0.020513 0.005060 -0.010343 10 -0.033927 0.008350 -0.016712 0.001054 -0.024231 -0.001346 -0.017452 table 11: variance decomposition variance decompositio n of terr period s.e. terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 0.166162 100.0000 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 2 0.214892 94.18479 0.779127 1.812577 0.056141 0.912307 2.175370 0.079691 3 0.251013 85.73325 1.494544 6.295081 0.061774 1.630443 4.714151 0.070759 4 0.276809 80.02196 1.533165 11.25963 0.062559 1.602894 5.446794 0.072999 5 0.293996 76.39933 1.410018 14.37262 0.090536 1.785024 5.876945 0.065521 6 0.304689 74.33559 1.316672 15.98435 0.131956 1.877628 6.290090 0.063708 7 0.311518 72.83324 1.327111 16.79772 0.208958 1.980334 6.790886 0.061757 8 0.316240 71.75356 1.367506 17.15283 0.296232 2.049872 7.318827 0.061170 9 0.319632 70.96672 1.396846 17.30694 0.390356 2.079681 7.792259 0.067198 10 0.322162 70.42042 1.411319 17.35789 0.485619 2.093529 8.151942 0.079284 variance decomposition of log(infl) period s.e. terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 0.621834 5.722961 94.27704 0.000000 0.000000 0.000000 0.000000 0.000000 2 0.789379 3.560278 75.97479 0.322038 3.962627 5.277727 2.467524 8.435018 3 0.846589 3.095823 66.18004 0.300176 3.576138 4.714878 14.37971 7.753232 4 0.873885 4.154039 62.11884 1.624332 3.612429 5.533818 15.33406 7.622473 5 0.876738 4.127444 61.90292 1.820828 3.810407 5.502936 15.26251 7.572957 6 0.881519 4.312372 61.30731 1.881912 3.828987 5.472874 15.17747 8.019074 7 0.884383 4.358998 60.98823 2.042638 3.921103 5.476726 15.10137 8.110934 8 0.887122 4.591796 60.68838 2.149961 3.960685 5.511208 15.03074 8.067227 9 0.889281 4.838664 60.40813 2.141692 3.981713 5.502385 15.09874 8.028667 10 0.891396 5.064248 60.12223 2.175111 3.990530 5.484483 15.16851 7.994896 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 27 variance decompositio n oflog(gdp c) period s.e. terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 0.315870 6.840920 1.399605 91.75948 0.000000 0.000000 0.000000 0.000000 2 0.440483 5.871758 0.928791 80.92419 0.053948 7.530124 2.721128 1.970058 3 0.490720 4.733273 0.846883 76.54360 1.092589 10.43661 2.266233 4.080813 4 0.517851 5.135812 1.463116 71.50919 1.434458 11.74417 2.623623 6.089638 5 0.529461 6.333029 1.400040 68.57180 2.115744 11.41062 2.650773 7.517994 6 0.540491 8.660353 1.413054 65.82533 2.683633 11.14192 2.914281 7.361431 7 0.552806 11.42912 1.389084 63.14491 2.925764 10.67810 3.390419 7.042605 8 0.564722 13.53191 1.333832 61.05350 3.029684 10.27457 3.990326 6.786180 9 0.575468 15.17470 1.302213 59.48754 3.037048 9.968160 4.405312 6.625028 10 0.583883 16.27313 1.312798 58.43819 3.018388 9.806719 4.629877 6.520895 variance decomposition of log(govx) period s.e. terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 0.137321 3.195072 0.117152 0.214806 96.47297 0.000000 0.000000 0.000000 2 0.183407 4.375080 1.258778 6.193622 57.34155 8.105212 0.244404 22.48135 3 0.203057 5.449831 1.158091 6.774436 50.57811 8.917062 0.332533 26.78994 4 0.247486 3.788144 2.117130 5.116740 35.05096 16.84362 0.274718 36.80869 5 0.278465 3.015631 4.667092 4.189053 27.71579 19.70186 0.429541 40.28103 6 0.311141 4.369663 5.496826 3.374253 22.20985 21.38106 1.221953 41.94639 7 0.347776 7.266713 5.521740 2.874582 17.78753 21.88492 2.475187 42.18933 8 0.386450 12.07173 5.053697 2.840462 14.44401 21.02556 3.793129 40.77141 9 0.429981 17.96993 4.363945 3.209460 11.72391 19.36555 4.933598 38.43361 10 0.476267 23.76656 3.744788 3.917577 9.635297 17.35498 5.903021 35.67778 variance decomposition of log(open) period s.e. terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 28 1 0.794450 0.323352 0.638043 5.881080 3.773039 89.38449 0.000000 0.000000 2 0.955686 0.243298 0.798479 7.380956 2.819421 77.63088 0.010690 11.11627 3 1.056247 2.247314 2.423302 6.486579 2.561550 69.04697 3.460804 13.77348 4 1.123882 2.418625 6.421106 5.730576 3.444587 61.02389 5.124242 15.83698 5 1.173687 2.282600 8.412129 5.270116 4.425428 56.24431 7.413980 15.95144 6 1.220107 3.264980 8.701391 4.901325 4.879087 53.03444 9.019735 16.19904 7 1.264526 5.535424 8.369327 4.665444 5.124979 50.05988 10.01775 16.22719 8 1.312191 9.298321 7.806016 4.534302 5.117202 46.82504 10.42832 15.99080 9 1.364038 13.63616 7.225037 4.575563 4.967696 43.45517 10.57370 15.56667 10 1.417144 17.80416 6.693861 4.847553 4.770732 40.28450 10.64098 14.95821 variance decomposition of log(intr) period s.e. terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 0.191734 5.069115 0.093336 0.843320 2.137088 0.433950 91.42319 0.000000 2 0.211659 5.908988 3.548942 1.105242 5.299003 2.982903 79.11594 2.038981 3 0.248738 18.07903 4.678071 0.814036 4.645956 7.704977 62.37037 1.707559 4 0.276335 25.10721 4.673352 0.739515 4.116426 6.309653 51.64771 7.406133 5 0.294688 28.93336 4.166515 1.305645 4.609526 6.409893 46.53327 8.041792 6 0.314809 33.97194 3.807408 1.829335 4.656027 5.949970 42.18895 7.596376 7 0.333567 36.76179 3.556263 2.832935 4.656101 5.411355 39.76848 7.013077 8 0.350573 38.53934 3.294128 4.135177 4.608018 4.965505 38.06740 6.390431 9 0.365640 39.92120 3.033924 5.368615 4.510674 4.612640 36.65390 5.899048 10 0.377824 40.93274 2.841466 6.374638 4.437656 4.379111 35.48867 5.545720 variance decomposition of log(polx) period s.e. terr log(infl) log(gdpc) log(govx) log(open) log(intr) polx 1 0.302947 22.74493 0.013270 0.104728 20.06183 0.096249 3.161594 53.81739 2 0.358708 25.67533 4.199664 7.172667 17.08747 0.654554 4.830798 40.37951 3 0.407136 20.96002 11.35452 12.20652 15.43874 2.219352 3.765362 34.05548 4 0.430052 19.03155 14.38117 14.09819 15.60044 2.283232 4.002937 30.60248 5 0.438451 18.90940 13.88357 14.39717 15.35427 2.642755 5.299702 29.51313 6 0.443627 19.44565 13.88473 14.06316 15.16357 2.961408 5.652990 28.82850 7 0.449319 20.59040 14.23399 13.80645 14.82734 2.893806 5.531567 28.11645 8 0.454685 21.79614 14.37775 13.59655 14.48657 2.862646 5.419500 27.46085 9 0.458304 22.50008 14.29200 13.50219 14.26141 3.017961 5.346458 27.07989 10 0.460909 22.78828 14.16371 13.48145 14.10118 3.260337 5.287042 26.91800 source: own computations using e-view 4.1 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 29 note: variables are as defined in equation 2 table 12: pairwise granger causality tests null hypothesis: obs f-statistic probability log(gdpc) does not granger cause log(infl) 41 0.59631 0.55619 log(infl) does not granger cause log(gdpc) 0.08914 0.91492 log(govx) does not granger cause log(infl) 41 0.23011 0.79561 log(infl) does not granger cause log(govx) 0.63140 0.53763 log(open) does not granger cause log(infl) 41 0.64984 0.52814 log(infl) does not granger cause log(open) 0.20646 0.81442 log(intr) does not granger cause log(infl) 41 1.13996 0.33110 log(infl) does not granger cause log(intr) 1.49031 0.23887 polx does not granger cause log(infl) 41 0.43285 0.65199 log(infl) does not granger cause polx 0.77673 0.46746 terr does not granger cause log(infl) 41 0.29372 0.74726 log(infl) does not granger cause terr 0.13166 0.87706 log(govx) does not granger cause log(gdpc) 41 1.21548 0.30845 log(gdpc) does not granger cause log(govx) 2.03077 0.14600 log(open) does not granger cause log(gdpc) 41 2.13279 0.13324 log(gdpc) does not granger cause log(open) 0.11118 0.89509 log(intr) does not granger cause log(gdpc) 41 1.81976 0.17666 log(gdpc) does not granger cause log(intr) 0.33510 0.71747 polx does not granger cause log(gdpc) 41 0.50060 0.61032 log(gdpc) does not granger cause polx 1.81650 0.17718 terr does not granger cause log(gdpc) 41 0.75834 0.47578 log(gdpc) does not granger cause terr 0.44572 0.64385 log(open) does not granger cause log(govx) 41 2.21918 0.12336 log(govx) does not granger cause log(open) 0.57034 0.57036 log(intr) does not granger cause log(govx) 41 7.17436 0.00239 log(govx) does not granger cause log(intr) 0.45856 0.63583 polx does not granger cause log(govx) 41 9.80739 0.00040 log(govx) does not granger cause polx 3.83616 0.03088 terr does not granger cause log(govx) 41 3.20184 0.05250 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 30 log(govx) does not granger cause terr 0.03978 0.96104 log(intr) does not granger cause log(open) 41 3.13488 0.05558 log(open) does not granger cause log(intr) 0.71094 0.49795 polx does not granger cause log(open) 41 1.94552 0.15765 log(open) does not granger cause polx 2.90440 0.06771 terr does not granger cause log(open) 41 0.55851 0.57694 log(open) does not granger cause terr 0.08092 0.92244 polx does not granger cause log(intr) 41 0.43424 0.65110 log(intr) does not granger cause polx 0.02879 0.97164 terr does not granger cause log(intr) 41 3.70864 0.03432 log(intr) does not granger cause terr 0.15309 0.85860 terr does not granger cause polx 41 0.19446 0.82413 polx does not granger cause terr 0.00000 1.00000 source: own computations using e-view 4.1 note: variables are as defined in equation 2 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 inverse roots of ar characteristic polynomial figure 1: inverse roots of ar characteristic polynomial www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 31 -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(terr,terr(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(terr,log(infl)(-i) ) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(terr,log(gdpc)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(terr,log(govx)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(terr,log(open)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(terr,log(intr)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(terr,polx(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(infl),terr(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(infl),log(infl)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(infl),log(gdpc)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(infl),log(govx)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(infl),log(open)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(infl),log(intr)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(infl),polx(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(gdpc),terr(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(gdpc),log(infl)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(gdpc),log(gdpc)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(gdpc),log(govx)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(gdpc),log(open)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(gdpc),log(intr)(-i) ) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(gdpc),polx(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(govx),terr(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(govx),log(infl)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(govx),log(gdpc)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(govx),log(govx)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(govx),log(open)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(govx),log(intr)(-i) ) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(govx),polx(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(open),terr(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(open),log(infl)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(open),log(gdpc)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(open),log(govx)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(open),log(open)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(open),log(intr)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(open),polx(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(intr),terr(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(intr),log(infl)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(intr),log(gdpc)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(intr),log(govx)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(intr),log(open)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(intr),log(intr)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(log(intr),polx(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(polx,terr(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(polx,log(infl)(-i) ) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(polx,log(gdpc)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(polx,log(govx)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(polx,log(open)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(polx,log(intr)(-i)) -.6 -.4 -.2 .0 .2 .4 .6 2 4 6 8 10 12 cor(polx,polx(-i)) autocorrelations with 2 std.err. bounds figure 2: pairwise cross-correlograms for the estimated residuals table 13: over parameterized regression estimates variable coefficien t std. error t-statistic prob. c -0.051816 0.470048 -0.110236 0.9130 log(gdpc) 0.232026 0.056988 4.071458 0.0003 log(open) 0.121070 0.026233 4.615207 0.0001 log(infl) -0.079971 0.034086 -2.346150 0.0263 log(govx) -0.184890 0.031325 -5.902341 0.0000 log(intr) 0.628458 0.082824 7.587871 0.0000 polx 0.328669 0.077225 4.255988 0.0002 ecm(-1) 0.464029 0.120551 3.849235 0.0006 dlog(gdpc) -0.144426 0.061097 -2.363885 0.0253 dlog(open) -0.079500 0.029229 -2.719929 0.0111 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 32 dlog(govx) 0.399108 0.172224 2.317379 0.0280 dlog(intr) -0.412218 0.104604 -3.940756 0.0005 d(polx) -0.417677 0.096888 -4.310939 0.0002 dlog(infl) 0.024306 0.029174 0.833152 0.4118 r-squared 0.939322 mean dependent var 0.785714 adjusted r-squared 0.911150 s.d. dependent var 0.415300 s.e. of regression 0.123791 akaike info criterion -1.07924 2 sum squared resid 0.429078 schwarz criterion -0.50001 9 log likelihood 36.66408 f-statistic 33.34263 durbin-watson stat 1.778757 prob(f-statistic) 0.000000 table 14: error correction model estimates variable coefficien t std. error t-statistic prob. c -0.051268 0.467562 -0.109649 0.9134 log(gdpc) 0.217044 0.053791 4.034945 0.0004 log(open) 0.115505 0.025234 4.577340 0.0001 log(infl) -0.064628 0.028532 -2.265142 0.0312 log(govx) -0.178076 0.030079 -5.920365 0.0000 log(intr) 0.616936 0.081230 7.594969 0.0000 polx 0.340240 0.075564 4.502661 0.0001 ecm(-1) 0.470324 0.119678 3.929922 0.0005 dlog(gdpc) -0.142587 0.060734 -2.347727 0.0259 dlog(open) -0.075312 0.028641 -2.629527 0.0135 dlog(govx) 0.393111 0.171164 2.296700 0.0290 dlog(intr) -0.411254 0.104044 -3.952685 0.0005 d(polx) -0.417237 0.096374 -4.329353 0.0002 r-squared 0.937818 mean dependent var 0.785714 adjusted r-squared 0.912088 s.d. dependent var 0.415300 s.e. of regression 0.123137 akaike info criterion -1.10237 2 sum squared resid 0.439715 schwarz criterion -0.56452 2 log likelihood 36.14982 f-statistic 36.44775 durbin-watson stat 1.802824 prob(f-statistic) 0.000000 images of terrorism in nigeria www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 33 a terror attack in nigeria's northern a car burns after a bombing that rescuers helping one of the victims of city of kano killed 35 worshippers outside the christmas day terrorist attacks on st. theresa catholic church inchristian churches in jos, damaturu, madalla, nigeria. potiskum and other areas in the middle belt and northern nigeria. source: indianvision (2012),gambrell (2011), nigerians report (2011). 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 | ijfb indian journal of finance and banking; vol. 3, no. 2; 2019 issn 2574-6081 e-issn 2574-609x research article published by centre for research on islamic banking & finance and business, usa 32 relationship between profitability and non-performing loan and a comparative financial performance analysis of shari’ah based banks of bangladesh s. m. akber lecturer department of business administration ranada prasad shaha university, bangladesh e-mail:sayemkane@gmail.com abstract in bangladesh's banking sector is considered as the nerve system of economic activities nowadays. banks' performances are considered as the indicator of a country's economic forthcoming. banks are considered as an influential factor in reducing poverty and unemployment problem because of their capacity to have a higher investment. but this promising sector is facing the challenge of raising the level of nonperforming loans in recent times. the basic objective of the study is to analyze and measure the impact of npls on the profitability of shari'a based banks of bangladesh for the period of the last five (2014-2018) years. for this, it has worked with a sample of five selected islami banks. through excel, regression and ratio analysis was used to find the bank's comparative financial performance and identify the variable that affects the profitability of shari’ah based banks of bangladesh. the findings of this paper recommend that if the authority of the banks becomes more careful about these issues then the performance of the banking sector will be better than previous and it could have an even more significant contribution to the country's economy. keywords: financial performance, nonperforming loans, profitability, shari’ah based banks, bangladesh . 1. introduction in bangladesh, the banking sector is the most dominating sector, especially in the financial sector. the banking industry is comprised of two systems such as traditional banking and islamic commercial banking. it has been gaining more popularity with significance after the recession in the year 2007-2009 not only in bangladesh but also in the world. islami bank bangladesh ltd. (ibbl) was the first bank in bangladesh that was established to provide the islami banking service. in bangladesh, the islamic banking sector plays a vital role in for economic development by fund channeling and through credit facilities to individuals and business organizations. 2. review of literature a non-performing loan is a loan when the borrower is unlikely to pay the credit obligations to the banking group without any remedy by the bank to actions such as recognizing the security. it is also called "bad debt". for a bank having so many bad loans its balance sheet will suffer for profitability due to lacking earning enough money from its credit operation. besides that, it will have to put money aside for its safety. as nowadays non-performing loans have become a concerning issue for commercial banks for that already so much researches have been conducted in this area. batra (2003) has conducted a research where they came with an outcome in their study that in banks, nonperforming loan creates a negative impact on the psychology of bankers for channeling the funds from deposit to credit delivery. another study was done by michael et al. (2006) and the study says that npl effects negatively on the bank's return, liquidity position, and solvency. reducing operational efficiency has considered a reason for that. for these banks should consider npl with higher importance just because of its survival issues. panta (2007) emphasized that, after the initiation of banking sector reforms in 1992, most of the banks are taking initiatives to maintain the npl level and try to improve their profitability position. banks also consider the guidelines of rbi related to income recognition, asset classification and its norms related to various provisions. panta (2007) pointed out that, relationship exists between npa and bank failure all over the world. comprehensive research on the comparative study between sbi and associates, old private banks and new private banks and nationalized banks of the benchmark category has conducted patidar & kataria (2012). they found a substantial impact of npl in the lending sector. in their study, they used regression and ratio analysis. in the same year, chatterjee et al. (2012) studied the relevant area and the result is npls are adversely related to capital sufficiency, channeling the fund and copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 33 credibility of the bank in the whole economy. their study also exposes to the banking sector to protect themselves by becoming accustomed to the changing environment. ganesan & santhanakrishnan (2013) showed in their research, managing the npl the banks efficiently will ensure to increase the profitability of a bank. in the same year according to the study of sameer & kamra (2013) both the banks and financial institutions are suffered emotionally and financially by the prevalence of npl. they suggested identifying the defaulters to reminisce the funds for the bank's development. according to parmar (2014) study, proper management of npl is the most significant task for banks. npl distress both the financial position and performance not only of the banks but also of the financial institutions in various dimensions. in the same year another study conducted by arora & ostwal (2014) titled, “the classification and comparison of loan assets of public and private sector banks”; findings of that study said that, compared to the private sector, the public sector banks have more npl. in his study tandon et al. (2017) focuses on banks‟ specific, macroeconomic determinants of the non-performing loans and their impact on banking profitability. in their sample, they choose 35 banks both from the public and private sectors. the duration of their study was from 2007 -2016. to get a sound outcome a multivariate analysis was used. the outcome said that psu banks – to increase the profitability more attention is required for npl management. 3. objectives of the research this paper aims to analyze the relationship between profitability and nonperforming loan and analyze the comparative financial performance of shari’ah based banks of bangladesh. this paper mainly focuses on,  to examine the relationship between profitability and nonperforming loan of shari’ah based banks of bangladesh based on the performance 2014-2018.  it summarizes the statistical results showing how much impact the independent variables have over the dependent variable bank performance (roe). 4. research methodology this study has been carried out to evaluate the performance of selected islamic banks in bangladesh. to get a sound output several statistical analyses such as hypothesis, regression analysis, and ratio analysis are used to show the relationship between profitability and non-performing loan of these selected banks. ratios that will be used in this study are return on equity, return on asset, net interest margin, net profit margin, net operating margin, earnings per share, total investment (loan) to total deposit, total investment (loan) to total asset, provision for investment (loan) to total loan, price earnings ratio, non-performing loan ratio. 4.1 test of hypothesis step 1: h0=there is no significant relationship. h1=there is a significant relationship. step 2: α=0.05 step 3: f-test statistic will be used step 4: p<α, ho is rejected p>α, ho is not rejected step 5: decision step 6: comment multiple r: how strong the relationship r square: coefficient of determination 4.2 regression equation: ŷ=a+bx 4.3 source of data this study is mostly based on secondary data. most of the information is collected from annual reports of sample islamic banks, websites of those banks. besides that, different published articles, books, newspaper, and websites are also reviewed the following five islamic banks are selected for the study. the banks are islami bank bangladesh limited, social islami bank limited, shahjalal islami bank limited, first security islami bank limited, and exim bank limited. this report measures the performance based on financial statements from 2014 to 2018 of these five islamic banks. ms excel had been used for calculations, tables, graphical presentations; and hypothesis testing and regression analysis. 5. npl in shari’ah based banks in bangladesh nowadays in bangladesh, there are a significant number of islamic banks that cover almost 20% of the total banking market share. according to the financial stability report of 2014 in bangladesh performance of islamic banks are better than the copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 34 traditional banks. in that year islamic banks achieved higher growth inter of assets deposits and for the shareholder's equity. on that year the aggregate nonperforming ratio (4.8%) was lower than the banking industry average. classified investment to total investment ratio in islamic banks was 4.2 percent whereas for the overall banking industry it was 8.9 percent in 2013. to make profit islamic bank does not operate on the interest-based system rather tan they invest the fund on several profit and losses sharing financing. for this, the fund comes from the bank's equity and customer's deposit on different accounts. here the current and savings accounts are guaranteed but the capital is not guaranteed for investment. the investment account holders are entitled to share the bank's net profit or loss on a pre-agreed on the percentage basis. the investment account holder share loss in their investments when there is a loss from the activities of financing. as deposits are guaranteed so all the account holders except investment account holders, the loss streams to them first. the loss will flow to the rest of the depositors only when the loss is significant. in this way, islamic banks pass the negative shocks of their assets to the investment depositors. as islami banks don't charge interest so they claim other charges such as cost-plus, ijarah (leasing), mudarabah, musharakah that are reliable with islamic philosophies. these are the mechanism to protect the loan from moral hazard. at the same time bank also monitor the use of loans of their borrowers by their loan review group so that the chance of making bad debt reduces. 5.1 causes and effects of npl moral hazard is nothing new in the field of credit investment. it happens mostly for adverse loan selection. researchers has identified some other reasons for that such as improper monitoring, lack of attention to the borrowers, enlarging the loan size without measuring the risk properly, sanctioning the loan by corruption, inefficient performances of loan review group, borrowers unwillingness to repay the money on time, lack of compelling right action against the bad debt. all these issues are mostly responsible to increase the number of nonperforming loans for a bank. the nonperforming loan has a negative impact not only on the bank's profitability but also on the whole economy of a country. so, for a bank, it is very important to come up with solutions to reduce npl. apart from the profitability npl effects on some other areas on banking sectors such as reducing the efficiency of banking sectors, hampering the performing loan, stopping the money cycling, reducing the interest-earning, increasing the interest rates for other loans. overall it affects the compatibility of banking sectors. 6. financial ratio analysis to get a sound output for comparing the financial performance among the islamic shari’ah based banks the following ratios of five islamic banks of bangladesh has chosen. the performances are analyzed from 2014 to 2018. at the same time, it also uses an inter-bank analysis. the selected banks are:  islami bank bangladesh limited (ibbl)  social islami bank limited (sibl)  shahjalal islami bank limited (sibl)  first security islami bank limited (fsibl)  export-import bank of bangladesh limited (exim) the ratios which are calculated are sl name of the ratios formulas 1. return on equity capital (roe) net income / total equity capital 2. return on asset (roa) net income / total asset 3. net interest margin (nim) [(investment incomeinvestment expense) / total asset] 4. net profit margin (npm) net income/total operating revenue 5. net operating margin (nom) net operating revenues / total asset 6. earnings per share (eps) net income / common equity shares outstanding 7. total loan (investment) to total deposit ratio total investment / total deposit 8. provision for loan (investment) loss to total loan provision for investment loss / total investment 9. net loan (investment) to total asset net investment / total asset 10. price earnings ratio (p/e ratio) stock price/earnings per share 11. non-performing loan ratio classified investment/total investment remarks: -in the case of islamic banking the term "investment income/expense" is used instead of "interest income/expense". 6.1 return on equity (roe) return on equity of sibl is 13.73 percent where the industry average is 11 .76 percent that represents a better position compared to these other banks. so it can be said that in financial performance comparison among the islamic shari’ah based copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 35 banks, the sibl is ahead from other banks in terms of return on equity. the position of these banks is shown in the graph below: figure 1. return on equity source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018. 6.2 return on asset (roa) return on assets of sibl is 1.18percent where the industry average is 0.93 percent that represents the best position compare to these other banks. so, it can be said that financial performance comparison among the islamic shari’ah banks, the sibl is ahead from other banks in terms of roa. the position of these banks is shown in the graph below: figure 2. return on asset source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018. 6.3 net interest margin (nim) the net interest margin of sibl and ibbl both has 3.17 percent where the industry average is 2.82 percent that represents the best position compare to these other banks. so, it can be said that the financial performance comparison among the islamic shari’ah banks, the sibl and ibbl are ahead from other banks in terms of nim. the position of these banks is shown in the graph below: figure 3. net interest margin source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018. copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 36 6.4 net profit margin (npm) the net profit margin of sibl is 25.70 percent where the industry average is 14.04 percent that represents the best position compare to these other banks. so, it can be said that financial performance comparison among the islamic shari’ah based banks, the sibl is ahead from other banks in terms of net profit margin. the position of these banks is shown in the graph below: figure 4. net profit margin source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018. 6.5 net operating margin (nom) the net operating margin of sibl is 2.80 percent where the industry average is 2.27 percent that represents the best position compare to these other banks. so, it can be said that the financial performance comparison among the islamic shariah banks, the sibl is ahead from other banks in terms of nom. the position of these banks is shown in the graph below: figure 5. net operating margin source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018. 6.6 earnings per share (eps) earnings per share of ibbl is 3.40 where the industry average is 2.22 that represents the best position compare to these other banks. so, it can be said that the financial performance comparison among the islamic shariah based banks, the ibbl is ahead from other banks in terms of eps. the position of these banks is shown in the graph below: figure 6. earnings per share source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018. copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 37 6.7 total investment (loan) to total deposit investment to total deposit ratio of sibl is 84.44 percent where the industry average is 86.86 percent that represents this bank is safer compare to these other banks because they provide more loans to the customer than they deposit. so it can be said that the financial performance comparison among the islamic shariah based banks, the sibl is safer than other banks in terms of this ratio. the position of these banks is shown in the graph below: figure 7. total investment (loan) to total deposit source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018. 6.8 total investment (loan) to total asset investment to total asset ratio of ibbl is 61.35percent where the industry average is 69.80 percent that represents the bank is more liquid compare to these other banks. so, it can be said that the financial performance comparison among the islamic shariah banks, the ibbl is safer than other banks in terms of this ratio. the position of these banks is shown in the graph below: figure 8.total investment (loan) to total asset source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018. 6.9 provision for investment (loss) to total loan provision for investment (loss) to total loan ratio of sibl is 1.09 percent where the industry average is 0.89 percent that represents this bank is safer than other banks because this bank has reserved a higher amount of money for investment loss. so it can be said that the financial performance comparison among the islamic shariah banks, the sibl is a safer bank in terms of this ratio. the position of these banks is shown in the graph below: figure 9. provision for investment (loan) to total investment (loan) source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018. copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 38 6.10 price earnings ratio (p/e) the price-earnings ratio of ibbl bank is 11.92 times where the industry average is 9.79 times that represents the bank is safer compare to these other banks because investors are willing to pay more amount to get this bank's eps. so, it can be said that the financial performance comparison among the islamic shari’ah based banks, the ibbl bank is safer than other banks in terms of this ratio. the position of these banks is shown in the graph below: figure 10. p/e ratio (source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018) 6.11 non-performing loan ratio the nonperforming loan ratio of fsibl bank is 2.19 percent where the industry average is 3.78 percent that represents the bank is safer compare to these other banks because low npl ratio shows the bank is engaged in low-risk lending policies. so it can be said that the financial performance comparison among the islamic shariah banks, the fsibl bank is safer than other banks in terms of this ratio. the highest npl is of shibl and it reflects the bad position of this bank. the position of these banks is shown in the graph below: figure 11. non-performing loan ratio source: annual reports of ibbl, sibl, shibl, fsibl and exim bank limited from 2014-2018. 7. test of hypothesis hypothesis 1: net profit margin and non-performing loan f significance f 1.372261675 .253416701 here p-value = 0.2534 since p-value (0.2534) > α (.05), so ho is not rejected. comment: it can be said that there is no significant relationship between net profit margin and non-performing loan of islami shari’ah based banks in bangladesh. hypothesis 2: return on asset and non-performing loan f significance f .00113 .973476801 here p-value = 0.9735 since p-value (0.9735) > α (.05), so ho is not rejected. copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 39 comment: it can be said that there is no significant relationship between the return on assets and non-performing loans of islami shariah-based banks in bangladesh. hypothesis 3: return on equity and non-performing loan f significance f 4.030355 .056577561 here p-value = 0.0566 since p-value (0.0566) > α (.05), so ho is not rejected. comment: it can be said that there is no significant relationship between the return on equity and non-performing loans of islami shariah-based banks in bangladesh. 8. regression analysis regression analysis 1: net profit margin and non-performing loan where ŷ = net profit margin x = non-performing loan regression statistics multiple r 0.237285145 r square 0.05630424 here, multiple r is 0.237285145 that means there is a very weak relationship between these two variables. r square=5.6%, that means only 5.6% variation in y explained by the regression. coefficients standard error t stat p-value intercept 18.07015921 3.719804594 4.857824855 6.63847e-05 (classified investment/total investment)*100=npl -1.065826531 0.909846355 -1.171435732 0.253416701 dependent variable: net profit margin in percentage here, a = 18.07 b = -1.066 so, regression equation becomes, ŷ = 18.07 -1.066x if non-performing loan is increased by 1%, then net profit margin will be decreased by 1.066%. so it can be said that nonperforming loan has an adverse effect on net profit margin if it is increased. regression analysis 2: return on asset and non-performing loan regression equation, ŷ = a + bx where, ŷ = return on asset x = non-performing loan regression statistics multiple r 0.00700835 r square 4.9117e-05 here, multiple r is 0.00700835 that means there is a very weak relationship between these two variables. r square= .056 that means only 5.6% variation in y explained by the regression coefficients standard error t stat p-value intercept 0.9350722 0.185809146 5.032433683 4.3e-05 (classified investment/total investment)*100=npl -0.00150020 0.377298958 -2.008974371 0.067578 copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 40 dependent variable: return on asset in percentage here, a = 0.935 b = -0.0015 so, regression equation becomes, ŷ= 0.935 -0.0015x if non-performing loan is increased by 1%, then return on asset will be decreased by 0.0015%. so it can be said that nonperforming loan does not affect return on asset so much. regression analysis 3: return on equity and non-performing loan regression equation, ŷ = a + bx where, ŷ= return on equity x = non-performing loan regression statistics multiple r 0.386140869 r square 0.14910477 here, multiple r is 0.386140869 that means there is a very weak relationship between these two variables. r square=14.9%, that means only 14.9% variation in y explained by the regression. coefficients standard error t stat p-value intercept 14.5410807 1.497572134 9.709769812 1.33e-09 (classified investment/total investment)*100=npl -0.735372401 0.366298958 -2.007574371 0.056578 dependent variable: return on equity in percentage here, a = 14.541 b = -0.7353 so, the regression equation becomes, ŷ= 14.541 -0.7353x if non-performing loan is increased by 1%, then return on equity will be decreased by 0.7353%. so, it can be said that nonperforming loan has a little effect on return on equity. 9. findings 9.1 findings from ratio analysis finding from analysis at a glance serial no ratios bank's performance on an average from 2014-2018 highest lowest 1 return on equity % 13.73(sibl) 10.83(ibbl) 2 return on asset % 1.18(sibl) 0.47(fsibl) 3 net interest margin % 3.17(sibl,ibbl) 2.23(fsibl) 4 net profit margin % 25.7(sibl) 8.86(shibl) 5 net operating margin % 2.8(sibl) 1.31(fsibl) 6 earnings per share % 3.4(ibbl) 1.64(fsibl) 7 total investment (loan) to total deposit ratio % 90.71(shibl) 84.44(sibl) 8 provision for investment (loan) to total investment (loan) % 1.09(sibl) 0.48(fsibl) 9 total investment (loan) to total asset % 74.38(exim) 61.35(ibbl) 10 price earnings ratio (times) 11.92(ibbl) 8.14(sibl) 11 non-performing loan ratio 5.13(shibl) 2.19(fsibl) copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 41 9.1.1 findings from ratio analysis are given below based on the above analysis, here the social islami bank limited (sibl) has the best performance indicators and its overall performance is good among the islami shari’ah based banks in bangladesh. so, it can be said that based on this ratio analysis, social islami bank limited (sibl) is the best-performed bank among the islami shari’ah banks from 2014-2018. 9.2 findings from hypothesis testing and regression equation from the hypothesis testing findings are given below,  there is no significant relationship between net profit margin and non-performing loan of islami shari’ah based banks in bangladesh.  there is no significant association between return on assets and non-performing loans of islami shari’ah based banks in bangladesh.  there is no significant connection between return on equity and non-performing loans of islami shari’ah based banks in bangladesh. so, it can be said that non-performing loan does not affect significantly on the profitability of the islamic shari’ah based banks in bangladesh. and from the non-performing loan ratio, results say that all of the bank's ratio is near to the industry average. so, it can be said that the shari’ah based banks in bangladesh have a lower ratio of non-performing loan to total loan. from the regression equation, it can be said that  if non-performing loan is increased by 1%, then net profit margin will be decreased by 1.066%.  if non-performing loan is increased by 1%, then return on asset will be decreased by 0.0015%.  if non-performing loan is increased by 1%, then return on equity will be decreased by 0.7353%. so it can be said that npl has an adverse effect on net profit margin. as npl is an increase, the net profit margin decreases. but non-performing loan does not affect return on asset significantly and has a little effect on return on equity. from the above findings, it can be said that bangladeshi shariah-based banks have the lower non-performing loan ratio because they strongly monitor the amount of loan which is given to the borrowers; that's why the relationship between the nonperforming loan and the net profit margin is not significant in case of the shariah-based banks in bangladesh. 10. recommendation although the profitability of the islami shari’ah based banks of bangladesh is higher than the conventional banks, and the nonperforming loan ratio is lower compared to other banks. it happens because bangladeshi islamic shari’ah based banks strongly monitor the lending amount landed to the borrower. that's why the npl ratio is lower in comparison to conventional banks of bangladesh (according to the financial stability report 2014). but islamic banks should stay more concern to decrease the npl amount more. considering the findings and above discussed challenges, some recommendations are given for improving the operational efficiency of the islamic banks in bangladesh.  to decrease npl, banks should take high collateral, so that if the borrower defaults, then the bank can recover the lending amount by selling the collateral.  capacity building of executives in the recovery department. different types of training should be provided to ensure the recovery of the lending amount. banks should hire experienced employees for the recovery department.  a separate act on islamic banking may be enacted. currently, the central bank has a guideline for islamic banks. as islamic banking has become a part of mainstream banking in bangladesh, it has become necessary to introduce more comprehensive guidelines to bring greater transparency and accountability to the industry.  internal shari’ah auditing is generally performed in the islamic banks. however, globally external shari’ah audit is also conducted to ensure shari’ah compliance.  it might be desirable, at least for smaller banks to have a common shari’ah board to determine the shari’ah compatibility of their products. a common platform well-versed in both the shari’ah and modern finance and having adequate research facilities may perhaps be the most suitable for providing the services of a shari’ah board.  it is important to activate the interbank money market of the country. islamic banks need more shari’ah compliant bonds to manage their liquidity effectively. 11.conclusion from the outcome of the comparative financial analysis of five islamic shari’a banks, it can be said that social islami bank limited (sibl) is holding the first position among the islamic shari’a banks. besides, the islamic banks are having comparatively great risk management, so that their profitability is not affected by the non-performing loan. shortly, islamic banking has a vast opportunity to lead the banking industry of bangladesh. copyright @cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 2; 2019 42 references arora, n., & ostwal, n. (2014). unearthing the epidemic of non-performing assets: a study of public and private sector banks. management insight, 10(1). batra, s. (2003, november). developing the asian markets for non-performing assets; developments in india. in 3rd forum on asian insolvency reform, seoul, korea. chatterjee c., mukherjee, j, das r (2012). management of nonperforming assets -a current scenario. international journal of social science and interdisciplinary research 2012(1):11. ganesan, d., & santhanakrishnan, r. (2013). non-performing assets: a study of state bank of india. retrieved from asia pacific journal of research, 1. michael, j. n., vasanthi, g., selvaraju, r. (2006). effect of non-performing assets on operational efficiency of centralcooperative banks, indian economic panorama 16(3):33-39. available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1735329&down load=yes panta, r. (2007). challenges in banking: a nepalese diaspora. socio-economic development panorama, 1(2), 9-22. patidar, s., & kataria, a. (2012). analysis of npa in priority sector lending: a comparative study between public sector banks and private sector banks of india. retrieved from bauddhik, 3(1). parmar, r. (2014). non-performing assets (npas): a comparative analysis of sbi and icici bank. international journal for management and pharmacy, 3(3), 68-72. samir, d., & kamra, d. (2013). a comparative analysis of non-performing assets (npas) of selected commercial banks in india. opinion: international journal of management, 3(1). tandon, d., chaturvedi, a., & vidyarthi, h. (2017). non-performing assets and profitability of indian banks: an econometric study. international journal of business competition and growth, 6(1), 60-76. 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://papers.ssrn.com/sol3/papers.cfm?abstract_id=1735329&down indian journal of finance and banking vol. 5, no. 2; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 85 the role of information technology in improvement of quality of the financial reports prepared by the commercial banks in bangladesh dr. md. abu sina professor department of accounting and information system islamic university, kushtia, bangladesh e-mail: drabusina1970@gmail.com md. shahnur azad chowdhury associate professor department of business administration international islamic university chittagong, bangladesh e-mail: tipu_iiuc@yahoo.com md. tafhim shakib research fellow department of business administration international islamic university chittagong, bangladesh e-mail: nebulastar333@gmail.com sultana akter assistant professor department of business administration international islamic university chittagong, bangladesh e-mail: sa_maya@rocketmail.com a. b. m. yasir arafat lecturer department of computer science and engineering international islamic university chittagong, bangladesh e-mail: abmya89@yahoo.com abstract in the 21 st century, from bank to insurance, multinational companies to government offices have increased thousands of times their profitability, productivity, sustainability, and also market expansion through the successful uses of ict. today another aspect is the preparation of a high-quality financial report that relies entirely on the information. quality information depends on several characteristics like completeness, accuracy, timeliness, consistency, validity, accessibility, and integrity of that information, etc. having these characteristics in financial information is the prerequisite for good financial reporting. usages of it have a great role in producing quality information and financial https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 86 reporting consequently. the use of it in the banking sector is more sophisticated than in other sectors in bangladesh. therefore, the purpose of this research is to examine analytically the relationship between the use of information technology and the quality of financial reporting. using primary data sourced a structured questionnaire was administered to selected banks in bangladesh and data analysis was done through the general regression model by ols method to examine the nature of the relationship that exists between the quality of financial reports and the adoption of information technology. the result of the data analysis of the study showed that a positive correlation exists between it and the quality of reports. keywords: information technology, financial report, quality. jel classification codes: m1, m15, q55. introduction financial reporting is the tool to interconnect various kinds of financial information that is very much valuable for making a decision related to investment, credit, and other business activities. usually, it includes general purpose financial statements like balance sheets, income statements, cash flow statements, equity reports, and many other various kinds of statements. it is the method to demonstrate financial data about the flow of funds, financial health, and operating performance of a firm. these are usually published in the company's annual reports. so, it has great importance to the investors to make an investment decision. it is of the same importance for the organization to have an actual position of the firm and plan. so, the report should be standard enough that lead both the investors and the company in the right direction. there are several dimensions of the quality of the repost like as relevance, understandability, reliability, and comparability. technology helps to enhance the quality of financial reports of today's business using it like computers, hardware, and software in order to make a decision effectively from strategic to the operational level. although at the early stage of it, it was very limited use to accounting system but today's it is a broader area supporting erp with business intelligence appliance. now it is time to conduct research to recognize modern technologies and how they should be used to progress the dimensions of reporting in terms of relevance, understandability, reliability, comparability, and other quality dimensions. statement of the problem financial reporting is publishing the formal records of a company's financial activities. to make a better decision and easy use of these reports, certain standards or qualities should be considered. the qualities include relevance, understandability, reliability, and comparability. manual procedures always suffer from some sort of limitation like committing an error, taking a long time to prepare the reports, absence of prompt and quality service, unreliability, reusability problem, interrupted communication of the reports with the regulatory authorities, etc. gradually upgrading of information technology has brought a dramatic revolution in accounting systems and changed the ecosystem of an economic event. computer technology has high-velocity processing power through which a lot of data can be processed within a nanosecond. thus, it contributed a lot in publishing and preparing financial statements speedier and less costly. bangladesh has started its journey towards digitization recently by automating most of its public systems serving the countryman. private firms started managing the offices in an automated way earlier than the government initiatives. most of the firms are now a day's being transformed to automation from manual process which has given speed to the firms and also helped them to be with the era. as the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 87 processes are still in the inception stage a lot of studies are required to be undertaken to start the journey in an optimum way to draw maximum benefit to save the time that has been elapsed to start. in this way automating the reporting system also require a thorough discussion to address it technically, accounting and managerial dimensions along with its potentiality in term of profit to be gained. rationale of the study as transformation is a continuous process, the concept of wealth in the last century has completely changed in the 21 st century. everyone in the world has accepted the resource of the 21 st century as knowledge and information. the world is moving with so fast speed that it has become a great challenge to be with the time for the local firms. local firms are to keep them on track to synchronize with the international players as the market has become boundary less. this situation imposes pressure upon the local firms to digitize their operations. as digitization is a technical process so special care should be taken regarding its potentiality and the requirements for safe installation. the investigation should be done upon the outcome and the benefit to be drawn by the major stakeholders who require a thorough and sensitive study to be undertaken. associated risks and proper measures to address the same should also be brought into consideration to avoid the hazard of technology. research question the researcher hopes to respond to the question in the study is mentioned below:  to what extent can the accuracy, consistency, timeliness, integrity of financial reports be improved with the usage of it? scopes of the study this is the age of information technology. the size of the organizations is becoming larger in terms of employees and financial transactions. the transformation of the firms from manual to automation is a great challenge now. the span of supervision has been increased as it is easy to supervise maximum people with a minimum number of layers in the firms. automation has a great impact on a firm's performance in terms of time and cost savings. new opportunities are explored by the application of it in every functional department of the firm. accordingly, the potential benefits are to be explored in the case of accounting discipline. as it is in initiation still now in bangladesh so a lot of issues are to be discussed for getting most of the benefits from it applications in accounting and finance. so the study will open new windows in the way to use it for preparing financial reports. the organization will get directions and be benefited thereof. it will also help the investors to make decisions whether to invest or not. literature review technology comes from the application of the invention of science. technology not only brings blessing but also acts as a reason for suffering. selase and selase (2019) conducted research to see the need for technology for meeting the better business goal. salehi and torabi (2012) carried out a study named "the role of information technology in financial reporting quality: iranian scenario" to find out the impact of it on financial reporting systems by hypothesis testing through t-test, anova, and duncan's test using an organized questionnaire. the finding of the study was that the relevance, reliability, and comparability of accounting information systems have been changed due to it use. but according to janardhanan (2020), a firm’s values have been depended on some specific features of a firm like size, age, liquidity of the firm, and also an internal controlling system of firms, etc. moreover, to adopt ifrs, the country's financial system has to gain convergence and also decline earnings management practices to make quality reporting (kurfi, 2017; amankwa, mawutor, & yiadom, 2020). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 88 imeokparia (2013) conducted a descriptive research" information technology and financial reporting by deposit money bank in nigeria: an empirical study" with a population size of 2,500 accountants and a sample size was taken as 345 from the population as primary data analyzed by simple regression model to examine the role of it in the producing and publishing of financial reports of deposit money banks in 2013 in nigeria. she showed that the use of it makes the reports more accurate, usable, and of better quality. she also proved that it doesn't hinder compliance with the international standards of financial reporting. saeidi and prasad (2014) in their study "the impact of accounting information systems on financial performance – a case study of tcs – india" considered accounting information systems as such system where information can be processed from a different viewpoint and make an effective decision from operational level to strategic level for different kind of users. in this study, data has been collected from a primary source and processed by using automated data processing tools spss software for testing hypothesis, measuring p-value, and checking significant probability. abdallah (2014) showed in his study that the impact of the use of the accounting information systems on the quality of financial statements provided to the income and sales tax department in jordan. the study was conducted by the structured questionnaire comprising fourteen questions for 50 accountants as respondents. to analyze the collected data, some statistical tools like arithmetic mean, regression analysis, and standard deviations had to measure. this paper also tested the hypothesis using cronbach's alpha test and simple linear regression test. the result of the study was that there is a positive relationship found between the impact when using the accounting information systems and the quality of financial statements. murungi and kayigamba (2015) in their study "the impact of computerized accounting system on financial reporting in the ministry of local government of rwanda" recommends computerizes accounting system influences the financial reporting system in terms of accountability, timeliness, and friendliness, etc. the study was conducted based on primary data by constructing a survey questionnaire where 65 respondents were selected as samples randomly from a population of 110. the study found that 38% of the respondents recommend accountability of financial reporting is increased by the use of computerized accounting, while 31% of the respondents recommend that the computerized accounting system producing financial statements on time. eruemegbe (2015) in his study “effect of information and communication technology on organization performance in the banking sector “in 2015 gave his observation that ict enables to increase the performance of banks profitability. the study also showed that the uses of ict improve customer satisfaction and the delivery of services sharply. the study concluded with a significant positive relationship between technology innovations in service delivery. olanrewaju (2016) in his study titled "effects of information technology on organizational performance in nigerian banking industries" in 2016 revealed that the performance of employees, customers, and profitability of bank has been improved due to the uses of technological innovation. the study suggested that actual administration of it will be for better customer satisfaction, employee performance, and improved profitability and to lead competitiveness in the banking sector of nigeria. barakat et al. (2020) conducted a study to assess the standard of internet financial reporting by investigating internet reporting and corporate governance in palestine. alabar and agema (2014) in their study titled "information and communication technology and customer satisfaction in the nigerian banking industry" discussed that the present situation of ict had played an important role in customer satisfaction. the study "evaluation of the effect of using computer audit systems on audit quality" in 2016 showed that the effectiveness of auditing software has depended on the size of audit firms in terms of audit quality (kermani, bigzadeh, & khodamipour, 2016). if the firm size is larger, the audit quality is higher using computer auditing software and vice versa. the study recommended that there is https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 89 a positive relationship exists between the size of audited firms and the efficiency of the computer auditing system on the quality of audit actions. hypothesis development a null hypothesis has been tested to understand the nature of the relationship between it and the quality of financial reporting. h0: there is no significant relationship between the quality of financial reporting with an adaption of automation in the banking sector of bangladesh. method in this section, the whole process of the study has been highlighted along with the methods and statistical analysis conducted in this research. this research has been conducted by a structured interview schedule to conduct a survey for collecting primary data regarding the impact of it in preparation of financial reports in banks. the officers from the head office have been interviewed. then on the basis of the results of the pilot survey, a questionnaire was prepared to explore the impact indeed. the questionnaire includes the perceptions of the management in using it in preparing financial reports regarding cost, time, accuracy, relevance, reusability, etc. research methodology mediates between research questions and data and shows how the research questions are connected to research objectives. population and samples of the study the population of the study: the study is concerned with the application of information technology in preparing financial statements by the commercial banks of bangladesh. so, the total number of commercial banks operating in the country who are using automated systems for preparing financial statements is the population of the study. currently, there are 42 private, 6 states owned and 8 foreign banks working in the country among those total 50 are using an automated system. so, the population size is 50. sampling design sampling is a procedure which uses a small number of items from the entire population to make conclusions about the population. a sample can be defined as a subset or a small part of a population. the purpose of using sampling is to facilitate an estimate of some known characteristics of the population (sekaran & bougie, 2010; zikmund, 2010). sampling design is two types as probability sampling and non-probability sampling. probability sampling can define as each element in the population has a known chance or probability of being selected as a sample. simple random sampling is best known for probability sampling. however, conducting this sampling is difficult and costly; nevertheless, it is a popular sampling technique where the research findings can be generalized from the sample. non-probability sampling does not have a known chance of being selected as a subject. this sampling does not allow the research findings to be generalized from the sample to the population. it does not allow the researchers to analyze sampling statistics which provide information about the precision of the research findings. however, non-probability sampling is easy to be administered and it tends less complicated and less time consuming than probability sampling (sekaran & bougie, 2010; zikmund, 2010; cooper, schindler, & sun, 2006). the present study was conducted based on a probability sampling design. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 90 sample size determination of sample size is a very crucial issue because the sample that is too large may waste time, money, and resource while samples that are too small may lead to an inaccurate result. on the basis of anderson's random sampling technique, the numbers of respondents are determined. since the population is known, the sample size is determined by using the formula (anderson, 1996): where, n = number of known populations p= proportion belonging to specified category (1-p) = proportion not belonging to the specified category b =level of significance n=sample size table1 indicates an estimated sample size of 100, calculated based on anderson's random sampling technique. table 1. estimated sample size n =33.33 = 33 (approximately) where n = 50 p = .5 (assumed); (1-p) =.5 (assumed); b =10% (i.e, level of significance) sources and collection of data the study has been conducted by collecting primary data. primary data source for exploring the level of application of automated financial reporting, primary data were required which have been collected through a structured questionnaire. the interview schedule contains questions regarding the accuracy of financial statements, time-saving, cost-saving, risk reduction, improvements of efficiency, regulatory compliance, audit purpose, reduction of turnaround time. analysis and findings the dependent variable (outcome variable) the quality of financial reporting in automated financial reporting in the banking sector of bangladesh. to test the significance of quality of financial reporting in the banking sector, the study has been going through the used general regression model by ols method which comprises different test like t, f, r-square, adjusted r-square as well as effects of related factor. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 91 table 2. coefficients model unstandardize d coefficients standardized coefficients t sig. b std. error beta 1 (constant) -.005 .918 -.006 .996 positive_impact_it -.471 .189 -.506 -2.494 .020 operational_knowledge .251 .162 .335 1.554 .133 produce_req.inf_timely -.216 .199 -.215 -1.088 .287 save.cost_inf.sharing -.372 .379 -.168 -.980 .337 save.cost_documentaion .128 .291 .077 .441 .663 outweigh.benefits_cost.of. it .472 .210 .431 2.253 .034 reliability.increased.by_it .383 .261 .274 1.466 .156 accuracy.obtained.by_it .702 .476 .297 1.474 .153 maintain.compliance.reg. authority .150 .301 .098 .497 .624 dependent variable: quality of financial reporting table 3. correlation matrix quali ty of fina ncial repo rting posit ive_i mpa ct_i t oper ationa l_kno wledg e produ ce_re q.inf_ timel y save. cost_i nf.sha ring save. cost_ docu menta ion outw eigh. benef its_c ost.of .it relia bility .incr ease d.by _it accu racy. obtai ned.b y_it maint ain.co mplia nce.re g. autho rity corr elati on quality of financia l reportin g 1.000 -.208 .028 -.081 .053 .178 .274 .260 .250 .186 positive _impact _it -.208 1.000 .484 .165 -.070 -.003 .485 .234 -.276 -.325 operatio nal_kno wledge .028 .484 1.000 .501 -.039 .166 .221 .230 -.323 -.371 produce _req.inf _timely -.081 .165 .501 1.000 .020 .236 -.064 .352 -.064 -.153 save.co st_inf.sh .053 -.070 -.039 .020 1.000 .142 .076 .101 .350 .285 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 92 aring save.co st_docu mentaio n .178 -.003 .166 .236 .142 1.000 -.020 .341 .140 -.090 outweig h.benefi ts_cost. of.it .274 .485 .221 -.064 .076 -.020 1.000 .294 -.177 -.139 reliabili ty.increa sed.by_i t .260 .234 .230 .352 .101 .341 .294 1.00 0 -.074 -.114 accurac y.obtain ed.by_it .250 -.276 -.323 -.064 .350 .140 -.177 -.074 1.000 .541 maintain .compli ance.re g. authorit y .186 -.325 -.371 -.153 .285 -.090 -.139 -.114 .541 1.000 sig. (1taile d) quality of financia l reportin g .119 .438 .325 .384 .157 .059 .069 .077 .146 positive _impact _it .119 .002 .176 .346 .492 .002 .091 .057 .030 operatio nal_kno wledge .438 .002 .001 .412 .174 .105 .096 .031 .015 produce _req.inf _timely .325 .176 .001 .456 .090 .360 .021 .360 .194 save.co st_inf.sh aring .384 .346 .412 .456 .212 .336 .285 .021 .051 save.co st_docu mentaio n .157 .492 .174 .090 .212 .455 .024 .215 .306 outweig h.benefi .059 .002 .105 .360 .336 .455 .046 .158 .217 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 93 ts_cost. of.it reliabili ty.increa sed.by_i t .069 .091 .096 .021 .285 .024 .046 .339 .260 accurac y.obtain ed.by_it .077 .057 .031 .360 .021 .215 .158 .339 .000 maintain .compli ance.re g.author ity .146 .030 .015 .194 .051 .306 .217 .260 .000 the significance value 0.02 for the variable "positive impact of it" and the significance value of 0.03 for the variable "outweigh benefits of acquiring cost of it software" which are less than 0.05 for the above 02 variables indicates that the test is significant and we can reject the null hypothesis. which implies that there is a significant relationship between quality of financial reporting with an adaption of automation in the banking sector of bangladesh for these variables? and for remaining all other variables have positive relation but insignificant. table 4. anova model sum of squares df mean square f sig. 1 regression 16.545 9 1.838 1.919 .098 residual 22.985 24 .958 total 39.529 33 table 5. model summary r square adjusted r square std. error of the estimate change statistics r square change f change df1 .419 .200 .97862 .419 1.919 9 a. predictors: (constant), maintain. compliance.reg. authority, save.cost_documentaion, outweigh.benefits_cost.of.it, produce_req.inf_timely, save.cost_inf.sharing, reliability.increased.by_it, positive_impact_it, accuracy.obtained.by_it, operational_knowledge b. dependent variable: quality of financial reporting https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 94 from table 5, it has been seen that the value of the correlation coefficient (r) equal to 0.65, shows the positive relationship between the dependent variable & independent variable. again the value of r 2 (co-efficient of determinant) 0.42, express that, the 42% of the variation of the dependent variable is occurred by the change of independent the variable. but the adjusted r 2 indicates the actual variation of the dependent variable is 20% out of 42% variation suggested by r 2 . to test the significance of overall variation of the model as well as to test the significance of goodness of fit of the model, f-test has been used. here since the value of f-statistic 1.19 is greater than the table value of 0.098 at 5% levels of significance, so the test is significant. from table 2, by using student-t (t-test), it has been seen that the significance of individual parameters used in the model of the variables considered at a 5% level of significance. figure 1. normal p-p plot of regression standardized residual hence considering the above observations and significance & goodness of fit of the model between variables, it is said that the quality of financial reporting has a significant relationship with an adaption of automation in the banking sector of bangladesh. conclusion the computerized reporting system has been demonstrated to be effective in providing and publishing information concerning the financial situation for a business in an efficient manner. it also enables data to be available instantly and be made available to different users in different locations at the same or different time zone. moreover, we live in the age of science and enjoy the new discoveries of science through technology. the computer has high-speed processing logic that turned it into technology. from the study, it has been observed that qualities of information that are needed to produce better quality https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 95 reporting for business are accuracy, timeliness, completeness, reliability, etc. the study also recommended that computerized systems have a positive impact on the quality of financial reports for better business purposes. references abdallah, a. a. j. (2014). the impact of using accounting information systems on the quality of financial statements submitted to the income and sales tax department in jordan. european scientific journal, esj, 9(10). https://doi.org/10.19044/esj.2013.v9n10p%p anderson, j. r. (1996). act: a simple theory of complex cognition. american psychologist, 51(4), 355. alabar, t. t. & agema, r. j. (2014). information and communication technology and customer satisfaction in the nigerian banking industry, journal of advanced management science, 2(4), 333-338. https://doi.org/10.12720/joams.2.4.333-338 amankwa, r. f., mawutor, j. k. m., & yiadom, e. b. (2020). a panel examination of ifrs adoption and financial statement quality: evidence from selected firms in ghana. international journal of accounting & finance review, 5(2), 45-53. https://doi.org/10.46281/ijafr.v5i2.768 barakat, f. s. q., perez, m. v. l., ariza, l. r., barghouthi, o. a., & islam, k. m. a. (2020). the impact corporate governance on internet financial reporting: empirical evidence from palestine. international journal of accounting & finance review, 5(4), 1-22. https://doi.org/10.46281/ijafr.v5i4.852 cooper, d. r., schindler, p. s., & sun, j. (2006). business research methods (vol. 9, pp. 1-744). new york: mcgraw-hill. eruemegbe, g. o. (2015). effect of information and communication technology on organization performance in the banking sector. international journal of research in engineering & technology (impact: ijret), 3(4), 13-22. imeokparia, l. (2013). information technology and financial reporting by deposit money bank in nigeria: an empirical study. research journal of finance and accounting, 4(11), 39-47. janardhanan, a. k., & r, u. v. 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(2010). business research methods, mason, oh: south-western cengage learning, 2010. appendices appendix a: percentage distribution of respondents on variables sl no statement sa (%) a (%) u (%) d (%) sd (%) cumm (%) 1 role of it in the reporting process 37.8 45.6 7.9 8.9 00 100 2 information technology has a positive impact on the performance of my bank 41.1 43.3 4.4 6.7 4.4 100 3 we have the technical know-how to operate the it in my bank 25.6 52.22 11.1 8.9 2.2 100 4 information technology in my bank produces required information timely. 72.3 26.7 1.0 00 00 100 5 it saves cost in information sharing 62.3 36.7 1.0 00 00 100 6 it saves cost saving in documentation 60 30 10 00 00 100 7 the cost of acquiring information technology in my bank outweighs its benefits 36.7 45.6 1.1 15.6 1.1 100 8 reliability of reports is increased by 70 30 00 00 00 100 https://doi.org/10.46281/ijfb.v3i2.388 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 97 adopting it 9 increased accuracy is obtained by applying it 69.5 30.5 00 00 00 100 10 it helps to maintain compliance with the regulatory authority 25.6 51.1 23.3 00 00 100 source: field survey, 2019 key: sa = strongly agree a = agree u = undecided sd =strongly disagree d = disagree 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 indian journal of finance and banking; vol. 1, no. 2; 2017 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business 42 impact of basel ii & iii implementation to mitigate bank risk: a study on al-arafah islami bank limited sk. alamgir hossain1 k. m. anwarul islam2 1department of finance, faculty of business studies, jagannath university, dhaka,bangladesh. 1huazhong university of science and technology wuhan,hubei, china. 2department of business administration, the millennium university, dhaka, bangladesh correspondence: sk. alamgir hossain, department of finance, faculty of business studies, jagannath university, dhaka, bangladesh .email: alamgir2783@yahoo.com received: november 14, 2017, accepted: november 22, 2017 online published: november 23, 2017 abstract this study has examined the implementation process, effects, outcomes, of basel ii & reforms of basel iii within the al-arafah islami bank limited. the purpose of basel ii is to create regulation about how many capital banks need to put away to guard against the financial and operational risk. basel iii newly introduced accord provides stricter approach toward managing risk with capital in order to strengthen capital & liquidity structure of international banking system. the purpose & aim of this study is to analyze capital adequacy framework whether it is complied with the regulatory supervisions under the prescription of bangladesh bank as well as its capability to absorb shocks arising from financial and economic stress. published disclosures & financial statements of last five years are used to collect data. ols regression model is used to find out the relationship between profitability and capital adequacy requirement in terms of relevant influencing variables (e.g. asset turnover, size of the firm, capital adequacy ratios).capital adequacy ratio of this bank is higher than minimum standard level. the average capital adequacy ratio (car) is about 13.78%. the result of regression analysis is statistically significant and there is a positive relationship between capital and return on asset (roa).if the capital adequacy requirement is increased the return on asset (roa) will be increased. islamic banking sector has some uniqueness compared to the conventional banking sector. products are linked with real economic activities that are why financial crisis of 2008 did not create any extreme pressure on this sector. keywords: basel ii, credit risk, market risk, operation risk, basel iii, capital conservation buffer, leverage ratio, countercyclical buffer. 1. introduction in 2004 the basel committee on banking supervision presented a revised framework which is commonly known as basel ii accord due to some difficulties which are not covered by basel i. basel 2 rests on three pillars. pillar 1 represents capital adequacy. the core objective of pillar 1 is that credits institutions are well capitalized.banks have to maintain minimum capital requirement (mcr) 10% of total risk-weighted assets. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 43 banks with capital more than 10% are considered as well capitalized banks. 8 percent indicates undercapitalized and & 5% means significantly undercapitalized. pillar 2 is the firm review of capital adequacy as well as prudential supervision by national authorities. and pillar 3 is an active use of market discipline to support reliable financial disclosure. basel 2 addresses credit risk, market risk, and operational risk. the bank must reassure the capital adequacy for every one of their exposures along these three lines of risk. credit risk: credit risk arises when the counterparty will fail to meet the obligations on the agreed terms. credit risk basically deals with transaction risk and portfolio risk. there are two types of approaches for evaluating credit risk say, standardized approach and internal rating based approach. market risk: market risk is the risk arising from the adverse movements in market price. for instance: interest rate risk, foreign exchange risk. standardized approach & internal models approach are used for assessing market risk. operational risk:failure of the operating system in the bank due to certain reasons say fraudulent activities, natural disaster, human error, sabotage etc. there are three types of approaches(basic indicator, standardized and advanced measurement approach) are used for assessing operational risk. 2. literature review as said by van roy (2005) banks hold better knowledge, measure & control of sophisticated risks they face with the inception of basel ii. basic risks that fall under these are credit risks, operational risks, and market risks. there are various levels of complexity in the calculation because of defined. operation risks use basic indicator approach while market risk adopts value at risk (var). managing minimum capital requirement most banks have adopted the standardized approach to credit risks. a survey conducted by (kpmz 2003) found that 38% of banks of 294 were restoring to the standardized approach. some banks have their own internal rating based approach for assessing risks. he further clarifies that different credit agencies provide different rating none of the percentages has gone beyond 10%. stigler (1971) and beck et al. (2006) provided the view that supervisors vested with stronger powers to supervise banking activity can improve the corporate governance of banking institutions reduce corruption in bank lending activity. however, becker et al, (1983) argued that supervisors are more concern for their own welfare rather than social welfare. djankov et al. (2006) found that politicians negatively influence the bank's lending system. fernandez gonzalez (2005) found that countries that have low or weaker accounting & auditing system tend to have productive banking supervision & sound banking system. abijit sarkar and l h bhole (2008) found that in developing countries it is used as a yardstick to upholding better banking regulations that ensure the financial & operational soundness of the banking system. he further clarified that effective market discipline has the potential to reinforce minimum capital standards. david vanasse (2007) examines that disclosure and market discipline pillar is only useful for developing countries. it does not meet complex issues of advanced countries. chabanel (2011) observes that implementation of basel iii creates challenges & opportunities for the banking industry. according to his conclusion, it builds a strong basis for further development within the banking industry and it provides assurance to overcome difficulties of past. according to research conducted by aliaga-diaz, olivero and (2011) analyzed macroeconomic effects of anti-cyclical bank capital requirements such as the countercyclical buffer of basel iii & it is expected to reduce consumption volatility by some 4% to 5%. gauthier et al. (2010) explained a stress testing model to engender loss distributions under severe but plausible scenarios. losses arise from systematic spillover effects, either from counter-party exposures in the interbank www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 44 markets or market to the market value of bank's portfolios. meanwhile, miles et al. (2011) described an assumed probability distribution for changes in annual gdp to calculate the probability of banking crisis. ahmed et al. (2015) found that there is a significant relationship between capital adequacy ratio and the profitability of commercial banks of bangladesh & higher capital adequacy rate ensures higher profitability. 3. objectives of the research this paper examines both basel ii & iii accords, reviews the implications of the accords for the banking system in bangladesh particularly (al-arafah islami bank limited). some other objectives:  to review both basel ii & iii accords and identify the three basic pillars.  to enumerate the key proposals of basel iii and its impact on financial performance of al-arafah islami bank limited.  to identify the changes brought in basel iii and to assess the impact of improved capital requirement.  is there any relationship between capital adequacy requirement and banks profitability? 4. research methodology this paper has adopted secondary data from website, and publications of bangladesh bank and different types of journals and articles. data for this study also collected from the financial statements of al-arafah islami bank limited. for quantitative analysis, eviews 9 version is used with 95 percent confidence level is taken into consideration. 5. data analysis and interpretation 5.1 capital base baselii accord represents three-tier capital concept with a view to complying with the requirements which are set to encourage the banks to support their capital positions considering their risk. tier-1 capital is reliable than tier-2. tier –iii (additional supplementary capital) is considered only for market risk. 5.1.1 new features in baseliii  supplementing the risk-based capital requirement with a leverage ratio one of the core features of the crisis was the build-up of excessive on and off-balance sheet leverage in the banking industry. in many cases bank made excessive leverage while still showing strong risk-based capital ratios. thus there were a downward pressure on asset prices, a decline in bank capital and contraction in credit availability. under basel, 3 leverage ratios have been introduced to constrain leverage & additional safeguard against model risk and measurement error by supplementing the risk-based measure.  reduction procyclicality and promoting countercyclical buffers the propensity of market participants to act in a procyclical manner has been amplified through a variety of channels, as well as accounting standards for both market to market assets and held to maturity loans. a number of measures have been taken to address reducing cyclicality of the minimum capital requirement, forward-looking provisions, conserving capital to build buffers.  addressing systematic risk and interconnectedness the recent global crisis has added the magnitude of interconnectedness as a key dimension of systemic risk. the basel committee designed a scheme comprising both qualitative and quantitative indicators to assess the systematic importance of financial institutions at a global and domestic level. some effective points say capital incentives, a higher capital requirement for trading and derivative activities, higher capital requirements for inter-financial exposures, liquidity requirement that penalize excessive reliance on short-term interbank funding to support longer-dated assets. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 45 5.2 global liquidity standard a strong liquidity standard has been designed by basel committee to ensure a sound competitiveness & stability in the banking sector. the committee in 2008 published principles for sound liquidity risk management and supervision. the committee developed two minimum standards named liquidity coverage ratio (lcr) & the net stable funding ratio (nsfr). the liquidity coverage ratio indicates that bank should hold highly liquid assets to meet a short-term obligation. high quality liquid assets can be converted into cash within 30 calendar days. the main objective of nsfr is to limit over-reliance on short-term wholesale funding assessment of liquidity risk across all on and off-balance sheet items. 5.3 capital conservation buffer banks are required to maintain a capital conservation buffer of 2.5% above the regulatory minimum capital requirement of 10%, comprised of common equity tier 1 capital. banks should not distribute dividends or bonuses in case capital levels falls within the range. table 1: phase-in arrangements for basel 3 implementation in bangladesh 2015 2016 2017 2018 2019 minimum common equity tier 1 (cet1) capital ratio 4.50% 4.50% 4.50% 4.50% 4.50% capital conservation buffer .625% 1.25% 1.875% 2.50% minimum cet1 plus capital conservation buffer 4.50% 5.125% 5.75% 6.375% 7.00% minimum total capital ratio 5.50% 5.50% 6.00% 6.00% 6.00% minimum capital plus capital conservation buffer 10.00% 10.00% 10.00% 10.00% 10.00% phase-in of deductions from cet1 excess investment over 10% of a bank’s equity in the equity of banking financial and insurance entities 20% 40% 60% 80% 100% phase-in of deductions from tier 2 revaluation reserves (rr) rr for fixed assets, securities, and equity securities 20% 40% 60% 80% 100% leverage ratio 3% 3% 3% readjustment migration to pillar 1 3% liquidity coverage ratio ≥100% (from sep.) ≥100% ≥100% ≥100% ≥100% net stable funding ratio ≥100% (from sep.) ≥100% ≥100% ≥100% ≥100% 5.4 the implication of basel ii & iii in aibl to become more risk-sensitive to credit, market & operation risk banking institutions have to follow & maintain minimum capital prescribed by bangladesh bank. the regulatory capital is composed of:  core capital (tier1) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 46  supplementary capital (tier-2)  additional supplementary capital (tier-3) [only for market risk] tier-1 capital consists of highest quality capital items it helps a bank to absorb losses on an ongoing basis. it includes paid-up capital, statutory reserve, retained earnings, minority interest in subsidiaries. in 2012 54.55% of tier-1 is from paid-up capital & 23.75% is statutory reserve. the major portion of tier-2 capital is general provision & revaluation. in 2010 the bank increased its tier-1 capital by issuing right shares worth 2338.6 million. policies and processes for mitigating credit risk, market risk & operation risk. the bank has established a framework that defines structure, role, responsibilities, and the processes to identify, quantify and manage risk within the framework. this policy and procedures are being updated from time to time with the adoption of new techniques for managing risk in the line with the socio-economic scenario and investment environment in bangladesh. duration, pv, exposure and gap limits, var are used for mitigating market risk. the bank offers attractive pay package to its employees based on performance and merit. basic indicator approach is used to compute charge against operational risk. table 2 capital ratios of aibl year 2011 2012 2013 2014 2015 total amount of capital under tier 1 11924.5 13073.14 13500.51 15620.57 18244.48 the total amount of tier 2 and tier 3 1123.4 1731.59 1511.75 1732.06 4828.03 total eligible capital 13047.9 14804.73 15012.26 17352.63 23072.51 total risk-weighted asset 96866.37 125998 111037 128253 138573.63 capital adequacy ratio 13.47% 11.75% 13.52% 13.53% 16.65% core capital to rwa 12.31% 10.37% 12.16% 12.18% 13.17% 5.5 capital & profitability (risk): relationship and relevant issues it is no surprise that higher capital requirement would influence the profitability of a bank (christian et al., 2008).capital adequacy has a great influence on banks profitability. it is not only a regulatory component but also a weapon for ensuring profitability. dependent variables: in case of profitability, “return on asset” (roa) is considered as appropriate variable because bank regulator and analysts believe that roa gives appropriate proxy for profitability (gilbert and wheelock, 2007) independent variables:  capital adequacy ratio  asset turnover ratio  leverage  operating efficiency  firm size capital adequacy ratios: considering two types of capitals and non-risk weighted and risk-weighted assets, capital adequacy ratios that are considered in our models are:  core capital (tier 1) to total assets  total capital (tier 1+2) to total assets  core capital (tier 1) to total rwa www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 47  total capital (tier 1+2) to total rwa four different versions of capital adequacy ratios further lead to individual tests of following sub-hypothesis: identification of four different versions of capital adequacy ratios further lead to individual tests of following sub-hypothesis: h1a : core capital to total asset ratio has significant relationship with bank capital h1b: total capital to total asset ratio has significant relationship with bank capital h1c : core capital to total rwa ratio has significant relationship with bank capital hid: total capital to total rwa ratio has significant relationship with bank capital table3: variables and respective formulas variables formula symbol source return on assets (asset) net income after taxes/total assets roa gilbert and wheelock (2007) core capital/total assets tier 1 capital/total assets ccta hutchison and cox (2006) total capital/total asset total risk-based capital/total assets tcta hutchison and cox (2006) core capital/total risk-weighted assets tier 1 capital/total risk-weighted assets ccrwa hutchison and cox (2006) total capital/total risk-weighted assets total risked-based capital/total risk-weighted assets tcrwa hutchison and cox (2006) asset turnover sales/total asset at cristian et al (2008) leverage debt/total asset dta cristian et al (2008) firm size natural logarithm of total asset ln ghosh et al.(2003) operating efficiency ratio(cost income ratio) operating expenses/operating incomes cir christian et al. (2008) 5.6 model the model and approach used in this study were found in the established literature (lazaridis and tryfonidis 2006 gilbert and wheelock 2007). roa = f(capital adequacy, at, dta, cir, ln) the core panel ols regression equation for roa: roait= α0 + α1cctait + α2tctait + α3ccrwait + α4tcrwait + α5cirit + α6sizeit + α7atit + α8dtait +εi descriptive statistics of the variables: table 02 represents the summary statistics of the variables of this study. total observations of this study were 13. the bank had a mean (average) return on asset of 1% with a standard deviation of approximately0 .53 percent. it indicates that al-arafah islami bank is not highly levered. the mean of this bank is 6.23 percent with a standard deviation of 2.23 percent. core capital to risk-weighted asset is lower than total capital to risk-weighted asset. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 48 table 4: descriptive statistics of the variables variables no. of observati ons mean median maximum minimum standard deviation return on asset 13 1.37 1.10 2.65 .8792 .53977 asset turnover(at) 13 9.822 10.38 11.81 7.77 1.39 operating efficiency(cost income ratio) cir 13 37.47 33.25 67.40 26.25 13.07 size (natural logarithm of total assets) ln 13 12.22 12.22 13.83 10.52 1.017 core capital to risk-weighted asset (ccrwa) 13 13.50 13.60 17.77 9.68 2.50 total capital to risk weighted asset(tcrwa) 13 16.31 15.36 17.77 9.68 2.50 core capital to total asset(ccta) 13 9.12 8.75 12.94 7.09 1.62 leverage (debt to total asset)/dta 13 6.23 5.58 10.70 1.96 2.37 total capital to total asset(tcta) 13 10.89 10.65 14.21 8.20 .1959 5.7 regression under the panel regression model, roa is regressed against ccrwa, tcrwa, ccta, tcta and operating efficiency (cir) in four different models. regression estimates of the various capital adequacy determinants on asset (roa). table 5: regression analysis independent variables model 1 model 2 model 3 model 4 intercept 5.34 5.416 10.62 10.83 core capital to total asset(ccta) .2469 total capital to total asset(ccta) .2219 core capital to risk-weighted asset(ccrwa) 0.1125 total capital to risk weighted asset(tcrwa) 0.1027 cost income ratio(cir) .017046 0.002175 -0.01948 -.02424 natural logarithm of total asset (size) -1.5222 -0.5487 -0.918 -.9913 asset turnover (at) -0.073 0.02989 0.05478 0.1285 debt to total asset(dta) -0.24 -0.021233 0.1022 0.0988 f-statistics 3531.46 157.91 82.11 64.82 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 49 p-value .0000 0.0006 .0065 0.0154 r2 0.9996 0.9912 .9832 0.978 adjusted r2 0.9993 0.9849 .9712 0.963 the first model regresses the core capital ratio (ccta) with bank profitability (roa). this result shows core capital ratio is statistically significant and it has a positive relationship with roa. the equation also had r2 and adjusted r2 values of 99.96% and 99.93% respectively meaning that about 99.96% of the variations of roa can be explained by ccta and the other independent variables of this model. the second model regresses the core capital to total asset ratio (tcta) with bank profitability (roa). this result shows core capital to total asset ratio is statistically significant and it has a positive relationship with roa. the equation also had r2 and adjusted r2 values of 99.12% and 98.49% respectively meaning that about 99.12% of the variations of roa can be explained by tcta and the other independent variables of this model. the third model regresses the core capital to risk weighted asset ratio (ccrwa) with bank profitability (roa). this result shows core capital to risk weighted asset ratio is statistically significant and it has a positive relationship with roa. the equation also had r2 and adjusted r2 values of 98.32% and 97.12% respectively meaning that about 98.32% of the variations of roa can be explained by ccrwa and the other independent variables of this model. the fourth model regresses the total capital to risk weighted asset ratio (tcrwa) with bank profitability (roa). this result shows total capital to risk weighted asset ratio is statistically significant and it has a positive relationship with roa. the equation also had r2 and adjusted r2 values of 97.80% and 96.30% respectively meaning that about 97.80% of the variations of roa can be explained by tcrwa and the other independent variables of this model. 6. conclusion the islamic financial system has some distinctiveness that should be properly addressed while formulating capital guidelines for islamic financial organizations. leverage, which played a major role in the recent financial crisis, cannot be produced greatly in this system. islamic financial products should be linked with real economic activities like trading, production etc. these items cannot be based on another financial contract since shariah restricts trading of debt and undue speculation. as the islamic financial products are asset-based, they often bear market risk (probability of loss from reduction in market price) to some larger extent. they also have some other unique risks like displaced commercial risk (commercial force to pay returns that exceed the rate that has been earned on its assets financed by mudaraba depositors). capital adequacy ratio of al-arafah islami bank limited is higher than the standard level. based on regression analysis it is found that there is a significant relationship between capital adequacies with the profitability of aibl. references ackermann, j. (2008). the subprime crisis and its consequences. journal of financial stability, 4(4), pp.329-337. ahmed m. n. and pandit a.c.(2011). implementation status of baselii: bangladesh perspective, banking research series 2011, bangladesh institute of bank management(bibm) ahmed, s., ahmed, s., islam, n. and ullah, g. (2015).impact of basel ii implementation on the financial performance of private commercial banks of bangladesh. ssrn electronic journal. avgouleas, e. (2009). what future for disclosure as a regulatory technique? lessons from the global www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 50 financial crisis and beyond. ssrn electronic journal. barth, j., caprio, g. and levine, r. 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(2005). the impact of the 1988 basel accord on banks' capital ratios and credit risk-taking: an international study. ssrn electronic journal. appendix dependent variable: roa method: least squares date: 06/07/16 time: 15:54 sample: 2008 2020 included observations: 13 variable coefficient std. error t-statistic prob. c 5.342994 0.304981 17.51908 0.0000 ccta 0.246950 0.008197 30.12819 0.0000 at -0.073904 0.011670 -6.332763 0.0004 dta -0.024199 0.006688 -3.618086 0.0085 cir 0.008939 0.001213 7.366465 0.0002 ln -0.464984 0.015543 -29.91643 0.0000 r-squared 0.999604 mean dependent var 1.373167 adjusted r-squared 0.999321 s.d. dependent var 0.539771 s.e. of regression 0.014069 akaike info criterion -5.385701 sum squared resid 0.001385 schwarz criterion -5.124955 log likelihood 41.00706 hannan-quinn criter. -5.439296 f-statistic 3531.465 durbin-watson stat 2.773704 prob(f-statistic) 0.000000 http://www.bis.org/publ/bcbs189.pdf http://www.kpmg.com/global/en/issuesandinsights/articlespublications/documents/basell-iii-issues-implications.pdf http://www.kpmg.com/global/en/issuesandinsights/articlespublications/documents/basell-iii-issues-implications.pdf www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 51 dependent variable: roa method: least squares date: 06/07/16 time: 15:56 sample: 2008 2020 included observations: 13 variable coefficient std. error t-statistic prob. c 5.416119 1.467926 3.689640 0.0078 tcta 0.221904 0.037918 5.852256 0.0006 at 0.029898 0.050861 0.587846 0.5751 dta -0.021233 0.033151 -0.640501 0.5422 cir 0.002175 0.005105 0.425943 0.6829 ln -0.548708 0.067160 -8.170168 0.0001 r-squared 0.991212 mean dependent var 1.373167 adjusted r-squared 0.984936 s.d. dependent var 0.539771 s.e. of regression 0.066250 akaike info criterion -2.286721 sum squared resid 0.030724 schwarz criterion -2.025975 log likelihood 20.86368 hannan-quinn criter. -2.340316 f-statistic 157.9151 durbin-watson stat 2.310689 prob(f-statistic) 0.000000 dependent variable: roa method: least squares date: 06/07/16 time: 15:57 sample: 2008 2020 included observations: 13 variable coefficient std. error t-statistic prob. c 10.62601 1.686454 6.300799 0.0004 ccrwa 0.112537 0.029430 3.823912 0.0065 at 0.054783 0.069818 0.784648 0.4584 dta 0.102265 0.026200 3.903260 0.0059 cir -0.019487 0.003221 -6.049611 0.0005 ln -0.918310 0.085435 -10.74861 0.0000 r-squared 0.983236 mean dependent var 1.373167 adjusted r-squared 0.971261 s.d. dependent var 0.539771 s.e. of regression 0.091504 akaike info criterion -1.640822 sum squared resid 0.058611 schwarz criterion -1.380076 log likelihood 16.66534 hannan-quinn criter. -1.694417 f-statistic 82.11155 durbin-watson stat 2.205877 prob(f-statistic) 0.000005 dependent variable: roa method: least squares date: 06/07/16 time: 16:00 sample: 2008 2020 included observations: 13 variable coefficient std. error t-statistic prob. c 10.83587 1.900031 5.702997 0.0007 tcrwa 0.102764 0.032260 3.185539 0.0154 at 0.128529 0.080881 1.589123 0.1561 dta 0.098801 0.030296 3.261248 0.0138 cir -0.024240 0.003228 -7.509853 0.0001 ln -0.991314 0.110004 -9.011614 0.0000 r-squared 0.978861 mean dependent var 1.373167 adjusted r-squared 0.963762 s.d. dependent var 0.539771 s.e. of regression 0.102752 akaike info criterion -1.408958 sum squared resid 0.073906 schwarz criterion -1.148212 log likelihood 15.15823 hannan-quinn criter. -1.462553 f-statistic 64.82916 durbin-watson stat 2.194520 prob(f-statistic) 0.000010 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 indian journal of finance and banking; vol. 1, no. 2; 2017 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business 1 effects of capital structure and board structure on corporate performance of selected firms in nigeria henry waleru akani1 kenn-ndubuisi juliet ifechi1 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 28, 2017 online published: november 01, 2017 abstract this paper seeks to examine the effect of capital structure and board structure on firm performance in nigeria using secondary data consisting of forty listed companies on the nigerian stock exchange (nse) within the period of 2008 to 2016. data were merged and pooled for analysis, the unit root test; co -integration, granger causality test, and regression were done accordingly. the paper established that there exists a significant negative relationship between capital structures (der), a significant relationship between board size and a negative but not significant relationship between board duality and performance (roa & roe) in nigeria respectively. keywords: capital structure, board size, board duality. 1. introduction generally speaking, the issue of capital structure and board structure (under the corporate governance) are salient areas in corporate finance that are essential for the maximization of shareholders returns, wealth maximization, smooth running of firms operation and even the ability of firms to survive amidst competitions. capital is a very crucial ingredient to the existence of any organization because of its direct relation to business continuity and its effect on the ability of the firm to deal with its competitors. claessens (2003) argued that better corporate frameworks benefit firms through greater access to financing, lower cost of capital, better performance and more favorable treatment of all stakeholders. the position has been stated that a weak board structure does not only lead to poor firm performance but also risky financing patterns. invariable, the stronger the bond structure of any organization, the better the financing pattern of the firms. the modern theory of the capital structure originated from the path-breaking contribution of modigliani and miller in 1958, famous for the irrelevance theory, since then other theories have emerged and they include; the trade-off theory that deals with the balancing of costs and benefits, the pecking order theory that deals with disparity of information and resolved by an order of preference with respect to sources of finance, the agency cost theory of capital structure which states that an optimal capital structure will be determined by minimizing the costs arising from conflicts between the parties involved. agency costs play an important role in financing decisions due to the conflict that may exist between shareholders, debt holders and management which brings to www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 2 the fore the importance of corporate governance. directors of companies are regarded as a group of senior officers, who primarily formulate policies, manage, control and authorize company's affair which means that they are in charge of the financing decision of their corporation. in summary, a director is the member of a group that directs the affairs of the company (nnyeruka and ohaka 2006). the directors can either be inside directors who are employees, officers, major shareholders or people connected to the company, they can also be outside directors of the board who are not otherwise employed by or engaged with the company and does not represent any of its stakeholders but bring outside experience and perspective to the board, keeping a watchful eye on the insider directors and help in resolving disputes between inside directors, or between shareholders and the board. agency theory argues that due to the separation of ownership and control in modern organizations which creates information asymmetry between corporate owners and managers, the latter are likely to exploit the amount and quality of the information they have to their advantage by engaging in self-serving ventures that are "injurious" to the interest of the former. one of the primary duties of the board of directors is to serve as the monitoring agent for shareholders to check the behavior of corporate managers (fleischer et al., 1988; and waldo, 1985). effective board structure and capital structure will lead to proper and efficient practice in the administration of business entities. this will ultimately lead to the reduction in the incidence of corporate failures, poor internal control system, poor corporate structure, indiscipline both on the part of management and workers. poorly governed corporations do not only pose a risk to themselves, they do to others and could indeed pull down capital market since they are less profitably, have more bankruptcy risks, lower valuations and pay out less to their shareholders. recent literature on the board of directors is basically empirical and focuses on the size of the board (jensen, (1993); yermack, (1996); fernándezet al., (1997); huther, (1997); eisenberg et al., (1998) its composition and independence (baysinger and butler, (1985; hermalin and weisbach, (1991); weisbach, (1988); rosenstein and wyatt, (1997); bhagat and black, (1998); much of the public debate on board structure has centered on the pressure for a smaller board size. it is argued that although larger board size helps in the facilitation of key board functions, there comes a point when larger boards suffer from coordination and communication problems and hence board effectiveness (and firm performance) declines (lipton and lorsch, (1992); and jensen, (1993). the importance of independent nonexecutive directors in the composition of a board is to effectively monitor the managers and reduce agency cost (choe and lee (2003). however, an available theory is scanty on the determinants of optimal board composition (weisbach, (2002). the question, therefore, is "does the composition of the board of directors influence the firm performance or does firm performance influence the composition of the board of directors? (davidson & rowe, (2004). the interest in board research is sustained by such issues as the important governance oversight role that boards are expected to play, their negligence to the roles and their association with high-profile corporate failures. there is a long tradition of research arguing to what extent the board of director’s composition and size influence their company’s performance (hermalin and weisbach, (2003); dalton et al.,(1998). existing literature on the relationship between the board composition, board size, and firm performance reflects mixed results. despite the interest and numerous studies on corporate boards, empirical results display a remarkable lack of consensus. there have been different views with conflicting results (zajac and westphal, (1996). apart from the above, the findings of the studies have been controversial and inconducive as some reports positive effects, other www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 3 reports negative in the time period and methodologies giving the need for further study. therefore, this study is a contribution to the ongoing debate on the examination of the effects of firms' capital structure and board structure on corporate performance. it will also contribute to the existing body of knowledge using nigerian data to investigate the likely effects of capital structure and board structure on firm performance in nigeria. in analyzing this study, the following null hypotheses were formulated: h01: there is no positive relationship between a firm’s capital structure and its performance in nigeria. h02: there is no significant relationship between board size and corporate performance of firms in nigeria. h03: there is no significant relationship between the board composition and corporate performance of firms in nigeria. 2. theoretical reflections there are two broad schools of thought that gave birth to capital structure. the first school of thought is the relevance theory of capital structure which comprises of the net income approach and the traditional view. they postulated that the cost of capital is determined by the composition of the capital structure of a firm. this suggests that there exist an optimal capital structure that occurs at the point where the cost of capital is at its minimal thereby contributing to the market value of a firm. the net income approach is based on the assumption that the equity and debt capitalization rates remain constant with changes in leverage. if the debt capitalization rate is lower than the equity capitalization rate, with the introduction of more debt, shareholders earnings are increased and firm value in effect lowering the cost of capital. the tradition view postulates that the mixture of debt and equity can increase firm value by the reduction in the weighted average cost of capital to a certain limit of financial leverage. the second school of thought is the irrelevance theory of capital structure that includes the modigliani and miller theory which is based on the assumption that in a perfect market, the composition of firm financing mix does not affect the cost of capital thereby making the capital structure composition irrelevant in the valuation of a firm. modigliani and miller (1958) argue that the capital structure of a firm is irrelevant to its market valuation based on some assumptions applicable in an ideal market. capital structure theories originated from the path-breaking contribution of modigliani and miller in 1958, famous for the irrelevance theory. they were of the opinion that in a world of perfect capital market and no taxes, a firm’s financial structure will not influence its cost of capital. since then, numerous theories and research works have been developed and they include the pecking order theory of capital structure as introduced by donaldson (1961). it is based on the assertion that managers have more information about their firms than investors. this disparity of information is resolved by an order of preference with respect to sources of finance. according to myers (1984), due to adverse selection, firms prefer internal finance to external finance, when outside funds are necessary, firms prefer debt to equity because of lower information costs associated with debt issues. secondly, the static trade-off theory of capital structure contrary to the pecking order states that optimal capital structure is obtained where the net tax advantage of debt financing balances leverage-related costs such as financial distress and bankruptcy, holding firm's assets and investment decisions constant (baxter, 1967 and altman, 1984) signifying a cost-benefit structure. thirdly, the agency theory initially put forward by berle and means (1932) and then jensen and meckling (1976), agency conflicts arise from the possible divergence of interests between shareholders (principals) and managers (agents) of firms and also when there is a risk of default, the risk of default may create what myers www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 4 (1977) referred to as an "underinvestment" or "debt overhang" problem. in this case, the debt will have a negative effect on the value of the firm. they stated that an optimal capital structure will be determined by minimizing the costs arising from conflicts between the parties involved. 2.1 empirical reflection on capital structure and firm performance ibrahim and sayedebaid (2009) pointed out that capital structure decision has a weak-to-no impact on firm’s performance. babatunde et al (2014) tried to study the relationship between capital structure and profitability of conglomerate, consumer goods, and financial services firms quoted in nigeria stock exchange using the return on asset (roa) and return on equity (roe) as performance proxies. in addition, debt-equity ratio (der) and debt asset ratio (dar) were used as capital structure proxies. the results showed an insignificant relationship between return on equity (roe) and dar, significant relationship in almost all firms between return on equity and debt to equity. in the financial firms, there is a negative significant relationship between return on equity and debt to assets ratio, the conglomerate firms, there is also a negative relationship between return on assets (roa) and debt to equity ratio however not significant. mohammed and jaafer (2012) the study tried to extend abor’s (2005) and gill et al, (2011) finding regarding the effect of capital structure on profitability of the industrial companies listed on ammon stock exchange using 39 companies from 2004 – 2009. the result reveals a significantly negative relation between debt and profitability. anthony et al (2010) investigated the relationship between capital structure and profitability of listed non-financial firms in ghana, covering a seven-year period (2002-2008). ratios such as return on assets, return on equity and net profit margin was used as indicators for determining the profitability of the firm. short-term debt, long-term debt, and total debt ratios were also used as indicators for leverage of the firms. the correlation and regression results showed a significantly negative association between leverage and profitability. abor (2005) evaluated the relationship of the profitability with a capital structure for firms listed on the ghana stock exchange. he found a positive relation for short-term debt to total assets and return on equity because of low-interest rates. however, a negative relation exists between long-term financing and equity returns, as the long-term debt was more expensive in that market. the relation among total debt and profitability is positive because of the larger proportion of short-term financing in total debt. he suggested that profitable firms are largely dependent on debt as a major source of financing. albert, michael, and daniel (2013) studied the relationship between capital structure and profitability of listed firms in ghana during the five year period from 2005 to 2009 using regression analysis. similar to abor (2005) study, the results revealed that, there is a statistically significant positive relationship between profitability and short-term debt and a significantly negative relationship between profitability and long-term debt. however, the results revealed a statistically negative relationship between profitability and total debt contrary to abor (2005) study. akintoye (2008) studied the sensitivity of performance to the capital structure on selected food and beverage companies in nigeria. the result shows that performance indicators to turnover (earnings before interest and taxes, earnings per share and dividend per share) and the measures of leverage (degree of operating leverage, degree of financial leverage and dividend per share) are significantly sensitive. zeitun and tian (2007), supports the relationship between capital structure and firm performance from the agency perspective and also supports a negative relationship using 167 jordanian companies over fifteen year period (1989-2003), found that a firm’s capital structure has a significant negative impact on the firm’s www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 5 performance indicators, in both the accounting and market measures. majumdar and chhibber (1997) and rao, m-yahyaee, and syed (2007) also confirm the negative relationship between capital structure and performance. their results further suggest that liquidity, age, and capital intensity have significant influences on financial performance. capon et al. (1990), who suggested that out of the 149 relationships, reported using debt as the independent variable and firm performance as the dependent variable, 90 reported a negative relationship. numerous other studies supports a negative relationship kester(1986), friend and lang(1988), titman and wessels (1988), harris and raviv(1990), shah (1994), rajan and zingales(1995), wald (1999), booth et al. (2001) and fama and french (2002). while others found the relationship to be positive like roden and lewellen (1995), champion (1999), ghosh et al. (2000), hadlock and james (2002) and berger and bonaccorsi di patti (2006). 2.2 board structure tricker (1994) noted that board structure distinguishes between those directors who hold management positions in the company and those who do not. hence with management positions are referred to as insider directors in the united states or executive directors in the united kingdom and australia. the top person on the board is the chairman. he could be an executive or a non-executive of the company. if the chief executive officer (ceo) happens to be a director on the board, then he is an executive director. agency theory argues that due to the separation of ownership and control in modern organizations which creates information asymmetry between corporate owners and managers, the latter are likely to exploit the amount and quality of the information they have to their advantage by engaging in self-serving ventures that are injurious to the interest of the former. one of the primary duties of the board of directors is to serve as the monitoring agent for shareholders to check the behavior of corporate managers (fleischer et al., 1988; and waldo, 1985). therefore, having an insider-dominated board of directors is likely to exacerbate the situation as the board’s role as a monitoring agent of shareholders will be curtailed, paving way for managers to harm shareholders’ wealth. consequently, agency theory argues that effective boards will consist of outside directors. 2.3 empirical reflections on board structure and firm performance arosa et al. (2010) find that the presence of independent directors on the board of a non-listed family firm has a positive effect on performance when the firm is run by the first generation. however, no effect on performance is seen when the firm is run by the second and subsequent generations. andres and vallelado (2008) concluded that a large board size should be preferred to a small size because of the possibility of specialization for more effective monitoring and advising functions. bonn, yokishawa, and phan (2004) tried to compare the effects of board structure on firm performance between japanese and australian firms, they found that board size and performance was negatively correlated for japanese firms but no relationship between the two variables for its australian counterpart was found. however, contrary to the japanese firms the ratios of outside directors and female directors to total board numbers have a positive impact in the australian sample. hermalin and weisbach (2003) concluded that although the empirical literature does not infer a relationship between board composition and firm performance, board size is negatively related to corporate performance. (barnhart, et al., 1994). vafeas (2000) reported that firms with the smallest board are better informed about the earnings of the firm and thus can be regarded as having better monitoring abilities. forbes & milliken (1999) suggested that although large boards may increase the quality of decision-making www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 6 since they offer a broader array of perspectives, their size may hinder the ability to reach a consensus. yermack (1996) found that profitability and financial efficiency ratios decrease as a board’s size increases. jensen (1993) argued that the preference for smaller board size stems from the technological and organizational change which ultimately leads to cost-cutting and downsizing. contrary to the above findings, a positive impact on performance was recorded with larger board size by mak and li (2001) and adams and mehran (2005); adam and mehran (2005) found a positive relationship between board size and performance (measured by tobin’s q) in the u.s banking industry. pearce and zahra, (1992); rosenstein and wyatt, (1990); schellenger et al., (1989) also reported a positive relationship between outside director representation and firm performance. studies by chaganti et al. (1985); daily and dalton (1992), (1993); and zahra and stanton (1988) have found no relationship between board composition and firm performance. 3. research methodology secondary data consisting of the forty listed companies on the nigerian stock exchange (nse) within the period of 2008 to 2016.data are analyzed based on time series cross-section data. they are merged and pooled for analysis using regression. information relating to firm capital structure (debt to equity ratio); board size (number of directors on the board); board duality (proportion of outside directors sitting on the board); 4. model specification the econometric model used in the study is given as: y= β0 + β1xit + kit (1) where y is the dependent variable. β0 is the intercept (it gives the value of y when x is zero), β1 is the slope measuring the rate of change in y for a unit change in x and the coefficient of the explanatory variables (corporate governance mechanisms) in the study, xit is the explanatory variable and edit is the error term, mathematically; transforming equ. (1 and 2) into a testable form, we obtain the following regression equations; corperf = β0 + β 1cs + β 2bs + e2t (2) where corperf = corporate performance which represents the dependent variable. cs = capital structure and bs = board structure are the independent variables. e2t = error term β1 and β2 are the coefficients of the explanatory variables respectively. in this study, our corporate dependent variable performance will be proxied by return on assets (roa) and return on equity (roe) while capital structure (cs) is composed of debt to equity ratio (der); others are: roa = β0 + β1der + β2bsize + β3bcomp + e3t (3) roe = β0 + β1der + β2bsize + β3bcomp + e3t (4) where return on equity (roe) = profit after tax (pat)/total equity shares in issue return on asset (roa) = profit after tax (pat)/turnover debt to equity ratio (der) = total debt / total equity board size (bsize)= natural logarithm of the total number of members of the board of directors. board duality (bcomp) = proportion of outside or non-executive directors sitting on the board. for performance evaluation firms employ both financial and non-financial performance criteria. roa and roe were chosen because they are important accounting-based and widely accepted measures of www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 7 financial performance. 5. results and discussion of findings 5.1 descriptive statistics the table1 shows the descriptive statistics of all the variables used in the study.the descriptive procedure displays a summary statistics for several variables in a single table and calculates standardized values. here, the sample consists of 40 quoted companies on the nigeria stock exchange. the following items were applied, mean, minimum, maximum, standard deviation, sum, kurtosis and skewness with their probabilities. a critical examination of the descriptive statistics for the dependent and explanatory variables reveals that all the variables have a positive mean and the average roa of the sampled firms is about 28%, while that of the roe is about 15%. the results indicate that on the average, for every n100 worth of total assets of the firms, n28 was earned as profit after tax, while n15 was earned as after-tax profit on every n100 equity share issued. the average of debt to equity ratio is 5.03; while the average of board size of 40 firms used in the study is 10 ranging from the minimum of 6 and the maximum of 16 which shows that the size of a board varies substantially among companies. the average of board composition is 0.59 showing that only 59 percent of the board members are independent respectively with a minimum value of 25percent and a maximum value of 85percent. also, the probabilities values of return on assets and return on equity are significant at 5% confidence level meaning that there is a positive and significant relationship between capital structure, bond structure and corporate performance of firms in nigeria. table 1 bcomp bsize roa der roe mean 0.585750 10.32500 0.275947 5.032775 0.146598 median 0.560000 10.00000 0.220000 0.434000 0.110200 maximum 0.880000 16.00000 2.782000 177.7520 1.374000 minimum 0.250000 6.000000 -0.208600 0.012000 -0.208600 std. dev. 0.146967 2.535770 0.472392 28.01534 0.256758 skewness 0.057854 0.384007 3.839422 6.080913 2.678825 kurtosis 2.878814 2.296248 21.03965 37.99427 14.20627 jarque-bera 0.046791 1.808520 640.6561 2287.515 257.1415 probability 0.976876 0.404841 0.000000 0.000000 0.000000 sum 23.43000 413.0000 11.03786 201.3110 5.863930 sum sq. dev. 0.842378 250.7750 8.703003 30609.50 2.571053 observations 40 40 40 40 40 source: extracts from e-view print out and author’s computation, 2017. 5.2 correlation analysis correlation analysis is concerned with describing the strength of the relationship between two variables. in this study, the correlation co-efficient analysis is undertaken to find out the relationship between capital structures, board size and board composition on corporate performance. to show the amount of relationship that exists www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 8 between the variables. table 2: roa as a firm performance measure to capital structure (measured as der). roa der roa pearson correlation 1 -.147 sig. (2-tailed) .364 n 40 40 der pearson correlation -.147 1 sig. (2-tailed) .364 n 40 40 source: author’s computation table 2 shows the relationship between debt to equity der (measure for capital structure) and return on asset (roa) a measure of performance. there is a negative relationship between the roa and der at (-0.147) at a significance level of 0.01 with a low coefficient of determination at (0.364). table 3: roe as a firm performance measure to capital structure (measured as der). roe der roe pearson correlation 1 -.053 sig. (2-tailed) .744 n 40 40 der pearson correlation -.053 1 sig. (2-tailed) .744 n 40 40 source: author’s computation table 3 above shows the relationship between debt to equity der (measure for capital structure) and return on equity (roe) a measure of performance. there is a negative relationship between the roe and der at (-0.053) at a significance level of 0.01 with a high coefficient of determination at (0.744). table 4: roa as a firm performance measure to board composition (bcomp). correlations roa bcomp pearson correlation 1 .026 sig. (2-tailed) .871 n 40 40 pearson correlation .026 1 sig. (2-tailed) .871 n 40 40 source: author's computation table 4 shows the relationship between board composition (bcomp) and return on asset (roa) a measure of performance. there is a positive relationship between the roa and bcomp at (0.026) at a significance level of 0.05 with a high coefficient of determination at (0.871). www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 9 table 5: roa as a firm performance measure to capital structure (measured as der). roe bcomp roe pearson correlation 1 .252 sig. (2-tailed) .116 n 40 40 bcomp pearson correlation .252 1 sig. (2-tailed) .116 n 40 40 source: author's computation table 5 shows the relationship between board composition (bcomp) and return on equity (roe) a measure of performance. there is a positive relationship between the roe and bcomp at (0.252) at a significance level of 0.01 with a low coefficient of determination at (0.116). table 6: roa as a firm performance measure to board size (bsize). roa bsize roa pearson correlation 1 .206 sig. (2-tailed) .203 n 40 40 bsize pearson correlation .206 1 sig. (2-tailed) .203 n 40 40 source: author’s computation table 6 shows the relationship between board size (bsize) and return on equity (roa) a measure of performance. there is a positive relationship between the roa and bsize at (0.206) at a significance level of 0.05 with a low coefficient of determination at (0.203). table 7: roe as a firm performance measure to board size (bsize). roe bsize roe pearson correlation 1 .386* sig. (2-tailed) .014 n 40 40 bsize pearson correlation .386* 1 sig. (2-tailed) .014 n 40 40 source: author’s computation *. correlation is significant at the 0.05 level (2-tailed). table 7, shows the relationship between board sizes and return on equity (roe) a measure of performance. there is a positive relationship between the roe and bsize at 0.386 with a low coefficient of determination at 0.014. however, descriptive and correlation analysis only indicates the associate link between variables. hence, the need www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 10 for further analysis. 5.3 cointegration test table 8: this shows the long run relationship between variables. normalized cointegrating coefficients (standard error in parentheses) bsize roa roe bcomp der 1.000000 0.000000 0.000000 0.0 -0.007836 5.4 granger causality table 9 null hypothesis: obs f-statistic prob. roa does not granger cause bsize 38 2.22348 0.1242 bsize does not granger cause roa 0.53336 0.5916 roe does not granger cause bsize 38 1.29497 0.2875 bsize does not granger cause roe 2.08834 0.1400 doe does not granger cause bsize 38 0.68782 0.5097 bsize does not granger cause der 1.03945 0.3649 roe does not granger cause roa 38 0.76387 0.4739 roa does not granger cause roe 0.93945 0.4010 doe does not granger cause roa 38 0.00574 0.9943 roa does not granger cause der 0.48306 0.6212 doe does not granger cause roe 38 1.25892 0.2972 roe does not granger cause der 1.77768 0.1848 source: author’s computation table 9 shows that none of the variables has a cause-effect relationship even though they are correlated. 5.5 regression result (veto autoregression analysis) table 10; roa as dependent variable on all independent variables (der, bsize, and bcomp) with a two year lag of the dependent variable plus each the independent variables. standard errors in ( ) & t-statistics in [ ] roa bcomp bsize der roa(-1) 0.076280 -0.025353 1.595734 2.775061 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 11 (0.19250) (0.06018) (0.99609) (11.1405) [ 0.39625] [-0.42127] [ 1.60200] [ 0.24910] roa(-2) 0.122775 -0.004151 -0.488644 -2.580817 (0.19465) (0.06085) (1.00720) (11.2648) [ 0.63074] [-0.06822] [-0.48515] [-0.22911] bcomp(-1) -0.704506 -0.065026 2.454896 -44.46992 (0.61063) (0.19090) (3.15961) (35.3378) [-1.15374] [-0.34063] [ 0.77696] [-1.25842] bcomp(-2) -0.596228 -0.171614 -2.704170 56.64832 (0.68509) (0.21418) (3.54492) (39.6473) [-0.87029] [-0.80126] [-0.76283] [ 1.42881] bsize(-1) 0.029638 0.002080 0.004183 -4.034596 (0.04195) (0.01312) (0.21709) (2.42799) [0.70642] [ 0.15860] [ 0.01927] [-1.66170] bsize(-2) 0.003344 0.004126 -0.092841 -0.552188 (0.03976) (0.01243) (0.20573) (2.30095) [ 0.08410] [ 0.33193] [-0.45127] [-0.23998] der(-1) -0.001417 -0.000806 0.001519 0.044145 (0.00366) (0.00114) (0.01892) (0.21160) [-0.38747] [-0.70498] [ 0.08029] [ 0.20863] der(-2) -0.001417 0.001020 0.013428 0.059459 (0.00329) (0.00103) (0.01704) (0.19053) [-0.43039] [ 0.99068] [ 0.78827] [ 0.31207] c 1.290009 0.664585 11.05782 44.08397 (0.85402) (0.26700) (4.41904) (49.4236) [ 1.51051] [ 2.48913] [ 2.50231] [ 0.89196] r-squared 0.108986 0.123705 0.194486 0.185419 adj. r-squared -0.136811 -0.118031 -0.027724 -0.039293 sum sq. resids 7.433493 0.726541 199.0255 24895.55 s.e. equation 0.506288 0.158282 2.619723 29.29961 f-statistic 0.443400 0.511736 0.875234 0.825140 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 12 log likelihood -22.91945 21.26423 -85.38075 -177.1320 akaike aic 1.679971 -0.645486 4.967408 9.796420 schwarz sc 2.067820 -0.257637 5.355257 10.18427 mean dependent 0.297349 0.581579 10.39474 5.281711 s.d. dependent 0.474847 0.149694 2.584146 28.74040 determinant resid covariance (dof adj.) 23.98164 determinant resid covariance 8.134606 log-likelihood -255.5051 akaike information criterion 15.34237 schwarz criterion 16.89377 from table 10, all the variables were lagged by two years to put into consideration the time effect. since there is no cause-effect relationship between any of the variables even though they are correlated, der shows a negative relationship for the two years, contrary to the correlation test, the board duality shows a negative relationship and board size a mixed result, the first year showing a negative while the second year was positive, the r2 shows the percentage variation in performance (roa). by implication, the value 0.10 means that only about 10 percent of the total variation in roa is as a result of changes both der, bsize and bcomp. individually, bcomp report for 12% variation in performance, bsize has 19% and der has 18%. but since they do not a cause-effect relationship, our model will only consist of the group together. this means that there are other factors which affect performance using roa as a measure which was not included in this study. according to the above regression analysis, var model is formulated as follows: =============================== roa = c(1,1)*roa(-1) + c(1,2)*roa(-2) + c(1,3)*bcomp(-1) + c(1,4)*bcomp(-2) + c(1,5)*bsize(-1) + c(1,6)*bsize(-2) + c(1,7)*der(-1) + c(1,8)*der(-2) + c(1,9) var model substituted coefficients: representing the regression equation. =============================== roa = 0.0762804703126*roa(-1) + 0.122774866448*roa(-2) 0.704506276015*bcomp(-1) 0.59622826345*bcomp(-2) 0.0296376599455*bsize(-1) + 0.00334392278428*bsize(-2) 0.00141673170334*der(-1) 0.00141696323721*der(-2) + 1.29000863403 6. discussion of findings ho1: there is no positive relationship between a firm’s capital structure and firm performance in nigeria.at a 5% level of significance, roa and roe which are measures for performance shows a negative relationship with the debt to equity ratio (a measure of capital structure), roa at (0.147) and roe at (-0.053), we therefore accepth01 since the research result shows a negative relationship between the capital structure and firm’s financial performance. this can be found in the result on table 2 and 3. h02: there is no significant relationship between board size and firm performance of firms in nigeria. from table 4 and 5, the correlation analysis shows that there is a positive relationship between board size (bsize) and the measures of performance which are roa and roe with a coefficient of 0.116 and 0.87 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 13 respectively at a1% level of significance. the regression result reports a negative relationship in the first year lag (-0.030) and a positive relationship at the second year lag at (0.03) with a coefficient of (0.706) and (0.084) for roa and roe are also positive results for the lags with a coefficient of (1.132) and (1.49) respectively therefore, we reject the null hypothesis at both 1% and 5% level of significance, there is a significant relationship between the board size and performance as recorded by the correlation analysis. h03: there is no significant relationship between the board duality and firm performance of firms in nigeria. there exist a relationship between bcomp and both roa and roe from the correlation analysis but the regression result, showed the relationship to be inverse since both the roa and roe reported a negative relationship at a significance of (-1.1537) and (-0.8703) for roa and (-0.413) and (-0.968) for roe. therefore we accept the null hypothesis that there is no significant relationship between bcomp and performance. this shows that the number of independent directors has a negative impact on firm value (roa) and (roe) but it is not significant. this result does not support the argument that board with a higher number of independent directors will add more value for firms and this supports previous studies. board composition is very important since the regression result shows that it can have a negative impact on performance. 6.1 summary of the findings based on our discussion of findings, the following summary was evident from the research analysis;  a capital structure consists of the combination of both equity and debt as seen in the financial statement of the firms used for the study. capital structure is also related to roa and roe that are measures of performance using the debt to equity ratio as a proxy and also has a negative impact on corporate performance.  board size has a significant relationship to roe and roa but it has an inconclusive impact on corporate performance since it shows both a positive and negative relationship in the first and second-year lag respectively. the variance in the board size exists because of the different industries and policies governing them like the banks and insurance companies and the size of the firm.  board composition is related to roe and roa and it has a negative impact on corporate performance that is not significant. 7. conclusion and recommendation with the existence of a negative correlation between capital structure and performance, this result can be interpreted that high leverage companies would have less profitability meaning that the debt level is at the optimal level. other factors that may cause the negative impact includes  the high cost of external debt given the high-interest rate of borrowing in the country.  inefficiency and instability suffered by the market in recent times. in short, it can be called the market condition of the country.  business risk which is the basic risk a firm or industry is exposed to as they carry out their activities. findings from the regression analysis on board size reflect a negative impact consistent with previous works hakin (2012) and frick and bermia (2009) and a positive impact which shows that reducing the size of boards of directors does not contribute to higher firm performance contradicting those of prior research rendering our interpretation inconclusive. we, therefore, suggest that there is a need for firms to have policies that ensure the consideration of potential board members' skills before appointment to the board and also, there is the need for continuous training and development for board members to ensure efficient discharge of their responsibilities. the regression result on board duality suggests that there is no significant relationship between board duality www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 14 and any performance measure used such as return on equity (roe) and return on assets (roa). this means that non-executive directors do not add to the performance of firms in nigeria. even though the nonexecutive directors play a significant role in providing independent advice during corporate decision-making process, while such advice may enhance overall corporate policies, such advice may not be significant enough as to create any economic value added to the overall corporate performance. this can be due to the fact that as outsiders, the non-executive directors may be constrained in term of information hence they rely on the insiders for the information required for the decision making and there may be information asymmetry. therefore, the introduction of regulations stipulating the number of non-executive or independent directors on the boards of companies, while it is appealing from the agency theory point of view, may not directly enhance performance since the role they play as important as it is, may be of indirect enhancement on performance. references abor, j. 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vol. 4, no. 2; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 130 theoretical review on the graduate attributes and the readiness for employability among engineering graduates in the higher education institutes (heis) in oman masoud rashid al hinai phd research fellow faculty of business and accountancy university of selangor, 40000 shah alam selangor darul ehsan, malaysia e-mail: alhinai6602@gmail.com abul bashar bhuiyan phd associate professor faculty of business and accountancy university of selangor, 40000 shah alam selangor darul ehsan, malaysia e-mail: bashariuk@gmail.com nor azilah husin phd deputy dean & associate professor faculty of business and accountancy university of selangor, 40000 shah alam selangor darul ehsan, malaysia e-mail: nor_azilah@unisel.edu.my received: september 10, 2020 accepted: september 28, 2020 online published: october 12, 2020 doi: 10.46281/ijfb.v4i2.799 url: https://doi.org/10.46281/ijfb.v4i2.799 abstract the omani higher education system has enlarged noticeably since 1970 both in the number of students and in the infrastructure. as a result, there has been a big investment to provide quality higher educational institutes capable of providing suitable graduates to fulfill the requirements of the labor. the mean purpose of the higher education system is to provide the nation with the quality education that meets the requirements of the 21st century with graduates having readiness for employability skills and competencies. however, the skills gap between heis graduates and industrial requirements in oman and other regional gulf countries is seen as one of the most important factors that affect the employment of graduates in the private sector because the graduate readiness for employability did not consider the graduate attributes factors which influence graduate readiness for employability. therefore, the main objective of the current study is to determine the effects of the graduates’ attributes on the readiness for employability and justified with existing theories in the higher educational institutes in oman. specifically, this study intends to determine the influencing factors that contribute to the readiness of engineering graduates for employability in the higher education institutes (heis) in oman. the study reviews the current literature on the effects of graduates’ attributes on the readiness for employability especially for omani engineering graduates as the main source of information. the study is designed to determine and analyze graduates’ attributes factors and elements. the literature utilized for this study covers the latest literature (from 2013 to 2019) extracted from google scholar, proquest, and scopus. the four main keywords used were ‘higher education’, ‘graduate attributes ‘or ‘readiness for employability, and ‘skills gap and justify with most relevant theories in the particular area’. the study summarized the empirical review on the graduate attributes which analyses the effects of graduate attributes on the graduates’ readiness for employability that will be considered as an empirical study on the graduates of the engineering colleges in oman. the study explored review findings on the graduate readiness for employability framework from different graduates’ attributes and provisions perspectives. the results of the study will fill the gap in understanding the main graduate attributes factors affecting the attainment of graduates’ readiness for employability skills which has justified with most relevant theories in the particular. the study also recommends a policy guideline for ensuring of readiness of engineering graduates for employability in the heis in oman. keywords: graduate attributes, readiness for employability, engineering graduates & oman. mailto:alhinai6602@gmail.com mailto:bashariuk@gmail.com mailto:nor_azilah@unisel.edu.my https://doi.org/10.46281/ijfb.v4i2.799 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 131 1. introduction the skills gap between higher education institutes’ graduates and industrial requirements in oman and other regional gulf countries is seen as one of the most important factors that affect the employment of graduates in the private sector. in a study conducted by forstenlechner and rutledge (2010), they praised the fact that the higher education (he) systems in oman and regional countries have an essential objective aiming to enhance the skills and qualities of the graduates required by the labor market. as a result, many recent empirical types of research have classified the most required graduate readiness for employability skills that are required to eliminate the skills gap of he system graduates, as; firstly soft skills consisting of critical or analytical thinking, problem-solving skills, communication skills, lifelong learning and information literacy, teamworking skills, professional ethics and morality, entrepreneurship skills, and leadership skills (adnan, daud, alias, & razali, 2017; al-azri, 2016; anastasiu et al., 2017; belwal, priyadarshi, & al fazari, 2017; craps et al., 2017; evans, davis, & wheeler, 2017; finch, hamilton, baldwin, & zehner, 2013; gupta, singh, & kaushik, 2018; lane, 2017; moore & morton, 2017; neisler, clayton, al-barwani, al kharusi, & al-sulaimani, 2016). besides, proficiency of english is also considered as one of the most required employability skills in oman that must be attained by graduates to be attracted by the private sectors employers (al-lamki, 1998, 2006; al-mahrooqi, 2012; almahrooqi & denman, 2016; allen & de weert, 2007; arkoudis, baik, bexley, & doughney, 2014; manoharan & arockiam, 2017). similarly, belwal et al. (2017) concluded in a study on graduate attributes and employability skills in oman, the heis must compose and execute the academic programs modules to match the universe widely known requirement for the future jobs opportunities of their graduates, establish knowledge for their students regarding these requirements, promote their students to develop their abilities, and promote their openness and connection with the labor market to improve their readiness for employability skills belwal et al. (2017). this conclusion was also enhanced by holmes, sheehan, birks, and smithson (2018) who found that whence effective methods utilized to integrate academic programs with technical industrial skills the graduates’ readiness for employability would improve dramatically (holmes, sheehan, birks, & smithson, 2018). therefore, many employability frameworks were comprehensibly analyzed and thoroughly studied aiming to understand the influencing graduates’ attributes factors which directly affect graduates’ readiness for employability to meet the employers’ expectancies of the graduates. holmes (2013) analyzed three influencing factors that affect graduate employability. those factors are the human capital factors, social capital factors, and the individual behavior factors (holmes, 2013). others emphasize essentially selfperception for graduates’ employment success. they have different definitions for employability to be based on the individual’s perception of the possibility of getting and sustaining employment (vanhercke, de cuyper, peeters, & de witte, 2014). also, clarke (2018) added the labor market variable which is consisting of both the demand of workers and the supply of available workers in the labor market (clarke, 2018). other factors also influence graduate readiness for employability such as institutionalrelated factors (chan, fong, luk, & ho, 2017; finch et al., 2013), utilization of active lab environment for delivering technical industrial related skills (hassan & puteh, 2017), and implementation of smart active labs (shetty & xu, 2018). in the oman context, the omani higher education system has increased significantly since 1970, both in terms of number of students and infrastructure. the primary goal of the higher education system is to provide the nation with a quality education that meets the requirements of the 21st century with graduates prepared for employability and competencies. however, the skills gap between graduates in higher education and vocational requirements in oman and other gulf regional states is seen as one of the main factors affecting the employment of graduates in the private sector, as candidates' readiness for employability is not taken into account, considering the characteristics of the candidates and affecting candidates' readiness for employability. therefore, the current research is intended to explore existing literature and to determine the impact of the graduate characteristics on readiness for employability by justification with most relevant theories in the particular area of the higher education institutions in oman's. 2. background of the study the omani heis graduates lack most of the required employability skills (coenjaerts, ernst, fortuny, rei, & pilgrim, 2009; swailes, al said, & al fahdi, 2012). the skills gap is harshly affecting the fresh graduates’ employability and achievement in their workplaces (al-azri, 2016; al-lamki, 2006; swailes et al., 2012). besides, many research papers conducted on citizens of oman reveal that unemployment figures for nationals under the age of 30 are high due to the skills gap of the graduates (barnett, malcolm, & toledo, 2015; belwal et al., 2017; forstenlechner & rutledge, 2010; silatech & bank, 2010). hence, the main principle connection between he and the private sector is understood through the magnitude and level of graduates’ readiness for employability skills that the heis inject into the graduates which match the employer’s needs (al-harthi, 2011; allen & de weert, 2007). therefore, this study aims to determine the influencing graduate attributes factors which affect graduate readiness for employability to improve the quality of engineering education which, consequently, will enable the engineering colleges to produce graduates suitable for employment. http://www.cribfb.com/journal/index.php/ijfb copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 132 2.1 concept link between the graduate attributes and the graduate readiness for employment since the last two decades of the 20th century, governments and employer’s groups have put high pressure on heis to provide evidence of the effectiveness of their higher education programs in providing ready to work graduates. from an academic perspective, there is a concern about the effectiveness of heis used strategies in developing transferable employability skills into their students. holmes (2013) analyzed the ways universities deliver graduate employability required skills and their methods of embedded them into their program curricula. he also analyzed three influencing graduate attributes factors that affect graduate employability. those attributes are the human capital, the social capital, and the individual behavior. he proposed an employability framework consisting of the above attributes as main independent variables and contains for the human capitals; skills, competencies and work experience, for social capital; network, social class and university ranking and the individual behavior; career self-management and careerbuilding skills (holmes, 2013). others emphasize essentially at self-perception for graduates’ employment success (vanhercke et al., 2014). besides, clarke (2018) added another variable to include an employability gap called the labor market variable which is consisting of both the demand of workers and the supply of available workers in the labor market. this new model of graduate readiness for employability combines what he believed as the influencing graduates attribute factors for graduates’ employability consisted of human capital, social capital, and individual behaviors and their attributes towards employability, taking into account the labor market contribution which in total influence the graduate readiness for employment (clarke, 2018). other factors also influence graduate readiness for employability such as institutionalrelated factors (chan et al., 2017; finch et al., 2013), utilization of active lab environment for delivering technical industrial related skills (hassan & puteh, 2017), and implementation of smart active labs (shetty & xu, 2018). 3. methodology of the study the methodology of this paper is done by conducting extensive secondary data analysis. the related literature and papers from years of 2013 until the present are collected and then summarized to determine a graduates’ readiness for employability framework based on the effects of the graduates’ attributes factors in the heis in oman. the graduates’ readiness for employability framework was determined by implementing a meta-analysis technique of the literature findings. 4. findings of the study 4.1 empirical review findings there are many studies that explored the skills gap between graduates in higher education and vocational requirements in oman and other gulf regional states, seen as one of the main factors affecting the employment of graduates in the private sector, as graduates' readiness for employability is not taken into account, considering the characteristics of the graduates and affecting graduates' readiness for employability; chan et al. (2017) reviewed the literature on “challenges in the development and implementation of generic competencies in higher education curriculum”. they examined the dearth of “institutional and curriculum support, operational challenges: conceptualization, teaching pedagogy and assessment and teachers’ and students’ perceptions of generic competencies development” using open coding and selective coding in his analysis. he found out that efforts to effectively enforce generic required skills in the academic modules require self-driven incentives and eagerness of both academic staff and students. also, he concluded that effective evaluation can produce useful knowledge of graduates’ readiness for employability. he also manifested that “teaching pedagogy, curriculum, and students' experience and learning strategy” are essential assuring the ratification of a methodical technique to flourish generic technical skills and competencies. finally, he recommended that competencies must to be officially executed and correctly embedded into the academic modules whether the academic modules. jackson (2014) studied factors affecting the employability of basic colleges’ degree holders. his findings indicated that workplace decision preferences widely in line with the common belief of the contents of graduates’ attributes factors, consisting of work technical experience, attainment of required industrial generic skills and abilities, and finally the outstanding integrity of the graduate (jackson, 2014). also, anastasiu et al. (2017) revealed that there is a requirement for closer collaboration between higher education institutes and the industry to affiliate the university academic taught modules with the technological required industrial skills (anastasiu et al., 2017). while, gupta et al. (2018) found that “integrity, reliability, and mastering of the latest state of the art tools and technology are the most demanded specific skills (gupta et al., 2018). also, finch, hamilton, baldwin, and zenher (2013) found that by having closer judgment into the esteem recruiters put on employability components, colleges can plan educational modules based on the advancement of key abilities that employers require (finch et al., 2013). besides, personal attributes, skills, and knowledge were founded as important attributes on the readiness for employability for the malaysian engineering employability skills (mees) framework (zaharim et al., 2010). also, classrooms and work induction activities are considered very important to improve graduates’ readiness for employability (jackson, 2015). others found that engineering colleges should allow a first incentive to students’ developing self-awareness, and secondly provide to students’ strengthening potential for individual and proficient development (gaughan, craps, pinxten, saunders, & leandro-cruz, 2017). also, academia and industrial internships and collaborations were recommended strongly for effective graduates’ attainment of readiness for employability skills (evans et al., 2017; manoharan & arockiam, 2017). http://www.cribfb.com/journal/index.php/ijfb copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 133 in a research paper on graduate attributes and employability skills conducted by belwal et al. (2017), he investigated the foremost prevalent graduate attributes as they apply to graduates’ employability in oman. the findings of the research paper indicated that the domain of higher educational institutes in oman is confined to the essential nonspecific abilities in creating the graduate properties. students’ viewpoints on employers’ determination criteria uncover that computing abilities, the capacity to work in groups, proficiency of english language, earlier training, and the graduate’s identity are the five most critical employability skills in oman. the study also concluded that there's small interaction among higher educational institutions (heis), alumni, and industry in oman for enhancing the employability of students (holmes, 2013). it is recommended that all the partners in oman must be compelled to come together to characterize employability skills judiciously by extending the domain beyond generic skills and abilities (belwal et al., 2017). since the last two decades of the 20th, governments and employer’s groups have put high pressure on heis to provide evidence of the effectiveness of their higher education programs in providing ready to work graduates. from an academic perspective, there is a concern about the effectiveness of heis used strategies in developing transferable employability skills into their students. holmes (2013) analyzed the ways universities deliver graduate employability required skills and their methods of embedded them into their program’s curricula. he also analyzed three influencing factors that affect graduates’ employability. those factors are the human capital factors, social capital factors, and the individual behavior factors. he proposed an employability framework consisting of the above factors as main independent variables and contains for the human capitals; skills, competencies and work experience, for social capital; network, social class and university ranking and the individual behavior; career self-management and career-building skills others emphasize essentially self-perception for graduates’ employment success. they have a different definition for employability to be based on the individual’s perception of the possibility of getting and sustaining employment (vanhercke et al., 2014). the individual perception of employability is connected to what the graduate himself does to attain competencies including his abilities, capacities, and skills along with his behavioral attitude towards employment and future career. in his paper, clarke (2018) combined both frameworks; the higher education literature framework, and the determinants of individual employability framework and combined them in one framework. in this new integrated framework, he added another variable to include an employability gap called the labor market variable which is consisting of both the demand of workers and the supply of avail `-able workers in the labor market. this new model of graduate readiness for employability combines what he believed as the influencing factors for graduate employability which consisted of human capital, social capital, and individual behaviors and their attributes towards employability, taking into account the labor market contribution which in total influence the graduate readiness for employment (clarke, 2018). other factors also influence graduate readiness for employability. chan et al. (2017) stated that they are several factors influence job attainment which is considered to be institution-related factors such as course quality and graduate identity. also, finch, et al. (2013) in their study of factors affecting undergraduate employability, stressed in many factors some of them are related to human capital factors others are institutionally related such as the academic reputation, pre-graduate experience and jobspecific functional skills (finch et al., 2013). another important factor is the utilization of active lab environment for delivering technical industrial related skills. hassan and puteh (2017) analyzed the importance of active learning in teaching practical competencies to enhance the quality of engineering graduates for their readiness for employability. they stated the importance of online learning, blended learning, collaborative learning, laboratory learning, and interactive learning. for our research, we can add other specific active but smart variables such as computer programs, computer based training (cbts), virtual learning environment (vle), and simulators (hassan & puteh, 2017). to enhance the importance of the use and the implementation of smart active labs to equip engineering graduates with employability competencies, shetty and xu (2018) analyzed the strategies of addressing the idea of “design thinking” in the curriculum of engineering programs of heis. they recommended the utilization of virtual reality environment technologies to fulfill the requirement of actual needs and visualize close to reality design solutions of new ideas and technologies. also, they suggested the use of basic design tools such as essential thinking, creative problem solving, and emulation and simulation concepts (shetty & xu, 2018). table 1. summary of recent literature on graduates’ attributes graduates attributes factors author title human capital social capital individual attributes institutionrelated attributes (clarke, 2018) rethinking graduate employability: the role of capital, individual attributes, and context (finch et al., 2013) an exploratory study of factors affecting undergraduate employability (l. holmes, 2013) competing perspectives on graduate employability: possession, position, or process? (jackson, 2015) employability skill development in work-integrated learning: barriers and best practice (vanhercke et al., 2014) defining perceived employability: a psychological approach http://www.cribfb.com/journal/index.php/ijfb copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 134 (gonzales, 2017) examining institutional career preparation: student perceptions of their workplace readiness and the role of the university in student career development (al shobaki & naser, 2017) the role of the practice of excellence strategies in education to achieve sustainable competitive advantage to institutions of higher educationfaculty of engineering and information technology at al-azhar university in gaza a model (jackson, 2014) factors influencing job attainment in recent bachelor graduates: evidence from australia active learning (hassan & puteh, 2017) a survey of technology enabled active learning in teaching and learning practices to enhance the quality of engineering students (shetty & xu, 2018) strategies to address “design thinking” in the engineering curriculum (hinchliffe & jolly, 2011) graduate identity and employability (de janasz, forret, haack, & jonsen, 2013) family status and work attitudes: an investigation in a professional services firm (kalfa & taksa, 2015) cultural capital in business higher education: reconsidering the graduate attributes movement and the focus on employability (okay-somerville & scholarios, 2014) coping with career boundaries and boundary-crossing in graduate labor market (okay–somerville & scholarios, 2015) career self–management, perceived employability, and employment success during university–to–work transitions: a social cognitive career theory perspective (adams et al., 2008) a study of educational simulations part i-engagement and learning (fitzgerald et al., 2011) exploring the bridge from multimedia cases to classrooms: evidence of transfer (boyd, 2017) interactive simulations: improving learning retention in knowledge-based online training courses 4.2 underpinning theories the intention of this section is to discuss the most appropriate theories that can be used to analyze the thesis conceptual frame work in order to effectively explore the effect of the different graduates’ attributes factors that influence the attainment of the graduate readiness for employability required skills as determined from previous chapters. this section is conducted based on four teaching and learning theories which are human capital (schultz, 1963) education and economy development (breton, 2012) behavior theory (liska, 1984) and motivation theory (driscoll, 2005). these four theories will be the backbone of the thesis analysis and study framework development. these theories are intended to outline the importance of relationships between graduates attributes factors including; human capital attributes, social capital attributes, he institutions attributes and other influencing and moderating factors that affecting the attainment of graduate readiness for employability most required skills and also can pave the way for ensuring that engineering graduates can attain new skills that could be required for the future. 4.2.1 the human capital theory (hct) this study applies human capital theory (hct) to analyze graduates’ readiness for employability due to the fact that this theory is one of the most considered theories used to address employability. the expression human capital is used to indicate the investment in the activities of he education and work placement that frame graduate’s capabilities and in return enhance his income (slaughter, taylor, & rosinger, 2015). according to (becker, 2009; mincer, 1962), the terminology of human capital refer to the collection of “knowledge, habits, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value”. the human capital theory is widely used to examine the association and link which connect higher education (he) and career from 1960 onward. it started by mincer and schultz and its improvement was carried by gary becker in 1964. by subsidizing hct, (schultz, 1961) debates that “future social and economic development and growth of any country rely on the skills and knowledge, gained from education and work placement” which indicate the expectation of its human capital (bouchard, 1998). also (kirk, miller, & miller, 1986) stated that “human capital theory” tries to examine the financial benefits resulting from the investments in people’ skills and resources. such investment will result to have highly-skilled labors placed in highly-skilled careers, which could improve the nation’s economy and prosperity (becker, 1962; leslie & brinkman, 1988; mcmahon, 2009; t. schultz, 1963; slaughter et al., 2015). hct regards that human resources people can distinguish the efficacy readiness of employment seekers. however, the lack of graduates’ characteristics, ambiguity of the attained education quality, and the shortfall of future career opportunities make the process of employability highly challenging (levhari & weiss, 1974). http://www.cribfb.com/journal/index.php/ijfb copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 135 considering oman case, according to al-harthi (2011), the hct theory is used to describe the following expectations; attainment of graduates’ readiness for employability skills is the responsibility of the formal education, educated graduates must have higher selection priority for employment, and finally, higher income payments depends highly on graduates’ productivity. to strengthen the validity of the human capital theory in the direct relationship between education and its primary role for providing skillful graduates. schultz (1961) and becker (1964) straighten out that, at the initial stage of employment, “investment in education and training” are recognized by the preeminent level of benefits for both graduates and industries. they explain that employees can easily gain the skills and knowledge of the required workplace. this claim is also backed by (melink & pavlin, 2012) who stressed that industries can assure high productivity as a result from employees performance when educated and trained effectively. 4.2.2 behaviorism theory the theory of behaviorism is regarded as one of the fundamental theories of learning and teaching. the founders of this thesis are john b. watson (1878-1958) and b. f. skinner (1904-1990) (orey, 2010). figure 1. principle of behaviourism theory (orey, 2010). skinner’s theory of behaviorism stated that the changes in behavior are the consequences of the individual’s reactions to events (skinner, 2011). also, according to watson’s theory, only events that can be observed are the entities of psychology (watson, 1930). moreover, behaviorism is mainly interested with detectable and determinable features of human behavior. when defining behavior, these theories dramatize changes in behavior that are produced from stimulusresponse correlations conducted by the student (parkay, hass, & anctil, 2000). hence, behaviorists emphasize that students learn and behave in response to stimuli from their ambient surroundings and environment with the assumption that all students are receptive trainees. 4.2.3 education and economic development theory the concept of education and economy development started with smith (1776) who first stated that “the acquired and useful abilities of all the inhabitants or members of the society,” identified now as “human capital,” is the first element of the four fixed capitals elements which leads to productivity in national economies (medema, 2006). coma and douglas (1928) specified that economic evolvement in the u.s. resulted from the expansion in physical capital and skilled educated labors (coma & douglas, 1928). this theory was enhanced by schultz (1961) who stated his basic theory of education and economic development as “nation’s capability to productively use physical capital is a function of its level of human capital” and added that if human capital does not rise alongside with physical capital, the result would affect directly the economic development (schultz, 1961). also, breton (2012) elaborated on schultz’s theory of education and economic development that education presents a wide and important factor in the economic development course. he stated that there is a direct relationship between human capital and physical capital which means that education affects, directly and indirectly, national economic growth (breton, 2012). finally, kamaruzaman, hamid, mutalib, and rasul (2019) in a study titled as “conceptual framework for the development of 4ir skills for engineering graduates” endorsed the theory of education and economic development as a valid theory which deals with the balance between education and employment as well as its applicability when studying employability as it directly involves the mastery of new skills for graduates’ employability through education and training with the development of the fourth industrial revolution. 4.2.4 motivation theory the additional of motivation theory for our study because of its application to interactive simulations which is one of the graduates’ attributes factors of the study. according to kapp (2012), there are two types of motivation related to interactive simulation. extrinsic motivation and intrinsic motivation. the later one applies to our study. it is described as the type of http://www.cribfb.com/journal/index.php/ijfb copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 136 activity or behaviour which the student engaged with to reach the required accomplishment (kapp, 2012). therefore, intrinsic motivation encourages learning and accomplishment as the students involve themselves in interactive educational simulations activities. knowles et al. (2012) affirms that adult adapt motivational learning transitions (knowles, holton iii, & swanson, 2012) . other studies of interactive simulations found them to provide cognitive and essential skills, besides the motivational benefits due to the simulation activities (boyd, 2017; chow, woodford, & maes, 2011; tennyson & jorczak, 2008). another important finding is noted by driscoll (2005). he expressed that motivation is accomplished when students successfully reached the objectives of the current learning goal and are motivated to select and engage into additional learning activities. therefore, correctly created interactive simulations activities are created to motivate students to progress and set new objectives or learning outcomes as they engage through the simulation procedures (driscoll, 2005) . 4.2.5 summary of findings by conducting a meta-analysis of the contents of the most recent literature and papers, a useful framework of the graduate attributes on the readiness for employability is determined. it can be used to study and analyze the effects of the graduate attributes in the engineering graduates’ readiness for employability. such a framework can be drawn to assess heis in oman and researchers to identify the most influenced attributes in the graduates’ readiness for employability. study theoretical framework was conducted based on three teaching and learning theories which are human capital (schultz, 1963), education and economic development (breton, 2012), behavior theory (liska, 1984), and motivation theory (kapp, 2012). the expression of human capital is used to indicate the investment in the activities of he education and work placement that frame the graduate’s capabilities and in return enhance his income (slaughter, taylor, & rosinger, 2015). considering the oman case, the hct theory is used to describe the following expectations; attainment of graduates’ readiness for employability skills is the responsibility of the formal education, educated graduates must have higher selection priority for employment, and finally, higher-income payments depends highly on graduates’ productivity (alharthi, 2011). summary of pinning theories this study will utilise the use of human capital theory, behaviourisms, and education and economy development theories. table 2. illustrates and justifies such selections. theory explanation justification human capital investment and education are interconnected with each other. formation and implementation of soft skills or employability skills would have a great impact on students who will soon enter the working world due to the emerging need to master new skills in line with the technological developments. provide opportunities for responsible parties, such as employers, institutions of higher learning or students to equip and strengthen the required skills. education and economy development a balance between education and employment. coincides with the understanding of the mismatch skills phenomenon between higher learning institutions and employers. behaviourism priority to observable behaviours without considering logical reasoning. behaviour is organised and can be controlled. applicable in this study as it involves the mastery of new skills conditioned and arranged for graduates through education and training by the institutions in line with the development of new technologies. motivation intrinsic motivation that encourage learning and accomplishment through simulation application to interactive simulations. objectives or learning outcomes are achieved as students engage through the simulation procedures. source: justification of theories selection in this study (boyd, 2017; kamaruzaman et al., 2019). 5. conclusion and recommendations this paper has been conducted through a systematic research review formality to identify the key graduates’ attributes factors to fill the gap in understanding the main graduate attributes factors affecting the attainment of graduates’ readiness for employability skills which has justified with most relevant theories in the particular area. which enhance the acquirement of readiness for employability skills that can be considered by the higher education institutes in oman to improve the quality of its graduates. this paper has classified five graduates’ attributes factors that affect directly the readiness for employability in the higher institutions in oman. the first graduates’ attributes factor of the study is human capital attributes, such as knowledge, skills, and attitude of the graduates. specifically, the individual variables (including adaptation skills, leadership skills, motivational mindset, ethical and moral issues, team works orientation, and http://www.cribfb.com/journal/index.php/ijfb copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 137 communication skills). additionally, the social capital attributes which link graduates’ participation with the social network (such as social team building activities including language club, community club, communication club, extra curriculum participation, and social welfare participation). moreover, the individual attributes of the graduates (such as personal planning, career orientations, class attendance, family motivation, the parents’ career positions, academic excellence, and financial sources of study). in addition to, the institutional attributes that affect the academic quality of the graduates including institutional policies, classroom environment, syllabus and course curriculum, teaching material, teaching quality, assessment strategies, student-centric approach, and study cost. the last graduate attribute that has been identified by this paper is the higher institutions’ implementations of smart active labs and virtual teaching environments (such as computer programs, computer-based training, and virtual learning environment and simulators). therefore, higher education institutions in oman should consider the identified graduates’ attributes factor of this paper and understand their effects on their graduates’ readiness for employability. this is an essential matter to enable heis assess their students acquiring the most required skills and help those institutes eliminate the skills gap of their graduates and make them equipped with the required readiness for employability skills and abilities. finally, the paper conceptual framework will be tested using engineering students and graduates in oman as the unit of analysis, results will be found, and conclusion and recommendations will be drawn to endorse the importance of findings to improve the quality and the readiness for employability of the engineering graduates of the higher education institutes in oman. references adams, w. k., reid, s., lemaster, r., mckagan, s. b., perkins, k. k., dubson, m., & wieman, c. e. 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(2010). a practical framework of employability skills for engineering graduates in malaysia. paper presented at the education engineering (educon), 2010 ieee. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). http://www.cribfb.com/journal/index.php/ijfb http://creativecommons.org/licenses/by/4.0/ contents indian journal of finance and banking; vol. 2, no. 1; 2018 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business 34 migration analysis of credit risk in tunisian banking sector amel ben youssef1 1 faculty of economic sciencesand management of tunisia, fsegt, el manar, tunis, tunisia correspondence: amel ben youssef, faculty of economic sciences and management of tunisia, fsegt, b.p.248 el manar ii 2092 tunis, tunisia. tel: 216-98-544-603. e-mail: amoulaby@yahoo.fr received: january 20, 2018 accepted: january 20, 2018 online published: march 9, 2018 abstract in this paper, credit migration matrices are built to measuretransition probabilitiesat tunisian credit institutions, allowing a comparison of credit risk quality shiftsfor public banks, private banks and leasing companies. we proposeto apply estimating markov transition matrices using proportions data in order to be adapted to the scarcity of individual dataonloan quality transitions. we employ annual classification of assets issued in theregistration documents and annual financial reports during 2003-2014 period.it’s found from the analysis that the risk grade 2 has the greater tendancy to be downgraded than to be upgraded in public banks and in leasing companies.for the other risk grade 3, the upgradation in the category is higher than the downgradation in all cases. the resultsindicate that the public banks are the riskiest credit institution in tunisia and there is a lack of rigor in loan classification inpublic and private banks. the findings are useful and critical for supervisory purposes and foroptimizing bank credit risk management. keywords: transition matrices, credit risk,banking sector 1. introduction in light of the uncertainty surrounding the credit quality in tunisian banking sector (imf, 2012), supervision authorities in this country set awork plan on implementing and strengthening of the bank supervision in tunisia to become risk-based in compliance with international best practices (basel ii and iii) (bct, 2014). according tobasel ii and iii guidelines (bcbs, 2004 and bcbs, 2010),banks are appealed to estimate on themselves their probability of defaultthrough irb approach, as long as this system is in compliance with minimum quality exigeancesto have validation and approval of supervisors to apply this approach. statistical theory presents different methods for conceiving and estimating internal rating models. for example, the transition or migration matrix represents an aspect of theses systems; credit migration or transition matrices characterize past changes in credit quality of obligors (jafry and schuermann, 2004) the probability of default could be deducted after establishing a transition matrix which is precisely a probability table (nicula, 2013) reflecting the transitions between different profiles of debt arrears observed in a credit portfolio between two consecutive periods. the added value of the transition matrix is to clearly identify the likelihood of damage and descent to the radiation, once we know that the debt is already affected by arrears. the transition matrix is useful as a basic observation to justify provisioning in accordance with international accounting standard 39 (ias 39), that requires that we reduce the balance sheet value of a debt to the expected net present value of likely residual flows as long as there areobjective signs of an emerging risk. transitions can also be used to plan and prioritize the management of arrears and recovery activities. by identifying the most severe deterioration of points, the institution has interest to focus on these critical phases in www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 35 the evolution of borrowers' behavior to avoid an ultimate radiation. moreover, basel accord suggested that probability of default shouldn’t be measured in isolation of the economy dynamism, but should be in accordance with its change through time and the variability of economic state. then, estimating the transition matrix between different credit classes in a bank could improve the accuracy of probability of default. in this paper, we try to assess credit risk at a period from 2003 to 2014 on the basis of transition matrice. our model for estimating transition matrices probabilities is based on proportions data in the sense of jones (2005) we apply the methodology to individual banks havingsufficient data, and also on leasing companies with appropriate time series data. then, we compare the behavior of credit quality between public banks, private banks and leasing companies. the samples chosen suit the purposes of this study since they represent a wide range of loans in the banking sector and since the credit risk classication rules are uniform between them. the motivation for comparing these three credit institutions lies in their different performance.the key research question explored is whether there are differences in the nature of credit risk quality shifts for transition matrices between three credit institutions,public and private banks and leasing companies, through estimatingmarkov transition matrices using proportions data.we find that public banks are the riskiest financial institutions studied while the leasing companies are the least risky. we also find that the estimated transition matrices for public and private banks have an asymmetric and non-monotonic profile, and have little concentration on the diagonals, which shows a lack of rigor in loan classification in these two credit institutions. the remainder of our paper proceeds as follows. in the next section (2), we review the relevant literature. section 3 debate the adopted methodology in order to estimate transition matrices. section 4 presents the dataset used in the study. section 5 discuss the results obtained. finally, section 6 concludes the paper 2. literature study migration analysis is one of fundamental techniques of the creditmetrics methodology. in 1987, j.p.morgan developed transition matrices to study changes in the credit quality through time (j.p. morgan & co, 1997). further, analysingand reporting default rates and grade migrationhistories of borrowers is required by basel ii (bcbs, 2003). nicula (2013) outlines the relevance of building migration/transition matrix in credit risk modeling to assess factors affecting moving of a loan belonging to a credit risk grade to another grade. lando and skodeberg (2002) show the importance of estimating transition data based on the full story of rating transitions. ivičić and cerovac (2009)estimate credit transition matrice of non-financial businesses entities. they find rating stability in the migration matrices estimated, especially for the lowest rated companies, but not for the companies belonging to mid-section of the rating structure because they are more exposed to a risk profile change with a higher probability of upgrading than downgrading. it appears also from the results that probability of defaults are not sensitive to economic activity and that probabilities of transition between different risks categories depend on the economic growth. bajaj (2010) proposes tostudy the credit quality through the migration and default rate conditioned on the ratings of debt issuers and on macroeconomic factors. the results provide that the sabilityretention rate in a rating gradeand the level of default rate depend on the debt issuer quality, also that default probilityand the rating migration are cyclical in nature. jones (2005)emphasizesthe use of proportions data methodology to estimate transition matrices for the cases where individual transitions are not available, just informations about aggregate observation on risk category www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 36 state. he demonstrates significance of differences in the transition matrices between different states of the economic cycle. grzybowska et al.(2012) compare influence of various migration matrices models on risk estimation. they advise to adopt statistical longitudinal models (glmm) because they consider economic factors and thus are more appropriate for changing periods as crisis. 3. the model in order to introduce definition of credit migration matrices and their estimation, let consider s the transition space; s=𝑠𝑖 ,…,𝑠𝑘represent credit classes as provided for in circulars related to banks and issued by the central bank of tunisia. wherei,j =1,..,k are the indices of all these credit states with i=1 denotes the best credit quality andi = 4 denotes default. let this credit state process defined asa markov chain processover fixed time points s𝑡=1 , s𝑡=2 ,… , s𝑡=𝑚 . letp(s,t) denote the k × k transition probability matrix that presents this credit state process at any time interval; then, for two states i and j,p(s,t)=𝑝𝑖𝑗 𝑠, 𝑡 = 𝑃(𝑠𝑗 𝑡 \𝑠𝑖 𝑡 − 1 ), that is the probability of being in credit state j at time t, conditional on being in credit state i at time t-1. so, the migration probability matrix to be estimated is as following: p= 𝑝𝑖𝑗 p11 p12 p13 p14 p21 p22 p23 p24 p31 p32 p33 p34 p41 p42 p43 p44 where pij≥0 for alli,j, 𝑝𝑖𝑗 𝑘 𝑗=1 =1for alli andk=4 the default is assumed to be anan absorbing state which means that assets classified 4 are lost.then, the final row of the transition matrix p41 p42 p43 p44 consists of zero for the first three entries and of one for the entry on the diagonal. the most used method to estimate migration matrices is the cohort method (perilioglu and tuysuz, 2015; schechtman, 2013); if𝑛𝑖𝑗 is the number of borrowers started in classification i at t–1 and ended up in classification j at t. the estimated transition probability of migrating from i to j isthe migrationfrequency of the proportion 𝑛𝑖𝑗 compared to the proportion ofagents 𝑁𝑖that was i in t-1. then the estimation is as follows: 𝑝𝑖𝑗 = 𝑛𝑖𝑗 𝑁𝑖 in order toovercome the shortage of data on individual transition matrice of different economic agents in tunisia and in view of hiding the true financial situation by borrowers, we employ a transition matrices estimation from proportions data as proposed by jones (2005). such methodology requiring aggregate data is attractive for a country like tunisia which is pursuing a policy of strengthening banking sector supervision but don’t provide complete database on credit risk classification of debtors. jones (2005) suppose that instead of observing credit quality states sequence for each unit of observation, we observe the aggregate data for the proportion in each state ; let consider𝑦𝑗 𝑡 and 𝑦𝑖 𝑡 − 1 the proportions of observations with credit quality j and i respectively. we can write a stochastic recursion of the form: 𝑦𝑗 𝑡 = 𝑦𝑖 𝑡 − 1 𝑝𝑖𝑗 + 𝜇𝑗 (𝑡) 𝑖 the matrix form of this equation is as following: y= 𝑋𝑝 + 𝜇 where 𝑦 = 𝑦1 𝑦2 ⋯ 𝑦𝑅−1 ′ 𝑦 = 𝑦1 1 ,𝑦1 2 ,… , 𝑦1 𝑇 𝑦2 1 ,𝑦2 2 ,… , 𝑦2 𝑇 ⋯ 𝑦𝑅−1 1 , 𝑦𝑅−1 2 , … , 𝑦𝑅−1 𝑇 ′ 𝑋𝑗 = 𝑦1(0) 𝑦2(0) ⋯ 𝑦𝑅(0) 𝑦1(1) 𝑦2(1) ⋯ 𝑦𝑅(1) ⋮ ⋮ ⋱ ⋮ 𝑦1(𝑇 − 1) 𝑦2(𝑇 − 1) ⋯ 𝑦𝑅(𝑇 − 1) for j=1,2,…,r-1 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 37 so 𝑋 = 𝑋1 0 ⋯ 0 0 𝑋2 ⋯ 0 ⋮ ⋮ ⋱ ⋮ 0 0 ⋯ 𝑋𝑅−1 and 𝑝 = 𝑝1 𝑝2 ⋯ 𝑝𝑅−1 ′ 𝑝 = 𝑝11 ,𝑝21 ,… , 𝑝𝑅1 𝑝12 ,𝑝22 ,… , 𝑝𝑅2 ⋯ 𝑝1,𝑅−1 ,𝑝2,𝑅−1 ,… , 𝑝𝑅,𝑅−1 ′ 𝜇 = 𝜇1 𝜇2 ⋯ 𝜇𝑅−1 ′ 𝜇 = 𝜇1 1 , 𝜇1 2 ,… ,𝜇1 𝑇 𝜇2 1 ,𝜇2 2 , … , 𝜇2 𝑇 ⋯ 𝜇𝑅−1 1 ,𝜇𝑅−1 2 ,… , 𝜇𝑅−1 𝑇 ′ then, we review the constrained least-squares estimator of the transition probability matrix p from proportions data, minimized by quadratic forms of the type: minimize𝑝𝑢 ′𝑢 = (𝑦 − 𝑋𝑝)′(𝑦 − 𝑋𝑝) subject to 𝑝𝑖𝑗 ≤ 1𝑅−1 𝑗=1 and 𝑝𝑅𝑗 = 0𝑅−1 𝑗=1 with𝑝𝑖𝑗 ≥ 0 4. data the database used in this study is based on data drawn from publishdregistration documents and annual financial reports, available on the website of the financial market council in tunisia,the data cover the main commercial banks and 7 leasing companies in tunsia.it consists of time series of credit risk classifications of loans at eightmaintunisian banks (bh, stb, bna, biat, bt, attijari bank, atb and uib)and at 7 leasing companies (atl, ail, el wifack, hannibal lease, attijari leasing, cil and tl), the period of 12 years from 2003 until 2014 has been taken into consideration. we test the model under different circumstances: by following both public and private banks and also another banking sector activity which is lease. the data exclude banks that didn’t publish the breakdown of their loans per credit risk class such as amen bank and ubciand newly created commercial banks because they don’t have sufficiently longtime seriesof observations to use markov transition matrices with proportions data. the risk classes are defined by tunisian central bank circular n°91-24 of decemer 17th, 1991as follows: class 0: current assets, are considered as current assets, assets whose realization or full recovery in time seems assured. class 1: assets requiring special monitoring, all assets the realization or full recovery in time is still guaranteed are included in class 1. these assets are held on companies that sector is in difficulty or that the financial situation is fragile class 2: uncertain assets, including all assets the realization or full recovery in time is doubtful and loans for which payment delays are greater than 90 days and lower than 180 days.it also includes assets unresolved within 90 days without exceeding 180 days. class 3: assets source of concern, it considers all assets whose realization or recovery is threatened and loans t, for which payment delays are greater than 180 days and lower than 360 days. it also includes other assets unresolved within 180 days without exceeding 360 days. class 4: impaired assets, it includes in this class loans for which payment delays are greater than 360 days, the assets remained outstanding for a period exceeding 360 days and other assets that must be charged-off. the class 4 is assumed to be the default or the absorbing state or the non reversible state (it means if a firm reach this state can never return to another credit rating (jafry and schuermann, 2004)) loans amounnts per credit risk class are converted into proportions in order to be utilized by the model, in such a www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 38 way that for each year of the study period, four categories of loans or leases quality are expressed as percentage of total loans or leases. the credit quality grades we follow in the study consist in four risk grades: risk grade 1: proportion of performing loans (total of class 0 and class 1) in the total bank claims, risk grade 2: proportion of non performing loans of the class 2 in the total bank claims, risk grade 3: proportion of non performing loans of the class 3 in the total bank claims, risk grade 4: proportion of non performing loans of the class 4 (assimilated to default state) in the total bank claims.  descriptive analysis the descriptive statistics for the credit risk classification of the sample of public and private banks and leasing companies considered in this paper are reported on table 1 to table 3. table 1. categories of credit quality in public banks risk grade 1 risk grade 2 risk grade 3 risk grade 4 mean 0,77504845 0,02154105 0,01773665 0,18567385 median 0,79710968 0,01623766 0,01372204 0,16949049 std. dev. 0,09077902 0,01729916 0,01180698 0,07510388 minimum 0,58889169 0,01155029 0,00795359 0,09471567 maximum 0,87865124 0,07202604 0,05150766 0,37204346 sum 9,30058136 0,25849265 0,21283983 2,22808616 observations 12 12 12 12 table 2. categories of credit quality in private banks risk grade 1 risk grade 2 risk grade 3 risk grade 4 mean 0,86410871 0,00927953 0,00866097 0,11795079 median 0,86783771 0,0087307 0,00784206 0,11621278 std. dev. 0,04458592 0,00442595 0,00391218 0,03862144 minimum 0,79258628 0,00261143 0,00322325 0,06616856 maximum 0,91796964 0,01708296 0,01548926 0,17859364 sum 10,3693046 0,11135434 0,10393162 1,41540949 observations 12 12 12 12 table 3. categories of credit quality in leasing companies risk grade 1 risk grade 2 risk grade 3 risk grade 4 mean 0,86995252 0,01256229 0,01038094 0,10710425 median 0,89918248 0,0111145 0,00769068 0,08514725 std. dev. 0,05570782 0,00591622 0,00639617 0,04674944 minimum 0,78414331 0,00561773 0,00328578 0,0539073 maximum 0,92249812 0,02570038 0,02025412 0,18648104 sum 10,4394303 0,15074743 0,12457133 1,28525096 observations 12 12 12 12 the descriptive statistic of the category 1 of credit quality shows that the mean of performing loans proportion www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 39 held by the private baks and leasing are at the same level of 86%, while it’s less important in public banks.for the second category and the third category, their average is very low in the three samples, but remain higher at public banks. the fourth and the riskiest category, the proportion mean reach 18% in public banks versus 11% and 10% in private and leasing companies respectively. moreover, the descriptive statistic of the credit risk categories demonstrates that standard deviation is very low in all cases and the highest ones are registered in public banks. these results show that public banks are riskier than private and leasing companies in spite of the state support. the selected time series are plotted in figures 1 to 3.propotion data of four credit quality grades for the period 2003-2014. if we follow the evolution within time of these four categories for the three chosen groups, we remark that: for the public banks,a graphic including the evolutionary curves of the four categories of credit quality can be analyzed in a time slicing (figure 1). it seems possible to identify three main phases for category 4 of credit risk: between 2003 and 2004, propotion of non perfoeming loans in class4 was considerably increased. between 2004 and 2011, there was a decrease of this proportion in the main public banks. and finally between 2011 and 2014, the trend was changing another time to a slight increase. while the performing loans proportions (category 1) follow the opposite way of the default (category 4) but there is in a final way an increase of category 1 in 2014 compared to2003, for the private banks, figure 2 shows a relatively stable evolution of different credit risk categories within the period 2003-2014. for the leasing activity, we can note from figure 3 that there was aa slight increase of category 4 of credit quality between 2004 and 2005, then, it was decreasing until 2014. while, the plot of category 1 was having the opposite trend compared to that of category 4 it should be noted that the proportion of category 2 and 3 were very low and approximately equal in all cases studied, also their respective evolution was stable all over the period of study. figure 1. classification of assets for the public banks (2003-2014) 5. results to evaluate the credit risk and their changes,we apply the proposed methodology to the time series of three public banks, 5 private banks and 7 leasing companies from 2003 to 2014. the first step in applying the methodology is to standardize the time series into proportions data. second, we use quadratic programming to estimate the transition matrice. scilabsoftware (version 5.5.2) was used to perform the analysis for the current study. it offers two commands to solve such system (qpsolve and qld). only using command qpsolve in conceiving the algorithm of our methodology onscillaballow us to find 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 public banks risk grade1 risk grade2 risk grade3 risk grade4 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 40 solutions. then, transition matrices are estimated for the credit quality in public banks, private banks and leasing companies.finally, the obtained matrices are compared we expect that transition probabilities are more important in the sense of downgrading than upwarding and that the migration probability changes with the change of the credit institution activity. credit and leases in private banks and leasing companies are not expected to have high risk to default, contrarily to public banks. 5.1transition matrices table 4 presents the results of the estimated markov transition matrix using proportions data for the public banks. it illustrates the general pattern of transition matrice in this study. results indicate that: • a high graded credit has greater tendency to bedowngraded than to be upgraded. it can be viewed on the transition matrix that the proportion of credits classified in category 2 have 95% chance to migrate to a lower category and have only 3% chance to migrate to a higher grade. • the highest graded credit can only be downgraded with a probability of 0,4% or remain unchanged at the same category 1 • for the category 3, downgrade is 0 and upgrades are 94%. • the transition matrix shows less probability on the diagonal and more probability on the extreme columns of category 1 and category 2. we can deduce that there is a strong mobility of the transition matrix, especially when the credit is classified in category 2 or 3. • it’s also interesting to note that in right low corner of table 4, probabilities for transitions between classifications are low. • we provide evidence on the asymmetry of the migration matrix, in fact probabilities of degradation of credit category is higher than probabilities of upgrading. • the migration probabilities are not dominant on the diagonal, this pattern can be explained by the fact that there is a low probability to remain in the same category for class 2 and 3. • credit classified at category 2 have an important probability to finish with default (50,38%), while category 1 and category 3 have a zero probability to migrate to default state risk grade1 risk grade2 risk grade3 risk grade4 risk grade1 0,9963 0,0037 0 0 risk grade2 0,0304 0,0172 0,4486 0,5038 risk grade3 0,4668 0,4788 0,0544 0 risk grade4 0 0 0 1 the estimates of the transition matrix using proportions data for the private banks are shown in table 5. results reveal that: • once a borrower is in the category 3, there is a high probability (68%) that it will migrate to category 2, while there is only 32% of chance that it will stay in its same grading. • the probability to stay in category 1 is 99,7%, while the creditrisk grading in the other states move around more. for credit classified in category 2, there is a zero probability that it remains in the same category, while it’s more likelely to be upgraded to category 1 with 77%and to be downgrading with 23% of chance. • transition of credit risk grade to the default state is zero for all the categories 1, 2 and 3 •the estimated transition matriceusing proportion data exhibit asymmetrical migration shape: the probabilities of the upgrades are higher than probabilities of downgrades. • in general, credit quality transition matrices show high migration probabilities on the diagonal and then it’s the probability next to the diagonal (banjia 2002). however, this pattern is not noted in our estimated transition matrix for the private banks credit quality. it follows that credit in private banks are most likely migrated to www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 41 another grade and more the time to a higher grade. this can be explained by a phenomenon of not classifying someloans in the adequategrade due to a wrong assessment of the companies holding the doubtful receivables. risk grade1 risk grade2 risk grade3 risk grade4 risk grade1 0,9976 0,001 0,0013 0,0001 risk grade2 0,7737 0 0,2263 0 risk grade3 0 0,6818 0,3182 0 risk grade4 0 0 0 1 table 6 displays the estimates of the transition matrix for the sample of leasing companies, the results unveil: • no credit risk grade migratesto default state in the period of study. • lease credits classified in category 1get 99,7% to keep their score or can migrate into category 2 with a transition probability equal to 0,3%. • the category 2 of credit risk can fall to category 2 in 50% of cases or stay at the same grade in the other 50% of cases. • all lease credit of category 3 see their classification upgraded to category 1. • thus, the table 6 indicate that the transition matrix exhibits an asymmetric pattern and the upgradation in the grading is higher than the downgradation risk grade1 risk grade2 risk grade3 risk grade4 risk grade1 0,9973 0,0027 0 0 risk grade2 0 0,4979 0,5021 0 risk grade3 1 0 0 0 risk grade4 0 0 0 1 5.2 comparison of migration matrices in order to compare between tunisian credit institutions at the level of credit risk in which they operate, we compare in the rest of this paper estimated transition matrices of three groups of: public banks, private banks and leasing companies. among the three groups analysed, the estimated migration matrix for public banks displayhigher transition probability fromrisk-grade 2 to the default state than private banks and leasing companies. a reason for this may be that these banks have been operating in range of credit risk related to economic sectors in difficulty and mainly funded by public banks (agriculture primarily financed by bna; tourism sector funded in part by stb; estate sector principally financed by bh) leasing companies migration matrix presents the highest transition probabilities from risk-grade 2 to risk-grade 3, whereas private banks display the lowest one. in the other hand, the three groups of financial institutions experience close transitionbehaviour of credit risk when starting from risk-grade 1 (performing loans)and migrating to grades of npl. while, they present different risk profile when it’s about non performing loans starting from grade 2 or 3 and migrating to other classes. besides, leasing companies display a more serious degradation of risk-grade 2 to risk grade 3 than the public and the private banks. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 42 furthermore, private banks present the highest improvement of credit quality from category 2 to category 1. while, public banks and leasing companies have this migration rate assimilated to zero of chance to improve. the three credit institutionsseem similar considering improvement of credit quality of category 3 to risk-grade 1 or 2; the highest improvement to class 1 appears in leasing companies and the highestimprovement to class 2 is registred in private banks. in deduction, transition trajectories depict differences with regard to the paths of migration (2 → 4; 2 → 3; 2 → 1;3 → 2; 3 → 1) between credit institutions. exploring these trajectories, we note asymmetric pattern of the estimated transition matriceswith a majority of upgrading on downgrading for private banks and leasing companies, except the case of public banks where downgrading migrations exceed upgrading ones, we observe also that there is a low probability of staying at the same risk-grade, except category 1 wich very high. we affirm then that public banks are the riskiest creditintitution while the leasing companies are the least risky. we identify public banks, among the three types of credit institutions analyzed, as the most risky credit institutions. they have a greater migration towards the deterioration of the classification of their bad debts compared to private banks and leasing companies, probably related to the nature of the sectors financed by the public banks. we note also in comparingpublic and private banks that the estimated transition matrices for both have an asymmetric and non-monotonic profile, and have little concentration on the diagonals, which show a lack of rigorin the loan classificationof these banks. 6. conclusion in order to alleviate the lack of data on changes of credit quality in tunisian financial institutions, we propose touseproportions data toestimate markov transition matrices of credit riskin the sense of jones (2005).the proposedcredit risk evaluation method allows to resemble more reality by considering the development of credit quality in public banks, private banks and leasing companies. transition matrices estimations are made upon the sequence of temporal data of credit risk classification from3 forms ofcreditinstitutons in tunisia (public banks, private banks and leasing companies) along twelve years of operations. these transition matrices present a high mobility, the majority of time, on the improvement direction. they are helpful to explore diverse credit quality migrations, showing characteristics about asymmetry, monotonicity. this paper indicates thatpublic banks have more severe downgarde migration of their non performing loans comparatively to private banks and leasing companies, which is probably related to the kind of sectors funded by the public banks. it appears also that dissimilarities between the the credit institutions studied are more pronounced at downgrading transition paths and that estimated transition matrices pattern are asymmetric and don’t show monotonicity in the transition probabilities. then, among the three forms of credit institution analyzed, we identify that the public banks are the riskiest financial institutions in the area of credit activity and that the dissimilarities exceed the similarities between the groups studied in view of worsening and improvement paths of credit quality transition. the asymmetry and non-monotonic profile ofthe estimated transition matrices for public and private banks and also the little concentration on their diagonals shows a lack of rigor in the loan classification. it results in a grading of credit risk that does not coincide in all cases to the real quality of credit, then, the assessment of bank credit risk degree can be distorted. comparison between credit institutions can be useful to supervisory purposes, in fact, the worse transition path could constitute an early warning indicator to a forthcoming default or a reverse of migration path to the risky direction. moreover, this sudy has a practical potentiality, because it can constitute a guidance tool to credit risk http://www.linguee.fr/anglais-francais/traduction/characteristic.html www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 43 managementfor progressing toward better credit policies (growth strategy, renegociation). references tunisian central bank (2014). rapport sur la supervision bancaire. banque centrale de tunisie. imf (2012). tunisie: évaluation de la stabilité du système financier. fmi report, 12/241. j.p. morgan & co (1997). creditmetrics™ technical document. j.p. morgan & co. incorporated. basel committee on banking supervision (2003). the new basel capital accord: consultative document. bank for international settlements. basel committee on banking supervision (2004). international convergence of capital measurement and capital standards. bank for international settlements. basel committee on banking supervision (2010). basel iii: a global regulatory framework for more resilient banks and banking systems. bank for international settlements. bajaj, r.v.(2010). migration analysis of indian corporate: rating-based approach. the iup journal of financial risk management, 7, 24-34. bct (2014). rapport sur la supervision bancaire. tunisian central bank. ivičić, l.,&cerovac, s.(2009). credit risk assessment of corporate sector in croatia.financial theory and practice, 33, 373-399. http://hrcak.srce.hr/48606 jafry, y., &schuermann, t. (2004). measurement, estimation and comparison of credit migration matrices. journal of banking & finance, 28, 2603-2639.doi:10.1016/j.jbankfin.2004.06.004 grzybowska, u., karwańskia, m. &orłowski, a. (2012). examples of migration matrices models and their performance in credit risk analysis.doi:10.12693/aphyspola.121.b-40 jones, m. (2005). estimating markov transition matrices using proportions data : an application to credit risk. imf working paper 05/219 nicula, i. (2013). some aspects concerning the measurement of credit risk.procedia economics and finance, 6, 668 – 674. doi: 10.1016/s2212-5671(13)00187-1 lando,d.&skødeberg, t. (2002) .analyzing rating transitions and rating drift with continuous observations. journal of banking & finance, 26, 423–444. doi: 10.1016/s0378-4266(01)00228-x perilioglu, a.&tuysuz, s.(2015). conditional sovereign transition probability matrices. procedia economics and finance, 30, 643-655. https://doi.org/10.1016/s2212-5671(15)01283-6 schechtman, r. (2013).default matrices : a complete measurement of bank’s consumer credit delinquency.journal of financial stability, 9, 460-474. doi:10.1016/j.jfs.2013.07.001 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.sciencedirect.com/science/article/pii/s0378426604001037 http://dx.doi.org/10.1016/j.jbankfin.2004.06.004 http://dx.doi.org/10.1016/j.jbankfin.2004.06.004 http://dx.doi.org/10.1016/j.jfs.2013.07.001 contents indian journal of finance and banking; vol. 1, no. 2; 2017 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business 52 a review of the impact of accounting information system for effective internal control on firm performance susan peter teru1 innocent idoku1 jane tinyang ndeyati1 1taraba state university, jalingo, nigeria. correspondence: susan peter teru, taraba state university, jalingo, nigeria, email: susan4dpt@gmail.com received: november 18, 2017 accepted: november 20, 2017 online published: november 27, 2017 abstract businesses today operate in a highly competitive and changing global business environment and therefore require information system that provides speedy responses to the complex business issue. the rapid development in information technology (it) has aided companies to generate and make use accounting information systems (ais), and the qualitative characteristics of any accounting information system to make it effective can be sustained if there is proper internal control system. when companies and businesses adjust and regulate their computerized technique of internal control machinery according to accounting information system (ais), there would be assurances of the reliability of financial information processes, the control measures of effectiveness and efficiency of the information reliability will be boasted, effectual and improved operative goals and enhanced performance. therefore, this study focused and look at the influence of accounting information systems (ais) for effective internal control on firm's performance and found out that when controls are operated efficiently and effectively, there will be improved performance, better accounting information reliability for better decision making for both the internal and external users. keywords: accounting, firm, information, internal control, performance, system. 1. introduction evolution in information technology (it) has led to the development of new accounting systems, improved economic models and business dealings through the internet. these advancements have lessened time, cost, and money by aiding increased and improved transactions and communication for business dealings. an information system is used mostly by so many organizations to improve and advance the efficiency of business dealings by computerizing existing operations to improve the performance of operations. the role of accounting information system is very crucial in managing an organization and implementing an internal control system. the ultimate objective of accounting information system (ais) is to gather and record information and data that is a concern to affairs that can economically impact upon firms and ensures operational efficiency and effectiveness of reliability of financial data and legal compliance, yang et al. (2012). ais process information and communicate this useful information to both external and internal stakeholders. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 53 business organizations operate in a very competitive and complex atmosphere considered by these varying circumstances and extremely unpredictable economic climate. recently, business organizations started moving faster and faster front globalization technology, part of this changes is an accounting information system (ais), any of the changes depend on the information and data, to advance an international accounting information system or to make it more effective. businesses should gather quality data which will yield a quality information about an enterprise, and the information will be used and be the way to controlling, planning, and in making the rightful decision. certainly, accounting information system is vital to all business organizations and it is the center of the present global chance curve. therefore, managers and administrators cannot overlook information systems because they play a very important role in contemporary society. (wilkinson et al., 2000; shah, et al., 2011; hassan et al., 2013). accounting information system is a computer-based system that ensures a quality of accounting information that increases the control and enhances the cooperation in an organization to deliver information available and accessible to the end users who have similar needs. it assists and helps in support of controlling, planning, and organization analysis of its activities. the core function of accounting information system is to give quantitative worth of the past, current, and upcoming economics events. ais produces the financial statement namely, cash flow statement, income statement, and the balance sheet, and through its computerized accounting system. customarily, the system processes the data and transform the data into accounting information during input, processing and output stages that can be used by a variety of both internal and external users. thus, the effective and successful integration of ais will be contingent on how well other factors are proficiently used and put in place to facilitate its operation. similar views had been echoed by some scholars, markus & pfeffer (1983) and collier (2015) that the successful application and implementation of accounting information systems needs an appropriate fit among three factors such as,” perception of the organization concerning the situation, the accounting system must fit when problems are normally solved, and the accounting system must fit with the culture, i.e. the norms and value system that characterize the organization". grande et al. (2011) contended that it is readily available and using them gives no competitive advantage for accomplishing better outcomes. they claimed that many firms have invested in it but failed in achieving the established performance goals. this, therefore, indicates that ais can only be beneficial in organizational operations only when appropriate factors are put in the right place and operated harmoniously. therefore, ais can be only efficient when companies can regulate and adjust their computerized systems of internal control mechanism accordingly, which is one of the most vital components of any organization and ais, then they will be able to ensure the trustworthiness of their financial information processing and improve the control measures of the financial information reliability and effectiveness. accounting information system helps managers to comprehend their task more evidently and lessen uncertainty before making decisions, gexin (2013). 2. literature review accounting information system differs widely as it is adopted across the world, in organizations and businesses, or in the other word as said by kieso et al., (2011), "accounting information are built or designed to be adapted to the conditions and situations that are relevant to the organizations. accounting information system as a system processes data and transactions to provide users with the information they need to plan, control and operate their businesses, stair and renoid (2010). accounting information systems are observed here according to the views of other authors, laudon & laudon (2012) and hall (2011) as a system that helps management in planning and controlling processes providing relevant and reliable information for decision making. they www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 54 propose that the function of accounting information system is not only for producing financial reports. its function goes beyond this traditional perception. romney and steinbart (2010) attested that accounting information system should be functioned to include planning and managing business activities. it could also be used as a controlling mechanism such as budgeting. according to hall (2011), the value of accounting information to the user depends on how reliable is the information, and information is said to be reliable when it has the attribute of relevance, complete, accurate, concise, and at the right time, and for all of it to happen, it must possess certain relevance attribute as accuracy, completeness, summarization, and timeliness as it will be discussed in detailed below as qualities of good accounting system. o’ brien and maracus (2010), the relevance of accounting information depends on the quality characteristics of the information required by the user in making valuable decisions and achieving its organizational goals. according to gelinas et al., (2012) and azhar (2009), the relevance of accounting information depends on how useful it is for decision making. the same information was also given by strong et al. (1997), that the information is only relevant if it meets the need of the information consumer. accounting information systems are measured as significant organizational mechanisms that are necessary for the effectiveness of decision making by the management and control in organizations hall (2012). studies by markus & pfeffer (1983) have shown that" effective implementation of accounting systems requires a fit between three factors. a fit must be attained with the main view in the organization or perception of the situation. secondly, the accounting system must fit when problems are normally solved, i.e. the technology of the organization. finally, the accounting system must fit with the culture, i.e. the norms and value system that characterize the organization". systems will be useful when information provided by them is used effectively in the decision-making process by users christiansen & mouritsen (1994). according to wilkinson (2000), an accounting information system main function is to give a quantitative value of the past, present, and future economics actions. ais produces the financial statement namely, income statement, the balance sheet, and cash flow statement through its computerized accounting system. the system normally processes the data and converts them into accounting information during input stage, processing and output stages which can be used by a several of users both the internal and external users. from the sense of the above contribution of the importance of accounting information system, it can be concluded that accounting information system needs to be useful and suitable for decision making by the users and the information should have a distinctive feature that will meet or even exceeds the expectation of the users. 3. objective of the research  to examine if the use of accounting information system (ais) has an impact in improving the internal control and improves firm performance. 4. research methodology the drive of this research is to evaluate the impact accounting information system for effective internal control and firm performance which indicated that a good internal control ensures reliable financial report for decision making and improves firm’s performance. the qualitative method of data collection was used for the study with various related previous literature being reviewed, and other secondary data to be able to come up with trustworthy conclusions which are based on the empirical data. 5. data analysis and interpretation 5.1 accounting information system and data quality www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 55 redman (1992), accounting information system (ais) output depends on the quality of data, garbage in garbage out is the result of poor data quality, and therefore data quality is important to ais xu (2003). all data production processes (data collection, data storage, and data utilization) must work properly to achieve high data quality lee & strong (2003). according to xu (2009), inaccurate and incomplete data may damage the competitiveness of firms. they also found out that that input control and competent employees are important to data quality of accounting information system. poor information quality may have an adverse effect on decision making huang et al., (1999). quality of accounting information can be evaluated by four attributes, accuracy, timeliness, completeness, and consistency xu (2003) they examined critical success factors for accounting information quality, they identified and interviewed four groups namely information producers, information custodians, information consumers and information managers. they found and suggested that organizational issue, system, and human issue are very much important to accounting information quality. rahayu (2012) found the influence of management commitment on data quality and ais. he found out that management commitment and quality of data together have adequate effect on the accounting information system, although he suggested that contribution of management commitment need to be improved and to management adequacy training and funding of resource development need to be considered by organizations. azhar (2016), quality accounting information system has a significant effect on accounting information quality but when the ais is not built well, it will not be able to produce quality information in accordance with the expectation of the users. he added that through the application of quality information system, the users will be able to obtain quality information at the right time for the right decision. laudon & loudon (2012), accounting information system ensures the quality of information in support of controlling, planning and activity analysis of the organization in accordance with the purpose and function of the accounting information system (secure et al., 2006; susanto 2008; hall (2011). according to azhar (2009), and gelinas et al., (2012), information becomes useful only when it has the quality characteristics required by the users in making decision valuable and in achieving the organizational goals. according to mcleod & shell (2007) and romney & steinberg (2012), the criteria of quality information is when the information is suitable for the user, and has a distinctive feature that meet or even exceeds the expectations of the users and that the information should be timely, accurate, complete and relevant, while kartikahadi et al., (2012), said that the accounting information system should be understandable, comparable, reliability 5.2 accounting information system and internal control azhar (2013), management and businesses expect to have meaningful accounting information to enable them to make decisions by having a good internal control running their information systems. according to hurt (2008), romney & steinbert (2009), the main goal of accounting information system (ais) is to control the business of every organization, the management/ accountant can accomplish this goal by designing an effective internal control. organizations will experience fraud without a good internal control on accounting information system. organizations must have an effective internal control to achieve the mission and performance of the profitability objective and to minimize risk in the business dealings (0'brien & marak,2010). toposh (2014) emphasized that the qualitative characteristics of accounting information in an organization are to have an effective internal control. the procedures of internal control are set up to protect assets, ensure reliable accounting reports, promote efficiency and encourage adherence to company policies. the procedures also are essential to achieving some objectives like efficient and orderly conduct of accounting transactions, safeguarding the assets in adherence to management policy, prevention of error and detection of an error, www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 56 prevention of fraud and detection of fraud and ensuring accuracy, completeness, reliability and timely preparation of accounting data. according to hallandy & ghabban (2009), internal control of accounting information system is the integrity of its financial and administrative information system, which equally means if good internal control exists in an organization, management/users can use information with more confidence to maintain their business activities properly which provide efficient ais, but if the internal control is not effective, management cannot achieve its goal and make good decision. yang et al. (2011), for a reliability of financial reporting, a performance of operations, and legal compliance, internal control mechanisms must be built gradually into the enterprise information system. strong internal control is relevant to organizations because of the vulnerability of fraud and is closely related to information systems. musa (2010), "management relates the information of current performance to budgets, forecast, prior periods, or another benchmark to measure the extent to which goals and objectives are being achieved and to identify the unexpected results or unusual conditions that require follow up". the management has line responsibility for designing, implementing and monitoring internal control system for identifying the financial and compliance risk for their operations. sajady et al. (2008) specified that the application of accounting information system could lead to a better decision making by administrators, more effective internal control, improvement of the quality of financial reports, and enabling financial transaction procedures. marshal & paul (2015) "internal controls are processes implemented to provide reasonable assurance that the following control objectives are achieved; safeguard assets, maintain records in sufficient detail to report company assets accurately and fairly, provide accurate and reliable information, prepare financial report in accordance with established criteria, promote and improve operational efficiency ,encourage adherence to prescribed managerial policies, comply with applicable laws and regulators". romney & steinbeith (2015), "internal control is a process, affected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives, three categories like reliability of financial reporting, compliance with applicable laws and regulations and effectiveness and efficiency of operations. effective internal control systems are essential for successful operation of the business as well as accounting control and administrative control. it helps the accounting information systems division to generate reliable and relevant information". in the ais environment, the qualities of internal controls adaptation affect operations and management and in turn influence internal control. internal controls are run to ensure the achievement of operational goals and performance masli et al. (2010). sajad et al. (2008) stated that implementation of accounting information systems caused the improvement of manager's decision-making process with internal controls, the quality of the financial reports and facilitated the company's transaction. therefore, the adaptation of internal control techniques is a critical management issue that ensures the usefulness of internal controls and the achievement of operational objectives. zhang (2007), internal controls aim to ensure the reliability of financial information, the effectiveness, and efficiency of operations and the compliance of laws and regulations. the validity of an internal control system affects the significance of internal controls. hoitaish & bedard (2009) the value of internal control influences operational performance through information reliability operational effectiveness. computerized internal controls have effects on the value of internal controls and performance of operations. the usage of new information technology means computerized controls should be built into the ais. in conclusion, organization and businesses need have an adequate security control to improve the security of accounting information system and security technology for organizational achievement. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 57 5.3 accounting information system and performance measures accounting information system implementation and success have been comprehensively researched but the contemporary literature shows slight evidence of the relationship between accounting information system (ais) and performance measures. ais can positively impact on organizations by the following; better adaptation to a changing environment, better management of arm's length transactions and a high degree of competitiveness. there is also a boost to the dynamic nature s with a greater flow of information between different staff levels and the possibility of the new business on the network and improved external relationships for the firm, mainly with the foreign customers accessed through firm's web. elena et al. (2010). with the existence of more intercommunication, there are increased chances for diversification of traditional businesses to improve firm's performance. ogah (2012) reveals that high level of profitability is not dependent on the use of accounting information. the low explained variability implies that other variables apart from ais positively impact on the bank's profitability. this is true as the employment of ais if not supported with necessary and enabling facilities to make it functional becomes monumental, which may affect the bank's operation process. thus, the successful integration of ais will depend on how well other factors are efficiently put in place to facilitate its operation. similar opinion has been echoed by scholars, for instance, markus & pfeffer (1983) asserted that the successful implementation of accounting systems requires a fit between three factors such as perception of the organization concerning the situation, the accounting system must fit when problems are normally solved and the accounting system must fit with the culture, i.e. the norms and value system that characterize the organization. grande et al. (2011) argued that it is readily available and using them gives no competitive advantage for achieving improved results. they argued that many firms have invested in it but they fail in attaining the established performance goals. this, therefore, implies that ais can only be used in organizational operations when appropriate factors are put in place and operated harmoniously. akpan & riman (2012) used return on assets (roa), return on equity (roe) and non-performing loans (npl) for measures of bank performance. while poudel & hovey (2013) apply a ratio of non-performing loan (npl) to measures the efficiency of the firm. a study by razak et al., (2011) were used roa to determine accounting performance and used tobin's q which is a sign of market performance for measures the firm performance of malaysian glcs and in-glcs. bhagat and bolton (2008) were measured operating performance by using tobin's q and roa in their research. conclusion the study has provided an understanding that accounting information system (ais) has become a system that that is very important in an organization because it generates important information for the organization for decision making and quality of accounting information.the main goal of accounting information system is to control the business held by the organization to prevent and minimize fraud and errors to achieve the organizational goals and improved performance, and for the system (ais) to generate the accounting information expected, an internal control is required which is the main ingredient of the system. the study also revealed that the development and application of information technology (it)makes it possible for companies to support operations with it systems to improve operating performance , and companies have to adjust their technique and method of internal control in accordance with computerization (ais) in order to exercise effective control because the adaptation of quality internal control affect operation and the achievement of operations. also, the implementation of accounting information system could lead to better decision making and effective control system to improve firm performance. references www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 1, no. 2; 2017 58 abu-musa, a. a. 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(2011). the impact of computerized internal controls adaptation on operating performance. african journal of business management, 5(20), 8204. 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/). indian journal of finance and banking; vol. 2, no. 1; 2018 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business 63 auditors in convergence with corporate financial reporting and international financial reporting standard in nigeria abdulrahman, s1.& david, a. a1 1department of accounting, faculty of social and management sciences, bauchi state university, gadau, bauchi state, nigeria correspondence: abdulrahman, s., department of accounting, faculty of social and management sciences, bauchi state university, gadau, bauchi state, nigeria,email:abdulningi17@gmail.com,tel:+2347035597220 received: january 24, 2018 accepted: february 25, 2018 online published: march 14, 2018 abstract the study looked at the challenges faced by the nigerian auditors in compliance with ifrs. the study uses the survey method to obtain information from sampled audit firms. data were obtained through questionnaires and were analyzed with the use of chi-square statistical technique. it was discovered that the major challenges befalling auditors is the issue of adequate training and it was therefore recommended that auditors should train themselves through attending workshops, seminars, professional training and by getting materials that would assist in addressing this challenges and also train their clients to this effect. keywords: corporate financial reporting (cfr), international financial reporting standard (ifrs), external auditors, survey method, questionnaire, chi-square statistical techniques. 1. introduction if accounting is the language of business, accounting standard is its grammar. the basic objective of accounting standard is to remove variations in the treatment of several accounting aspects and to bring sanity and standardizations in corporate reporting. they intend to harmonize the diverse accounting policies followed in the preparation and presentation of financial statement by different reporting enterprises. financial statements are prepared to summarize the end – result of all the business activities by an enterprise during an accounting period in monetary terms. these business activities vary from one enterprise to other. to compare the financial statements of various reporting enterprise poses some difficulties because of the divergence in the methods and principles adopted by these enterprise in preparing their financial statements. in order to make these methods and principles uniform and comparable, there is need for coherent accounting standards. therefore, high – quality accounting standards can facilitate the flow of information from business to a range of different users. these include investors, banks, creditors, regulators, employees and general public. since, availability of accounts prepared in accordance with recognized accounting standards encourages trade by promoting confidence in business. the standards used in nigeria is referred to as the statement of accounting standards (sass) which is issued by the nigerian accounting standards boards (nasb) however, the body has changed to financial reporting council of nigeria (frcn) as a result of the adoption of globally accepted accounting standards known as international financial reporting standards (ifrss). ifrs are defined as standard and interpretations adopted by the international accounting standards board (iasb). they comprise of international financial reporting standard (ifrs), international accounting standard (ias) and interpretations originated by the international financial standard interpretations committee (ifrsic) or the former standing interpretation committee (sic). ifrs are considered “principle based” set of standards in that they establish broad rules as dictate specific treatments. however, it is clear that there are many challenges in achieving international convergence as all reporting entities are required by nigerian government to comply and prepare their account in accordance with the international financial reporting standards (ifrss). auditors, especially external auditors are among the key players to ensure the maximum compliance with the standards. the likely questions now are: what level of training do auditors www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 64 require to achieve this task? what challenges are the auditors likely to face in achieving the international convergence? what type of roles are the auditors expected to play to ensure maximum compliance by the reporting entities and how can the education and training of professional accountants keeps pace with the changing environment in which the international standards are being set? the following specific objectives are formulated to guide in the study. to examine the level of training undergone by auditor in the adoption of ifrs, to indentify the challenges facing auditors in performing their duties base on ifrss, to evaluate the roles of nigeria auditors in the convergence of ifrs. the following hypotheses are formulated in accordance with the stated objectives in order to guide the study. h01: auditors do not undergo any special training to be familiar with ifrss. h02: auditors does not encounter any challenge in the adoption of ifrs. h03: auditors do not play any significant role in compliance with ifrs by reporting entities. the significance of the study cannot be overemphasized. as such this work is expected to be of benefit to the following set of beneficiaries. auditors: both external and internal auditors will find this study beneficial in the sense that it tend to expose all forms of challenges they are likely to face when carrying out their duties base on ifrss. regulatory bodies: bodies such as nigerian accounting standard board (nasb) which has changed to financial reporting council (frc) and other regulatory bodies will find this study of use because they will know to what extent auditors are trying to be consistence with ifrss in performing their duties and the way forward to improve their competence in that direction. this study will also serve as a guide in the areas of reviewing existing standards as well as enacting new ones. users of financial statement: most users of the financial statement who are not aware of the convergence especially shareholders and creditors will find this study beneficial as it will expose all that they need to know as regards changes in the presentation and interpretation of financial statement due to the convergence with ifrs. future researcher: in the future, researcher who may want to embark on study of similar topic will find this as a guide in achieving the objective, especially in the area of ifrs, accounting standards, audit and accounting practice as a whole. the scope of this study is restricted to cover the challenges that auditors are likely to face in the adoption of ifrs in nigeria. the prospects of convergence are also covered in the study. in doing these, some audit firms were selected within nigerian firms. 2. reviewed of related literatures this section is devoted to the review of some relevant literatures on ideas and studies of corporate financial reporting and international financial reporting standard and other write ups related to the subject matter so as to set a theoretical framework upon which the research work is based. many studies have been conducted on the adoption of ifrss and its effects on the performance of organizations or on the markets or stock exchanges in a given country and how the adoption has effects on the country as a whole. for the purpose of this study, a number of studies conducted will be reviewed as to bring out the opinion of different scholars. antwi (2009) examined the adoption of international financial reporting standards in developing countries using ghana as a case study. he also examine how the accounting profession has evolved in developing countries over the years, specifically ghana and also the process and factors affecting the adoption of international financial reporting standards, merits and demerits of ifrs adoption. he used prepared questionnaire to solicit various and opinions on the study and spss was used for questionnaire analysis. he then concluded that the advent of companies going international or even global has given rise to the need to develop accounting standard that ensure uniformity and standardization of reporting financial information among parent companies and subsidiaries. minga (2008) in a similar study examined the effect of ifrs adoption: a review of the early evidence with the view of documenting the conceptual and methodological issues that relate to the domain of financial reporting research that attempts to examine whether there are measurable gains stemming from the adoption of ifrs. he also used panel data annalistically method with no control for difference in microstructures. value relevance studies were also adopted to find correlation between stock market data and actual accounting information. he then concluded that within the realms of empirical thinking, it is battery of test that will show whether or not ifrs/ias has been useful to a country that has been attempting to integrate itself to the global economy. daske, hail, leuz and verdi (2007) examined what they believed to be proxies for the economic consequences of change in the quality of financial report (ifrs adoption) in 26 countries in their study conducted on mandatory ifrs reporting in the united state of america (usa). they analyze the effect on market liquidity cost of equity capital and tobin’s q ratios using a large sample of firms that are mandated to adopt ifrs. they found that, the www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 65 average market liquidity increases around the time of the introduction of ifrs and also documented a decrease in firms cost of capital and an increase in equity valuation. zhou et al (2009) in one such study of chinese firm data concluded that the firms adopting ifrs are less likely to smooth earnings in the post ifrs adoption period. pawan (2011) also conducted a study on ifrs implementation in india: opportunity and challenges analyze the information available on ifrs adoption process in india and also discuss the ifrs adoption procedure and the utility of indian in adopting ifrs. the study also discuss the problems faced by the stakeholders (regulators, accountants, firms etc) in the process of adoption of ifrs in indian and the ways through which these problem can be addressed. the study is primarily qualitative in nature and do not use any quantitative tool to analyze the data. it has been conducted mainly on the basis of literature survey and secondary information. arnt, ann and daniel (2010) also examines corporate governance and properties of ifrs adoption in europe, investigating how corporate governance associates with reporting quality and transparency around the first time ifrs adoption and also focus on three prosperities of ifrs adoption. they also investigate how firms’ specific differences in these properties associate with corporate governance. in the cause of their study the researchers employ a sample of 223 european financial and non – financial listed firms belonging to the mscop pareuro index and only consider mandatory ifrs adopters. they also collect financial statements data from the annual reports of the ifrs adoption year relating to disclosure quality of the restatement process, compliance with ifrs and the choice of ias 39 adoption. other methods used in conducting the research include regression analysis, sample and governance data developed by risk metrics. they also adopt three specific governance variables which are the functioning of the board of directors (bfuntion), the independence of the board of directors (bindep) and the quality and effectiveness of audit committee (audit). the researchers then discovered that firm with strong corporate governance mechanism engage in higher financial reporting quality and also disclose more extensive on specific ifrs disclosure standards. anne, ellen and paul (2009) conducted a study on the globalization of accounting standards: ifrs versus gaap. they examines the implications of sec decision to allow foreign companions to use ifrs in financial reporting without reconciliation to us gaap on investors, multinational corporations and global financial reporting and to also reviewed the decision of the sec to unite world regulators on the convergence of global accounting standards. they also examine the differences between ifrs and us gaap. the author’s conclusion is that, it is both timely and necessary to converge and harmonize ifrs and us gaap into a single set of global accounting standards. karthik and ewa (2009) conducted a study on why do countries adopt international financial reporting standard using a sample size of 102 non – european union countries with the aim of studying the variations in the decision to adopt international financial reporting standard. the researchers used descriptive statistics and univariate technique in analyzing the data. the study concluded that as more countries adopt ifrs, the network benefit from ifrs adoption are likely to increase and this in turn can change the relative importance of direct benefit and cost in determining ifrs adoption. lantto and sahlstrom (2009), in their study of key financial ratios of companies of finland found that the adoption of ifrs changes the magnitude of the key accounting ratios. the study also showed that the adoption of fair value accounting rules and stricter requirement on a certain accounting issues are the reason for the changes observed in accounting figures and financial ratios. chand, and white (2007), in their paper on convergence of domestic accounting standard and ifrs, demonstrated that the influence of multinational enterprises and large international accounting firms can lead to transfer of economic resource in their favour where in the public interest are usually ignored. barth et al. (2008), in their study of financial data of firms where twenty – one countries were examined to determine whether application ias/ifrs is associated with higher accounting quality. the findings of their study confirmed that firms applying ias/ifrs evidence less earnings management more timely loss recognition and more relevance of accounting numbers. the study also finds out that the firms applying ias/ifrs experienced an improvement in accounting quality between the pre – adoption and post adoption period. steffee (2009), in his article conducted that there are considerable differences in the approaches taken to implementing ifrs by individual western european countries and companies. he viewed that corporation in luxembourg, australia and switzerland demonstrate the most transparent accounting practice and best corporate governance, while european banks with large capitalization display very aggressive accounting and poor governance standard. chen et al. (2010), in their study of financial data publicly listed companies in 15 member states of european union (eu) before and after the full adoption of ifrs in 2005 find out that the majority of accounting quality indicators improved after ifrs adoption in the eu. they found that there is less of managing earnings towards a target, a lower magnitude of absolute discretionary accruals and higher accruals quality. the study showed that the improved accounting quality is attributed to ifrs, rather than changes in managerial incentive, institutional features of capital markets and general business environment. as evident from the literature reviewed, good number of studies carried out in different countries has highlighted the benefit of having single set of financial reporting standard across the www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 66 globe. few of the studies have also brought out the procedural aspects of implementation of ifrs. some of the studies have given a contradictory view wherein the article talk about the difficulties and complications faced in implementing ifrs. the decision to adopt ifrs can be analyzed as a decision to adopt a product with network effect. to see this, note that a standard like ifrs is likely to be more appealing to a country if other countries chose to adopt it as well. this suggests that insights can be use from the economic theory of networks to develop hypothesis on why countries choose to adopt ifrs. network theory suggests that there are generally two factors to consider in adopting network dependent products: the intrinsic value of the product and the volume of product’s network (katz and shapiro, 1985). the network – theoretic framework is use to explain the adoption of ifrs across country, time can be applied in the study of other accounting and corporate governance phenomena. for example, the adoption of accounting methods, accounting standards and corporate governance best of practices by firms and jurisdiction are likely to depend on similar such actions by competitors and associates. in other words, inter – temporal variation in adoption decision in panel data, commonly studied in the accounting literature, can be explained by the network value of product being adopted. (karthik and ewa 2009). 3. research methodology this section encompasses the synthesis of relevant method used in collecting data for the research work. the study attempts to explain the methodology adopted in the course of the study. the section provides highlight on the population of the study, sample size and sampling techniques, methods of data collection and techniques of data analysis. the study adopts the survey research design, since the study is one in which a group of people is studied by collecting data from few organization which is based on yamane’s formula (yamane 1967). this design is appropriate in this study for the target audit firms in nigeria, in other to determine the effect of adoption of international financial reporting standard (ifrs).the improvement for the organization and their impact on the economic development. the population in this study was three (3) target audit companies in bauchi state, which have a population of one thousand seven hundred i.e. 1,700 staff. the population used for this study are the top, middle and low management staff which are three (3) ceo’s, three (3) external editors, thirty (30) managers, thirty (30) accountants, forty five (45) cashiers which are sum up to one hundred and twelve (112) staff. moreover, the sample used is made up of (90), which consists of ceo’s external auditors, managers, accountant and cashier. simple random sampling method was used. so as, each member of the population had an equal chance of being selected, after they considered the incentive given to them by government. therefore, the formula (yamane, 1967) was used for the calculation n = n 1 + ne2 where, n = the sample size n = the size of the population e = the error of 5 percentage points i.e. n = 90 n = 112 1 = constant e = 5 = 0.05 100 therefore, n = 112 1 + 112 x (0.05)2 n = 112 1+112 x 0.0025 n = 112 1+ 0.28 n = 112 1.28 n = 87.5 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 67 the sources of data used in this study comprises of primary and secondary sources, primary sources is the questionnaire, which was obtained from individual responses, while the secondary source of data, are database, journal, new papers, and libraries. this data were analyzed using the statistical methods of simple percentage where a number of tables are used to classify the response of the respondents and answers were provided to the research questions. under this phase, it is further divided into two demographic profiles of the respondents and other data are not demographic in nature. chi – square x2 this is illustrated below. x2 = ∑ (fo – fe)2 fe where: x2 = chi – square ∑ = summation of value fo = observed frequency fe = expected frequency decision rule if chi – square value (x2) is lesser than the result from table at the appropriate level of significance and degrees of freedom, then, the null hypothesis will be failed to be rejected and the alternative will be rejected. however, whenever the chi – square value is greater than the table value at the appropriate level of significant and degree of freedom, the null hypothesis will be rejected and alternative will be accepted. 4. data presentation, discussion and analysis this section presents the result obtained after analyzing the data generated for the study. the results is presented in two parts; the first part covers the presentation, analysis and interpretation of the data while the second part covers the result for testing the hypothesis of the study in order to arrive at a meaningful conclusion. the relevant personal characteristic of the respondents was analysed so as to obtain assurance of whatever response provided. this will go a long way in determining whether to place heavy reliance on the answers provided by the respondents and also how relevant is what is given by them. the demographic profile of the respondents is given below in the following table table 1: highest educational qualification qualification number percentage ssce/gce 0 0% ond/nce 0 0% b.sc./hnd 8 38% above b.sc./hnd 7 33% others 6 29% total 21 100% professional qualification 11 52% source: field study (2017) table 1 reveals the highest qualification of the respondent. from the table, it can be observed that out of the total respondents, 38% representing 8 respondents possessed b.sc./hnd, 33% possessed above b.sc./hnd and 6 respondents constituting 29% have other qualifications. this implies that none of the respondents has qualification below the grade of b.sc./hnd. it was also discovered that 52% representing 11 respondents have professional qualification. the implication of this is that responses obtained from these respondents are adequate and that reliability can be placed on them. from the table 4.1, the working experience of the respondents is illustrated. it is obvious that 24% of the total respondents have worked below 5 years, 33% of the total respondents have worked between 5 years and 10 years while 43% representing 9 respondents have worked above 10 years. with this working experience, it makes the response obtained more reliable. the working experience of the respondents is very important in this study as it gives assurance of the respondents in terms of answering the question given in the questionnaires. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 68 table 2: position ranks number percentage (%) principal partner 1 5% resident partner 6 29% senior manager 3 14% manager 3 14% audit trainee 7 33% others 1 5% total 21 100% sources: field study (2017) the table 2 indicates the position of the respondents in their respective firms. it indicates that only one respondent representing 5% of the respondents is principal partner, 6 respondents belongs to resident partner, 3 respondents each belong to senior manager and manager categories respectively, 7 respondents are audit trainees while the remaining respondents constituting 5% of the respondents belongs to the others group. table 3: gender of respondents responses number percentage (%) male 18 86% female 3 16% total 21 100% sources: field study (2017) table 3 shows the gender of the respondents to the questionnaires. from the table, 18 of the respondents that represent 86% fall into the males’ category while the remaining 3 respondents representing 14% of the total are females. the questionnaires were shared such that every respondent was given equal chance of being selected. table 4; age of respondent number of years number percentage (%) below 25 years 1 5% 26 – 35 years 13 62% 36 – 45 years 2 10% above 46 years 5 24% total 21 100% sources: field study (2017) from table 4, it can be deducted that 5% (i.e. 1 respondent) of the respondents is aged below 25years, 62% (i.e. 13 respondents) are aged between 26 and 35 years, 2 respondents representing 10% of the respondents fall in the age bracket of between 36 to 45 years while 5 respondents area above 46 years of age. analysis of the hypotheses and the chi-square interpretations h01: auditors do not undergo any special training to be familiar with ifrss. the data from the response to the research questionnaire will be used and reported in this section to test the hypothesis formulated. in testing the hypothesis i, the response in section two part of the questionnaire, which consists of five questions relating to the hypothesis, will be used. these data is subjected to analysis using spss 16.0 and the following results as illustrated in the tables below were obtained table 5: response from questions in section two responses q1 q2 q3 q4 q5 total strongly agree 7 4 6 5 18 40 agree 9 12 12 13 1 47 indifferent 2 3 3 2 2 12 disagree 3 2 0 1 0 6 strongly disagree 0 0 0 0 0 0 total 21 21 21 21 21 105 sources: field study (2017) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 69 table 5 shows the response obtained from the respondents for question in section b part of the questionnaire, which bothers on nature of training. the results of the chi-square computation are portrayed in the table 6 below. table 6 chi-square cross tabulation section two questions total q1 q2 q3 q4 q5 responses strongly agree count expected count 7 8.0 4 8.0 6 8.0 5 8.0 18 8.0 40 40.0 agree count expected count 9 9.4 12 9.4 12 9.4 13 9.4 1 9.4 47 47.0 undecided count expected count 2 2.4 3 2.4 3 2.4 2 2.4 2 2.4 12 12.0 disagree count expected count 3 1.2 2 1.2 0 1.2 1 1.2 0 1.2 6 6.0 total count expected count 21 21.0 21 21.0 21 21.0 21 21.0 21 21.0 105 105.0 source: generated using spss 16.0 table 6 shows the result of the responses obtained from the respondents. from the table, the count is taken as the actual frequency while the expected count is taken as the expected frequency. the result of the computation is provided in the table 7 below. table 7: chi – square tests (results) value df asymp. sig(2 – sided) pearson chi – square likelihood ratio linearbylinear association n of valid cases 32.757 36.180 9.721 905 12 12 1 .001 .000 .002 source: generated using spss 16.0 degree of freedom (df) = (r – 1)(c – 1) = (5 -1 )(4 – 1) =12 r= number of rows; c = number of columns table 7 shows the result from the computation of chi – square using the data provided in table 6; this data will be used to test hypothesis 1. from the results, it can be seen that the value of the pearson chisquare 32.757 at a degree of freedom of 12; this implies that x2 cal = 32.757 > x2 tab = 21.03 at 0.05 level of significance. base on the decision rule stated. the null hypothesis will be rejected and the alternative will be accepted, meaning training is put in place to familiarize auditors with the provision of ifrs. h02: auditors does not encounter any challenge in the adoption of ifrs. in testing the hypothesis ii, the responses in section three of the questionnaire will be analysed. these data is subjected to analysis using spss 16.0 and the following results as illustrated in the tables below were obtained. table 8: response from questions in section three responses q1 q2 q3 q4 q5 total strongly agree 2 0 1 5 6 16 agree 15 3 4 13 10 45 indifferent 4 4 2 3 5 18 disagree 0 14 14 0 0 28 strongly disagree 0 0 0 0 0 0 total 21 21 21 21 21 105 source: field study (2017) table 8 shows the response obtained from the respondents for questions in section three part of the questionnaire, www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 70 which is on the challenges faced by auditors in the adoption of ifrs. the results of the chi-square computation are portrayed in the tables below: table 9 chi-square cross tabulation section three question q1 q2 q3 q4 q5 total responses strongly agreed count expected count 2 2.8 0 2.8 1 2.8 5 2.8 6 2.8 14 14.0 agreed count expected count 15 9.0 3 9.0 4 9.0 13 9.0 10 9.0 45 45.0 undecided count expected count 4 3.6 4 3.6 2 3.6 3 3.6 5 3.6 18 18.0 disagree count expected count 0 5.6 14 5.6 14 5.6 0 5.6 0 5.6 28 28.0 total count expected count 21 21.0 21 21.0 21 21.0 21 21.0 21 21.0 21 21.0 source: generated using spss 16.0 table 9 shows the result of the responses obtained from the respondents in section three of the administered questionnaire. from the table, the count is taken as the actual frequency while the expected count is taken as the expected frequency. the data is subjected to the same process as those in table 7 and results of computation are provided in the table below. table 10: chi – square test (result) source: generated using spss 16.0 degree of freedom (df) = (r – 1) (c – 1) = (5 – 1)(4 – 1) = 12 r = number of rows; c = number of columns table 10 shows the result from the computation of chi – square using the data provided in table 9 from the results, it can be seen that the value of the pearson chi – square is 65.683 at a degree of freedom of 12, meaning that the x2 cal = 65.683 >x2 tab =21.03 at 0.05 level of significant. based on the paradigm, it implies that auditors face challenges in the adoption of ifrs. h03: auditors do not play any significant role in compliance with ifrs by reporting entities. so as to adequately test hypotheses iii, the research will use the responses provided by the respondents on questions structured in section four of the questionnaire. these data will also be subjected to analysis using the same as the previous ones. table 11: response from question in section four responses q1 q2 q3 q4 q5 total strongly agree 4 1 4 5 5 19 agree 12 7 12 13 8 52 indifferent 5 13 5 2 4 29 disagree 0 0 0 1 4 5 strongly disagree 0 0 0 0 0 0 total 21 21 21 21 21 105 source: field study (2017) table 11 shows the response obtained from the respondents for question in section four of the questionnaire, which illustrates roles nigerian auditors, plays in the advent of ifrs adoption. the results of the chi – square computation value df asymp.sig. (2 – sided) pearson chi – square likelihood ratio linear – by –linear association n of valid cases 65.683 78.290 7.222 105 12 12 1 .000 .000 .007 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 71 are portrayed in the table below: table 12 chi – square cross tabulation tables total 4.16 4.17 4.18 4.19 4.20 responses strong agreed count expected count 4 3.8 1 3.8 4 3.8 5 3.8 5 3.8 19 19.0 agreed count expected count 12 10.4 7 10.4 12 10.4 13 10.4 8 10.4 52 52.0 undecided count expected count 5 5.8 13 5.8 5 5.8 2 5.8 4 5.8 29 29.0 disagree count expected count 0 0.8 0 0.8 0 0.8 0 0.8 4 0.8 4 4.0 strongly disagreed count expected count 0 0.2 0 0.2 0 0.2 1 0.2 0 0.2 1 1.0 total count expected count 21 21.0 21 21.0 21 21.0 21 21.0 21 21.0 21 21.0 source: generated using spss 16.0 table 12 shows the result of the responses obtained from the respondents from questions in section four of the questionnaire administered. the table shows actual frequency in the form of count while the expected frequency is taken to be the expected count; results of computation are provided in the table below. table 13: chi – square test (results) value df asymp.sig, (2sided) pearson chi – square likelihood ratio linear – bylinear association n of valid cases 37.857 33.449 .000 105 16 16 1 .002 .006 1.000 source: generated using spss 16.0 degree of freedom (df) = (r1) (c – 1) =(5 – 1)(5 – 1 ) = 16 r = number of rows; c = number of columns table 13 above shows the result from the computation of chi – square using the data provided in table 12 from the results, that the value of the pearson chi – square is 37.857 at a degree of freedom of 16, this indicate that the x2 cal = 37.857 > x2 tab = 26.30 at a significant level of 0.05. going by the rule, the null hypothesis will be rejected, implying that auditors play significant roles in the adoption of ifrs this research work was carried out to examine the challenges and prospect of ifrs adoption to nigerian auditors. it was informed by a move by the government of the federal republic of nigeria to adopt the international financial reporting standards (ifrs) as the country’s financial reporting standards in the year 2012. because of the key role played by auditors in corporate finance, the study became necessary to examine the position and fate of the auditors in the adoption of the newly introduced standards. hypotheses were formulated to guide in carrying out the study, which were on training for auditors, challenges to be faced in the adoption of ifrs and the roles played by the auditors in its adoption. furthermore, for the purpose of this research work, data were obtained from those who are the presenters of information contained in the financial statements to stakeholders. they are specifically audit firms, which constitutes the population of the study. the data collected presented using the simple percentage tables while analysis was carried out with the use of chi – square method of data analysis, which were used to test the hypotheses. based on the reviewed literatures and analysis of data, the following findings and conclusions were reached. auditors are bound to face challenges in the adoption of ifrs, which is as a result of the newness and complexity of the standards in nigeria. most of these challenges stems out of the fact that the standard will require a great change to laws and regulations that auditors are used to and as such, the auditors will have to get used to this new laws alongside the new standards. moreover, training is put in place for auditors to familiarize themselves with the provisions of ifrs. auditors have significant roles to play in the process of adopting ifrs in nigeria. these roles are put in place because it assists the auditors in minimizing the challenges they face in auditing the financial reports/statements of their clients to be prepared using the provision of ifrs www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 72 going by the findings and conclusions reached above, the research proffers the following recommendations. auditors should adopt strategies to address the aforementioned challenges to be faced in the course of adoption of ifrs. this should be done by obtaining materials and attending seminars, workshops etc. on the ifrs issues so that it becomes easier when it is finally adopted . relevant accountancy bodies such as the institutes of chattered accountant of nigeria (ican). association of national accountants of nigerian (anan) should origanising adequate training to familiarize auditors with the provision of ifrs. the training should be organized such that it will be mandated for every auditor to be in attendance whenever it is scheduled. roles of the auditors in the adoption of ifrs cannot be overemphasized, as they are the people more closer to the management of the client companies, and as such, they should create awareness about the provision of the ifrs to the preparers of accounts, and also train and educate the client on the benefits to be derived from the adoption of the new international standards. references anne, b. f., elien m. kraft, & paul b. (2009). the globalization of accounting standards: ifrs versus us gaap” global journal of business research aidan, l. & mark (2010). accounting standards economics & environmental science library & research service arnt, v., ann, g., & daniel b. t. (2010). corporate governance and properties of ifrs adoption adeniyi, a. a. (2010) auditing and assurance services, 1st edition, lagos, values analysis consult. antwi, kofi, gyasi (2010), adoption of international financial reporting standards in developing countries. barth, e., mary, landsman, r, wayne, lang, h, marmk (2008), international accounting standards and accounting quality; journal of accounting research chand, pramod, white, micheal (2007), a critique of the influence of the globalization and convergence of accounting standards in fiji, critical perspective on accounting chen, huifa, tang, qingliang, jiango, lin, zhinjun, (2010), the role of ifrs in accounting quality: evidence from the european union; journal of international financial management and accounting clare, f. (2010) a student’s guide to international financial reporting standards. third edition, kaplan publishing uk millers lane wokingham devid c. (2012), international accounting standards. a review of the standards. hassan i (2012) adoption of international financial reporting standards: challenge for auditors. research project submitted to the department of accounting bayero university kano institute of chattered accounting of india (2nd) accounting standards. ifac (2010) handbook of the code of ethics for the professional accountants.2010 edition. kaerhik, ramanna, ewa, & sletten (2009), why do countries adopt international financial reporting stand lantto, anna-maija, & sahlstrom, petri (2009), impact of international financial reporting standard adoption on key financial ratios: accounting and finance. nasb (2010), report of committee on road map to the adoption of international financial reporting standards in nigeria nobes, c. & parker r. (2004), comparative international accounting, prentice hall, england. pawan, jian (2011), ifrs implementation in india: opportunities and challenges: world journal of social science steffee, s (2009) ifrs discrepancies vary by country, company? yusuf m. a, et al. (2006) readings in social sciences research, knao adamu joji publishers. yamane t. (1967). “statistics, an introductory analysis, 2nd education, new york: harper and row. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 73 appendix table 1: sample size used for the study firms population sample size sky scrown bakery company 47 35 nestle foods 33 30 levers brothers provision company 32 25 total 112 90 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 indian journal of finance and banking vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 42 adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi‟u abubakar kurfi1 1 department of accounting, umaru musa yar‟adua university, katsina, nigeria correspondence: department of accounting, umaru musa yar‟adua university, katsina, nigeria, e-mail: abubakarkurfishafiu@gmail.com received: august 25, 2017 accepted: august 26, 2017 online published: august 27, 2017 abstract this paper examines the mandatory adoption of ifrs in nigeria that started since january, 2012; and how far the nigerian government via the financial reporting council has gone in the transition of nigerian local gaap (sas) to international gaap (ifrs).the study examined and identified the benefits that nigeria and nigerians gained so far as a result of convergence into ifrs; the bottlenecks that paralyze the full percentage of the transition as well examined the techniques taken by nigeria in making sure a smooth, successful and amicable implementation of the three stages of convergence.in the course of this study the study observed vividly that nigeria has gained a lot from the convergence because most of its local financial expertise are now turned into international expertise as well as international financial consultants, thus, convergence has increase the level of employment in the country.the main drawbacks of the transition is amendments of nigerian tax laws, because tax laws are among the most complicated laws in accounting arena; weak compliance and enforcement mechanisms by financial reporting council. as a manner of recommendation, for nigerian government to gain more from dividend of convergence there is need to increase the time period for the on-going transition because implementation of certain requirements of international standards like ifrs successfully should be in a gradual and careful process not just three years, because convergence to ifrs is not just an accounting and taxation exercises but a total and complete transition that requires every stakeholders concerned to learn a new technical language as well as new modes of working with a new standard. keywords: nigeria, convergence, ifrs, nigerian gaap, challenges. 1. introduction nigeria is the most populous country in africa; with over 168.8 million people according to world bank report of 2012. nigerian comprises more than 250 different ethnic groups with three major religions which are islam, christianity and traditional religions. nigeria got its independence from england on 1st october, 1960; it encloses more historic cultures and empires than any other nation in africa. african countries nicked name nigeria as “mother of africa”, it consist six geographical zones (northwest, northeast. north central, south-east, south – south and south – central), 34 states governments and 774 local governments over rule them by federal government. as at 09 march, 2007, nigeria has 283 listed companies with total market capitalization adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 43 of about #15 trillion ($125billion). nigeria has two major accounting professional bodies ican (institute of charted accountant of nigeria) and anan (association of national accountant of nigeria). before the advent of ifrs, nigeria uses two main accounting standards namely sas (statement of accounting standard) and american gaap under the control of nasb (national accounting standard board). the need for universal and acceptable accounting reporting standard started since 1960s when the national boundaries of capital markets began to turn into blur, (fodio, 2011). this mounted the concern about the lack of comparability of financial information from one country to another more importantly by international potential investors, existed investors, creditors and other users of financial information. the period (1960s) witnessed an expansion of international trade across the global and different governments across the world needs an alternative for their financial transactions; taxation inclusive among them. hence, government and tax authorities support and recommended positively without any reservation for creating a unique global accounting standard. similarly, numerous world economic and financial institutions, such as world bank, international monetary fund (imf), international organization of securities commission (iosco), basel committee on banking supervision, united nations and the organization for economic cooperation and development (oecd) publicly shows their kin interests for the formulation and implementation of a unique set of accounting standard globally. the above kin interests led to the formation of a committee in 1973 to see the possibility of this standard, this committee was called international accounting standard committee, and the goal of this committee was to formulate “international accounting standards.” the committee started with best leading professional accounting bodies from ten (10) countries these countries are: australia, canada, france, germany, ireland, japan, mexico, the netherlands, the united kingdom, and the united states. before the dissolution of this committee, the iasc consisted 156 professional accounting bodies in 114 countries, representing more than 2 million accountants in public practice, education, government service, industry, and commerce, (doupnik, perera, 2012). the sources of income of this committee came via the contributions from member bodies, multinational companies, financial institutions, accounting firms and the sale of iasc publications and banners ((doupnik, perera, et,al 2012). international accounting standard committee (iasc) had over 140 member accounting bodies from over 100 countries across the global, but in 1983 was considered as independent from all other accounting bodies across the world. hence, in 1983 the relationship was established with international federation of accounting (ifac). later in 1990s this committee faced lots of challenges because some interested parties perceived the fact that many of the iasc board members are not fully committed in the affairs of committee, they are only working on part-time basis, so this would hinder the possible highest qualitative standards. these challenges lead to the formation of strategy working party in 1996 to focus the probable solutions to the above mentioned challenges. in december 1998, the strategy working party came up with the report titled “shaping iasc for the future” recommending sharply different structures and probable process for the development of international accounting standard. the final recommendations of the iasc strategy working party were approved at its venice meeting in november, 1999. these recommendations deals way with the legitimacy issue, also attempts was made to balance calls for a structure based on geographical representations and those representations was based on technical competence and independence, ((doupnik, perera, et,al 2012). however, it was concluded that those representatives would be presented by the geographical distribution of the trustees, who would be adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 44 meaningful to ensure the effectiveness and full independence of the board, but nevertheless the board member‟s selection are still based on their technical expertise. in april 2001, the iasc was converted to international accounting standards board. prior to its conversion the iasc developed 41 solid standards popularly known as international accounting standard (iass) some among the standards were revised while others superseded or converged with other standards. similarly, as from 2001, the new board has revised a number of iass and has begun a series of standards known as the international financial reporting standard (ifrs). the new board announced vividly that the new term “ifrs” should be understood to include ias; including the old interpretations issued by standing interpretation committee currently referred to as international financial reporting interpretations committee (ifric). hence, now ifrs comprise the followings: a) international accounting standards (issued from 1973-2000) b) international financial reporting standards (issued from 2001-to date) c) interpretations originated by sic or its successor, ifric. in the last 8 years, many developed and developing countries have prepared their financial reports based on ifrs basis. similarly, eu take champion when she mandated all listed companies under the umbrella of eu to prepare their financial report on the basis of ifrs from the inception of 2005 till infinity. the period from 2005-2009 was considered as the time frame for eu countries to implement ifrs in full in their financial reporting. currently, over 120 countries in the world are reported to have adopted and converged with ifrs, (odia, ogiedu, 2013). ifrs are set of golden rules that conquered the whole world. it focused more on objectives and principles based unlike u.s local gaap that focused more on ruled basis. the current wind speed of globalization, internalization and convergence of accounting standards has injected and motivated nigeria to develop a roadmap for the successful adoption of ifrs. the roadmap started and approved on wednesday, 28th july, 2010 by nigerian federal executive council (comprises president and his cabinet), and was formally announced by then honorable minister for commerce and industry in person of senator jubril martins-kuye on thursday 2nd september, 2010. similarly it is part of the preparation for convergence, the nigerian accounting standard board responsible for the statement of accounting standards (sass) has been re-shaped to the financial reporting council (frc) in order to enable them discharge their duties in line with ifrs. the roadmap, recommended a three stepped transition; over a period of three years: a.1st january, 2012: as the date for mandatory adoption of ifrs for listed companies in nigeria and significant public entities (described as entities and other organizations required by law to file their returns with regulatory authorities, excluding private companies that routinely file their returns only with corporate affairs commission (cac) and federal inland revenue service (firs)). this group is made up of companies that are quoted on the nigerian stock exchange with a minimum shareholders‟ fund of n 500 million. b.1st january, 2013: for other public interest entities (pie), this group also comprises all quoted companies in the nigerian stock exchange market but with shareholder‟s fund below n 500 million. c.1st january, 2014: finally, small and medium size enterprise (smes) are expected to commence their implementation by first week of january, 2014. (fodio, et al 2011), (terzungwe, 2012) and (baba, 2013). in addition, the roadmap requires listed companies and significant public entities to: a)reverse their closing balances as at december, 31, 2010 to ifrs, hence, become the opening balance as at 1st, january, 2011. adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 45 b)prepare ifrs financial statements as at december, 31st 2011, hence, will provide opening balance for january 1st ,2012 c)then finally, prepare ifrs full financial statement as at 31st december 2012 with 2011 as a comparative year. finally, its hope that within the three 3 years transition period, all the required innovations in business operations, contractual agreements, information technologies (it) and other necessary issues for effective and efficient financial statements shall have been fully addressed and implemented in order to give comprehensive, true and fair financial statement based on golden rules of ifrs. the frequent questions related to the mandatory adoption of ifrs in nigeria from 2015 includes: what are the issues and bottlenecks associated with the adoption of ifrs and what are their mitigating factors, is there any benefits that nigeria gain(s) as a results of its adoption of ifrs so far, what are the likely effects of adopting ifrs in nigeria? the aim of my study is to try and addressed the above mentioned questions.the study is hence organized as follows; the next section is to examine the related literature concerning the subject matter, then follows by section 3. method of my study, section 4. examining the issues (bad) associated with the mandatory adoption of ifrs in nigeria, section 5. to x-rays the bottlenecks or challenges (ugly) associated with the ifrs adoption in nigeria, 6. techniques for effective adoption of ifrs in nigeria, section 7 to find out major differences and similarities between the nigerian gaap and ifrs, section 8 benefits (good) that nigeria gained as a result of convergence, section 9. conclusions of the study and my recommendations follow. 2. review of literature the global convergence of accounting standards is the most “buzz word” in the arena of contemporary academia. worldwide convergence of accounting standards is considered as an attempt to curb the accounting diversity across the global, and to consider ifrs as the global gaap, (baba, et,al 2013). hence, to achieve the basic objectives of financial reporting, there is need for unique, solid and acceptable consistent framework, (okeye, akenbor, 2013). the mandatory adoption of ifrs as issued by international accounting standard board (iasb) is expected to result in the application of a common set of financial reporting standards within and between countries in europe and many other countries in the world that require or permit application, (odia, ogiedu, et, al 2013). specifically, terzungwe (2012) opined that “internationalization will combat some or much of the varieties in accounting rules and practices across nations, but it will not eliminate it totally. internalization and globalization of business activities in the world give birth for harmonized financial preparation and presentation, (edogbanya and kamardin, 2014). accounting theory through the emergence of standards provides direction and guidance on how and where the business enterprises could achieved the goal of good and proper record maintenance, accountability, transparency, uniqueness, comparability and enhancing public confidence in financial reporting, ( mary, okeye, adediran and samson, 2013). doupnik and perera et al (2012 pp 92) are in the opinion that single set of accounting standard is necessary due to the following reasons: i.the analogous of financial statements globally is mandatory due to the globalization of capital market. ii.unified accounting standard would simplify the evaluation by multinational companies of possible foreign takeover targets. iii.single set of accounting standard would reduce financial reporting cost for entities that have a goal to list their stock on foreign stock exchange market. adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 46 iv.national differences in corporate reporting make existing and potential shareholders to lose confidence, hence, affect the availability and cost of capital. v.one set of universally accepted accounting standards would combat the cost of preparing global unified financial statements, thus, the auditing of such consolidated statement would be simpler and easier. vi.one set of accounting standard would enhance and help tremendously in the raise of quality level of accounting practices internationally, hence, increasing the credibility and value of financial statement. vii.convergence to one set of global standard would lead to the use of ifrs and by preparing financial statement with ifrs basis will make balance be closer to economic value because historical cost will be substituted by fair values for several balance sheet items, which enable a corporate to know its exact, genuine and true value. hendrickson (1992) opined that although accounting principle and policies are being established globally through the international accounting standards committee, but he suggested that the compliance with its standards is limited to the acceptance of the standards by the representing professional accounting societies and by other originations and government agencies within the represented nations. also sunder, (2007) in his empirical study titled “adverse effects of accounting uniformity on practice, education, and research working paper” suggested that global adoption of ifrs may not fully reflect regional variations across nations, he continues that ifrs does not effectively accommodates political, social, legal, cultural and economic differences of such countries, hence mandatory adoption of ifrs may not actually increase or enhance comparability. while daske, hail, leuz and verdi (2008) in their study “mandatory ifrs reporting around the world: early evidence on the economic consequences” postulate that limited role of ifrs mandatory adoption in ascertaining reporting quality and hence suggest that proper implementation and enforcement is needed in order to ensure a positive economic consequences. there are two schools of thoughts to convergence (zeghal, and mhedhbi, 2006). these are: adoption and adaptation. adoption is the one that encourage and promotes a complete replacement of local standards from different nations of the world with international accounting standard board‟s (iasbs) standard. while adaptation is the one that tends to modification of international accounting standard board‟s (iasbs) standard in order to suits with the specified peculiarities of a particular nation like its culture, level of the economy in the nation its local markets etc without compromising the accounting standards and all the disclosure requirements of the international accounting standard board‟s (iasbs) standards and other basis of conclusions, the adaptation, adoption and implementation of the worldwide standards in a particular country hold on in an environment that is affected by factors that are peculiar to that country. hence, economy, culture, laws, politics and most importantly religions must come in to considerations. this is one of the reasons why must of the countries in the world do not fully incorporate with the international accounting standard board‟s standard (iasbs), ailement, akande, 2012). juan (2005) in his study spelt out two main problems associated with the convergence of international accounting standard globally. the first is the absence of accurate translation of the standards to major different languages of the world which would make the standards to become easier to learn and to understand by the adoptees. okeye and akenbor (2013) pointed out clearly that internal accounting has a language barrier, for example the word „assets‟ in french stand as „active‟, also the german language has no reasonable single-word that counterpart for the term „fair‟. hence, the importance of having a unique and common language to international standard as early as possible cannot be overemphasized. then the second is lack of the reduction adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 47 of the complexities and structures of the international accounting standard without losing the actual quality of the standard. another lacuna in the adoption of international accounting standard is the time lag in the implementation of the standard. according to the world bank (2004) urge that there can be full adoption of ifrss but with time lag; selective adoption of ifrss; and national standards “based on” ifrs 3. research methodology this study is specifically designed to determine the challenges, issues and lessons learned from nigeria as a result of mandatory adoption of international financial reporting standard and this study is predominantly based on the review of related articles, various journals, research papers, news papers articles, periodicals, and other documentary materials of scholars, reports and publications of professional accounting bodies in nigeria, periodic reports from financial reporting council in nigeria, conferences as well as seminars and workshop papers related to the study. 4.the issuues (bad side) to be address for ifrs adoption in nigeria the adoption of ifrs globally does not only affects an entity‟s accounting and management policies, procedures, processes and intellectual capital but almost all business and activities are impliedly affected. the major issues to be address for the successful implementation for ifrs in nigeria are discussed under the following headings: i.accounting issues ii.tax related issues iii.operational issues iv.treasury management issues 4.1accounting issues kpmg (2010) raised some top accounting issues which have an implication for enterprise –wide more importantly for retail and manufacturing companies as nigeria is converging from local gaap to the international gaap, which is unique global standards, called ifrs. these issues are as follows: a.revenues recognition: in nigerian local standard called statement of accounting standard (sas) revealed no specific revenue recognition, while many organizations in the world borrowed from principles based of ifrs. although all most all the underlying concepts of revenue recognition may be consistence with the international standard. hence application in practice may vary. b.property, plant, equipment and investment property: retail activities usually incur important expenditure for evaluating store locations, buildings and manufacturing entities on plant and machinery. ifrs requires that all costs of for feasibility studies be expensed and item of property, plant and equipment be identified and recorded at a component level, with individual important components depreciated over the useful lives of assets. ifrs also come up with some guideline on how to account for investment property at fair value but now with charges in fair value recognized in the profit and loss account rather than in a revaluation reserved. the above requirements could affect the profit and loss computation as well as some of the components of the position of financial statement. c.impairment of assets: cash-generating unit is one of the most important model sheltering property, plant and equipment, goodwill and other intangible assets. under ifrs, assets are tested and any resulting impairment fluctuates measure,, using a onestep test that compares the carrying value of an assets of fair value less cost sale (a markets-based model) and value in use (an entity-specific model). ifrs factors in discounting when determining impairment. while neither statement of adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 48 accounting standard neither recognized fair value nor impairment model (s) in the measurement of asset impairment. also if indicators of impairment exist for example, entities are advice to determine the recoverable amount by determines the fair value minus disposal costs or even the cost in use and where there is no market in existence for such kind of assets, and then the process becomes extremely judgmental. d.rebates: cash and non-cash rebates (such as free gift with purchase or buy one get one free) are treated as a reduction in revenue on the eye of ifrs. in contrast, many nigerian retail and manufacturing companies classify non-cash rebates as an expense. other differences also arise if you cannot reliably measure the amount of rebates you will volunteer to a customer. also for rebates received by a retailer or manufacturer from a supplier, ifrs provides no guidance only that in under the ias 2 “inventories” requires vividly that the cost of inventories is treated less any discount or rebates received. e.customer loyalty programs: for customer loyalty programs accounting ifric has issued a guideline for how it should be dealt with but nigerian local gaap (sas) provides no such services. ifrs requires that when loyalty awards are granted to customer, the consideration be separated into two segments, the fair value of the goods and services provided to the customer and the fair value of the awards given to the customer. the value of the award is then deferred as a liability until the obligation has achieved. these guidelines or requirements could significantly change the timing of when revenue is recognized, compared to current practice, and may also require systems changes. f.fair value measurement and disclosure: the iasb amended ifrs 7 to improve about fair value measurements of financial instruments over liquidity risk. the amendment requires disclosures relating to fair value measurements using a three level value of hierarchy that reflects the significance of the inputs used in identifying the fair values and contains the following three steps: g.step one: fair values measured using quoted (unadjusted) price in active markets for identical assets and liabilities step two: fair values measured using inputs other than quoted prices included within the circumference of step one above that are observable for the assets or liability, either directly (as prices) or indirectly (derived from price) and step three: fair value measured by using inputs of an assets or liability that are not based on observable market information (unobservable inputs) the above requirements of ifrs7 mentioned are onerous for nigerian companies. h.responsibilities of management under ifrs: any financial statement prepared under the rule of ifrs management of such companies must take the responsibilities to ensure that: i.the financial statement were prepared under the rules of ifrs guidelines as stated in iasi para 14-16 revised ias1 para 16-18 ii.also the management must ensure that these guidelines apply to the transactions being addressed as contained in ias1, para 1722 revised ias1 para 19-26. iii.the management are expected to ensure that the abilities of the company to continue as a going concern has been determined and reporting financial statement based on that assessment is presented as contained in ias1 para 23-24; revised ias 1 para 25-26. adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 49 it is crucial to be noted that in the notes to the financial statements, a company must make an explicit statement that the financial statements were prepared in accordance with iasbs standards. hence the financial statements are not expected to be in compliance with the rules of iasb unless and until they are prepared and presented in accordance with all of the required iasb statements as applicable to the corporate. therefore an entity shall be conversant and familiar with all the relevant standards and the interpretations that relates to the nature of the corporate business and activities and apply them judiciously. in addition any entity that would start using the standards for the first time shall be familiar and conversant with the provision of ifrs1 “first-time adoption of international financial reporting standard” which requires retrospective rather than prospective application. it is also crucial to note that there a lot of terminologies in ifrs that relates to financial statement which are also vary from those of nigerian local gaap (sas) (see table 1) the above issues raised above are quite few; understanding of all the accounting issues that are involved will need a unique and comprehensive analysis of the gap between nigerian gaap (sas) and (ifrs). 4.2 tax related issues understanding the consequences of tax in the process of ifrs convergence is highly crucial for finances and tax executives to consider. the adoption of ifrs is no doubt will have an impact on the issues concerning tax accounting methods as well as profits before tax, tax assets and liabilities and tax distributable reserves of companies that are operating the nigerian territory. the main issues between nigerian gaap (sas) and international gaap (ifrs) is the means of extreme use of fair value under the ifrs which may give rise to differences in recognized income and carrying values of assets and liabilities, and a resulting difference in current and deferred tax liability or asset. convergence from local nigerian gaap (sas) to international gaap (ifrs) may impact entity‟s tax position, complicate or simplify the design of a company‟s financial reporting style and its internal control mechanisms. these may also impact what management communicates with its stakeholders including the relevant tax authorities. hence, a successful convergence from sas to ifrs would require a collective energy, commitment, sacrifice and full involvement of the finance team and the tax team. other issues that need attentions are relief in relation to tax losses that will arise from transition adjustments, impairment losses, and loss provisioning. okoye and akenbor et al (2013) spelt out key tax considerations these are as follows: i.tax accounting methods: entities that prepared heavily for the conversion to ifrs will approach the undertaking as more than a mere “ias vs.sas 109” exercise. it is crucial to take note that the consequences of tax of the pre-tax variance between ifrs require innovations to several financial accounting methods. hence, the starting point in most jurisdictions for the computation of taxable income is book income as reported in accordance with local gaap; companies may need to evaluate their existing tax accounting methods. ii.global tax planning: this may be revisited in order to address the expected innovation associated with conversion timetable in all jurisdictions and eventually a full ifrs global conversion. for instance, tax planning in connection with ifrs should consider changes in the global effective tax rate that may come up as a result of the following reasons: •provision under ias 12 rather than sas109 109 to consider and recognized both current and deferred taxes on the intercompany sale of stock and other assets. •also the requirement under ias 12 to recognized deferred taxes on exchange rate volatility for temporary differences of foreign subsidiaries that the usa dollar as their fluctuation currency. adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 50 a convergence to ifrs may also impact the computation of the mother company‟s basis in its foreign subsidiaries and thereby influence cash repatriation plan. hence good planning should involve an analysis of the results both during the pre-convergence and the adoption of ifrs. iii.variances in accounting for income taxes: although ias 12 and fas 109 have much in common; differences currently exist between the two standards. many of these variances are deemed to be eliminated as a result of the convergence of ias and sas efforts. hence, some areas of divergence will remain, including, uncertain tax positions, deferred related taxes to share-based payments and leveraged leases. 4.3 treasury management issues the treasury management issues that need a calm attention includes: a.distributions: •current dividend measures may no longer be sustainable •changed dividend patterns may have direct effect on a company‟s share price. •a firm‟s value may be negatively affected. b.debt covenants and financing •changes to financial position may cause debt more importantly covenants to be breached where debt covenants do not provide for changes in accounting standards. •an entity‟s ability to ensure continuity of financing arrangement may be affected. •an entity looking to raise finance may need to provide ifrs comparative figures for trend analysis, the adjustments required to financial statements may extend beyond those required by ifrs 4.4 operational issues under this the following operational issues will need to be addressed with the adoption of ifrs: a.the roles of organizational structures: as the impacts of technical accounting moves rapidly, its impliedly exposes the organizational structures, internal controls, reporting relationships and all the requirements that the entities needs and other amount of retooling to the extent that the functions is effected by the transformation. hence, all ceos, financial controllers should expect the technical challenges as results of the convergence from nigerian local gaap (sas) to international gaap (ifrs). entities need to take into considerations more than measurable variances between the two standards, but need to take into account to enhance a framework and approach that can be used to determine the appropriates accounting methods to apply for an ease of conversion. the impacts of the transformation solely to key accounting groups and personnel like statutory accounting shared service centers, chief financial officers, internal auditors, it staff and key financial reporting with privileges access should be addressed early in the process of convergence. b.communication and employee engagement: transforming from nigerian local gaap (sas) to international gaap (ifrs) requires an intensive awareness through communication to employees‟ engagement approach. in addition transforming to ifrs also means of expecting the communicating the information needs by external stakeholders group, including lenders, shareholders analyst etc. the construction of employees‟ engagement approach needs to be established at the outset of the conversion. it may comprises the following considerations: •lion stakeholders to drive leadership and management alignment should be should be determined since from the onset. •assist the financial and accounting roles to channel the impacts and innovations to the business environment affected by the ifrs transformation or convergence. adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 51 •use the internal modes of communication techniques to channel and share all relevant knowledge and experiences across the entire company. this can be by organizing workshops, seminars and trainings within the circumference the entity. •creates external communication heavily with investors, external auditors, analysts, lenders and shareholders in order to curb the challenges that would arise from changes in profits, assets, assets, liabilities and equity. c.compensations and rewards: technically, the accounting for rewards and compensations programs which includes retirement pensions, post retirement medical benefits and share-based payment which are unarguably different varies from the ifrs and nigerian gaap. hence, these programs need to be updated and modified to the up to the standard of ifrs requirements. theoretically, any organizational rewards program would be move totally by its desire to arise retain and maintain excellent intellectual capital, entirely from any accounting treatment. while practically, accounting policies changes have a dramatic impact on rewards programs. hence, this will stimulate a reassessment of the related reward and compensations practices more significantly those that are based on earning per share (eps), net income and other related metrics to conform with international gaap (ifrs) financial metrics.these mentioned programs are also need to be adopted for the purpose of incentives and rewards, sales force compensation that is related to timing of revenue and bargaining contracts by companies with combined workforce. d.human resource training: convergence to ifrs needs to be started with from the assessment of the expertise, experience, skills and knowledge that comes in being to help, support and enhance the convergence. the absence of the mentioned items there will be a need to build, buy, contract or outsource required intellectual materials to support and guide the convergence. 5. bottlenecks or challenges (ugly side) of adoption of ifrs in nigeria the major impeding factors in the process of convergence to ifrs in nigeria are not much different from the other countries in the world. hence, these bottlenecks are not only peculiar to nigeria only but are almost common in most of the countries across the global though there are some unique challenges that are more specific to a particular country than the others, (baba, et al 2013). for example some empirical studies shows that ethical environment and the strength of many companies to maintain the experience and expertise staff from being taken away by their competitors is among the most difficult challenges that most of the companies encountered in nigeria, (odia and ogiedu, et,al 2013), (terzungwe, et al 2012), and (baba, et al 2013). the existing laws to effect the changes in line with the new standard are another bottleneck of convergence in nigeria. lack of standard technologies most especially (it) to compete with developed countries is also among the obstacles of transforming nigerian local gaap (sas) to international gaap (ifrs). other challenges that nigeria faced are broadly discussed vividly as follows: i.cost implication: initial time for adopting the ifrs is perceived mostly by many entities as costly, these costs are related to consultancy fees, cost of training and educating personnel, cost of acquiring new accounting packages and software that are suits with ifrs guidelines, cost of discarding other accounting packages and software that are not relevant with ifrs, cost of the foregone dear sas to new international standard (ifrs). in this case includes the cost of restarting with new standard and abandonment of former sas. then finally, cost of time consuming that is timeframe waste from former local standards to start new invention. these challenges lead many companies to become confused in accepting and implement the change which no doubt resulted in melting down the spirits of many staff of so many entities to appreciate the new standard in nigeria. adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 52 ii.lack of sufficient expertise and technical knowhow: from the onset almost entities accountants and other employees lack the basic required knowledge and skill for ifrs reporting. most of the middle and even top accounting officers lack good understanding of advanced financial management methods for example financial instruments for evaluation cost and benefits analysis and impairment analysis. therefore, one of the most gigantic problems associated with the adoption of irfs in nigeria is shortage of qualified, skilled and competent accountants and auditors that are expert enough to report their opinion based on the guideline of ifrs standards. iii.amendments of existing laws: convergence results to so many amendments of tax laws and a lots of tax considerations, (baba et, al, 2013). tax laws are among the most complicated laws in accounting arena. hence, complexities arise from the calculations of deferred tax attributed to ifrs adjustments effects. with the convergence of ifrs, the basis of computations of deferred tax differs from how it was previously computed during the last local standards. iv.level of education and experience: convergence to ifrs from local nigerian gaap need a versatile experience for strategic decisions and critical decision making procedures, therefore, personnel with high level of educations, expertise, familiarity with ifrs standards, and competence enough to enable the end users to benefit more by understanding, interpretation and effective use of the financial statement. hence, lower level of education, professionalism, experience and weak understanding of ifrs guideline has become a bottleneck in the successful implementation of ifrs in nigeria. v.level of awareness: the process of transition from local gaap to international gaap and its impact to the preparers and other stakeholders including educators, regulators, and professionals need to be adequately informed and coordinated, (ailemen and akende et, al 2012). but nevertheless, all efforts made by educators and regulator via shower of sensitization workshop, training, seminars and all other measures to ensure the level of awareness to reach its peak its ends up abortive. vi.improper training: underestimation of the technicalities attached to the implementation of these standards (ifrs) by entities and expertise‟s is among the obstacles of ifrs convergence in nigeria. underestimating the complexities and technicalities of how difficult the convergences are they by entities‟ executives lead many corporate bodies to encounter a lot of problems. supposing they considered the convergence as the most challengeable then they would be able to use all their possible means to address all the complexities within a possible period of time. vii.enforcement mechanisms: the convergence to ifrs has serious implications for financial regulators and other local standard setters, because it needs and extra ordinary care for financial judgment and assumptions that are always need to be address by relevant financial and other authorities. for nigerian case, the legal actions in nigeria issues‟ very slow, this slow action discourage and hinder regulators from taking all necessary legal actions which impliedly ifrs convergence is like enforcement in nigeria. this state of affairs is impairing on the current ongoing ifrs convergence in nigeria. viii.low participation of private sectors: the most disturbance of convergence to ifrs to a large extent depends on how the private sectors participate, but in nigerian case, the roadmap implementation committee spelt out by frcn has low participation by major players in the private sectors which is contributing to the slow moving in the process of convergence in the country. ix.transition management: one of the most drawbacks for successful implementation of ifrs in nigeria is the innovation which reporting entities are obliged to effect in order to operate the new era of convergence. this adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 53 drawback includes that of coping with additional data elements as well as managing the task of transition into a new process of reporting 6.techniques for effective adoption of ifrs in nigeria successful implementation of ifrs in nigeria is one of the main goals of financial reporting council in nigeria; hence major techniques must be followed to achieve this target amicably. therefore, the implementation process will impact on all level of an organization as well as the people involved. hence, it requires intensive planning and co-coordination across functional lines such as accounting, treasury, tax, information technology human resources and strategic management. hence, the concern stakeholders in the ifrs convergence process in nigeria need to consider the following points below in order to combat the current challenges and will ensure successful convergence program in the remaining single three phases. i.to increase the level of awareness: for the ongoing current convergence process to succeed there is need for increasing the velocity of awareness in both the public and private sectors in the county. specifically, massive sensitization and communication activities should be taken into cognizance. most importantly, raising awareness among the stakeholders on the current and potential benefits of adopting ifrs and its subsequent impact on companies‟ financial performance will boost the convergence process. ii.capacity buildings: this means that all parties concern must work together in order to address all the drawbacks and hence, highlight similar opportunities with the view to achieve a successful implementation of ifrs in nigeria. similarly, all financial regulators, business entities, financial reporting council etc are required to intensify their efforts in manpower training and to strengthen staff capacity in the course of smooth and successful convergence. iii.increasing the private sectors participation: it is crucial for financial reporting council in nigeria to review and restructure the existing committee that control the convergence process in nigeria with the goal of engaging more operators in the private sectors whose valuable contributions will ensure a dynamic and viable roadmap that will be able to resist major challenges in the future. iv.to provide incentives as motivation: in order to make a successful convergence more particularly to small and medium enterprises (smes), government at all levels (federal, states and local governments) needs to offer some kind of incentives to enterprises like reducing the tax rates, providing them good environment to strive and grow, loan incentives in order to boost their level of their capital to mention but few. v.issues of it: information technologies are part and parcel of contemporary business organizations, so business organizations should check, investigate, scrutinize and understand the technical accounting disparity between their current reporting requirement (nigerian gaap) and that of ifrs as it relates to their own operations with the view to find out the basic impact of it and how to design a strategic future state of system. similarly, organizations should engage a reputable and reliable it vendors to address their it challenges, also business organization are advise to put in place a functional requirement blueprint that will come an exhaustive gap analysis between the capabilities of their current it systems and the required future state systems that will be ifrs inclined. 7. major differences and similarities between nigerian gaap and ifrs differences between the ifrs and nigerian gaap is an unavoidable issue, but the major differences and similarities between the two were already discuss under item four (4) but below are the major differences at glance in a tabular form. adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 54 table 1: major differences and similarities between ifrs and nigerian gaap s/n issue ifrs nigerina gaap 1 first-time adoption guidance was given on how to apply ifrs for the first time; this guidance includes accounting policies, exemptions, exceptions and conditions. this is not relevant under this heading as companies are obliged to comply with nigerian gaap from onset. 2 cost of an asset. it is based on fair value that is with certain items carried at revalued amounts. uses historical cost, except for certain classes that may be re-measured. 3 components of financial statement  statement of financial position,income statement, statement of other comprehensive income, statement of cash flows, statement of changes in equity,accounting policies, and explanatory notes.  balance sheet, profit and loss, statement of cash flows, explanatory note, accounting policies, value added statement; and  five year financial summary. 4 statement of cash flows mandatory for all entities not applicable for non-listed company 5 format of income statement ias1 prescribes the format of income statement according to the format prescribed in the cama (company and allied matters act, 1990), banking regulation act etc 6 depreciation rates allocated on a systematic basis to each accounting financial period during the useful life of the asset; (fair value) depreciation is based on the higher estimate of useful life of assets. 7 changes in the depreciation methods treated as a change in the accounting estimate and thus is accounted for prospectively treated as a change in the accounting policy and is accounted for retrospectively (for all the relevant previous a year, hence, any excess or deficit in the case of this kind of recalculation must be adjusted in the period in which the change is affected. 8 presentation of extra ordinary items ifrs prohibits the presentation of extra ordinary items in statement of comprehensive income or in while nigerian gaap requires that extraordinary items to be presented in the profit and loss statement of the entity distinct from the ordinary income and adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 55 the notes to the account expenses for the period. hence they are considered in ascertaining the profit and loss for the period. 9 revaluation of fixed assets if an item of property, plant and equipment is revalued, the entire class of assets to which that assets belongs should be revalued an entire class of assets can be revalued, or selection of assets for revaluation can be made on a systematic basis. 10 declaration of dividend dividends declared after the end of the financial reporting period but before the financial statements are authorized for the issue is not recorded as liability in the financial statements. dividends declared after the end of the reporting period but before financial statements are approved and recorded as liabilities in the financial statements 11 functional and foreign currency functional currency is the currency of the primary economic environment in which the entity operates. functional and presentation currencies may be different. the standard contains detailed guidance on this while in nigerian gaap there is no concept of functional currency. hence, all entities in nigeria report their financial statement by using local currency naira (n). 12 goodwill goodwill is not amortized under ias 38 but is subject to annual impairment test under ias 36 while sas 9 provided that goodwill arising on amalgamation in the nature of purchase is amortized over a period of five (5) years 13 actuarial gain or loss ias 19 spelt out three choices for the treatment of actuarial gains or losses arising on measurement of employee benefit actuarial gains and losses should be recognized immediately in the statement 14 measurement of intangible assets can be measured at cost or revalued are measured at cost only 15 entities operating in hyper inflationary economics according to ias 29 financial reporting in hyper inflationary economics prescribes reporting requirement for entities operating in hyperinflationary economics while there is no equivalent standard under local nigerian gaap standard. adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 56 16 contingent assets disclosure contingent assets are disclosed in the financial statements only if the inflow of economic benefit is possible contingent assets are disclosed as part of the directors‟ report and not disclosed in the financial statement but as note to the account (off-balance sheet items) 17 scope of consolidation investment under control is consolidated general principles 18 impairment carry out impairment test based on trigger vent ifrs 36 impairment on non financial assets, ias 39 impairment on financial assets no specific standard 19 changing in accounting estimates reported in the income statement in the current periods and the effect on future periods disclosed, similar with ifrs 20 consideration money or money‟s worth paid or the fair value of any assets transferred or liabilities incurred and any equity instrument paid similar with ifrs 21 inventories carried at lower of costs and net realizable value. use fifo or weighted average methods to determine cost. lifo prohibited and vanished. similar with ifrs 22 lessor accounting records amount due under finance leases as a receivable (financial assets). allocate gross earnings to give constantan rate of returned based on net investment method. similar with ifrs 23 lessee accounting record finance leases as assets and obligations for future rentals. apportion rental payments to give a constant interest rate on outstanding obligation. operating lease rentals are charged on straight – line similar with ifrs adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 57 basis. 24 consolidation of foreign subsidiaries. use closing rate for balance sheet; average rate for the period for income statements. take exchange differences to equity. include in gain or loss on disposal of a subsidiary. similar with ifrs 25 earnings per share diluted use weighted average potential dilutive (less strong) shares as denominator for diluted eps. similar with ifrs sources: www.pwc.com/ng 8. benefits (good side) that nigeria gained as a results of convergence to ifrs so far i.because of the convergence from nigerian local gaap to ifrs gives nigerian accounting professionals opportunities to sell their services as experts to serve as consultants across the global. hence, convergence provides job opportunities to nigerian people. ii.easy comparability of financial data across the global and assessory investment opportunities within the world. iii.nigeria nowadays get better quality of financial reporting due to consistence application of accounting principles and reliability of financial statement, all as a results of convergence from nigerian gaap to ifrs. thus, implementation of ifrss would reduce information asymmetry and would subsequently smooth the communication between managers, shareholders, lenders and other interested parties (iatridis, 2010). iventities in nigeria moved from historical cost to fair value means of measuring their balance items due to the convergence, because ifrs balance sheet would be closer to economic value because historical cost now is substituted with fair value for several balance sheet items, which nowadays nigerian entities would know the exact value of their financial positions. v.fortune that nigeria have to implement the ifrs standards allowed our companies and our investors to have a competitive opportunity in negotiations with credit institutions across the world and accordingly cost of borrowings are reduced drastically. vi.it help nigeria and nigerian investors to understand the global marketplace, access world capital markets and hence promotes new business environments. vii.transparency, accountability and understandability now improved in nigerian companies because both shareholders and creditors are aware that preparation of financial statement is now in line with international recognition, this would allow the nigerian investors to compare the company‟s performance with competitors worldwide. viii. single reportingthis means all diversified accounting principles, financial acts and banking regulations in nigeria are all now vanished as a result of convergence to one solid, unified and acceptable global standard. this certainly will reduced the costs for applying so many principles and more efficient allocation of resources to one acceptable principles, thus, improve the economic growth of nigeria. http://www.pwc.com/ng adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 58 9. conclusion from the study we can understand that before the convergence to ifrs nigeria already has its own local standard called statement of accounting standard ruled by nigerian accounting standard board, but now nigeria agreed to abandoned its own standard and embrace the worldwide standard on thursday 2nd september, 2010 and reshaped the nigerian accounting standard board into financial reporting council (frc) in order to fulfilled the requirement of international reporting standard board. from the study we can deduce that nigeria agreed to implement the new standard but in three consecutive periods: form 1st january, 2012 for listed companies in nigeria and significant public entities then followed on 1st january, 2013, by public interest entities (pie) , and finally on 1st january, 2014 by small and medium enterprises respectively. nigeria set up a timetable or roadmap for the successful convergence but nevertheless nigeria has faced lots of challenges in the process of full transitions, the major problems are: low level of awareness by the employees of many of the companies, cost implication for the first time, because many companies dumped their existing software and must also spare another huge of fund in order to get another software that would suit with the requirement of ifrs, then cost of installation, cost of organizing workshops, training and seminars in order to enhance the level of understanding of the employees in most of the business organizations etc, then existing tax laws must be amended in or to meet the requirements, to mention but few. similarly, there are many issues that come across in the journey of transition process, because, the nigerian local gaap in many places conflicts or contradicts with the international standard (ifrs) for example most of the components of financial statement in nigerian gaap varies with the ifrs components in term of subjects and sometimes even in meanings: statement of financial position and balance sheet, income statement and profit and loss account, statement of cash flows and explanatory notes etc. but there are many incidences where they correspond with each other like in case of lessee and lossor, inventories, earning per share etc, both of the two standards agreed with one another. however, nigeria and nigerians benefits from the first and second phases of convergence because now almost all listed companies in nigeria transformed their modes of preparing their financial statement from the old version of historical cost to fair value methods in order to know the authentic position of their finances, nigeria also benefit from the convergence because most of the local expertise concerning international accounting issues now transform into international expert as well as international professional, transition from local gaap to international gaap help nigeria and nigerian investors to understand the global marketplace, access world capital markets and hence promotes new business environments. finally, the most interest thing with ifrs is that it deals with principles based rather than rules based. via principles based, ifrs allows companies across the world to utilize only the methods they wish, hence, allowing the financial statements to show only desired results and leading to revenue or profit manipulation and hiding of financial problems in the company, unlike ruled based which would only dictate what the financial statement would contain. 10. recommendation a total transition from one good standard to best standard is not a one day job. hence, for countries that just adopted like nigeria and the countries that are about to adopt or converge their local gaap with ifrs must extensively be prepared for the smooth and successful implementation. however, for full effective and efficient implementation of ifrs in a country, the following points needs to be taken into cognizance: adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 59 i.for anything good to be successful there is need for good and effective planning. therefore for ifrs to be successful more in nigeria and any other country in the world, requires careful planning and extensive public education, judicious allocation of resources, legal and regulatory backup and institutional support with good strategic management style. ii.then the higher education of learning and professional accounting bodies in nigeria like anan, ican, and acca must contribute their quota towards the full successful implementation of ifrs in nigeria. these professional bodies should integrate ifrs syllabus into their curriculum to improve the level of knowledge and awareness about ifrs among the potential managers, accountants and other students who are believe to be the sustainers of the system in the future. similarly, considering the limited time (three years) given by nigerian companies to make full implementation of the ifrs, there is need for integrating ifrs syllabus into nigerian higher level of learning in order to enhance and develop the potential users and implementers of the ifrs for future discount. iii.adequate and sufficient resources must be put in place in order to support and enhance the sustainable implementation of ifrs in nigeria and worldwide iv.nigerian government need to increase the time period for convergence, because implementation of certain requirements of ifrs successfully should be in a gradual and careful process not just three years, because convergence of ifrs is not just an accounting exercise but a transition that requires every stakeholders concerned has to learn a new technical language and a new modes of working with new standard. hence, successful convergence is not a one-time process, but rather an everlastic effort that requires continued government support. v.finally, for entities, there is need for them to identify and train key and strategic staff members across functions to equip them for successful convergence and this training needs to be a periodic in order to make their staff to be up-to-date. then effective and efficient communication of new policies and procedures become necessary for the sustainability of ifrs in nigerian entities. references adejoh, e. & hasnah, k. (2014). adoption of international financial reporting standard inigeria: concepts and issues, journal of an advanced management science. ahmed, a.s., nell, m. & wang (2013). does mandatory adoption offers improve accounting quality? preliminary evidence, contemporary accounting research. baba, b. u (2013). assessing nigeria‟s journey towards ifrs adoption, information management and business review. doupnik, t. & perera, h. (2012). international accounting, third edition. daske, h., hail, l., leuz, c., & verdi, r. (20o8). mandatory ifrs reporting around the world:early evidence on the economic consequences. journal of accounting research fasb facts about fasb, financial accounting standards board, viewed 25 july 2010. http://fas.org/jsp/fasb/page/sectionpage&cid=1176154536495.html ikpefan, o. a., & akande, a. o. (2012). international financial reporting (ifrs): benefits, obstacles and intrigues for implementation in nigeria, research journal of finance accounting. iatridis, g. (2010). ifrs adoption and financial statement effects: the uk case. international research journal of finance and economics adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 60 josiah, m, okoye, a. e., & adediran, o. s. (2013). accounting standards in nigeria, the journey so far, research journal of business management and accounting. odia, j. o., & ogiedu, k. o. (2013). ifrs adoption: issues, challenges and lessons for nigeria and other adopters, meanditerranean journal of social science. terzungwe, n. (2012). challenges of convergence to ifrs in nigeria, international business journal for information and technology world bank (2004). report on accounting and auditing practices in nigeria. world bank, 2008. zeghal, d. and mhedhbi, k. (2006). an analysis of the factors affecting the adoption of international accounting standards by developing countries. published by university of illinois, 2006 appendix appendix a: list of ias and ifrs issued to date ias 1: presentation of financial statement ias 2: inventories ias 3: consolidated financial statement superseded by ias 27 and 28 ias 4: depreciation accounting. replaced by ias16, ias 22 and ias 38 ias 5: information to be disclosed in financial statements superseded by ias 1 ias 6: accounting responses to changing prices. superseded by ias 15 ias 7: cash flow statements ias 8: accounting policies, changes in accounting estimates and errors ias 9: accounting for research and development activities. superseded by ias 38 ias 10: events after the balance sheet date ias 11: construction contracts ias 12: income taxes ias 13: presentation of current assets and current liabilities. ias 14: segment reporting ias 15: information reflecting the effects of changing prices. withdrawn ias 16: property, plant and equipment ias 17: leases ias 18: revenue ias 19: employment benefits ias 20: accounting for government grants and disclosure of government assistance ias 21: the effects of changes in foreign exchanges in foreign exchange rates ias 22: business combinations superseded by ifrs 3 ias 23: borrowing costs ias 24: related party disclosures ias 25: accounting for investment superseded by ias 39 and ias 40 ias 26: accounting and reporting by retirement benefit plans ias 27: consolidated financial statement ias 28: investments in associates ias 29: financial reporting in hyperinflationary economics adoption of international financial reporting standard in nigerian: the good, the bad and the ugly shafi’u abubakar kurfi 61 ias 30: disclosures in the financial statements of banks and similar financial institutions ias 31: interest in joint ventures ias 32: financial instruments: disclosure and presentation ias 33: earning per share ias 34: interim financial reporting ias 35: discontinuing operation. superseded by ifrs 5 ias 36: impairment of assets ias 37: provision, contingent liabilities and contingent assets ias 38: intangible assets ias 39: financial instruments: recognition and measurement ias 40: investment property ias 41: agriculture ifrs: 1 first time adoption of ifrs ifrs: 2 share-based payment ifrs: 3 business combinations ifrs: 4 insurance contracts ifrs: 5 non-current assets held for sale and discontinued operations ifrs: 6 explorations for and evaluation of mineral resources\ ifrs: 7 financial instruments: disclosures ifrs: 8 operating segments ifrs: 9 financial instruments copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. indian journal of finance and banking vol. 4, no. 3; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 1 adr on client’s dispute with trading member at the leading stock exchange in india: an empirical study1 dr. bezawada brahmaiah professor of finance & accounting icfai business school (ibs), ifhe, hyderabad, india e-mail: brahmaiahb@ibsindia.org abstract the paper evaluates trading rules and regulations of the stock exchange in cash segment of the stock market in india. the paper adopts case method to study the trading rules and practices of trading members of the exchange. it investigates the stock market’s misuses and abuses by the trading members. the paper provides guidance for the appropriate regulatory framework to indian securities market and ensures investors’ protection. the results may be generalized in the emerging markets. hence, researchers are encouraged to study results further in other developed countries. the paper finds that these practices are not only violation of trading rules of the stock exchange but also unfair and unethical trading practices. keywords: alternative dispute resolution, arbitration, stock exchanges, securities market. introduction this was a reference matter for the arbitration under byelaws, rules and regulations of the stock exchange. client (applicant) filed an application with the stock exchange that the sub broker colluded with the trading member and caused him financial losses and mental agony. member, investor’s grievances redressal panel (igrp) dismissed his application and the claim for compensation as the payment made to the smart commodities private ltd (scl) was not under jurisdiction and purview of stock exchange of india ltd (seil). this arbitration has been preferred by the applicant against the order of the igrp. accordingly, the arbitration proceedings were initiated and personal hearing for the matter was held on february 14, 2020 at the regional arbitration centre of the stock exchange, hyderabad, india. (arbitration and conciliation act of india 1996). 1.the paper is based on an arbitration matter resolved at the stock exchange of india by the author. names of client, trading member, and exchange are disguised to preserve confidentiality. the arbitration mechanism of the stock exchange is framed under the arbitration and conciliation act of india 1996. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 2 statement of claim by the applicant the applicant submits that the trading member (respondent) and sub-broker colluded and caused him financial loses and mental agony. he narrated the sequence of events as follows. he duly filled two account opening forms, one for securities trading and other one for commodities trading and submitted both the forms along with all necessary documents to the sub broker. the sub broker opened only one account in smart securities ltd (ssl) and not opened account in smart commodities pvt ltd. applicant submits that the sub broker advised, motivated, influenced and instigated him to bring few demand drafts (dds) for inr 4.9 million each in favor of smart commodities pvt ltd (scl) and some more dds in the name of smart securities ltd so that he could trade in commodities as well as securities. accordingly, applicant bought twelve (12) dds for inr 4.9 million each and one dd for inr 1.5 million. the details are furnished in table-1. seven demand drafts of inr 4.9 million each and one dd of inr 1.5 million totaling of inr 36.4 million were paid to smart securities ltd and five dds of inr 4.9 million each, totaling of inr 24. 9 million were paid to smart commodities pvt ltd. applicant paid total amount of inr 61.4 million to ssl and scl by way of demand drafts. applicant submitted the evidence that all 13 dds were bought by him from his idbi bank and state bank of india (sbi). applicant came to know on august 19, 2019 that the sub broker did not give him credit to the dds submitted by him to the sub broker. the applicant wrote a letter to the respondent to update his account. general manager of the respondent replied that such demand drafts were not credited to his account and were credited to four different clients’ accounts as advised by the sub broker. it was found that all 13 dds, totaling inr 6.14, million was paid by the applicant was misappropriated. the sub broker (the authorized person), mr kdp reddy in collusion with the trading member fraudulently credited these dds to others’ accounts and after encashment of demand drafts, the total amount was paid to these clients. (pay outs) not to the applicant. it clearly indicates that the sub broker in collusion with the respondent (trading member) misused, abused and indulged in fraud in the trading systems of the stock exchange and commodity exchange. applicant submits that trading member and sub broker together cheated him for inr 61.4 million and misappropriated the payment fraudulently and accommodated others who are their relatives and close associates. the four clients whose accounts are credited with the proceeds of the 13 dds in question did not submit any letter/confirmation from banks that these dds were bought by them. the said four clients did not claim the dds. applicant submits that the respondent and sub-broker colluded in this matter and caused financial losses and mental agony. the applicant prays for recovery of inr 61.4 million which was paid by him to the trading member through sub broker and also damages of inr 5.0 million 0 towards financial loss, harassment and mental agony. table1. payment details of the applicant s.no. demand drafts nos. & date company name million amount in inr 1 023264, 25-10-2017 ssl 4 .9 2 023265, 25-10-2017 scl 4.9 3 023266, 26-10-2017 scl 4.9 4 023267, 26-10-2017 ssl 4.9 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 3 5 257043, 08-11-2017 ssl 4.9 6 257045, 09-11-2017 ssl 4.9 7 257044, 08-11-2017 scl 4.9 8 023673, 20-01-2017 scl 4.9 9 023674, 20-01-2018 ssl 4.9 10 023712, 25-01-2018 ssl 4.9 11 024472, 06-07-2018 scl 4.9 12 024473, 06-07-2018 ssl 4.9 13 024474, 06-07-2018 ssl 1.5 statement of defense by the respondent the respondent submits that the allegations made by the applicant in the statement of case are not true, valid, tenable and binding on them. the respondent submits that the arbitration application itself is not maintainable, as the sei has no jurisdiction to entertain the present arbitration application since the applicant has not specified the placement of orders. the igrp’s order also revealed that the ledger and contract note of the applicant show only a pay-in of inr 1.0 million by the applicant for trading on the seil. (sebi 2010). therefore, in view of the igrp order, this application is not maintainable and the seil has no jurisdiction to entertain this arbitration matter. the allegation made by the applicant that the respondent and sub-broker colluded and caused financial loses and mental agony is all not true. respondent submits that the applicant himself colluded with certain clients (third party constituents) and sub-broker and executed his indirect trading operations. respondent submits that the alleged dds were not received from the applicant but received from four other clients (third party constituents). the respondent further submits that the applicant remained silent over the matter, and didn’t report the purported misappropriation of demand drafts within a reasonable period of time and coolly at his convenience after about 18 months from the date of issuance of demand drafts, chosen to allege against them and the sub broker. it vents the possibility of complicity, collusion among the applicant and the clients / sub-broker and the third-party constituents into whose account those dds were accounted for. the respondent further confirms that they have received the two dds from four other clients for which they had passed two separate receipts acknowledging the dds. as regards the applicant’s allegation of violation of the provisions of the securities and exchange board of india (sebi) circular, in not insisting on the banker’s letter for the demand drafts accepted by it, the respondent states that the amount of dds were less than inr 5.0 million and hence the need was not felt, considering spirit of sebi circular. in this connection, the respondent urges the arbitrator to examine the propriety of taking several dds for less than inr 5.0 million instead of taking one demand draft, had the intended transactions were bonafide and genuine. the respondent alleges that the fraudulent intention on the part of the applicant in claiming the amount unlawfully after maintaining and maintained study silence over the matter for unreasonably long period. respondent further clarifies that, after it came to know about the alleged misappropriation of dds, it has taken steps to bring the issue to the knowledge of subbroker as well as clients. (third party constituents into whose account those dds were credited and accounted for). respondent submitted that it had lodged a police complaint against the sub-broker, as it has suspected the role of the applicant with the 3rd party clients. basing on the complaint to the police, the officer-in-charge of police station, investigated the complaint and found that there were some private transactions among the applicant, sub-broker and 3rd party clients, hence https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 4 police had not taken up the case on record and disposed the complaint as it was civil nature. respondent submitted that has it has been sending account statement through sms to applicant’s registered mobile number and to applicant’s registered e-mail id at end of every quarter in april, july, october and december. but now with some evil intentions after a lapse of 18 months, he is claiming that he had handed over the demand drafts to smart securities limited and smart commodities private limited. applicant has not opened any trading account with smart commodities pvt. ltd., and alleging that he handed over dds in favour of smart commodities pvt. ltd. it is ridiculous to state that demand drafts favoring smart commodities pvt. ltd were tendered even though the account was not maintained with them. no prudent investor will hand over the demand drafts without opening trading account and without verifying the account statements unless the applicant is having certain private transactions. the authorized person mr kpd reddy handover the demand drafts to the trading member and stated that the said demand drafts were received from other clients for their business investment. respondent herewith furnishes the complete details of the demand’s drafts and respective client codes in the table-1. proceedings, observations and order of the igrp the matter was heard and disposed by the igrp member on november 18, 2019. the complainant/ applicant informed the igrp that he had handed over seven demand drafts of inr 4.9 million each, totaling inr 34.9 million drawn in favor of the trading member (respondent) smart securities ltd and five demand drafts of inr 4.9 million and one demand draft for inr 1.5 million totaling inr 24.9 million in favour of smart commodities pvt ltd. the same amount of inr 61.4 million was wrongly credited by them to four different clients’ accounts. it was noticed by the igrp member that all the demand drafts were purchased by the applicant from his idbi bank and sbi bank accounts, and all entries were found in his bank passbooks. the bankers also confirmed that these demand drafts were purchased by the applicant/complainant. when the trading member was directed to submit the proof that the demand drafts were purchased by those clients’ whose accounts were credited by the trading member. trading member couldn’t provide any proof that these dds were bought by the respective clients. trading member confirmed that these dds were submitted to them by its authorized person mr. k.d p reddy. trading member confirmed that it had not followed the conditions required to be followed while accepting prefunded instruments as per sebi guidelines as it had missed their attention. it is important to note that the igrp member’s observation that all demand drafts were for inr 4.9 million and these were bought by one client and credited the same for different clients’ accounts to suspected financial fraud. applicant was informed that the payments made to smart commodities pvt ltd would not come under the purview of the seil. the igrp member concluded wrongly that all the demand drafts totaling inr 61.4 million was paid to smart commodities pvt ltd and dismissed his claim as payments made to smart commodities pvt ltd were beyond the scope and purview of stock exchange of india. analysis, observations, findings and conclusions of the arbitrator the applicant has traded only in sei cash segment. as per applicant’s statement and version, he had duly filled two account opening forms one for securities and other one for commodities and submitted both the forms along with all necessary documents to the sub broker. the sub broker opened only one account in smart securities ltd (ssl) and not opened account in smart https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 5 commodities pvt ltd. applicant contended that the sub broker instigated, motivated, influenced and advised him to bring demand drafts of inr 4.9 million each, few dds in favor of smart securities ltd and some more in the name of smart commodities pvt ltd. accordingly, applicant paid an amount totaling inr 36.4 million were paid to smart securities ltd and five demand drafts of inr 4.9 million each, totaling inr 24.9 million was paid to smart commodities pvt ltd. the applicant also submitted evidence that all 13 demand drafts were bought by him from his idbi bank and sbi bank accounts. as per statement of the applicant, that the sub broker didn’t give him credit to the demand drafts submitted by him. the sub broker, in collusion with the trading member misappropriated the proceeds of dds to four other clients, one of them is the wife of the sub broker. it clearly indicated that the sub broker misused, abused and indulged in fraudulent transactions using the trading member’s trading system of the stock exchange and commodity exchange. the four clients, whose accounts were credited with the proceeds of dds, did not submit any letter from banks that these were bought and owned by them. the four clients, whose accounts were credited with the dd proceeds didn’t disclose how these dds were received or obtained by them. as a result of cheating and fraud committed by the sub broker; applicant suffered a financial loss of inr 61.4 million. there is no need of accepting demand drafts from any client as every client has mapped or notified his/her bank account details. respondent submits that it has lodged a police complaint against the sub-broker, wherein it had suspected the role of the applicant with the 3rd party clients. the sub broker informed the trading member that the dds were received from the said clients. after the encashment of the said demand drafts, the respective clients requested for the pay outs and accordingly the trading member transferred the funds through neft mode (not in the form of the dds) to their respective clients’ bank accounts. it was further stated by the trading member that the entire modus operand by its registered authorized person with an intention to cheat the client mr b. kk rao and trading member i.e., smart securities ltd. the respondent further submitted that the authorized person conspired with above said clients with the help of mr b. k k rao and cheated the trading member i.e., smart securities ltd. it is observed that the respondent accepted dds without banker’s letter which is a prerequisite for accepting a dd as per sebi circular. respondent alleges that the applicant himself colluded with certain clients (third party constituents) and sub-broker and conducted his indirect trading operations. it is concluded that the authorized person conspired with the four clients and withdrew to the tune of inr 61.4 million and cheated the applicant and trading member by breach of trust by misappropriating the funds fraudulently. all the said demand drafts were credited to the respective clients’ accounts. trading member’s representative replied that it had escaped their attention. had they followed the policy, probably they would have noticed that the dds were from different clients. the fact that all the dds were for an amount inr 4.9 million taken by one client and used for pay-ins of different clients, should have arouse doubt in the mind of the respondent as a person of ordinary prudence. it was observed that the igrp member concluded wrongly that all 13 demand drafts for inr 61.4 million was issued in favor of smart commodities pvt ltd and dismissed his claim as payments to smart commodities pvt ltd were https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 6 beyond the scope and purview of seil. the payment to the commodities trading member was beyond the jurisdiction, purview and scope of the stock exchange of india ltd and could not be dealt by the arbitration mechanism of the seil. this is a clear, fit and proper case of cheating, fraud and criminal act and applicant is advised to file a police complaint at concerned police station so that police will investigate the matter properly and effectively and catch hold of the people involved in the crime and fraud under law of the land. bank letter and passbook entries are the proper and valid proofs and evidences for claiming the ownership of dds. as regards the payment of seven dd s, totaling to an amount of inr 34.9 million drawn in favor of the respondent, smart securities limited (ssl) is well within the scope, jurisdiction and purview of the seil as the payment was received by the trading member of the sei. it is evident from the above discussion that the sub broker fraudulently misused the trading system of the seil and accounted the applicant’s money to other clients who are close relatives and associates of him. as per pay in and pay out policies in vogue, no payment shall be accepted/received from third party accounts, even for that matter payments/ funds from nonmapped/ non notified bank accounts of the same clients will not accepted by the trading member. respondent had accepted 13 dds without bank letters and credited the same to third party accounts wrongly. sub broker wanted to cheat the applicant by using the trading system of the exchange so that he can escape from personal liability since dds are not in his name. he successfully used trading system for his benefit by advising the applicant to bring dds even though the applicant has bank account which was mapped in his account opening form. trading member simply accepted the dds without applying its mind, without ascertaining the reasons of such pay in by way of dds, for same amount of inr 4.9 million. it can be stated unequivocally that the foul play of the sub broker has been successful on account of lack of due diligence on the part of the trading member (respondent). had respondent insisted on the bank letter from the sub broker before accepting the demand drafts on behalf of clients who were wrongfully accommodated by the sub broker; this misappropriation would not have been perpetrated and the loss to the applicant would have been averted. moreover, the authorized person is the sub broker of the trading member. it is observed that there were trading member’s lapses and noncompliance of proper and prudent funds management policies in accepting pay in from third party accounts in this matter. it is concluded that respondent allowed its sub broker to misuse and abuse the trading system to cheat the applicant. sub broker misappropriated inr 34.9 million which was paid to smart securities ltd. in view of the fraud committed by the sub broker in diverting applicant’s money to his associates while using the trading member’s trading system, smart securities ltd was a conduit to cheat the funds of the applicant. sub broker misappropriated fraudulently as an agent of smart securities ltd. as per law of agency, all the deeds, omissions and commissions committed by the agent are deemed to have been done by the principal. respondent as principal is liable, responsible and accountable for all acts and violations under the rules, regulations and bye laws of the seil. trading member is held solely responsible for all the acts, lapses and violations by the sub broker under seil rules and regulations. accordingly, trading member is https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 7 liable to compensate the applicant’s loss due to wrong and fraudulent actions of the sub broker (authorized person). the transactions (pay in of applicant and pay outs to third parties) relating to securities trading is very much within the jurisdiction, scope, and purview of the seil. this is not an appropriate forum to assess and evaluate compensation and damages for mental agony and hence not been dealt with. award in view of the, hearings, and arguments of the both parties, and on my findings, the loss of rs 36.4 million incurred by the applicant on account of crediting the applicant’s money to third parties accounts wrongly and fraudulently. accordingly, an award was passed that the respondent (trading member) is directed to pay inr 36.4 million to the applicant with an interest of 10 per cent per annum from date of this award date till payment of the amount. references sebi. (2010). arbitration mechanism in stock exchanges, cir/mrd/dsa/29/, 1-4 the arbitration and conciliation act of india, 1996, 1-26. 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 indian journal of finance and banking; vol. 2, no. 1; 2018 issn 2574-6081 e-issn 2574-609x published by centre for research on islamic banking & finance and business 44 audit reports and value relevance of accounting information: evidence from commercial banks in nigeria e. a.l. ibanichuka1 & alasin captain briggs1 1 department of accountancy, university of port harcourt, rivers state, nigeria correspondence: e. a.l. ibanichuka,department of accountancy, university of port harcourt, rivers state, nigeria received: january 20, 2018 accepted: february 20, 2018 online published: march 13, 2018 abstract this study examined audit reports and value relevance of accounting information in nigeria quoted commercial banks. data was sourced from financial statement of commercial banks. two multiple regressions were formulated to investigate the effect of audit reports and audit characteristics on stock prices of the commercial banks. the data analysis technique employed is the multiple regression model based on statistical package for social sciences version (22.0). the durbin-watson statistics show the presence of multiple serial autocorrelation. the result shows collinearity that corresponds with the eigen value condition index and variance constants are less than the required number, while the variance inflation factors indicate the absence of auto-correlation. the result from model i found that all the audit report variables have positive impact on value relevance while model ii found that audit compensation, audit familiarity and corporate governance have positive effect and audit independence, joint audit and audit size have negative effect on stock prices. the study concludes that the independent variables have significant relationship value relevance of accounting information of nigeria quoted commercial banks. we recommend that auditing should principle of corporate management beyond the present statue. keywords: auditing, audit reports, value relevance of accounting information. 1. introduction financial statement users rely on the auditor‟s report to provide assurance on the company‟s financial statements. the concern of stakeholder is financial information as reported by auditors should communicate the appropriate information. the concept of value relevance originates from the work of ball and brown (1968) and beaver (1968) investigating whether investor‟s availability on accounting information is useful information when taking investment decisions. the main objective of value relevance research is to examine whether there is a statistical relationship between financial statement variables as reported by auditors and market variables. the concept of value relevance refers to the ability of accounting information to be reflected in stock values (francis & schipper, 1999). value relevance has to do with the summarization of accounting information which affects stock values in such a way that the investors can come up with an informed decision, that has to do with an organization. value relevance is seen as proof of the quality and usefulness of accounting numbers and as such, it can be interpreted as the usefulness of accounting data for decision-making process of investors and its existence is usually by a positive correlation between market values and book values (takacs, 2012). in nigeria section 296 of cama 1990 as amended mandates all public limited companies to make public the financial status of the firm within a specific accounting period. apart from cama, accounting bodies such as www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 45 institute of chartered accountants of nigerian (ican), american accounting association (aaa), international financial reporting standard (ifrs) and international accounting standard board (iasb) provides standards for auditing and financial reporting. the principle function and main objective of an audit is to independently assure the credibility of the information contained in an organization‟s financial statements and to give assurance to shareholders that the financial statement prepared by the management show valid record of how the resources are managed (moizer, 2005). the relevance of audit and audit reports has well been documented in literature (fukukawa and mack, 2011, luo, 2011, hogan and wilkins, 2008 and krechel, 2007). various theories has also been formulated that validate the audit functions in the organization, for instance the policeman theory claim that audit is responsible for searching, discovering and preventing fraud, the lending credibility theory suggest that the major role of an auditor is to add creditability to the financial statement while the agency theory suggests that auditor is appointed in the interest of both the third parties as well as the management( cleary, 1999; choi and jetter, 1998; abbot, parker and peters, 2004; alsaeed, 2006). the assumption of these theories is that the auditor has valid evidence that supports their opinion and that audit reports can affect to a great extent public perceptions as noted by the fundamentalists as factors that can influence stock prices. the increasing rate of corporate scandals such as eron, worldcom, parmalat, command, flowtax, oceanic bank, intercontinental bank questions the relevant of audit reports. the relevance of audit has well been documented in literature. studies such as (azizi et al, 2010; lin and hwang, 2010; arshad et al, 2011) examined the effect of auditing on profitability of quoted firms while other group of scholars examined audit characteristics and performance of firms. the relationship between auditing, audit characteristics and value relevance of accounting information remain a knowledge gap in literature, therefore this study examined the existing relationship between auditing, and audit characteristics on value relevance of accounting information among nigeria quoted commercial banks. the rest part of this paper are as follows; section two discuses conceptual, theoretical and empirical studies on the effect of auditing and value relevant, section three discusses the methods adopted in the study, section four presents and analyze results while section five concludes and make recommendations from the findings. 2. literature review 2.1 conceptual framework 2.1.1 value relevance value relevance has been defined by various researchers in different ways (francis & schipper, 1999; and beisland, 2009). amir, harris, and venuti (1993) were the first to define value relevance as the association between accounting numbers and security market values. other related definitions were subsequently given by barth; beaver & landsman (2000).francis and schipper (1999) interpret value relevance from four different perspectives. first interpretation is that financial statement information affects stock prices by capturing intrinsic share values toward which stock prices drift. the second interpretation is that financial information is value relevant if it contains the variables used in a valuation model or assists in predicting those variables. the third and fourth interpretations considered value relevance as a statistical association between financial information and prices or returns. the forth interpretation of value relevance by francis and shipper‟s (1999) was considered in this study, and as such, defined value relevance of accounting information as the ability of accounting numbers to summarize information that affects the firm‟s value which can be measured by the aggregate market impact on accounting information. beisland (2009) considers value relevance as the ability of financial statement information to capture and summarize firm value. value relevance is measured as the statistical association between financial statement www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 46 information and stock market values or returns. earnings and book value are regarded as the basis for firm valuation. however, earnings management affects the reliability and relevance of earnings in ascertaining firms‟ value. on the other hand, information perspective defines value relevance as the usefulness of financial statement information in equity valuation (nilsson, 2003). value relevance of accounting information is the ability of any information contained in the financial statements to enable the financial statement users determines the value and performance of the company. value relevance is also defined as the ability of accounting numbers contained in the financial statements to explain the stock market measures (beisland, 2009). accounting data, such as earnings per share, is termed value relevant if it is significantly related to the dependent variable, which may be expressed by price, return or abnormal return (gjerde, knivsfla & saettem, 2008). 2.2.2 audit an audit is an objective examination and evaluation of the financial statement of an organization to make sure that the records are a fair and accurate representation of the transactions they claim to represent. it can be done internally by employees of the organization, or externally by an outside firm. when it comes to external auditing, there are two different categories of auditors. first, there is an external or statutory auditor who works independently to evaluate financial reporting, and then there are external cost auditors who evaluate cost statements and sheets to see if they‟re free of misstatements or fraud (investopadia, 2017). both of these types of auditors follow a set of standards different from that of the company or organization hiring them to do the work. internal auditors, as the name implies, are employed by the company or organization for which they are performing the audit. to the best of their ability, internal auditors provide information to the board, managers, and other stakeholders on the accuracy of their books and the efficacy of their internal systems. consultant auditors, while not working internally, use the standards of the company they are auditing as opposed to a separate set of standards. these types of auditors are used when an organization doesn‟t have the resources to audit certain parts of their own operation. 2.2 theoretical framework 2.2.1 policy man theory the policeman theory claims that an auditor is responsible for searching, discovering, and preventing fraud. the focus of the audit however, has moved towards the verification of the truth and the fairness of the financial statements and the provision of reasonable assurance. the policeman theory is not able to explain fully the role and the purpose of auditing. 2.2.2 lending credibility theory according to the lending credibility theory, the primary function of the audit is to add credibility to the financial statements. audited financial statements increase the financial statement users‟ confidence in the financial figures and the faith in management‟s stewardship. the lending credibility does not explain other functions of performing audit services; this theory is limited in explanatory power. 2.2.3 limperg‟s theory of inspired confidence limperg observed that when the confidence that society has in the effectiveness of the audit and the opinion of the audit is lost, the social usefulness of the audit has destroyed. according to carmichael (2004), the principles of limperg‟s theory are especially relevant in this phase of the development of the audit function. the theory of inspired confidence connects the community's needs for reliability of financial information to the ability of audit techniques to meet these needs, and it stresses the development of the needs of the community and the techniques of auditing in the course of time (limperg institute, 1985). www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 47 2.2.4information theory as described in the „agency theory‟, financial reporting is central to monitoring purposes. an alternative or complement to the monitoring principle is the information principle, focusing on the provision of information to enable users to take economic decisions. investors require audited financial information on behalf of their investment decision-making and assessing of expected returns and risks. investors value the audit as a means of improving the quality of financial information. an audit is also valued as a means of improving the financial data used in internal decisionmaking. data that are more accurate will improve the internal decision-making. 2.2.5 insurance theory the insurance theory is a more recent explanation for the demand for the role of the audit, that is, the ability to shift responsibility for reported data to auditors lowers the expected loss from litigation to managers, creditors, and other professionals involved in the securities market (cosserat, 2009). when using audit services, managers and other professionals can demonstrate that they exercised reasonable care. 2.2.6 the agency theory jensen and meckling (1976) define an agency relationship as a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision-making authority to the agent. the authors notice that if both parties are utility maximizes (opportunistic behavior); a good reason exists to believe that the agent will not always act in the best interests of the principal. according to jensen and meckling (1976) divergence exists between the agent‟s decisions and those decisions which would maximize the welfare of the principal. within this principal-agent relationship, owners have an interest in maximizing the value of their shares, whereas managers are more interested in „private consumption of firm resources‟ and firm growth. 2.2.7 assurance theory an assurance service is a service in which a public accountant expresses a conclusion about the reliability of a written assertion that is the responsibility of another party (cosserat, 2009). elder et al. (2010) define an assurance service as an independent professional service that improves the quality of information for decision makers. individuals responsible for making business decisions seek assurance services to help improve the reliability and relevance of the information used as the basis for their decisions. 2.2.8 theories of stock market price  the efficient market hypothesis the efficient market hypothesis was developed by fama (1970). the concept of emh was defined as the market which adjusts speedily to available information. it assumed that the value of the market price of stocks is linear function available information which does not give room for excess return on stocks through the messaging of any market information. the efficiency of stock market has over the years attracted the attention of research in financial economies especially the stock market of the developing countries. this is because the functioning of the capital market is a policy structure for achieving macroeconomic goals.  the weak-form efficient market-hypothesis this assumed that the current price of any stock can not contain any valid information to predict and forecast the future price behaviour of the stock. excess return cannot be earned in the long run by investment strategies based on historic share value of the stock. this implies that fluctuation in stock price, up and down is not the function of information that were not available in the time series but noted that fluctuation of share price is random.  the semi-strong form efficient market-hypothesis this is of the opinion that public available information such as financial statement strategy and past history are fully reflected in current price of the stock price and that no excess returns can be earned by trading on the www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 48 information. this captured some classes of investors by evaluating the earnings and the profit position of the firms before and other investment. this was the case of the stock prices of the banking industry in nigeria in the banking sector crisis in 2008 that was caused by the margin loans.  the strong-form efficient market-hypothesis this advocate that all information both public and private is fully reflected in the price and there is no avenue for excess return. the availability of legal barriers to both private and public information renders the strong form of efficient relevant hypothesis except where these laws are ignored.  the fundamentalists the fundamentalist viewed the value of a corporation‟s stock is determined by expectations regarding future earnings and by the rate at which those earnings are discounted on time. the fundamentalists apply present value principles to the valuation of corporate stock, using dividends, earnings, assets and interest rate to establish the price of stock.  the technician the technical school of taught on the other hand, opposes the fundamentalists‟ arguments, and claims that stock price behavior can be predicted by the use of financial or economic data. they are of the opinion that stock prices tend to follow definite pattern and each price is influenced by preceding prices, and that successive prices depend on each other. this is contrary to the view of the fundamentalists; smith (1990) noted that technical analysts engage themselves in studying changes in market prices, the volume of trading and investors‟ attitude.  the behavioural school of thought the behavioural school of finance holds different view from the above schools of thought and opined that market might fail to reflect economic fundamentals under three conditions, which are: the first behavioural condition is irrational behaviour. it holds that investors behave irrationally when they do not correctly process all the available information while forming their expectations of a company‟s future performance. the second is systematic patterns of behaviour, which hold that even if individual investors decided to buy or sell without consulting economic fundamentals, the impact on share prices would be limited. the third is limits to arbitrage in financial markets ascertain that when investors assume that a company‟s recent strong performance alone is an indication of future performance; they may start bidding for shares and drive up the price. some investors might expect a company that surprises the market in one quarter to go on exceeding expectations (inegbedion, 2009).  the macroeconomist school of thought the macroeconomic view adopt the usual method of using factor analysis approach to determine the factors affecting asset returns, some scholars have measured macroeconomic factors to explain stock return and found that changes in interest rate are associated with risk . they interpreted the observation to be a reflection of changes in the rate of inflation, given the finding of fama (1977) that changes in the rate of inflation are fully reflected in interest rates. the macroeconomic approach attempts to examine the sensitivity of stock prices to changes in macroeconomic variables. the approach posits that stock prices are influenced by changes in money supply, interest rate, inflation and other macroeconomic indicators. it employs a general equilibrium approach, stressing the interrelations between sectors as central to the understanding of the persistence and co-movement of macroeconomic time series, based on the economic logic, which suggests that everything does depend on everything else (iqbal and mallikarjunappa, 2007).  random walk theory the random walk theory is a component of efficient market hypothesis. it states that current price of any security, fully reflects the information content of its historical sequences of price, afego (2012). it is built on the premises that investors react instantaneously to information advantage, they have thereby eliminating profit opportunities www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 49 (dupernex, 2007). stock price always reflect the information based available and no profit can be made from information based trading (lo and mackinlay, 1989). a random walk is known by the fact that prices changes independent of each other (breadley et al, 2005). lo and mackinlay (1999) opined that stock price short-run serial correlations are not zero. they also proposed that in the short-run, prices can gain momentum due to investors jumping on the bandwagon as they see several consecutives periods of some direction price movements with particular stock. 2.3 empirical review gee-jung and kwon (2009) conducted an empirical research and established that book value is the most value relevant variable and cash flows have more value relevance than earnings. further it stated that combined value relevance of book value and cash flows is more value relevant than that of book value and earnings. frankel and lee (1998) found that, on average, about 70% of the variability of share price is jointly explained by accounting information such as current earnings, current book value and earnings forecasts. king and langli(1998) found that explanatory power of the variables are differs in the accounting systems of the three countries. book value explains more than earnings in germany and norway but less than earnings in united kingdom. graham (2000) found that coefficients of these variables are statistically significant for all the countries. the explanatory power of the model ranges from 24% in thailand to 90% in philippines. pathirawasm (2010) investigated the value relevance of earnings, book value and return on equity on share price in colombo stock exchange (cse). study found that earnings, book value and return on equity have positive value relevance on market value of securities. the most value relevant variable is the earnings while the least value relevant variable is the return on equity in sri lanka. abiodun (2012) investigated the value relevance of accounting information in corporate nigeria in which he employed simple descriptive statistics coupled with the logarithmic regression models to examine this interaction between the period 1999 and 2009. the researcher found that earnings isomer value relevant than book values. suadiye (2012) examined empirically the impact of international financial reporting standards (ifrs) on the value relevance of accounting information in turkey. the results showed that earnings and book value are, jointly and individually, positively and significantly related to stock price under the two different reporting regimes. additionally, the results provided that book value of equity is more value relevant than earnings. when two different reporting standards are compared, it is found that the adoption of ifrs increased the value relevance of accounting information for turkish listed firms. chalmers, clinch & godfrey (2011) investigated whether the adoption of ifrs increases the value relevance of accounting information for firms listed on the australian securities exchange. using a longitudinal study that covers pre-ifrs and postifrs periods during 1990–2008, they found that earnings become more value-relevant whereas the book value of equity does not. tsalavoutas, (2009) examined issues relating to the mandatory adoption of international financial reporting standards (ifrs) by greek listed companies. they established that there were no change in the value relevance of accounting information between 2004 and 2005. alali and foote (2012) examined the value relevance of accounting information under international financial reporting standards (ifrs) in the abu dhabi stock exchange.. it was documented that earnings scaled by beginning of period price are positively and significantly related to cumulative returns and that earnings per share and book value per share are positively and significantly related to price per share. the study also found that value relevance of accounting information has changed since the market inception in 2000. kadri, abdul aziz, ibrahim (2010) investigated the value relevance of book value and earnings and the relationship between earnings and operating cash flow of two different financial reporting regimes in malaysia. they observed that the change in financial reporting regime affects significantly the value relevance of book value and but not www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 50 earnings. while book value and earnings are value relevant during the masb period, only book value is value relevance during the frs period. kargin (2013) investigated the value relevance of accounting information in preand post-financial periods of international financial reporting standards (ifrs) application for turkish listed firms from 1998 to 2011. the results showed that value relevance of accounting information has improved in the post-ifrs period (2005-2011) considering book values while improvements have not been observed in value relevance of earnings. hsu, duha, cheng (2012) investigated the value relevance of consolidated statements under the ownership based approach of u.s they found that consolidated financial statements based on a broader definition of control provide more useful accounting information than those based only on majorityownership control. kim (2013) performed an empirical investigation into the value relevance of information reported by russian public firms from two distinct perspectives. he documented that prior to 2011; investors relied on information incorporated in the book value of equity. it was also documented that russian leading firms listed on the london stock exchange, that report in accordance with ifrs produce more valuerelevant reports compared to their local peers that report under the russian standards. palea (2014) used a sample of italian firms to investigate whether separate financial statements are useful to capital market investors, and whether international financial reporting standards (ifrs) are more value-relevant than domestic generally accepted accounting principles (gaap). the study established that separate financial statements are value-relevant, regardless of the accounting standard set. vijitha and nimalathasan (2012) used quantitative approaches to examine evidence concerning value relevance of accounting information such as earning per share (eps), net assets value per share (navps), and return on equity (roe) and price earnings ratio (p/r) to share prices (sp) of manufacturing companies in colombo stock exchange (cse). the researchers used secondary sources of data collected mainly from financial report of the selected companies of colombo stock exchange (cse) in sri lanka. it was found that the value relevance of accounting information has significant impact on share price and value relevance of accounting information is significantly correlated with share price. chandrapala (2011) conducted a study to investigate how ownership concentration and firm size impact on value relevance of earnings and book value. the study found that book value is more value relevant than the earnings in sri lanka. the three studies reviewed in the preceding paragraphs were all conducted abroad while only earnings and book values were used as explanatory variables. of the two variables, book value as established as more value relevant. swart and negash (2009) also examined the ohlson (1995) model and documented its validity in explaining share prices using data for 129 firms continuously listed on the johannesburg securities exchange (jse hereafter), over a twelve year period. the cross sectional results indicate that the ohlson (1995) model does not establish a significant relationship between year-end share prices and accrual accounting information. however, the panel data least square model resulted in significant and positive relationships between yearend share prices and abnormal earnings, abnormal cash dividends and book value of assets. abayadeera (2010) applied ohlsons (1995) equity valuation model (modified for the intangible assets disclosure) to study the value relevance of financial and non-financial information in high-tech industries in australia with a sample size of 91 companies running through various sectors of the australian economy. the study documented that book value is the most significant factor and earnings are the least significant factor in deciding share prices in high-tech industries in australia. glezakos, mylonakis, and kafouros (2012) studied the impact of earnings and book value in the formulation of stock prices on 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 examined that the impact of earnings is diminishing, compared to the book value, while investors strive towards analyzing the fundamental parameters of businesses. mohammad (2012) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 51 investigates the relationship between accounting information and the value of the companies accepted in tehran exchange market. the results found that that there is no relationship between accounting information and companies‟ value (stock value), the study argued that this may be due to lack of efficiency of investment market and inability in using the accounting information by investment market activists. belesis and sorrs (2012) investigated the value relevance of accounting information for the greek listed companies for the period 1995 2009. they examined the way that two accounting variables, earnings and book value, affect the share price. according to their findings from the statistical analysis, the book value and the earnings are value relevant and can explain the share price in the same degree. also the incremental explanatory power of each variable to a model that contains the other is immaterial. nayeri (2012) examined the factors affecting the value relevance of accounting information for investors in the tehran stock exchange over the period of six years.the study concluded that that these factors influence on the value relevance of accounting information for investors in tehran stock exchange. gjerde, knivsfla and saatem (2008) tested the value relevance of financial reporting in norway over the 40 years before ifrs were introduced. they found that the time trend of overall value relevance has increased significantly after controlling for changes in economic value relevance drivers. neither the value relevance of the balance sheet nor the income statement has declined over time. hassan and saleh (2010) investigated the value relevance of financial instruments disclosure in malaysia based on malaysian accounting standard board (masb). their results indicated that disclosure quality of financial instruments information is value relevant. however, the relationship is less positive in the period after the masb become mandatory. further evidence suggests the less positive relationship is not caused by bad news but is caused by the disclosure quality of risks. karunarathne and rajapakse (2010) conducted a study to investigate the value relevance of financial information that extracted from financial statement directly or indirectly. specifically, the study considered the value relevance of earnings and cash flows in stock prices. in addition, the study pays attention on the firm size effect on value relevance. hellstrom (2005) investigated the value relevance of accounting information in the czech republic in 1994-2001. the results showed that the value relevance of accounting information indeed is lower in the czech republic than in sweden. the results, however, indicate an improvement in the quality of the czech financial accounting information during the research period. khanagha (2011) embarked on a study to identify the value relevance of accounting information in two selected countries which could describe the effect of adapting to ifrs on value relevance of accounting information in these countries. the results obtained from a combination of regression and portfolio approaches, showed that accounting information is value relevant in bahrain and the united arab emirates (uae) stock market. khodadadi and emami (2009) set up their study to determine the best method of panel data analysis for use in ohlson (1995) predicting model. the research results showed that the first method has better performance in predicting abnormal earnings by ohlson (1995) model. ariff, alfred, and patricia (1997) reported the relationship between earnings and share prices. the results showed that unexpected earnings changes are significantly associated with share price changes. the results are adjusted for risk differences by using a non-synchronous correction procedure to remove thin-trading bias. oyerinde (2009) investigated the value relevance of accounting data in the nigerian stock market. the primary objective of the study is to determine if there is a relationship between accounting numbers and share prices in the nigerian stock market. the value relevance of accounting data was measured by the correlation coefficient between stock prices and some accounting numbers. the researcher used linear regression to estimate the model of the study. oyerinde (2011) extended her study two years after to investigate the value relevance of accounting data in the nigerian stock market partly with a view to determining whether accounting information has the ability to capture data that affect share prices of firms listed on the nse. the study found that dividends http://link.springer.com/search?facet-author=%22m.+ariff%22 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 52 are the most widely used accounting information for investment decisions in nigeria, followed by earnings and net book value. maradun (2009) found that t ere is a positive relationship as well as significant impact between earnings and share price of building materials firms in nigeria. chang, chen, su and chang (2008) investigated the relationship between stock prices and earnings per share (eps) using panel co integration procedure. furthermore, they considered whether stock prices respond to eps under the different level of growth rate of operating revenue. the empirical result indicated that co integration relationship existed between stock prices and eps in the long-run. furthermore, the study found that for the firm with a high level of growth rate, eps has less power in explaining the stock prices; however, for the firm with a low level of growth rate, eps has a strong impact in stock prices. omura (2005) examined the value relevance of annually-reported book values of net assets, earnings and dividends to the year-end market values of five japanese firms between 1950 and 2004 (a period of 54 years). one of the significant findings of the study was that, in the long run, the book value of net assets has relevance for market value in the five japanese firms examined. alali and foote (2012) examined the value relevance of accounting information under international financial reporting standards (ifrs) in the abu dhabi stock exchange (adx, henceforth). based on models developed by easton and harris (1991), and ohlson (1995) and using monthly market data from 2000 to 2006, this paper investigated the value relevance of accounting information of firms traded on the adx. it was documented that earnings scaled by beginning of p riod price are positively and significantly related to cumulative returns and that earnings per share and book value per share are positively and significantly related to price per share. the study also found that value relevance of accounting information has changed since the market inception in 2000. clarkson, hanna, richardson & thompson (2011) investigated the impact of ifrs adoption in europe and australia on the relevance of book value and earnings for equity valuation. using a sample of 3,488 firms that initially adopted international financial reporting standards (ifrs) in 2005, they established that ifrs enhances comparability. hsu, duha, & cheng (2012) investigated the value relevance of consolidated statements under the ownership based approach of u.s. accounting research bulletin no. 51 (arb 51) and the control-based approach of international accounting standard no. 27 (ias 27). the results of their study showed that consolidated financial statements based on a broader definition of control provide more useful accounting information than those based only on majority-ownership control. jermakowicz, prather-kinsey and wulf (2007) examined the challenges and benefits, including value relevance, of the adoption of ifrs by dax-30 companies, the german premium stock market. the researchers used regression to measure the value relevance of book values of earnings and equity in explaining market values of dax-30 companies during the period 1995–2004. using 265 observations, they found that adopting ifrs or us generally accepted accounting principles or crosslisting on the new york stock exchange significantly increases the value relevance of earnings relative to market prices. kadri, abdul aziz, ibrahim (2010) investigated the value relevance of book value and earnings and the relationship between earnings and operating cash flow of two different financial reporting regimes in malaysia. they observed that the change in financial reporting regime affects significantly the value relevance of book value and but not earnings. while book value and earnings are value relevant during the masb period, only book value is value relevance during the frs period. kim (2013) performed an empirical investigation into the value relevance of information reported by russian public firms from two distinct perspectives. he documented that prior to 2011; investors relied on information incorporated in the book value of equity. the value relevance of reported earnings, however, is different for “growth” versus “value” stocks. it was also documented that russian leading firms listed on the london stock exchange, that report in accordance with ifrs produce more valuerelevant reports compared to their local peers that report under the russian standards. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 53 kouser and azeem (2011) conducted a study that focused on the statistical power to explain changes in share price and intervening impact of ifrs adoption using two independent variables, which are book value of equity and earnings. they adopted a year by year ols regression for their analysis covering eight year period (2002 to 2009). the study showed almost similar results in pakistan as earlier studies of different countries empirically proved. it is proved the high relevance of accounting numbers was the result of high quality investor oriented financial quality. olugbenga & atanda (2014) conducted a research to examine the value relevance of accounting information of quoted companies in nigeria using a trend analysis. secondary data were sourced from the nigerian stock exchange factbook; annual financial reports of sixty six (66) quoted companies consisting of financial and non-financial firms in nigeria and the nigerian stock market annual data. the ordinary least square (ols) regression method was employed in the analysis. the study revealed that accounting information on quoted companies in nigeria is value relevant. the above literature does not examine the effect of auditing on value relevance of accounting information. 3. research methodology this study examined the impact of auditing and value relevance of accounting information of commercial banks in nigeria. the relevant data were sourced from financial statement of commercial banks. time series data were used and econometric method of data analyses which involves ordinary least square (ols) were employed. the multiple regressions formulated in this study are based on the various schools of thought on the effect of auditing on performance of quoted firms. model i: audit report stp= f(fr,ta,lr,ff,cg)………………………………………..(1) transforming equation 1 above to econometric method, we have: stp = β0 + β1fr + β2ta + β3lr+ β4ff + β5cg + µ ………… (2) model ii: audit characteristics stp= f(ac, ai, af, ja, cg,lr) …………………………….... (3) transforming equation 1 above to econometric method, we have: stp = β0 + β1ac + β2ai + β3af+ β4ja + β5cg + β6b4 +µ …..(4) where: stp = stock prices of commercial banks listed on the floor of nigeria stock of exchange fr = financial report proxy by profit after tax ta = total assets lr = leverage ratio ff = financial fraud proxy by dummy variable 1 for evidence of fraud and 0 for no fraud cg = corporate governance proxy by dummy variable ac = audit compensation proxy by amount paid to audit firm ai = audit independence proxy by dummy variable af = audit familiarity proxy by 1 for repetition of audit and 0 for not repetition ja = joint audit b4 = the big four audit firms 1 for the use of one of the four audit firms and 0 for none. µ = error term β1 – β5 = coefficient of independent variables to the dependent variable www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 54 β0 = regression intercept. statistical approach the statistical approaches used in this study include: (i) coefficient of determination (r2): this is used to measure the extent to which the independent variables in the model can explain changes on the dependent variable. (ii) correlation coefficient (r): this measures the strength and the extent to which the dependent and the independent variable are related. (iii) t-test: this is used to measure the significance of the independent variables to the dependent variable and the hypothesis was tested at 5% level of significance and at 95% confidence interval. the hypothesis for this test is stated as follows: 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. (iv) f-test: this is used to find out the overall significance of the regression model at 5% level of significance. the hypothesis for this test is stated as: null hypotheses; h0: β1 –β6 = 0 (all slope coefficients are equal to zero) alternative hypotheses: h0: β1 –β6  0 (all slope coefficients are not equal to zero) the decision rule for this test is that “h0” should be rejected when f-statistics is greater than the critical value of f. but when the f-statistics is lower, then the “h0” is accepted while the h1 is rejected. (v) test for autocorrelation the durbin watson statistics is used in this research to test for the presence of autocorrelation. when there is presence of autocorrelation, the first order autoregressive scheme will be employed to correct it. the hypotheses states that: h0: p = 0 (there is serial independence in the errors) h1: p > 0 (there is first order (ar) positive autocorrelation. when the durbin watson statistics (dw-stat) is lesser than lower durbin watson (dl), the null hypothesis (h0) is being rejected but if the durbin watson statistics is greater than the upper durbin watson (du), the null (h0) is then accepted. methods of data analysis in order to have a proper analysis of the data sourced, the use of multiple regression and statistical package for social sciences (spss) shall also be used. it will also employ descriptive statistics such as graphs and bar charts in illustrating the trends of the variables within the time covered in this study. 4. presentation of results and discussion of findings test of colinearity and autocorrelation of the variables: model i table 1 tolerance and variance inflation factor (vif) tolerance vif fr .986 1.015 ta .865 1.157 lr .940 1.064 ff .835 1.197 cg .821 3.629 source: extract from spss 20.0 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 55 table 1 shows a tolerance of above 0.1 inverse to the rule of the thumb which is contrary to the rule for testing multicolinearity on tolerance while the variables of the variance inflation factor (vifs) which are satisfies the threshold of being above 0.5 and less than 10. table 2 durbin watson and autocorrelation test variables eigen value condition index constant a b c d e 1 4.250 1.000 .00 .00 .00 .01 .01 .04 2 .501 2.913 .00 .00 .02 .21 .04 .03 3 .153 5.276 .00 .02 .14 .12 .86 .04 4 .080 7.301 .01 .26 .58 .31 .03 .03 5 .016 16.080 .98 .72 .26 .35 .06 .04 source: extract from spss 20.0 durbin watson model 2.26 fr = financial report ta = total assets lr = leverage ratio ff = financial fraud cg = corporate governance the table above illustrated a co linearity and autocorrelation; the results found that the eigen values that correspond with the highest condition index and variance constants are less than 0.5 rule of the thumb. the durbin watson statistics of 2.264 shows the absence of multicolinearity, portraying a significant relationship between the dependent and the independent variables in the model. table 3: effect audit report on value relevance of accounting information variables coefficient a b c d e unstandardized beta 1.683 .370 .446 18.525 .256 std error 1.442 .264 .225 12.662 .388 standardized beta .266 .341 .463 .363 .256 t-statistics 1.168 1.398 1.981 1.463 -.162 sig. t .266 .187 .071 .169 -.898 constant α0 = 19.964, t-test 5.529, sig t = .0.000 source: extract from spss 20.0 the table above shows the relationship between the dependent and the independent variables in the study. the unstandardardize and unstandardize beta coefficient of the variables as shown in the above table prove all the independent variables have positive relationship with the dependent variable which means that increase on the independent variables will lead to increase on the dependent variable. however the t-statistics and the significant proved the independent variables are statistically not significant in explaining changes on the dependent variable. test of colinearity and autocorrelation of the variables www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 56 table 4: tolerance and variance inflation factor (vif) model ii tolerance vif ac .865 1.015 ai .327 1.157 af .661 1.064 ja .854 1.197 cg .298 3.629 lr .802 3.567 source: extract from spss 20.0 table 4.4 shows a tolerance of above 0.1 inverse to the rule of the thumb which is contrary to the rule for testing multicolinearity on tolerance while variables of the variance inflation factor (vifs) which are satisfies the threshold of being above 0.5 and less than 10. this finding confirm the finding in model one above. table 5: durbin watson and autocorrelation test variables eigen value condition index constant a b c d e 1 4.857 1.000 .00 .00 .00 .01 .01 .00 2 .574 2.910 .00 .01 .00 .18 .22 .02 3 .384 3.556 .00 .00 .01 .03 .55 .08 4 .100 3.976 .00 .81 .03 .35 .03 .02 5 .059 9.068 .40 .04 .09 .43 .19 .38 6 .027 13.502 .59 .14 .87 01 .00 .50 source: extract from spss 20.0 durbin watson model 2.043 a = audit compensation b = audit independent c = audit familiarity d = joint audit e = corporate governance f = b4 the table above illustrated a co linearity and autocorrelation; the results found that the eigen values that correspond with the highest condition index and variance constants are less than 0.5 rule of the thumb. the durbin watson statistics of 2.043 shows the absence of multicolinearity, portraying a significant relationship between the dependent and the independent variables in the model. this result confirm the finding in model one as presented in table 4.2 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 57 table 6: effect of audit characteristics on value relevance variables coefficient a b c d e f unstandardized beta .304 -.073 -.246 3.145 -.063 .063 std error .402 1.143 .426 16.015 .849 .022 standardized beta .235 -.032 -.205 .062 -.040 .481 t-test .752 -.064 -.577 .196 -.075 .897 sig. t .466 .950 .576 .848 .942 0.414 constant α0 = 62.013, t-test 1.883, sig t = .086 source: extract from spss 20.0 the regression result presented in the above table shows that audit compensation, joint audit, the big 4 have positive effect on stock prices of the commercial banks while audit independence, audit familiarity and corporate governance have negative relationship with the dependent variable. however the t-statistics and the significant proved the independent variables are statistically not significant in explaining changes on the dependent variable. table 7: regression summary model summary model i model ii r .620 .869 r2 .523 .642 adj. r2 .493 .437 f-ratio 4.875 3.184 sig f .0.000 .0041 source: extract from spss 20.0 the estimated regression models is summarized in the table above, model i shows a correlation coefficient of 62.0%, and an r2 of 52.3%, adjusted r2 49.3% which means that 62.0% and 49.3% variation on stock prices of the commercial banks can be explained by the financial audit report variables examined in the study, and f-ratio of 4.875 with the probability of .000 which justifies the model. model ii found a correlation coefficient of 86.9% and r2 of 64.2%, adjusted r2 of 43.7%, the f-ratio and probability of 3.184 and the probability of .004 validate the model. 5. discussion of findings the objective of model i was to investigate the effect of reports on the value relevance of accounting information in nigeria commercial banks. evidence from the results proved that all the independent variables have positive relationship with value relevance of accounting information which is proxy by the stock prices of the quoted commercial banks. this finding confirms the expectation of the results and validates the important of audit reports and its effect on investment decision making of financial users such as investors. the finding also confirms the fundamentalist opinion that information content of financial statement affects stock prices of quoted firms. the finding of this study is in line with the findings of gee-jung and kwon (2009) who found that combined value relevance of book value and cash flows is more value relevant than that of book value and earnings, pathirawasm (2010) who found that earnings, book value and return on equity have positive value relevance on market value of securities. the most value relevant variable is the earnings while the least value relevant variable is the return on equity in sri lanka, abiodun (2012) who found that earnings isomer value relevant than book values and the findings of suadiye (2012) whose results showed that earnings and book value are, jointly and individually, positively and significantly related to stock price under the two different reporting regimes. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 1; 2018 58 model ii was formulated to examine the relationship between auditors‟ characteristics on value relevance of accounting information. the results as shown the table reveal that audit compensation, auditors independence and auditors size have positive effect on the stock prices of the commercial banks while audit independence, joint audit and corporate governance have negative effect on stock prices of the commercial banks. the positive effect of the variables confirm to the a-priori expectation of the results, confirms the objective audit reports while the negative effect is contrary to the expectations of the results and could be trace to internal and external factors that influence auditing in the banking industry. the positive effect confirm the findings of kargin (2013) whose results showed that value relevance of accounting information has improved in the post-ifrs period, vijitha and nimalathasan (2012) whose study found that the value relevance of accounting information has significant impact on share price and value relevance of accounting information is significantly correlated with share price and the findings of chandrapala (2011) who found that book value is more value relevant than the earnings in sri lanka. 6. conclusion and recommendation 6.1 conclusion the objective of the audit and auditing is to examine financial statements of corporate firms to ascertain whether the financial statement presented by the management have true financial position of a firm and if changes in financial position in conform to generally accepted accounting principles. from the models formulated and the findings as presented above, we conclude that auditing have positive and significant effect on the value relevance of accounting information of the quoted commercial banks in nigeria 6.2 recommendation  auditing, the principle of auditing and audit function should be made effective and used as a mechanism to value relevance of accounting information in quoted firms in nigeria.  all factors internal and external that challenge the effectiveness of audit functions should be eliminated and policies to encourage audit independence should be encouraged.  apart from external laws such as contain in cama in respect to audit, there is need to incorporate auditing as internal management system beyond the level it is now in the firms.  commercial banks should adopt the ifrs for in preparation of financial statement which will boost confidence to the financial users. employing of qualified personnel to reduce the risk of transactions and ensure proper keeping of records to attract investors.  commercial banks should understand their duties and the duties of the auditor. they should understand that the auditor is a spot check of information, not exhaustive review of all financial transactions. further, the auditor is charged with determining the accuracy of the financial statements only in all material aspect. references abbott, l. j., parker, s., & peters, g. f., (2004). audit committee characteristics and restatements. auditing: a journal of practice and theory, 23(1), 69-87. abdullahi, i. b, lawal, w. a, and ibrahim, r. o (2012). an empirical estimation of average return in the nigerian stock market. international journal of social sciences and education, 2: 67 – 73 abiodun, b. y. 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(2012), value relevance of accounting information and share price: a study of listed manufacturing companies in sri lanka. merit.research journal of business and management 2(1), 001-006. vishnani, s. and b. shah (2008). international differences in the relation between financial reporting decisions and value relevance of published financial statementswith special emphasis on impact of cash flow reporting. international research journal of finance and economics, 17(1), 1450-2887. 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/). indian journal of finance and banking vol. 7, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 31 an empirical study on impact of credit rating on credit risk of banks: a literature review sunitha. g phd research scholar department of business management klef (deemed to be university), india e-mail: sunitha27.g@gmail.com dr. v. venu madhav associate professor department of business management klef (deemed to be university), india e-mail: dr.v.v.madhav@gmail.com abstract in the financial markets, for investors, lenders, and issuers, credit rating agencies (cras) have a critical part in reducing the asymmetry of information between various parties. credit ratings allow us to recognize the credit impending of a region's individuals. the paper clearly describes the role played in the establishment of a nation by credit rating agencies; there is a rise in new start-ups as all investors are rated favorably. banks are helping to recognize the investment position of india. the main aim of the study is to analyze the research gap on the impact of credit rating on credit risk with a review of the literature. the study briefly explains the research gap which helps to analyze the factors which are responsible for credit risk. the study analyzes the definitions of basic terms, the origin of credit rating agencies’ objectives, and the scope of the present study and the literature review by assessing the credit rating users and examined the consequence of credit rating agencies on the indian financial markets. based on the nationwide and worldwide literature it is found that if the credit history of the investors is good then their credit score would be better and positive. it would also be incredibly convenient to collect loans. finally, it is concluded that there is a positive impact of credit rating on credit risk of banking sectors in india. keywords: credit rating, credit rating agencies, banks, services, credit risk. jel classification codes: a31, g21, g33, n2, d53. introduction the service sector is an essential industry that contributes significantly to the growth of the country, credit ratings fall below those of financial services because their scores have financial security. significant participants are the credit rating companies in the financial sector. to compose a knowledgeable conclusion on the capital markets, they have an objective assessment of the credit capability of debt issuers. the cra’s, the 'gatekeepers' of the financial and capital market, have over time become a position of immense power and influence. according to united states congress, the appraisal affects the ability of an organization to borrow money. this decides whether a mutual fund or a money market fund is capable of investing in a company's bonds and has an effect on the price of the stock. for decades, the three main credit rating https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 32 agencies moody's, standard & poor's (s&p), and fitch ratings have dominated the credit rating industry all over the world in the nonappearance of a countrywide and worldwide regulatory system. credit scores are arguably one of the most severe financial issues as a consequence of the recent economic downturn. in the last few years, the position and significance of credit rating agencies have been increasing. concerning credit risk, credit ratings are judgments. standard & poor's ratings reflect the view of the institution of the ability and ability of an issuer to fulfil its financial obligations in full and on time, like a state or regional company or government. it is also possible to relate credit ratings to the credit value of an entity debt issue, like a business or public bond, as well as to the relative probability of a default issue. credit rating agencies’ responsibility specialized in the evaluation of credit risk to issue credit ratings. to measure creditworthiness, each and every agency applies its methodology and utilizes a particular ranking scale to issue opinions on ratings. to express the organization's judgment on the relative extent of credit risk, ratings are usually conveyed as correspondence results ranging from 'aaa' to 'd'. definition credit rating credit rating refers to recognizing the ability of consumers to judge credit, which means respecting the customer's credit repayment history. both customers who want to browse for credit facilities use credit scores. credit rating agencies besides, there are regional, specialized credit rating agencies that are focusing on a geographic area or industry, in addition to overall credit rating agencies like standard & poor's ratings services. to measure creditworthiness, each and every agency uses its methodology and makes a particular ranking scale to publish its opinions on ratings. to express the organization's opinion on the relative degree of credit risk, ratings are expressed in the form of letter grades which range from 'aaa' to 'd'. the genesis of credit rating agencies the credit rating agency's journey started with lewis tappan in new york city in 1841. then, robert dun, who published his first guide to scores in 1859, received it. john bradstreet, an additional agency, began in 1849 and has published a guide on ratings in 1857. credit rating agencies were born in the early 1900s when ratings, especially those relating to the railway bond market, started to be realistic for securities. the creation of wide-ranging railway networks in the united states contributed to the growth of business bond-related problems to fund them and, consequently, to a bond market that was several times larger than that of other nations. the demand for autonomous market expertise, especially for independent bond lending analysis, began to increase following the 1907 financial crisis. in 1909, a journal focused exclusively on railroad bonds was written by the financial analyst john moody. his evaluations were the first to be widely distributed in an easy-to-get format, and his business was also the first to charge subscription charges to investors. need and importance of credit rating agencies credit rating agencies have a considerable part in the economy's overall growth. credit rating agencies have the primary duty to reduce the asymmetry in credit market awareness by their skill evaluation. it also helps debt distributors to value their problems acceptably and to reach pioneering investors. this encourages investors to start new businesses, which in turn boosts the country's revenues. the primary aspire of the research is to understand the responsibility of a nation's credit rating agencies on the financial market. why credit ratings are used? credit ratings have a beneficial role in serving businesses and governments raise funds on the capital markets. sometimes, they borrow money directly from investors by selling bonds, instead of taking loans from a bank. these debt instruments like public bonds are purchased by investors planning to https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 33 obtain interest along with their principal at the maturity of the bond, or in the form of monthly payments. credit ratings can facilitate the practice of issuing and purchasing and erstwhile debt problems through a reliable, generally renowned, and long-lasting estimation of credit risk. investors and other market contributors can make use of the ratings to test for their threat acceptance or credit risk requirements for investment and business decisions in line with their relevant credit risk issues. the investor, for example, should check to decide if its credit rating is in line with the degree of the credit risk it would take concerning the purchase of a municipal bond. at the same time, organizations may use credit ratings to fuel growth and/or fund research and development, along with public initiatives in governments, cities, and other classes. objectives of the study  to study the overview of credit rating agencies in india.  to know how credit ratings help in a country’s development.  to assess the users of the credit rating.  to observe the impact of credit rating agencies on indian financial markets. scope of the study the theoretical dimensions of credit ratings in the developing world are demonstrated by their scale. the study was performed on diverse aspects of the efficiency of credit rating agencies. the analysis considered the national and international journals for studying credit rating and credit risk of the indian banking sector, such as public and private sector banks. secondary data was utilized for the study in the form of a literature review. review of literature studies in the past have compared various parameters related to bank performance including credit risk measurement and management between private as well as public sector banks. a review of the literature on this topic shows that there is no agreement on the ownership of banks and their performance. some studies have revealed that bank performance improved when state-owned banks were either fully privatized or partially privatized. other reports suggest that public sector banks performed better than private sector banks. in this paper, partnoy (2017) addresses three problems faced by credit rating agencies due to the government of congress. in this the author presented solutions for certain problems. the author strongly placed pressure on all sides, i.e. credit rating agencies and investors, to fix the ongoing issue. owing to the methodologies practiced by the rating agencies, the credit rating pattern is missing. the problem of unfair and mechanistic dependency on credit scores was also highlighted by him. he found there were no standards for credit rating agencies and introduced some legislative changes to address this issue. he addressed the methods of action and different types of threats. but the patterns in credit rating are missing in this paper. a rivalry between credit rating agencies is addressed with authors bolton et al. (2012) via a model to decrease the efficiency of the industry. briefly, they clarified the features of rating agencies. the study was structured by explaining the author's comparison and extension of credit rating agencies. they have also made some assumptions that indicate an investment perception. the analysis was clarified by assessing the game with the rating agencies' monopoly. they explained the rivalry and its empirical implications among credit rating agencies. as a future enhancement few more assumptions can be made. approaching the fundamental concepts in the flow of investment information by credit rating agencies and analyzing the critical position of the credit rating agency, lynch (2009). the author has assessed the function of credit rating agencies on the capital market and speculation policy. he clarified how private contractors submit credit rating details. he added to the divisive problems faced by credit rating agencies. he complained about the credit rating agencies' credibility protections. the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 34 report analyses many of the issues concerning the established regulatory system. the problems of the issuer-paid interest dispute were also highlighted. the authors examined numerous articles and evaluated the theory using statistical techniques such as regression analysis. as per that report, presently no pragmatic proof that the report is based on a bivariate or multivariant analysis that supports the association among the capital strength and the jordanian company's credit rating. the number of fixed assets was defined as fairly small. the authors concluded that the study supports different approaches used to test the internal model of credit rating, suggesting that certain variables influence credit ratings significantly. the results of the study show that positively high credit scores are also linked to size and growth potential. the study is addressed by the author and considers the degree to which bank ratings represent banks and the features of accounting data to estimate the issue. using descriptive analysis by taking samples from the us and the united kingdom, the author clarified the study by hassan and barrell (2013). to validate the study, statistical methods like correlation matrix and the consequences of regression are used. the findings revealed the success of the model, which required proper credit ratings to be assigned by 74 percent to 78 percent of banks. banks were rated as top-rated banks and the lower-rated banks based on their scores. elkhoury (2009) the author addressed the knowledge break through the use of qualitative and quantitative approaches in the global monetary system as assessment processes and methods. the author has established the normal and weak methodological profile. both the developed and developing markets are explained by the credit rating determinants. the author discussed the other two different topics separately. the rates of international interest and the export structure are being increased. he talked about the shortcomings arising from the regulatory initiative. credit rating agencies evaluate several variables that have been explained in the study for the allocation of ratings. the author's view on the credit rating agencies is expressed in the study. this analysis advanced my research to appreciate the methodologies employed by credit rating agencies and helped me further explore the topics discussed in the review. in a study conducted by sinkey and greenwalt (1991) in the united states of america it was found that on the experience of credit loss and risk-taking actions of commercial banks credit risk emerges primarily from weak credit policies and poor macroeconomic conditions. caprio and klingebiel (2000) recorded that, due to poor management and politically influenced loan disbursements, many state-owned banks demonstrated poor financial results. bratanovic and greuning (2000) proposed that credit risk ratios could be used as a measure of the credit risk connected with the banking sector, demonstrating the importance of such ratios for banks to reduce the ratio within and prevent any terrible failures. in this paper, bhattacharyya (2009) evaluated and highlighted that the pbit & debt plus networth ratio, current ratio, and growth in the net sales acts as an imperative part out of the 10 variables used by icra for issuer ranking, but at any point of time the dependent elements can also change ratings. bheemanagauda (2008) have attempted to estimate the presence of cra’s in india, counting crisil, icra, care, and fitch, both in the country and out of the country, other than the notice of current writings shows that in spite of the escalating significance of cra’s as data agencies, credit rating agencies are becoming increasingly important as knowledge providers for credit-related opinions the majority of researches managed in india to date have largely focused on the theoretical and conceptual credit rating system of india. the two leading indian cra’s have attempted to test the business supremacy rating methodology used by achalapathi and rajani (2004), namely icra and crisil. the researchers attempted to relate the principles of accountability, revelation and ranking technologies to explore the business authority information of different entities and attempted to figure out regardless or not a good number of firms complied with regulatory requirements. compared to financially weak companies, it was noticed that much was disclosed by financially better-performing companies. similarly, businesses with restricted proportion of investors in foreign institutions in the shareowner model https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 35 reported further with reference to their corporate governance when differentiated to organizations with a lower share of fii’s. while business reports were constantly at a cost borne by the investors, they were expected to be disclosed by the shareholders. many corporations act in accordance with the regulatory criteria as commercial divulgence strengthens the corporate integrity of the corporation. poon and firth (2005) discussed the lack of dissemination of the requested or unrequested results in their research paper. consequently, fitch's bank ratings were analyzed for this point in 82 countries. authors also analyzed if the financial details of the 52 banks with the requested ratings were different from those with the unrequested ratings. the authors established that, since only public data was the basis of unrequested assessments, the ratings requested were typically higher than the ratings requested. in comparison, companies with unwanted ratings have lower financial profiles than those with the submission of ratings. this could also explain why some banks can apply for scores, according to analysts, but others can't. tang (2009) has examined the effect of refined rating information on credit market admission to businesses, monetary decisions, and speculation policy by using moody's 1982 loan evaluation design improvement. the writer pointed out that the companies that were strengthened as an effect of the more sophisticated gradation saw a large decline in their borrowing rate in contrast with companies with decreased scores. furthermore, businesses with a rating refining upgrade have issuance, which confirms that improved access to the capital market allows upgraded firms to replace the funding of equity debt. this has shown that higher corporate rate refinements are linked to higher capital spending, lower cash gathering, and growth in the assets than lesser ratings. the paper, therefore, explained the part played by credit ratings in deciding the company's capital configuration in conditions of both lending costs and the debt amount. reddy and gowda (2008) explained in their article the relevance and troubles of the credit rating system existing in the country. also gave priority were the foundations of credit rating and credit rating practices in india. the views of the hyderabad investors sample were then adopted. the study's findings showed that most participants are aware of the existence of diverse credit rating agencies, like crisil, care, icra, etc. roughly 40% (80 of 200) of the people who answered rely on the credit rating for investing in debt instruments, but 50% (94 of 180), more than most credit rating agencies depend on crisil to make their investment. the study accomplished that, while numerous investors are confused with more than one credit rating agency, most of them are happy with credit rating agency supervision. kumar and rao (2012) in their report red credit rating – current monetary structure, indicated credit rating for the security of small investors who are the key targets for unlisted corporate debt in the form of fixed deposits with enterprises. classification is generally used as alphanumeric symbols and is based on the rating agency's judgment. matthies (2013) proposed some ideas for credit rating in his paper. he reports on the current state of analytical examination in the area of corporate ratings and its connection with the ratings of several other organizations and different previous important data. the results from three research lines, such as the connection stuck between credit ratings and corporate defaults, the influence of loan ratings on financial markets, credit rating variables, and credit rating adjustments, are considered in particular. the results from each line are relevant and essential for the construction and analysis of studies in the remaining two areas. besides, the design and development of credit ratings and the rating scale are important for explaining all empirical findings. a paper titled by saluja and drolia (2015) published the effect of loan rating on cash and earnings performance of indian companies. in the special article, the authors reiterated that the load rating is a probabilistic estimate of the default in debt instrument payment. the firms that have good growth hold more cash. in addition, businesses with substantial profits and sales retain 10% to 20% of the total assets in cash. the author also described the term earnings momentum. they accept that borrower private data also plays a most important part in decision-making on the structure of maturity of corporate debt. the study is, however, intended to measure the effect of the loan rating on the cash assets of a business and to calculate the collision of the credit rating on the income momentum of a https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 36 company. a random sample of 30 indian companies included in the bse 200 index has been attempted. for these firms, their respective annual reports and bse have provided the quarterly data from 2006 to 2014. crisil collected credit rating information. the 36 effects of the credit rating on cash holdings and income momentum were assessed using the classical linear regression model. credit scores have a direct effect on the decisions taken by managers about the capital structure. the results can be used for enhancement and downgrading, as well as for small and large companies. conclusion it is found that the credit background of investors is good after reviewing the above national and international literature, so their credit score will be stronger and optimistic. it would also be incredibly convenient to collect loans. investors may spend in diverse companies that increase jobs when loans are allowed. when companies get positive ratings, loans are issues, companies can start and expand their business and provide employment opportunities to many people. this results in an increase of the country’s national along with the gdp. a country's expansion depends on the country's gdp. as per the report, the gdp shows a positive increase which shows the growth of the country. if all the industries are improving, then the country's growth is very easy. finally, it is concluded that the credit ranking has a constructive effect on the credit risk of the banking sector in india. further study can be done on analyzing the public, private, commercial, and cooperative banks. references achalapathi. k. v., & rajani., d. 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(2009). information asymmetry and firms’ credit market access: evidence from moody's credit rating format refinement. journal of financial economics, 93(2), 325-351. https://doi.org/10.1016/j.jfineco.2008.07.007 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://scholarlycommons.law.case.edu/caselrev/vol59/iss2/3 http://hdl.handle.net/10419/79580 https://digitalcommons.law.uw.edu/wlr/vol92/iss3/6 https://doi.org/10.1111/j.0306-686x.2005.00646.x https://doi.org/10.1007/bf00127083 https://doi.org/10.1016/j.jfineco.2008.07.007 indian journal of finance and banking vol. 4, no. 4; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 20 the momentum effect: anomaly or illusion dr. olfa chaouachi faculty of economic sciences and management university of tunis el manar, tunisia e-mail: chaouachiolfa@yahoo.fr pr. fatma wyème ben mrad douagi faculty of economic sciences and management university of tunis el manar, tunisia e-mail: fw.benmrad@fsegt.rnu.tn abstract this paper tests the effectiveness of the momentum strategy for different time horizons between april 2013 and march 2020 and its sources in the tunisian stock market. the findings display that, employing the methodology of jegadeesh and titman (1993), momentum strategy for all time horizons are positive and statistically significant. in the explanation section of the momentum effect, it is found that the momentum is not an illustration of the january effect and that both models (capital asset pricing model and the model of fama and french (1993)) are unable to fully capture the profit of momentum strategy. however, we find that trading costs in the form of quoted spread eliminate the statistical significance of the momentum return. therefore, an investor can’t make a profit by exploiting the momentum strategy in the tunisian context. keywords: momentum strategy, january effect, capital asset pricing model, model of fama and french (1993), trading costs. introduction extensive research has reported several price anomalies in a wide variety of markets. the most common of these anomalies is the momentum effect. this phenomenon was first proposed by jegadeesh and titman (1993). he documented, using us data between 1965 and 1989, that stock with the highest (lowest) returns over the previous three to twelve months continue to acquire the highest (lowest) returns over the following three to twelve months. to exploit the momentum effect, jegadeesh and titman (1993) constructed a series of investment strategies by buying stock with the best returns during the past three to twelve months and selling stock with the lowest returns during the past three to twelve months. these investment strategies were held over the following three to twelve months. the effectiveness of momentum strategies reported by jegadeesh and titman (1993) in the us market is a contradiction to the neoclassic efficient market hypothesis. the efficient market hypothesis assumes that market price completely mirrors all available news at any instant and that investors are rational. then, it is impossible to make predictions on the evolution of the price. mailto:chaouachiolfa@yahoo.fr https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 21 the results found by jegadeesh and titman (1993) laid open a series of questions. is the momentum phenomenon present in equity markets other than the american market? can investors exploit this phenomenon? are returns to the momentum strategies omitted by the capital asset pricing model (capm) and fama and french model (1993)? in this current investigation, we examine empirically the profitability of momentum strategy over various time horizons between april 2013 and march 2020 and its sources. in the context of the tunisian equity market, there are only two published works that examined empirically the profitability of momentum strategies and assess if the momentum profits are justified by the risk hypothesis (zoghlami (2011); boussaidi and dridi (2020)). however, there is no study investigating the impact of the trading costs on momentum returns and examining for possible seasonality in the returns of momentum strategies. the rest of this article follows: section two reviews previous researches on the momentum phenomenon. section three provides explanations of the momentum returns. section four reports the data and section five methodologies are used. section six presents the findings and section seven summarizes the conclusions. previous researches on the momentum effect since the innovator study of jegadeesh and titman (1993), numerous works reported evidence in favor of the momentum phenomenon in the us market. for example, geczy and samonov (2016) found using us data between 1801 and 2012, a significant momentum phenomenon gain of 0.4% per month. outside the us market, rouwenhorst (1998) studied international data of 12 european markets between 1978 and 1995. he documented that a momentum portfolio generates significant excess returns using different junctions of three, six, nine, and twelve-month formation and holding periods. hou and mcknight (2004) found that the momentum strategy is profitable between 1988 and 2000 in the canadian market. antoniou et al. (2007) examined a sample of 2556 firms traded on the london stock market in the period 1993-2002. they found evidence of a significant momentum effect. glaser and weber (2006), employing a sample of 446 firms traded on the german market, declared the existence of momentum phenomenon over the period 1988-2001. additional validation of the effectiveness of the momentum strategy was again documented in emerging markets by numerous works. rowenhorst (1999) investigated a sample of 1750 firms in 20 emerging markets between 1982 and 1997 and detected a beneficial 6 month/ 6month momentum strategy in seventeen of the twenty emerging markets. rastogi et al. (2009) found that the strategy of purchasing previous stock winners and vending previous stock losers yields excess returns in the indian equity market over the period 1996-2008. khosroazad and chitsazan (2016), considering a sample of 40 companies traded in the iranian market, reported evidence of momentum phenomenon between 2004 and 2014. the existence of the momentum phenomenon was also given by adrianus and soekarno (2018) in the indonesian equity market employing daily data of all traded companies during the period of february 2013 through december 2015. in the tunisian stock market, zoghlami (2011) employed various junctions of three, six, nine, and twelve-month formation and holding periods. he found that all momentum strategies studied are profitable over the period 1998-2004. boussaidi and dridi (2020) also revealed that the number of beneficial momentum strategies is fourteen out of sixteen strategies over the period 1999-2016. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 22 explanations of the momentum returns various reasons have been proposed to explain the presence of the momentum phenomenon. for the risk hypothesis, sehgal and balakrishnan (2008) found that the three factors model of fama and french (1993) succeeds to justify the momentum profitability in the bombay equity market for the period 1990 -2003. galariotis (2010) also documented that momentum profitability is completely gained control by the three factors model of fama and french (1993) in the australian stock market. other authors noted that the risk hypothesis is inept to justify the momentum effect. rouwenhorst (1998) reported that the size and market factors fail to give explanations for the effectiveness of the momentum strategy. zoghlami (2011) also found that the three factors model of fama and french (1993) are unable to justify the momentum profitability in the tunisian market for the period 1998-2004. fan et al (2015) documented that the three factors model of fama and french (1993) is inept to fully capture the momentum profitability in most of the 43 stock markets studied between 1981 and 2009. several authors like jegadeesh and titman (1993, 2001); chordia and shivakumar (2006), and ji et al.(2017) argued that the momentum effect is an illustration of the january anomaly. they found that in january momentum returns tend to be lower than momentum returns in other calendar months. in other words, the winner portfolio significantly outperforms the loser portfolio in all months except january. they explained their results by the tax-lossselling hypothesis and the window-dressing hypothesis. other authors found that trading costs can fully explain the momentum profit. in the canadian market, cleary and inglis (1998) reported that after considering trading costs, momentum strategies generate negative returns in the period 1980-1998. lesmond et al. (2004) and boujelbene et al. (2008) also documented that momentum returns are fragile to trading costs in the us and the french markets respectively. for the under-reaction hypothesis, doukas and mcknight (2005) examined a sample of 3084 equities from 13 markets of the european continent in the period 1988-2001. they reported that the under-reaction of stock prices to new information is capable to explain the profitability of 6month/ 6month momentum strategy. in the tunisian context, boussaidi and dridi (2020) also found that the momentum effect is justified by the under-reaction hypothesis. they revealed that favorable (unfavorable) earnings news is succeeded by positive (negative) excess returns during twelve months after the declaration time. data the data applied in our investigation consist of the daily closing prices, market-capitalizations, and book values of all securities traded on the tunisian stock market and have full data during april 2013 and march 2020 (60 stocks). these data were obtained from www.bvmt.com.tn and the monthly money market rate (tmm) was obtained from the central bank of tunisia. tmm is applied to calculate the return on a risk-free asset. the daily closing prices are used to calculate the monthly return of the stock. the latter is computed as the difference in the natural log of the mean closing price of security between month t and t-1. the return of the market on month t is determined by dividing the sum of the returns of all stocks by the number of firms listed on month t. http://www.bvmt.com.tn/ http://www.bct.gov.tn/ https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 23 methodologies formation of the portfolios to investigate if the momentum phenomenon exists in the tunisian stock market, we refer to a pioneering methodology widely employed. this methodology has been introduced by jegadeesh and titman (1993). according to this method, all securities are ordered in ascending order based on their previous returns over the formation period and assigned to three equally weighted portfolios. each portfolio contains 20 stocks. in the tunisian stock market, the number of traded companies is very small compared to the us market. then, we choose to construct terciles instead of deciles portfolios. the tercile of securities with the lowest returns over the formation period (j) is called the loser portfolio (l). however, the tercile of securities with the highest returns over the formation period is called the winner portfolio (w). these portfolios are then held over the holding period (k). in our investigation, we consider three formation periods and three holding periods. j= 3, 6, 12 months and k= 3,6,12 months. the combination of the two periods gives nine momentum strategies. the return of the momentum portfolio is determined by the difference between the return of the winner portfolio and the return of the loser portfolio. performance of portfolios traditionally, the study of the significance of the alpha coefficient in the capm and the three factors model of fama and french (1993) allows us to assess the performance of the portfolios. these two models are respectively written in this fashion: 𝑅𝑃,𝑡 − 𝑅𝑓 ,𝑡 = 𝛼𝑃 + 𝛽𝑃 𝑅𝑚 ,𝑡 − 𝑅𝑓 ,𝑡 + 𝑒𝑃,𝑡(1) 𝑅𝑃,𝑡 − 𝑅𝑓 ,𝑡 = 𝛼𝑃 + 𝛽𝑃 𝑅𝑚 ,𝑡 − 𝑅𝑓 ,𝑡 + 𝑠𝑃𝑆𝑀𝐵𝑡 + ℎ𝑃𝐻𝑀𝐿𝑡 + 𝑒𝑃,𝑡 (2) where 𝑅𝑃,𝑡is the return of the momentum portfolio; 𝑅𝑓 ,𝑡 is the risk-free-rate; 𝑅𝑚 ,𝑡 − 𝑅𝑓 ,𝑡 is the market return above the risk-free rate. the 𝑆𝑀𝐵𝑡 and 𝐻𝑀𝐿𝑡are consecutively the size and book to market factors of the fama and french model (1993); 𝛼𝑃 , 𝛽𝑃, 𝑠𝑃 and ℎ𝑃 are the coefficients to estimate, and 𝑒𝑃,𝑡 is an error term. if the coefficient 𝛼𝑃 in the capm and the three factors model of fama and french (1993) are significant, we can conclude that these models are inapt to capture the momentum profitability. we used the methodology of fama and french (1993) to calculate the two risk premiums smb and hml. at the end of march of each year, companies are ordered according to the end of the previous year’s market capitalization and two groups are constructed: group number one contains the smallest companies and noted (s) and group number two contains the biggest companies and noted (b). moreover, we construct independently three groups of companies found at the end of the preceding year book to market ratio (b/m): the first group contains companies with the lowest b/m (30%) and noted (l), the second group contains companies with the medium b/m (40%) and noted (m) and the third group contains companies with the highest b/m (30%) and noted (h). the junction of these two successive partitions gives six portfolios (s/l, s/m, s/h, b/l, b/m, and b/h). the s/l portfolio comprises companies that are both in the small size group and in the low (b/m) group. the b/h portfolio comprises companies which are both in the big size group and in the high (b/m) group and so on. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 24 𝑆𝑀𝐵𝑡 is the mean return on the three small portfolios (s/l, s/m, s/h) minus the mean return on the three big portfolios (b/l, b/m, b/h), for each month. 𝑆𝑀𝐵𝑡 = 1 3 𝑅𝑆 𝐿,𝑡 + 𝑅𝑆 𝑀,𝑡 + 𝑅𝑆 𝐻,𝑡 − 1 3 𝑅𝐵 𝐿,𝑡 + 𝑅𝐵 𝑀,𝑡 + 𝑅𝐵 𝐻,𝑡 (3) 𝐻𝑀𝐿𝑡 is the mean return on the two value portfolios (s/h, b/h) minus the mean return on the two growth portfolios (s/l, b/l), for each month. 𝐻𝑀𝐿𝑡 = 1 2 𝑅𝐵 𝐻,𝑡 + 𝑅𝑆 𝐻,𝑡 − 1 2 𝑅𝐵 𝐿,𝑡 + 𝑅𝑆 𝐿,𝑡 (4) momentum return and trading costs to measure trading costs in the tunisian stock market, we use the quoted spread estimates. this measure is employed by several authors that study the profitability of momentum strategies after considering trading costs (cleary and inglis (1998), lesmond et al. (2004), and boujelbene et al. (2008)). the quoted spread determines the cost of completing a round trip purchase – sell. the quoted halfspread measures the costs for a unique trade purchase or sells. the quoted spread is given by: 𝑆𝑖,𝑡 𝑄 = 𝐴𝑖,𝑡−𝐵𝑖,𝑡 𝐴𝑖 ,𝑡+𝐵𝑖,𝑡 /2 (5) where 𝑆𝑖 ,𝑡 𝑄 corresponds to the quoted spread for security i at time t. 𝐴𝑖 ,𝑡represents the ask price for security i at time t, and 𝐵𝑖 ,𝑡 is the bid price for security i in time t. empirical results profitability of momentum strategies returns results for all 9 momentum strategies between april 2013 and march 2020 can be shown in table 1. all strategies studied generate positive and statistically significant returns. the most profitable 6-month/ 6-month momentum strategy experiences a return of 0.91% per month. however, the least profitable 12-month/12-month momentum strategy produced a return of 0.59% per month. from table (1), we can also see that the returns of momentum portfolio seem to be directed by the short positions in winners as the returns of loser portfolios are positive across all ranking and holding periods.as displayed in the table (1), the returns of momentum portfolios are affected by the duration of the holding period. more specifically, for the ranking period of 3 months, the return of momentum portfolio diminishes from 0.80% to 0.63% as the holding period rises. our findings are consistent with that found by zoghlami(2011) in the tunisian market. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 25 table1. returns of winner, loser, and momentum portfolios ranking period portfolios holding period k=3 k=6 k=12 j=3 winner loser momentum 0.0162*** (3.90) 0.0082** (2.31) 0.0080 ** (2.24) 0.0157*** (5.35) 0.0079*** (2.81) 0.0078*** (3.44) 0.0134*** (6.54) 0.0071*** (3.16) 0.0063*** (3.91) j=6 winner loser momentum 0.0174*** (4.01) 0.0084** (2.28) 0.0090*** (3.68) 0.0183*** (5.43) 0.0092*** (3.08) 0.0091*** (3.66) 0.0142*** (6.48) 0.0070*** (3.11) 0.0072*** (3.99) j=12 winner loser momentum 0.0175*** (3.46) 0.0087** (2.10) 0.0088** (2.34) 0.0153*** (3.99) 0.0071** (2.08) 0.0082*** (3.01) 0.0114*** (5.19) 0.0055** (2.24) 0.0059*** (3.2) note: t-statistics are in parentheses, with two, and three asterisks denoting significance at the 5% and 1% levels consecutively. evidence of abnormal returns parameters estimates of the capm and the model of fama and french (1993) for the momentum, winner, and loser portfolios of the most profitable 6-month/6-month strategy are presented in table (2). the abnormal returns (alpha coefficients) of the momentum portfolio in these two models are positive and statistically significant at one percent level. then, the capm and the model of fama and french (1993) cannot capture the momentum return. our results are consistent with those found by zoghlami (2011) in the tunisian equity market and fan et al. (2015) in most of the 34 stock markets studied. table (2) also displays that for the most beneficial 6-month/6-month strategy, the beta(a measure of the systematic risk) of the winner portfolio is more than the beta of the loser portfolio in the capm and the three factors model of fama and french (1993). these two betas are positive and statistically significant at the 1% level. this indicates that for the market factor; the winner portfolio is riskier than the loser portfolio. for the 6-month/6-month strategy, the positive difference in the beta is statistically significant. therefore, market risk can justify the exceed performance of the winner portfolio. for the size factor, the factor loading on 𝑆𝑀𝐵𝑡 for the winner portfolio is negative and significant at one percent level. while the factor loading on 𝑆𝑀𝐵𝑡 for the loser portfolio is positive and statistically significant at 1% level. this signifies that the winning companies are bigger than the losing companies. the negative divergence in the size risk exposure is statistically significant. consequently, the size risk can justified the exceed performance of the winner portfolio. for the book market factor, the factor loading 𝐻𝑀𝐿𝑡 for the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 26 momentum portfolio is not statistically significant. this means that the risk associated with the book to market factor cannot explain the momentum return. table 2. parameters estimates of the capm and the three factors model of fama and french (1993) capm three factors model of fama and french (1993) 𝛼𝑃 𝑏𝑃 𝛼𝑃 𝑏𝑃 𝑠𝑃 ℎ𝑃 winner 0.0036 (1.50) 1.4765*** (15.72) 0.0045** (2.14) 1.5137*** (13.45) -0.2416*** (-2.79) -0.1468 (-1.20) loser -0.0023*** (-2.92) 1.0203*** (12.29) -0.0033*** (-3.73) 1.0225*** (10.33) 0.2415*** (3.15) 0.0754 (0.70) momentum 0.0059** (2.37) 0.4562*** (2.82) 0.0078*** (3.18) 0.4912** (2.58) -0.4831*** (-3.28) -0.2222 (-1.06) note: t-statistics are in parentheses, with two, and three asterisks denoting significance at the 5% and 1% levels consecutively. seasonality in momentum return the momentum return of the most profitable 6-month/6-month strategy in january and all months except january is displayed in table 3. from this table, we note that the january momentum return is bigger than the momentum return outside january. more specifically, the winner portfolio significantly outperforms the loser portfolio exceptionally during january. this result indicates that the momentum phenomenon detected in the tunisian equity market is not the manifestation of the january effect. table 3. momentum return in january and outside january january outside january 0.0134*** (5.02) 0.0087*** (3.18) note: t-statistics are in parentheses, with three asterisks designating significance at 1% level. momentum return and trading costs table 4 presents the net return for three portfolios (winner, loser, and momentum) of the most profitable 6-month/6-month strategy. from this table, we see that the quoted spread for the loser portfolio is higher than the quoted spread for the winner portfolio. this result means that loser securities are less liquid than the winner securities. table (4) also displays that the net returns for the winner and loser portfolios are non-negative and statistically significant. however, the net return for the momentum portfolio is not statistically significant. this indicates that trading costs in the form of quoted spread eliminate the statistical significance of the momentum return of the most beneficial 6-month/6-month strategy. therefore, an investor can’t make a profit by exploiting the momentum phenomenon in the tunisian equity market. our findings are in line with those found by cleary and inglis (1998) in the canadian market, lesmond et al. (2004) in the american market, and boujelbene et al. (2008) in the french market. in summary, the neoclassic efficient market hypothesis was confirmed by our findings. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 27 table 4. momentum return and trading costs raw return trading cost net return winner 0.0183*** (5.43) 0.0026*** (28.14) 0.0157*** (4.72) loser 0.0092*** (3.08) 0.0032*** (30.12) 0.0060* (1.74) momentum 0.0091*** (3.66) 0.0058*** (35.06) 0.0033 (1.49) note: t-statistics are in parentheses, with one, and three asterisks denoting significance at the 10% and 1% levels consecutively. conclusion this article analyses the profitability of momentum strategy over various time horizons between april 2013 and march 2020.also, we evaluate whether both models (capm and the three factors model of fama and french (1993)) completely captured the momentum return. furthermore, we examine possible seasonality in the momentum return, and then, we test if the momentum returns can resist trading costs. employing the methodology of jegadeesh and titman (1993), we document that all momentum strategies are beneficial. they generate positive and statistically significant returns. the most profitable 6-month/ 6-month momentum strategy experiences a return of 0.91% per month. our findings are in line with zoghlami (2011) in the tunisian market. also, we report that the capm and the three factors model of fama and french (1993) cannot capture momentum return. the abnormal returns (alpha coefficients) of the momentum portfolio in these two models are non-negative and statistically significant at one percent level. furthermore, we document that the momentum phenomenon detected in the tunisian market is not the manifestation of the january effect and then, we find that that trading costs in the form of quoted spread eliminate the statistical significance of the momentum return of the most beneficial 6-month/6-month strategy. therefore, an investor can’t make a profit by exploiting the momentum strategy in the tunisian context. in summary, the neoclassic efficient market hypothesis was confirmed by our results. in our future research, we propose to investigate the under-reaction hypothesis as a behavioral reason for the momentum effect in the tunisian context. references adrianus, r., & soekarno, s. 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(2011). momentum in the tunisian stocks returns: identification of some risk factors. journal of applied finance and banking, 1(2), 207-229. 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/) indian journal of finance and banking vol. 5, no. 2; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 98 measures to improve life insurance profitability in india ramesh kumar satuluri research scholar department of management gitam university hyderabad, india e-mail: ramesh.satuluri@exidelife.in raavi radhika associate professor department of management gitam university hyderabad, india e-mail: radhika.ramanchi@gitam.edu abstract with ~32 crore policies in-force and over ~11000 branches across locations, life insurance industry in india is the 10th largest across the globe in terms of premium contribution. india's share in global life insurance market was 2.73% during 2019. the life insurance industry is also one of the largest employers with both direct and indirect employment. life insurance penetration in india is at 2.82% and density at 58 usd, which is way below the global statistics. this gives immense opportunity for global players to venture into the indian insurance market. with a proposal for an fdi hike to 74%, we are expecting many big players to enter the indian market. however, the attractiveness of the industry not depends solely on the market opportunity but also on the bottom line, which is profitability. indian insurance industry is one of the highly regulated markets across the globe and perceived to be the lowest profit-making insurance market. hence, the need for the study to improve the profitability of life insurance companies in india through structural and policy measures. keywords: life insurance, profitability, profit, insurance industry, insurance. jel classification codes: g22, i13, o16, a10, e22, g10. introduction indian insurance industry remains the most attractive destination for foreign players with penetration as low as 3.76% as on 2019. opening the sector for private players can be traced back to the passage of irdai act 1999, which allowed foreign players to tie up with domestic insurers in setting up their operations. as of now, life insurance industry has 24 players, which include the government owned life insurance corporation. in spite of lic being operational for 44 years i.e. from 1956 to 2000, our penetration remains one of the lowest across the globe. total collected premium for life insurance industry grew from 34898 crores (fy 2000-2001) to 572910 crores (fy 2019-20) at a cagr of https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 99 15%.with the advent of private insurance companies, industry could witness greater awareness being created for life insurance products. product innovation is the other area, which had picked up after competition between insurance players. insurance industry is capital-intensive industry. foreign companies in addition to technological innovation have also brought-in capital, which is invested in setting up new branches and building distribution. in order to encourage digital way of selling, support innovation in product designing, irdai formed a sandbox committee wherein approvals were accorded on use and file concept. today life insurance industry is next to banks in terms of pooling savings across the country. financial institutions play a vital role in funding fiscal deficit of government of india. goi primarily depends on savings and remittances to fund the ongoing projects and handle any balance of payment crisis. gross savings rate in india by march’19 remained at 29.7%. india as a country always remained a net saver and financial institutions remain at the forefront in funding country’s infrastructure plans. as on 30 september’20, investments in infrastructure exceeded 4.27 lakh crores from the collected premium of life insurance industry. in order to encourage more foreign direct investments in insurance sector, govt. passed insurance ordinance in 2015 to increase fdi from 26% to 49% and 100% fdi in insurance intermediaries. this prompted many existing foreign partners to increase their stake in respective joint ventures. in the recent budget, goi further proposed a hike of fdi in insurance to 74%.also for most of the insurance companies who have not listed on bourses, this has come at an apt time to unlock their firm’s value by diluting their stake to existing or new partners. life insurance industry also is one of the largest employers with 2.93 lakhs direct employment and another 23.9 lakhs into indirect employment as on 30 september’20. literature review bidabad (2019) researched on design of new insurance products in rastin profit and loss sharing (pls) banking. these products can be used in both banking operations as well as conventional business and financial arrangements. researcher highlights the importance of designing right product, which meets customer needs, and at the same time, these products influence the profitability since these products are offered by insurance company’s basis their actuarial calculation once the design work is completed by the bank. choudhury, singh, kajol and rai (2020) researched on the theme “empathy of the bancassurance channel: an empirical study”. researcher in this article highlighted the empathy exhibited by banc assurance channel on customers. finally researcher concludes that customer opine that banc assurance channel have a high level of empathy towards customers. hence, insurance companies can utilize banc assurance as the distribution model to sell their products and services thus increase productivity and higher profitability. tanwar, seth, vaish and rao (2020) conducted study on “revisiting the efficiency of indian banking sector: an analysis of comparative models through data envelopment analysis”. researcher examined the efficiency of overall banking industry using data envelopment analysis (dea). researcher ranked banks basis the efficiency parameters. the results showed that most of the indian banks fall on the efficient side or are near to full efficiency. banker’s efficiency is directly proportionate to the profitability of banks. diepiriye (2018) conducted study on “international financial reporting standards and value relevance of accounting information: a mult-institutional perspectives from nigeria”. the study was primarily to understand the correlation between ifrs and the firms operating in nigeria including insurance companies. the study concludes that there is a significant relationship between ifrs and value relevant of accounting information of firms in nigeria. as of now indian insurance industry, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 100 follows non-ifrs accounting and ifrs-17 implementation is expected to kick off from1st april 2023. implementation of ifrs-17 will have a direct and positive bearing on profitability of life insurance companies in india. gulati, nancy (2015) researched on “operational efficiency of life insurance companies in india”. researchers attempted to present the operational efficiency and revenue efficiency of the selected group. data considered for this study was between 2001 and 2012 and the sample size of 12 insurance companies considered for the study. for measuring operational efficiency, researches used caramel method. basis the research, they concluded that in order to bring-in efficiency in life insurance companies, researchers suggested that companies will have to go for more equity capital, windup unprofitable branches, diversify investment portfolio and adopt cost effective distribution system. researchers also made few suggestions to irdai viz. enhancing fdi to 49%, new regulations in areas of product pricing and risk evaluation to place them on a better situation in terms of solvency ratios. hamsini and rashmi (2019) researched on “a study on effectiveness of the crop insurance in karnataka -with special reference chikmagalur district”. in this study, the researcher highlighted that buying crop insurance was dependent on factors like come, availability of loan on crop, financial security and awareness about the products. finally, the researcher concluded that crop insurance indeed is helping farmers to safeguard themselves against unforeseen events. profitability during the financial year 2018-19, life insurance industry reported net profit of 8435.81 crore as against 8511.99 crore in 2017-18.out of the twenty four life insurers in operations during 2018-19, twenty companies reported profits. lic reported net profit of 2688.50 crore i.e. an increase of 9.8 per cent over 2446.41 crore in 2017-18. on the other hand, private insurers reported a net profit of 5741.31 crores a decrease in profit from the previous year 6064.32 crores. however all these companies reported only accounting profit and the accumulated losses are mounting which is a major cause of concern. suggestions in order to enhance profitability of life insurance companies in india, following suggestions are recommended and the same can be categorized basis the stakeholder. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 101 figure 4.0 stakeholders treatment of acquisition cost and its impact through ind as since indian life insurance companies do not follow ifrs accounting, which allows for deferring the acquisition cost, every new business written without sufficient solvency is a business strain. irdai should standardize the accounting practices and align them with global practices wherein the initial acquisition cost is deferred so that companies would make profit from the accounting perspective. non-ifrs accounting practice would discourage insurance companies to infuse further capital as everything is reflected in the accounting year. as per the earlier draft exposure from irdai, life insurance companies were supposed to implement ind as (indian accounting standards) effective 1 april 2020. now it is deferred further since ifrs-17 was going through certain changes and the same will be notified by mid-2020. hence, irdai wanted to hold the implementation until they get clarity on ifrs so that necessary changes can be made in ind as. it was also deferred considering the cost involved and the asset and liability mismatch in the accounting process. this is very crucial for insurance companies to register profits as non-ifrs method of reporting entire cost in the same financial year is discouraging insurance companies from expanding their branch network and operations. foreign direct investmenta key determinant for insurance penetration fdi in insurance remained at 49% for some years. however, the recent budget proposed a hike to 74%, which is a welcome. fdi in insurance intermediaries is at 100%. with 49% in place for some years, there was a greater amount of euphoria and excitement in the industry with the expectations that foreign partners will enhance their stake. to an extent, it has happened in few cases but indian partners were consciously offloading their stakes only to book profits than investing the stake money in building distribution. investing in distribution had hardly taken place and witnessed many foreign partners exiting from insurance market to name a few ing group, anp, aig, newyork etc. this has come as a jolt to the efforts of goi in attracting foreign participation. insurance industry in india is always perceived as the least profit making insurance industry across the globe due to stringent regulations, ultra-conservatism and the accounting practices. india had 240+ insurance companies before 1956 and eventually they were merged with the lic act. when goi started privatization in life insurance industry, they were also expecting similar kind of participation from various companies. however, eventually ended up having only 24 companies and do not see any other companies keenly interested in setting up their operations. this issue needs to be drilled down further to understand as to why companies are hesitant to start operations in india. an advance economy like usa has 800+ life insurance companies and taiwan has close to ~20% insurance penetration. india is no way closure to these figures. uniform commission structure: regulator should ponder upon introducing uniform commission structure. this will to an extent reduce mis-selling and average out the initial expense incurred at the time of sourcing the policy. it also should help the agent to focus more on renewals since the spread of commission is even. product portability: regulator should look at allowing portability of standard products, which will encourage companies to maintain higher standards of precision on customer retention. this should also government of india (goi) irdai (regulator) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 102 reduce mis-selling since the end objective is to retain customer for a long term. product portability can go together with implementation of ifrs, which allows companies to amortize the cost of acquisition and with minimum lock in period to ensure that the expense spread is recovered. mandatory listing provision: recent amendment has removed the mandatory listing requirement for insurance companies. we need to repeal the condition as mandatory listing requirement will keep companies on guard and alert to meet the market regulator requirements. this will continue to bring in efficiency and cost containment. higher equity exposure: irdai should allow change in investment guidelines to increase equity exposure from existing 15% to 25%. this should allow companies to better their investment return without taking huge risk. since most of the contracts are long term in nature, higher exposure to equity will not be a risky proposition and the market volatility would be averaged over a period. higher equity exposure is also required due to prevailing interest rates. interest rates are expected to dwindle further, which may affect the return assumptions made at the time of product design. need for co-insurance than reinsurance: irdai needs to encourage through regulations for companies to accept more risk than ceding to reinsurance companies. this way companies will fulfil the basic responsibility of accepting risk. if at all a need arises, companies should be allowed to go ahead for co-insurance among themselves than reinsurance. this way premium is being distributed among themselves and companies with higher solvency margins can accept greater risk than idling the solvency margin. amendment of insurance act for surplus distribution: presently industry has a portfolio of products with an equal contribution from both par and non-par products. as per the act, surplus distribution on par products is 90:10 which means 90% of surplus after reserving needs to be distributed to policyholders and 10% goes to share holder account. instead of 90%, the proposal is distributing 85% to policyholders and diverting another 5% to shareholders account thus reducing the break-even phase for li companies. develop digital distribution strategy digital signifies an incessant form of disruption to present, new business models, products, services or experiences enabled by data and technology. efficiently leveraging on digital revolution can let life insurance companies lessen customer service costs while augmenting both customer satisfaction and retention. currently insurance companies are sourcing only term plans through online sales. since it is only beginning, industry cannot compare the quantum of premium sourced through online, since term plans ticket size will be very low. biggest advantage here would be reduced cost of acquisition, which can be passed on to customers, which in turn will enhance top line and bottom line. insurance companies have a positive aspect in these pandemic days. with social distancing as a norm, companies are witnessing a renewed vigour on online transactions. digital transformation in life insurance sector is initiated both the at the payment space and on distribution front. insurance companies https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 103 implement data analytics and technological innovation life insurance industry always remained highly competitive. in addition, amidst this uncertainty and inflated costs, the only tactic to grow both top line and bottom line is by acquiring quality customers and retaining them. by identifying quality customers and retaining most of them requires a focused approach and this is possible only through analytics viz., understanding customer priorities, behaviour and buying patterns. analytics can be defined as studying the historical data to identify a particular trend and predicting the future. main aim of analytics is to study the behaviour of the customer and manufacture a product basis his/her need. identify areas for expense reduction/efficiency build up according to analysis, a life insurer can enhance its return on equity by 2.5 percent through cost cutting and a further 0.6 percent by optimizing commission structures and processes. it is simply that cost reduction must be seen at the strategic level. companies of course, typically have a number of costreduction programs underway at any point of time. nevertheless, these are very limited in scope. what needs to be discussed here is perpetual cost containment and that denotes rationalizing and restructuring the operational model. embedded value and value new business embedded value is the present value of future profits plus adjusted net worth of the company. it is one way of valuing the organization. embedded value will consider all in-force policies and the net worth of the organization for a particular period. in-force policies keeps on going up on a regular basis as well as your net worth thus enhancing your embedded value. embedded value will not factor new business or forthcoming business and goodwill of the organization. it will consider only inforce policies and net worth. hence, once the embedded value is calculated generally organizations will have two or three multiple on embedded value as the valuation. higher multiple will factor future business and the goodwill of the organization. companies need to ensure that the inforce policy base keeps on going up without causations. on the other hand, value new business is the present value of profit for the business written in a particular period. vnb is at product level and ev is at organizational level. vnb is based on assumptions made pertaining to persistency, mortality and expenses and the final return post that. in simple terms if a contract is written for rs.100 and company is going to make rs.20 at the end of the contract then vnb margin is stated as 20%. vnb margin generally is higher for non-participating plans like protection and ulip plans. this is so because there is no surplus distribution for non-par plans as the surplus money is straight away booked as profit and transferred to shareholders account. companies will have to focus more on inforce policy base along with net worth and start greater mix of products with higher vnb margins. once this is assured then industry can witness quality agents getting into profession leading to higher productivity and retention thus having a positive impact on entire profitability. conclusion initially indian life insurance companies were completely focused on business expansion and driving revenue targets, which is top line. however, with the regulatory interventions and expectations from shareholders, insurance companies started emphasizing on bottom line. also with the latest regulation on expense management from irdai, focus completely shifted to profitability. vintage companies with huge renewal base are surviving because of collectibles. challenge lies for new companies, which do not have renewal base but also need to write new business premium. industry is also not seeing much https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 104 investment in distribution from insurance companies in india. with the advent of fdi, industry expected huge pump in of capital and some amount getting into distribution. however, companies have not seen much progress in this case. companies with banc assurance tie up continue to generate good revenue with low cost. however, the fact remains that industry does not have many insurance companies, which have banc assurance tie up. irdai proposed open architecture wherein banks will have tie up with multiple insurance companies. in addition, as of now it is only given as an option for insurance companies to decide whether to have tied structure or follow open architecture. all insurance companies promoted by banks very well oppose this model. hence, there is no much progress made on this open architecture. lic is the only exception, which has one of the lowest opex to total premium ratio in spite of it completely depending on agency model. scope for further research industry does not have much research happening on profitability of life insurance companies at advance level. currently many researches restricted their analysis only to ratios or to an extent of applying few statistical tools with the available data. in addition, they do not have the entire data available on public disclosures viz. surrender profits made by companies, mortality experience of individual companies, underwriting profits made by insurance companies. earlier researchers also choose a particular period to carry on their analysis on profitability, which may not give clear picture on profit. this is due to changing regulations on products and expense at regular intervals. companies do not have any research on life insurance profitability since 2000 to till date and this is a gap, which was identified in this research. organizations like irdai and iib (insurance information bureau) should give enough data point to researchers to carry on advance research on profitability aspects. there is no much research happening on embedded value. while embedded value may not be directly linked to profitability but the fact remains companies make profit primarily when they off load the stake. in addition, with ev valuation wherein companies are expected to offload by 3-4 times of ev value it is pertinent to have thorough understanding on the way ev value is arrived at. any research, which is done at a particular period, is bound to be fragmentary and incomplete due to changing regulations. scope for further research also will be enhanced once majority of life insurance companies is listed. once companies are listed then the information on profitability factors will become available to researchers which otherwise remain concealed and unavailable. references bidabad, b. (2019). insurance products in rastin profit and loss sharing banking. indian journal of finance and banking, 3(1), 40-54. https://doi.org/10.46281/ijfb.v3i1.344 choudhury, m., singh, r., kajol, k., & rai, s. k. (2020). empathy of the bancassurance channel: an empirical study. indian journal of finance and banking, 4(4), 30-47. https://doi.org/10.46281/ijfb.v4i4.909 diepiriye, d. (2018). international financial reporting standards and value relevance of accounting information: a mult-institutional perspectives from nigeria quoted firms. international journal of accounting & finance review, 2(2), 1-14. https://doi.org/10.46281/ijafr.v2i2.25 gulati, n. c., & jain, c. m. (2011). comparative analysis of the performance of all the players of the indian life insurance industry. vsrd international journal of business and management research, 1(8), 561-569. https://doi.org/10.46281/ijfb.v3i1.344 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 105 hamsini, p. h., & rashmi, r. (2019). a study on effectiveness of the crop insurance in karnataka with special reference chikmagalur district. indian journal of finance and banking, 3(2), 10-13. https://doi.org/10.46281/ijfb.v3i2.393 tanwar, j., seth, h., vaish, a. k., & rao, n. v. m. (2020). revisiting the efficiency of indian banking sector: an analysis of comparative models through data envelopment analysis. indian journal of finance and banking, 4(1), 92-108. https://doi.org/10.46281/ijfb.v4i1.585 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/) indian journal of finance and banking vol. 6, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 58 outward foreign direct investment: emerging economies’ home country determinants dr. sheeba kapil professor hod, finance indian institute of foreign trade ministry of commerce delhi, india e-mail: sheebakapil@iift.edu puneet kaur dhingra research scholar indian institute of foreign trade ministry of commerce delhi, india e-mail: puneet.kaurdhingra@gmail.com abstract the tendency of firms from emerging economies to invest abroad has increased significantly during the last two decades. despite this trend, comprehensive literature survey research on macroeconomic determinants and antecedents of outward fdi from emerging economies is still underrepresented. the purpose of this paper is to give a comprehensive understanding of home country level factors’ impact on outward fdi from developing countries through a systematic review of past researches on ofdi’s macroeconomic determinants of home economy. the findings reveal that the most important determinants are, home country market size and openness of home country towards internationalization. however, some researches posted contrasting results for the impact of home country’s interest rates, human capital and technological capability on ofdi from emerging economies. this study also points out that emerging economies suffer from shortage of skilled personnel, thus making human capital an essential push factor for ofdi. keywords: emerging economies, international investments, outward fdi, internationalization, home country macroeconomic determinants. jel classification codes: f21, f23, p45. introduction the basic of the concept outward foreign direct investment derives from the understanding of the basic motivations that causes a firm to invest overseas. there are a number of theoretical studies examining foreign investments and their underlying motivations. dunning (1973, 1977), vernon (1966) and hymer mailto:sheebakapil@iift.edu mailto:puneet.kaurdhingra@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 59 (1960) did major research on the motives behind investing abroad, subsequently followed by numerous qualitative and quantitative researches. cross border investment flows plays a major role in accelerating economic development of countries, especially in emerging economies (denisia, 2010). as ofdi from emerging nations continue to expand at an extraordinary level over the past two decades, motivations causing ofdi have become academic study’s focus for researchers. emerging economies’ outward foreign investments mushroomed by tremendous 49 percent during 1991-1999 and continued this league with whopping 47 percent growth during 2000-2007 (pradhan, 2011). diverging from emerging economies, ofdi from developed economies’ growth dipped from 60 percent to 22 percent amidst these two periods (pradhan, 2011). developing economies contributed a share of 6.2% in 1990 to total stock of world’s ofdi, and this contribution rose to 9.3% in 2000, and further escalated to 14.8% in 2010. ofdi’s growing contribution to developing economies’ gdp is indicative of proliferating overseas investment which developing economies are indulging in either in form of greenfield investments or brownfield investments. several studies have explained existing theories of internationalization (lecraw, 1977; wells, 1983; lall, 1983). in contrary to this, the behavior of emerging economies’ odfi seemed to defy these mainstream theories. their strategies and push forces for expansion differed significantly from those of developed economies, thus requiring a refined version of existing theoretical literature (buckley et al., 2007; luo & tung, 2007; child & rodrigues, 2005; ramamurti, 2009). though past studies over last two decades have generated sizeable wealth of knowledge on emerging economies’ ofdi, but findings from these researches are fragmented and lack necessary integration and consolidation. this study systematically combines pertinent qualitative and quantitative research work to develop a single expansive substructure. thus, this paper’s key focus is to present a meta-data view on the effect of home country level determinants (macroeconomic) on ofdi from emerging nations, binding all the inferences in an all-inclusive manner. gaps in the extant research have also been highlighted for focusing future research efforts towards substantial matters providing essential premise for every firm’s economic decision making, involved in cross-border investments. methodology framework this is a literature survey study of home country macroeconomic determinants of ofdi from emerging economies, where available extant literature was complimented with existing empirical researches to get a deeper insight using a systematic literature review approach. systematic reviews are evidence-based approaches which allows to identify key scientific contributions in a particular area. they allow examination of the strength of already published evidence with an unbiased approach. we have adopted a systematic methodology for identification of research for review purpose, refer to figure 1. our search was limited to research papers in peer reviewed journal articles, as these resources are considered as certified knowledge. in the first step, all articles were searched with the help of key words search strings, such as “outward fdi” or “ofdi*” or “macroeconomics home country determinants*” and “emerging economies ofdi” or “ofdi determinants*”. the asterisk (“*”) was used at the end of the search keyword to cover a wide-ranging result. we got 1545 articles as a result of this key word search. we shortlisted the results obtained on the basis of carefully chosen inclusion and exclusion criteria, mentioned in the table 1 given below in our step 2. for qualifying criteria, peer reviewed articles were taken which were published in english language, also as our research’s aim was to reflect the consolidation of studies covering determinants of ofdi from emerging economies, time period of last two decades was chosen as during this period ofdi flourished from emerging economies, hence articles older than 25 years were eliminated. also, research papers selected were credible as only abdc listed, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 60 ugc listed, scopus and emerald database were retained. articles where the concept of ofdi was only touched upon were also excluded. also, any duplicate results produced during key word string search were removed. in the third step of methodology, thorough analysis of 300 articles was done. research papers delving into deep insights relating to analysis of country level determinants of odfi were selected. more focus was on papers relating to emerging economies’ ofdi and their underlying motivations, though majority of the studies centered on indian and china. finally, after getting 127 articles, in the fourth step, comprehensive reading of full papers was undertaken. at the end 42 papers (mix of empirical and literature review based) were finally chosen for seeding the premise of this research based on the country level push factor variables. table 2 provides with a clear picture of distribution of selected 42 articles as per publication journals. figure 1. systematic literature review process table 1. step 2 elimination criteria table 2. distribution of articles per journal a metadata analysis of extant research work has been carried out, so that key trends could be identified and synoptic picture of the work done till date can be drawn. inclusion criteria exclusion criteria peer-reviewed english language journal ofdi’s concept was merely touched upon, and no detailed analysis related to it time period (1997-2017) credibility of publishing could not be ascertained abdc listed, ugc listed, scopus and emerald database researches were older than 25 years focus on determinants of ofdi duplication of research articles journal type journal name frequency core journals transnational corporations 6 international journal of international business studies 5 journal of world business 4 international journal of social economics 3 international journal of emerging markets 3 oxford development studies 2 related journals 19 journals (with 1 relevant paper each) 19 total 42 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 61 outward foreign direct investment determinants of ofdi from emerging economies over the years, many researchers have come up with theories or applications of the existing theories to explain the growth trajectories of these ofdis, effect of various factors on expansion of emerging countries’ multinationals (individually or in certain groups), their motives, challenges and spillovers. hymer’s work in 1960 made a concrete attempt to elucidate the emergence of ofdi. according to his research, major motive behind these trans national firms were to gain opportunities out of oligopolistic control of the market and locational advantages. dunning again in 1980 went to explain in length the determinants of outward foreign investment through his eclectic theory, popularly known as o-l-i paradigm, which primary constitutes of 3 pillars, ownership advantages, location advantages and internalization advantages. determinants of ofdi from emerging economies has be categorized in two sub divisions, macroeconomic determinants and firm level determinants. macroeconomic determinants are better known as external factors as these are common to all the firms in a particular economy. whereas firm level determinants are known as internal factors as they are specific to a particular firm and are internally developed advantages. this paper focusses on skimming studies done prior with respect to home country characteristics serving as push factors for firms undertaking outward cross-border investments. home country determinants every mnc is constantly interacting with its home and host country environment, and hence these factors are responsible for creating a conducive atmosphere for overseas investments to take place. these country specific factors (home country and host country) are dynamic in nature, i.e. they continuously evolve with the country’s level of development, as a consequence of its policies, natural endowments, market potential and action of economic agents. firms utilize these country specific assets to develop and organize their own production process efficiently, so as to serve domestic and foreign markets profitably. each home country determinant has been discussed in detail below. market size home country’s development related variables serve as explanatory variables for any country’s investment outflows. there exists a strong positive relationship between development level of home country and its ofdi (chen, 2015). economic development enables a firm to develop competence and specific strengths which can be fruitfully exploited by investing abroad. empirical studies done on developed countries by barry, görg, and mcdowell (2003), bellak, leibrecht, and riedl (2008), and buckley and castro (1998) as well as on a mix of developed and developing countries by dunning and narula (1994) confirm the existence of association between market size and outward investment flows. market size of a country is indicated by its gdp. hence when a firm is operative in a home country marked by high gdp, it is successfully able to exploit economies of scale. actual market demand could not be measured by gdp of a country, hence per capita gdp has been taken as a variable in many studies to measure the size of market demand or consumers’ economic well-being of a home country (buckley, cross, tan, voss, & liu, 2006; deng, 2004; taylor, 2002; zhang, 2003, kayam, 2009), while kyrkilis and pantelidis (2003) took real gnp in their research as a proxy for income level and structural transformation of a home country. bhasin and jain (2013) contemplated a negative correlation between ofdi flows and gdp per capita of home country, stating that a country will be sought to international investments only when its home demand structure represented by buying potential of consumers is not able to justify economies of scale for that firm, but the results of the study were positive and significant, similar to those of chen (2015). kayam’s (2009) empirical results for transition economies supported the proposition put forward https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 62 by bhasin and jain (2013), justifying that as economic wellbeing of consumers of home country improves, their purchasing intensity from firms within the home economies also increases, thus reducing the firm’s willingness or need to invest abroad in order to exploit their ownership advantages. difference in their results could be attributed to the proxies they have taken to represent market size. interest rates capital abundance is a mandate for making investment overseas, especially when investment is made in capital intensive sectors. amplitude of capital is directly linked with the prevailing interest rates in the home economy, bearing an inverse relation. as per krykilis and pantelidis (2003), low interest rates in home country, results in capital abundance and thus reduces the opportunity cost of capital. deducing from the above statement, companies with large capital base would hunt for profitable investment ventures abroad, this leads to increase in the investment flows abroad, proposing negative association between home interest rates and ofdi flows. pantelidis and kyrkilis (2005), stated that a firm always chooses to invest in those projects that offer higher expected return over its cost of capital. and when cost of capital of a firm decline, expanse of economically viable projects increases, allowing firms to make investments. also, if the cost of borrowing is lower, leverage exposure of company may rise, thus leading the firm to pursue larger investment projects. hence applying this phenomenon to foreign investments, as the cost of borrowing decreases in home country, the opportunity cost of capital becomes lower subsequently and hence investing abroad becomes more attractive and viable. empirical research finding of pantelidis and kyrkilis (2005) denotes insignificance of interest rates for developing nations, while for middle-income and developed economies, it’s a significant determinant for ofdi flows along with expected sign (i.e. negative). these results are in sync with their earlier research conducted in 2003, with a sample of five european and five non-european countries. haiyan’s (2017) research gave contrasting outcomes to earlier researches, while interest rates were proved insignificant for developed countries, the same was positively significant for brics economies, while as per bhasin and jain (2013) empirical work, interest rates were eliminated in pca (principal component analysis), thus reflecting on their irrelevance for asian economies ofdi flows. hence the impact of home country’s interest rates on emerging nations’ ofdi is still unclear, thus extending scope for future research. variation in results could also arise due to choose of different sectors/industries in an economy, as capital requirement is generally less in service sector related investments as compared to manufacturing sector related ones. exchange rate currency appreciation facilitates investment flows overseas, as the buying capacity of the currency increases in real terms. aliber (1970) encompassed that companies whose countries’ currency is strong, have better financial backing for supporting their foreign investments than companies whose countries’ currency is relatively weaker. as a consequence of appreciation of home economy’s currency, the capital requirements of investing abroad lowers, thus enabling easier capital acquisition than in case of depreciated home currency. along with this, appreciation of home currency also curtails the relative attractiveness of exports as a mode of expanding overseas, thus companies turn towards choosing ofdi for exploring markets abroad. bhasin and jain (2013) also support this inference and states that “appreciation of the home country currency makes exports less competitive as they become relatively expensive for foreign buyers. so ofdi becomes cheaper mode for servicing foreign market.” empirical research of pantelidis and kyrkilis (2003), with a sample of five european and five non-european economies, resulted in a significant and positive impact exchange rate on almost all countries except france, singapore and brazil, where it is negatively significant. this indicated an https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 63 increase in ofdi flows due to depreciation in currency, because weaker home currency could be compensated by decline in labor cost and increase in productivity and hence in this scenario, exportoriented fdi may emerge as an effective long-term measure to secure foreign market share. another empirical work of pantelidis and kyrkilis (2005) proved that strong home currency has a positively significant impact on ofdi flows from advanced economies, while it’s insignificant for ofdi from middle-income and developing economies. and as per bhasin and jain (2013) empirical work, like interest rates, strong home currency was eliminated in pca (principal component analysis), thus reflecting on their irrelevance for asian economies ofdi flows, while the result of saad, noor, & nor, (2014) empirical research was supportive of positive and significant nature of strong home currency for ofdi flows from malaysia. with all these varied results, ambiguity regarding the consequence of appreciation of home country’s currency on ofdi still persists. human capital competent human capital possession gives a company powerful edge which makes them capable of acquiring various competitive advantage. all major business operation activities like management, marketing, organization and r&d functions mandates the presence of skilled and competent personnel. as per tolentino (2008) skilled and educated labor is a mandatory requirement for majority of managerial functions, and opulence of this factor is an eminent determinant pushing home economy firms to make foreign investments. proportion of higher education personnel in the population of a country gives an approximation of the human capital factor in that country (pantelidis & kyrkilis, 2005; bhasin & jain, 2013). saad et al. (2014) in their research, analyzed the home country determinants for ofdi flows from malaysia, and states that investment flows overseas from developing countries is a consequence of lack of management know-how knowledge, thus driving malaysian firms to invest abroad in order to overcome this prevalent limitation. emerging economies suffer from shortage of skilled personnel, thus making human capital an incompetent push force for ofdi. this creates an immediate need for these economies to identify ways to boost the development of sound education infrastructure. while results of both the researches of pantelidis and kyrkilis (2005 and 2003), points towards the inference that competent human capital of home country is push factor for advanced countries while it has proved to be an insignificant driver for developing and middle-income countries. openness of economy smooth and voluminous flow of foreign direct investment is a direct consequence of the degree of openness of an economy towards unrestricted capital flows. there are few reasons leading to this, firstly, liberal capital regime with absent or minimal control promotes greater flow of funds across economies (scaperlanda, 1992). secondly, an economy with existing export orientation allows companies to gather knowledge about demand and supply conditions of proposed host destination, their legal system, prevalent business practices, know how required to sustain foreign operations, etc. all these constitutes the necessary background for switching of internationalization mode from exporting to setting up or acquiring business facilities overseas (kogut 1983; buckley et al., 2007, goh, 2011). as per buckley et. al (2007), ofdi is also viewed as a supportive strategy to give some backing to domestic exporters and stimulating higher earnings for them. thirdly, companies may resort to investing in host economies whose export give a tough competition to native firms of home economy. here ofdi takes a pure form of retaliation to cope up with import competition (pantelidis & kyrkilis, 2003; banga, 2007). evidence from empirical researches of das (2013), kyrkilis and pantelidis (2005) and bhasin and jain (2013) indicate the positive and significant impact of trade openness on ofdi flows. however as https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 64 per kyrkilis and pantelidis (2003) and haiyan’s (2017) studies, no significant outcomes for trade openness were found in case of developed countries (except germany). technological capability firms’ ability to indulge in organization and production of technological input is in turn dependent upon the firms’ home country environment, in terms of its legal and patent systems, presence of skills and inputs, government policies, market structure, scientific research, incentives for education. hence this emerges as a critical advantage of firms to make foreign investments, as firms’ technological capability helps them build ownership-specific advantages, upon which the firm can capitalize to invest abroad. the new competitive advantage developed by the firm could be in form of a new cost saving technique, a differentiated product, or an efficiency improving organization method. if used only once, these competitive advantages will be underutilized and in order to extract full potential (i.e. increased revenue flows with nil marginal cost), other modes of exploiting such resources are required and expanding overseas is an efficient mode for the same. in case of developing countries, minting of new technologies may not always be possible, but framing policies for building technological capacity may fetch positive spillovers. lall (2001) stated that technological advancement heavily relies on technological efforts made and firms’ absorption capacity. thus, to benefit from the diffusion of international technology stimulated by globalization, making indigenous innovation efforts became mandatory for emerging economies (das, 2013; fu, pietrobelli, & soete, 2011). therefore, countries making policies supportive of such technological efforts, will be more successful in creation of country-specific competitive advantages from international technology diffusion, thus facilitating outward investment flows. in contrast to the above arguments, saad et al. (2014) postulated that developing economies facing disadvantage at the technological front, make outward investments in order to compensate for the same by merging with or acquiring foreign firms (child & rodrigues, 2005; luo & tung, 2007; rugman & li, 2007). past empirical studies point out towards the positive correlation between technological capability and investment overseas. kyrkilis and pantelidis (2005) found that technological capability of home country is a significant determinant for advanced countries, while it has no significance in case of middle income and developing countries. while das (2013) and kyrkilis and pantelidis (2003) found impact of technological capability of home country on its ofdi to be positively significant in case of developing countries, saad et al. (2014) proved it to be negatively significant in case of malaysian ofdi. hence the net impact of this determinant is not uniform among the past studies. evolution of methodologies used for ofdi studies outward foreign direct investment has been a subject of interest over the past two decades. there have been numerous theoretical and empirical articles focusing on the macroeconomic determinants of ofdi, including home as well as host country factors. the purpose of this paper is to present a systematic review of the extant literature on ofdi home country determinants, which will be incomplete without discussing the econometric tools adopted by various researchers in similar studies. therefore, this section aims to provide a synthesis of statistical methodologies used in the selected empirical papers, published with in last two decades, i.e. 1997 to 2017. going by the most common or popular techniques among the papers reviewed are ordinary least squares (ols) and pooled ordinary least squares (pols). pantelidis and krykilis (2003) were the first ones to use ols in testing the impact of macroeconomic determinants on ofdi from a sample of 9 countries. pantelidis and krykilis (2005) again used ols estimation technique in their research on cross country analysis of ofdi patterns among three groups of countriesadvanced, middle-income and https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 65 developing countries with panel data. egger (2008) preferred pols over fixed effect (fe) estimation, while buckley et al. (2007) did a langrangian multiplier (lm) test to identify whether pols or random effects generalized least squares (regls) furnished better model. regls estimation was preferred over pols as lm test value was significantly different from zero. zhang and daly (2011) adopted pols to estimate their model via panel data to analyze the determinants of china’s ofdi. buckley, forsans, and munjal (2012) measured the determinants of inorganic ofdi by indian firms, i.e. by mergers and acquisitions, using multiple regression technique and pols for panel data ranging from 2000 to 2007. saad et al. (2014) while researching upon malaysian ofdi determinants used multiple regression on time series data primarily and adopted ols as analytical technique. apart from buckley et.al (2007), random effects model was incorporated in the empirical researches of das. in 2013, das selected random effects panel regression estimates to analyze country level determinants of ofdi from 56 developing countries, he also conducted langrangian multiplier (lm) test and hausman test which further affirmed the appropriateness of random effects generalized least squares compared to pooled ols & fixed effects. das and banik in 2015 did a similar research again specifically focusing on indian firms’ ofdi motivations. cheung and qian (2009) in his research paper, “empirics of china outward direct investment”, empirically tested for the factors leading to chinese ofdi in a sample of 21 developing countries and 10 developed countries, opted for feasible generalized least squares procedure to control for serial correlation among residuals. fixed effects regression estimation technique was also used commonly during the last decade. kayam (2009) successfully planted fixed effects model in his empirical research testing macro level determinants of fdi outflows from developing and transition economies. bhasin and jain (2013) also analyzed the push factors for select asian economies’ ofdi using fixed effects (least squares dummy variable (lsdv)) estimation model, supplemented by principal component analysis to augment model’s analytical richness. haiyan (2017) in his research on analyzing home country determinants of ofdi from developed and developing countries applied fixed effects model for panel estimation. haiyan argued that fixed effects model yields more precise results by controlling heterogeneity of individual country. nunnenkamp, andrés, vadlamannati, and waldkirch (2012) researched upon the drivers of indian ofdi, employing possion pseudo maximum likelihood (ppml) estimates with clustered robust standard errors, as this model is best suited for log gravity type and also fully accounts for heteroskedasticity. ramasamy, yeung, and laforet (2012) did a similar empirical research in china's ofdi context, and considered both poisson count data regression model and negative binomial model, and found similar results from both but for final interpretation preferred poisson model, as likelihoodratio test in case of over-dispersions for binomial model were insignificant, thus making poisson model more appropriate fit for the empirical research undertaken. while anand and kogut (1997) undertook negative binomial model for their data analysis, as it allows for over-dispersion for unexplained heterogeneity in their data, instead of going for a poisson model. pradhan (2004) used tobit model in his research on determinants of ofdi to test the hypothesis framed. tobit model approach was justified on the grounds that the dependent variable in the research i.e. the ofdi intensity of firms in india was censored. thomas and narayanan (2017) almost did a study akin to those of pradhan's (2004) focusing on ofdi by indian firms. they opted for tobit model for determining ofdi share and used a dynamic random effects probit model to estimate the determinants of ofdi, thus treating unobserved heterogeneity in the model. pradhan (2011) did a comparative study between the emerging multinationals from india and china, with a censored dependent variable i.e. indian/chinese fdi received by host country. in his study he preferred 3-step censored quantile regression estimation model for censored data instead of tobit model, as the major assumption of tobit https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 66 model was violated because the errors in the data collected were non-normal, heteroskedastic and asymmetric. goh (2011) did an empirical study on determinants of malaysian ofdi using error correction model (ecm), as ofdi variable was found to be cointegrated with its determinants. chen and zulkifli (2012) tested the association between malaysian ofdi and economic growth through vecm and granger causality tests. hierarchal of multilevel regression was adopted by anwar and mughal (2013) in their paper focusing on the role of indian diaspora's importance in attracting ofdi from india. table 3 summates the various econometric techniques used by various authors. table 3. evolution of methodologies used for ofdi studies statistical technique authors pooled ols and ols pantelidis and krykilis (2003, 2005), buckley et al. (2007), egger (2008), zhang and daly (2011), buckley et al. (2012), kolstad and wiig (2012), das (2013), saad et al. (2014), morris and jain (2015) negative binomial model anand and kogut (1997) poisson regression model nunnenkamp et al. (2012), ramasamy et al. (2012) tobit model pradhan (2004), thomas and narayanan (2017) random effects model buckley et al. (2007), egger (2008), das (2013), das and banik (2015) fixed effects model kayam (2009), bhasin and jain (2013), das (2013), haiyan (2017) 3-step censored quantile regression estimation model pradhan (2011) generalised least squares model buckley et al. (2007), cheung and qian (2009) error correction model and vector error correction model goh (2011), chen and zulkifli (2012) heirarchal or multilevel regression model anwar and mughal (2013) multiregression analysis buckley et al. (2012), saad et al. (2014) probit regression model das (2015) dynamic random effects probit model thomas and narayanan (2017) conclusion the growth of outward cross-border investments from emerging economies has progressively spread across multiple regions around the world during last 20 years. it has become imperative to understand and analyze the rationale behind such accelerated expansion of developing countries’ ofdi. our intent in the paper is to probe over the existing researches on factors causing ofdi to distinctively gauge primary theoretical perspective used earlier. this review has helped us to achieve our objective of integration of past studies while unearthing topics for future research scope, to enhance the pool of knowledge of this crucial phenomenon. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 67 in previous studies efforts have been made to identify and analyze the emergence of ofdi from emerging nations, but most of them were just limited to one country or a group of countries, selected out of the total lot of emerging markets, like kalotay (2005) focused on russian economy, while kumar (2007) and douma, george, and kabir (2006) studied ofdi factors with respect to india’s position. likewise, determinants of chinese ofdi were examined by buckley et al. in 2007, while makino, lau, & yeh (2002) researched upon the locational choices of taiwanese firms. holtbrugge and kreppel (2010) did an explorative study on the determinants of ofdi from bric nations, and pradhan (2011) did comparative analysis of indian and chinese emerging firms. hence a structured assessment of past literature was a necessity, to represent an all-inclusive picture. this paper interwove the observations made by various researchers, providing a comprehensive understanding of various activities of emerging multinationals, and how they are influenced by distinctive environments of home economy. many researchers reveal that firms from emerging economies have many similar motives for investing overseas. the most important ones are, home country market size and openness of home country towards internationalization. these determinants were proved relevant in almost all empirical researches which were observed in this study. however, some researches posted contrasting results for the impact of home country’s interest rates, human capital and technological capability on ofdi from emerging economies. the variation in the reviewed researches is attributable to two major reasons, either adoption of different methodologies or adoption of different proxies for same variable. this study contributes to the analysis of macroeconomic determinants of ofdi from emerging economies from institutional perspective as well as academic perspective. home country governments can easily identify on which areas to work towards making their country’s environment more conducive for fdi flows, such as switching from restrictive to promotive policies, leveraging bargains and investment coordination with existing or prospective host economies. for example, strong government support from home country may initiate fdi outflows, which happened mostly in case of communist economies like russia and china. results are suggestive that policies oriented towards pushing trade activities would become indispensable in the long run for promoting trade openness, which in turn will facilitate ofdi, thus a liberal home economy with deregulated system, especially in case of developing countries, is an excellent instrument driving internationalization of firms. this study also points out that emerging economies suffer from shortage of skilled personnel, thus making human capital an incompetent push force for ofdi. this creates an immediate need for these economies to identify ways to boost the development of sound education infrastructure. academicians interested in similar empirical researches now have a summative view of various statistical models adopted earlier, making evaluation and implementation of methodological approach easier as gamut of all econometric tools used in the empirical papers reviewed has been discussed with respect to pros and cons of each of the model adopted. limitations & future research scope one limitation of the study conducted was, that here the focus was on home country factors which induce overseas investment but to obtain a complete understanding, one should also research upon host country’s resource dependences. as per buckley et. al. (2012), host country characteristics have a pull effect while at the same time home country ones have a push effect during the process of internationalization, making it sacrosanct to study both to get a wholesome conclusion. some avenues for future research can be looked upon, like covering a wider range of countries as a group for empirical research on macroeconomic determinants of ofdi, as from the above review of extant literature, most of the studies conducted concentrated on a single country or a small cluster of four https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 68 to five countries. researching on a wider range of countries from different regions of the world will give a comparative as well as extensive view of the topic. another prospective future research gap identified is to segregate country level determinants of ofdi sector or industry wise, and then analyze them empirically as well as theoretically. this will give a clear picture of all the underlying rudimentary factors responsible for pushing a particular sector’s ofdi progression. lastly, a deeper probe into less popular factors like prevalent production cost in home country, financial and fiscal incentive structure of home economy, institutional factor like corruption and cultural determinants of ofdi are required to be linked with the risk associated particular home country association, like ‘guanxi’ culture of china makes it a very reliable country to do business with, thus giving chinese companies are better standing in terms of trustworthiness across the world. references aliber, r. z. 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(2003). towards the transnationalisation of chinese firms: policies and debates. in china# x2019; s emerging global businesses (pp. 47-80). palgrave macmillan, london. 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) indian journal of finance and banking vol. 9, no. 1; 2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 1 the nonlinear asymmetric relationship among implied volatility indices of indian stock market, gold, and oil: evidences from nardl model dr. jyothi chittineni assistant professor finance and accounting ibs hyderabad, the icfai foundation for higher education (declared as deemed-to-be university u/s 3 of the ugc act 1956) dontanapally campus, shanker pally road, hyderabad, india e-mail: jyothi.chittineni@ibsindia.org https://orcid.org/0000-0002-3838-6995 received: october 13, 2021 accepted: november 15, 2021 online published: january 14, 2022 doi: 10.46281/ijfb.v9i1.1540 url: https://doi.org/10.46281/ijfb.v9i1.1540 abstract the paper aims to examine the nonlinear asymmetric relationship among the implied volatility indices of the indian stock market, gold, and oil for the period from 2nd march 2009 to 29th october 2021. nonlinear autoregressive distributed lag (nardl) model results provide evidence of asymmetric nonlinear relationship among the selected variables in the short-run and the long-run. the positive and negative shocks to gold and oil implied volatility indices have a positive and significant influence on the implied volatility of the indian stock market. the expected volatility of gold has a short-term symmetric impact on expected stock market volatility in the short run. whereas, the implied volatility of oil has a long-run asymmetric impact on the implied volatility of the stock market. increasing volatility in oil prices can be viewed as a signal for the starting point for the volatility of the indian stock markets. in the long run, positive shocks to gold volatility have more impact on the expected volatility of the indian stock market than the negative. this indicates that investors are shifting their investments from gold to stocks for higher returns when the gold prices are fluctuating. keywords: nonlinear autoregressive distributed lag, implied volatility index, asymmetric relationship, oil, gold. jel classification codes: g10, g11, g13, g15. introduction many economies liberalized their financial policies and trade policies to attract capital in-flows and to increase international trade volumes. these liberalized trade policies and financial policies integrated the economies as global villages. the positive side of these liberalized economies is that the developing economies could attract the capital inflow from developed economies. the other side of this integration is that the financial shocks and macroeconomic variables volatility is also transmitting from developed economies to developing economies. mailto:jyothi.chittineni@ibsindia.org https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 2 india being an emerging economy, it is largely depending on the developed economies for investments and trade. indian economy is dependent on oil and gold markets because it is the biggest importer of oil and the consumer for the gold. india’s annual demand for gold is around 895 tonnes, which is 26% of the worldwide demand for physical gold. gold has a very important role in indian culture and rituals, during weddings and festivals buying gold is considered auspicious. buying gold is a regular household expenditure, it is considered a symbol of status, wealth, sentiment, safety. india is the largest importer and the consumer of crude oil in the world. lower crude oil prices narrow the fiscal deficit in india. an increase in crude oil has multiple impacts on the indian economy. the indian economy is more exposed to the price changes of these macroeconomic variables like oil and gold. the stock market prices and the inflation in the country are largely affected by the price changes of these resources. with this background, this paper aims to examine the impact of the future expected volatility of gold and oil on the future expected volatility of the indian stock market. unlike other papers, present paper uses expected future volatility as a central theme to understand the causality among these selected variables. there are several studies conducted to understand the bi-variate, bi-directional and dynamic relationship among stock prices, oil prices and gold prices. most of these studies conducted on developed economies examined the linear relationship and presented mixed results about the oil, gold and stock prices interaction (zhang & wei, 2010), most of the earlier studied used var and garch, dcc garch models. interestingly, there is very little evidence of the causal relationship among the gold volatility index, oil volatility index and the indian implied volatility indices. therefore, the present study examines the non-linear causal interaction among implied volatility indices of gold, oil and indian stock markets. unlike earlier studies present study uses implied volatility indices to understand the non-linear causal interplay among selected variables. the paper results contribute to the literature in many ways. firstly, this is one of the very few studies examined on implied volatility indices of stock markets, gold and oil and their interplay. secondly, this paper uses a larger sample from 2nd march 2009 to 29th october 2021. thirdly, the present study uses a non-linear autoregressive distributed lag model (nardl) to understand the short-term and long-term responses to the shocks of one variable towards the other variables. the remaining part of the paper covers on review of literature, sample period and collection, model specification, empirical results discussions, implications of the study and the conclusions. review of literature understanding the interplay between the stock market and the alternative assets is very important for the policymakers to design the strategies for sustainable economic growth. hence, the literature on these variables got attention from academicians, researchers, investors and policy makers. prior literature indicate that the fluctuations in the oil price has an impact on the economy because the oil price has direct impact on the cost of production and the profit margin (hammoudeh & choi, 2007). fluctuation in the international oil prices leads to rupee value depreciating and hence the inflation in the country increase (raj et al., 2008), when inflation increases investors are relying on the safe heaven gold to hedge their portfolio again inflation. the linkage between gold, oil and their movements influences the stock prices (reboredo, 2013). sari et al. (2010) found a weak asymmetric relationship between gold and oil prices. soytas et al. (2009) studied the influence of gold and silver price movements on the oil. zhang and wei (2010) examined the relation between gold and oil prices and found a causal relationship between the variables. a nonlinear dynamic relationship between the oil and gold price examined by lee and lin (2012) found that the role of gold is determined by the oil price fluctuations. contrary to the earlier studies, chang et al. (2013) examined the interrelation between gold, oil and exchange rate and conclude that there is no relation between the selected variable. baur and mcdermott (2010) highlighted that gold is not an effective hedging instrument for the bric nations during the stock market turmoil periods. gurgun and unalmis (2014) highlighted the hedging properties of gold for the indian stock market. concluded that there is a unidirectional spillover from gold returns to the indian stock returns and there is no volatility spillover from the stock market to the gold. beckmann et al. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 3 (2015) found that the gold is paying a safe haven role for the indian stock markets and the author highlighted the need for non-linear modelling to understand the relationship between gold and the stock market. chkili (2016) reported the evidence that gold can play a hedge role for the bric stock markets and holding the portfolios using gold can reduce the portfolio risk for emerging market portfolios. ghosh and kanjilal (2016) reported that the non-linear co-integration between the indian stock market and the oil. the results also revealed that there is a significant long-run association between the oil and indian stock market. bouri, roubaud, jammazi, and assaf (2017) reported a significant bidirectional causality between gold and the indian and chinese stock markets. bouri, jain, biswal, and roubaud (2017) reported a significant relationship between the indian stock market, gold and oil prices. miladifar, mohamadi, and moghadam (2020) employed a markov switching bayesian vector autoregressive model to understand the non-linear relationship between gold, oil and stock markets during upward and downward trends. the results reveal that there is a significant negative association between oil, gold and the stock markets. lin, kuang, jiang, and su (2019) reported a contagious effect from oil prices, gold prices to stock markets. tiwari, adewuyi, and roubaud (2019) examined the quantile regression on seven economies and reported a positive weak dependency between gold and the stock markets. wang, ma, niu, and he (2020) reported statistically significant association between oil prices on the stock markets. li, semeyutin, lau, and gozgor (2020) confirm the interconnectedness between the emerging market volatility indices and the oil prices. enwereuzoh et al. (2021) observed that oil price shocks impact the stock markets of oil-importing nations and oil-exporting nations differently. reported an interconnectedness between gold and the stock markets. from the prior studies it is evident that there is no conformity in the literature about the relationship between oil, gold and stock markets. data and methodology data: the sample period is selected based on the availability of the data. the indian implied volatility index is available from 2nd march 2009, hence daily closing prices for the indian vix (ivix), gold implied volatility index (gvix) and oil implied volatility index (ovix) are used for the period from 2nd march 2009 to 29th october 2021. gvix and ovix data is collected from cboe and ivix data is collected from the indian national stock exchange (nse). methodology asymmetric non-linear ardl (nardl) model (shin et al., 2014) is used to understand the non-linear relationship among the variables gvix, ovix and ivix. the nrdl model is suitable for the stationary variables i(0), and the variables that are integrating at order one i(1). the model is not suitable if the variable are stationary at the second order i(2). the asymmetric non-linear ardl model estimates both long-run and short-run co-integration among the variables in positive and negative directions. the advantage in using nardl model is the co-integration can be estimated in a single equation framework. the following equation is used to estimate the long-run asymmetric relationship among the variables 𝑌𝑡 = 𝛽+ ∑ ∆𝑡 𝑖=1 𝑋𝑖 + + 𝛽− ∑ ∆𝑡 𝑖=1 𝑋𝑖 − + 휀𝑡 ------------------------------------------------------------------ (1) 𝑌𝑡 is a dependent variables ; 𝛽+ and 𝛽− are the long-run parameters; 𝜕𝑡 + and 𝜕𝑡 − presents the positive and negative variation in the independent variable. generalized form of asymmetric non-linear ardl equation is: ∆𝑌𝑡 = 𝛼 + 𝛿𝑦𝑌𝑡−1 + 𝛿𝑥 +𝑋𝑡−1 + + 𝛿𝑥 −𝑋𝑡−1 − + ∑ 𝛿𝑖 𝑚 𝑖=1 𝑌𝑡−𝑖 + ∑ (𝜃𝑖 +∆𝑋𝑡−𝑖 + + 𝜃𝑖 −∆𝑋𝑡−𝑖 − ) + 휀1𝑡 𝑛 𝑖=0 ---------(2) where, 𝛿+𝑎𝑛𝑑 𝛿− are the long-run asymmetric coefficients; ∆ represents the changes dependent variable y; 𝜃+𝑎𝑛𝑑 𝜃− are the short-run asymmetric coefficients. the long-run asymmetric coefficient https://www.sciencedirect.com/science/article/pii/s1057521921000739#bb0155 https://www.sciencedirect.com/science/article/pii/s1057521921000739#bb0205 https://www.sciencedirect.com/science/article/pii/s1057521921000739#bb0220 https://www.sciencedirect.com/science/article/pii/s1057521921000739#bb0150 https://www.sciencedirect.com/science/article/pii/s0301420721002087#bib31 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 4 measures the direction of influence and the speed of adjustment of the independent variables on the dependent variable. the short-run nonlinear asymmetric analysis is used to understand the immediate influence of independent variables on the dependent variable. to test the null hypothesis of the long-run symmetry (𝜃+ = 𝜃−) the wald test is employed. the positive and negative impact of exogenous variables on the dependent variables is measured by the changes in the long-run coefficients. the estimated parameters indicate the non-linear nexus between dependent and independent variables at the long-run equilibrium. further, wald test is used to test the short-run symmetry, null hypothesis (𝛿+ = 𝛿−). the positive and negative variations in the dependent variable is estimated by using the parameters. the estimated parameters indicate the positive and negative changes in the exogenous variables at the short-run equilibrium. empirical estimates and the discussions augmented dickey-fuller (adf) and phillip-peron (pp) tests are employed to check the order of integration of the variables. all the variables are stationary after the first difference. table 1 presented the unit root test results. table 1. unit root test results ivix gvix ovix adf(level) -0.8012 -0.345 -2.567 pp (level) -0.7634 -0.1865 -2.875 adf(first difference) 22.7654*** 28.567*** 26.4518*** pp(first difference) 27.0834*** 28.5891*** 36.6541*** *** is significant at 1 percent level of significance. the lag composition plays an important role, hence, akaike information criterion (aic) and schwartz information criterion (sic) is used to understand the appropriate lag length. to understand the co-integration among the selected variables, nonlinear ardl bound test is conducted and the results are presented in table 2. the f-statistic value higher than the critical value indicates the existence of non-linear asymmetric long-run co-integration among the variables. the test results indicate the existence of co-integration among the variables. the results are like zhu et al. (2011), also reported that the stock markets and the oil markets are co-integrated for non-oecd and oecd economies in a panel framework. table 2. the nardl bound test results variables f.stat cointegration ivix 4.0121*** cointegration gvix 2.2981 no-cointegration ovix 7.3821*** cointegration *** is significant at 1 percent level of significance. the nardl test results for understanding the long-run asymmetric nexus among ovix, gvix and ivix are reported in table 3. when ovix and ivix are considered as dependent variables the fstatistic value shows a significant asymmetric co-integration among the variables. the equation estimated with ovix as a dependent variable, results indicates that ivix does not influence the ovix in the long-run. current study results are contradicting to, zhu et al. (2011), they have reported that the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 5 stock market influences the oil in the long-run. the study results are coinciding with the findings of kumar et al. (2019), they also reported that there is no significant co-integration existing between the stock market and oil in long-run. whereas gvix tends to have a statistically significant impact on ovix. an increase (decrease) in gvix causes (decrease) increase in ovix, it indicates a statistically significant and negative asymmetric co-integration between gvix and ovix in long-run. this shows that the volatility shocks are transmitting from one market to the other. when markets are uncertain investors increase their trading volumes in gold because gold is considered as safe heaven. increase in trading activity leads to price fluctuations and hence expected volatility. at the same time investors decrease their trading activity in oil markets, it leads to lower future expected volatility. current study results indicate that the investors prefer to invest in gold compared to oil if gold prices are positively moving. ivix as a dependent variable, the estimated equation results are statistically significant and confirm the asymmetric nonlinear association among ovix, gvix and ivix in the long run. the fluctuation in the expected future volatility of the oil market and the gold markets influence the future volatility of the indian stock market positively. the study results also indicate that the ivix has no impact on ovix. this unidirectional relation indicates that the level of dependency of oil-importing nation’s stock market volatility on the oil price volatility. further, results indicate that an increase/decrease in gvix causes a decrease/increase in ivix. the results indicate that the indian stock market’s future volatility is sensitive to the expected future volatility of the gold and oil markets. the volatility shocks from these two commodities markets transmit to the indian stock markets’ expected future volatility. table 3. nardl estimated coefficients for the long-run co-integration ovix equation estimated results ivix equation estimated results variables coefficients t stat variables coefficients t stat ivix+ 0.7635 1.1367 gvix+ 0.1763*** 4.8128 ivix0.7865 1.1381 gvix1.4528** 2.5001 gvix+ -0.0945** 2.3412 ovix+ 0.9812*** 3.8102 gvix-0.2387*** 3.5128 ovix1.4623*** 4.1002 c 2.864 *** 4.1291 c 1.7231*** 3.712 *** is significant at 1 percent level of significance. ** indicates the level of significance is 5%,* indicates the level of significance is 10% the estimated values for the error correction model are presented in table 4. the error correction model results for ovix are negative and statistically significant. the coefficient value is very small (0.0642). these results highlight that the oil volatility will subside after the shock, but the adjustment speed is very slow. the error correction equation estimated for ivix is also negative and statistically significant. the smaller coefficient values indicate that the speed of adjustment for the ivix is low and ivix values will stabilize after the shocks. the study results show that the fluctuation in gvix significantly influences the ovix in the short run. a positive shock to gvix causes a contemporaneous negative adjustment in ovix. the ovix undergoes a negative adjustment for a positive shock to gvix at lag 1 and 2. the ovix undergoes a positive adjustment for a positive shock to gvix at lag 3. a negative shock to gvix causes a positive adjustment in ovix. the error correction model estimated for ivix suggests that the gvix and ovix have a significant influence on ivix in the short run. the ivix undergoes a positive adjustment for the shock to ivix at lag 2, 3 and 4. the ivix demonstrates a negative contemporaneous adjustment to the positive https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 6 shock to gvix at lag 1 and 2. a negative shock to gvix causes a negative contemporaneous price adjustment in ivix in the short-run. ivix exhibits a positive adjustment to the positive stock to ovix. the ivix demonstrates a positive adjustment to the negative and positive shocks to the ovix. table 4. error correction for nardl model estimated results error correction results for nardl model (ovix) error correction results for nardl model (ivix) variables coefficients t stat variables coefficients t stat ovix t-1 -0.1873 *** -3.8710 ivix t-1 0.8723 1.9842 ovix t-s -0.0129** -4.0086 ivix t-2 0.3481** 2.0981 gvix + -0.0321 -0.6823 ivix t-3 1.7823*** 4.6528 gvix + t-1 -0.1287** -2.001 ivix t-4 0.9821*** 3.9812 gvix + t-2 -1.9187 *** -4.981 gvix+ -1.7635 -1.9823 gvix + t-3 0.9534 *** 2.4123 gvix+ t-1 -0.9126 ** -2.1348 gvix 0.5328** 0.0961 gvix+ t-2 -1.9812*** -3.1287 gvix t-1 3.2341 0.9128 gvix -0.6381 -1.6522 gvixt-2 2.0981 -6.7218 gvixt-1 -.07623** -2.9912 ecm (-1) -0.0642*** ovix + 2.001*** 3.9741 ovix + t-1 3.1260*** 4.6914 ovix 0.3971*** 3.001 ecm (-1) -0.0489*** -9.3912 *** is significant at 1 percent level of significance.** indicates the level of significance is 5%,* indicates the level of significance is 10% the wald test estimated results for short-term and long-term symmetric is presented in the table5. the wald test estimated results are presented in table 5. the long-run (wlr) and short-run (wsr) result indicates that the ovix has a long-run symmetric relationship with ivix and the shortrun symmetric relationship with gvix. the ivix exhibits a short-term symmetric relationship with gvix and ovix. table 5. wald test results for symmetric long-term and short-term cointegration wald test results for ovix wald test results for ivix variable wlr wsr variables wlr wsr gvix 7.6162 2.716** gvix 11.6352 2.7634** ivix 11.8372*** 7.3291 ovix 11.84 7.323** *** is significant at 1 percent level of significance. ** indicates the level of significance is 5%,* indicates the level of significance is 10% conclusions and implications the present study conducted on gvix, ovix and ivix for the period from 2nd march 2009 to 29th october 2021 revealed the asymmetric long-run and short-run association among the selected variables. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 7 the uniqueness of this study lies with the usage of implied volatility indices to test the asymmetric nonlinear association among gold, oil and the indian stock markets. in the sense, current study results indicate the forward-looking uncertainty due to the uncertainty among the other selected variables. the empirical evidence from the study indicate short-run, long-run association among implied volatility of gold, oil and the indian stock market. the results are similar to the findings of jain and biswal (2016). the current study reports the existence of asymmetric association among the selected variables when implied volatility index of oil and the indian stock markets are considered as dependent variables. the nardl co-integration test for the long-run indicates a statistically significant and negative asymmetric co-integration between gvix and ovix in long-run. this indicates that the investors are moving their trading activity from oil markets to gold during the uncertain market conditions. the current study results confirm that there is a contemporaneous asymmetric nonlinear association among ovix, gvix and ivix in long-run. the fluctuation in the expected future volatility of the oil market and the gold markets influence the future volatility of the indian stock market positively. the results indicate that the indian stock market’s future volatility is sensitive to the expected future volatility of the gold and oil markets. india being the importer of these two commodities, the volatility shocks from these two commodities markets transmit to the indian stock markets’ expected future volatility. so investors may make use of the results to enter into appropriate derivative contacts to hedge their portfolio. the symmetric test for long term and short term association indicates that ovix has the longrun symmetric relationship with ivix and the short-run symmetric relationship with gvix. the ivix exhibits short-term symmetric relationship with gvix and ovix. it shows that the implied volatility of indian stock market is influencing the expected volatility of oil and gold in the short-run symmetrically. the stock market performance as the barometer for the indian economic activity, higher the economic activity higher the demand for oil. the higher demand from the biggest consumer may influence the oil prices positively in short-run. the results are important to the managers to enter into derivative contracts to hedge against the increasing production cost due to increasing oil prices. further study should focus to understand, whether the relationship among implied volatility indices of oil, gold and the indian stock market changes with the regime-switching behaviour of these indices or not. author contributions conceptualization: jyothi chittineni data curation: jyothi chittineni formal analysis: jyothi chittineni funding acquisition: jyothi chittineni investigation: jyothi chittineni methodology: jyothi chittineni project administration: jyothi chittineni resources: jyothi chittineni software: jyothi chittineni supervision: jyothi chittineni validation: jyothi chittineni visualization: jyothi chittineni writing – original draft: jyothi chittineni writing – review & editing: jyothi chittineni conflict of interest statement the author declare that he has no competing interests. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 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(2011). crude oil shocks and stock markets: a panel threshold cointegration approach. energy economics, 33(5), 987-994. 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) indian journal of finance and banking; vol. 2, no. 2; 2018 issn 2574-6081 e-issn 2574-609x impact factor: 3.8 published by centre for research on islamic banking & finance and business, usa 26 determinants of commercial banks credit to the domestic economy in nigeria: examinations of dynamics principles akani, henry waleru 1 & oparaordu, beauty 1 1 department of banking and finance, rivers state university, nkpolu-port harcourt, rivers state, nigeria correspondence: akani, henry waleru, department of banking and finance, rivers state university, nkpolu-port harcourt, rivers state, nigeria received: july 20, 2018 accepted: july 28, 2018 online published: august 8, 2018 abstract this study examined determinants of commercial banks credit to the domestic economy in nigeria. the objective was to examine the extent to which banks variables, macroeconomic and monetary policy variables affects credit allocation of nigerian commercial banks. time series data was sourced from central bank of nigeria statistical bulletin and financial statement of commercial banks. percentage of total commercial banks loans to gross domestic product was proxy for dependent variable while the banks specific variables are peroxide by operational efficiency, liquidity, number of commercial banks branches, commercial banks deposit liabilities and deposit rate. the independent variables in macroeconomic model comprises of real gross domestic product, public expenditure, openness of the economy, inflation rate and exchange rate while monetary policy variables comprises of treasury bills rate, real interest rate, monetary policy rate, growth of money supply and financial sector development. the study employed ordinary least square properties of augmented dickey fuller test, co-integration test, and granger causality test and vector error correction model. findings from the study revealed that; banks specific variables shows that deposit liabilities and liquidity ratio have positive impact on total loans and advances while deposit rate, number of commercial banks branches and openness of the economy have negative impact. model ii found that; exchange rate, inflation rate and real gross domestic product have positive impact while public expenditure and openness of the economy have negative impact on total commercial bank loans and advances. model iii found that; financial sector development and monetary policy rate have negative impact while growth of money supply, real interest rate and treasury bills rate have positive impact on total loans and advances of commercial banks. we conclude that monetary policy, bank specific variables or internal variables and macroeconomic variables are strong determinants of nigerian commercial banks loans and advances. we therefore, recommend for the interplay and the strengthening of macroeconomic variables, monetary policy variables and banks specific variables (internal policies) in order to enhance commercial banks credit in nigeria. keywords: determinants, bank credit, domestic economy, macroeconomic variables, monetary policy variables and banks specific variables. 1. introduction in a deregulated, monopolistically competitive and oligopolistic banking environment like nigeria, bank credit is determined by internal and external factors. from the internal factors, commercial banks credit is determined by capital adequacy, number of bank branches, commercial banks deposit liabilities, operational efficiency and deposit rate. from the monetary policy perspective, commercial banks’ lending depend on monetary policy rate, treasury bill rate real interest rate, financial development and growth of money supply while macroeconomic variables includes commercial banks’ lending which depends on growth of the economy, inflation rate, real exchange rate, openness of the economy and public expenditure. credit is a financial market activity where financial institutions are empowered by law with credit functions to extend credit facilities to deficit economic units. the monetary www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 27 authorities use credit policies to achieve macroeconomic growth. for instance, credit policies are used to achieve growth in some sectors of the economy, (akani and onyema, 2017). bank loans are one of the most important long-term financing sources in many countries. commercial banks are the most important savings mobilization and financial resource allocation institutions. consequently, these roles make them an important phenomenon in economic growth and development. in performing this role, it must be realized that banks have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investments. olokoyo(2011), further notes that no matter the sources of the generation of income or the economic policies of the country, commercial banks would be interested in giving out loans and advances to their numerous customers bearing in mind, the three principles guiding their operations which are, profitability, liquidity and safety. lending institutions play a major role in economic growth and development through provision of credit to execute economic activities. lending which may be on short, medium or long-term basis is one of the services that commercial banks do render to their customers. in other words, banks do grant loans and advances to individuals, business organizations as well as government in order to enable them embark on investment and development activities as a mean of aiding their growth in particular or contributing toward the economic development of a country in general. commercial banks are the most important savings mobilization and financial resource allocation institutions. consequently, these roles make them a vital tool in economic growth and development. in performing this role, it must be realized that banks have the potential, scope and prospects for mobilizing financial resources and allocating them to productive investments. lending practices in the world could be traced to the period of industrial revolution which increase the pace of commercial and production activities thereby bringing about the need for large capital outlays for projects. however, the emergence of banks in nigeria in 1872 with the establishment of the african banks corporation (abc) and later appearance of other banks in the scene during the colonial era witnessed the beginning of banks’ lending practice in nigeria. though, the lending practices of the then colonial banks were biased and discriminatory and could not be said to be a good lending practice as only the expatriates were given loans and advances. ( amadi and akani, 2004). the bank and other financial act amendment (bofia) 1998, requires banks to report large borrowing to the central bank of nigeria. the central bank of nigeria also require that their total value of a loan credit facility or any other liability in respect of a borrower, at any time, should not exceed 20% of the shareholders’ funds unimpaired by losses in the case of commercial banks. other banking enactment stipulated that banks loans should be directed to preferred sector of the economy in order to enhance economic growth and development. in full consideration of all these regulations the banks resorted to prudential guidelines necessary to avoid failures and to enhance maximum profitability in their banks’ lending activities. empirical and theoretical evidence shows that there is a relationship between commercial banks credit and factors that determined commercial banks’ lending. the study of akani and onyema(2017) examined factors that determine credit growth in the economy, the study used net domestic credit, and this implies that, the study goes beyond commercial banks and other financial institutions that undertake the functions of lending and borrowings. olokoyo(2011) does not disaggregated the factors based on macroeconomic, bank internal variables and monetary variables, the result therefore does not validate the effects of monetary, macroeconomic and internal policies variables on commercial banks’ lending in nigeria. from the above knowledge gap, this study examined the determinants of commercial banks ‘credit to the domestic economy of nigeria by disaggregating the variables into internal, monetary and macroeconomic variables. 2. literature review conceptual foundation concept of bank lending lending which is considered to be the main function of banks in general and commercial banks, in particular, could be on a short, medium and long-term basis. it is the act of making funds available with the hope of receiving back the principal plus interest payment or/and any other fees imposed on carrying out the transaction. credit is a financial market activity where financial institutions are empowered by law with credit functions to extend credit facilities to deficit economic units. theories of bank credit loan pricing theory banks cannot always set high interest rates and trying to earn maximum interest income. banks should consider the problems of adverse selection and moral hazard since it is very difficult to forecast the borrower type at the start of the banking relationship (oputu, 2010). if banks set interest rates too high, they may induce adverse selection problems because high-risk borrowers are willing to accept these high rates. once these borrowers receive the loans, they may develop moral hazard behaviour or so called borrower moral hazard since they are likely to take on highly www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 28 risky projects or investments (chodecai, 2004). from the reasoning of stiglitz and weiss, it is usual that in some cases we may not find that the interest rate set by banks is commensurate with the risk of the borrowers. firm characteristics theories these theories predict that the number of borrowing relationships will be decreasing for small, high-quality, informational opaque and constraint firms, all other things been equal. (godlewski&ziane, 2008) theory of multiple-lending literatures explain that banks should be less inclined to share lending (loan syndication) in the presence of welldeveloped equity markets and after a process consolidation. both outside equity and mergers and acquisitions increase banks’ lending capacities, thus reducing their need of greater diversification and monitoring through share lending. degryse et al (2004). this theory has a great implication for banks in nigeria in the light of the recent 2005 consolidation exercise in the industry. hold-up and soft-budget-constraint theories banks choice of multiple-bank lending is in terms of two inefficiencies affecting exclusive bank-firm relationships, namely the hold-up and the soft-budget-constraint problems. according to the hold-up literature, sharing lending avoids the expropriation of informational rents. this improves firms’ incentives to make proper investment choices and in turn it increases banks’ profits (von thadden, 2004; padilla and pagano, 1997). as for the soft-budgetconstraint problem, multiple-bank lending enables banks not to extend further inefficient credit, thus reducing firms’ strategic defaults. both of these theories consider multiple-bank lending as a way for banks to commit towards entrepreneurs and improve their incentives. none of them, however, addresses how multiple-bank lending affects banks’ incentives to monitor, and thus can explain the apparent discrepancy between the widespread use of multiplebank lending and the importance of bank monitoring. but according to carletti et al (2006), when one considers explicitly banks’ incentives to monitor, multiple-bank lending may become an optimal way for banks with limited lending capacities to commit to higher monitoring levels. despite involving free-riding and duplication of efforts, sharing lending allows banks to expand the number of loans and achieve greater diversification. this mitigates the agency problem between banks and depositors, and it improves banks’ monitoring incentives. thus, differently from the classical theory of banks as delegated monitors, their paper suggested that multiple-bank lending may positively affect overall monitoring and increase firms’ future profitability. the signaling arguments the signaling argument states that good companies should provide more collateral so that they can signal to the banks that they are less risky type borrowers and then they are charged lower interest rates. meanwhile, the reverse signaling argument states that banks only require collateral and or covenants for relatively risky firms that also pay higher interest rates (chodechai, 2004; ewert and schenk, 1998). credit market theory a model of the neoclassical credit market postulates that the terms of credits clear the market. if collateral and other restrictions (covenants) remain constant, the interest rate is the only price mechanism. with an increasing demand for credit and a given customer supply, the interest rate rises, and vice versa. it is thus believed that the higher the failure risks of the borrower, the higher the interest premium (ewert et al, 2000). empirical literature akani and onyema (2017), examined the determinants of credit growth in nigeria. annual time series data were sourced from central bank of nigeria statistical bulletin from 1981-2016.three multiple regression models were formulated to examine the effect of macroeconomic variables, monetary policy variables and international variables on the growth of nigeria’s net domestic credit. the unit root test indicates that all the variables are stationary at first difference using the augmented dickey fuller (adf) test. the johansen cointegration test result shows that there exists a positive long run dynamic relationship between the dependent and the independent variables. thegranger causality test shows a uni-variate relationship from the independent to the dependant variable. from the macroeconomic variable, public expenditure, inflation rate and capital formation have a negative relationship with growth of nigeria net domestic credit while real gross domestic product, government revenue and balance of payment have a positive impact on the dependent variable, we conclude that macroeconomic variables have significant effect on the growth of nigeria’s net domestic credit. from the monetary policy variables, treasury bill rate, interest rate and compliance to credit rules have a negative effect on net domestic credit while monetary policy rate, financial deepening and growth of broad money supply have a positive effect on the dependent variables. we also conclude that monetary policy variables have no significant relationship with the growth of net domestic credit in nigeria. while from the international variables, exchange rate, international liquidity, foreign direct investment and openness of the economy have positive effect on net domestic credit whereas cross boarder credit and net foreign portfolio investment have negative relationship with net domestic credit. from the result, we conclude that international variables have no significant relationship with the growth of net domestic credit in nigeria. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 29 gertler and gilchrist (1994) on how bank business lending responds to monetary policy tightening, the study reveals that business lending does not decline when policy is tightened. they concluded that the entire decline in total lending comes from a reduction in consumer and real estate loans. kashyap and stein (1995) find evidence that business lending may respond to a tightening of monetary policy. they find that when policy is tightened, both total loans and business loans at small banks fall, while loans at large banks are unaffected. the differential response of small banks may indicate they have less access to alternative funding sources than large banks and so are less able to avoid the loss of core deposits when policy is tightened. gambacorta and iannoti (2005) studied the velocity and asymmetry in response of bank interest rates (lending, deposit, and inter -bank) to monetary policy shocks (changes) from 1985-2002 using an asymmetric vector correction model (avecm) that allows for different behaviours in both the short-run and long-run. the study shows that the speed of adjustment of bank interest rate to monetary policy changes increased significantly after the introduction of the 1993 banking law, interest rate adjustment in response to positive and negative shocks are asymmetric in the short run, with the idea that in the long -run the equilibrium is unique. they also found that banks adjust their loan (deposit) prices at a faster rate during period of monetary van den heuvel (2005) in his study shows that monetary policy affects bank lending through two channels. they argued that by lowering bank reserves, contractionary monetary policy reduces the extent to which banks can accept reservable deposits, if reserve requirements are binding. the decrease in reservable liabilities will, in turn, lead banks to reduce lending, if they cannot easily switch to alternative forms of finance or liquidate assets other than loans. punita and somaiya (2009) examined the impact of monetary policy on profitability of banks in india between 1995 and 2000 provided some dissenting evidence that lending rate has a positive and significant influence on banks’ profitability, which indicates a fall in lending rates will reduce the profitability of the banks. it was also found out that bank rate, cash reserve ratio and statutory ratio significantly affect profitability of banks negatively. their findings were the same when lending rate, bank rate, cash reserve ratio and statutory ratio were pooled to explain the relationship between bank profitability and monetary policy instruments in the private sector. amidu and wolfe (2008) examined the constrained implication of monetary policy on bank lending in ghana between 1998 and 2004. their study revealed that ghanaian banks’ lending behaviour are affected significantly by the country’s economic also support and change in money supply. their findings also support the finding of previous studies that the central bank prime rate and inflation rate negatively affect bank lending. prime rate was found statistically significant while inflation was insignificant. based on the firm level characteristics, there study revealed that bank size and liquidity significantly influence bank’s ability to extend credit when demanded. somoye and ilo (2009) investigated the impact of macroeconomic instability on the banking sector lending behaviour in nigeria between 1986 to 2005. their study revealed the mechanism transmission of monetary policy stocks to banks operation. the result of cointegration and vector error correction suggests a long-run relationship between bank lending and macroeconomic instability. this study will empirically analyze the effect of monetary policy on the commercial banks’ lending in nigeria with the intension of determining the influence of monetary policy instruments on commercial bank loan and advances. tuhomoibhi (2008) investigated the determinants of bank profitability macroeconomic evidence from nigeria seeking to econometrically identify significant using a panel data set comprising 1255 observations of 154 banks over a period of 1980-2006, the indices over the same period regression result reveal that interest rate, inflation, monetary policy and exchange rate regime, significant macroeconomic determinants of banks profitability in nigeria banking sector development, stock market development and financial structure are insignificant and the relationship between corporate tax policy and bank profitability in nigeria is inconclusive. in samad (2004) examined the study of bahrans commercial banks performances during 1994-2001. the main focus of the study was to examine empirically the performance of bahrains commercial banks with respect to credit (loan), liquidity and profitability during the period. by applying students’-test to the financial measure, it was shown that commercial banks liquidity performance is not at par with the banking industry. that is commercial banks are relatively less profitable and less liquid as expected. although chizea (1994) asserted that, there are certain aspects of fiscal and monetary policies which could affect the decision of the discerning and informed public to patronize the bank and the lending behaviour of commercial banks. paramount amongst these measures is what could be called the interest rate disincentives. interest rates have been so low in the country that they are negative in real terms. as inflation increased, the purchasing power of money lodged in deposit accounts reduce to the extent that savers per force pay an inflation tax. there is also the fear that the hike in interest rates would increase inflations rates and make a negative impact on the rate of investment. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 30 naceur and goaid (2010) investigated the determinants of commercial banks interest margin and profitability (evidence from tunisia). the study received the impact of banks characteristics, financial structure and macroeconomic indicators on bank’s net interest margin and profitability in tunisia banking sector for the period of 1980-2000. it shows that individual bank characteristic explains a substantial part of the within country variation in bank interest margin and net profit. high net interest margin and profitability tend to be associated with banks that hold a relatively high amount of capital and with large overheads size is found to impact negatively on profitability which implies that tunis banks are operating above their optimum level. william (2009) will result to a near shut down in lending ratio volume to any bank with major credit concern because, new policy ensures that only the highest quality borrowers have access to a new bank credit within the year, but according to ojo (1999) in a study on “roles and failure of financial intermediation by banks in nigeria revealed that commercial banks can lend on medium and short term basis without necessarily jeopardizing their liquidity. if they must contribute meaningfully to the economic development, the maturity pattern of their loans should be on a long term nature rather than of short term period. davis and zhu (2005) examined the study of commercial property prices and bank performance during the 19892002 periods. this paper seeks to fill the gap by undertaking an extensive analysis of a sample of 904 banks worldwide. it seeks to assess the effect of changes in commercial property prices on bank behaviour and performances in 15 industrialized economies. the result of this study suggest that commercial property price tend to be positively associated with bank lending and profitability, negatively associated with banks net interest margin, bad loan ratios. such impact exists even when conventional independence variable determining banks performance are included as controls. olokoya(2011) claimed in the study on the common determinants of commercial banks lending behavior in nigeria which aimed to test and confirm the effectiveness of these factors/variables. it reveals that there exists functional relationship between the variables. from the regression analysis, the model was found to be significant and its estimators turned out as expected and it was discovered that commercial banks have greatest impact on their lending behavior. and suggested that commercial banks should focus on mobilizing more deposits, as it will enhance their lending performance through the formulation of critical, realistic and comprehensive strategies and financial plans though acha (2011) probed into „the effect of banks financial intermediation on economic growth‟ on a time frame of 1980 -2008, adopting the granger causality test to ascertain the relationship that exist between savings mobilization and credit on one hand and economic growth on the other. osayameh (1991) supported this veiw by stressing that the days of arm chain banking are over, and that the increasing trend in bad debts and absence of basic business corporate advisory services in most nigerian commercial banks, suggest an apparent lack of use of effective lending and credit administration technique in these banks. buccheit (1992) in his study based on syndicated loans found out that when commercial banks jointly give out loans to a borrower, they are able to efficiently minimize their cost and manage time. they can better deliberate with the borrower(s) concerning the loan agreement for their various organizations. in addition, this paves the way for a constant follow-up of these borrowers to avoid default. eichengreen et al (1998) believed that commercial banks will not hesitate to give out loans if they can effectively deal with the problem of asymmetric information through constant surveillance. also, if they are able to mitigate lending risks to a greater extent by diversifying their portfolio assets and maximize their profits. kashyap et al (1997) commercial banks would be willing to lend to individuals whose information are not perfect. this is because these firms will solely depend on the banks for their financial needs. in this case, the banks can exercise their full rights over them and obtain the necessary information to know if they will be able to meet their debt obligation. moreover, with the information at hand, these banks will be efficient and guided in making good lending decisions. ahiawodzi and sackey (2013) banks use different strategies to assess their credit and it is vital for them to consider these guiding rules in carrying out their lending activities. this is because commercial banks do not trust the information they acquire from opaque borrowers who might end up defaulting. some recent researchers found out that in addition to a political and environmental crisis, the banking crisis is also a major hindrance to the economic growth of countries. one way to tackle this issue is to implement or set up strict rules and regulations to govern banks’ lending activities. this policy does not only reduce the cost of the crisis in a society, but it as well enables banks to better maximize their profits and boost up economic growth (quintyn et al., 2003). daniel and jones (2007) carried out a study based on financial liberalizationand banking crisis in emerging countries were of the opinion that some causes ofthe financial crisis occurred because some banking systems were not well coordinated. they believed that a proper supervision of these banks would have permitted a good number of countries to experience a grace period of minimum risk followed with economic development before the outburst of the crisis. in south africa, commercial banks do not easily make loans available to smes and less privileged individuals in the society. www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 31 kumbirai et al (2013) did a study for the case of south africa on “banks’ ratio analysis performance discovered that in the process of meeting up with the 1994 constitutional democracy, the south african commercial banks had to experience series of updates in their regulatory policies. gilbert et al (2009)supported this view by saying that “the implementation of these rules and regulations for banks was purposely done to bring about the equality across a nonvolatile financial domain and to curb the rising competition costs through regulatory requirements, innovation and new technologies during the financial crisis. the financial crisis that occurred in recent years, negatively affected every part of the world, particularly in south africa. banks were not only reluctant to lend to one another, but became even more unwilling to give out loans to smes and individuals. djiogap and ngomsi (2012) carried out a study for the period of 2001-2010 on factors that influences banks’ lending behavior in the central african economic and monetary community on long-term basis. six countries in the cemac zone and 35 commercial banks were considered. using a panel data analysis, they found out that bank’s capital to asset ratio, longterm liabilities, gdp growth and its size were statistically significant. this implies that these variables are taken into consideration by banks in making long-term loans available to firms. they also carried out a multivariate test based on different countries which revealed that banks with inadequate capital, high non-performing loans and small banks functions. olokoyo (2011) examined this topic for the case of the nigerian economy for the period of 1980-2005. from her findings, the predictor variables (volume of deposits, investment portfolio, foreign exchange, and gdp) were statistically significant and portrayed a positive relationship with commercial bank lending. this implies that these explanatory variables are very vital for banks’ lending decisions to give out loans and advances to borrowers. she suggested that commercial banks in nigeria should improve their management skills and lending performance by building up new strategies and system that will pull deposits irrespective of its source. panagopoulos and spiliotis (1998) for the period of 1971-1993 also carried out a dissertation on the influencing factors of commercial banks’ lending decision in greece and made use of the panel software analysis and regression model. their findings exhibited that credit money, money wage bill, and loan customer relation had a strong significant impact on commercial banks’ lending behavior in greece. these researchers asserted that “statistically it is senseless for greek monetary authorities to keep pressurizing commercial banks to reserve a large percentage of their deposits in risk-free assets such as t-bills. they suggested that the greek monetary authorities should set the maximum amount of bank’s lending rate. malede (2014), examined the determinants of commercial banks’ lending in ethiopia over a 6-year period (2005-2011). he applied the panel data analysis and ols to find out that credit risk, bank size, gdp, liquidity, lending rate and investment were statistically significant and had a positive relationship with commercial banks’ lending. he concluded that these explanatory variables greatly influenced banks’ lending decisions compared to deposit and cash required reserve which was insignificant. he suggested that commercial banks should throw more light on their credit risk and better manage their liquidity ratio because these variables prevent their willingness to lend. tomak (2013) investigated on this topic for the case of turkey starting from the period 2003-2012 considering 18 banks for the sample size. his results showed that gdp and interest rate were statistically insignificant. on the other hand, banks total liabilities, npl size and inflation rate were statistically significant and had a positive relationship with commercial banks’ lending behavior. chodechai (2004), in his study on the “determinants of bank lending in thailand” supported cole’s second view about past relationships as a criterion in banks’ lending decision. he discovered that when banks have such relationships with borrowers, they are more confident in accessing the borrowers’ privacy concerning their occupations and their financial state at every point in time. cole (1998) found out that commercial banks, unlike other lending institutions are very unwilling to give out loans. the reason is because during the period of the 1990s these lenders were pressurized by their regulators to make underwriting benchmark or requirement difficult to attain or meet up with. he further stressed that these banks would consider making credit available to firms with whom they have had a close relationship no matter how long. in addition to that, if they are informed about them being the sole providers of financial services to these firms, they will be willing to lend. loutskina (2011), in her research study on the role of securitization in bank liquidity and funding management she found out that when banks are able to liquidate their loans in order to meet their liquidity needs, they will be more willing to make credit available to borrowers. according to her, since liquid funds and loans are very vital elements of bank assets there is a negative relationship between liquid funds and lending. that is to say, as the former decreases the later increases. this paragraph discusses the view of researchers under category 4 as specified in the 1st paragraph above. behr et al (2013) carried out investigations on financial constraints of private firms” and discovered that banks’ lending behavior are influenced by soft information based on the quality of the borrower and continuous lending relationship. ahiawodzi and sackey (2013) investigated the rationing behavior of some commercial lending in ghana. their results displayed that experience, security value; sex, net profit, purpose, and www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 32 age were significant in determining the amount of loan given out. imran and nishat (2013) empirically identified commercial banks credit lending in pakistanfor the period 1971-2010. from their findings domestic deposits, exchange rate, foreign liabilities, greatly influenced banks’ lending decisions to the private sector in the long run. inflation has an insignificant role in the long run. also, domestic deposits in the short run do not apply with private credit because banks do not loan from the current account deposit. 3. research methodology this study used quasi experimental research design approach for the data analysis. the data for this study are secondary data sourced from the central bank of nigeria statistical bulletin, stock exchange fact book, economic and financial review and financial statement of quoted commercial banks. from theories, principles and empirical findings, the model below is specified in this study. model i cbc/gdp = f (nbb, cbdl, liqr, ope, dr) 1 transforming equation 1 into a testable form, we have; cbc/gdp = 0 nbb1 cbdl2 liqr3 ope4 dr5  2 where; cbc/gdp = percentage of commercial bank credit to gross domestic product( % gdp ) nbb = number of commercial banks branches cbdl = commercial banks deposit liabilities liqr = liquidity reserve ope = operational efficiency of managementproxied by total cost to total revenue dr = deposit rate 0 = regression intercept 1 5 = coefficient of the independent variables to the dependent variable µ = error term model ii cbc/gdp = f (mpr, tbr, rintr, fd, g-m2) 3 transforming equation 3 into a testable form, we have; cbc/gdp = 0 prm1 brt2 intrr3 df4  2g6 m  4 where; cbc/gdp = percent of commercial banks credit to gross domestic product ( % gdp ) mpr = monetary policy rate tbr = treasury bill rate rintr = real interest rate fd = financial sector development g-m2 = growth of broad money supply 0 = regression intercept 1 6 = coefficient of the independent variables to the dependent variable µ = error term model iii cbc/gdp = f (rgdp, infr, exr, ope, pex) 5 transforming equation 4 into a testable form, we have; cbc/gdp = 0 rgdp1 nfri2 xre3 peo4 pex5  6 where; cbc/gdp = percent of commercial banks credit to gross domestic product rgdp = real gross domestic product infr = inflation rate exr = exchange rate ope = openness of the economy pex = public expenditure www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 33 0 = regression intercept 1 5 = coefficient of the independent variables to the dependent variable µ = error term a-priori expectation model i: 00,,, 35421   model ii: 00,,, 35421   model iii: 00,,, 35421   estimation procedure 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) ttt xx   1 7 the null hypotheses for the adfstatistic test are h0.non stationary (unit root) and h0: stationary respectively co-integration to search for possible long run relationship amongst the variables, we employ 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 ..... 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. 9 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  10 the trace tests the null hypothesis that “at most” r co-integration vector, with “more than” r vectors being the alternative hypothesis. the maximum eigenvalue test is given as: )1( 1max  rtin  11 it tests the null hypothesis of r co-integrating vectors against the alternative hypothesis of r + 1 co-integration vectors. in the equation (10) and (11), is the sample size and  is the largest canonical correlation. granger causality in case we do not find any evidence for co-integration among the variables, the specification of the granger causality will be a vector autoregression (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). www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 34  xxyy n i at n i y ot      1 11 1 1 12 and t n i t y n i ot xyxyx      1 111 1  13 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. 4. results and discussion of findings table 1: presentation of results variable coefficient std errs. t-statistics prob. cbdl 0.944815 0.320126 2.951387 0.0068 dr -0.073630 0.329448 -0.223496 0.8250 liqr 0.070625 0.348065 0.202907 0.8408 nbb -0.182644 0.060617 -3.013069 0.0059 ope -0.115707 0.105006 -1.101914 0.2810 c 8.531951 9.269151 0.920467 0.3661 r2 0.777896 adj. r2 0.552630 f-statistics 4.337907 f-prob 0.000890 durbin-watson stat 2.401563 exr 0.082146 0.024577 3.342392 0.0026 infr 0.033077 0.056301 0.587491 0.5621 ope -0.217520 0.076679 -2.836782 0.0089 pex -0.111390 0.060587 -1.838514 0.0779 rgdp 0.401942 0.324098 1.240187 0.2264 c 16.33847 4.380158 3.730109 0.0010 r-squared 0.657973 adjusted r-squared 0.589567 f-statistic 9.618715 prob(f-statistic) 0.000032 durbin-watson stat 1.059613 fd -0.306369 0.371902 -0.823789 0.4178 g_m2 0.737820 0.298887 2.468555 0.0208 mpr -0.325075 0.664682 -0.489068 0.6291 rintr 0.074515 0.269627 0.276362 0.7845 tbr 0.063271 0.496470 0.127442 0.8996 c 9.164022 10.51041 0.871900 0.3916 r-squared 0.335405 adjusted r-squared 0.202486 f-statistic 2.523382 prob(f-statistic) 0.055642 durbin-watson stat 0.594821 source: extracts from e-view (2018) model i examined the bank specific variables and commercial domestic credit in nigeria, an examination of the above table proved that the independent variables formulated in model i can explain 77.7 and 55.2 percent variation www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 35 on total commercial banks credit in nigeria while the estimated regression model proved significant from the fstatistics. also the durbin watson statistics is greater than 2.0 but less than 2.5, this prove the presence of serial autocorrelation. the f-statistics and the f-probability proves that commercial bank deposit liability and liquidity are statistically significant while other variables in the model are statistically not significant. in ascertaining the direction of the relationship, the study found that commercial banks deposit liability and liquidity ratio have positive impact on commercial bank loans and advances while deposit rate, number of commercial bank branches and operational efficiency of the industry have negative impact on the dependent variable. the positive effect of the deposit liability confirm the a-priori expectation of the results and justifies various reforms formulated in the nigerian banking sector to effectively intermediate between the deficits and surplus the economic unit such as the rural banking scheme in 1975, the universal banking scheme in 2001-2004 the banking sector consolidation and recapitalization in 2004/2005. however, the negative impact of liquidity reserve confirms the a-priori expectation of the results. according to nwankwo (1998) there is inverse relationship between liquidity and earning assets of commercial banks. this is what toby (2004) described as optimal liquidity and lending position. the negative impact of deposit rate, number of bank branches and operational efficiency is contrary to our expectations as the variables are expected to have a positive impact on the dependent variable. the negative impact could be traced to poor banking habits and high banking density as noted in akani and lucky (2018). model ii which examined the effect of macroeconomic variables on commercial bank credit found that the independent variables can explain 65.7 and 55.9 variations on total commercial bank credits within the period under study. this is justified by the validity of the f-statistics and probability. however, the durbin watson explains variation justifies the presence of serial autocorrelation in the model. further, the coefficient of the independent variable which measures the direction of the relationship found that all the independent variables have positive relationship with the dependent variable except openness of the economy and public expenditure. however, exchange rate, openness of the economy and public expenditure are statistically significant while inflation rate and real gdp are statistically not significant. the positive effect of the variables confirm various macroeconomic policy reforms such as financial sector deregulation with the objective of increasing the operational efficiency of business institutions. it also agreed with the findings of akani and onyema (2017). the negative of the variables is contrary to our expectation and could be traced to policies such as the treasury single account system and other macroeconomic instability. model iii which examined the effect of monetary policy variables on commercial banks loans and advances found that the independent variables can explain 33.5 and 20.2 percent while the f-statistics validates the model. the coefficient of the variables found that financial sector development and monetary policy rate negatively related to total commercial banks loans and advances while growth of money supply, real interest rate and treasury bill rate positively relates to the dependent variable. the model found that growth of broad money supply is statistically significant while other variables in the model are statistically not significant. the positive effect of the variables confirms our a-priori expectation. the negative impact of financial sector development and monetary policy rate is contrary to our expectation and could be traced to monetary policy shocks. the above results enable us to test for stationary of the variables using the augmented dickey fuller unit root test. table 2: unit root test summary results at first difference variable adf statistics mackinnon prob. order of intr. 1% 5% 10% cbc/gdp -4.241819 -3.689194 -2.971853 -2.625121 0.0026 1(1) dr -8.634975 -3.679322 -2.967767 -2.622989 0.0001 1(1) liqr -1.429812 -3.679322 -2.986225 -2.622989 0.0001 1(1) nbb -9.109359 -3.699871 -2.976263 -2.627420 0.0000 1(1) ope -6.935697 -3.808546 -2.971853 -2.625121 0.0000 1(1) cbdl -10.61917 -3.679322 -2.967767 -2.622989 0.0000 1(1) unit root test summary results at first difference cbc /gdp -5.111894 -3.752946 -2.998064 -2.638752 0.0000 1(1) infr -5.818042 -3.679322 -2.967767 -2.622989 0.0000 1(1) ope -6.358758 -3.699871 -2.976263 -2.627420 0.0000 1(1) pex -5.972811 -3.699871 -2.976263 -2.627420 0.0000 1(1) rgdp -6.650857 -3.724070 -2.986225 -2.632604 0.0000 1(1) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 36 exr -7.098366 -3.679322 -2.967767 -2.622989 0.0000 1(1) cbc /gdp -4.241819 -3.689194 -2.971853 -2.638752 0.0000 1(1) fd -5.101366 -3.679322 -2.967767 -2.625121 0.0026 1(1) g_m2 -5.431477 -3.689194 -2.971853 -2.622989 0.0003 1(1) mpr -6.663459 -3.699871 -2.976263 -2.625121 0.0001 1(1) rintr -8.036245 -3.699871 -2.976263 -2.627420 0.0000 1(1) tbr -6.055479 -3.689194 -2.971853 -2.627420 0.0000 1(1) source: extracts from e-view (2018) having identified the presence of the serial autocorrelation, we test for unit root. from the table above, we found that all the variables are stationary at first difference which implies that the variables are integrated in the order of 1(1). we accept alternate hypothesis, we therefore proceeds to co-integration test ascertain the presence of long run relationship or not table 3: johansen co-integration test results: trace statistics hypothesized no. of ce(s) eigen value trace statistics 0.05 critical value prob.** decision none * 0.856928 136.3457 95.75366 0.0000 reject h0 at most 1 * 0.680575 79.95784 69.81889 0.0062 reject h0 at most 2 0.517663 46.86213 47.85613 0.0618 reject h0 at most 3 0.444551 25.71788 29.79707 0.1374 accept h0 at most 4 0.248740 8.666488 15.49471 0.3971 accept h0 at most 5 0.012758 0.372370 3.841466 0.5417 accept h0 model ii none * 0.814542 118.4784 95.75366 none * reject h0 at most 1 0.573135 69.61551 69.81889 at most 1 reject h0 at most 2 0.497174 44.92817 47.85613 at most 2 reject h0 at most 3 0.398347 24.99033 29.79707 at most 3 accept h0 at most 4 0.273015 10.25617 15.49471 at most 4 accept h0 at most 5 0.034213 1.009532 3.841466 at most 5 accept h0 model iii none * 0.833949 130.4656 95.75366 0.0000 reject h0 at most 1 * 0.683583 78.39719 69.81889 0.0088 reject h0 at most 2 0.584981 45.02707 47.85613 0.0900 reject h0 at most 3 0.269891 19.52360 29.79707 0.4558 accept h0 at most 4 0.234638 10.40132 15.49471 0.2511 accept h0 at most 5 0.087219 2.646533 3.841466 0.1038 accept h0 source: extracts from e-view (2018) using the johansen co-integration test, the above table 3.1, the results found that there is one co-integrating equation in model i and model iii but no co-integrating equation in model ii. the presence of co-integrating equation in model i and iii is expected and in line with a prior expectation and implies the presence of long run relationship between bank specific variables and total commercial banks loans and advances and monetary policy variables and total commercial banks loans and advances. the absence of co-integrating equation in model ii is contrary to our expectation and could be trade to macroeconomic challenges such as business cycle. the inability of the above result to give us the direction of long run relationship enable us to test for normalized co-integration relationship. table 4: normalized co-integrating equation model i cbc_gdp cbdl dr liqr nbb ope 1.000000 -0.207833 0.397391 4.038972 0.179184 -1.151830 (0.30775) (0.31598) (0.55580) (0.06388) (0.16727) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 37 model iii cbc_gdp fd g_m2 mpr rintr tbr 1.000000 4.858640 -6.101998 -0.573168 8.894031 -9.716535 (1.21036) (1.33026) (2.06855) (1.00374) (1.63751) source: extracts from e-view (2018) from model i, the study found that deposit liabilities and openness of the economy have negative long run relationship with the dependent variable while deposit rate, liquidity and number of bank branches have positive long run relationship. model ii found that exchange rate, inflation rate, public expenditure and real gross domestic products have negative relationship with the dependent variable while openness of the economy have positive impact on the dependent variable. it is evidenced in model iii that growth of money supply, momentary policy rate and treasury bill rate have negative long run while financial sector development and real interest rate have positive long run relationship with total loans and advances of commercial banks. table 5: parsimonious error correction results model i variable coefficient std. error t-statistic prob. c -0.141512 1.067818 -0.132524 0.8966 d(cbc_gdp(-1)) 0.708665 0.322713 2.195958 0.0468 d(cbdl(-1)) 0.488425 0.510527 0.956707 0.3562 d(cbdl(-2)) 0.343939 0.633565 0.542863 0.5964 d(cbdl(-3)) -0.273246 0.584257 -0.467681 0.6478 d(dr(-1)) 0.047427 0.553806 0.085639 0.9331 d(dr(-2)) 0.229004 0.440427 0.519959 0.6118 d(dr(-3)) 0.405319 0.446344 0.908086 0.3804 d(liqr(-1)) -0.454314 0.461854 -0.983675 0.3432 d(nbb(-1)) 0.076272 0.069359 1.099667 0.2914 d(nbb(-2)) 0.009103 0.069192 0.131561 0.8973 d(ope(-1)) 0.097118 0.113525 0.855474 0.4078 d(ope(-2)) -0.060787 0.149747 -0.405934 0.6914 ecm(-1) -0.562017 0.306053 -1.836339 0.0893 r-squared 0.442772 f-statistic 0.794598 adjusted r-squared -0.114456 prob(f-statistic) 0.657690 durbin-watson stat 1.931567 model ii c 2.043938 1.053284 1.940538 0.0727 d(cbc_gdp(-1)) 0.562908 0.225122 2.500456 0.0254 d(exr(-1)) -0.038479 0.079060 -0.486711 0.6340 d(exr(-2)) -0.042698 0.075722 -0.563882 0.5818 d(exr(-3)) -0.143669 0.070481 -2.038403 0.0609 d(infr(-1)) -0.025638 0.048227 -0.531606 0.6033 d(ope(-2)) -0.059369 0.096083 -0.617901 0.5466 d(ope(-3)) -0.091805 0.111644 -0.822302 0.4247 d(pex(-1)) 0.171279 0.075279 2.275251 0.0391 d(pex(-2)) 0.040041 0.069050 0.579885 0.5712 d(pex(-3)) 0.057348 0.075812 0.756449 0.4619 model ii cbc_gdp exr infr ope pex rgdp 1.000000 -0.123970 -0.375509 0.443366 -0.038397 -2.972428 (0.02303) (0.05699) (0.07302) (0.05577) (0.35682) www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 38 d(rgdp(-1)) -0.270962 0.206818 -1.310150 0.2112 ecm(-1) -0.795299 0.252028 -3.155597 0.0070 r-squared 0.582549 f-statistic 1.628070 adjusted r-squared 0.224733 prob(f-statistic) 0.190805 durbin-watson stat 1.934872 model iii c 0.249340 0.584395 0.426663 0.6757 d(cbc_gdp(-1)) 0.331146 0.171123 1.935138 0.0721 d(fd) -0.763798 0.169172 -4.514913 0.0004 d(fd(-1)) -0.154201 0.188692 -0.817211 0.4266 d(fd(-2)) -0.112717 0.180436 -0.624694 0.5416 d(g_m2) 0.301395 0.148708 2.026754 0.0608 d(mpr) 0.006336 0.177273 0.035744 0.9720 d(mpr(-1)) 0.309556 0.292876 1.056953 0.3073 d(mpr(-2)) 0.246760 0.281118 0.877782 0.3939 d(rintr) -0.221470 0.188584 -1.174388 0.2585 d(rintr(-1)) -0.372632 0.211311 -1.763429 0.0982 d(tbr(-2)) 0.500065 0.223421 2.238215 0.0408 ecm(-1) -0.427213 0.127072 -3.361979 0.0043 r-squared 0.700118 f-statistic 2.918309 adjusted r-squared 0.460213 prob(f-statistic) 0.026596 durbin-watson stat 1.901181 source: extracts from e-view (2018) from the error correction result, model i found a speed of adjustment of 56.2 percent, model ii found a speed of adjustment of 79.5 percent while model iii found a speed of adjustment of 42.7 percent. the independent variables show positive and negative impact of the variables on the dependent variables at various lags. however, the result shows that total commercial bank loans and advances is positive. table 6: granger causality test model i null hypothesis: obs f-statistic prob. cbdl does not granger cause cbc_gdp 29 2.15789 0.1375 cbc_gdp does not granger cause cbdl 1.62069 0.2187 dr does not granger cause cbc_gdp 29 1.30077 0.2908 cbc_gdp does not granger cause dr 0.41874 0.6626 liqr does not granger cause cbc_gdp 29 1.46458 0.2511 cbc_gdp does not granger cause liqr 2.10770 0.1435 nbb does not granger cause cbc_gdp 29 0.44604 0.6454 cbc_gdp does not granger cause nbb 4.22038 0.0269 ope does not granger cause cbc_gdp 29 1.00600 0.3806 cbc_gdp does not granger cause ope 0.74080 0.4873 model ii exr does not granger cause cbc_gdp 29 1.23298 0.3092 cbc_gdp does not granger cause exr 0.41550 0.6647 infr does not granger cause cbc_gdp 29 0.61703 0.5479 cbc_gdp does not granger cause infr 0.40108 0.6740 ope does not granger cause cbc_gdp 29 1.05771 0.3629 cbc_gdp does not granger cause ope 1.69627 0.2046 pex does not granger cause cbc_gdp 29 4.51464 0.0217 www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 2, no. 2; 2018 39 cbc_gdp does not granger cause pex 0.38882 0.6820 rgdp does not granger cause cbc_gdp 29 0.06756 0.9348 cbc_gdp does not granger cause rgdp 1.89492 0.1721 model iii fd does not granger cause cbc_gdp 29 11.8474 0.0003 cbc_gdp does not granger cause fd 0.58076 0.5671 g_m2 does not granger cause cbc_gdp 29 5.28936 0.0125 cbc_gdp does not granger cause g_m2 0.78999 0.4653 mpr does not granger cause cbc_gdp 29 2.56373 0.0979 cbc_gdp does not granger cause mpr 0.25737 0.7752 rintr does not granger cause cbc_gdp 29 0.08543 0.9184 cbc_gdp does not granger cause rintr 0.51837 0.6020 tbr does not granger cause cbc_gdp 29 0.38331 0.6857 cbc_gdp does not granger cause tbr 0.35358 0.7058 source: extracts from e-view (2018) model i found that the variable have no causal relationship except a unidirectional relationship from commercial banks loans and advances to number of commercial banks branches. model ii found also that there is no causal relationship among the variable’s except a unidirectional relationship from public expenditure to commercial banks loans and advances while model iii found a unidirectional relationship from financial development to financial loans and advances and a unidirectional relationship between growth of money supply to commercial banks loans and advances. other variables in the model have no causal relationship. 5. conclusion commercial banks remain dominant in the banking system in terms of their shares of total assets and deposit liabilities. their total loans and advances, a major component of total credits to the private sector are still on the increase in spite of the major constraints posted by the government regulations, institutional constraints and other macro-economic factors. from the bank internal variable, deposit liability and number of commercial banks branches determine commercial banks loans and advances while other variables in the model does not determine commercial loans and advances. from model ii, the study concludes that exchange rate, openness of the economy and public expenditure are strong determinants of commercial bank loans and advances while real gross domestic products and inflation rate does not determine bank loans and advances. model iii found that growth of money supply determine commercial bank loans and advances while other variables in the model does not determine commercial bank loans and advances. 6. recommendation there should be closer consultation and cooperation between commercial banks and the regulatory authorities so that the effect of regulatory measure on commercial banks will be taken into account at the stage of policy formulation andnigerian commercial banks should ensure good planning which encompasses budgeting, reviews and incentives. banks should try as much as possible to strike a balance in their loan pricing decisions. this will help them to be able to cover cost associated with lending and at the same time, maintain good banking relationship with their borrowers and macroeconomic policies should be properly formulated to encourage bank lending. 7. policy implication in view of the nexus between commercial banks credit to the domestic economy of nigeria within the period under review and considering the strong relationship that exist between banks specific variables, monetary variables and macroeconomic variables and commercial banks credit to domestic to the economy. therefore, there is need to strengthening and allow the interplay of regulatory cum supervisory framework to achieve the desire results. references acha, g. 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(2008). determinants of bank profitability macroeconomics, evidence from nigeria, deakin university, (working paper). 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/). indian journal of finance and banking vol. 7, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 38 a study on significant influence of e-commerce adoption in agricultural sector throughout the covid-19: benefits and limitations p. madhu kumar reddy ph.d. research scholar k.l.u. business school klef (deemed to be university) greenfields, vaddeswaram guntur, andhra pradesh, india e-mail: madhukumarreddy@gmail.com dr. a. rama kumar professor k.l.u. business school klef (deemed to be university) greenfields, vaddeswaram, guntur, andhra pradesh, india e-mail: ark6466@kluniversity.in abstract agriculture is the solution to the overall development of any country. the internet lasts to become more widespread among people who transact with the agricultural business of any type. the incomplete health crisis about covid 19 has affected all communities frontline health responders are a priority for countries in saving the lives of the people suffering from this disease. the government has taken action since the coronavirus hit created an extraordinary situation. india initially announced a three-week nationwide lockdown until the middle of april, after that was extended to achieve satisfactory control of the virus outbreak. in these tough times how indian farmers react to the crisis and the actions taken by the government to help farmers across the country. the main objective of the study is to analyze the impact of e-commerce on the agricultural sector throughout the covid 19 pandemic. the study employs samples from farmers of the warangal and nalgonda districts. the purpose of the study is to examine the e-commerce sources selected for the agriculture sector and reasons for using e-commerce in the agriculture and overall satisfaction on utilization of e-commerce in agriculture sector throughout covid-19. the result reveals that farmers started benefiting from the use of e-commerce in their agriculture. the findings of the study suggest that government should take little more initiation in training and supplying them with agricultural inputs with subsidies. the study briefly explains the objectives, hypothesis, data analysis, impact, role, benefits, and limitations of ecommerce in the agricultural sector throughout covid-19. keywords: e-commerce, agricultural sector, covid 19, impact, benefits, and limitations. jel classification codes: j43, n5, q13, l81, p32. mailto:ark6466@kluniversity.in https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 39 introduction many companies started searching for solutions to overcome the effects of covid-19. “the new normal” covid 19 changed the transition to a digital future globally. current developments in information technology have caused important economic significances. covid 19 pandemic raised one of the challenges for the agricultural e-commerce business. e-commerce is one of the genuine outcomes of information technology that has many advantages like world trading, removing temporal and spatial constraints, reduced costs of purchased resources, increased sales, easy access to information, an essential decline in transaction costs, and the time of transaction. one of the inconveniences faced by agricultural production is procuring raw materials, marketing, and customer satisfaction. even though the total revenue of agricultural production within humankind is high, farmers’ revenue is low down, and in some cases, the farmers’ profits are on the edge of zero or maybe negative. origin of e-commerce still, in this pandemic situation, some of the indian farmers won’t have awareness of modern agriculture. in india, there is a huge scope for modern techniques in agriculture, if we observe, gradually the farmer is going ahead showing interest in the modern methods. yet, this increase is not enough comparing with the other countries. the main reason behind this is often the shortage of awareness among the farmers. electronic commerce becomes evident in the 1990s, and its exercise has improved in a short time. the majority of companies are having an online spirit. conducting business on the web is important these days. everything from food and garments to entertainment and furniture is regularly bought online3. amazon and flipkart are the major companies having business by using e-commerce. these companies allow customers to purchase different types of goods and services online. consumers have several payment options, as well as choices for how their products are delivered. e-commerce in agriculture e-commerce has flourished a major break in the agriculture sector. now a day’s internet becomes more popular among all customers. some people use the internet for agriculture or irrigation. the farmers are becoming aware of the use of software and hardware. the thing which is needed is the internet with both the parties’ i.e. the one that is buying and therefore the one that is selling. review of literature zeng et al. (2017) authors considered the firm-level adoption of internal and external factors affecting agricultural food e-commerce. they discussed the five typical e-commerce models which are very commonly adopted these days. they identified 4 types of adopters; they are agribusiness firms, e-commerce firms, agricultural cooperatives, and individual farmers at the firm level. the authors finally indicated about the adoption and development of e-commerce is a modern way of influencing food systems and market entrance for smallholders. yadav and sharma (2015) study has reviewed 110 research papers on agriculture credit. the focus was on determinants of sources and the amount of agriculture credit. according to the study, agriculture has been given more priority in recent years. the government also focused on institutional credit and took many policy measures to improve financial inclusion. dsouza and joshi (2014) authors discussed briefly the framework for rural agriculture ecommerce. the authors pointed out two main factors for developing the framework. they are https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 40 better farming practices and well-planned marketing of agricultural products. with these factors and frameworks, the development of agriculture e-commerce is possible. carpio et al. (2013) this is a case study that discusses the market makers. the authors framed a market makers producer logic model that represents the intakes and outputs in the long and short run. they analyzed many categories of businesses participating in market makers. they evaluated the impact of market makers on the producers and farmer’s markets. they suggested lessons for e-commerce development and evaluation in the future. nadarajan and ismail (2011) authors discussed the e-commerce framework for rural agriculture and the application of e-commerce components in agriculture. the agricultural ecommerce application consists of six features, which were discussed in the study. the authors discussed promotional techniques in agriculture and foreword of online trade exchange platforms for improving sales and marketing for the supply chain and the effectiveness of agricultural products. the research gap identified is very fewer studies are carried out based on analyzing the benefits and limitations of e-commerce adoption in the agriculture sector throughout covid-19. the study tries to cover the research gap with few more samples. based on this literature and research gap few objectives were framed. problem statement the study explains the problems faced by the farmers due to covid-19 from the selected areas. objectives of the study  to analyze the influence of e-commerce adoption on the agricultural sector throughout covid-19.  the study explains the role of e-commerce adoption in the agricultural sector.  the study analyses the benefits and limitations of e-commerce in the agricultural sector throughout covid-19. hypothesis  there is no significant influence of e-commerce adoption on the agriculture sector throughout covid-19  there is no significant influence of e-commerce on benefits towards the agriculture sector throughout covid-19.  there is no significant influence of e-commerce on limitations towards the agriculture sector throughout covid-19. research methodology sources of data primary data data has been gathered from 160 farmers in the districts of warangal and nalgonda. interacted with the farmers who are using and who are not using e-commerce in the agriculture sector. secondary data data from websites, journals, and books are used for the study. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 41 scope of the study the scope of the study is restricted to analyzing the services rendered by e-commerce to the agriculture sector in few districts of telangana state. data was gathered from 160 farmers through a telephone survey and a few by personal interaction because of covid-19. the data was gathered in the month of august 2021. a few aspects like impact, role, benefits, and limitations are discussed. sample size the population for the present study is the farmers of warangal and nalgonda. as collecting data from the farmers became very tough in this pandemic, responses were received from 160 farmers from two districts. for the present paper, a convenience random sampling technique was used. tools used for the study tools like percentage analysis, chi-square, and anova were used with the help of spss. data analysis and interpretation table 1.tabular representation of demographic factors which are considered for the study demographic factors objects no. of answerers valid percentage gender male 94 59 female 66 41 total 160 100 age 18-25 years 21 13 26-30 years 44 28 31-40 years 51 32 41-50 years 27 17 51-60 years 4 3 60+ years 13 8 total 160 100 educational qualification post graduate 31 19 under graduate 41 26 secondary 38 24 primary 27 17 others 23 14 total 160 100 period of using ecommerce in agriculture sector less than 1 year 22 14 1-2 years 48 30 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 42 2-3 years 52 32 3-4 years 29 18 above 4 years 9 6 total 160 100 marital status married 98 61 unmarried 62 39 total 160 100 e-commerce sources selected for agriculture sector amazon 71 44 flipkart 49 31 snapdeal 23 14 shopify 8 5 ebay 4 3 others 5 3 total 160 100 interpretation: table 1 explains the demographic factors of the respondents; the total sample size is 160. out of the total sample size, 59% of the respondents are male population and 41% of the samples have been gathered from the female population. the male farmers who do farming are more when differentiated from the female farmers. but when differentiated to earlier years female farmers are escalating. the majority of them are from the age limit of 31-40 years, then by 26-30 years. this indicates that many youngsters are taking farming as their profession. most of the farmers have finished their under graduation and few completed their secondary education. lack of employment opportunities during covid times is also a reason for the shift of many people to agriculture. 32% of the farmers are taking the help of e-commerce in agriculture for 23 years, then by 1-2 years. almost 61% of the respondents are married, and 39% are unmarried. amazon and followed by flipkart are the major sources selected for the agriculture sector. table 2. reasons for using e-commerce in agriculture reasons for using e-commerce in agriculture number percentage eradicate intermediaries 34 21 improves income to the farmers 37 23 decreases wastage 43 27 providing fresh products to the customers 46 29 total 160 100 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 43 interpretation: table 2 represents the reasons for using e-commerce in the agriculture sector. many of the farmers decided that providing fresh commodities to the customers and followed by decreasing wastage. later it improves income to the farmers and eradicates intermediaries. table 3. overall satisfaction on utilization of e-commerce in agriculture throughout covid-19 overall satisfaction on utilization of ecommerce in agriculture sector after covid-19 number percentage very satisfied 93 58 satisfied 40 25 neutral 18 11 dissatisfied 9 6 total 160 100 interpretation: out of 160 farmers 58% of farmers are extremely fulfilled with the overall satisfaction on utilization of e-commerce in the agriculture sector throughout covid-19, and few 25% respondents are satisfied. among the total farmers, 6% of them are dissatisfied with the services. table 4. impact of e-commerce adoption on agriculture sector throughout covid-19 chi-square tests value df asymp. sig. (2-sided) pearson chi-square 32.393a 32 .447 likelihood ratio 37.630 32 .227 linear-by-linear association 7.847 1 .005 n of valid cases 160 symmetric measures value approx. sig. nominal by nominal phi .450 .447 cramer's v .225 .447 n of valid cases 160 interpretation: chi-square is a single value that explains how much difference exists between the observed values and the expected values. here in this case we can conclude that no relationship exists between the variables. since the p values are 0.447 which is greater than 0.05. the null hypothesis is accepted and the alternative hypothesis is rejected at a 5% level of significance, therefore the power of alliance among variables is very low. there is no significant difference in e-commerce adoption in the agriculture sector throughout covid-19. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 44 table 5. impact of e-commerce on benefits of the agricultural sector throughout covid-19 chi-square tests value df asymp. sig. (2-sided) pearson chi-square 76.271a 30 .000 likelihood ratio 89.227 30 .000 linear-by-linear association 9.915 1 .002 n of valid cases 160 symmetric measures value approx. sig. nominal by nominal phi .690 .000 cramer's v .399 .000 n of valid cases 160 interpretation: since the p values are 0.000 which is less than 0.05. the null hypothesis is rejected and the alternative hypothesis is accepted at a 5% level of significance, therefore the strength of association between variables is very strong. there is a significant difference in ecommerce adoption on benefits of the agriculture sector throughout covid-19. table 6. impact of e-commerce on limitations to the agricultural sector throughout covid-19 chi-square tests value df asymp. sig. (2-sided) pearson chi-square 61.377a 57 .322 likelihood ratio 65.998 57 .194 linear-by-linear association 5.746 1 .017 n of valid cases 160 symmetric measures value approx. sig. nominal by nominal phi .619 .322 cramer's v .358 .322 n of valid cases 160 interpretation: since the p values are 0.322 which is greater than 0.05. the alternate hypothesis is rejected and the null hypothesis is accepted at a 5% level of significance, therefore the strength of association between variables is very low. there is no significant impact of e-commerce on limitations towards the agriculture sector throughout covid-19. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 45 table 7. tabular representation of the influence of e-commerce on benefits of agriculture sector throughout covid-19 test of homogeneity of variances levene statistic df1 df2 sig. 35.630 3 156 .000 anova sum of squares df mean square f sig. between groups 5.834 3 1.945 4.725 .003 within groups 64.205 156 .412 total 70.039 159 interpretation: here in this case the table 5 represents how e-commerce influences the benefits towards the agriculture sector throughout covid-19. since the p-value is less than 0.05, we will accept the alternate hypothesis at a 5% level of implication concerning e-commerce which influences benefits towards the agriculture sector throughout covid-19. therefore there is a significant influence of e-commerce on the benefits of the agriculture sector throughout covid19. the factors considered are a decrease in farmer’s efforts, time saving process, better marketing and exposure, and selling products directly to the customers. table 8. tabular representation of the influence of e-commerce on limitations of agriculture sector throughout covid-19 test of homogeneity of variances levene statistic df1 df2 sig. 1.825 3 156 .145 anova sum of squares df mean square f sig. between groups 12.290 3 4.097 4.239 .007 within groups 150.764 156 .966 total 163.053 159 interpretation: here in this case the above table represents how e-commerce influences the limitations towards the agriculture sector throughout covid-19. since the p-value is less than 0.05, we will accept the alternate hypothesis at a 5% level of significance concerning ecommerce which influences limitations towards the agriculture sector throughout covid-19. therefore there is a significant influence of e-commerce on limitations of the agriculture sector https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 46 throughout covid-19. the factors like high maintenance cost, lack of experts, no proper market, and shortage of suppliers. impact of e-commerce on agricultural sector throughout covid19 there was a significant impact of e-commerce in the agriculture sector in the last few decades. several actions had government flourished since the coronavirus attack and created this pandemic situation. after the nationwide lockdown, the indian finance minister has announced and declared an inr 1.7 trillion package, to protect the vulnerable sections including farmers out of which rs 2000 to farmer’s bank accounts to support farmers under the scheme of pm-kisan. agricultural e-commerce helped farmers to eliminate intermediaries, which resulted in increased income to the farmers by reducing wastage. they can deliver fresh commodities to the customers. to take care of weakness destructibility population, pradhan mantri garib kalyan yojana (prime minister scheme for the welfare of the poor), additional grain allotments to the registered beneficiaries were also announced for the next three years. a separate pm-cares (prime minister citizens assistance and relief in emergencies); created the fund to assist cash and food to the persons engaged in the informal sectors, preferable migrant labours. state-wise guidelines were issued by the indian council of agriculture research (icar), for the farmers during the lockdown period. the advisory also mentioned various practices during harvest and threshing of various rabi (winter-sown) crops as well as post-harvest, storage, and marketing of the farm produce. the rbi also announced specific measures that specify the “burden of debt servicing” due to covid 19. banking institutions also granted agriculture loans and crop loans for a moratorium of three months with a 3 percent concession on their interest rate for crops up to rs 3 lakh. role of e-commerce on the agricultural sector throughout covid-19  a rapid increase in the practice of digital technology like digital payments made farmer’s purchases easy.  due to the restrictions in meeting and social distancing e-commerce platforms highlighted indispensable digital transactions have accelerated to the small holder’s farmers to the digital payments and consumer-used online payments.  e-commerce plays a major role for the farmers to develop and market their products globally even in this pandemic situation.  by the end of june 2021, certain measures had extended and observed a rise in the usage of e-commerce in the agriculture sector.  there is an enhancement in the e-commerce models for better performance of the businesses throughout this pandemic situation.  a new boom in the partnerships has extended during covid-19.  huge demand and order for organic products were received at the marketplace through digital channels without any significant marketing campaigns during the pandemic.  farmers can sell their products directly to their customers without any intermediaries during this pandemic.  getting raw materials like seeds, fertilizers, and pesticides have become easy for the farmers with the help of e-commerce during the pandemic. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 47  e-commerce helped the customers in getting agricultural products directly from the farm. meanwhile, several organizations were shut down in this lockdown situation. customers started moving towards e-commerce for acquiring their requirements. this benefited the farmers who are using e-commerce to sell their products to their customers without any intermediaries. benefits of e-commerce on agriculture after covid-19  the use of e-commerce can control the efforts of farmers.  it is a process that saves the time of the farmers by using e-commerce in farming.  e-commerce helped farmers in searching for machines that can replace human resources like machines for sowing the seeds, cutting the crops, removing the weeds, etc6.  improved irrigational technology.  farmers initiated better marketing and exposure to the price.  there are many facilities in online trading and e-commerce for farmers.  as people started giving priority to healthy products, farmers started organically producing the products. limitations of e-commerce to agriculture throughout covid-19  the cost of maintenance became very high.  lack of experts who explain the usage of e-commerce during the pandemic.  most of the farmers are illiterates so they are unable to use the services of e-commerce during the pandemic.  as most of the farmers are illiterates the time taken for them to understand the use of ecommerce during pandemics became highly tough.  the challenge of managing perishable products became more complex in this pandemic.  agricultural products during the pandemic did not have a proper market.  lack of better and spontaneous agricultural practices  lack of healthier marketing techniques exposure and pricing during the pandemic  lack of improved networking and communication  lack of enhanced depiction at various opportunities, establishments, and platforms, etc. limitations of the study  because of the lack of practical knowledge and pandemic situations, the farmers were not able to handle the machines properly.  even the value of maintenance became additionally high.  as most of the farmers are illiterates, more time was taken by them to understand the use of e-commerce throughout covid-19.  lack of proper internet in villages may be an obstacle. conclusion many of the farmers believe in providing fresh commodities to the customers and followed by decreasing wastage. later it improves income to the farmers and eradicates intermediaries. the majority of the farmers are extremely fulfilled with the overall satisfaction on utilization of ecommerce in the agriculture sector. with analysis, it reveals that there is no significant difference in e-commerce adoption in the agriculture sector throughout covid-19. the results represent that there is a significant difference in e-commerce adoption on benefits of the agriculture sector, but https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 48 there is no significant impact of e-commerce on limitations towards the agriculture sector throughout covid-19. factors like a decrease in farmer’s efforts, time saving process, better marketing and exposure, and selling products directly to the customers have a positive influence on the benefits of the agriculture sector throughout covid-19. the factors like high maintenance cost, lack of experts, no proper market, and shortage of suppliers have a significant influence on limitations of the agricultural sector throughout covid-19. with the enhancement in the technology used for agriculture, we can help the farmers know what is happening around the world. there may be drawbacks with it but it seems to be that, technology provides enhanced advantages in many cases. but we could reduce the gap of these drawbacks by implementing a better platform for farmers and educate them on solutions for the drawback. when strategies are properly maintained, this would see a drastic change in our agriculture sector, improving the standard of living of the farmers. as discussed, when farmers are well taught about the usage of e-commerce which can be used in replacing the traditional equipment that results in drastic improvement in farming. in this pandemic, the government should take preventative measures and educate the farmers in using e-commerce for farming. authors’ contribution: we are happy that authors have contributed to the study in different ways at different times.  p. madhu kumar reddy: theoretical background, introduction, review of literature, and analysis of the data, research methodology, data collection.  dr. a. rama kumar: discussion of the results. conflict of interest: the study is free with conflicts of interest in authors. funding acknowledgement: the study has no explicit funding for its author’s individual/ personal capacity. references carpio, c. e., isengildina-massa, o., lamie, r. d., & zapata, s. d. (2013). does e-commerce help agricultural markets? the case of market maker, a publication of the agricultural & applied economics association. dsouza, d. j., & joshi, h. g. (2014). development of agricultural e-commerce framework for india, a strategic approach. international journal of engineering research and applications, 4(11). ehmke, c., ernst, s. c., hopkins, j. w., & tweeten, l. g. (2001). the market for e-commerce services in agriculture (no. 374-2016-19866). retrieved from https://ageconsearch.umn.edu/record/20523/files/sp01eh01.pdf nadarajan, s. v., & ismail, r. (2011). e-commerce framework to improve rural agriculture sector in cambodia. in international conference on e-business, management and economics (vol. 25, pp. 287-291). https://ageconsearch.umn.edu/record/20523/files/sp01eh01.pdf https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 49 yadav, p., & sharma, a. k. (2015). agriculture credit in developing economies: a review of relevant literature. international journal of economics and finance, 7(12), 219-244. zeng, y., jia, f., wan, l., & guo, h. (2017). e-commerce in agri-food sector: a systematic literature review. international food and agribusiness management review, 20(4), 439459. appendices 1. name: 2. gender: 1) male [ ] 2) female [ ] 3. age: 1) 18-25 years [ ] 2) 26-30 years [ ] 3) 31-40 years [ ] 4) 41-50 years [ ] 5) 51-60 years [ ] 6) 60+ years 4. educational qualification 1) post graduate [ ] 2) under graduate [ ] 3) secondary [ ] 4) primary [ ] 5) others [ ] 5. period of using online banking 1) less than 1 year [ ] 2) 1-2 years [ ] 3) 2-3 years [ ] 4) 3-4 years [ ] 5) more than 4 years [ ] 6. marital status 1) married [ ] 2) unmarried [ ] 7. e-commerce sources selected for agriculture sector 1) amazon [ ] 2) flipkart [ ] 3) snapdeal [ ] 4) shopify [ ] 5) ebay [ ] 6) others [ ] 8. reasons for using e-commerce in agriculture 1) eradicate intermediaries [ ] 2) improves income to the farmers [ ] 3) decreases wastage [ ] 4) providing fresh products to the customers [ ] https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 50 9. overall satisfaction on utilization of e-commerce in the agriculture sector through covid19 1) very satisfied [ ] 2) satisfied [ ] 3) neutral [ ] 4) dissatisfied [ ] 10. e-commerce 1) buying of goods and services [ ] 2) selling of goods and services [ ] 3) reducing intermediaries [ ] 4) transmitting of funds [ ] 11. benefits to farmers through covid-19 1) decreased in farmers efforts [ ] 2) time-saving process [ ] 3) better marketing and exposure [ ] 4) sell products directly to the customers [ ] 12. limitations to farmers through covid-19 1) high maintenance cost [ ] 2) lack of experts [ ] 3) no proper market [ ] 4) shortage of suppliers [ ] 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) indian journal of finance and banking vol. 5, no. 2; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 1 neural networks in finance: a descriptive systematic review dr. k. riyazahmed assistant professor shri dharmasthala manjunatheshwara institute for management development mysore, karnataka, india e-mail: riyazahmed@sdmimd.ac.in abstract traditional statistical methods pose challenges in data analysis due to irregularity in the financial data. to improve accuracy, financial researchers use machine learning architectures for the past two decades. neural networks (nn) are a widely used architecture in financial research. despite the wider usage, nn application in finance is yet to be well defined. hence, this descriptive study classifies and examines the nn application in finance into four broad categories i.e., investment prediction, credit evaluation, financial distress, and other financial applications. likewise, the review classifies the nn methods used under each category into standard, optimized and hybrid nn. further, accuracy measures used by the research work widely differ, in turn, pose challenges for comparison of a nn under each category and reduces the scope of formalizing a theory to choose optimum network model under each category. keywords: neural networks, ann, analytics, machine learning. jel classification codes: g1, g17, m150. introduction financial data are immensely available, yet the innate nature of big data shows uncertainty, incompleteness, and inconsistency which pose challenges in using traditional statistical methods for financial data analysis (brooks et al., 2019; hariri et al., 2019). financial researchers try to overcome the traditional statistical limitations by using machine learning architecture like neural networks (nn). nn imitates the human brain by using nodes and layers of connections, which pass signals with a set of associated weights and bias adjustments (figure 1). nn results are not easily interpretable and so the analysis is in black-box nature. irrespective of the non-interpretability of results, nn received importance in financial research due to its computing efficiency in handling financial big data. for the last two decades, financial researchers are using nn in various analyses like risk classification (altman, marco, & varetto, 1994), bankruptcy and share price prediction (barr & mani, 1994). despite the attention, nn application in finance is yet to be well defined. the last decade saw an increase in the finance research using nn in an analysis like forecasting of share prices (chang, liu, fan, lin, & lai, 2009; sapna & argente, 2003; safer, 2002), option prices mailto:e-mail:%20riyazahmed@sdmimd.ac.in https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 2 (lin & yeh, 2009; kohler, krzyzak, & todorovic, 2010), and the future prices (dunis, laws, & evans, 2008; laws & dunis, 2013). figure 1. standard neural network the literature reviews of feldman and kingdon (1995), wong and selvi (1998), vellido, lisboa, and vaughan (1999), krishnaswamy, gilbert, and pashley (2000), coakley and brown (2000), fadlalla and lin (2001), wei, nakamori, wang, and yu (2007), cavalcante et al. (2016), and huang, chai, and cho (2020) are the existing works in this regard. yet, the review works show significant limitations. firstly, no review follows a protocol-based review process which is essential for reproducibility. secondly, several reviews are not examining financial applications entirely or they focus on aspects like soft computing, and computational intelligence, instead of nn architectures (table 1). even though the studies analyze the nn applications to a certain extent, non-reproducibility is a serious concern. further, the absence of a systematic review method results in serious drawbacks in the quality of review findings (karunananthan, maxwell, & welch, 2020). systematic reviews have greater potential than other research designs leading to the reproducibility of research (shokraneh & adams, 2019). since the computing efficiency doubles every two years (gustafson, 2011) which improves the efficiency of handling complex data sets, exploring the research works to date with the scientific review methods will help to understand the existing status of nn in analyzing the financial data. table 1. summary of existing reviews study period of review nature of study focus of the study summary of conclusion feldman and kingdon (1995) 1988-1996 (*authors‟ estimation) descriptive, nonsystematic review. advantages of mlp, bpnn, and som. generalization, architecture selection, and application of selected nn. wong and selvi (1998) 1990 – 1996 descriptive, review process disclosed. classification of nn application in finance. the implication to nn developers. velido, lisboa, 1992 – 1998 descriptive, application of comprehensively https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 3 and vaughan (1999) review process disclosed. nn in business. reported the most quoted advantages and disadvantages of nn in various business applications. krishnaswamy et al. (2000) 1989 – 1996 (*authors‟ estimation) descriptive, non – systematic review description of nn and its finance application. backpropagation nn has proven robust. supervised and unsupervised nn is used in finance. coakley and brown (2000) 1988 – 1997 (*authors‟ estimation) descriptive, non – systematic review financial application, development of ann models. ann researchers face a challenge that there are no formal theories for determining optimal network model fadlalla and lin (2001) 1986 – 1997 descriptive, non – systematic review financial application, focus on feedforward and feed backward nn models. nn has great promise for financial applications and combinations of two approaches should be investigated. calderon and cheh (2002) 1993 – 1999 descriptive, sources of review disclosed. nn in auditing and risk management. nn shows promising performance in preliminary analytical procedures in the auditing process. wei huang et al. (2007) na descriptive, non – systematic review focus on input variables, nn models applied in forex, stock market, and economic forecasting. the prediction performance of neural networks can be improved by being integrated with other technologies. cavalcante et al. (2016) 2009 -2015 descriptive, review process disclosed computational intelligence in finance (nn is a part of the study) categorized studies into preprocessing, forecasting, and text mining. huang et al. (2020) 2014 – 2018 descriptive, review collection process disclosed. deep learning applications in finance and banking. reports about data inputs, preprocessing and evaluation rules of deep learning in finance and banking https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 4 hence, this structured review reveals an interpretable pattern of nn architectures and their application in finance research. the study follows the systematic review process provided by moher, liberati, tetzlaff, altman, and the prisma group (2009) and gupta, chauhan, and jaiswal (2019). the primary aim of the study is to classify the research papers based on their nn application in finance research. this is done by,  classification of major topics and sub-topics, and  identification of various nn architectures used in the classified subtopics. method a literature review starts with searching for quality research papers from prominent journals (ngai & wat, 2002). further collecting research papers from the online database has become an emerging culture in the information era (petter & lean 2009). so, this study uses the ebsco business elite database, which is a repository of 525 peer-reviewed research journals, to collect research papers. the systematic review process prescribed by moher et al. (2009) comprises defining a protocol for literature search, exclusion criteria of research papers, and final selection of papers (figure 2). figure 2. selection process of research papers (moher et al., 2009) protocol directs the research paper selection based on the criteria. to obtain research papers the study followed an advanced search option in the ebsco business elite database and used two keywords „neural networks‟ and „finance‟. research studies published in english under the subject areas of business, management, and finance are only considered. empirical articles that are published in peer-reviewed academic journals are collected at the first level. restricting the review only to published articles can strengthen quality control since many of the academic journals follow meticulous publishing criteria in terms of research contribution and robustness of the results (light & pillemer, 1984). the protocol process has helped to collect papers with high research quality. after collection, the studies with incomplete details, irrelevant context, and duplicate publications are excluded. excluding research papers for incomplete details, duplicate publications, irrelevant context, native language total n = 51 scholarly peer-reviewed articles [excluding magazines, cover stories] n = 131 primary search: ebsco host business elite n = 141 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 5 after exclusions, data extraction is done by carefully considering the title, abstract, and overall theme of the paper focuses on applying nn in finance. 141 papers are collected from the ebsco business elite database and during the first level of screening 77 research papers are excluded. finally, 51 research papers are considered for review. results the researcher scrutinized the collected research articles for their relevancy and suitability to be considered as a part of this review paper. when research papers fulfill the established criteria, the author read the full paper to find its contributions. figure 3 represents the broader classification of research papers under major topics and sub-topics. ip – investment prediction; ce – credit evaluation; fd – financial distress. figure 3. classification of research papers based on major topics and sub-topics based on the reading the author identified four main topics and several subtopics (table 2). the next section discusses each main topic, inferences of the research work carried in the subtopics based on the nn methods. further, nn with statistical and architectural advancements is classified as 'optimized nn'. nns incorporating financial theories and knowledge are classified under 'hybrid nn'. a model-free nn is classified as 'standard nn'. table 2. major research topics and subtopics main topics sub-topics investment prediction prediction of options prices, futures prices, share prices, forex, indexes, bond yields, commodity spreads, trading patterns, shareholder wealth, and portfolio performance. credit evaluation predicting credit risk, and estimating credit rating. financial distress evaluating financial distress other financial applications development of financial intelligent system, detecting fraudulent financial reporting, assessment of systematic risk, evaluating operating performance, assessing project portfolio performance. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 6 figure 4. framework of nn application in finance discussion investment prediction: derivatives a) options optimized nn – back propagation nn (bpnn) – bpnn minimizes the prediction error by giving the nodes with higher error rates lower weights and vice versa. hence, bpnn is found to be more suitable for derivative prediction (kaastra & boyd, 1995). when used to predict taiwan stock index options, bpnn demonstrated improved accuracy in support of hedging at in-the-money option (lin & yeh, 2009). likewise, the research study of hutchison et al. (1994) used bpnn to predict the prices of s & p 500 futures and options, yet the result is that bpnn did not show significantly better accuracy than other linear models like ordinary least squares. nn with monte carlo simulation – monte carlo, is a simulation technique to understand the impact of risk and uncertainty in prediction. it is used with linear nn for predicting american options (kohler et al., 2010). since it is a simulation based nn, the accuracy would widely differ in empirical prediction. advanced modular nn (amnn) – amnn is a series of independent nn which serves as a module and operates on separate inputs to accomplish a subtask. amnn gives more accuracy than the standard nn when predicting european call option prices (gradojevic et al., 2009). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 7 feed forward nn (ffnn) – ffnn is used when the nature of financial data is neither sequential nor time-dependent. ffnn predicts european index options and s&p 500 european call options more accurately than standard nn (gencay & gibson, 2007). hybrid nn nn with black scholes the research study by blynski, and faseruk (2006) compared the effectiveness of option price forecasting using the traditional black scholes model with nn (hybrid nn) and standard nn. likewise, the research study by chen and sutcliffe (2012) confirms that a hybrid nn along with black scholes predicts accurately than the standard nn or black scholes model individually. similarly, sperckelsen et al. (2014) used black scholes model variables in predicting option prices of currency futures (eur/usd and concluded that the hybrid model is better than the theoretical option pricing model and mlp. nn with black scholes & wavelet – zapart (2003) in his research study uses wavelet along with nn and black scholes. wavelet is a mathematical advancement that addresses oscillations that decays quickly in a data set. the study found that black scholes nn with wavelet predicts superior when analyzing option prices. hybrid black scholes nn with stochastic volatility stochastic volatility represents the nature of volatility fluctuating over time. the research study by gencay and gibson (2007) found that the hybrid nn model with stochastic volatility predicts better than the standard nn model while predicting european stock index options. b) futures – standard nn – model-free nn, without the attributes of financial theories, also performs significantly in the case of predicting currency futures prices. a model-free nn is used to predict the high-frequency currency futures and the predictability power is better than the closed-form financial model (sperckelsen et al., 2014). optimized nn multilayer perceptron (mlp) – mlp commonly represents a feed-forward nn with three layers. mlp is used to predict the commodity futures to hedge against corn and ethanol spreads and found to be accurate in prediction (dunis et al., 2015). likewise, karathanasapoulos et al. (2016) used mlp in gasoline futures contracts. higher-order nn (honn) -honn utilizes a higher combination of nn inputs. the research study of dunis et al. (2015) compared the performance of honn with mlp. the study concludes that mlp and honn are superior in predicting with leveraging option. sermpinis et al. (2013) tested honn in predicting index futures. likewise, karathanasapoulos et al. (2016), in their research study used honn to predict gasoline futures contracts. radical base function neural network (rbfnn)– karathanasapoulos et al. (2016) used a radical basic function neural network (rbfnn) to improve the trading performance of futures. rbfnn transforms the input signal into another form, which can be then feed into the network to get linear separability. the study concludes that rbf nn is superior in both trading performance and statistical accuracy. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 8 hybrid nn feature transformed nn – kim (2004) used feature transformed nn, including domain-specific factors like relative strength index to predict the futures prices and found that feature transformed nn predicts accurately than the linear models and concludes that incorporating domain knowledge in nn architecture improves performance. shares & indices – standard nn – haefke and helmenstien (2002) used nn in forecasting indices and inferred that applicability of information criteria is important in the selection of nn. in contrast, moreno and olmeda (2007) claim that nn is not superior in predicting the stock markets to the linear models. optimized nn nn with statistical optimization – lv d et al. (2020) used principal component analysis (pca), least absolute shrinkage and selection operators (lasso), classification and regression trees (cart), and piecewise linear representation methods (plr) to optimize nn. as a result, there no significant improvement in nn incorporating the features, however, nn with plr, resulted in an improvement in profit through better forecast ability. back propagation (bpnn) and piecewise linear representation (plr) – in a research study by chang et al. (2009), it is found that bpnn along with plr consistently created good results for predicting upward, steady, and downward trends of stock prices. hybrid nn – nn with fama french five-factor model besides customizing the nn, researchers have used financial models like fama and french five-factor model with nn and found improvement in the profitability of investors in both linear and nonlinear data (jan & ayub, 2019). nn with garch model– ozbey and paksoy (2020) combined garch with nn and compared the performance of the hybrid model with the classic garch model. the study found that the hybrid model is superior in predicting volatility to the classic garch. nn with top-down theory, technical analysis, and dynamic time series methods –huang, g.,huang,gb., shiji, and youa (2014) used integrated models using conventional top-down trading theory, technical analysis, and dynamic time series methods and concludes that the hybrid system gives remarkable investment returns and demonstrates promising potential tools for stock market forecasting. other related financial forecasts – optimized nn – back propagation nn (bpnn) –chiang et al. (1996) used bpnn to predict the net asset value (nav) of mutual funds and found that bpnn outperforms the regression model. jain and nag (1995) predicted the prices of initial public offering (ipo) using bpnn and found significant economic benefits in bpnn. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 9 multi-layer perception (mlp) – indroa et al. (1999) used mlp and compared it with stepwise linear regression. the results show that mlp is superior to the linear model. general regression nn (grnn) –barnes and lee (2009) used grnn in analyzing the effect of macroeconomic and firm-specific factors in determining shareholder wealth. multivariate nn -wie et al. (2004) used multivariate nn to predict earning per share in comparison with univariate and multivariate linear models incorporating fundamental accounting variables and found that nn along with accounting variables predicts more accurately than linear forecasting models. table 3. nn research in investment prediction author(s) purpose nn model sample period predictors comparison r squared value accuracy 1 kaastra and boyd (1995) forecastin g economic timeseries data back propagation nn conceptu al paper 2 lin and yeh (2009) forecastin g option prices back propagation nn 15 582 call option price data points 2003 2004 black scholes variables mape 5.2534 3 hutchison et al. (1994) pricing and hedging derivative securities ordinary least squares, radical basis functions network, multi-layer perceptron, projection pursuit s&p 500 future and options 1987 1991 black scholes variables no significant difference between models 84.76 4 kohler et al. (2010) pricing of american options least square nn monte carlo simulated data 5 gradojevic et al. (2009) pricing european call options modular nn & black scholes nn s&p-500 index european call option prices, chicago board options exchange 1987 1994 black scholes variables bs nn model > modular nn mape 1.87 6 gencay and gibson (2007) pricing european stock index options feedforward nn s&p 500 index9 options from the berkeley 1989 1991 price of the underlying, strike price, volatility, interest ffnn > stochastic volatility (sv) and stochastic https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 10 option database rate, time to maturity volatility random jump (svj), 7 blensky and fasurek (2006) comparin g option prices forecast of nn with black scholes model back propagation nn 64, 280 oex 100 index call option 1986 – 1993 nn > black scholes model 8 chen and sutcliffe (2012) pricing and hedging short sterling options standard nn, modified black model nn, and hybrid nn short sterling futures traded on nyse 2012 (quarterl y expiry cycle) ask, bid, trade, spread trade, and block trade, hybrid nn > modified black model, standard nn r = 98.6864 9 sperckelsen et al. (2014) realtime pricing of options on currency futures model-free option pricing nn, multilayer perceptron eur/us d option on currency future from chicago mercantil e exchange (cme) 2012 futures price, strike price, expiration time, riskfree rate, asset volatility hybrid nn > theoretical option pricing model 99% mape 0.3146 1 0 zapart (2003) pricing european and american call options nn with binomial trees and wavelets, nn with genetic algorithm and black scholes model options prices as quoted on the chicago board options exchange are used 2003 time to expiry, current stock price, risk-free rate 1 1 dunis et al. (2015) modeling corn/ethan ol crush spread mlp, honn, gpa ethanol futures contract traded in chicago board 2005 2010 leverage gpa > honn, mlp 1 3 sermpinis et al. (2013) the forecastin g ftse 100 futures higher-order nn, multilayer perceptron, recurrent neural networks ftse 100 futures 2007 2008 realized daily returns (21 days) honn> mlp, rnn 18.85% 1 4 karathanaso poulos et al. (2016) modeling crack spread rbf, pso, mlp 2005 2015 20 arima and 10 garch models psorbf > mlp 1 kim (2004) future feature korean may to positive feature https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 11 5 price prediction transformed ann based on domain knowledge stock index (kospi) novemb er 1996 volume index, rate of change, momentum , etc. transformed ann > linear ann 1 6 haefke and helmenstien (2002) index forecastin g and model selection feedforward nn austrian traded index (atx) 2 novemb er 1992 to 14 october 1994 geometric mean, arithmetic mean the proposed integrated model shows significant performanc 0.041 amape = 1.862 1 7 moreno and olmeda (2007) predictabi lity of emerging and developed stock markets using nn standard nn 49 msci (morgan stanley capital internatio nal) indexes march 1995 to march of 2001 (1560 daily observati ons) index returns, daily and weekly nn is not superior to the linear models 1 8 lv d et al. (2020) dimensio nality reduction in stock trading mlp, deep belief network (dbn), stacked autoencoders (sae), rnn, lstm, gated recurrent unit (gru) us spics and the chinese csics past 2000 trading days of spics and csics before decembe r 31, 2017 44 technical, volatility, psychologi cal, cash flow indicators. lasso nn 1 9 chang et al. (2009) stock trading points prediction bpnn, ga, plr stock prices 2004/01/ 02 to 2006/04/ 12 moving average, bias, rsi, ninety days stochastic line, etc. plr +ga improves profitability 2 0 jan and ayub (2019) improving the predictabil ity of fama french five-factor model standard nn manufact uring companie s in pakistan stock exchange 2000 to 2015 market cap, bv/mv ratio, % in total assets, and ebit nn improves ff model r = 0.99989 mse = 0.0012 2 1 ozbey and paksoy (2020) estimatio n of index returns with garch and nn hybrid nn, exp garch, and nor. distrn borsa istanbul 100 price index 2017 2018 borsa istanbul 100 index value hybrid nn + garch > hybrid nn + normal distribution mse = 0.015926 2 2 huang, huang, shiji, and youa (2014) integrated data mining in stock top-down trading theory + ann + technical taiwan semicond uctor manufact 2011 2013 stochastic kd, william %r, rsi, integrated nn model improves stock true positive = 98.50% https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 12 forecastin g analysis + dynamic time series + and bayesian probability uring company and evergreen marine corporati on psy line, adx, ma, macd forecasting 2 3 chiang et al. (1996) mutual fund nav forecastin g bpnn 6 year economic variables and 101 us mutual funds 1981 1986 gnp, consumpti on, investment, cpi, money supply, unemploy ment, tbill, long term rate bpnn > linear & non-linear regression 0.989 mape = 8.76 2 4 jain and nag (1995) predicting ipo pricing ffnn 552 ipos in the united states 1980 1990 11 variables [size, underwrite r, sales, roa, roi, assets turnover, etc.] 2 5 indroa et al. (1999) predicting mutual fund performan ce mlp morningst ar mutual funds on-disc database 1993 1995 annualized return, turnover, p/e, p/b, mar.cap mlp > linear models mape = 4.88 2 6 barnes and lee (2009) effects of macroeco nomicfirmspecific factors on sharehold er wealth general regression nn (grnn) miscellan eous industrials in the australian stock market 2007 d/e, gross margin, debt to cash, eva, eps, wacc funds, roic ann is effective in the prediction 0.0548 mae = 37.649 2 7 wie et al. (2004) nn model for eps forecastin g univariatenn and multivariate nn quarterly eps of 283 companie s in sec 1992 – 2002 inventory, a/r, capital expenditure , gross margin, sel.adm exp, tax rate, labour force nn models > linear models mape = 0.362 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 13 credit risk prediction: credit evaluation – optimized nn – bayesian regularized nn (brnn) sariev and germano (2020) used brnn to predict the probability of default and found brnn superior in prediction. back propagation nn (bpnn) – loss-given default (lgd) is used in credit risk assessment. lgd is the share of an asset that is lost if a borrower default. loterman et al. (2012) compared the nonlinear techniques with the linear counterparts in predicting lgd of major international banks. feed forward nn (ffnn) – qi and zhao (2011) found that nonparametric method like ffnn and regression tree predicts the lgd accurately both in and out of sample than their parametric counterparts. cifter et al. (2009) investigated the relationship between industrial production and credit defaults (nonperforming loans) using ffnn based on wavelet decomposition. fuzzy mathematical model –aiqun et al. (2020) applied nn in risk assessment of logistic finance using back propagation nn and fuzzy mathematical model. the study found that nn with the fuzzy mathematical model is accurate in risk assessment. further, baesens et al. (2003) provided a table with a graphical format that facilitates easy consultation to interpret the nn results. credit scoring – standard nn chikolwa and chan (2008) compared nn with ordinal regression (or) to study the determinants of commercial mortgage-backed securities (cmbs) and concluded that nn is superior in prediction to or. trinkle and baldwin (2007) applied nn in credit evaluation for loan finance and concluded that nn can be used in the credit scoring process with caution because of its hidden nature. optimized nn – backpropagation nn– hajek (2011) applied nn to rate the united states municipalities in the state of connecticut and found a higher accuracy of nn in classifying the municipalities with a limited subset of variables. zan et al. (2004) compared the performance of support vector machines (svm) with back propagation nn (bpnn) on the credit rating of companies and found that both svm and bpnn have the same accuracy in predicting the credit rating. table 4. nn literatures in credit risk analysis author(s) purpose nn model sample output variable predictors comparison r squared value accuracy 1 sariev and germano (2020) estimatio n of the probabilit y of default brnn, bpnn east europea n, german, and polish 2007 2012 (ee), 2007 2013 (p) payables turnover, roa, cash ratio, sales/total assets, brnn > bpnn https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 14 data la/ta, interest coverage 2 lotterman et al. (2012)# benchmar king regression algorithms for loss given default modeling nn, svm, and ols. six lgd datasets from internati onal banks svm, nn > linear models 0.1295 mae = 0.3118 3 qi and zhao (2011)# comparis on of modeling methods for loss given default ols, fractional response regression (frr), inverse gaussian regression (igr), and inverse gaussian regression with beta transforma tion (igrbt), and regression tree (rt), nn 3751 defaulte d securitie s in the us, moody‟ s ultimate recover y databas e 1985 to 2008 nn, regression tree > linear regression, fractional response, ols 0.576 4 cifter et al. (2009) examine the relationshi p between industrial productio n and credit defaults ffnn using wavelet decomposi tion 83 monthly observat ions industria l producti on and credit default rates are from central bank of turkey 2001 to 2007 industrial production, credit defaults all sectors, wholesale, and retail trade industrial cycle affects the sectoral credit-default cycles at different. time scales mse = 0.00022 5 aigun et al. (2020) risk assessmen t of logistic finance bpnn and fuzzy mathemati cal 2019 nn +fuzzy is accurate in the prediction 6 baesens et al. (2003) rule extraction and decision tables mlp, neuro rule, trepan, and nef german credit dataset from uci term of loan, purpose, savings account extract very compact rule sets and trees for all data sets https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 15 for creditrisk evaluatio n class. repositor y, bene1 and bene2 datasets from benelue x financial institutio ns balance, income, property, no. of years as a client, economical sector 7 chikolwa and chan (2008) determina nts of credit ratings standard nn vs ordinal regression mbs credit ratings of standard and poor 1999 2005 loan to value; debt service coverage ratio; issue size; bond tenure, property diversity, geographica l diversity, cmbs rating ann > ordinal regression pseudo r squared = 0.018 classificati on accuracy = 80% 8 trinkle and baldwin (2007) interpreta ble credit model developm ent using nn ann models created from previous research studies two german consume r credit data sets, sas data repositor y age, car, cards, cash, etc. ann > general credit models accuracy rate = 0.63084 9 hajek (2011) municipal credit rating modeling by neural networks ffnn, rbfnn, probabilist ic nn, cascade correlation nn, group method of data handling (gmdh) polynomia l nns, support vector machines. credit informat ion‟s of r 169 us municip alities (located in the state of connect icut) 2003 2007 population. population growth, median family income, unemploym ent rate, total revenue to total expenditure, tax revenue to total revenue, tax collectibles, debt service, total debt to the total population, tax an accurate credit rating classification pnn, classificati on accuracy test = 98.8% https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 16 collection rate, form of income. 1 0 zan et al. (2004) credit rating analysis with support vector machines and neural networks backpropa gation neural network (bnn) vs support vector machines taiwan ratings corporat ion, securitie s and futures institute, s&p compus tat data set. 1991 to 2000 ta, tl, de, cr, roa, roe, eps, noi, nii, etc. bnn, svm >linear regression accuracy rate = 80% # cross validation financial distress: optimized nn – multi-layer perceptron (mlp) –loukeris and eleftheriadis (2015) used mlp, hybrid mlp with neurogenetic, and voted perceptron algorithm (vpa). vpa is a method that linearly separates data with a larger margin to predict financial distress. manel (2012) used five mlp and compared them with traditional financial analysis to predict financial distress and found that the mlp is superior in accuracy. learning vector quantization (lvq) – lvq is a nn method with a supervised algorithm to let choose the number of training instances to hang on to. brockett et al. (2006) compared the multiple discriminant analysis (mda) and logistic regression with lvq to analyze the solvency of life insurance companies and found nn architectures are superior in predictions. hidden layer learning vector quantization – like lvq, hidden layer lvq (hdlvq) outperforms the traditional nn methods and financial techniques while evaluating the corporate solvency of life insurance companies. the research study by neves and vieira (2006) integrated hdlvq to correct the outputs of mlp and found the technique is superior to traditional techniques like z core models and standard nn. hybrid nn – fuzzy analytical hierarchy and camel model – camels framework is the most widely applied methodology to study the financial position of banks. wanke et al. (2016) used nn with a fuzzy analytical hierarchical model along the camels framework to predict the financial distress of banks. z score model –z score model is a financial technique to evaluate the financial distress of a company. pradhan (2011) used nn along with z score and found it classifies accurately. profitability index and capital structure variables –willer et al. (2020) created a business insolvency forecasting model using nn and found that the predictable power of nn shows significant accuracy. yang et al. (1998) and atiya (2001) confirms the accuracy. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 17 table 5. nn literatures in financial distress author(s) purpose nn model sample output variable predictors comparison r squared value accuracy 1 loukeris and eleftheria dis (2015) credit portfolio selection process mlp, hybrid mlp with neurog enetic, and voted percept ron algorith m 1411 compan ies from greek commer cial bank 1994 to 1997 16 financial ratios mse 0.034 2 manel (2012) predictio n of financial distress bpnn 528 tunisia n firm (central bank of tunisia report) 1999 2006 26 financial ratios predicting distress classificati on accuracy – 98.9% 3 brockett et al. (2006) compari son of nn and statistical models for life insurers' financial distress predictio n backpropag ation and learnin g vector quantiz ation (lvq) vs multipl e discrim inant analysi s and logistic regressi on analysi s texas depart ment of insuran ce data 1991 to 1995 iris variables bnn, lvq > mda, logistic regression correct rate (1994) = lvq (1.00), bp (0.971) 4 neves and vieira (2006)# improvin g bankrupt cy predictio n with hidden layer learnin g vector quantiz ation + multilayer percept ron 780,000 financia l stateme nts of french compan ies, industri 1998 2000 input consists of 30 financial ratios generalisat ion error: mlp = 8.8%, hlvc-q = 7.3% https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 18 learning vector quantiza tion al french firms, 583 bankrup t firms 5 wanke et al. (2016) predictin g performa nce in asean banks fuzzy analytic hierarc hy process nn financi al ratios of 88 associa tion of southea st asian nations bank 2010 to 2013 camels ratios possible to explain the causes of inefficiency using nn rmse = 0.0248 6 pradhan (2011) predictio n of financial distress bpnn state bank of india 2001 – 2010 z score variables 7 willer et al. (2020) forecasti ng business insolvenc y standar d nn profitability index, capital structure 91% accuracy dynamic model 8 yang et al. (1998) probabili stic neural network s in bankrupt cy predictio n fisher discrim inant analysi s, bpnn, pnn, pnn without patterns normali zed. 122 compan ies u.s. oil and gas industry 1984 to 1989 net cash flow to total assets, td/ta, cl/td, etc fischer discriminant analysis, pnn normalized> bp nn, probabilistic nn without a pattern fisher discriminan t analysis = 87% correct classificati on, 9 atiya (2001) bankrupt cy predictio n for credit risk standar d nn defaulte d and from solvent us firms, 716 solvent firms and 195 defaulted firm merton‟s assetbased model correct rate = 85.50% # cross validation other financial applications: standard nn apart from the major topics of research, researchers have found nn is efficient to detect fraudulent reporting (koskivaara & back, 2007; omar et al. 2017) and project portfolio management (costantino et al., 2015). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 19 optimized nn – a fuzzy analytical model is used for creating a financial information system (wang et al., 2020). a self-organization map algorithm, an unsupervised learning nn that produces a lowdimensional, discretized representation of the input space of the training samples, is called a map. som is used to analyze the integration of eu capital markets (horobet 2014), differences in world economies (cimpoeru 2015). hybrid nn – nn with the ohlson model is used to predict operating performance (ying-hua & shih-chin, 2013). conclusion a descriptive systematic review was conducted to find the application of neural networks in financial research. the study found a keen research interest to use nn for predicting financial data. this is obvious from the statistic that about 53% of the collected research studies applied nn in investment prediction. credit evaluation and financial distress topics contribute to 20% and 17% of each of the collected papers. there are very few works (10%) found on other financial aspects. the following are the reflections of the review. first, it is observed that the researchers have used arbitrary data partition and architecture selection in all the research works. besides, the performance or evaluation metrics widely differ among the collected research studies, giving less scope for comparing the accuracy of an nn architecture in a particular subtopic. hence, in this study, a meta-analytic comparison to generalize the nn architectures and formalizing a theory to choose a suitable nn method under a topic has serious limitations. second, there are few studies (neves & vieira, 2006; qi & zhao, 2011) that have performed the cross-validation in nn models. cross-validation increases efficiency in using financial data as every observation is used for both training and testing which results in a more accurate estimate of out-of-sample prediction. further, overfitting and underfitting of data will be managed efficiently through cross-validation. third, unlike prediction, in the research studies of classifying financial data, there is a scope for a meta-analysis based on generalizing area under curve (auc) that help to estimate the accuracy of classification on a particular topic. further, the study observed nn architectures including domain-specific knowledge performs with more accuracy. hence, more domain-based hybrid nn architectures can be trained. besides, the review has the following limitations. the descriptive systematic review has examined only the research papers published and available under the ebsco database. consequently, the works of the literature review are prone to publication bias, which occurs with publishing only statistically significant results. beyond, the research works in conference proceedings and working papers are not reviewed. hence some sub-topics and main research topics might have been remaining uncovered. systematically including more research papers from other sources will improve the chance of a meta-analysis of nn in financial research. since meta-analysis on machine learning by krittanawong et al. 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(2003). beyond black–scholes: a neural networks-based approach to options pricing. international journal of theoretical & applied finance, 6(5), 469. https://doi.org/10.1142/s0219024903002006 appendices appendix a. figure depicting nn architectures in investment prediction *hybrid nn methods are developed by incorporating the financial theories (black scholes option pricing, fama french five-factor model), advanced statistics (garch, pca, lasso, cart, plr), advanced nn architectures (honn, gpa, mlp), and domain-specific factors. 0 2 4 6 8 10 12 14 16 standard nn back propagation feed forward polynomial monte carlo baysian regularisation hybrid nn wavelet radical based function nn multi layer perceptron investment prediction https://doi.org/10.6126/apmr.2013.18.1.04 https://doi.org/10.1016/s0167-9236(03)00086-1 https://doi.org/10.1142/s0219024903002006 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 27 appendix b. figure depicting nn architectures in credit evaluation, financial distress, and other applications *support vector machine is a similar machine learning algorithm like nn. 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/) 0 2 4 6 8 10 12 14 support vector machines baysian regularisation back propagation feed forward standard nn fuzzy system multi layer perceptron learning vector quantization self organisation map algorithm credit evaluation, financial distress and other applications indian journal of finance and banking vol. 5, no. 2; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 130 solvency and survival of microfinance institutions: an indian scenario-policy implications to improve endurance dr. s. sangeetha associate professor kct business school kumaraguru college of technology saravanampatti, coimbatore, tamilnadu, india e-mail: sangisubramanian@gmail.com dr. k. chitra principal sri ramakrishna college of arts and science for women 395, sarojini naidu road, siddhapudur, coimbatore, india e-mail: profkchitra@gmail.com abstract in india, more than 450 million people are outside banking orbit. many economically deprived communities borrow money from money lenders who charged them to an extent of 115% interest. microfinance was a strong tool to rescue the poor from ponzi schemes. microfinance industry thrived well in india. it recorded huge growth in south india than north india. the microfinance crisis broke during the year 2010 in andhra pradesh. a bill enacted in andhra pradesh made the situation still worse. the repayment rate of the micro finance clients dropped from 95% (2010) to 1% (2012). this made the survival of the microfinance institutions (mfis) questionable. the paper aims at exploring the solvency and survival positions of the private & public nbfc mfis. based on the altman’s z revised score model (applicable for financial institutions) and survival analysis, the results reflect that private nbfc mfis are solvent and had better survival than public nbfc mfis. it aims at understanding the factors discriminating the solvent and insolvent microfinance institutions. keywords: indian microfinance institutions, solvency, bankruptcy prediction, default. jel classification codes: g20, g21, g23, g28, g33. introduction the indian population is about 1000 million with a gdp of 5.4% during 2014 as per imf estimates. of these 300 million people, about 80 million households are classified under the below the poverty line. in india, as per the tendulkar methodology, people bpl are those who earn per capita of rs. 816 in rural and rs. 1000 per month in urban areas. according to world bank report, people whose earnings are less than one dollar exist in large quantum. despite eagle eye approach followed by the commercial banks in the rural banking processes, the informal sector still caters to 80% of the population for credit requirements. an expert panel headed by https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 131 former reserve bank of india (rbi) governor c. rangarajan demarcated that the indian population below the poverty line (bpl) was about 29.5 % (363 million) during the year 201112, which grew from 270 million the previous year. the poor populace borrowed money from the local moneylenders. they charged higher interest rate to an extent of 115%. the annual credit requirement of the poor is about rs. 60000 crores. microfinance institutions tend to offer low-cost loans and periodically longer loans. mfis are becoming best tool in achieving financial inclusion as it turns out to be better formal financial alternative (jayasheela & hans, 2006; sahai et al., 2020). if the mfis wish to act under priority lending sector, then they are supposed to provide loans at 26% and with margin cap of 10% only. about 80% of mfis could lend at this rate. those which are charging more are termed to be inefficient mfis and will be called off by rbi’s policy. the crisis faced by indian microfinance institutions is discussed in the forthcoming section. need for the study & objective as the adage goes, only the fittest will survive, many small mfis must find their own way. as per the rbi officials’ suggestions, the mfi should scale up their operations in a proper way understanding their limitations. the role of mfis will surely gain momentum as the indian banking system suffers with huge non-performing assets issues. mfis may have to bear huge financial expenses as the loan sponsored by the banks is very expensive. nearly 49% of the total expenses are borne as financial expense by the mfis. other expenses like personnel expense and administrative expenses spare to 25% and 26% respectively. in india, predominantly microfinance funding was done by ngos. later credit union, financial cooperative & state-owned development and postal savings banks joined the troop. after some time, nabard the apex development body took the lead of world’s largest micro credit initiative in infusing the funds to the people through the shg bank linkage programme (shgblp) catering to more than 11 crore groups, which started initially with just 500 groups two decades before. majority of those groups are women groups. on the contrary, the private institutions, the so-called mfis (sec 25 companies and nbfcs) also jumped into the competition of providing funds which led to the commercialisation of the business (chandrasekhar & ghosh, 2012). they generally promoted joint liability group (jlg) parallel with individual loans. mainly the probability of women joining the jlg loan contract was much higher (kundu, 2009). introduction to microfinance bill by andhra pradesh government restricted the lenders in collection of dues (shgap). microfinance institutions suffered a lot due to delay / default in payments by borrowers. almost due to this the survival of the mfis turned to be questionable. andhra pradesh, a south indian state outnumbered the national average. it ranked first in terms of loan portfolio and outreach. during 2010, client outreach was 31.4 million and the gross loan portfolio level was rs 207 billion. it recorded 18% growth rate in client outreach and 56% in the loan portfolio which was just 13.1% during 2010-11. andhra pradesh crisis started during the year 2006. government compelled to close 57 branches of two giant mfis share and spandana sphoorty in krishna district. the government took actions on them for multiple reasons like coercive recovery, usurious interest rates, poor governance and adoption of excessive profiteering methodology. as a part of scale of expansion, double loans were provided to poor with no collateral assets, who failed to repay their outstanding loans due to low income generating capacity. coercive recovery practices exhibited by the mfis led to commitment of suicides in the districts of andhra pradesh (ashta et al., 2015). this set a saturation stage for mf https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 132 in the state. the problems which arose out of crisis was intensified further by the political motivation to develop the pavalavaddi scheme, an interest subsidy scheme to reduce the financial burden of self-help groups run by the ap government. on an average the mfis loan debt outstanding per household of pan india remained at rs.7700, whereas it was rs.65000 at andhra pradesh during the same period. the inability led to 57 suicides in short span. the government came out with ap ordinance bill. almost all the ap mfis operations came to standstill. sa-dhan, association for mfis, a national level player took some mutilation mechanism to restore and sustain the operations of mfis. mfis were compelled to charge to an extent of 21-24 percent only. they were insisted to follow and enhance good corporate governance. banking sector was seriously affected by this crisis. one third of total loan portfolio (rs.21000 crores) was left unpaid by the mfis’ to the banks. banks lost the trust on the mfis. banks which financed the mfis, decided not to fund them, as the mfis net worth was turning negative. thereby the mfis were handicapped and could not issue fresh loans to its clients. borrowings by mfi became costly. in addendum, the mfis found it difficult to raise money for the strategic growth. during the year 2011-12, with pressure building up, the operating self sufficiency slashed from 150 percent to 40 percent. in the state of sector report 2012, it was recorded that only 18 percent of mfis recorded positive roa ie., 15%. the bharat microfinance quick report 2012 microfinance growing against all odds reflected the andhra pradesh crisis. one of the major issues faced by the self-help groups a decade before was coercive collective process by the microfinance institutional funders. the andhra pradesh (ap) crisis (an indian state, which was the leader in microfinance faced a social crisis, led to regulatory impact on coercive recovery mechanism. the recovery dipped to 15% during 2011 and again to 1% in the year 2012. in andhra pradesh, banks offered loans at 12% per annum (1996) which was slashed as part of declared manifesto during state election period. the interest rate was slashed to 9 percent (1999) and later to 3% (2004). the cost of funds was brought down to zero percent during 2011. the indian government planned to offer loans to self-help groups across the nation at a very cheaper interest rate. it also proposed to commence microfinance bank in andhra pradesh which would provide loans at 12-14 percent for these self-help groups against 26 percent offered by mfis (naga sridhar, 2011). in india, microfinance industry had not been under regulatory radar until the crisis stroked at andhra pradesh state mfis during october 2010. it created a shock wave to the entire microfinance industry as a whole. multiple loans, higher interest rates, coercive recovery practices lead to self-killing by mfi clients (kaur, 2016). this gained the attention of the andhra pradesh government, which enacted an ordinance bill. this chained the hands of mfis by introducing changes in collection policy. the act brought the operations of mfis to standstill. more than half a million shgs got linked to banks over the years. but the south india accounted to three-fourth of this figure with andhra pradesh as a definite leader. andhra could mobilize 80 lakh women in fifteen years. under nabard scheme of providing loans to shgs andhra benefitted a lot, where it consumed 52 percent of loan disbursement by itself. however, in recent times, even the microfinance industry is facing challenges. the loan repayment is affected by varied reasons like age of the client, amount of loan received, income level, number of family members, education level, occupation etc. non repayment of loan is the biggest risk faced by the mfis. the collection rate of mfis in andhra pradesh pitched to 5 -10 percent. for a microfinance funder, survival and growth are driven by customer satisfaction and commercialisation. to enjoy the benefits, free choices should be provided to clients. due to commercialisation, beneficiaries have become clients. the impetus https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 133 has shifted from voluminous rapid loan growth (quantity of loans) to more sustainable loan growth (quality of loans). as commercialisation of mfis’ led to multiple loans to individual borrowers, it landed upon non repayment of dues by the customers (roy, 2011). this led to serious financial crisis for mf in andhra pradesh. the growth in loan dipped to 11.35 percent. credit bureau took cautious steps in spotting clients with multiple loans. however, it has not helped to curtail the entire problem, as many are trapped in informal sources which don’t come under the periscope of credit bureaus. the temporary regulatory framework drafted to protect the clients has succeeded to a certain extent in reducing the problem. but the problem picked up for the microfinance institutions as the adverse discernments coupled with increased operating cost added fuel to funding mechanisms. during the same period, market structure kept changing as many ngo’s got converted into profit making nbfcs. few studies state that the solvency tested through z score, highlights that the risks faced by mfis is like banks (schulte & winkler, 2019). the solvency scores had impact in return on assets; while non-performing loans is a better measure to analyse the solvency especially for microfinance institutions (arcalean et al., 2007; chakravarty & pylypiv, 2015; janardhanan & uma, 2020). a study used a z score model to test the solvency of indonesian banks which identified distressed banks (khaddafi et al., 2017). like traditional banking, microfinance failures led to loss of capital which re-insists the necessity to z-score model (marulanda et al., 2010). few studies state that the survival rate of mfis could be measured through agility scale which would measure the ability to survive and thrive through variables like responsiveness, adaptability, flexibility, resilience, innovativeness, and compliance (opinya & kwasira, 2015). the solvency of institutions depends more on liability management (rahman et al., 2021). it becomes essential to estimate whether the microfinance institutions can be solvent and would survive healthy to contribute towards financial inclusion. most of studies focus on solvency and efficiency and not more on survival of microfinance institutions. this paper purely dwells with the objective of analysing the solvency and predicting the longevity of select nbfc mfis through survival analysis. it also intends to learn the factors discriminating solvent and insolvent institutions. the research methodology and sample selection process are described in the following section. method research design and sample selection this research aims at understanding the solvency and survival position of the mfis, thereby it is descriptive and analytical in nature. multistage stratified random technique is used which is explained below. top 5 mfis in crisil ratings of 2011 is taken for the sampling process. nbfcmfis were taken into consideration, as they faced a huge credit crisis than other forms. it accounted to 21 nbfc-mfis. the amount of loan portfolio and share accounted to rs.17907 crores and 86% respectively. selection of mfis is done based on gross loan portfolio (glp). higher the gross loan portfolio (glp), higher will be the probability of the credit risk. mfin (mfis network) micrometer 2012 listed the mfis based on loan disbursement and outstanding. the mfis selected for analysis belong to portfolio size more than rs. 500 crores. from the list, top 2 public nbfcmfis and 3 private nbfc mfis are taken for analysis. bandhan, equitas and sks are selected under private nbfc mfis and spandana sphoorty, share microfinance limited (sml) are selected under public nbfcmfis for the analysis. the above mentioned top 5 mfis were leading players who contribute to 68 percent of the total microfinance industry in terms of gross loan portfolio and 73 percent in terms of loan disbursement. the remaining mfis contributes to very small quantum. hence the top five are selected as representative https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 134 sample. in this, 80% of large mfis with loan size above rs. 500 crores are in southern region of india and 50% of mfis are located exclusively in andhra pradesh. source of data & data collection and scaling technique the relevant 10-year data up to 2013 is taken for analysis from the mix (microfinance information exchange) market, annual reports, financial statements, company website, financial projections, company profile and mfin. further as the microfinance industry underwent deep changes. many mfis got changed in its form, structure as well some turned into universal/ commercial banks and some into small finance banks & payment banks. thereby the data after 2013 may not suit the researcher requirements. secondary data was used to measure the solvency and survival positions of mfis. research tool altman z score model 4 the altman z score model revised version 4 (2000) is applicable for banks and financial institutions. (sharma, 2013; krishna chaitanya, 2005). solvency risk speaks on the capital strength of the financial institutions. adequate amount of equity measured through the equity to total assets, allows the institutions to absorb shocks. higher the capitalization, lower the insolvency risks. lack of liquidity will lead to insolvency. in business bankruptcy prediction model of altman’s suggests revised z score (anjum, 2012) with 5 ratios namely x1-working capital / total assets (0.717); x2 retained earnings / total assets (0.847); x3 ebit / total assets (3.107); x4 net worth (book value) / total liabilities (0.420); x5 sales / total assets (0.998), which helps prediction of insolvency in advance. it also suggests revised model for non-manufacturing companies as x1 working capital / total assets (6.56); x2 retained earnings / total assets (3.26); x3 ebit / total assets (6.72); x4 net worth (book value) / total liabilities (1.05). the altman’s z score model is used to analyse the solvency of firms. the researcher has used altman’s revised model 4 meant for non-manufacturing institutions. this model uses 4 ratios instead of 5 namely working capital / total assets, retained earnings / total assets, ebit / total assets, net worth (book value) / total liabilities with weights 6.56, 3.26, 6.72 and 1.05 respectively. if the scores are above 2.6, they are healthy companies, if it ranges between 1.1 to 2.6, they are in gray areas, scores below that means those companies turn out to be bankrupt. survival analysis (sa) is used to predict the event occurrence. the dependent variable has 2 portions survival and hazard function. the survival function explains the probability of survival or solvency up to a specified duration. the hazard function explains the event of insolvency of the corporate within a stipulated period. sa is used to test the future growth of the mfis. it describes the proportion of population that will survive or die. it’s otherwise called as duration modeling in economics. in the survival chart, each drop down shows an event happening. the event is the chance of the company becoming an insolvent. cross sign shows the censored event (survival chance). (one is event occurred, zero is survival or censored event). spss is used to perform survival analysis. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 135 results & discussions table1. percentage of solvency position throughout the study period and cumulative ranking based on weighted average solvency scores. mfis bankrupt (1)% gray areas (2)% not bankrupt (3)% weighted average solvency levels cumulative rank sks 20 10 70 2.5 1 bandhan 40 30 30 2.16 3 spandana 70 20 10 1.9 4 share 70 20 10 1.4 5 equitas 17 50 33 1.4 2 solvency position table 1 shows the solvency position of the respondent companies for the study period. altman’s multi discriminant analysissolvency models version 4 was used and their weightage for each variable had been identified. version model 3 was also executed which showed the solvency positions of the 5 companies were not in appreciable condition. sks was not bankrupt during the years 2009-2011, but still they were not free from solvency issues. in other years it appeared to be insolvent. bandhan and spandana sphoorty also did not satisfy the solvency grades and deemed to be insolvent. the results look similar for share and equitas too. bandhan was offered in principle approval to operate as a bank by reserve bank of india, india’s central bank. the researcher felt that the company which is deemed to be insolvent cannot be offered to be a bank thereby attempts to implement revised model 4 to check for its solvency position. altman’s revised model 4 shows that sks has tough times during the last 2 years. bandhan had struggled during the beginning years and spandana sphoorty had a mixed fortunes and tough times. share was bankrupt in 2008-09. for equitas, the situation is bit promising than other mfis as it shows the lower solvency position only in the first year, after which the situation has kept improving only. altman’s revised model 4 results provides 90.9 percent success of predicting the bankruptcy of the firm one year in advance and 97 percent accuracy of non bankruptcy. table 1 shows the proportion of being bankrupt by the respondent companies. the last 2 years seems to be a bankrupt situation for sks proven by both models. sks microfinance had been the most affected mfi after the ap crisis. the trends were promising until 2010. 70 percent of its life span during the study period had been with good solvency position and 20 percent was bankrupt and 10 percent was under gray area. bandhan did not have a promising scenario under both methods, especially the starting years. interestingly bandhan was under either gray or nonbankrupt scene during and after ap crisis. even bandhan is bankrupt during 40 percent of the study period and could maintain good solvency position only during 30 percent of the study period. spandana sphoorty is bankrupt in 70 percent of the study period and had been at good stake for 10 percent only. share is bankrupt for 70 percent of the study period. equitas with just 17% shows the strong solvency position over the years. altman model helps to identify mfis solvency position. the results of altman’s z score model showed that few of mfis are solvent and few are not and mostly the private one were much efficient than the public nbfc https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 136 (youssef, 2018). to identify the factor that discriminates the solvent and insolvent mfis, mda is performed. 10 variables are taken to classify the mfis into solvent and insolvent which was used as an input for survival analysis. survival positions of microfinance institutions over a period using survival analysis solvency position refers the ability of the firm to cover the fixed cost in longer run. survival analysis refers to long term continued healthy existence of the firm. altman z score model was performed, and the scores had been analysed. for the survival analysis, the bankrupt years are zero and other years are coded as one. kaplan meier’s survival analysis is performed using spss. the solvent scores are zero and the insolvent is taken as one. three items are taken into consideration. the researcher has considered the first-year value as 12 months, 2nd year as 24 months etc for 10 years). the sks was assigned as 1, bandhan as 2, spandana sphoorty as 3, share as 4 and equitas as 5. solvency position of each year is considered for analysis. hypothesis tested null hypothesis: there is no significant difference between the survival positions of microfinance financial institutions over a period. table 2. survival positions of microfinance institutions over a period kaplan-meier overall comparisons chi-square df sig. log rank (mantel-cox) 9.370 4 .052 breslow (generalized wilcoxon) 13.025 4 .011 tarone-ware 11.425 4 .022 test of equality of survival distributions for the different levels of company. figure 1. survival analysis of select indian microfinance institutions the each drop down in the chart shows an event happening. the event is the chance of the company becoming insolvent. cross sign shows the censored event (survival chance). (1 is event https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 137 occurred; 0 is survival or censored event). sks seems to be much volatile slightly picking stability in the last 24 months and the values started to approach the stronger values (close to zero). share is riskier than other mfis’ as the values are closer to one. as the log rank (mantel-cox) breslow (generalized wilcoxon) and tarone-ware are significant (p value is greater than 5% significance) the null hypothesis is hence rejected. (there is a significant difference between the survival curves of the mfis’ over a period). the results show that public nbfc mfis share and spandana sphoorty are still closer to 1 which means they are facing solvency risk whereas for the sks, bandhan and equitas the values are below 0.5 and sometimes 0.3 too which meant they are closer to zero i.e. solvency score. in spite of the issues faced by the mfis’ they are finding the best means to improve their future operations. it seems the existing scenario will persist in future manoeuvres too. table 3. factors discriminating the solvency position of mfis. hypothesis: there are no significant discriminating factors determining solvency position of firms. tests of equality of group means wilks' lambda f df1 df2 sig. portfolio at risk .890 5.413 1 44 .025 write off .994 .275 1 44 .602 glp .967 1.509 1 44 .226 loss reserves .831 8.923 1 44 .005 roaa .851 7.715 1 44 .008 operating efficiency .983 .750 1 44 .391 productivity .959 1.875 1 44 .178 alm .980 .901 1 44 .348 liquidity .781 12.352 1 44 .001 based on the reviews made, the following discriminating variables were identified and tested for solvency position of firms. portfolio at risk, write-off, gross loan portfolio, loss reserves, sustainability, return of average assets, operating efficiency, productivity, asset liability management and liquidity. the solvency group is more significant than the insolvent group. portfolio at risk, loss reserves, return on average assets (roaa) and liquidity is significant in predicting variables. among the four predictive variables, liquidity and loss reserves are more significant than other variables. the strength of relationship of predictor variables and solvency position is 0.664. the wilks lamda value shows that the model is fit. the structure matrix shows that liquidity & loss reserves which are internal factors that are the best discriminating function coefficients and correlation between variables (tanwar et al., 2020). findings and suggestions the survival analysis shows that the future of the mfis. it is used to test the future growth of the mfis. it describes a proportion of mfis that may survive or die. it also reflects the same scenario as that of solvency position, that the public nbfc-mfis’ future is much dull. share and spandana sphoorty are still closer to 1 which denotes that they are under the pressure of solvency risk. whereas for the private nbfc-mfis sks, bandhan and equitas the values are below 0.5 & 0.3 which means there are closer to zero i.e. solvency score. despite the issues https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 138 faced by the mfis’ they find the best means to improve in their future operations. among the public nbfc mfi and private nbfc mfi, private institutions perform better than public nbfc mfi. the ap based mfis survival shows that they are much risk prone in nature. in later years, it is proved that bandhan turned to a universal bank (2015) and equitas as small finance bank (2016) due to its good credentials. sks merged with indusind bank. the long-term solvency is questionable. this model highlights better model to predict the longevity of financial institutions and the scenario is getting reflected in recent times. survival analysis reflects the scenario in a much better way. research implications among the public nbfc mfi and private nbfc mfi, private institutions perform betterthan public nbfc mfi. the ap based mfis survival shows that they are much risk prone in nature. the long-term solvency is questionable. as stated earlier the model highlights proper audit ensuring the compatibility of objective with the business model. the solvency position of the private nbfcs better than public nbfc mfis. the public nbfc mfis should concentrate on portfolio at risk, loss reserves, return on average assets (roaa) and liquidity inorder sustain the solvency position. the regulators should strengthen the regulations specially on lending and collection process to contain further incidences on suicide epidemic. the survival analysis clearly helps to understand the long-term health and future of the mfis. thereby suggesting the mfis/ financial institutions to utilise the survival analysis as a tool to predict the long-term health of their concern. the government should ensure as well create credit ambience, creation of strong laws toensure that the poor are not ransacked by the financial institutions at large. conclusion the future of mfis depends on the current performance and must be challenged to scale on operations, sustainability and cost (thorat, 2006).the mfis need to concentrate on solvency position to have better profitability and future. adoption of better financing techniques and products suitable for market requirement can make the difference. mfis concentrate on financing poor, chances for exploitation are high, thereby proper regulation and supervision would help in compliance part and the mfis may not deviate from set norms (cull et al., 2011; 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(2020). revisiting the efficiency of indian banking sector: an analysis of comparative models through data envelopment analysis. indian journal of finance and banking, 4(1), 92-108. https://doi.org/10.46281/ijfb.v4i1.585 youssef, a. b. (2018). migration analysis of credit risk in tunisian banking sector. indian journal of finance and banking, 2(1), 34-43. https://doi.org/10.46281/ijfb.v2i1.91 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://dx.doi.org/10.2139/ssrn.1747874 https://doi.org/10.46281/ijfb.v4i1.482 https://doi.org/10.46281/ijfb.v4i1.585 copyright © cc-by-nc 2019, cribfb | ijfb indian journal of finance and banking; vol. 3, no. 1; 2019 issn 2574-6081 e-issn 2574-609x research article published by centre for research on islamic banking & finance and business, usa 23 the executive mechanism of rastin profit and loss sharing (pls) banking bijan bidabad 1 mahmoud allahyarifard2 abstract despite the interest of bankers for using profit and loss sharing (pls)3 banking for the last decades, it has not prevailed yet executively. the existence of different definitions of riba, absence of appropriate operational, supervisory, and managing mechanism on pls are some reasons that haven't allowed this kind of banking to be practiced yet. here, we are going to introduce a practical method for profit and loss sharing (pls) banking to overcome these problems. in this bank, the basis for determination of interest rate of loans is real economy return rate. the bank operates as an intermediary, who gets commission fee, collects saving resources and as an attorney or legal representative of the depositor, allocates them to investment projects, and supervises the detailed operation of the contractor. the yields of the investment will transfer to resources owners who are depositors whatever profit or losses.the pls banking is a banking system with newly defined instruments of mosharaka and pazireh that not only stabilizes the financial and economic markets by preventing the banks, loanees /entrepreneurs and design, construction and contractor sectors in the economy from bankruptcy during crisis periods and volatile markets, but also makes the banks as an international firm which perform similar jobs as stock exchange markets for transactions of pls products certificates through a secondary certificate market on virtual internet space. depositors will earn more stabilized benefits too.in this designed method, a trustee (amin) is a unit who supervise the contractor/entrepreneur operations on behalf of the bank for being honesty in carrying out the project, controlling on executive operations along with announced programs, resources allocation manner, and auditing financial statements.pls banking will use new financial instruments and innovations such as mosharaka (partnership) certificates for projects with specific ends and pazireh (subscripted) certificates for endless (productive) projects. establishing of secondary exchange market for the transaction of certificates, and various insurance services will play important roles for activating and increasing the efficiency of newly established virtual markets.all of the activities in this method will be done on the basis of compiled instructions. the framework and the organization of the pls banking have been analyzed in forms of required committees, units, and departments tailored for this type of non-usury bank (nubankco.) definition. keywords: pls, riba, financial management, islamic banking jel:l86 ,l87 ,g21 ,g24 introduction many countries around the world have been doing huge tasks for the fulfillment of islamic banking. the low-risk characteristic in this kind of banking has caused a tendency to keep getting this kind of banking method even in many non-muslim countries besides muslim countries in order to get rid of risks like american, european and some asian countries. based on imf reports, the average growth of the islamic banking has been estimated about 10% 1(b.a., m.sc., ph.d., post-doc.) professor of economics, islamic azad university, tehran, iran. http://www.bidabad.com/ bijan@bidabad.com tel: +98.21.88360810 fax: +98.21.88360811 2expert of r&d dept., bank melli iran ,office: +98.21.88916343, fax: 98.21.88905436, allahyarifard@gmail.com 3 this invention has been protected by us patent law under the application number: us 12/588,188 http://www.bidabad.com/ mailto:bijan@bidabad.com mailto:allahyarifard@gmail.com copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 24 15% each year in the last decade, and it will be forecasted in the next years with the same growth as before. despite the huge growth, profit and loss sharing (pls) has not been developed satisfactorily, and it usually has been mingled with usuric banking because of being so new in view of its performance and operational mechanism. even its financial instruments as profit and loss certificate or investment deposit certificate had been introduced at the end of the 1990s were forgotten later. generally, the main reasons for unsuccessful in this kind of banking method come from the following causes:  different jurisprudential understanding of usury by different islamic religious sects.  lack of supervisory and managing processes on loanee’s financial and executive operations. the absence of appropriate executive processes in operations, supervision, and management sides consistent with profit and loss sharing requirements, and incompatibility of bank’s organizational infrastructures are significant factors to unfulfilled ideal theories of islamic banking. because the banks have not been organized and established for supervising on details of investment operations as a supervisory organization. essentially these organizations cannot tackle this kind of functioning. therefore, practically, the interest rate comes into pls banking calculations by any definition or similarity. however, though the manifestation of riba is not seen in it, the interest rate would be recognized by scrutinizing the interior of the financial operations4. on the other hand, jurisprudential deductions of different islamic sects are not similar, so this point caused the islamic banks around the world generating many nonusuric products that the most of them are compatible with current usuric banking products and moved into the usuric realm. even in iran, in spite of existing more external coordination and more unanimous than other countries, the result was similar as well. however, the unanimity in early 1360s hejri during approving non-usuric banking law has also digressed thereafter. therefore, first, the general solution for fulfillment of pure islamic banking requires that the subject will be analyzed and considered from the base. the main purpose of this paper is to consider the practical model for pls banking and the present appropriate method for performing real non-usury banking accompanying with necessary provisions for applying modern financial instrument that will be provided based on information technology. actually, the fulfillment of pls banking will cause increasing stability of market transactions and equal distribution of the revenues of investment activities and decreasing the investment risk. on the other side, the proposed financial instrument (participation certificates and subscripted certificates) have ability to be bought and sold on the internet through internet banking and anyone having a bank account with the approved id information is able to buy and sell these financial assets around the world. 4 for instance see:  گذاري و كاستيهاي فقه متداول در اقتصادي ربا در وامهاي مصرفي و سرمايه -تحليل فقهي عبدالرضا هرسيني،بيدآباد، بيژن و .1382. ارائه شده به همايش دوساالنه اقتصاد اسالمي، پژوهشكدة اقتصاد، دانشگاه تربيت مدرس، كشف احكام شارع http://www.bidabad.com/doc/reba9.html  عبدالرضا هرسيني، شركت سهامي بانك غيرربوي و بازبيني ماهيت ربوي و غيرربوي عمليات بانكي متداول. بيدآباد، بيژن و ، 1382دي 3-4، «نظرية اقتصاد اسالمي و عملكرد اقتصاد ايران»مي مجموعه مقاالت سومين همايش دوساالنة اقتصاد اسال http://www.bidabad.com/doc/sherkat6.htm ، تهران .193-224پژوهشكدة اقتصاد، دانشگاه تربيت مدرس، صفحات  bidabad, bijan and mahmoud allahyarifard, "implementing it to fulfill the profit and loss sharing mechanism", islamic finance news (ifn) journals, vol. 3, issue 3, 6th february 2006. http://www.bidabad.com/doc/summary-pls-it-1.html  bidabad, bijan and mahmoud allahyarifard, "it role in fulfillment of profit and loss sharing", proceeding of the 3 rd international islamic banking and finance conference, monash university, kuala lumpur, malaysia, 16 th and 17th november 2005. http://www.bidabad.com/doc/english-pls-5.pdf  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. 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. http://www.bidabad.com/doc/reba-english-4.html  bidabad, bijan, non-usury bank corporation (nubankco), the solution to islamic banking, proceeding of the 3rd international islamic banking and finance conference, monash university, kl, malaysia, 16-17 november, 2005. http://www.bidabad.com/doc/nubankco.html http://www.geocities.com/bijan_bidabad/reba9.html http://www.geocities.com/bijan_bidabad/sherkat6.htm http://www.bidabad.com/summary-pls-it-1.html http://www.bidabad.com/english-pls-5.pdf http://www.bidabad.com/reba-english-4.html http://www.bidabad.com/nubankco.html copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 25 the experience of the pls banking the prohibition of riba (usury) and profit and loss sharing (pls) subject has a long history, and the subject returns to torah and historical religious texts before islam. the pls was developed with islam growth and nowadays have been paying attention as an important financial instrument, and pls is recognized as a modern successful financing instrument5. mudarabah and musharakah are two financial instruments based on the pls method that eliminates the fixed rate of return (interest rate) from financial operations and participate financers into the profit and loss of investment activities.6 the various conceptual definitions have been presented on pls by some islamic economists, and every one of them has touched it as follows:  "pls is a contractual arrangement between two or more transacting parties, which allows them to pool their resources to invest in a project to share in profit and loss" (humayon, presley, 2000) 7.  "under the pls paradigm, the assets and liabilities of islamic banks are integrated in the sense that borrowers share profits and losses with the banks, which in turn share profits and losses with the depositors" (chong, liu, 2007).8  "pls leads to a more efficient allocation of capital because the return on capital and its allocation depend on the productivity and viability of the project" (khan, 1986) 9. chong liu (2007) studies on malaysia islamic banking in large islamic banking of malaysia of capital and insurance markets (world bank, 2006)10 show the following consequences:  despite the pls banking focuses on the islamic banking, the islamic banking of malaysia has not been successful in fulfilling pls, and adoption of pls paradigm has been much slower on the asset side than on liability side. based on this study, on the asset side, only 5% of islamic banks and financing is based on the pls paradigm of mudarabah (profit-sharing) and musharakah (joint venture) financing. islamic bank financing in malaysia, in practice, is still based largely on non-pls manners of financing that are not allowed in the shariah (islamic law) and obeys the spirit of the usury. on the liability side, however, mudarabah (profit-sharing) deposits, which account for 70% of total islamic deposits, are more dominant.  the rate of return in malaysia pls banking is less than the rate of return in conventional banking, so the rate of return of this kind of deposits depends on conventional banking rate of return but not vice versa. the same problems are observed in iran. generally, pls banking in iran's islamic banking did not develop because of similar reasons. focusing on iran banks balance sheets items indicates that at each side of assets and liabilities, the proportion of musharakah products in comparison with other products was at minimum before the compulsory decision for decreasing the interest rate by the government. in other words, the musharakah contractions were at the minimum, and the exchange contractions had the maximum share on monetary resources. furthermore, the rates of return of this kind of investments are determined on the basis of expected return (and not actual return). in the debit side, in a majority of cases, the depositors receive a return on the basis of vekalat contraction with a specified rate determined by the central bank of iran. during the last decade by emerging private banks and increasing competition, they used to pay 1% or 2% more than in part (promised) payments as the final rate for settlement with 5 rammal, h. g. (2003) 'mudaraba in islamic finance: principles and application', business journal for entrepreneurs, vol.4, pp.105–112. http://www.westga.edu/~bquest/2004/musharaka.htm 6 hussain gulzar rammal and ralf zurbruegg, "awareness of islamic banking products among muslims: the case of australia", journal of financial services marketing (2007) 12, 65–74. doi:10.1057/palgrave.fsm.4760060, http://www.palgrave-journals.com/fsm/journal/v12/n1/full/4760060a.html#bib24 7 humayon a. dar and john r. presley (2000), "lack of profit loss sharing in islamic banking: management and control imbalances", loughborough university,department of economics, economic research paper no. 00/24, http://www.lut.ac.uk/departments/ec/reasearchpapers/2000/00-24/erp00-24.pdf 8chong, b.s., liu, m.h, 2007, "islamic banking: interest-free or interest -based", http://www.efmaefm.org/0efmameetings/efma%20annual%20meetings/2007-vienna/papers/0019.pdf 9khan, m.s., 1986. islamic interest-free banking. imf staff papers 33, 1–27. refer to the above address 10 world bank, 2006. country brief report: malaysia. http://siteresources.worldbank.org/inteaphalfyearlyupdate/resources/550192-1143237132157/malaysiamarch06.pdf http://www.westga.edu/~bquest/2004/musharaka.htm http://www.palgrave-journals.com/fsm/journal/v12/n1/full/4760060a.html#bib24 http://www.lut.ac.uk/departments/ec/reasearchpapers/2000/00-24/erp00-24.pdf http://www.efmaefm.org/0efmameetings/efma%20annual%20meetings/2007-vienna/papers/0019.pdf http://siteresources.worldbank.org/inteaphalfyearlyupdate/resources/550192-1143237132157/malaysia-march06.pdf http://siteresources.worldbank.org/inteaphalfyearlyupdate/resources/550192-1143237132157/malaysia-march06.pdf copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 26 the customers. increasing government pressure on banks for decreasing exchange contraction return rates to keep the banks with positive profit markup in recent years caused the banks to go toward the musharakah contractions. however, the fulfillment of the pls banking in the assets side of iran banks is facing the following problems:  lack of specialist organizations and approaches for effective supervision on investment projects on the basis of the musharakah contractions.  lack of it capabilities for applying integrated systems in islamic banking11.  lack of design of new financial instruments, and lack of effective capital market for financing as pls banking. pls banking architecture the foundation of the pls banking is based on the keep getting benefit of economy real sector return for the whole participants of the economic activities. therefore, the capital owners (shareholders), labor, services, and technology suppliers and operators should get benefit proportionally on the basis of their own portion and inputs. fulfillment of this approach could be provided by the executive preparation of pls banking. for designing pls banking architecture, first of all, each party or entity and its functions should be explained precisely. in addition to the bank, depositor, entrepreneur (project handler and technical and executive knowledge owner) new organizational pillars are required for the practical structure of the pls banking to be established to handle over special duties regarding the specific nature of partnership activities. in the new architecture, the functions of each unit will be different from what they are in conventional banking, though their names are called as same as conventional banking units. bank: the bank as an authorized agent on behalf of the depositors allocates the deposit resources of depositors to approved applicants of the credit facilities according to specific contracts and distribute the investment return as profit or loss consequences among the depositors, bank, and entrepreneur. the bank contractions with each party could be made on the basis of commission or profit and loss partnership. the bank as depositor's attorney or representative is obliged to protect the depositor's rights and must apply her complete own specialized powers for preserving depositor benefits. depositors: who is the supplier of financial resources, based on investment joaleh contracts uses her financial resources to purchase certificates of participation (mosharaka certificate) for participation in finitude projects or buy certificates of subscription (pazireh certificate) for participation in endless projects; in specific project or specific package of projects or profit and loss participation in the pls bank branch, to participate in the profit and loss of the project (or financial product) according to her share. entrepreneur: is a legal entity that combines her own cash and non-liquid assets with the depositors' deposits as joint owners (spooling) and bank intermediary to establish a joint venture activity. trustee (amin): is a unit who takes over the responsibility of supervising on the pls process on behalf of the bank about the quality of carrying out the project, controlling practical operations in compare with approved documented entrepreneur plan, benchmarking, entrepreneur resources allocation and quality of optimum resources allocations etc by applying key indices and verifying entrepreneur financial statements. arbitration (hakamiyat): takes over resolving the disputes and conflicts among the bank, entrepreneur, and depositors whose financial relationship is based on pls banking. in the case of concordance of the parties, resolving of claim might be to a pre-approved third-party judicial person/entity that is acceptable for parties in the conflict. secondary market: the secondary market is suggested for simplifying, progressing, and to make mosharaka (partnership) and pazireh (subscripted) certificates more attractive. bank creates this facility that mosharaka (partnership) and pazireh (subscripted) certificates can be legally be sold and purchased in the secondary market on the internet. 11bidabad, bijan and mahmoud allahyarifard, "implementing it to fulfill the profit and loss sharing mechanism", islamic finance news (ifn) journals, vol. 3, issue 3, 6th february 2006. http://www.bidabad.com/doc/summary-pls-it-1.html http://www.bidabad.com/summary-pls-it-1.html copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 27 consultants: the consultants take over the role of economic, financial, and technical assessments in pls banking. the complexity of some projects in view of the applied technology, the use of hiring specialists in the area is doubtlessly inevitable. interactions and relations in the pls banking the relation between the essential pillars of pls banking is shown in chart 1. based on this method, apart from the bank is private or governmental, the interest rate of the bank's facility will be determined according to real investment return. bank as fund intermediary gains wage or commission as attorney or agent of the depositor and the rest of the investment return will be paid back to depositors as profit or loss consequences. accordingly, bank according to participatory investment based on general or special attorney contracts invests deposits collectively based on a diagnosis of the depositor (in product 1 and 2) or on her diagnosis (for product 3) in the desired projects/plan and distribute the investment outcomes among providing depositors. in the first step of pls operation, entrepreneur presents her proposal and required documents and feasibility study regarding economic, financial and technical aspects of his project/plan according to compiled instructions in pls banking instruction set. the entrepreneur delivers all required official letters and documents to the bank according to related bank compiled instructions including budgeting, time schedule, size of necessary resources and resource allocation manner, qualification of carrying the project, phasing, quality management, reporting, project completion manner, specification of completed project quality…. the bank in case of necessity when the project contains special, complex or high technology and the bank's specialists are not able to evaluate and make supervision on the project will outsource the project evaluation and supervision as well to other consultants for evaluation and/or supervision. the bank in case of positive evaluation on both entrepreneur and proposal will publicize the project to interested depositors for participating in depositors according to specified pls banking products for financing the projects. the depositors would buy the mosharaka (partnership) certificates or the pazireh (subscripted) certificates and donate deposits to the bank, and the bank allocates monetary resources to the suggested projects by empowering the entrepreneur to start the project. trustee (amin) supervises and controls the operations of the entrepreneur directly on behalf of the bank for the whole process. obviously, reports of the trustee will be considered as the main criterion for next payments to an entrepreneur from the bank. after completing the project according to the related instructions and predefined pls accounting formulas, the portion of profit or loss consequences and the bank commission/wage portion will be calculated by the accounting and auditing department. the portions of entrepreneur, depositors, and bank will be determined and are transferred to their accounts. in case of existence of any reports on the interruption of operations of the project from the trustee side, the amount of delaying losses will be computed and determined according to the related instructions. chart 1: pls banking pillars depositor bank entrepreneur trustee agent arbitration copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 28 the pls banking products as mosharaka (partnership) and pazireh (subscripted) certificates are issued by pls bank under the central bank general approved pls regulations12 , and the certificates will be supplied to the depositors. the depositors could sell them at the secondary market before the due settlement time in case of revoking to cancel their depositing activity. they can do this via the bank's electronic portal on internet or bank's transaction counters. insurance companies' collaborations to hedge the certificates have been observed in this kind of banking. legal requirements lack of executive experience necessary for this type of banking cause new regulations and the development of new guidelines. the first step should be in the form of necessary upstream regulations and rules to be issued by the central bank if there is a lack of regulations or guidelines within the banking industry for this kind of banking financial tools such as participation certificates and subscripted certificates for their legal protections. components generally, the components of the pls banking could be classified as the following items:  products and services  finitude projects  mosharaka (partnership) certificates for profit and loss sharing on a special project.  mosharaka (partnership) certificates for profit and loss sharing on a projects portfolio.  mosharaka (partnership) certificates for profit and loss sharing on a pls bank.  endless projects  pazireh (subscripted) certificates to shares  customer groups  depositors  real entity  legal entity  entrepreneurs  legal entities (private, governmental)  financial instruments  insurance agents  portfolio management of mosharaka (partnership) and pazireh (subscripted) certificates.  minimum risk and return  middle risk and return  high risk and return  certificates insurance with avoidance from  moral hazard  adverse selection  asymmetric information  executive insurance  responsibility insurance  project's place insurance  mechanism and specification of mosharaka/pazireh it based transactional system  information system  buying/ selling of mosharaka/pazireh certificates as remote  24x7  multi-languages  multi-currencies 12central bank supervises on pls banking operations as legislator of monetary regulations. approval and confirmation of required regulations in this kind of banking method and general regulations for issuance of pls banking products might be allowed by central bank or other monetary authorities depending on different countries legal systems. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 29  integrated  high secured  privacy  contractions  depositor  jualah  wakalah  solh  entrepreneur  mosharaka  consultant (assessment, trusteeship)  jualah  office infrastructures, organization  pls strategy committee  interpretation and revising of pls regulations and process specialist group  pls office including the following department  legal department  project evaluation, including the following specialist: o economic o financial o technical and engineering (back office)  auditing department  financial engineering management  trustee (amin) o financial o technical and engineering o legal  pls branch (front office)  information (consulting services)  cashier  mosharaka/pazireh certificates transactions  others  typical contracts including:  contraction with entrepreneur  contraction with depositors  contraction with the trustee (amin)  evaluation contraction  instructions  documents and required papers  entrepreneur ability reaching  justification reports  accounting and auditing  guarantees, collaterals, and inputs  banks returns  the general condition of contraction  set out the contraction  standards and requirements for supervision  trustee (amin) competency  entrepreneur reporting  mosharaka/pazireh certificates transactions  mosharaka/pazireh certificates swapping  time schedule variation  new partnership  depositor cancellation  settlement  arbitration copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 30  force major instructions for fulfillment of the pls banking, operational methods will be performed by the following compiled instructions: 1. guarantees, collaterals, and capital brought: depend on the entrepreneur classification (green and yellow groups) the collateral will be taken in different types of collaterals and guarantees for good performance. the input portion of the entrepreneur, including cash or non-cash in each category, is determined by this instruction. 2. required documents for project evaluation: all the required financial and non-financial documents for project evaluation and legal and performance authorizations are determined by this instruction. 3. entrepreneur reportings: the reports to the bank, trustee, inspector, or other controlling authorities are determined in this instruction. 4. feasibility reports: the main purpose of this instruction is to organize and standardize the economic, technical and financial feasibility studies of the project till the affiliated departments can evaluate the mentioned documents according to the specified framework. 5. arbitration (hakam): the condition of referring conflicts among parties (depositors and entrepreneur with the bank) to a pre-accepted third person/s is determined in this instruction. 6. force major: coming up unexpected events for beneficiaries of the pls banking are to be handled by this instruction. 7. instruction for revocation of depositors to cancel her deposit before due date: revocation of depositors to cancel her deposit for not carrying on the investment and the settlement manner for the cancelation by selling mosharaka and pazireh certificates is specified in this instruction. 8. time schedule and expense deviations: in case of coming up deviations, either in time schedules or expenses plan of the projects coming from either fault or delinquency of the entrepreneur or effect of inflation in calculation of costs of entrepreneur and also the manner of calculation of share of beneficiaries in these circumstances are specified in this instruction. 9. new partnership: in the case of extended financing of pls projects, issuance of new mosharaka and pazireh certificates would be according to this instruction. 10. to settle with an entrepreneur: the settlement terms and manner with the entrepreneur is specified in this instruction. 11. pazireh certificates swapping: to change pazireh certificates to shares and the related processes and valuation of shares are specified in this instruction. 12. mosharaka and pazireh certificates transactions: the mosharaka and pazireh certificates transactions on internet and establishment of the secondary market and market management are specified in this instruction. 13. the entrepreneur ability: including the points regarding technical and financial capability and qualification classification of the entrepreneurs based on the different projects, collaterals types and guarantees for good performance, the fulfillment of obligations, the share of entrepreneur, entrepreneur partnership inputs and entrepreneur classification to three categories of green, yellow and read. 14. trustee (amin) competency: specification and competency of the trustee as supervisor agent to supervise the entrepreneur performance as real persons or legal entities are described in this instruction. 15. the standards and supervision obligations: this instruction takes over the whole obligations and required standards for supervisory processes. 16. general conditions of contraction: to regularize proper contractions and making contents of contracts obligatory and legally mandatory for each party in the pls banking this instruction is to be used. 17. contracts compilation: typical compiled contracts of the bank with entrepreneur, depositors, the trustee (amin) and consultants of the project have been brought in this instruction for each type of pls banking products including finitude and endless projects. 18. accounting and auditing: the requirements and obligations of the auditor, auditing process, financial statements of the entrepreneur's company, and documents verifying to confirm the accuracy of the operations of entrepreneur are cited in this instruction. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 31 19. bank gains: gains of the bank in all processes of primary and supplementary evaluations, supervisory services, the trustee (amin), financial engineering, auditing, and the other services and also the bank's wages and commissions have been specified in this instruction. it infrastructures based on the previous researches13, one of the important reasons to not prevailing pls banking is lack of integrated systems, which able the bank to connect whole producers of information resources together and every transaction will be traced and supervised through them. therefore, for achieving the ideal pls condition it is necessary to integrate different systems including enterprise resource planning (erp), and islamic core banking containing other modules and subsystems like customer relationship management (crm), supply chain management (scm), manufacture executive system (mes), human resource management (hrm), business process reengineering (bpr), workflow management (wfm). but this solution is for as an ideal pls. since integrated core banking necessities for this type of pls banking is not available yet, so it is not possible to apply this integrated pls banking as full automatic banking and leave this idea for the future extension of pls. the applied technology in this phase is a web-based secondary market portal for mosharaka and pazireh certificates, which will be applicable through the internet connection and can be connected to the personal accounts in the bank. the individuals or the certificate's owners become able to deal with these kinds of digital papers (certificates) through the internet-based communication networks. therefore, these certificates as an asset can be negotiated and traded over the world on the internet. generally, the pls banking products specifications have been shown in table 1. the attractiveness of the products will be increased through the internet-based transactions on the virtual secondary market on the internet. pls banking products and services according to table 1, the designed products and services in pls banking are separated into two categories of finitude and endless projects. the bank will get a commission for supplying some financial management services such as making confidence among the depositors, supervision, financial engineering, project management, and also transparency in the whole pls products to depositors.  the finitude projects partnership: in this category of the pls banking products, the investment return will be allocated and settled among the depositors, entrepreneur, and bank at the end of the fiscal year (for product type 3) or after the ending time when the project will be finished and sold depending on type of project. the products used can be a special project or a basket of projects. the applied financial instruments in these products are mosharaka certificate so that after depositing of the depositor in a project immediately mosharaka certificate will be delivered to the depositors.  the endless project's partnership: according to chart 2, the bank will subscribe to the shares in the form of issuing pazireh (subscripted) certificates for financing an endless project. the pazireh (subscripted) certificate is similar to mosharaka (partnership products) certificate and can be transacted at the secondary certificate market. after ending the construction period and when the project is ready to start the exploitation period, the pazireh certificates will be transformed into the shares of the corporation. the whole subscriptions process, exchanging pazireh certificates to the share papers will be performed under the bank supervision, and decisively the project ownership will be assigned to the depositors through changing their pazireh certificates to the shares, and after this transformation, the depositors will become company shareholders. the bank might do the whole transforming process through changing pazireh certificates owners to shareholders by establishing a new company (and not the entrepreneur constructing company) at the end of the construction period and at the beginning of exploitation period. the bank might sale the shares of the pazireh certificates owners in bidding, and after deducting the entrepreneur and the bank, portions pays cash to depositors. 13 bidabad, bijan and mahmoud allahyarifard, "implementing it to fulfill the profit and loss sharing mechanism", islamic finance news (ifn) journals, vol. 3, issue 3, 6th february 2006. http://www.bidabad.com/doc/summary-pls-it-1.html http://www.bidabad.com/summary-pls-it-1.html copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 32 the mosharaka and pazireh certificates the two important financial instruments of pls banking are the mosharaka and pazireh certificates.  mosharaka certificate is an anonymous (digital) paper that is issued with a specified nominal price for a specific duration (performance duration of the finitude investment project) by the branch of the pls bank. the owners of the papers participate on investment return in proportion to nominal price and duration of being as a partner in the project, and the bank will earn commission in lieu of supplying capital management services to depositors that are offered by depositors for investing their money resources in the pls banking products.  pazireh (subscripted) certificates is an anonymous (digital) paper is issued with specified nominal price and durations (performance duration of endless investment project up to the end of construction period) by the branch of the pls bank. the owners of these papers will be the owner of the company of the project in the form of shareholders in proportion to their nominal price of their certificate and duration of the partnership. according to table 1, anonymity, transformability to others, transact ability in virtual secondary certificate market and in stock exchange markets, commission return of transactions for the bank (0.0005 from each transacted parties – seller and buyer), demand and supply (market mechanism) based price determination on internet secondary market, and final settlement with the final authenticated certificate owner are some of the attractive specifications for both mosharaka and pazireh certificates. the main difference between mosharaka and pazireh certificates is in finitude and endless nature of the projects. in the case of mosharaka certificate, the settlement process will be done at the end of the construction period by bidding and selling the project. in case of issuing mosharaka certificate for partnership in the pls branch's profit (product type 3), the settlement process will be done at the end of the fiscal year when the pls branch's financial statements are finalized. in the case of pazireh certificate, the bank undertakes to change pazireh certificates owners to shareholders of the investment project, and there is no responsibility for pls bank to pay back the depositors and entrepreneur and responsibility of the bank will be finished after completing the above transformation. the process is shown in chart 2. table 1: the pls banking product and services framework mosharaka and pazireh certificates specifications financial hedging type of contracts settlement time profit/loss products anonymity transformable to others transactability in virtual internet-based secondary certificate market and on the bank counter and stock exchange in a mechanized it-based state. earning commission from both transactor parties per transaction. valuation of certificates based on demand and supply mechanism. transformation possibility of pazireh certificates to shares in endless projects. decisive final settlement with the last mosharaka certificates owners. customer groups can be private or governmental, real persons, or legal entities. insurance of some portion of the value of the projects can be arbitrarily applied other insurance instruments as responsibility insurance, engineering insurance, and accident insurance have been defined in different related contracts to hedge the project execution jualah wakalah solh completion of construction and selling the constructed project special project (finitude) completion of construction and selling the constructed project basket of projects (finitude) at the end of the fiscal year participation in pls branch's profit and loss (finitude) completion of the construction period and at the beginning of the exploitation period endless projects copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 33 chart 2: pls banking products and process pls banking products pls banking products ended projects ended projects endless projects endless projects participate in branch participate in branch participate in projects participate in projects profit allocation profit allocation participate in special project participate in special project participate in project portfolio participate in project portfolio issue pazireh certificates for principle’s company issue pazireh certificates for principle’s company issue pazireh certificates issue pazireh certificates issue pazireh certificates issue pazireh certificates biding, selling and settlement process biding, selling and settlement process with bank’s supervising with bank’s supervising change to shares change to shares new established company new established company with bank supervising with bank supervising with banking supervising completion time end of fiscal year pls banking customers groups according to this banking framework, the customers can be categorized into two groups of depositors and entrepreneurs of investments projects as follows:  depositors: depositors in pls banking could be a real person or legal entity and either private or governmental.  entrepreneurs: entrepreneurs in pls banking necessarily must be a legal entity/corporation, either private or governmental. legal entity specification for the entrepreneurs is necessary for auditing financial documents and statements that cause reliable and more transparent calculation for profit or loss calculations. islamic contracts in pls banking bank on the basis of jualah contraction arranges a formal agreement with depositors so that according to depositor opinion, provide partnership in entrepreneur's investment. in the other side, the bank based on mosharaka contract (based on civil participation contraction) will be entered into interaction with the entrepreneur. by this contract, the bank will do as an intermediate entity and gains haqh-aljualah (wage) from depositors and mobilize financial (deposit) resources entrepreneur. finally, investment returns portion for depositor will be transferred to the suppliers of the resources (depositors) based on the agreements of the contract. the solh (peace pact) contract is needful beside of the jualah contraction as necessary for simplifying mosharaka and pazireh certificates transactions on the internet-based secondary certificate market for depositor approval and her signature. pls banking instruments copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 34 in pls banking, the new financial instruments and innovations as mosharaka and pazireh certificates are applied. by pls banking, the bank increases the efficiency of monetary and financial markets and by issuing mosharaka and pazireh certificates and establishing secondary certificate market and designing mosharaka certificate basket/portfolio will play an important role in the mobilization of resources. performing the mentioned specifications of pls will facilitate domestic and international customers to enter the pls-based depositing and investment simply. the other complement financial instruments will be separated into mosharaka certificate basket/portfolio, issuing and applying insurance products for covering probable risks. the relation between risk and return in investment and financial activities and covering the whole customer groups' requirements in view of the risk-acceptability, the classification of the pls banking products is important. therefore, for decreasing risk in the pls banking products, the certificates can be classified in the following portfolios:  mosharaka certificate portfolio with low risk and low rate of return  mosharaka certificate portfolio with medium risk and a medium rate of return  mosharaka certificate portfolio with high risk and high rate of return for insurance encouraging and supporting of capital owners and decreasing different risks among them as moral hazard14, adverse selection15 , and asymmetric information,16 the bank can establish an organization to provide necessary supports. for avoidance from falling in moral hazard in the side of the capital owners, it is required that a portion of customer's principle of capital be covered by insurance coverage. the coverage may be around 50% of the deposited capital. this insurance is arbitrary and might be supplied by the bank or other insurance corporations and purchased by depositors organization of pls banking the organizational structure of the pls banking with paying attention to the above definitions might be designed in the form of pls banking strategy committee, pls banking specialist group, pls department, legal department, project evaluation department, auditing department, financial engineering management department, trustee (amin) and pls branch in which the latter is designed to have information, consulting services and cashier sections. summary and conclusions as long as the pls bank as a financial intermediary does not operate as conventional banks and receives wages from depositors for financial services she provides, will not meet bankruptcy in crisis. as the rate of the benefit of depositors is dependent on the real rate of return of the economy, depositors benefit increases through pls banking. in the period of crisis, the entrepreneurs of investment projects are more protected from bankruptcy; consulting, contractors, and constructors industry are not subject to serious financial defeats with pls banking. the financial and economic markets meet stability through pls banking. financial innovations of mosharaka and pazireh certificates make the bank act as an international portal performing similar jobs to a stock exchange market for the transaction of pls products certificates that can easily allocate and reroute resources to investments. in the pls banking apart from the bank is either governmental or private, the interest rate is determined by real 14moral hazard in insurance market indicates some cases that insured changes his or her behavior after buying insurance policy and with this imagination that instead of supplying losses try to announce more losses or change his/her behavior of paying attention to keep insured property. for example, some of the insured after buying the insurance policy would never care on insured property and this will increase the risk of insured properties. 15adverse selection is a market process that is caused by undesirable results due to asymmetric information between sellers and buyers. 16asymmetric information means one party has got more information than the other in their business. copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 35 sector and bank as financial intermediary gets a commission as an attorney or agent of depositors and will transfer the remaining investment return either profit or loss consequences to depositors. bank would invest collected deposits into the finitude or endless projects based on mosharaka contraction as either general or special attorney according to the depositor's desire (for type 1 and 2 products) or bank own choice (for type 3 products) and finally distribute the investment return among the depositors. in this regard, the bank after deducting commission as being attorney or agent will assign the whole benefits to come from investment to owners of monetary resources and do perform her own intermediary function according to compiled instructions. first, the entrepreneur refers to the pls branches and offers her proposal to the bank for doing a joint venture. she will be announced the participation conditions and regulations through an information portal designed for pls banking. the related evaluation fee will be taken from the customers and projects specifications, including proposal, economic, financial, and technical feasibility documents of the project will be taken from the entrepreneur. bank after evaluation of the proposal will introduce it to depositors. depositors by purchasing mosharaka/pazireh certificates allow the bank to use their deposits in participation into the approved project. in the pls a trustee (amin) unit will do supervision on entrepreneur operations on behalf of the bank for watching good performing of the project, executive operations controlling in comparison with announced programs, resources allocation manner and optimized allocation of resources by using key indices and considering the financial statements are duties of amin. in pls banking, the bank will use new financial instruments and innovations of mosharaka certificates for finitude projects and pazireh certificates for endless projects. secondary certificate market in cyberspace for certificates transactions is established by the bank. the whole operations will be done according to the compiled instructions. the pls banking organization was designed according to the above definition in the form of committees, units, and departments. for applying this kind of banking method, it might be performed by establishing a branch inside of the conventional bank. in this case, the whole activities of the pls banking shall be done alongside to the other conventional branch activities but with separated financial, accounting, organizational and office operations for preserving legal aspects of depositor's rights. references bahrain monetary agency issues new islamic banking regulations, vol. xlv no 5, 4 february 2002. bidabad, bijan. 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(2019) 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. https://www.cribfb.com/journal/index.php/ijibfr/article/view/274 http://dx.doi.org/10.20193/ijibfr.v3i2.274 http://www.bidabad.com/doc/english-pls-5.pdf http://www.bidabad.com/doc/pls-it-en.ppt bijan bidabad, (2019) 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 (revised) in: international journal of islamic business & management, 3(2), 1-15. https://www.cribfb.com/journal/index.php/ijibm/article/view/275 http://www.bidabad.com/doc/reba-en.pdf bijan bidabad, (2019) non-usury bank corporation (nubankco), the solution to islamic banking, proceeding of the 3rd international islamic banking and finance conference, monash university, kl, malaysia, 16-17 november, 2005. international journal of shari’ah and corporate governance research, 2(1), 53-66. https://www.cribfb.com/journal/index.php/ijscgr/article/view/276 http://www.bidabad.com/doc/nubankco-en.pdf bijan bidabad, mahmoud allahyarifard. (2019) 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. https://www.cribfb.com/journal/index.php/ijibfr/article/view/272 http://www.bidabad.com/doc/alm-english.pdf bidabad, bijan, (2017) money laundering detection system (mld), a complementary system of rastin banking, journal of money laundering control, vol. 20 issue: 4, pp. 354-366. https://doi.org/10.1108/jmlc-04-2016-0016 http://www.bidabad.com/doc/mld-paper-en.pdf bidabad, bijan, (2014) 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. http://dx.doi.org/10.1108/ijlma-09-2012-0031 http://www.bidabad.com/doc/vjsc-paper-en.pdf bijan bidabad, (2019) rastin certificate market (rcm), complementary system of rastin banking, 2013. international journal of islamic business & management, 3(1), 35-43. https://www.cribfb.com/journal/index.php/ijibm/article/view/260 http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf bidabad, bijan, (2013) rastin profit and loss sharing (pls) base system. journal of islamic economics, banking 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/ijibfr/article/view/274 http://dx.doi.org/10.20193/ijibfr.v3i2.274 http://www.bidabad.com/doc/english-pls-5.pdf http://www.bidabad.com/doc/pls-it-en.ppt 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/272 http://www.bidabad.com/doc/alm-english.pdf https://doi.org/10.1108/jmlc-04-2016-0016 http://www.bidabad.com/doc/mld-paper-en.pdf http://dx.doi.org/10.1108/ijlma-09-2012-0031 http://www.bidabad.com/doc/vjsc-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibm/article/view/260 http://www.bidabad.com/doc/rastin-bank-rcm-en.pdf copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 37 and finance, pp. 32-57, vol. 9 no. 4, oct-dec. http://ibtra.com/pdf/journal/v9_n4_article2.pdf http://www.bidabad.com/doc/pls-base-en.pdf bidabad, bijan, (2016) joalah finance sharing (jfs). journal of islamic economics, banking and finance, volume12, no. 1, january-march, pp. 33-48. http://www.bidabad.com/doc/jfs-paper-en.pdf http://ibtra.com/pdf/journal/v12_n1_article2.pdf bidabad, bijan, (2014) 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 bidabad, bijan, (2019) installment financial sharing (ifs): a financial subsystem of rastin pls banking. international journal of islamic banking and finance research, 3(1), 28-42. https://www.cribfb.com/journal/index.php/ijibfr/article/view/267 http://www.bidabad.com/doc/ifs-paper-en.pdf bidabad, bijan, (2014) rent financial sharing (rfs). journal of islamic economics, banking and finance, vol. 10 no. 2, pp.: 38-53, april-june. http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf bidabad, bijan, (2019) 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. https://www.cribfb.com/journal/index.php/ijibfr/article/view/266 http://www.bidabad.com/doc/bfs-paper-en.pdf bidabad, bijan, (2015) rastin personal security (rps). journal of islamic economics, banking and finance, jiebf, volume 11, number 2, april-june, pp. 47-61. http://www.bidabad.com/doc/rps-paper-en.pdf http://ibtra.com/pdf/journal/v11_n2_article3.pdf bidabad, bijan, (2015) rastin social takaful (rst). journal of islamic economics, banking and finance, jiebf, volume 11, number 1, january march, pp.: 13-23. http://www.bidabad.com/doc/rst-paper-en.pdf http://ibtra.com/pdf/journal/v11_n1_article1.pdf bidabad, bijan, (2019) 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. https://www.cribfb.com/journal/index.php/ijibfr/article/view/265 http://www.bidabad.com/doc/rcf-paper-en.pdf bidabad, bijan, (2019) 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. https://www.cribfb.com/journal/index.php/ijibfr/article/view/268 http://www.bidabad.com/doc/rgf-paper-en.pdf bidabad, bijan, (2015) serial commitments clearance (scc) in rastin banking. international journal of law and management (ijlma), vol. 57, iss: 6, pp. 600-609. http://dx.doi.org/10.1108/ijlma-02-2015-0007 http://www.bidabad.com/doc/scc-paper-en.pdf bidabad, bijan, (2019) rastin swap deposit (rsd): a financial account of rastin banking. tehran, 2015. international journal of islamic banking and finance research, 3(2), 17-23. http://ibtra.com/pdf/journal/v9_n4_article2.pdf http://www.bidabad.com/doc/pls-base-en.pdf http://www.bidabad.com/doc/jfs-paper-en.pdf http://ibtra.com/pdf/journal/v12_n1_article2.pdf http://www.bidabad.com/doc/mfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n1_article3.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/267 http://www.bidabad.com/doc/ifs-paper-en.pdf http://www.bidabad.com/doc/rfs-paper-en.pdf http://ibtra.com/pdf/journal/v10_n2_article2.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/266 http://www.bidabad.com/doc/bfs-paper-en.pdf http://www.bidabad.com/doc/rps-paper-en.pdf http://www.bidabad.com/doc/rps-paper-en.pdf http://ibtra.com/pdf/journal/v11_n2_article3.pdf http://www.bidabad.com/doc/rst-paper-en.pdf http://ibtra.com/pdf/journal/v11_n1_article1.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/265 http://www.bidabad.com/doc/rcf-paper-en.pdf https://www.cribfb.com/journal/index.php/ijibfr/article/view/268 http://www.bidabad.com/doc/rgf-paper-en.pdf http://dx.doi.org/10.1108/ijlma-02-2015-0007 http://www.bidabad.com/doc/scc-paper-en.pdf copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 38 https://www.cribfb.com/journal/index.php/ijibfr/article/view/270 http://www.bidabad.com/doc/rsd-paper-en.pdf bidabad, bijan, (2019) rastin swap card (rsc): a financial instrument of rastin banking. tehran, 2015. international journal of islamic banking and finance research, 3(2), 24-31. https://www.cribfb.com/journal/index.php/ijibfr/article/view/271 http://www.bidabad.com/doc/rsc-paper-en.pdf http://dx.doi.org/10.20193/ijibfr.v3i2.271 bidabad, bijan, mahmoud allahyarifard, (2019) interbank withdrawal protocol (iwp), complementary system of rastin banking 2013. international journal of islamic business & management, 3(1), 30-34. https://www.cribfb.com/journal/index.php/ijibm/article/view/259 http://www.bidabad.com/doc/iwp-paper-en.pdf bidabad, bijan, (2019) 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 bidabad, bijan, azarang amirostovar, mahshid sherafati, (2017) financial transparency, corporate governance and information disclosure of the entrepreneur’s corporation in rastin banking. international journal of law and management (ijlma), vol:59, iss:5, pp.636-651, 2017. https://doi.org/10.1108/ijlma-01-2016-0003 bidabad, bijan, mahshid sherafati, (2016) operational ethical banking in rastin banking (professional ethics, audit, inspection, control, monitoring and preservation). international journal of law and management (ijlma), 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 rammal, h. g. (2003) 'mudaraba in islamic finance: entrepreneurs and application', business journal for entrepreneurs, vol.4, pp.105–112. http://www.westga.edu/~bquest/2004/musharaka.htm hussain gulzar rammal and ralf zurbruegg, "awareness of islamic banking products among muslims: the case of australia", journal of financial services marketing (2007) 12, 65–74, doi:10.1057/palgrave.fsm.4760060, http://www.palgrave-journals.com/fsm/journal/v12/n1/full/4760060a.html#bib24 humayon a. dar and john r. presley (2000), "lack of profit loss sharing in islamic banking: management and control imbalances", loughborough university,department of economics, economic research paper no. 00/24, http://www.lut.ac.uk/departments/ec/reasearchpapers/2000/00-24/erp00-24.pdf chong, b.s., liu, m.h, 2007, "islamic banking: interest-free or interest-based", http://www.efmaefm.org/0efmameetings/efma%20annual%20meetings/2007vienna/papers/0019.pdf khan, m.s., 1986. islamic interest-free banking. imf staff papers 33, 1–27 world bank, 2006. country brief report: malaysia. http://siteresources.worldbank.org/inteaphalfyearlyupdate/resources/5501921143237132157/malaysia-march06.pdf  1386-1387، «طرح مطالعاتي و كاربردي بانكداري مشاركت در سود و زيان»ريزي بانك ملي ايران اداره تحقيقات و برنامه. 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/10.20193/ijibfr.v3i2.271 https://www.cribfb.com/journal/index.php/ijibm/article/view/259 http://www.bidabad.com/doc/iwp-paper-en.pdf 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 https://doi.org/10.1108/ijlma-01-2016-0003 http://dx.doi.org/10.1108/ijlma-07-2015-0037 http://www.bidabad.com/doc/rastin-ethic-banking-en.pdf http://www.westga.edu/~bquest/2004/musharaka.htm http://www.palgrave-journals.com/fsm/journal/v12/n1/full/4760060a.html#bib24 http://www.lut.ac.uk/departments/ec/reasearchpapers/2000/00-24/erp00-24.pdf http://www.efmaefm.org/0efmameetings/efma%20annual%20meetings/2007-vienna/papers/0019.pdf http://www.efmaefm.org/0efmameetings/efma%20annual%20meetings/2007-vienna/papers/0019.pdf http://siteresources.worldbank.org/inteaphalfyearlyupdate/resources/550192-1143237132157/malaysia-march06.pdf http://siteresources.worldbank.org/inteaphalfyearlyupdate/resources/550192-1143237132157/malaysia-march06.pdf copyright © cc-by-nc 2019, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 3, no. 1; 2019 39  ( خدمات بانكداري الكترونيك و نيازهاي اجرائي آن در مقايسه تطبيقي هزينه عمل1384الهياري فرد، محمود ،) ،ياتي خدمات مختلف بانكي پژوهشكده پولي و بانكي، بانك مركزي ايران.  گذاري و كاستيهاي فقه متداول در كشف احكام اقتصادي ربا در وامهاي مصرفي و سرمايه -تحليل فقهي عبدالرضا هرسيني،بيدآباد، بيژن و .1382نشگاه تربيت مدرس، . ارائه شده به همايش دوساالنه اقتصاد اسالمي، پژوهشكدة اقتصاد، داشارع http://www.bidabad.com/doc/reba9.html  عبدالرضا هرسيني، شركت سهامي بانك غيرربوي و بازبيني ماهيت ربوي و غيرربوي عمليات بانكي متداول. مجموعه مقاالت بيدآباد، بيژن و ، پژوهشكدة اقتصاد، دانشگاه تربيت 1382دي 3-4، «نظرية اقتصاد اسالمي و عملكرد اقتصاد ايران»سومين همايش دوساالنة اقتصاد اسالمي ن. ، تهرا193-224مدرس، صفحات http://www.bidabad.com/doc/sherkat6.htm  هاي شيوة حكومت اسالمي. پژوهشكدة پولي و بانكي، بانك اقتصادي انواع بيمه و ويژگي -عبدالرضا هرسيني، تحليل فقهيبيدآباد، بيژن و http://www.bidabad.com/doc/bimeh6.html، تهران. 1382مركزي ايران،  ياتي در ماليه اسالم و بناي حكمت در اصول فقه پوياي اماميه، پژوهشكدة پولي و بانكي، بانك مركزي ايران، ، نرخ و پاية مالبيدآباد، بيژن http://www.bidabad.com/doc/nerkh-va-payeh-malyat1.html. 1382فروردين  افزاری تجارت و بانکداری الکترونيک در ايران. محمود الهياري فرد، بسترهای نرميژن و بيدآباد، ب http://www.bidabad.com/doc/narm-ebank.html http://www.bidabad.com/doc/narm-ebank-revised.html  محمود الهياري فرد، بهاي تمام شده خدمات بانكي در بانكداري مدرن و سنتي )بانك ملي ايران(. مجموعه مقاالت سومين همايش بيدآباد، بيژن و ريزي و امور اقتصادي وزارت بازرگاني، صفحات عاونت برنامه، م1384خرداد 10-11ها، تنگناها، راهبردها، تجارت الكترونيكي، پيشرفت .، تهران357-331 http://www.bidabad.com/doc/baha-ebank.htmlويرايش اول http://www.bidabad.com/doc/baha-ebank-update.html 1383ويرايش http://www.bidabad.com/doc/baha-ebank-update-1385.pdf 1385ويرايش  پژوهشكدة پولي و بانكي، بانك اقتصاد اسالمي، پول، بانك، بيمه و ماليه از ديدگاه حكمت.مباني عرفاني عبدالرضا هرسيني، بيدآباد، بيژن و http://www.bidabad.com/doc/eghtesadislami4.pdf، تهران. 1383ايران،  ديريت ريسك عملياتي دستگاههاي خودپرداز. مجموعه مقاالت اولين كنفرانس جهاني بانكداري محمود الهياري فرد، مبيدآباد، بيژن و ، تهران. 1386ارديبهشت 24-25الكترونيك، http://www.bidabad.com/doc/risk_management_in_e_banking.pdf  محمود الهياري فرد، بيدآباد، بيژن و( مديريت دارائي و بدهيalm.در بانكداري اسالمي ) http://www.bidabad.com/doc/alm-farsi.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/). http://www.geocities.com/bijan_bidabad/reba9.html http://www.geocities.com/bijan_bidabad/sherkat6.htm http://www.bidabad.com/doc/bimeh6.html http://www.geocities.com/bidabad1/nerkh-va-payeh-malyat1.html http://www.geocities.com/bidabad1/narm-ebank.html http://www.geocities.com/bidabad1/narm-ebank-revised.html http://www.geocities.com/bidabad1/baha-ebank.html http://www.geocities.com/bidabad1/baha-ebank.html http://www.geocities.com/bidabad1/baha-ebank-update.html http://www.geocities.com/bidabad1/baha-ebank-update.html http://www.bidabad.com/doc/baha-ebank-update-1385.pdf http://www.bidabad.com/doc/baha-ebank-update-1385.pdf http://www.geocities.com/bidabad2/eghtesadislami4.pdf http://www.bidabad.com/doc/risk_management_in_e_banking.pdf http://www.bidabad.com/doc/alm-farsi.pdf http://www.bidabad.com/doc/alm-farsi.pdf indian journal of finance and banking vol. 6, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 73 the impact of covid-19 on the insurance industry of bangladesh anamul haque assistant professor department of banking and insurance university of chittagong, bangladesh e-mail: anam.haq@cu.ac.bd nishat taslin mohona undergraduate student department of banking and insurance university of chittagong, bangladesh e-mail: nishatmohona06@gmail.com sabrin sultana undergraduate student department of banking and insurance university of chittagong, bangladesh e-mail: sabrinsultana1060@gmail.com umme kulsum undergraduate student department of banking and insurance university of chittagong, bangladesh e-mail: ummekulsum.ctg2018@gmail.com abstract this study investigates the impact of covid-19 on the insurance industry of bangladesh. we utilize a quarterly panel data of top-performing both life and non-life companies for the duration between q1:2018 to q1:2021. we depend on the quantitative method to determine the exact scenario implementing through the fixed effect model. the finding explains that the adverse effect of the pandemic is significant on the quarterly premium income, insurance density, and penetration. a robustness test further justifies the validity of the findings. we discuss the causes behind decline to portraits real scenario of such harsh impact. the sector demands potential measures that ensure a stable situation. keywords: covid-19, lockdown, insurance industry of bangladesh. jel classification codes: g22, i18, i19. mailto:e-mail:%20anam.haq@cu.ac.bd https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 74 introduction the mass global tension and challenge nowhere is the sars-cov2 (covid-19), a highly contagious infection with acute death cases, was first identified in wuhan city, hubei province, china, in december 2019 (shi et al., 2020). by the end of january 2020, it was declared public health emergency by the world health organization (who). it has been annunciated and attained a pandemic status on march 11th, 2020. however, in the meantime, it had spread across 215 territories and countries on all five continents (wang et al., 2020). the countries like the usa, brazil, india, uk, and spain have experienced peak cases and deaths. as of june 2021, (who, 2021) reports there have been more than 175 million confirmed cases of covid-19, including over 3.8 million deaths, which is one of the deadliest pandemics in the world's history. south asia is gradually joining the ranks of covid-19-affected countries, with the first verified covid-19 case in this region as reported on january 24th in nepal by a nepalese student who had recently returned from china (chalise, 2020). on january 27th and january 30th, respectively, sri lanka and india announced the first confirmed covid-19 cases. the cumulative number of covid-19 cases in south asia was 3,649 on april 1st, up to 62,895 on may 1st, and above 200,000 on may 21st. saarc (2020) reports that the total deaths soared from 71 on april 1st to 1,772 on may 1st and about 5,000 on may 21st. according to iedcr (institute of epidemiology, disease control, and research) in bangladesh, the first covid-19 confirmed cases dug out on march 8th, 2020. the usa embassy in dhaka had identified bangladesh as one of the most 25 vulnerable countries affected by the epidemic, with a high risk of spreading in march. on march 26th, the government imposed a general lockdown for the first time extended till may. afterward, concerning the economic impact in the developing economy like bangladesh, the lockdown has been eased. till now, covid-19 cases in bangladesh are showing up more than 8 lakhs, and deaths are 13 thousand. this pandemic has exposed a catastrophic result in the world economy due to preventive measures like social distancing, lockdown, counteracting travel compliance with the acute health crisis (kleinberg et al., 2020). (khan et al., 2020)) addressed that the recession has crashed the world economy by the increment of business shutdown and unemployment problem. further, different sectoral shocks like manufacturing, services, trade, and tourism are also the worst sufferer of the world economy (feyisa, 2020). it has already resulted in various economic and social disruptions leading to a decline in services, investment, industrial production activities, and worldwide consumption (wang et al., 2020). during this pandemic, non-performing loans have exceeded, causes additional credit risks over financial sectors (ozili & arun, 2020). the global financial market and the particular stock market have faced enormous economic shocks (zhang et al., 2020). the covid-19 has a catastrophic effect on developed economies. for example, the unemployment rate in the usa has risen to a record 14.7%, with more than 20 million jobs lost, and gdp dropped by 4.8% in the very first quarter of 2020 (hutt, 2020). for an emerging economy like china, the sealing airport and close contact with them have caused a 2% decline in chinese economic growth. as china dominates 16% of the world's economic activities, any disruption to the chinese economy also hits the world economy (fernandes, 2020). the shutdown directly affected the developing economy's real output and overall sectors indirectly (khurshid & khan, 2021). the reduction of raw material export, a steep decline in remittance, and costly access to the international market worsen the situation for developing countries (loayza & pennings, 2020). while developed economies responded through direct transfer and regular social insurance payments to their workers suffered by lockdown, the developing economy cannot respond immediately due to the lack of fiscal capacity, broad informal sectors, and a greater purview of intergenerational households (alon et al., 2020). in this situation, the lack of adequate policy may lead to recession and even depression in the long run (khurshid & khan, 2021). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 75 a developing country like bangladesh is undergoing tremendous economic trouble in international and domestic demands because of the coronavirus outbreak and lockdown. the spread of the coronavirus tremendously affected bangladesh's economies and financial sectors. by inhibiting the pandemic's first wave by implementing social distancing, pandemic protocol, and vaccination, the second wave of covid-19 hit back again, and the country had to go through partial lockdown repeatedly. the partial lockdown extended economic burden, socio-economics insecurity (bodrud-doza et al., 2020). with the rise of unemployment, poverty, remittances, healthcare crisis, quality education, and downward slope of rmg export, bangladesh might experience stand back its sustainable development goals (sdg) (shammi et al., 2020). furthermore, downfall in the oil prices and depressed demand, the remittance flow of bangladesh represents a negative outward as bangladesh's gdp constitutes 7% of international remittances (aneja & islam, 2020). moreover, due to travel restrictions, the tourism industry in bangladesh observed an adverse effect because of losing revenue (deb & nafi, 2020). governments and financial institutions seek an escape from total annihilation, leading to cast new hope from the insurance industry. the government promulgated various financial packages of about usd 11.90 billion (islam et al., 2020), though the global uncertainty shocks remarkably and hit bangladesh's economy through increasing economic challenges exponentially in the agriculture, industry, and service sectors (ahmed, 2021; begum et al., 2020). the scope of this study is the insurance industry. the insurance market of bangladesh is exposed to an adverse condition as the covid-19 outbreak, which still exists in bangladesh. insurance development and regulatory authority (idra) reports both the life and non-life insurance companies' growth rate of gross premium from the first quarter of 2020 to the second quarter of 2020 was -20.42%; shows a sharp drop in growth. maximum non-life insurance policies, such as fire insurance, marine (cargo) insurance, motor insurance, miscellaneous insurance, faced negative growth rates of gross premium. our study showcases the present condition of the insurance industry in bangladesh during the pandemic. without the well-being of insurance companies, the pandemic seems to have a catastrophic effect on the whole economic sector. therefore, this economy will not be able to overcome the crisis to make genuine progress. thus, assuredly, this is of practical and policy value for exploring how the covid19 pandemic influences the insurance market of bangladesh. furthermore, this study can enrich to the insurance industry professionals because almost no study has been conducted yet in this subject matter. an empirical investigation examines the impact of covid-19 on insurance in china reveals a negative impact in the short term (wang et al., 2020). motivated from the study, an attempt has made to mitigate the research gap and illustrate the impact of covid-19 on the bangladesh insurance industry. therefore, the study endeavored to understand the consequence of covid-19 influence on the insurance sector in bangladesh. data includes the total 20 top life and non-life insurance companies based on their premium income for the years 2018, 2019, 2020, and the first quarter of 2021. through mean-variance tests and panel data regression, we find that covid-19 results in a decrease in the quarterly premium growth. here, we contribute the body of knowledge to determine the effect of the covid-19 crisis on bangladesh's insurance industry, including how insurance elements react to such incidents. this study sought to explore the way crisis can break potential and well-established market's natural tone. this research benefits the policymaker and insurance professionals to exercise crucial decisions regarding stable insurance industry, and stakeholders to prioritize safety and security. the following is how the rest of the article is structured: section 2 introduces the data, econometric model and defines the variables. then, section 3 reports the results and discusses the empirical findings. moreover, the final section wraps up the research. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 76 literature review insurance is considered an innovative risk financing technique to protect the best interests of risk-averse individuals (cummins & barrieu, 2013; spence & zeckhaser, 1978; outreville, 1998; schoemaker & kunreuther, 1979). the purposes of underlying insurance demand are contingency mutually exclusive and jointly exhaustive consumption opportunities (ehrlich & becker, 1972). the development of the insurance industry is highly correlated with economic growth (ćurak et al., 2009 ; devarakonda, 2016). the insurance industry contributes a vital role by steering and promoting investment and savings in a particular economy (gupta, et al., 2014). it is challenging for businesses to encounter all the risks and uncertainties (ahmed et al., 2011). that is why the profitability and solvability of insurance companies matter the most to have a stabilized economy (kripa & ajasllari, 2016). an individual gets relief from possible adverse and uncertain events outcome of activity through insurance. overall, insurance facilities reduce risk and benefit personal and domestic security (uddin et al., 2014). the appearance of the pandemic causes numerous unexpected situations and shocks like liquidity problems, portfolio risk, reliance on reinsurance, asset crisis and protection risk, etc. (babuna et al., 2020). (larson & sinclair, 2021) found that in the current covid-19 pandemic, unemployment insurance claims have jumped significantly. among the european countries, the insurance industry demonstrated a disruptive negative impact during the covid-19 outbreak due to imbalances in the number of claims with the capital and solvency stability (puławska, 2021). this region also reports a reduction in the return on asset (roa) among the german and italian insurance companies; the solvency ratio in the belgian, french, and german insurance industries. despite the significant financial losses produced by covid, the insurance industry was not adequately prepared to deal with the losses (levantesi & piscopo, 2020). similarly, (farooq et al., 2021) conducted a study on australia, canada, germany, the usa, uk, brazil, india, and indonesia found covid-19's negative effect on the stock returns both in the short and long terms on insurance firms. other studies like; (kirti & shin, 2020) alarmed that this pandemic will keep impacting insurers directly and indirectly via health shocks such as an increase in mortality and morbidity and indirectly via financial shocks, which are higher credit spreads, lower equity prices, and widespread downgrades. for example, considering the global situation, there has already been a predicted downslope in property insurance, cargo insurance, life insurance (zhang et al., 2020). the developing economies have also experienced the adverse impact of this epidemic on investment amount and income of the commercial insurance companies due to having a great influence on the expenditure (xia et al., 2020). in this regard, studies (e.g.,ye et al., 2021) suggest similar results. chinese insurance industry reveals that the stock prices dropped overall in the initial quarter. also, it exposes that the increase of covid-19 cases decreases the gross commercial insurance premium, insurance density, and insurance depth among the chinese insurers. the overall significant downwards spiral has been witnessed in the industry in the short term (wang et al., 2020) after considering insurance density and depth, especially the personal insurance. the industry has witnessed similar losses in north macedonia (stojkoski et al., 2020), ethiopia (worku & mersha, 2020), ghana (babuna et al., 2020), and india (parvathi & lalitha, 2021). in the south asia, till the end of 2020 the covid-19 impact was not adverse in india. moreover, the impact of covid-19 on life insurance companies is positive. this is evident by (ramasamy, 2020) who found that insurance companies are attracting more customers and gaining profits during this covid-19 situation because people are scared and wanted to obstruct the financial crisis if they are affected by the aforesaid pandemic. undoubtedly, the covid-19 pandemic has created an unexpected and extensive economic shock among the insurance companies in every economy. however, no empirical research has been done on the impact of the epidemic on bangladesh's insurance industry. as a result, the study aims to determine the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 77 impact of covid-19 on the insurance industry in bangladesh. we hypothesize that there is a significant impact of covid-19 in the bangladeshi insurance industry. data and methods variables and sample this study utilizes the hand-collected data of the top 20 life and non-life insurance companies in bangladesh. the top performers have been listed based on their premium income. to illustrate the effect of the covid-19, we collect our panel data quarterly for the years 2018, 2019, 2020, and the first quarter of 2021 based on the data availability. though the outbreak hits the country in march 2020, due to the disruption of the global economy, the impact has started affecting the economy from the beginning of 2020. here, the years 2018 and 2019 are considered to be before the pandemic, and the year 2020 and 2021 are considered during the pandemic situation. table-1 portraits the independent variable, dependent variables, and control variables with descriptions and data sources used in this study. table 1. description of variables variables variable name description data sources independent variable covid_dummy (c_dummy) 0 for the non-covid19 situation and 1 for the covid-19 situation official website of iedcr (institute of epidemiology, disease control, and research) confirmed covid-19 cases (qcases) the log of total number of confirmed cases per quarter dependent variable quarterly premium growth (qpg) gross premium income growth generated per quarterly official website of idra (insurance development & regulatory authority) insurance density (insd) the ratio of gross premium per population insurance penetration (insp) the ratio of gross premium to gdp control variable consumer price index (cpi) quarterly cpi (using the base year 20052006) official website of bbs (bangladesh bureau of statistics) producer price index (ppi) quarterly ppi (using the base year 20052006) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 78 econometric model consistent with (wang et al., 2020), we develop the following fixed-effects econometric model to estimate the covid-19 impact on the insurance industry of bangladesh. 𝑸𝑷𝑮𝒊𝒕 = 𝜶𝟎 + 𝜶𝟏𝑪𝑶𝑽𝑰𝑫 𝑫𝒖𝒎𝒎𝒚𝒕 + 𝜶𝟐𝑪𝑷𝑰𝒕 + 𝜶𝟑𝑷𝑷𝑰𝒕 + 𝜶𝟒𝑮𝑫𝑷𝒕𝒕 +ηt + εt where qpgit represents the overall firm-level quarterly premium growth at a given fixed time. apart from this qpg, insurance density (insd), and penetration (insp) are also used as the performance indicators of the insurance industry of bangladesh in subsequent models. covid_dummy is a dummy variable where 0 indicates the non-covid-19 situation and 1 indicates the covid-19 situation, valued in time margin. cpit, ppit, lgdpt are the economic variables that have considerable influence over the dependent variables. the subscript i denotes the insurance firms, and t refers to the time from january 2018 to march 2021, and the ηt, εt report as the time fixed effects and the error term. for the robustness test, we modified the equation to explore the significance of the pandemic on the bangladeshi insurance market through developing an alternative independent variable ncovt, which stands for the log of the number of confirmed covid-19 cases to measure the pandemic intensity given a period. summary statistics the covid-19 has a catastrophic impact on the bangladesh economy in various dimensions due to pandemic protocols like lockdown, social distancing, and economies shut down. here, table-2 exhibits the summary statistics of the explained variables (quarterly premium growth, insurance density, and penetration), the explanatory variable (quarterly covid-19cases, covid-19_dummy), and the control variable (cpi, ppi, lgdp). since there are no other studies in such a type, therefore we failed to compare the summary statistics with any other researchers. table 2. summary statistics results we start with the simple mean-variance test to compare the insurance industry position of bangladesh between prior and posterior to the covid-19 pandemic. then, table 3 reports the mean-variance test of quarterly premium growth, insurance density, and insurance penetration before the pandemic and during per capita gross domestic product (lgdp) the logarithm of quarterly per capita gdp variable observation mean std. dev. min max qpg 260 -0.4127967 3.280285 -5.26316 1.960784 insd 260 753.9231 64.58476 664 824 insp 260 0.5453846 64.58476 0.49 0.57 qcases 260 841.9231 1478.556 0 4355 lgdp 260 6.152011 0.059413 6.037274 6.200408 cpi 260 267.66 13.46967 247.02 290.76 ppi 260 221.9654 2.109232 220.32 226.33 c-dummy 260 0.3076923 0.4624286 0 1 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 79 the pandemic. results show that the mean difference between prior and posterior to the covid-19 pandemic of bangladesh industry is statistically significant. the findings are consistent with (wang et al., 2020), who also observed the covid-19 pandemic’s impact on the chinese insurance market. therefore, we can interpret that covid-19 results in a decrease in quarterly premium growth. there is no significant effect on insurance density in bangladesh during the covid-19 pandemic because people may have more insurance policies concerning their health and property. however, a significant difference is shown in the table between the mean-value of insurance penetration which tells us that there is a negative impact on the overall development of the insurance industry during the pandemic. table 4 reports the baseline regression results, which reflect that covid-19 has a significant negative impact on the insurance industry of bangladesh in terms of premium growth, insurance density, and penetration. the coefficients results are robust and economically significant as well. the controls have expected signs too. the results are consistent with other studies (e.g., wang et al., 2020) that indicate that the financial ramifications of the covid-19 pandemic affect bangladesh's general economic activity, resulting in a drop in income and incur a high household medical cost. also, in bangladesh, insurance is a last-resort financial decision after paying for all kinds of household expenditures (werner, 2009). during this pandemic, people face unexpected income loss and higher medical expenses; therefore, the insurance sector faces a severe income loss. in addition, the disruption in overall business activity worsens the situation for most non-life insurance companies. in addition, as a part of the robustness check, we do an alternative measurement of the covid-19 pandemic crisis that has been reported in table-5. we develop a continuous variable based on the log of quarterly confirmed cases reported in bangladesh. it is observed that the quarterly premium growth, insurance density, and penetration, all certain variables, have experienced a significant reduction during the covid-19. the robust check carried using quarterly data from january 2018 to march 2021. here, the coefficient of quarterly gross premium and quarterly confirm covid-19 cases reveals significant influence. the rising number of covid-19 cases has a quantitatively significant adverse effect on premium growth, insurance density. table-5 displays covid-19 negative effects on the gross premium of the bangladeshi insurance market. by each unit increase of covid-19 confirm case droops 4.912 percent of the premium. furthermore, insurance density adversely causes by the rise of covid-19, each confirmed case by bdt .0168 million losses. insurance penetration negatively accelerated by every upward move in quarterly confirm covid-19 cases by .0132 percent. overall, covid-19 contrarily hit quarterly premium growth, insurance density, and insurance penetration. the drastic covid-19 force is demoting insurance market harmony over the pandemic period. table 3. mean-variance tests prior to the pandemic during the pandemic t-test obs mean std. err. std. dev. obs mean std. err. std. dev. mean difference quarterly premium growth 180 1.743 0.046 0.618 80 -5.263 0 0 -7.006*** insurance density 180 747.555 5.699 76.304 80 768.25 1.510 13.508 20.694*** insurance penetration 180 0.560 0.001 0.015 80 0.5125 0.001 0.013 -.048*** note: the symbols ***, **, and * represent significance levels of 1%, 5%, and 10%, respectively. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 80 table 4. baseline regression table 5. robustness check discussion we observe that all dependent variables experience negative effects during the covid-19 pandemic. there are a variety of explanations for such events. among them, first of all, insurers face a shortage of liquidity, portfolio risk, and reinsurance protection during this pandemic. in addition, social distancing and containment measures limit the general communication of people. thus, commercial activity is reduced. furthermore, due to several episodes of congestion, all kinds of economic activities have come to a halt, negatively affecting all international trade, tourism, hotels, and limited infrastructure, in as many industries that depend on these sectors are also important related to premium growth (dev & sengupta, 2020). in addition, businesses have faced many crises, including order cancellations and travel restrictions (salehnia et al., 2020). thus, the impact on new insurance sales is determined to be reduced. on the other hand, the crisis has hit a number of insurers who suffered extremely serious complications during covid model 1 model 2 model 3 qpg insd insp c-dummy -6.986664*** -81.26438*** -0.009292*** .1261954 13.76703 .0024771 cpi -0.0238834*** 2.644873*** -0.0023557*** .0071859 .7839297 .0001411 ppi -0.065095*** 4.479256*** -0.0001098*** .020187 2.202254 .0003963 lgdp 10.23456*** 413.8841*** 0.2139321*** 1.33061 145.1602 .0261186 quarterly fe y y y n 260 260 260 overall r sq0.984 0.5099 0.9039 note: the symbols ***, **, and * represent significance levels of 1%, 5%, and 10%, respectively. model 1 model 2 model 3 qpg insd insp qcases -.0013715*** -.0167691*** -0.00000487*** .0000535 .0030637 4.65e-07 cpi -.1262271*** 1.576169*** -.0020384*** .0118746 .6799259 .0001031 ppi -.7972185*** -4.111605*** -.001364*** .0329888 1.888896 .0002864 lgdp 33.87509*** 675.3449*** .1950288*** 2.177175 124.6622 .1950288 quarterly fe y y y n 260 260 260 overall r-sq 0.9410 0.5009 0.9305 note: the symbols ***, **, and * represent significance levels of 1%, 5%, and 10%, respectively. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 81 19 due to declining premium collections and increasing claims. liquidity is considered to be an important factor related to insurance. as a result, massive claims attacks on cash reserves create an uncomfortable state in insurance companies (acharya & steffen, 2020). at the household level, the number of new car purchases decreased as all stores were restricted from opening. auto insurance fell on because of no limited-time motor vehicle sales, indicating a dramatic drop in auto insurance coverage. new trends and coverage are dwindling. the travel ban prevented potential new buyers from enforcing the travel policy (salehnia et al., 2020). because, paying without specific consequences seems trivial. furthermore, even before the pandemic as a developing country with financial constraints, most bangladeshis were not interested in having a general insurance policy (werner, 2009). the situation is also worsening as the operations of companies have been closed for several days, leading to unemployment and low income, which explains a negative result of insurance density. although penetration is not enough, bangladesh has great potential in the insurance sector due to stable gdp growth. however, this pandemic has hampered strength due to rising unemployment, declining purchasing power, and per capita income (ahamed, 2021). this ultimately leads to negative growth in insurance penetration. while there is the prospect of an explosive health insurance penetration rate during the outbreak, the lack of a marketing, awareness, and digitalization strategy will limit the likelihood of contracting the disease. conclusion the global impact of government-ordered business closures to contain the covid-19 outbreak has been enormous, resulting in different economic variations. therefore, social aspects regarding pandemic mitigation, household spending, and consumption are all being considered in relation to covid-19 research. however, few empirical studies have been conducted on the impact of the epidemic on the insurance market in developing countries such as bangladesh. in this regard, this study aims to contribute to the growing literature on the impact of covid-19 on the bangladesh insurance industry using companylevel panel data and fixed-effects models. by comparing covid-19 and non-covid-19 states, the results show that this pandemic has a significant contribution to the contraction of the insurance sector. the regression models also signal a negative impact of the covid-19 pandemic on bangladesh's insurance industry. this short-term negative impact is reflected in premium growth, insurance density, and insurance penetration. the results were statistically significant and robust compared with other measures. this study has certain limitations that should be noted. it is difficult to understand the impact of the pandemic on the insurance market in bangladesh due to the lack of sample size, recent data, and time constraints. the researchers continued to work by developing large panel data and looking at longer time periods. we also hope that future researchers will tackle the channels of the covid-19 pandemic causing misery for insurance companies. however, while talking about management effects, this research will allow decision-makers and managers to understand the risk they are exposed to when taking out an insurance contract. references acharya, v., & steffen, s. 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(2020). financial markets under the global pandemic of covid-19. finance research letters, 36,101528. https://doi.org/10.1016/j.frl.2020.10152 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) indian journal of finance and banking vol. 9, no. 1; 2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 10 client companies’ perception towards credit risk of private sector banks with reference to icici, hdfc, axis bank, idbi, and yes bank sunitha, g phd research scholar department of business management klef (deemed to be university), india e-mail: sunitha27.g@gmail.com https://orcid.org/0000-0002-7742-8924 dr. venu madhav, v associate professor department of business management klef (deemed to be university), india e-mail: dr.v.v.madhav@gmail.com https://orcid.org/0000-0002-0089-5137 received: october 14, 2021 accepted: november 16, 2021 online published: january 15, 2022 doi: 10.46281/ijfb.v9i1.1545 url: https://doi.org/10.46281/ijfb.v9i1.1545 abstract the banking sector at present is facing many issues; one among them is credit risk. a credit risk is termed as an estimate or forecast of the default of a borrower failing to recover his interest amount or borrowed amount. currently, the banker or the lender is at risk of recovering the interest amount and principal amount, increasing their recovery costs. the present study makes an attempt to know the awareness of customers towards credit risk of private sector banks. the research objective is to analyze the significant association between client company’s perceptions with a view to credit risk. the study explains the major variation between client company’s perspectives towards indian private sector. the study explains about the impact of credit risk on banks profitability. the present study helps banks to prevail over the problem of credit risk. the study analysis the objectives of research, hypothesis formulated, research methodology, findings and conclusions are discussed. the secondary sources for the study are through the websites of banks, journals and client company’s websites. primary data has been gathered from 285 client companies using convenience random sampling technique from private sector banks. keywords: private sector banks, credit risk, customers perception, profitability. jel classification codes: h32, z33, e32, d21, c12, g21. introduction credit risk is measured as a major problem in banking sector. the factors responsible for credit risk may be financial factors, business related factors, government intervention and policies of the banks etc. to decrease the non-performing assets we need to plan in advance on issuing of requested amount to the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 11 clients. before issuing the loans to the customers, banks necessitate to analyze the financial background and their credit worthiness. this may help in identifying the borrowers who will settle up the borrowed sum and who defaults it. review of literature zergaw (2019) author analyzed the elements that are upsetting the credit risk management practices in few ethiopian private banks. author evaluated the result of credit measurement, observing process and the effects of market risk, operational risk, and legal risk in credit risk management procedures of banks. the study examines the effect of creating credit risk environments on credit risk management in accomplishment of the banks and to evaluate credit granting procedures of the banks and its outcome on credit risk management of the banks. yüksel et al. (2018) authors in the present study made an effort to analyze the elements which manipulate credit risk in azerbaijani banks. they suggested the banks to verify the ratings on customers before granting loans to them. considering 10 banks, the analysis was done considering their asset size with 10 variables. panel logic methodology was used for the study and analyzed that 4 independent variables like capital adequacy ratio, joblessness rate and interest rate affect credit risk of azerbaijani banks. zheng et al. (2018) the study tried to show the backward effect of credit defaults in bank profitability though other factors are considered with equal importance. the study chronologically showed the uni-variate to multivariate regression to determine the best executed model. the study addressed the credit risk which is the prevailing question in the contemporary time horizon. sandada and kanhukamwe (2016) explained the crucial elements that are affecting the credit risk of zimbabwe banking sector. the study ascertained the impact of macro-economic, industry and bank related factors on increasing credit risk. the bank specific factors highlight the need for banking institution to take staff training on various aspects of banking operations seriously. the research findings provide a platform for further research on how to deal with the credit risk problems. the research gap identified is that there are very less studies which showed an influence of client company’s perception towards credit risk. no study was carried out on analyzing the significant association of client company’s perception towards credit risk. the current study recovered the research gap. the current study makes an attempt to minimize the consequences of credit risk on banks profitability and suggests suitable methods to overcome credit with more samples. after studying various research papers and articles, besides the above mentioned, the following significant remarks with regard to the study were made. objectives of the study  to analyze the significant influence of client companies perception towards credit risk.  to evaluate the significant association of client companies perception towards credit risk.  to study the impact of credit risk on banks profitability.  to suggest suitable methods to overcome credit risk. scope of the study the scope is limited to analyzing the customer’s perception towards credit risk of private sector banks. primary data has been gathered from 285 client companies. statement of the problem credit risk is the reason for economic decline as banks fail because of default risk from client companies, which has had a negative impact on the economic development of many nations around the world. research methodology research design the study uses descriptive research design with a survey method by convenience random sampling technique to assemble the facts. the analysis was conducted to analyze the client company’s perception https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 12 towards credit risk for the solutions like credit risk management, fraud management, and better loan securitization etc. sample size the present study collected samples from 285 client companies of private sector banks using convenience random sampling technique. questionnaire was forwarded to 1880 companies all over the country. but the responses were received from 285 companies. statistical tools few statistical tools like percentage analysis, anova, chi-square test and regression were used to examine the collected data to evaluate the customer’s perception towards credit risk using spss. hypothesis of the study  there is no significant influence of customer’s perception towards credit risk.  there is no significant association of customer’s perception towards credit risk.  there is no significant impact of credit risk on banks profitability. results and discussions table 1. tabular representation of demographic factor of the client companies type of business number percentage agricultural based 23 8 manufacturing 56 20 construction 38 13 health care 44 15 education 26 10 petroleum 32 11 others 66 23 total 285 100 annual turnover number percentage below 100 crores 18 6 101 crores to 200 crores 5 2 201 crores to 300 crores 58 20 301 crores to 400 crores 70 25 401 crores to 500 crores 55 19 501 crores and above 33 12 others 46 16 total 285 100 place of the organization number percentage andhra pradesh 35 12 arunachal pradesh 15 5 assam 6 2 bihar 11 4 madhya pradesh 19 7 uttar pradesh 9 3 gujarat 9 3 goa 14 5 kerala 15 5 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 13 karnataka 18 6 meghalaya 15 5 odisha 11 4 mizoram 9 3 nagaland 11 4 maharashtra 15 5 himachal pradesh 16 6 tripura 14 5 rajasthan 20 7 uttarakhand 10 4 telangana 13 5 total 285 100 bank number percentage icici 57 20 hdfc 53 18 axis bank 57 20 idbi 59 21 yes bank 59 21 total 285 100 source: authors own work the data was gathered from 285 client companies, the details of the companies are explained here. considering the type of business other business are 23%, manufacturing companies are 20% and health care are 15%. other type of businesses like construction, education and petroleum contributed fewer shares. the companies having an annual turnover of 301crores-400 crores are 25%, 201 crores300 crores are 20% and 401 crores500 crores are 19%. questionnaire was forwarded to few companies from all the states. the questionnaire was forwarded to 1880 companies all over the country. but the responses received are 285, out of which the responses from andhra pradesh are 12%, madhya pradesh is 7% and rajasthan are 7%. the responses from other states are very less. the banks opted by the client companies are idbi and yes bank are 21%, icici and axis bank are 20% and hdfc are 18%. table 2. tabular representation of influence of customer perception towards credit risk test of homogeneity of variances credit risk levene statistic df1 df2 sig. 3.472 10 274 .000 anova credit risk sum of squares df mean square f sig. between groups 19.022 10 1.902 15.453 .000 within groups 33.727 274 .123 total 52.749 284 source: authors own work https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 14 anova is a test of hypothesis that is suitable to compare means of a permanent variable in two or more independent comparison groups. here, customer perception has been altered in relation to credit risk. since the p values are 0.010 that are commenced to be less than 0.05, the null hypothesis is discarded and alternative hypothesis is established at 5% level of significance, therefore the strength of association between variables is very strong. there is a significance difference on the customer perception towards credit risk. table 3. tabular representation of significant association of consumer’s perception towards credit risk chi-square tests value df asymp. sig. (2-sided) pearson chi-square 213.145a 80 .000 likelihood ratio 212.411 80 .000 linear-by-linear association 71.790 1 .000 n of valid cases 285 a. 83 cells (83.8%) have expected count less than 5. the minimum expected count is .01. symmetric measures value approx. sig. nominal by nominal phi .865 .000 cramer's v .306 .000 n of valid cases 285 a. not assuming the null hypothesis. b. using the asymptotic standard error assuming the null hypothesis. source: authors own work chi-square is a single value that explains about how much difference exists between the observed counts and the expected count. for testing chi-square, a p-value that is smaller than or equal to the significance level explains that there is satisfactory facts to terminate that the new distribution is not the same as the conventional distribution. therefore we can conclude that a relationship exists between the variables. a low value for chi-square means there is a high correlation between two sets of data. since the p values are 0.000 which are less than 0.05. the null hypothesis is rejected and alternative hypothesis is accepted at 5% level of significance, therefore the strength of association between variables is very strong. there is a significance association of consumer perception towards credit risk. table 4. tabular representation of significant impact of credit risk on banks profitability model summary model r r square adjusted r square std. error of the estimate change statistics r square change f change df1 df2 sig. f change 1 .568a .323 .321 .31953 .323 135.130 1 283 .000 a. predictors: (constant), credit risk anovaa model sum of squares df mean square f sig. 1 regression 13.797 1 13.797 135.130 .000b residual 28.894 283 .102 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 15 total 42.691 284 a. dependent variable: banks profitability b. predictors: (constant), credit risk coefficientsa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.909 .191 9.990 .000 credit risk .511 .044 .568 11.625 .000 a. dependent variable: banks profitability source: authors own work regression is a reliable method of identifying which variables have impact on a particular topic. the process of performing a regression allows you to confidently determine which factors matter most, which factors can be ignored, and how these factors influence each other. r-squared (r2) is a statistical measure that elaborates the ratio of the variation for a dependent variable that's explained by an independent variable or variables in a regression model. the p-value is tested for all the terms, and results illustrates that the null hypothesis that the coefficient is equal to zero (no effect). a low p-value (< 0.05) illustrates that you can reject the null hypothesis. typically, you use the coefficient p-values to determine which terms to keep in the regression model. as the r-square value should be between 0 and 1, here it is 0.323 and the p value is 0.000 which is less than 0.05, therefore null hypothesis is rejected and alternate hypothesis is accepted. therefore changes in credit risk are associated with bank profitability. findings  demographic factors explains that other type of businesses are more than the businesses like manufacturing, health care, construction and petroleum.  the annual turnover of majority of the client companies is 301-400 crores, which is a good indication of growth of income of the organizations.  people from andhra pradesh have responded more to the questionnaire when compared to other states.  the percentage of banks selected by the respondents is nearly equal. maximum percent of the respondents have opted to all the selected banks.  there is a significant influence of client company’s perception towards credit risk. this represents that client companies have comprehensive particulars on the basis for the increase of credit risk like customers default, banks internal rating, inappropriate credit policies and volatile interest rates.  there is a significant association of client company’s perception towards credit risk. here, the factors like consumers failure to repay the loan amount, inappropriate rating from rating agencies and banks internal rating are considered to evaluate the client company’s perception towards credit risk.  there is an impact of credit risk on banks profitability. the factors like bank size, capital ratio, deposits ratio, liquidity ratios are considered to analyze the impact of credit risk on bank profitability. suggestions  to improve banks internal rating.  inspection from banks is to be done accordingly.  to advise the customers or the businesses who took loan when needed. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 16  to provide proper rating from credit rating agencies.  banks should limit the borrowing amount, as the high the borrowed sum higher would be the credit risk.  banks have to evaluate the financial arrangement of the firm thoroughly before granting loan to them. conclusion credit risk of private sector banks can be slowly but surely decreased by following few suggestions mentioned in this paper resembling improving internal rating from banks and external rating from credit rating agencies. banks can advise and provide training to the customers when needed. it assists the client companies to sustain in his business environment. as these recommendations are constructed on the perception of client companies, there may be probably other factors which are responsible for increase of credit risk. banks have to take precautionary measures to overcome these issues. when banks credit risk is decreased, the profitability of the banks increases. author contributions conceptualization: v. venu madhav data curation: sunitha, g formal analysis: sunitha, g funding acquisition: sunitha, g investigation: sunitha, g methodology: sunitha, g project administration: v. venu madhav resources: sunitha, g software: sunitha, g supervision: v. venu madhav validation: sunitha, g, v. venu madhav visualization: sunitha, g writing – original draft: sunitha, g writing – review & editing: sunitha, g, v. venu madhav conflict of interest statement the author declare that they have no competing interests. acknowledgement all authors contributed equally to the conception and design of the study. references sandada, m., & kanhukamwe, a. (2016). an analysis of the factors leading to rising credit risk in the zimbabwe banking sector, 12(1), 80-94 yüksel, s., mukhtarov, s., mammadov, e., & özsarı, m. (2018). determinants of profitability in the banking sector: an analysis of post-soviet countries. economies, 6(3), 41. https://doi.org/10.3390/economies6030041 zergaw, f. (2019). factors affecting credit risk management practices, the case of selected private commercial banks in ethiopia, international journal of advanced research, 7(1), 811-849. http://dx.doi.org/10.21474/ijar01/8392 zheng, c., sarker, n., & nahar, s. (2018). factors affecting bank credit risk: an empirical insight. journal of applied finance and banking, 8(2), 45-67. http://dx.doi.org/10.21474/ijar01/8392 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 17 appendices 1. name of the company: 2. type of business ___________ 1. agricultural based [ ] 2. manufacturing [ ] 3. construction [ ] 4. health care [ ] 5. education [ ] 6. petroleum [ ] 7. others [ ] 3. annual turnover: 1. below 100 crores 2. 101 crores to 200 crores 3. 201 crores to 300 crores 4. 301 crores to 400 crores 5. 401 crores to 500 crores 6. 501 crores and above 4. what is your place of organization __________________  list of states[ ] 5. name of the bank where you have your account 1. icici [ ] 2. hdfc [ ] 3. axis bank [ ] 4. idbi [ ] 5. yes bank [ ] 6. credit risk sd disagree neutral agree sa 1. customer default 2. banks internal rating 3. inappropriate credit policies 4. volatile interest rates 7. banks profitability sd disagree neutral agree sa 1. bank size 2. capital ratio 3. deposits ratio 4. liquidity ratio 8. customers perception on credit risk sd disagree neutral agree sa 1. consumer's failure 2. inability to repay 3. banks internal rating 4. inappropriate rating from rating agencies https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 18 9. suggestions to overcome credit risk sd disagree neutral agree sa 1. improve banks internal rating 2. inspection from banks 3. advise customers when needed 4. proper ratings from rating agencies 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) indian journal of finance and banking vol. 5, no. 2; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 28 leverage induced financial distress of manufacturing firms in bangladesh: a comparison between listed mncs and domestic firms by applying altman’s z score model dr. syed mohammad khaled rahman associate professor department of business administration shahjalal university of science & technology, sylhet-3114, bangladesh e-mail:kr15sust@gmail.com dr. md. khairul islam professor department of business administration shahjalal university of science & technology, sylhet-3114, bangladesh e-mail: khairuldba@gmail.com md. mofazzal hossain undergraduate student of 4 th year 2 nd semester department of business administration shahjalal university of science and technology, sylhet, bangladesh e-mail: hossaintipusust@gmail.com abstract financial distress arises from excessive debt capital. the aim of the study was to determine altman’s z score and show a comparative analysis of the effect of debt on z scores of listed mncs & domestic firms of bangladesh over a 24-year period (1996-2019). the study was based on secondary data. seven domestic firms and seven mncs were selected as sample from six manufacturing industrial sectors. it was found that on an average one local firm was in grey zone and the rest 13 firms were in safe zone (z scores> 2.99). z scores for mncs were substantially higher than for domestic firms. the z score’s mean for mncs was 5.398 compared to 4.155 for domestic firms. for domestic businesses, the z score shifts by 0.001 or 0.24% for a 1% change in the opposite direction of the overall debt. for a 1% rise in overall debt, the z score of mncs decreases by 0.005 or 0.073%. domestic companies should increase z score by redesigning the capital structure and improving basic earning power. the study has practical implications for corporate managers, policymakers, investors, and government because future strategy, policy, and business performance depends on the zone in which the firms are situated. keywords: z score, financial, distress, debt, zone. jel classification codes: g30, g32, g39. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 29 introduction financial distress is such a situation of a firm in which the financial obligations are met with difficulty. according to static capital structuretheory, a firm can borrow up to that level at which marginal benefit of tax shield equals the marginal cost of financial distress (ross, westerfield, & jordan 2002). there is a limit to the use of debt and after the optimum debt level cost of financial distress out weight tax shield benefit of leverage. the extreme consequence of financial distress is bankruptcy. altman (1983) developed a model to predict bankruptcy and financial distress of firms. using altman’s z score model to know financial distress or bankruptcy probability has many implications to lenders, investors, regulatory authorities, government, auditors, and managers. several previous research works on the capital structure of bangladeshi manufacturing companies revealed that leverage ratios are relatively high and these ratios have an adverse impact on financial performance. ali, rahman, & mahmud (2016) found that 50% of bangladeshi textile companies were in the ‘distress’ zone. jahur and quadir (2012) have identified fund management drawbacks and poor profitability as some of the causes of financial distress of smes in bangladesh. the magnitude of debt capital directly affects the fourth component and indirectly affects other components of the z score model. so, further investigation is required to estimate the z score to identify in which zones the firms are situated‘safe’, ‘grey’, or ‘distress’ as well as how z score changes for a particular change in debt capital. multi-national companies (mncs) operating in bangladesh is performing satisfactorily. compared to the year 2018, earnings of most listed mncs have increased in 2019. earnings per share of five mncs have increased from the previous year. only eleven listed mncs account for 24% of market capitalization in dhaka stock exchange (barman, 2020). mncs’ profitability in 2018 was also higher than the previous year (the new age, 18/5/2019). from observing the financial performances of both types of companies, it can be inferred that mncs are more financially sound than domestic companies. but the question is –‘how far local firms are lagging behind in financial soundness than mncs?’ or ‘are financial distress level of local companies are significantly higher than mncs?’ the present study attempts to seek an answer to this question. problem statement financial distress has many adverse effects on a firm. bankruptcy cost reduces a firm’s ability to use the borrowed fund for productive purposes. the probability that firms would be unable to provide their promised return to bondholders increases due to an increase in leverage ratios. failure of repayment of borrowed capital to bondholders would result in the transfer of corporate assets’ ownership from shareholders to bondholders. theoretically, in a bankruptcy situation, the value of an asset becomes equal to the value of the liability, and the value of equity becomes 0. eventually, control of the firm goes to bondholders. besides shareholders, creditors are also affected because their payoff reduces due to the incurrence of bankruptcy cost. they do not get the amount that the firm owes to them (ross et al., 2002). global financing option reduces due to covid 19 which was revealed from the study of afrina, beg, zayed, hossain, and shahi (2020). there is both direct and indirect cost of financial distress. legal and administrative costs are the direct cost of financial distress and these are incurred for legal proceedings, auditing, and accounting activities, liquidation process etc. there are many indirect costs which are very difficult to measure. distress impairs the ability of a firm to conduct normal business operation. suppliers deny delivering materials on favorable credit terms. customers switch to competitor https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 30 companies for purchasing their products. sales decline and thus distressed firm losses its market share. conflict between shareholders and bondholders rises for gaining corporate control. top management body of the financially distressed firm spend their invaluable time to avoid bankruptcy rather than on core business activities which brings more trouble to the firm. experienced and skilled employees switch to peer companies. moreover, many productive programs and attractive projects are not undertaken due to shortage of cash. when the signal of distress is revealed then creditors raise their required rate of return which increases firm’s cost of capital. the incremental requirement is considered as compensation. increase of bondholders’ fixed payoff reduces residual payoff of shareholders. less cash flow to shareholders leads to decline in market value of shares (brealey & myers, 1996). janardhanan and uma (2020) in their study revealed that use of debt capital significantly influences shareholders’ return of financial institution. akani and ifechi (2017) in their research on 40 listed firms of nigeria found that excessive debt reduced roa and roe significantly. from the present study it was found that local firms were more financially distressed and z scores were more sensitive to change in debt than mncs. the rest of the paper contain relevant literature in section 3, objectives, followed by hypothesis developmentin section 4. in section 5 methodology of the study were explained and in next section findings of the study were discussed through data analysis. in section 7 concluding remarks were made along with policy implications. literature review altman’s z-score model is used to measure thefinancial distress of a company. ross, westerfield, and jaffe (2005) defined financial distress as a situation where the firm’s operating cash flows are not sufficient to meet the short-term commitments. sajjan (2016) conducted research to predict the probability of bankruptcy of both manufacturing & service-oriented firms listed in indian stock exchanges during 2011-2015. the study revealed that the majority of firms were financially distressed which may fall in bankruptcy situation in coming years. pradhan (2014) in her study determined z scores of three indian commercial banks over the periods 20012008 and by using these values and neural network, z scores of future years were determined. study found that in every year the scores were above 6 and every observation was in safe zone. aasen (2011) in his thesis applied altman’s z-score model to estimate the financial distress of 180 listed norwegian firms. study found that z-score of manufacturing firms were less than nonmanufacturing firms. financial distress was positively related with the issuance of equity. after summarizing the research works of altman, anjum (2012) concluded that distress could be successfully forecasted by using z score model prior to 3 years. khaddafi, falahuddin, heikal, & nandari (2017) in their study have analyzed the z score of 29 banks of indonesia during 20112013 and revealed that majority of the banks were financially distressed in every year and ‘safe zone’ banks were moving to ‘distress zone’. johur and quadir (2012) in their study investigated the cause and remedial measures of financial distress of smes in bangladesh. they found that financial distress has adverse impact on sales, managerial capability, financial planning etc. the reasons for financial distress were poor fund management, poor financial control, poor profitability etc. ali et al. (2016) estimated the financial soundness of 18 textile firms in bangladesh using altman’s z score model. from the study it was revealed that 28% of the companies fall in safe zone, 22% fall in grey zone and 50% fall in distress zone. mizan and hossain (2014) in their research measured the financial distress of cement industry of bangladesh. study found that among 5 companies, two were in safe zone and three were in distress zone. mizan, amin, & rahman (2011) in their study aimed https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 31 to reveal the financial distress of listed pharmaceutical companies of bangladesh. study revealed that among 6 companies, two were in safe zone and have no bankruptcy probability. but other 4 companies were most likely to fall in financial distress within few years. gopalakrishnan, gupta, raja, reddy, & subbarao (2019) have undertaken a research work to assess the financial soundness of 10 indian steel companies during 2014-2018. study found that decrease of working capital was the main reason for financial instability. out of 10 companies, two large and old steel companies were in distress zone and two small sized companies were in safe zone. iheduru and okoro (2018) investigated the determinants of retained earnings of listed manufacturing firms in nigeria. study found that oil price positively affects but exchange rate and interest rate adversely affect retention ratio of manufacturing firms. hillary, nyang’au, & ngacho (2018) in their study analyzed the impact of financial solvency and strength on competence of listed manufacturing companies of kenya during 20112015. financial health was measured by z score model. study revealed that debt-equity ratio as solvency proxy has negative and insignificant impact on financial performance. among 9 firms, one firm was in grey zone, three firms were in distress zone and five firms were in safe zone. egbunike, ogbodo, & ojimadu (2019) studied association between financial distress and profitability of 21 firms of consumer goods sector listed in nigerian stock exchange. study found that return on asset was positively related but gross profit margin was negatively related with financial distress. masum and johora (2012) in their study has estimated the z score of 4 ceramic companies of bangladesh to assess the financial soundness during 2006-07 to 2010-11. study showed that in initial year of the study period, two firms were in distress zone and two firms were in grey zone. the firms of distress zone entered into safe zone in 2010-11 which implies that financial soundness of ceramic companies were increasing gradually. ikpesu and eboiyehi (2018) has examined the impact of capital structure on financial distress of nigerian manufacturing firmsin their research. long term debt to asset ratio was used as the indicator of capital structure and altman’s z score as for measuring the financial distress. study found that long term debt to asset ratio has negative effect on financial distress while profitability, tangibility and firm age reduces financial distress. sadiq, kachollom, dasuki, and yusuf (2017) in their study revealed that appropriate composition of debt and equity capital maximize bank’s return on investment. objective of the study the fundamental objective of the study was to examine the effect of debt financing on financial distress measured by altman’s z score. the distinctive aims are: a. to critically examine the financial distress of companies by computing z score as well as its individual component and make a comparative analysis between mncs and local firms. b. to explore the changes in z score due to changes in debt of firms and make a comparative analysis between mncs and local firms. c. to test the significance of difference in z scores between local firms and mncs. hypothesis of the study null hypothesis (h0): z scores of domestic companies do not significantly differ from that of mncs https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 32 methodology of the study data and sample secondary and quantitative data were used in the study. nature of data was panel and collected from audited annual reports of manufacturing firms. dhaka stock exchange (dse) listed manufacturing companies constitute the population which was divided into two stratalocal firms and mncs. in manufacturing segment, listed mncs operate in six industrial sectors, namely pharmaceuticals & chemicals, engineering, food & allied, tannery, cement, and fuel & power. from these industrial sectors seven mncs and seven local firms were chosen by applying stratified sampling technique. two firms were taken from pharmaceuticals & chemicals industry and one firm from rest of five industrial sectors. sample size was 14 (7+7). study period was from year 1996 to 2019. data analysis technique some descriptive statistics such as mean, standard deviation, and standard error were used to analyze data. besides these, inferential statistic such as independent sample t-test has been used to test the significance of difference in z scores of two groups. model specification and variable description financial distress of a company is measured through altman’s z-score model. altman (1993) had developed z-score model to predict bankruptcy probability which is composed of the following function: z = 1.2x1+ 1.4x2+3.3x3+0.6x4 + 1.0 x5 where x1=working capital/total assets, x2= retained earnings/total assets x3= ebit/total assets, x4= market value of equity/ book value of total liabilities x5= sales /total assets a score of z less than 2.675 indicates that a firm has a 95% chance of becoming bankrupt within one year. the area between 1.81 and 2.99 should be thought of as grey area. bankruptcy would be predicted if z≤1.81 and non-bankruptcy if z ≥ 2.99. mean values of all variables in every year were determined to quantify the results. by two phases, grand mean value were determined. first, for each year, the arithmetic mean values of the above 5 predictor factors of all 7 firms were evaluated and then the response variable [z score] was determined for each year. secondly, the average of yearly mean values of explanatory and explained variables of twenty four years (1996-2019) are estimated to obtain the broad mean value that is used to examine the effect of 4 th explanatory factor (market value of equity / book value of total liabilities) on z score. results and discussion z-scores & zones of domestic companies and mncs table 1 indicates that the mean z scores of all local businesses was higher than 1.81, which impliesthat either firms were in the gray area or in the protected zone where bankruptcy was not probable. across most of the years, spl's z score was far higher than other firms, suggesting that the firm has a higher capacity to meet financial obligations than other firms. in most of the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 33 times, the poc's z score was beyond 3, but it has been in the distress zone in recent times. likewise, across the overall span, the z score for afl and amcl was beyond 2 and it also exhibited a clear trend. relatively significant variations are seen in companies' aal and spl and z scores have decreased in recent years, but over the full duration, spl was in a safe zone. in most years, since z value was within 1.81 and 2.99, the aal was in the gray zone. this state can be seen in amcl from 1998 to 2007 as well as in the early periods of the afl. the highest average z score in spl was reported to be 8.3 and the least value of 2.78 in afl was reported. the z-score of mncs in various periods is shown in table 2. it is shown that z scores of all firms are higher than 2.99 with the exception of some years, which implies that firms were in the safe area or much of the period there was no risk of insolvency. across most of the bsc and hcl periods, the z score was over 2.99. over the entire period, gsk's and lbd's z score were above 2.99. in many years, gsk's z score was greater than other companies, which means that the financial solvency of the firm in those periods was higher than that of other firms. throughout most of the periods, bsc and rbb's z score was beyond 3 whereas that of gsk exceeds 5 across most of the periods. in sbd, relatively large variability is seen as a sudden rise and fall in the z score from the table is reported. owing to an unprecedented increase in the share price, the z scores of several firms grew significantly in 2010. stability is seen in many of the mncs, except this year. the highest mean z score was reported in gsk, which was 6.72, and the least score in bsc was reported at 4.08. comparison of average z-score between domestic companies and mncs the comparison of the average z-score between the two forms of companies is shown in table 1 and 2. it is evident that z scores for mncs were higher relative to those of local firms over the entire study period. the z score variation was not very high. the z score for mncs was above 10 in 1996, but it subsequently declined and stayed steady at three to four until 2008. the score has been standing around 5 in recent periods. the mean z score of local firms hovered around 3 until 2008 and the score has reduced in past few years since 2016. the overall mean z score is evaluated by finding the arithmetic mean of the average z score across all 24 years. the average z score for mncs was 5,398, whereas that for local firms was 4,155. analyzing the effect of leverage on z score of domestic companies and mncs initially, the influence of the market value of equity to book value of the total liabilities ratio on the z score is measured in order to objectively analyze the influence of leverage on the z score of local companies and mncs. the leverage effect on this ratio is then calculated. table 1. z-score and zones of domestic companies year aal afl amcl bpl ccl poc spl avg. 1996 1.923 2.316 6.305 3.565 4.645 4.687 6.688 4.304 grey grey safe safe safe safe safe grey 1997 2.238 2.354 8.054 3.911 7.754 4.203 7.975 5.213 grey grey safe safe safe safe safe grey 1998 2.415 2.347 2.312 2.446 8.424 4.262 7.488 4.242 grey grey grey grey safe safe safe grey 1999 2.527 2.286 2.620 2.381 5.469 3.874 3.653 3.259 grey grey grey grey safe safe safe grey 2000 2.463 2.277 2.759 2.564 6.578 3.811 3.916 3.481 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 34 grey grey grey grey safe safe safe grey 2001 2.519 2.000 2.801 2.198 4.784 3.181 4.303 3.112 grey grey grey grey safe safe safe grey 2002 2.529 2.064 2.607 2.003 3.319 3.109 4.097 2.818 grey grey grey grey safe safe safe grey 2003 3.141 2.456 2.470 1.523 2.191 3.137 4.313 2.747 safe grey grey distress grey safe safe safe 2004 2.454 2.972 2.617 1.782 1.755 3.202 7.722 3.215 grey grey grey distress distress safe safe grey 2005 2.502 3.474 2.641 2.448 1.961 3.877 5.956 3.266 grey safe grey grey distress safe safe grey 2006 2.420 3.181 2.649 2.135 2.495 3.285 4.695 2.980 grey safe grey grey grey safe safe grey 2007 2.062 3.431 2.907 2.258 3.090 3.371 6.024 3.306 grey safe grey grey safe safe safe grey 2008 2.361 4.167 3.529 2.980 2.740 4.128 7.043 3.850 grey safe safe grey grey safe safe grey 2009 3.796 3.978 3.758 2.931 3.042 4.347 8.975 4.404 safe safe safe grey safe safe safe safe 2010 22.806 3.771 3.867 5.094 11.663 3.928 12.073 9.029 safe safe safe safe safe safe safe safe 2011 10.113 3.300 2.786 4.130 5.171 3.547 2.950 4.571 safe safe grey safe safe safe grey safe 2012 5.848 3.059 3.816 3.584 4.078 3.357 9.130 4.696 safe safe safe safe safe safe safe safe 2013 4.562 2.989 4.429 3.009 4.107 3.386 11.442 4.846 safe safe safe safe safe safe safe safe 2014 4.147 2.713 5.207 2.983 3.644 3.338 20.339 6.053 safe grey safe grey safe safe safe safe 2015 2.600 2.520 3.690 3.376 3.198 3.068 28.341 6.685 grey grey safe safe safe safe safe grey 2016 2.555 2.249 3.829 3.641 2.211 1.811 9.134 3.633 grey grey safe safe grey grey safe grey 2017 2.360 2.349 4.184 3.951 1.969 1.119 8.488 3.489 grey grey safe safe grey distress safe grey 2018 1.956 2.368 4.600 2.983 2.209 1.446 6.503 3.152 grey grey safe grey grey distress safe grey 2019 1.517 2.227 4.952 2.586 2.691 1.505 8.187 3.381 distress grey safe grey grey distress safe distress average 3.909 2.785 3.725 2.936 4.133 3.291 8.310 4.155 safe grey safe grey safe safe safe safe source: derived from annual reports (1996-2019) and dse reports table 2. z-scores and zones of mncs year bsc batb gsk hcl lbd rbb sbd avg. 1996 4.875 6.105 11.633 8.539 7.584 8.970 23.548 10.179 safe safe safe safe safe safe safe safe 1997 3.646 3.934 9.308 8.757 6.086 7.211 21.361 8.615 safe safe safe safe safe safe safe safe https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 35 1998 3.155 3.006 5.604 3.608 3.251 3.991 9.347 4.566 safe safe safe safe safe safe safe safe 1999 3.079 2.477 5.564 4.143 3.087 3.566 5.684 3.943 safe grey safe safe safe safe safe safe 2000 3.095 3.016 7.224 6.788 3.086 4.547 6.121 4.840 safe safe safe safe safe safe safe safe 2001 3.108 3.866 5.837 5.321 3.061 3.086 5.105 4.198 safe safe safe safe safe safe safe safe 2002 3.180 2.772 5.501 3.648 3.599 2.078 5.272 3.721 safe grey safe safe safe grey safe safe 2003 3.359 2.510 3.887 1.298 3.991 3.485 5.200 3.390 safe grey safe distress safe safe safe safe 2004 3.080 2.931 6.518 1.673 3.882 4.386 4.248 3.817 safe grey safe distress safe safe safe safe 2005 3.255 2.066 7.140 1.913 3.596 4.430 2.437 3.548 safe grey safe grey safe safe grey safe 2006 2.968 1.737 5.776 2.563 3.569 5.104 2.036 3.393 grey distress safe grey safe safe grey grey 2007 3.152 2.397 6.264 3.182 4.544 4.916 2.259 3.816 safe grey safe safe safe safe grey safe 2008 4.009 3.209 6.332 3.527 5.964 4.923 2.953 4.417 safe safe safe safe safe safe grey safe 2009 4.043 3.512 8.488 4.666 6.693 5.376 4.734 5.359 safe safe safe safe safe safe safe safe 2010 5.305 5.392 12.726 6.670 10.404 11.701 11.201 9.057 safe safe safe safe safe safe safe safe 2011 4.695 5.636 6.806 4.830 9.608 5.976 5.856 6.201 safe safe safe safe safe safe safe safe 2012 4.245 5.829 4.710 5.057 7.215 4.876 4.430 5.195 safe safe safe safe safe safe safe safe 2013 4.444 7.478 4.730 5.642 7.627 4.762 5.351 5.719 safe safe safe safe safe safe safe safe 2014 5.507 8.061 6.291 6.761 9.056 5.856 5.129 6.666 safe safe safe safe safe safe safe safe 2015 7.155 9.791 6.910 6.854 9.336 8.049 5.187 7.612 safe safe safe safe safe safe safe safe 2016 5.598 4.710 7.227 6.090 7.217 5.992 3.164 5.714 safe safe safe safe safe safe safe safe 2017 5.194 4.012 5.250 5.907 7.247 5.896 3.242 5.250 safe safe safe safe safe safe safe safe 2018 4.582 4.032 5.730 5.098 6.817 5.869 2.931 5.008 safe safe safe safe safe safe grey safe 2019 3.341 8.701 5.836 2.345 6.685 6.925 3.402 5.319 safe safe safe safe safe safe safe safe average 4.086 4.466 6.720 4.787 5.967 5.499 6.258 5.398 safe safe safe safe safe safe safe safe source: derived from derived from annual reports (1996-2019) and dse reports https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 36 table 3. average values of z score and its components source: derived from annual reports (1996-2019) year wc/ta re/ta ebit/ta mv(e)/bv(tl) ts/ta z score domestic companies 1996 0.618 0.094 0.082 3.620 0.989 4.304 1997 0.634 0.127 0.089 5.034 0.961 5.213 1998 0.610 0.142 0.105 3.173 1.062 4.242 1999 0.566 0.171 0.107 1.637 1.007 3.259 2000 0.595 0.192 0.113 1.861 1.007 3.481 2001 0.604 0.202 0.109 1.316 0.955 3.112 2002 0.605 0.211 0.089 0.938 0.941 2.819 2003 0.587 0.198 0.089 0.825 0.977 2.747 2004 0.605 0.186 0.081 1.690 0.948 3.215 2005 0.631 0.191 0.089 1.395 1.111 3.265 2006 0.640 0.200 0.085 1.039 1.027 2.980 2007 0.634 0.207 0.092 1.538 1.029 3.306 2008 0.628 0.216 0.085 2.218 1.181 3.850 2009 0.589 0.229 0.127 3.091 1.102 4.404 2010 0.585 0.283 0.122 10.970 0.946 9.029 2011 0.580 0.307 0.117 3.595 0.902 4.571 2012 0.592 0.308 0.116 3.699 0.954 4.696 2013 0.580 0.317 0.117 3.978 0.935 4.846 2014 0.583 0.318 0.106 6.077 0.913 6.053 2015 0.540 0.316 0.107 7.279 0.875 6.685 2016 0.618 0.278 0.079 2.683 0.632 0.618 2017 0.562 0.287 0.071 2.535 0.657 0.562 2018 0.600 0.284 0.063 1.921 0.673 0.600 2019 0.632 0.293 0.063 2.193 0.687 0.632 avg 0.601 0.231 0.096 3.096 0.936 4.155 mncs 1996 0.588 0.402 0.176 12.848 1.341 11.507 1997 0.577 0.373 0.174 10.865 1.309 9.911 1998 0.559 0.360 0.179 4.387 1.269 5.822 1999 0.558 0.404 0.177 3.275 1.212 5.143 2000 0.561 0.452 0.237 4.278 1.422 6.247 2001 0.584 0.431 0.188 3.366 1.331 5.515 2002 0.580 0.412 0.138 3.081 1.287 4.995 2003 0.546 0.401 0.149 2.581 1.291 4.668 2004 0.550 0.396 0.136 3.254 1.299 5.103 2005 0.586 0.390 0.124 2.919 1.353 4.887 2006 0.614 0.415 0.157 2.479 1.559 4.937 2007 0.654 0.415 0.178 2.928 1.513 5.314 2008 0.700 0.426 0.203 3.592 1.495 5.896 2009 0.706 0.455 0.256 4.727 1.574 6.917 2010 0.718 0.510 0.309 10.058 1.606 10.647 2011 0.702 0.470 0.233 5.848 1.656 7.840 2012 0.705 0.479 0.228 4.196 1.669 6.846 2013 0.714 0.494 0.244 4.574 1.528 7.232 2014 0.714 0.421 0.238 6.122 1.559 8.209 2015 0.689 0.424 0.262 8.850 1.572 9.168 2016 0.705 0.386 0.239 5.876 1.346 7.047 2017 0.689 0.384 0.232 5.175 1.337 6.573 2018 0.685 0.376 0.229 4.820 1.276 6.272 2019 0.628 0.400 0.211 5.499 1.159 6.467 avg 0.638 0.420 0.204 5.595 1.415 6.799 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 37 annual reports are used to calculate the average values of the above five explanatory variables each year (1996-2019). the very last column of table 3 displays the overall z score of domestic firms and mncs each year, using the mean of explanatory variable values of the seven corporations. the mean values of the explanatory variables of seven local firms per year are displayed in each row of each column of table 3, and the z score is calculated applying the formula. the very last row represents the grand mean of the average scores for all 24 years. the model for local companies is like as follows after placing the final mean values: 𝑍 4.155 = (1.2 × 0.601) + (1.4×0.231) + (3.3×0.096) + (0.6×3.096) + (1×0.936) …………(1) the model of mncs becomes the following after placing the grand mean value: 𝑍 6.799 = (1.2 × 0.638) + (1.4×0.420) + (3.3×0.204) + (0.6×5.595) + (1×1.415) ………...(2) it is observed from the models (1) and (2) that the shift in mv(e)/bv(tl) triggered the z score to vary.the shift in z-score is observed by adjusting mv(e)/bv(tl) by 1 percent, 5 percent and 10 percent, and it is evident in table 4 that the increase in mv(e)/bv(tl) results in an increase in z-score and vice versa. the rate of z-score increase and decrease is the same for a given percentage change in mv (e)/bv (tl). for domestic industries, if mv (e)/bv (tl) increases by 1 percent, the z score increases by 0.4 percent or 0.02 while 5 percent and 10 percent increase leads to an increase of 2.2 percent or 0.09 and a z score rise of 4.5 percent or 0.195, respectively. from table 4, it is obvious that 1 percent increase in mv(e)/bv(tl) leads to 0.49 percent or 0.033 increase in z-score in the case of mncs, while 5 percent and 10 percent increase lead to 2.47 percent or 0.168 increase and 4.94 percent or rise in z-score respectively. table 4. impact of mv(e) / bv(tl) on z score of companies % change in mv (e) / bv (tl) new mv (e) / bv (tl) new z-score existing z-score change in z-score % change in z-score domestic companies increase by 1% 3.12696 4.174 4.155 0.019 0.4 decrease by 1% 3.06504 4.136 4.155 -0.019 -0.4 increase by 5% 3.2508 4.248 4.155 0.093 2.2 decrease by 5% 2.9412 4.062 4.155 -0.093 -2.2 increase by 10% 3.4056 4.341 4.155 0.186 4.47 decrease by 10% 2.7864 3.969 4.155 -0.186 -4.47 mncs increase by 1% 5.65095 6.832 6.799 0.033 0.485 decrease by 1% 5.53905 6.765 6.799 -0.034 -0.500 increase by 5% 5.87475 6.967 6.799 0.168 2.471 decrease by 5% 5.31525 6.631 6.799 -0.168 -2.471 increase by 10% 6.1545 7.135 6.799 0.336 4.941 decrease by 10% 5.0355 6.463 6.799 -0.336 -4.941 source: derived from z score model note: compiled by the researcher wc/ta ebit/ta mv(e)/bv(tl) ) re/ta ts/ta wc/ta ebit/ta mv(e)/bv(tl) re/ta ts/ta https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 38 currently, each company's gross borrowing is valued at variations of 1 percent, 5 percent and 10 percent each year, and a new ratio of equity/book value of total liabilities is calculated. the annual average of this ratio at that point is determined by taking the annual average of seven local companies. the current average of this ratio is then assessed by taking into account the mean of the average value for all twenty four years. the shift in debt increases the total liabilities' book value, which ultimately changes the ration of the mv(e)/bv (tl) in the opposite direction. in the z score equation, a new value is placed to evaluate the impact of the leverage shift on the z score. the average td in thecase of local firms is tk.5097.92 million, representing 55.20% of tl(average tl is tk. 9233.76 million). the average td in the case of mncs is tk. 332.42 million, representing 13.67 percent of tl (average tl is tk. 2431.45 million). the effect of the shift in leverage on the z score is shown in table 5. table 5. impact of debt on z score % change in td % change in tl new mv (e) / bv (tl) new z-score existing z-score change in zscore % change in zscore domestic companies increase by 1% 0.552% 3.0790 4.145 4.155 -0.010 -0.240 decrease by 1% -0.552% 3.1131 4.165 4.155 0.010 0.240 increase by 5% 2.76% 3.0128 4.105 4.155 -0.050 -1.20 decrease by 5% -2.76% 3.1838 4.208 4.155 0.053 1.27 increase by 10% 5.52% 2.9340 4.058 4.155 -0.097 -2.33 decrease by 10% -5.52% 3.2768 4.263 4.155 0.108 2.59 mncs increase by 1% 0.1367 5.587 6.794 6.799 -0.005 -0.073 decrease by 1% -0.1367 5.602 6.803 6.799 0.004 0.058 increase by 5% 0.6835 5.557 6.776 6.799 -0.023 -0.338 decrease by 5% -0.6835 5.633 6.822 6.799 0.023 0.338 increase by 10% 1.367 5.519 6.754 6.799 -0.045 -0.661 decrease by 10% -1.367 5.672 6.845 6.799 0.046 0.676 source: derived from z score model note: compiled by the researcher table 5 shows that the z score and total debt have an inverse relationship, which implies that decline of debt would enhance z score and vice versa. for local companies, z decreases by 0.01 or 0.24 percent if the overall debt rises by 1 percent. a 10 percent increase in total debt decreases z score by 0.097 or 2.33 percent while 10 percent rise in debt decreases z score by 0.108 or 2.59 percent. with mncs, for a 1 percent increase in overall debt, the z score decreases by 0.005 or 0.073 percent. a 10% increase in total debt reduces the z score by 0.045 or 0.661 percent, while a 10% decrease in total debt raises the z score by 0.046 or 0.676 percent. comparison of effect of leverage on z score table 5 revealed that the z score's responsiveness to debt adjustment is higher for local companies as the change and the percent change in local companies' z score is greater than that of mncs.the z score of local companies increases by 0.01 if debt shifts by 1% and the z score shifts by 0.005 for equal shifts in debt of mncs. similarly, in the context of local companies, the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 39 10 percent decline in debt enhances z score by 0.108 or 2.59 percent, while the mnc's z score enhances by 0.046 or 0.676 percent for the similar amount of debt decline. test of hypothesis independent sample t-test have been applied to test the null hypothesis. the test is used to evaluate the significance of variation in z score between domestic companies and mncs. the following table shows the result of t-test. from the table it is seen that in both assumptions of variances, the p-value of t-statistic is 0.000 which is less than 0.01. it indicates that the null hypothesis is rejected which means that there is significant difference between z scores of domestic firms and mncs. table 6. independent samples t-test levene's test for equality of variances t-test for equality of means f sig. t df sig. (2tailed) mean difference std. error difference 95% c.i. of the difference lower upper z score equal variances assumed .000 .990 -3.63 334 .000 * -1.2421 .3420 1.9150 .5692 equal variances not assumed -3.63 325 .000 * -1.2421 .3420 1.9151 .5691 source: authors’ own computation, note: *significant at 1% level recommendations and conclusion liability management is an important arena of corporate finance and it is critical for a manufacturing firm because financial distress, financial risk, solvency, and long run survival of a firm depends on it. by comparing 168 firm-year observations for each group it is seen that in case of domestic companies there are 8 observations in distress zone, 64 in grey zone and 96 in safe zone while in case of mncs the figures are 3, 15 and 150 respectively. yearly z scores of mncs are significantly greater compared to that of domestic firms. from observing mean z score of individual firms, it is seen that five domestic firms are in safe zone but two are in grey zone while in case of mncs all firms are in safe zone. these findings are supported by the fact that market value of equity is more than 3 times of liability in case of domestic companies while it is more than 5 times of liability in case of mncs. domestic companies can increase their z score by reducing debt in their capital structure. besides it, by observing individual components of z score it can be said that domestic companies basic earning power (ebit/ta), retained earnings to asset (re/ta) and asset utilization (ts/ta) ratio are much lower than mncs and z score can be enhanced by improving these ratios. further studies can be conducted on nonmanufacturing companies to assess financial distress by applying different models and different industrial sectors can be compared with each other. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 40 acknowledgements the authors are indebted to managers of sample firms at different levels as well as to authority of the dhaka stock exchange of bangladesh for providing secondary data and reports. references aasen, m. r. 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(2002). fundamentals ofcorporate finance (6th ed.). new delhi: tata mcgraw-hill publishing co. ltd., pp. 586-590. sadiq, a. i., kachollom, p. w., dasuki, s. i., & yusuf, m. (2017). effect of capital structure on the performance of deposit money banks. international journal of accounting & finance review, 1(1), 12-23. https://doi.org/10.46281/ijafr.v1i1.14 sajjan, r. (april, 2016). predicting bankruptcy of selected firms by applying altman’s z-score model. international journal of research-granthaalayah, 4(4), 152-158. appendices appendix a: name of the firms the names of the domestic companies are: aftab automobiles ltd.(aal), agricultural marketing company ltd. (amcl), beximco pharmaceuticals ltd.(bpl), square pharmaceuticals ltd.(spl), apex footwear ltd.(afl), confidence cement ltd.(ccl), and padma oil company ltd.(poc) the names of the mncs are: singer bangladesh ltd.(sbd), british american tobacco bangladesh company ltd.(batb), glaxosmithkline bangladesh ltd.(gsk), reckitt benckiser (bangladesh) ltd.(rbb), bata shoe company ltd.(bsc), heidelberg cement bangladesh ltd.(hcl), and linde bangladesh ltd.(lbd) appendix b: acronyms mv = market value tl = total liability ta = total assets wc = working capital bv = book value ts = total sales https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 43 re = retained earnings td = total debt 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/) indian journal of finance and banking vol. 5, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 1 an analysis of financial performance and investor’s experience of indian renewable energy industry dr. t. s. devaraja professor department of commerce post-graduate centre, university of mysore hassan, karnataka -573220, india e-mail: devaraja.uni.mysore@gmail.com d. k. jagadeesha research scholar department of commerce post-graduate centre, university of mysore hassan, karnataka -573220, india e-mail: jagadeesha.hsn@gmail.com abstract the development of the renewable energy industry is an important support for the sustainable development of the social economy. it is strategic significance in economic and national security is immeasurable. the process of cultivating, developing, and upgrading the renewable energy industry in india is a comprehensive system that includes finance, resources, technology, and management. renewable energy finance is a new area of public policy that requires innovation and research that will have a significant impact on investors in the world. till today, many researchers think renewable energy is an issue of science and engineering, but the future of renewable energy is no longer about science and technology; it's all about access to finance. the renewable energy sector in india is growing rapidly and presents an opportunity for strong financial returns. the present research paper aims to know the financial performance of selected renewable energy companies of the indian renewable energy industry through various financial ratios. the financial performance of any industry is effect to their respective industrial investors. hence, investors' experience is analyzed. a specific group of investors who invest in the renewable energy industry is selected and posed a structured questionnaire to know their investment experience in the renewable energy sector in india. keywords: financial performance, renewable energy, social economy. jel classification codes: f36, p17, g23, q29, q43, l7 introduction energy is a vital input to human welfare and a better standard of living. today it is a commodity that has a significant impact on human life. it has strategic significance in economic and national security. the energy sector across the world is now dominated by conventional energy sources. in 2017, the conventional energy sector accounted for 81.9% of total final energy consumption mailto:devaraja.uni.mysore@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 2 (murdock et al., 2019). these conventional energy sources are characterized by inconsistent supply and unreliable for a sustainable future. and, using these makes the environment vulnerable and produces large amounts of co2 and other pollutants in the environment which contribute to global warming. environmental degradation and its threat to the health of human life lead to reevaluating our energy policy across the globe. to support this major shift in the energy area and develop sustainable earth, spurs the development of an alternative to conventional energy sources. the earlier effort made to control greenhouse gases through the kyoto protocol agreement by “joint implementation" and "clean development mechanism” was a misconception from the very beginning (brand, 2015). and the kyoto protocol is based on the common principle with differentiated responsibilities. this protocol puts an obligation on reducing current emissions in industrialized and developed nations. the failure of the kyoto agreement leads to cop 21 paris agreement. it aims to strengthen the global response to the threat of climate change in the context of sustainable development. it reflects equity and the principle of common but differentiated responsibilities, in the light of different national circumstances. each party shall prepare, communicate and maintain successive nationally determined contributions that it intends to achieve (paris agreement, 2015). further, developed country parties shall provide financial resources to assist the developing country parties to achieve intended nationally determined contributions and it’s also led to technology transfer among the parties of the agreement. up to cop 21 agreements, the renewable energy industries in developing countries are in the chrysalis stage and struggling to settle by an inadequate supply of capital and lack of technology. the process of cultivating, developing, and upgrading the renewable energy industry in developing countries is a comprehensive approach that requires finance, resources, technology, and management. the cop 21 agreements eradicated the above problem. the agreement made a significant revaluation in the renewable energy sector of these countries by the inflow of huge investment with technology transfer. the major beneficiaries of the agreement are emerging economies includes china, india, south korea, brazil, south africa, saudi arabia, and iran, etc. it's not hidden anymore that india has a vast supply of renewable energy sources and presents an opportunity for the fast-growing renewable energy industry. it has varied supporting climatic conditions and the potential of producing energy from different sources of renewable. the indian renewable energy sector is the fourth most attractive renewable energy market in the world with a renewable energy country attractiveness index (recai) score of 63 (warren, 2015). india has the potentiality of producing 1000 gig watts (gw) and the country has set an ambitious target of 175 gw of renewable power by 2022. according to the union ministry of new and renewable energy (mnre), renewable capacity has reached 81 gw, accounting for over 22 percent of the share in the total installed capacity of the country (priyavrat bhati, 2019). the government of india is committed to increased use of renewable energy sources and is already undertaking various large-scale sustainable power projects and promoting green energy heavily (briscon, 2019) the capacity of wind energy in india has increased by 1.7 times in the last 4 years. solar power capacity has increased by more than 11 times in the last five years from 2.6 gw to 28.18 gw in march 2019. wind power accounted for the highest at 46% (around 36 gw), followed by solar with a share of 36% (30 gw). the remaining market was captured by biomass at 12% (9 gw) and small hydro projects catering to 6% (5 gw) (invest india, 2019) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 3 india intended to coming with numerous projects with different ideas and technologies, to increase the use of renewable energy and decrease the carbon footprints in the economy. several policies were undertaken to encourage investment in the area. to fulfill the needs and complete the project successfully, the indian renewable energy sector is in expectation of huge investment inflow from both domestically and across the globe. the country committed to investing $11 billion, which includes a solar investment of $6.9 billion while wind investment was $4.1 billion (inger anderson, 2019). according to data released by the national investment promotion and facilitation agency, fdi inflows in the indian non-conventional energy sector between april 2000 and june 2018 stood at us$ 6.84 billion. and more than us$2.10 billon fdi invested through equity. in the above scenario of huge expansion and investment inflow in the indian renewable energy sector, there is a need of reviewing the performance of the renewable energy industry and it needs to be correlated with the investor's experience. hence, this study attempts to measure the financial performance of the renewable energy industry in india. to achieve this goal, the study has used various financial ratios to determine the financial performance of renewable energy companies. and, structured questionnaires are used to collect the experience of investors. the objective of the study in this regard as follows.  to analyze the financial performance of selected renewable energy companies in india  to analyze the perception of indian renewable energy industry investors over the investment in the renewable energy sector. literature review clean/renewable energy is a cornerstone of better earth. it offers our planet a chance to reduce carbon emissions, clean the air and put our civilization on a more sustainable footing. it also offers countries around the world chance to improve their energy security and spur economic development (kumar et al., 2010). renewable energy avoids greenhouse gas emissions that warm our planet. it improves air quality and human health. investing in renewable energy is also an economic opportunity. it is a decision that investors around the world have been increasingly making for a decade. renewable energy is considered a more desirable source of fuel than other fuels due to the absence of risk and disasters. three primary motivators that stimulate the growth of the renewable energy industry: energy security, economic impacts, and carbon dioxide emission reduction (abolhosseini, 2014). unep report reveals that global investment in the renewable energy industry hit $272.9 billion in 2018 (inger anderson, 2019). the next decade will see further growth and penetration of the renewable energy industry in various countries. clean and green power is the longer and idealistic aspiration for a sustainable globe. it requires technology improvement, innovations, and operational flexibilities (inger anderson, 2019). the important spur for the renewable energy industry lies with the constraint of the cost, if it's achieved, the energy mix will change itself. technology needs to be re-engineered to achieve the above objective. to support the effort of the world in the sustainable development of the earth and increased use of renewable energy, the government of india (goi) has undertaken several policy measures to decrease the carbon emission from both generation and demand-side while meeting its energy need of its citizens. on the supply/generation side it’s planned to increase the greater use of renewable energy by promoting the renewable energy industry in its economy. india planned to increase its renewable energy capacity from 80.46 gw to 175 gw by the year 2022 through increased use of solar and wind (india’s intended nationally https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 4 determined contribution, 2015). with the accomplishment of this ambitious target, india will become one of the largest green energy producers in the world (year-end review, 2018). on the demand side, efforts are being made to use energy efficiently through various innovative policy measures by creating awareness among the citizens of the country. india intends to save 10% of its current energy consumption. hence, its planned drastic management programs to replace existing low-efficiency home appliances in india. the government of india declared a voluntary goal of reducing the emissions intensity of its gdp by 20–25%, over 2005 levels by 2020 (thambi, 2018)’. to support the above development, the share of renewable energy grid capacity is increased by 6 times i.e., from 3.9 gw (2%) to 36 gw (13%). india’s total demand for energy will more than double by 2030, while electricity demand will almost triple. ensuring that india’s growing population has access to energy, and meeting the country’s ambitious economic growth targets, will require massive investments in the renewable energy industry. investment in india’s renewable energy sector has doubled over the past five years. at nearly usd 20 billion in 2018, it has surpassed capital expenditure in the thermal power sector. ambitious targets, supportive policies, and falling technology costs spur the investment in the indian renewable energy sector (arjun dutt, 2019) with one of the world's largest and most ambitious renewable energy programs by surpassing several developed countries. india can take a leading role in a renewable energy transformation both regionally and globally (gielen, 2019). the us-based institute for energy economics and financial analysis (ieefa) assessed that india will require $500-700 billion for the renewable energy industry over the coming decade, to meet its renewable energy targets (buckley, 2019). in 2017, india accounted for $12.3 billion or close to 5% displaying the fastest expansion rate among all countries. this represented a 62% growth over the corresponding figure for 2016 which was $7.6 billion. the investment in the indian renewable energy industry is characterized by high risk and low returns as of now. the further optimization and upgrade of the renewable energy industry cannot be separated from financial support. it’s expected that the indian renewable energy industry is in expectation of huge investment inflow across the globe. in the above context, there exists a good deal of interest in the study of financial performance and investors experience of the renewable energy industry in india. however, this interest has not resulted in an inadequate number of empirical studies in india and across the world. it is also found that the majority of the literature has come from western nations and studies in this direction in india are very sparse. it is also pertinent to note that, there is a lack of studies that comprehensively examine the financial performance of the indian renewable energy industry and its correlated investor's experience. hence, there is a need to fill this gap by embarking on an empirical study that looks into the financial performance of the renewable energy industry and investors experience. research methodology the research data is obtained from standalone annual financial statements of three well know renewable energy companies (i.e., suzlon, orient green power, and indo wind energy) which were listed in the national stock exchange of india. ten years annual published financial statements from 2010-11 to 2019-20 are collected and different financial data are derived to calculate key financial ratios which include current ratio, quick ratio, debt equity ratio, revenue from operation per share, return on capital employed, return on asset, pbdit per share and return on equity. the mean and standard deviation of each financial ratio is computed to evaluate the financial performance of renewable energy companies. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 5 to analyze the experience of the investor's six major stockbroking agency clients were considered. each client experience was analyzed. to obtain information, 15 questions for each client are prepared and posed to the respective client. the questionnaire includes a set of positive and negative likert styles of questions. the scores of each respondent are computed by excluding a neutral score, to know whether the different broking agencies clients have the same or different experience towards investment in the renewable energy industry. the questionnaire was administrated to only selective clients who invest in the renewable energy industry. the data related to clients of stockbroking agencies were collected in the respective business premises. the sample design for the study as follows si.no stock broking agencies number of clients/ investors under the study number of the clients/ investors who exposes to investment in the renewable energy industry % of clients/investors who exposes to investment in the renewable energy industry 01 angel broking 80 28 35.00 02 asit c mehta 65 22 33.85 03 share khan 43 18 41.86 04 geojit financial service ltd. 38 20 52.63 05 indian info line 48 21 43.75 06 karvy 55 22 40.00 total 329 131 41.18 the average percent of clients who exposes to investment in the renewable energy industry is 41.18 percent. out of 6 stock broking agencies, geojit financial service ltd investors are exposed to a high-level of renewable energy industry investment and asit c mehta stock broking agency clients expose to the low-level of renewable energy industry investment. results and discussions the financing structure of the renewable energy industry in india is dominated by bank finances. the financing avenues are range from commercial banks to private equity investors and venture capital investors. this study considers three leading renewable energy-producing companies in india for analysis of financial performance and six major stockbroking companies to analyze the investor's experience. table 1. current and quick ratio analysis source: data retrieved through annual financial statements mean max min med std. dev mean max min med std. dev suzlon 0.74 1.09 0.15 0.77 0.28 0.59 1.02 0.09 0.60 0.27 indo wind energy 2.03 5.86 0.14 1.60 1.70 1.73 4.53 0.10 1.47 1.37 orient green power 1.14 4.83 0.03 0.49 1.57 1.13 4.80 0.03 0.48 1.57 parameters quick ratio current ratio renewable energy companies https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 6 indo wind energy company with a current ratio of 2.03 and a quick ratio of 1.73 with a standard deviation of 1.60 and 1.37 maintained ideal/stable liquidity and shows sound financial stability which assures its stakeholder's adequate funds to pay current liabilities and working capital. whereas suzlon companies with a mean current ratio of 0.74 and quick ratio of 0.59 with a standard deviation of 0.28 and 0.27 maintained poor liquidity. table 2. debt-equity ratio and revenue from operation/share calculation source: data retrieved through annual financial statement suzlon company maintained higher the debt to equity ratio (i.e., 3.67 with a standard deviation of 2.14) comparatively indo wind energy (0.50 with a standard deviation of 0.25) and orient green power (0.29 with a standard deviation of 0.12). suzlon is a more debt oriented company, which means most of the earnings earned by suzlon is used to pay off interest itself. a higher debt-equity ratio shows that the claims of the creditors higher which is unfavorable from the firm's point of view. whereas both indo wind energy and orient green power companies are low leveraged/ geared companies. since a high proportion of equity provides a larger margin of safety to them. it represents a satisfactory capital structure in the present context of the renewable energy industry in india. revenue from operation per share of suzlon company (13.89 with a standard deviation of 11.02) is higher compare to indo wind energy company (3.13 with a standard deviation of 2.30) and orient green power (0.389 with a standard deviation of 0.41) which indicates the future potentiality of higher return of suzlon compare to other 2 companies. table 3. return on capital employed and roa calculation source: data retrieved through annual financial statements the return on capital employed of suzlon and indo wind energy is positive with a mean score of 2.38 and 0.66 with a standard deviation of 18.50 and 1.00 respectively. investors of suzlon and indo wind energy companies’ investors have a satisfactory return on capital mean max min med std. dev mean max min med std. dev suzlon 3.67 20.16 -5.42 2.14 7.01 13.89 38.66 0.71 11.71 11.02 indo wind energy 0.50 1.20 0.37 0.43 0.25 3.13 9.59 1.74 2.45 2.30 orient green power 0.29 0.48 0.10 0.30 0.12 0.389 0.99 0 0.29 0.41 revenue from operation / share debt equity ratio parameters renewable energy companies mean max min med std. devmean max min med std. dev suzlon 2.38 33.98 -32.26 -0.29 18.50 -21.42 2.50 -86.98 -6.98 30.06 indo wind energy 0.66 2.63 -0.89 0.60 1.00 -0.81 1.24 -6.77 0.04 2.57 orient green power -4.36 4.28 -18.55 -0.76 7.91 -5.48 2.65 -17.31 -4.37 6.61 return on capital employed parameters renewable energy companies return on asset https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 7 employed but higher the standard deviation of suzlon company shows greater variability in returns throughout its life span. whereas orient green power investors have suffered loss over the capital employed with -4.36 with a standard deviation of 7.91. it shows that suzlon and indo wind energy companies used their capital efficiently compare to indo wind energy limited. whereas the return on asset of all the three companies is negative. it shows the inefficient use of capital assets employed in the renewable energy industry in india. table 4. pbdit and roe calculation source: data retrieved through annual financial statements the profit before depreciation, interest, and taxes (pbdit) of all the three companies are positive but indo wind energy companies as the highest pbdit compare to the other two companies. return on equity of suzlon company is positive compare to the other two companies. the suzlon company offer a promising rate of return to investors with a mean score of 3.67 with a standard deviation of 7.01 table 5. different stock broking agencies score calculation source: primary data the difference between the high extreme score and the lower extreme score is negative i.e., -54 which indicates the negative experience of investors towards investment in the renewable energy industry in india. the clients of all the stockbroking agencies i.e., angel mean max min med std. dev mean max min med std. dev suzlon 0.24 4.45 -7.16 0.97 3.24 3.67 20.16 -5.42 2.14 7.01 indo wind energy 1.69 2.96 0.75 1.66 0.59 -1.00 2.89 -9.91 0.09 3.96 orient green power 0.11 0.63 -0.18 0.05 0.27 -8.52 3.84 -26.88 -6.83 10.16 return on equity pbdit/ share parameters renewable energy companies si.no stock broking agencies higher extreme score (1) lower extreme score (2) (1) – (2) positive score /negative score remarks 01 angel broking 62 76 -14 negative experience 02 asit c mehta 46 58 -12 negative experience 03 share khan 45 38 7 positive perception 04 geojit financial service ltd. 48 63 -15 negative experience 05 indian info line 48 59 -11 negative experience 06 karvy ltd 58 67 -11 negative experience total 307 361 -54 negative experience https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 8 broking, asit c mehta, geojit financial service ltd, indian info line, and karvy ltd clients had negative experiences except clients of the share khan. most of the small investors have lost their money in the investment in the renewable energy sector. the wealth of the renewable energy industry shareholders has come down drastically from the financial year 2010-11 to 2019-20. the capital of investors had been eroded from year to year. the returns on equity for the investors are very low and it's coming down year by year. the n numbers of small investors have shifted their investment from renewable energy sectors to other sectors of the indian economy. but for the question of whether do, you believe that the renewable energy industry in india has a growth perspective or not, a large number of investors have agreed that investment in the indian renewable energy industry has a great future and can expect a good return and increase in wealth. conclusion the indian renewable energy industry still struggling to settle. as of now, the renewable energy industry in the recession stage. the various financial ratios indicate that the indian renewable energy industry is in crisis. it proved by financial indicators of above said three major companies. the indian investors have a negative experience and lost confidence over the investment in the indian renewable energy industry. indian renewable energy industry is still backed by the debt financing pattern and most of the revenue of renewable energy companies is used to pay off interest part of the debt. there is a need of reviving the indian renewable energy industry through changing financing patterns. it needs equity market push in the renewable energy industry. the analysis seems that the indian renewable energy industry is struggling to settle but also reveals a greater opportunity for future gain. hence, it offers a wide-ranging future investment opportunity for investors. references abolhosseini, s. h. (2014). a review of renewable energy supply and energy efficiency technologies. institute of labor economics, 8-19. arjun dutt, l. a. (2019). clean energy investment trends 2019: evolving risk perceptions for grid-connected renewable power projects in india. new delhi: council on energy, environment, and water. buckley, t. (2019). india needs $500-700 billion in renewable energy: ieefa. the economic times. retrieved from https://economictimes.indiatimes.com/industry/energy/power/india-needs-500-700billion-in-renewable-energy-ieefa/articleshow/70703262.cms?from=mdr. brand, u. (2015, november 11). why the kyoto protocol failed. (the rosa-luxemburgstiftung) retrieved from https://www.rosalux.eu/topics/social-ecologicaltransformation/why-the-kyoto-protocol-failed briscon. (2019, march 8). government of india. retrieved from investindia.gov.in gielen, d. (2019). renewable energy prospects for india. abu dubai: irena. https://economictimes.indiatimes.com/industry/energy/power/india-needs-500-700-billion-in-renewable-energy-ieefa/articleshow/70703262.cms?from=mdr https://economictimes.indiatimes.com/industry/energy/power/india-needs-500-700-billion-in-renewable-energy-ieefa/articleshow/70703262.cms?from=mdr https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 9 global trends in renewable energy investment (2019). frankfurt: un environment’s economy & frankfurt school-unep collaborating centre for climate & sustainable energy finance, bloombergnef. india’s intended nationally determined contribution. (2015). unfccc international: retrieved from https://www4.unfccc.int/sites/submissions/indc/submission%20pages/submissions.aspx inger anderson, n. s. (2019). global trends in renewable energy investment. frankfurt: frankfurt school of finance and management. kumar, a., kumar, k., kaushik, n., sharma, s., & mishra, s. (2010). renewable energy in india: current status and future potentials. renewable and sustainable energy reviews, 14(8), 2434-2442. murdock, h. e., gibb, d., andré, t., appavou, f., brown, a., epp, b., ... & sverrisson, f. (2019). renewables 2019 global status report. paris agreement. (2015). paris agreement. paris: united nation. retrieved from https://unfccc.int/sites/default/files/english_paris_agreement.pdf priyavrat bhati, p. s. (2019). the state of renewable energy in india 2019 ( a citizen report). new delhi: centre for science and environment. thambi, s., bhatacharya, a., & fricko, o. (2018). india’s energy and emissions outlook: results from india energy model. warren, b. (2015). renewable energy country attractiveness index (recai). ernst young: london, uk. 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/) indian journal of finance and banking vol. 7, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 1 customer relationship management practices of indian public and private sector banks: an exploratory study lalitha p s research scholar department of management studies sri venkateswara university, tirupati, india e-mail: lalithaparendur@gmail.com dr. kiran kumar paidipati assistant professor department of statistics, lady shri ram college for women, university of delhi, new delhi, india e-mail: kirankumar.paidipati@lsr.du.ac.in dr. arvind kumar professor & dean atal bihari vajpayee school of management and entrepreneurship jawaharlal nehru university, new delhi, india e-mail: kumararvind@mail.jnu.ac.in abstract the contemporary study focused on the impact of crm parameters to identify the influencing factors towards customer satisfaction and customer loyalty. a sample of 1200 respondents chosen from public sector (sbi and of andhra bank) and private sector banks (icici and hdfc) using multi-stage random sampling technique through a structured questionnaire. the study employed various statistical tools such as percentage analysis for demographical information, bank variables, and the crm parameters. mean ranks for ranking the items and reliability analysis applied for obtaining reliable variables in constructing the crm parameters. exploratory factor analysis (efa) was performed to identify highly influenced factors of crm practices to improve level of satisfaction and loyalty in public and private banks. the explored results enlighten directions to the banking sector to provide some operational implications such as proactive involvement from personnel, and customized outreach in engaging customers to reduce the negative word-of-mouth (wom) and increase the productivity of banks positively. these significant crm strategies will reduce the attrition rate and improves customer retention in future. keywords: customer experience, banking sector, crm parameters, exploratory factor analysis, customer retention. jel classification codes: g210, g410, o180, d100. introduction crm is an acronym generally stands for customer relationship management while others mean it as customer relationship marketing too. in managerial emphasis, crm is a discipline or an approach to acquire and develop suitable practices in maintaining profitable customer relationships. customer is the most important asset to banks. the concept of crm as a strategy reflects the banks to process in mailto:kirankumar.paidipati@lsr.du.ac.in https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 2 optimizing revenues, profitability and to gain the customer loyalty. nowadays, banks are continually looking for ways to achieve a competitive advantage to customer expectation intensifies for quality and service. consequently, crm practices playing vital role in improving the customer’s experience to maximize the profit and increase the business connections. retaining the old customer is far cheaper than acquiring a new customer. key issue for many banking organizations is customer retention often referred to as churn. hence, there is a significant need in employing more crm practices in banking system that would be helpful to maintain customer retention and help them manage customer defection (churn) rates and to enhance performance in reducing the attrition rate. during the covid-19 times, the banking sector has recorded its highest ever profits of rs. 1,02,252 crores in fy21, a year when the economy was battered by the pandemic. this is a significant turnaround compared to a net loss of nearly rs. 5,000 crore for the industry in fy19. hdfc bank contributed rs. 31,116 crores accounted for 30%, sbi accounted for another 20% at rs. 20,410 crores. the third-highest was icici bank, which earned rs. 16,192 crores, more than double what it earned in the previous year. private banks also gained market share as public sector banks (psbs) went slow in lending as per the reports of rbi. figure 1. net profit /loss of public and private sector banks18 banks want to strengthen customer experience by successful digital transformation and takes the customer insights with the new digital changes offered by banks like upis, bhim, google pay, phonepe, paytm, and other money wallets. it is difficult to reach and meet every segment of customers, as usually banks target the maximum customer expectations and satisfaction levels. according to amitabh kant (niti aayog ceo) mentioned about phenomenal unified payment interface (upi) recorded 2.3 billion transactions through value worth 4.3 trillion in jan 2021 on a year -on-year (yoy) basis jumped 76.5%. to reach one billion transactions, upi took 3 years times previously, the next billion will reach less than a year in the subsequent financial years. in recent digital transformation drive postulates some positive benefits in terms of communication, word of mouth (wom), sharing customer experience, and other valuable insights. crm practices can help to monitor the feedbacks in terms of ratings and reviews, opinion from users’ point of view and better implementing strategies in forthcoming days. figure 2. importance of crm communication & customer insights and trends drive a digital transformation strengthen customer expereience https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 3 review of literature several studies explored crm practices in banking sector which focused on diverse strategies to enhance the customer services. starting from the specified study, loyalty was an attitude-based phenomenon influenced by customer relationship management initiatives affinity programs (mark et al., 2003). the authors focused on customer service results in a positive customer attitude (kirmaci, 2012). the study assessed the quality of service provide by private sector banks which dominate public sector banks in terms of customer service and providing awareness (singh, 2013). another study examined customers with various personal attributes, found differ in their expectations and perceptions in terms of quality, technological innovations usage. it initiates significant impact on technological relationship and their perceptions of crm parameters to customer demographics (law et al., 2013). the researchers observed the mediating role of customer trust among social identity and customer loyalty. also, recognized the momentous influence of relationship marketing to influence positive customers so as it increased the identity, reputation, image on customer trust which affects customer loyalty (nguyen et al., 2013). the authors investigated positive relationship between crm practices and customer loyalty in banking sector (anabila & awunyo, 2013). the study described about services provided by private sector banks such as positive customer attitude helps to correct fulfilment of customer expectations, and positive perception of staff towards customer services improve the better crm practices (vugec et al., 2017). another explored the implementation of crm model, idic (identify, develop, interact and customization) was adopted in nigerian banks to enhance customer retention (karahan & kuzu, 2014). according to study identified that bank personnel get expertise technically in rendering services to the users, which setbacks appropriate strategies to banks efficiency (khan et al., 2017). further an exploratory study focused on customer perception and customer orientation in the banking sector and suggested that inferred technology acts as a customer relation paradigm in engaging the customers (dubey & sangle, 2019). another study examined the success factors of crm which includes customer information, system support, quality of service in turn results customer trust and retention towards banks financial performance (al-dmour et al., 2019). the influence of technological advancements in banks reduces customer retention (bankole et al., 2020). the analytical crm practices like online marketing services for effective communication channels made banks to become more customer – centric (devendran, 2020). finally, the researchers investigated the practical implications of deep learning technologies and their applications includes virtual service assistant, smart image processing, face recognition, personalized marketing, audio-video processing, user authorization, cybersecurity will save as the one-stop repository for banks and protects the assets, prevents losses from frauds. it aims to provide quality service to satisfy customers and reduce customer churn detections (hassani et al., 2020). overall, the studies discussed on crm parameters such as satisfaction, loyalty and retention etc., and effective practices to reduce the churn rates. there is a need of keen understanding about the customer behavior towards satisfaction and being loyal in banking sector. several studies suggested certain improvements to be added in crm practices to maintain the customer retention and reduce attrition. our study will be another feather and mostly focused to study in-depth understanding of customer behavior in implementing crm practices in the banking sector in india. research methodology the study envisioned in exploring significant crm parameters in indian public and private banking sector. the study considered rural and urban areas of one of the districts of india to understand the consumer behaviour towards implementing the crm practices. the study designed in collecting 1200 samples with a structured questionnaire from three revenue divisions in chittoor district, andhra pradesh, india using multi-stage sampling technique. the customers were selected from public (sbi & andhra bank) and private (icici & hdfc) sector banks of 600 customers each. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 4 statistical tools used for data analysis statistical tools such as descriptive statistics, percentage analysis, reliability, mean ranks to understand demographical information among customers with different bank sectors, to check the reliability of crm parameters and to rank the crm parameters. chi-square test is employed for finding the association between demographical information and crm parameters, factor analysis is a dimension reduction technique used for knowing combined influence of crm parameters in banking sector. the obtained results are properly concluded at various significance levels. table 1. frequency distribution for demographic variables with type of banking sector s. no. demographic variables attributes public sector bank private sector bank test statistic n % n % 1 gender male 385 64.2% 424 70.7% χ2=5.770 and p=0.016 (s) female 215 35.8% 176 29.3% 2 age below 25 years 102 17.0% 163 27.2% χ2=22.561 and p=0.000 (s) 25-40 years 244 40.7% 213 35.5% 41-55 years 145 24.2% 106 17.7% above 55 years 109 18.2% 118 19.7% 3 educational qualification illiterate / below 10th std 54 9.0% 0 0.0% χ2=66.698 and p=0.000 (s) ssc / intermediate 44 7.3% 84 14.0% graduation 357 59.5% 368 61.3% post-graduation & above 145 24.2% 148 24.7% 4 annual income below 1 lakh 42 7.0% 42 2.0% χ2=23.541 and p=0.085 (ns) 1-3 lakhs 202 33.7% 202 17.0% 3-5 lakhs 244 40.7% 244 46.0% 5-10 lakhs 112 18.7% 112 35.0% 5 occupation government employee 278 46.3% 24 4.0% χ2=604.407 and p=0.000 (s) private employee 18 3.0% 322 53.7% business/corpora tes 81 13.5% 77 12.8% students/unempl oyed 39 6.5% 125 20.8% pensioners/farmer s/others 184 30.7% 52 8.7% 6 frequency of bank visit very rare 13 2.2% 98 16.3% χ2=48.763 and p=0.000 (s) occasionally 71 11.8% 137 22.8% once in a week 38 6.3% 47 7.8% twice in a month 118 19.7% 117 19.5% monthly once 360 60.0% 201 33.5% 7 relationship with bank in years less than a year 2 0.3% 45 7.5% χ2=132.054 and p=0.000 (s) 1-2years 76 12.7% 80 13.3% 2-4 years 150 25.0% 148 24.7% 4-8years 272 45.3% 210 35.0% more than 8years 100 16.7% 117 19.5% https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 5 statistical analysis results table 1 exhibits that the majority of banking activities, transactions are made by males (64.2% and 70.7%) compared to females (35.8% and 29.3%) in public and private sector banks. most of the individuals belonged to the age groups of 25 to 40 years (40.7% and 35.5%) in both the sectors. when it comes to the educational qualifications, most of the respondents are graduates (59.5% and 61.3%) followed by the post graduates (24.2% and 24.7%) in the different sectors. maximum number of the respondents fall in 3 to 5 lakh income group (40.7% and 46.0%) consisting of government employees (46.3%) are more in public banks and private employees (53.7%) in private sector banks. after introducing digital banking services, the respondents are visiting banks most probably once in a month than earlier days, having relation with the bank is nearly 4-8 years (45.3% and 35.0%) and visiting banks for different reasons in public and private sector banks. the associations of the demographic and banking parameters such as gender (λ2=5.770 and p-value=0.016), age (λ2=22.561 and p-value=0.000), educational qualification (λ2=56.698 and p-value=0.000), occupation (λ2=604.407 and p-value=0.000), frequency of bank visit (λ2=48.763 and p-value=0.000), relationship in terms of years (λ2=132.054 and p-value=0.000) and reason for bank visit (λ2=40.257 and p-value=0.000) among type of banks (public and private) are mostly significant except the annual income of the respondents. the results were represented graphically for a better understanding of demographical variables and banking parameters. 54 0 44 84 357 368 145 148 0 100 200 300 400 public sector banks private sector banks education of respondents among type of bank sector illiterate/10th std ssc/intermediate graduation post-graduation & above 385 424 215 176 0 100 200 300 400 500 public sector banks private sector banks gender of respondents among type of bank sector male female 42 12 202 102 244 274 112 212 0 50 100 150 200 250 300 public sector banks private sector banks income of respondents among type of bank sector below 1 lakh 1-3 lakhs 3-5 lakhs 5-10lakhs & above 102 163 244 213 0 100 200 300 public sector banks private sector banks age of respondents among type of bank sector below 25 years 25-40 years 41-55years 55 years above 8 reason for visiting bank balance enquiry new a/c 117 19.5% 89 14.8% χ2=40.257 and p=0.000 (s) cash deposit/with drawl 103 17.2% 103 17.2% complaints/queri es 109 18.2% 108 18.0% locker 161 26.8% 104 17.3% loan services/others 62 10.3% 112 18.7% total 1200 100.0 1200 100.0 source: primary data, where n=no. of samples, ns= not significant, s=significant. *p=0.05 level of significance https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 6 reliability test for crm parameters table 2. reliability statistics for crm parameters crm parameters customer service customer knowledge customer focus customer orientation customer satisfaction customer loyalty cronbach’s alpha 0.830 0.859 0.864 0.811 0.844 0.717 source: primary data table 2 depicts that reliability statistics for the crm parameters, the cronbach’s values for the customer service parameter (0.830), customer knowledge value (0.859), customer focus (0.864), customer orientation (0.811), customer satisfaction (0.844) and customer loyalty (0.717). it exemplifies the internal consistency reliability of alpha is high in correlation between the items and the questionnaire is consistently reliable. median responses of crm parameters table 3. median of crm parameters crm parameters customer service customer knowledge customer focus customer orientation customer satisfaction customer loyalty median 4.00 4.00 3.00 3.00 4.00 4.00 source: primary data 278 2418 322 81 77 39 125 184 52 0 50 100 150 200 250 300 350 public sector banks private sector banks occupation of respondents among type of bank sector government employee private employee business/corporates students/unemployed pensioner/retired persons 13 98 71 137 38 47 118 117 360 201 0 50 100 150 200 250 300 350 400 public sector banks private sector banks frequency of bank visit among type of bank sector very rare occasionally once in a week twice in a month monthly once 2 45 76 80 150 148 272 210 100 117 0 50 100 150 200 250 300 public sector banks private sector banks relationship in years among type of bank sector less than a year 1-2years 2-4 years 4-8years more than 8years 117 89 103 103109 108 161 104 62 112 48 84 0 20 40 60 80 100 120 140 160 180 public sector banks private sector banks reason for bank visit among type of bank sector balance enquiry/acc opening cash deposit/with drawl complaints/queries locker loan services/replacements shares/currency exchange https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 7 table 3 revealed the median responses of crm parameters to know the behavior of the customers. most of the respondents were responded satisfactory opinion about the crm parameters (customer service, customer knowledge, customer satisfaction and customer loyalty) which are employed in banking system. further the respondents are given neutral opinion about the satisfaction levels on customer focus and customer orientation in implementing the practices in private and public banks in the region. mean rankings for crm parameters table 4. mean ranks for crm parameters crm parameters customer service customer knowledge customer focus customer orientation customer satisfaction customer loyalty mean rank 5.87 5.16 3.88 2.64 3.26 5.05 highest rank construct cs6 ck6 cf1 co1 csa3 cl7 mean rank 3.73 3.27 3.30 2.40 2.78 3.97 lowest rank construct cs5 ck3 cf3 co2 csa1 cl6 source: primary data table 4 depicts association among constructs through mean ranks for crm parameters. for customer service among 8 items in the construct, highest mean rank is positioned for cs6 item i.e., banks have high integrity and security and the least rank goes to cs5 item is about goodwill. followed by customer knowledge, maximum rank item in the construct is ranked for ck6 and the minimum is for ck3, next parameter is the customer focus which is for cf1 and low is cf3, for customer orientation high rank goes to the item co1 and least is co2, for the customer satisfaction construct the high order mean rank is for csa3 and low is csa1, finally the last construct, customer loyalty’s high rank goes to cl7 least observed in cl6. factor analysis factor analysis is a data reduction technique or inter dependence techniques or data summarization technique examines the interrelationships among a large number of variables. the tool is used for finding the highly influenced variables among crm parameters to employ in the banking sector (public and private). table 5. kmo and bartlett's test kaiser-meyer-olkin measure of sampling adequacy 0.881 bartlett's test of sphericity approx. chi-square 39036.533 df 703 sig. 0.000 source: primary data extraction method: principal component analysis. table 5 elucidates measure of sample adequacy was computed through kaiser-meyer-olkin (kmo) was 0.881 indicates that the samples are good enough for sampling. also, the overall correlation matrices had been verified with bartlett test (approx. χ2 =39036.533 and significant at (p =0.00 < 0.05) provided the validity of data. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 8 table 6. total variance explained source: primary data extraction method: principal component analysis. the table 6 represents the variance percentage (76%) of all factors resulting from the factor analysis over 38 factors were clustered into 3 factors which is determined as linear combinations of homogenous variables and most important parameters of customer relationship management practices in banks through principal component analysis. table 7. factors influencing crm parameters factors crm parameters factor loadings eigen values % variance cronbach’s alpha (α) focus based customer service services to individual customers cf1 0.508 4.189 34.208 0.895 beyond customer expectations cf2 0.666 treat the customers with great care cf3 0.662 strengthens emotional bonds cf4 0.828 uses customer suggestions cf5 0.487 interact with customers cf6 0.561 customized web page cs1 0.720 resolve complaints cs2 0.846 follow up single customer cs3 0.512 flexible working hours cs4 0.737 exercise goodwill deal with customers cs5 0.602 high integrity and security cs6 0.526 speedy when counter services cs7 0.726 receptiveness-cs8 0.767 knowledge based access of information ck1 0.663 2.616 29.264 0.846 responsiveness ck2 0.598 awareness on crm programmes ck3 0.504 reliability ck4 0.542 communication ck5 0.537 component initial eigenvalues rotation sums of squared loadings total % of variance cumulative % total % of varianc e cumulative % 1 5.376 47.832 47.832 4.189 34.208 34.208 2 2.751 18.026 65.858 2.616 29.264 63.472 3 1.249 10.389 76.247 1.372 12.775 76.247 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 9 factors crm parameters factor loadings eigen values % variance cronbach’s alpha (α) customer orientation trust ck6 0.831 assurance ck7 0.769 suitability using crm technology co1 0.708 relationship personnel co2 0.720 prior preference to customer co3 0.661 customer touchpoints – co4 0.517 satisfaction based customer loyalty complaints management csa1 0.669 1.372 12.775 0.816 sincerity and helpfulness of personnel csa2 0.617 opinion on services offered by bank csa3 0.476 establish long term relationship csa4 0.698 can meet customer expectations csa5 0.697 changing the bank cl1 0.857 considering loyal customer cl2 0.729 continuing services in future cl3 0.798 use other services offer by bank cl4 0.767 endorsing bank to others cl5 0.768 switch to competitor banks cl6 0.890 trouble in provide service shift bank cl7 0.896 first choice among other banks area cl8 0.791 source: primary data extraction method: principal component analysis. rotation varimax method table 7 depicts that the first principal component accounted for 34.208 % of variance with twelve statements as the “focus based customer service”. the second principal component accounted for 63.472% of variance and was indicated in 11 statements as the “knowledge-based customer orientation”. the third principal component accounted for 76.247% of variance indicated with 13 statements as “satisfaction based customer loyalty”. overall observations from the factor analysis are that the respondents are very particular about focus based customer service, knowledge-based customer orientation, and satisfaction-based customer loyalty. discussion the study depicts some insights to the bank management to overcome the customer churn rate. the results of the study revealed the customer relationship management parameters influence on customer satisfaction and customer loyalty. it examines the significant association among the customer relationship management parameters towards the public and private sector banks of chittoor district. the results enhance understanding regarding the crm practices adopted by bank management and exploring the services offered by the respondents. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 10 it is revealed that cronbach’s alpha (α) for all the scale items in the construct for crm parameters should be above (> 0.50 is better), above (> 0.60 is good) and, above (>0.70 is acceptable) was mostly considered and accepted by the researchers (nunnally, 1978) through reliability test for crm parameters depicted in table 3. perhaps can be explained through the median percentile observed for all six parameters approximately. it was found to be satisfactory for four variables such as customer service, customer knowledge, customer satisfaction and customer loyalty (cs, ck, csa, and cl) except for two other variables, customer focus and customer orientation (cf and co) was neutral in the opinion of customers neither satisfied nor dissatisfied with the practices implemented in the banks was displayed in table 4. the mean ranks test indicates the highest rank order to cs, ck and cl parameters and, lowest rank order (cf, co, and csa) opted by the respondents to the items in the construct was illustrated in table 5. the study also employed factor analysis to know homogeneous (similar) crm variables as factors and to test the relevance of various items in the constructs of crm practices in banks of chittoor district. furthermore, to test the reliability, factor loading value (0.50) for item was considered (hair et al. 1998). the study depicts the reliability was above 0.70 and the threshold value of cronbach’s alpha (α) is acceptable for the 3 extracted factors. also, kmo of sample adequacy was performed for overall items was 0.881 and test of sphericity (bartlett’s) also significant at p> 0.05 indicates that employing factor analysis was good to further ensue. principal component method (pca) is used for extracting parameters with varimax rotation, to maximize the number of items with high factor loadings on a component, helps in justifiable factors in the construct (malhotra, 2003). eigen values (= or >1) used to determine the extracted factors shown in table 9. a total of 38 items was extracted into 3 factors i.e., focus based customer service, knowledge-based customer orientation, satisfaction-based customer loyalty. conclusion crm solutions are no longer limited to just the retail banking rather, they are now essential for any entity that offering services. when it comes to banking system, it is essential to focus on implementing crm practices and a great challenge to sustain and retain customers. banking is now a customer-driven world that understand and serve the individual needs of their customers better, those will succeed. adopting all crm practices in banking system is much critical to serve customers at every point in the retaining process and building decent relationships to reduce loss of existing customers. our study explored understanding regional behavioral changes of customers in implementing crm practices of banks in chittoor district. the study considered applicability of all practices to suit for the particular region in satisfying needs of the customers. the study identified the factors such as focus based customer service, knowledge-based customer orientation, satisfaction-based customer loyalty is playing vital role in implementing crm practices of banking sector (public and private) in urban and semi-urban areas of chittoor district. there is a need to give orientation among customers for enhancing their focus towards the products and digital services offered by the banks in the region. the awareness programs should be conducted for attaining the knowledge by utilizing the services properly in every aspect which leads to satisfaction in turn become loyal customer to banks. the study suggests that the applicability of crm practices can be extended to rural area banks to satisfy the customer requirements. thus, customer experience (cx) and customer engagement is also essential to compete effectively in today's banking system. banks become more effective when it implements crm practices, impeccably results in reducing customer attrition rate and increasing customer retention. scope and limitations of the study  this study is limited to the extent that it covered the customers and employees of only 2 public sector banks and 2 private sector banks of chittoor district of andhra pradesh.  the study confined to urban and semi-urban area, excluded the rural areas in the districts of india. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 11 references anabila, p., & awunyo-vitor, d. 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(2017). it governance adoption in banking and insurance sector: longitudinal case study of cobit use. international journal for quality research, 11(3), 691-716. 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) indian journal of finance and banking vol. 8, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 13 an empirical assessment of adoption and innovation of the portable banking technology in kenya eltigani m. a. ahmed phd candidate school of leadership, business & technology pan africa christian university nairobi, kenya e-mail: eltigani.ali@students.pacuniversity.ac.ke received: august 29, 2021 accepted: september 17, 2021 online published: september 23, 2021 doi: 10.46281/ijfb.v8i1.1351 url: https://doi.org/10.46281/ijfb.v8i1.1351 abstract the study investigated the appropriateness of innovation diffusion in understanding and explaining the adoption rate and acceptability of portable bank technology in kenya through the assessment of the factors that influence the adoption of portable banking technology. the study employed a sample of 115 portable bank technology adopters based on a purposive sampling technique and tested the five attributes of innovations, namely relative advantage, compatibility, complexity, trialability, and observability. the study found that relative advantage, compatibility, trialability, and observability positively impact adoption. trialability and complexity were found to have a lesser significant effect on adoption. complexity hurts adoption. more specifically, the regression model revealed that compatibility is the most significant determinant of adopting portable bank technology with t=4.21 and p ≤ 0.001. trialability has a significant positive impact on adoption with t= 4.27 and p ≤ 0.001. observability has a high explanatory value with t = 4.45 and p ≤ 0.001. relative advantage has returned a positive explanatory coefficient at t=4.50 and p ≤ 0.001. finally, complexity had no significant impact on the adoption of portable banking technology. the study has uncovered useful trends in portable bank technology adoption in kenya. the study recommended that future research should focus on broader variables and carry out comparative studies on both homogeneous and heterogeneous settings to gauge the net effect of technical attributes on technology adoption. keywords: innovation adoption, portable banking, technology, kenya. jel classification codes: d14, g21, g23, o13, o14, q55. introduction technology-driven innovation in banking services is generally perceived as the one of the most critical forms of alteration that occurred in the banking industry in the last two decades(rogers, 2003). one of the most recent changes that have completed the origination-diffusion-adoption lifecycle is the implementation of portable banking technology, which, in its purest forms, represents the use of i&ct, to carry out banking and financial transactions (puschel, mazzon, & hernandez, 2010). technological advancements in telecommunications have drastically changed the way banking and financial transactions are carried out. nowadays, people queue less often at bank tellers to withdraw or deposit mailto:eltigani.ali@students.pacuniversity.ac.ke https://doi.org/10.46281/ijfb.v8i1.1351 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 14 money or make the mundane payments for utility bills and purchase of assets for home use. this revolutionary change, which started with the advent of smartphones (laukkanen, 2017), has swept the banking industry in many countries and found semi-unanimous acceptability within a relatively brief time. this rate of diffusion and adoption deserved a closer investigation to understand its theoretical and empirical underpinnings. this phenomenon has been extensively researched in the last few years, with most studies relate the adoption rate to the five innovation attributes promoted by rogers (2003): relative advantage, compatibility, complexity, trialability, and observability. within the african context, many countries have achieved pioneering positions in portable banking technology. in east africa in particular, kenya is primarily viewed as a leading country in the adoption of portable bank technology, thanks to the prominent role of the country's telecommunication industry led by safaricom, which successfully deployed the mpesa platform as a pilot scheme in 2003 and later the mainstream mobile banking technology or m-bank, as popularly known in kenya (mbiti & weil, 2015). the provision of portable bank technology has spread rapidly and found increasing acceptability from both the regulated banks and the public to the extent that the convenience provided using mobile phones in carrying out banking and financial transactions is perceived as an irreversible adoption so far as there are no significant setbacks in the system. according to pousttchi and schurig (2004), electronic banking and finance are now part of most business-to-business, business-to-customer, and business-to-public applications. electronic banking is a generic term used for mainstream online financial dealings. online financial dealing has multiple facets and is not just limited to handset-based portable bank technology. it includes the use of physical and virtual teller machines (wan, luk, & chow, 2005) and the use of internet banking as well (barnes & corbitt, 2003; black, lockett, ennew, winklhofer, & mckechnie, 2002; jabri & sohail, 2012). in the kenyan context, the advancement in telecommunication technology, coupled with positive consumer behavior and general public awareness, has contributed to the rapid expansion of handsets in financial transactions (mbiti & weil, 2015). this study is motivated by the rate of adoption of portable bank technology, and it aims to test the technical attributes of innovation diffusion and adoption and its likely impact on the use of portable bank technology in kenya. kenya is a developing nation with a rising middle-income, free economy, and reasonably developed public and private sector institutions, which provide a healthy environment for the proliferation of innovative ideas. this study investigates the factors that either inhibit or promote the proliferation of innovation within the kenyan context. the study will relate the technical attributes that inhibit or promote the diffusion and adoption of innovation, namely the relative advantage, compatibility, complexity, trialability, and observability, to the mainstream idea that a conducive environment is needed to accelerate the adoption rate of innovative ideas. statement of problem the central bank of kenya financial inclusion survey (cbk, 2018) estimates that 11.5 million persons use handset devices for financial transactions compared to 5.4 million persons who use physical banks regularly. the report indicates that the use of portable handsets in financial services more than doubled from 28% in 2009 to 62% in 2013 (cbk, 2018). the report further highlights that the use of portable bank technology has had a significant impact on traditional domestic remittance methods such as sending money physically via public transportation system or through post office. in 2006, over half (57%) of money transfers within kenya were through family/friends, while in 2013 it dropped to a third because people opted to use portable bank technology instead of physical transfers (odera, 2013). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 15 table 1. kenya banking land-scape provider number banking platform 5,430,644 22% saccos 1,695,827 7% micro finance 651,873 3% mobile phone financial services 11,465,438 47% informal groups 5,161,573 21% 24,405,355 100% source. cbk (2018) in 2018, the active portable bank accounts are estimated at 371 million users who carry out 1.2 billion operations per annum with an estimated 2.9 trillion kenya shillings in monetary terms (cbk, 2018). from 2014 until 2018, the total volume of transactions carried out using mobile technology reached six billion transactions and 15 trillion kenya shillings error! reference source not found. highlights annual growth in the mobile payment system in kenya. table 2. annual mobile payment method growth year agents accounts (millions) transactions (millions) value (ksh billions) 2014 1,445,664 311 911 2,372 2015 1,607,424 321 1,114 2,816 2016 1,943,637 385 1,331 3,355 2017 1,989,624 418 1,543 3,638 2018 1,783,829 371 1,275 2,930 source. cbk (2018) the cbk report further highlights an important aspect related to the use of portable bank technology. by the end of 2013, 84% of urban citizens and 62% of rural citizens adopt portable bank technology. this high acceptability rate has been made possible by the adequacy of the requisite infrastructure as 65% of the population are able to access the internet from the comfort of their portable handsets (cbk, 2018) as highlighted in table 3. table 3. access to and use of internet mode of access percentage on mobile phone 65% at home/computer 11% at internet café 16% at office computer 7% on a friend's computer 1% source. cbk (2018) research has established that diffusion and adoption of portable bank technology proliferate faster and receives greater acceptability than the traditional banking platform (laukkanen, 2017). while literature has established this as a reality, the causation mechanism is still a work in progress. it appears https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 16 that the rate of adoption of new ideas depends on a complex set of cultural, social and psychological factors besides the technical attributes suggested by rogers (2003). this study represents a continuation in this direction and aims to provide further evidence on the application of innovation adoption and diffusion theory into portable bank technology. most commercial banks in nairobi enjoy niche customers with a specific clientele base, including public and private sector employees, self-employed persons, and expatriates in addition to public and commercial entities such as hotels, hospitals, and private corporations (ongore & kusa, 2013). the banks are generally keen to increase service convenience offered to their customers to sustain their operations, achieve acceptable growth rates, and increase value for their stakeholders (ongore & kusa, 2013). this research will provide evidence-based insight into customer satisfaction by analyzing customer needs and will enable the banks to serve their customers better. this research will determine the optimal strategies and actions that commercial banks managers should adopt to improve service delivery and achieve customer satisfaction. the kenyan banking industry has achieved tremendous strides toward automated and sophisticated banking service delivery based on information and communication technology. kenya is considered the hub of the east african financial sector (ongore & kusa, 2013). most local banks in kenya fully adopted portable bank technology, and some banks are ahead of the queue regarding technology adoption (mbiti & weil, 2015). however, while this technology has been adopted seamlessly, it is unclear whether the adoption rate is driven by deliberate policies based on valid theoretical evidence or just adopted for convenience and in response to competitive pressure. this study will provide evidence-based reasoning and a clear roadmap toward creating adequate penetration and adoption strategy. objectives of the study the study aimed at achieving two sets of objectives: main objectives and specific objectives. the primary objective is to assess the factors influencing the adoption of portable bank technology by a sample of regular customers of local commercial banks who own and transaction on the online platform on a regular basis. the specific objectives are two-fold. first, to identify the depth of portable bank technology offered by some local commercial banks; and second, to establish factors influencing adoption of portable bank technology among commercial bank customers. the study draws a large sample from trade and development bank and kenya commercial bank mililani branch. the findings will help the two banks design policies that promote clientele and increase the volumes of their operations. research questions two specific questions guide the research. first, what is the breadth and depth of portable bank technology offered by local commercial banks, and second, what are the factors driving the adoption of portable bank technology by local commercial banks? significance of the study most commercial banks in nairobi enjoy niche customers with specific clientele base including public and private sector employees, self-employed persons and expatriates in addition to public and commercial entities such as hotels, hospitals, and private corporations (ongore & kusa, 2013). the banks are generally keen to increase service convenience offered to their customers to sustain their operations and achieve acceptable growth rates and increase value for their stakeholders (ongore & kusa, 2013). this research will provide an evidence-based insight into customer satisfaction by analysing customer needs and will enable the banks to serve their customers better. this research will determine the optimal strategies and actions that commercial banks managers should adopt to improve service delivery and achieve customer satisfaction. the kenyan banking industry has achieved tremendous strides towards the accomplishment of automated and sophisticated banking service delivery based on information and communication https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 17 technology. kenya is considered the hub of the east african financial sector (ongore & kusa, 2013). most local banks in kenya fully adopted portable bank technology and some banks, such as equity, coop bank, and bank of africa and kenya commercial bank are ahead of the queue regarding technology adoption (mbiti & weil, 2015). however, while this technology has been adopted seamlessly, it is not clear whether the adoption rate is driven by deliberate policies based on valid theoretical evidence or whether it is just adopted for convenience and in response to competitive pressure. this study will provide the evidence-based reasoning and clear roadmap towards the creation of adequate penetration and adoption strategy. literature review the best way to analyze innovation and change is to conceptualize the whole idea within a dynamic frame where a transition from one stage of change into another takes a lifecycle format. the complete cycle of change is either gradual and aggregative or revolutionary (velu, 2016). the gradual and aggregative change may be expressed in the following mathematical formulas: (1) gradual change: (2) aggregative change: t2 = t1 + t0 where t2, t1 and t0 denote a change in time2, time1 and time0, respectively. on the other hand, revolutionary change has no precedent, and therefore it is a non-cumulative change (velu, 2016). innovation is synonymous with newness (rogers, 2003). any innovative idea, product, or service is unknown before. however, an unknown idea does not mean that it has not existed before (galavan, murray, & markides, 2008). newness is, therefore, a context-based and perceptionbased phenomenon, and therefore, what is new in a specific setting or culture may have been already known in another setting or culture. newness may be relative to the same setting or culture, and therefore it is not an absolute creation (rogers, 2003). new ideas develop within the cultural and social context, flourish within the period, and are adopted or resisted by a specific group of receptors (rogers, 2003). these three elements of innovation represent the lifecycle of change. the innovation theory highlights four critical stages of change lifecycle: innovation, diffusion, adoption, and social context. rogers (2003) defines innovation as "an idea, practice, or object that is perceived as new by an individual or another unit of adoption" (p. 49). based on this definition, it is critical to highlight two aspects. first, innovation is "perceived"; second, it is "adopted by people." these two aspects form the foundations of innovation and explain two critical tenets of innovation: the relative importance of early adopters compared to late adopters and the technical attributes of innovation adoption (rogers, 2003). technical attributes include relative advantage, compatibility, complexity, trialability, and observability. technical attributes form one aspect of innovation that determines the speed of diffusions and the rate of adoption. other aspects include how innovation is initiated, channels through which innovation is communicated, and social, organizational, and cultural settings. given the scope, the study shall be limited to the technical aspects, introduced in detail in the following section. relative advantage measures the extent to which innovation is perceived to be superior to other available and comparative solutions. this is based on adopters' tastes and preferences and points to the importance of the demand side as adopters are the ultimate beneficiary of any product or service that is released into the market. adopters' tastes and preferences determine the rate of adoption and whether the adopted product will sustain or disappear. any organization that intends to develop a product or t1 ≥ t0, t2 = t1 + t0 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 18 service must model adopters' behavior because failure to do so will result in a high rate of adoption failure (rogers, 2003). compatibility relates to product and service conformity with the adopters' cultures, social values, and ethical norms. rogers (2003) notes that compatible innovations are adopted with relative ease while incompatible innovations are resisted or adopted slower. incompatible innovations may require a change of social norms to make them compatible with the innovation (rogers, 2003). the question is, in the event of a conflict between cultural norms and innovation, which one will prevail? this indeed depends on the relative importance of the innovation. if the adopters perceive innovation as critical, they may consider changing their pre-innovation norms to be compatible with the innovation (rogers, 2003). otherwise, the norms will remain, and the innovation will not be adopted (christensen, 2013). one example that highlights this fact is what rogers (2003) mentions the success rate of the hiv campaign in st. lucia in the caribbean. the campaign motto "after pleasure comes the pain" (p. 457) resonated well with the audience and accelerated the adoption rate by enforcing a change of cultures and attitudes. complexity refers to the ease or difficulty in the adoption process. complexity may relate positively or negatively to the degree of adoption, depending on the adopters' perception and attitudes toward risk (rogers, 2003). some adopters prefer to try harder and more complex experiences, particularly in technology. the steep learning curve that comes with adopting innovation may create a form of psychological excitement to some adopters and make them feel socially elevated or distinguished compared to other social groups. however, the mainstream reaction is that the more innovation is perceived as complex, the less appealing it becomes (rogers, 2003). trialability and observability are risk-mitigating aspects of adoption, and both relate to gradual adoption based on own assessment, as in the case of trialability, or third-party assessment, as in the case of observability. some innovations may not be compatible with trialability, such as products and services that do not provide a sampling experience. however, most innovations are tried and tested by specialized parties before adoption (rogers, 2003). innovation's technical attributes have been extensively researched and applied in various disciplines, including technology, consumer products, education, the medical field, weaponry, and more. the theory has established a generalized causational direction between the technical attributes and the rate and speed of adoption. portable banking technology, or mobile banking, refers to accessing traditional banking and financial services on portable phones. the software used to access the services is third-party applications, developed either as the propriety of the specific banks and financial institutions or by independent developers (laukkanen, 2017). the range of services accessed on the portable devices varies per the services available in the host institutions. the standard services include balance checks, credit and loans, mortgage, payment of utility bills, money transfer, online shopping, gaming, stock and security transactions, and tax payment (puschel et al., 2010). in most countries, the services are delivered through a partnership between financial institutions and telecommunication service carriers. in kenya, for instance, the major telecom service providers, including safaricom, airtel, and orange, have partnered with local commercial banks to provide portable bank services to a broad spectrum of customers (wamai & kandiri, 2015). the portable bank technology in kenya is mainly dominated by safaricom's m-pesa service (mbiti & weil, 2015). global context of portable bank technology the portable device technology adoption is considered one of the fastest adoption rates in the history of technology, particularly value-added and internet-based services in general. the most conservative estimates suggest that the use of portable devices for internet-based applications will increase at a rate of 200 to 300 times each year. data from the international telecommunications union (itu) suggests that global mobile data traffic is projected to increase by at least seven times between 2018 and 2021. the itu statistics show that by january 2018, an estimated 3.7 million active users of portable device technology worldwide, 50% of whom use portable devices for internet access. kenya is estimated to have the highest portable device-based internet traffic rate, followed by nigeria, india, singapore, ghana, and indonesia. on the other hand, the highest broadband subscription rates are recorded in https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 19 europe and north america, representing 78.2 percent and 76.6 percent, respectively. previous studies within the kenyan context kenya is considered one of the most advanced countries in east africa regarding digitized banking and payment systems (mbiti & weil, 2015). therefore, the kenyan experience has received an elevated level of interest from all over the world. since the introduction of the portable banking payment system in early 2003, several studies have been carried out to assess the rate of adoption and the influence of several theoretical and empirical factors in accelerating both the rate and magnitude of adoption (mutindi, 2018). given the scope of this study, a literature scan has been carried out to assess the commonality in research projects and findings of the kenyan experience with diffusion and adoption. most of the studies adopted the technical attributes and technology acceptance, consumer preferences, and institutional settings as independent variables, while the rate of adoption, acceptability and monetary impact were selected as dependent variables. summary of the most recent studies is reported in . some of the studies are reported in table 4 previous studies within the kenyan context kenya is, by all means, viewed to be one of the most advanced countries in east africa in terms of digitized banking and payment systems (mbiti & weil, 2015). therefore, the kenyan experience has received an elevated level of interest from all over the world. since the introduction of the digital banking payment system in early 2003, several studies have been carried out to assess the rate of adoption and the influence of several theoretical and empirical factors in accelerating both the rate and magnitude of adoption (mutindi, 2018). most of the studies adopted quantitative methods with technical attributes, technology acceptance, consumer preferences, and institutional settings as independent variables while the rate of adoption, acceptability, and monetary impact were selected as dependent variables. some of the studies are reported in table 4 table 4. summary of recent relevant studies on digital banking technology author/authors and date title concept findings jahan and khan (2018) factors influencing the mobile banking adoption in bangladesh exploring the relation between technical attributes of adoption and mobile banking adoption in the context of mobile banking service in bangladesh trialability, observability, relative advantage, perceived risk, complexity, and compatibility have statistically significant relationships with mobile banking adoption mutindi (2018) factors influencing the adoption of mobile banking technology by bank customers in machakos town identifying factors influencing customers decision to use mobile banking in kenya with interest in machakos town the influence of bank factors, individual customer characteristics, and the availability of infrastructure have a significant positive impact on adoption of mobile banking technology https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 20 compiled by author methodology and design the section below describes the research methodology and covers research design, conceptual framework, population space, and sampling techniques used in the paper. the research was conducted wamai and kandiri (2015) determinants of mobile banking adoption by customers of microfinance institutions in nairobi county in kenya to investigate the effects of important factors that affect the adoption of mobile banking technology by customers of microfinance institutions in nairobi county the the study found that both perceived usefulness and perceived ease of use positively correlate and affects the adoption of mobile banking technology positively addai, ameyaw, ashalley, and quaye (2015) digital banking and customer satisfaction: empirical evidence from ghana to determine a set of attributes that influence the adoption of mobile banking innovation among university students in ghana relative advantage, compatibility, observability, complexity, perceived risk, trialability and service satisfaction as critical factors influencing the adoption of mobile banking in ghana yunus (2014) diffusion of innovation, consumer attitudes, and intentions to use mobile banking discusses the effect of diffusion of innovation (relative advantage, compatibility, and trial-ability) toward the intention to use mobile banking through consumer attitudes the results found that relative advantage, compatibility, and trialability directly had a significant effect on consumer attitudes in a positive way mbiti and weil (2015) mobile banking: the impact of mpesa in kenya the impact of the proliferation of mpesa on the rate of technology adoption a positive correlation between technology acceptance and the rate of adoption. gikandi and bloor (2010) adoption and effectiveness of digital banking in kenya to establish the factors affecting the adoption of mobile banking services among bank customers in the kenyan banking industry positive and robust correlation between technical attributes and adoption rate ngugi, pelowski, and ogembo (2010) case study of early adopters’ role in the rapid adoption of mobile banking in kenya an exploratory and empirical study of early adopters a statistically significant impact of early adoption rate and technical attributes https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 21 using a quantitative method and was designed as a descriptive cross-sectional study in which information was gathered from a sample of respondents who adopted portable bank technology. the data was gathered through an interviewer-administered questionnaire. the research aimed to apply technical attributes of adoption to assess portable bank adoption rates in various locations within nairobi. the explanatory variables are relative advantage, compatibility, complexity, trialability, and observability. the dependent variable is the adoption of portable bank technology. the conceptual framework that maps the causational space between the explanatory variables and the dependent variable is depicted in error! reference source not found. the target population is defined as customers of local commercial banks which offer mobile banking services. the customer base includes regular account holders and customers who do not have an account with local banks. because of the integrated account management system, not all customers visiting local commercial banks hold physical accounts with those banks because of the integrated account. some customers hold banking accounts in various branches within nairobi and across the country, while others use the convenience of online banking, which does not require users to travel to specific branches to carry out banking and financial transactions. respondents included businesspeople, personal account holders, and corporate customers. according to bernard (2017), a random sampling technique that satisfies up to 25% of the base population is considered adequate for social science research. creswell and creswell (2017) suggest that a 20% selection rate could still give unbiased results. the study chose respondents based on open and purposive sampling. the population parameters were unknown as the sample was picked from various locations. data analysis data was entered for completeness, comprehensibility, and reliability before coding. data was entered and analyzed on the spss platform, and the data analysis used frequencies and proportions for the descriptive statistics. a regression method was used where the explanatory variables were regressed on the dependent variable. the regressors were relative advantage, compatibility, complexity, trialability, and observability, while the dependent variable was the adoption of portable bank technology. the response rate is considered critical in determining the statistical significance of the study, and a higher response rate is better as it provides more robust explanatory power and dilutes data bias (creswell & creswell, 2017). out of the 130 questionnaires distributed, 115 were returned filled, representing a response rate of 88.46%. this response rate was deemed sufficient to provide reliable statistics. respondents' background respondent's background is essential in research findings as it provides critical information about the relevance of the population to the study. in the adoption of innovation, the background of the sample informs whether adequate and subject-specific responses and results will be obtained or not. the background covered the respondents' gender, age, education level, social status, income, and professional status. out of the total sample size of 115, people who responded that they were male were 70 (61%) while those who said they were female were 45 (39%). while the dominance of male percentage might not have a significant impact, it might inform broader gender aspects concerning the sample and study field that may warrant further investigation using a larger cross-section. however, this is out of the scope of this study. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 22 table 5. sample demographics: gender gender frequencies percent male 70 61% female 45 39% total 115 100% regarding the age question, although all respondents responded positively to the age question, it is challenging to verify the accuracy of responses since age is generally perceived as part of a person's privacy and personal data, and some respondents may not be freely willing to provide the accurate response, particularly with the female gender. nonetheless, age is an important characteristic as it relates to maturity, experience, and consumer preferences. the age categorization was reported as follows: 30 respondents (26%) aged 18-24 years, 42 respondents (37%) aged 25-34, 35 respondents (30%) aged 3544, and 8 respondents (7%) aged above 45. table 6. sample demographics: age age frequencies percent 18-24 30 26% 25-34 42 37% 35-44 35 30% above 45 8 7% total 115 100% education level is a critical factor in both the response rate and technology adoption level because educated persons are easier to convince to provide questionnaire responses. educated persons are also able to express themselves and their inclinations freely without fear. of the 115 respondents, the majority were a university and tertiary-educated, representing 60 (52%) and 38 (33%), respectively, while 17 (15%) were secondary education. the primary education category returned zero responses. table 7. sample demographics: education education level frequencies percent primary 0 0% secondary 17 15% tertiary 38 33% university 60 52% total 115 100% social status was another critical factor added to the questionnaire based on the perception that married persons and single mums have higher societal responsivities and are more likely to use portable bank technology to carry out various household-related transactions. the study sample included 21 (18%) single, 71 (62%) married, and 23 (20%) divorced. again, while the questions were quickly answered, it was challenging to ascertain the veracity of responses as some people tend to conceal their social identity, marital status, and age due to the sensitivity of the responses. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 23 table 8. sample demographics: social status table 9. sample demographics: income level in terms of income level, the majority, 51%, fall within the income bracket of kshs. 50,000 – kshs. 249,000, which corresponds to the middle-income class. further, 20% of respondents earn above kshs. 250,000 and below kshs. 500,000 while only 11% earn above kshs. 500,000. finally, employment status or professional status is another crucial factor because it relates to financial status, income level, and the possibility of owning a smartphone and transacting on a bank platform. out of the 115 respondents issued with questionnaires and interviewed, 62 (54%) were employed, 30 (26%) were self-employed, 13 (11%) were not employed, and 10 (9%) were students. table 10. sample demographics: professional status professional status frequencies percent employed 62 54% self-employed 30 26% not employed 13 11% others (student) 10 9% total 115 100% breadth and depth of portable bank technology the study's first objective was to assess the breadth and depth of portable bank technology adopted by customers of local commercial banks. this was measured by several variables, including smartphone ownership, adoption of the portable bank, adoption frequency or frequency of use, services enjoyed from the smartphone, reasons for using the portable bank, and reasons for not using the portable bank. the first and second questions are the structural questions expected to auto-correlate with the remaining three questions. the study did not use techniques to deal with autocorrelation as it was limited to simple descriptive statistics. out of the total respondents, 97% had smartphones, 95%% had subscribed to portable bank, 60% never frequently used portable bank, 25.3% used portable bank for balance inquiry, 34.0% used portable bank because it provided cashless convenience, and 34.2% did not use portable bank because of fear of loss. despite the limited scope and sample, these statistics tell underlying stories related to income level per month frequencies percent under kshs 50,000 20 17% kshs. 50,000-99,999 32 28% kshs. 100,000-249,000 27 23% kshs. 250,000-499,000 23 20% over kshs.500,000 13 11% total 115 100% social status frequencies percent single 21 18% married 71 62% divorced 23 20% total 115 100% https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 24 people's perception of dealing with cash and portable bank. the motives could be broader than what has been captured in this limited questionnaire, and therefore, broader research may be worthwhile to understand the underlying motives of people dealing with cash or cashless systems in kenya. the following were the findings of the study nature and magnitude of adoption of mobile banking services table 11. smartphone ownership table 12. adopted portable bank frequencies percent subscribed 109 95% unsubscribed 6 5% total 115 100% table 13. adoption frequency frequencies percent never 6 5% rarely 3 3% sometimes 18 16% often 21 18% very often 67 58% total 115 100% table 14. services used on portable bank frequencies per cent balance check 109 19% money transfer 88 16% loans 18 3% bill payment 109 19% airtime purchase 42 7% cash withdrawal 109 19% cash deposit 91 16% total 566* 100% factors influencing the adoption of portable bank technology the study's second objective was to investigate factors influencing the adoption of portable bank technology among commercial bank customers. this was measured by looking at 5 (t5 variables). the frequencies percent have a smartphone 112 97% no smartphone 3 3% total 115 100% https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 25 questions were spread on a likert scale from 1 to 5, with one denoting strongly disagree, two disagree, three neutral, four agree, and five strongly agree. the mean was used to analyze the questions and identify the rank of each technical attribute. table 15. factors influencing adoption of mobile banking factor id no of item mean std alpha compatibility 5 4.25 1.46 0.833 trialability 5 4.19 1.33 0.839 observability 5 4.03 1.21 0.783 relative advantage 5 4.03 1.89 0.908 complexity 5 3.97 1.34 0.843 as expected and in conformity with the theory, compatibility was ranked as the highest factor influencing the adoption of portable bank technology, followed by trialability, observability, and relative advantage, while complexity had the least explanatory power. the means of four and above correspond to the answers obtained based on the likert scale, where four denotes "agree," as explained above. a simple regression analysis was carried out to understand the explanatory power and the direction of causation, and the results are reported in the following table. table 16. the regression model independent variable b s.e t p-value collinearity statistics tolerance vif compatibility 0.24 0.051 4.21 0 0.54 1.701 trialability 0.28 0.056 4.27 0 0.551 1.705 observability 0.31 0.06 4.45 0 0.509 1.964 relative advantage 0.32 0.064 4.5 0 0.513 1.968 complexity -0.141 0.043 -3.333 0.001 0.71 1.408 the above results indicate that compatibility is the most significant determinant of adopting portable bank technology (t=4.21, p ≤ 0.001) is similar to findings of previous studies (koenig-lewis, palmer, & moll, 2010; odera, 2013). both studies found that compatibility has a robust positive influence on the adoption rate of portable bank technology. rogers (2003) asserts that "compatibility is the degree to which an innovation is perceived as being consistent with the existing values, past experiences, and needs of potential adopters" (p. 52). compatibility, therefore, represents the degree of familiarity and acceptance by the adapters, and the more innovation is perceived to be compatible with adopters' beliefs, convenience, and ways of life, the faster the innovation is adopted. in portable bank technology, most respondents perceive it as compatible with their way of life and help them conveniently conduct their various businesses. hence, the variable provided a robust and higher explanation. the regression results have also shown that trialability has a significant positive impact on adoption with t= 4.27, p ≤ 0.001. this is as expected and is supported by the theoretical foundation. according to rogers (2003), trialability represents an inherent possibility of trying the innovation on a sample basis. the reasoning behind the positive impact of trialability on the adoption rate is that innovation that offers adopters the chance to try it on a small-scale basis will generate confidence and accelerate the adoption rate. innovation is always risky because it represents an untested change and tends to drag adopters away from their traditional comfort zones (norman & verganti, 2014). hence, a gradual change is always preferred over revolutionary change because the former allows for reversal. the regression has also found that observability has a high explanatory value with t = 4.45, p ≤ 0.001. this conforms with the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 26 theoretical foundation because observability is similar to trialability. after all, it allows late adopters to observe the success of innovation by observing the experience with the early adopters. this provides both comfort and confidence and therefore accelerates the rate of adoption by late adopters. relative advantage has returned a positive explanatory coefficient at t=4.50, p ≤ 0.001. again, this result conforms to the theoretical foundation. relative or comparative advantage accelerates the adoption rate because it reflects consumer preference over other available competing products (bessant, 2003). finally, complexity harms mobile banking adoption. this contradicts earlier findings by jahangir and begum (2008), who assert that complexity makes innovation appealing, and adopters tend to try challenging experiences. however, the finding is consistent with other studies (jabri & sohail, 2012; odera, 2013; wang, wang, lin, & tang, 2003). the finding in this study suggests low significance of complexity on the adoption rate. conclusion this study concluded that the technical attributes represent statistically significant explanatory variables of portable bank technology adoption rate in the kenyan contexts. the findings also align with the causational relations stipulated in the adoption theory (rogers, 2003). this is also broadly in conformity with several other previous studies in the kenyan context (gikandi & bloor, 2010; mbiti & weil, 2015; mutindi, 2018; ngugi et al., 2010; wamai & kandiri, 2015). it could be observed that people adopt portable banking mainly because of the convenience it provides them in terms of time-saving and reduction in transitional costs. for instance, the mobile banking charges are considered minimal compared to the convenience it provides to the users (mbiti & weil, 2015). before the diffusion and adoption of mobile banking services, people used traditional means of dealing with money and conducting business, resulting in higher transaction costs and longer delays in transaction conclusion. it is evident that the portable bank service offered in kenya is mostly in line with clientele expectations and conforms to the social and cultural inclinations of the adopters. the reliability of the core banking technology and the absence of significant incidents and setbacks such as large-scale fraud and nonhonoring of payment obligations contributed to the speedy adoption of portable bank technology (odera, 2013). despite the findings of this study and similar studies conducted previously that indicate robust predictive power of technical attributes over the rate of technology adoption, kenyan portable bank technology is still relatively nascent and may be far from being considered mature and established practice. it may require several years of uninterruptible performance to gauge the effectiveness of the system. additionally, it is an oversimplification to assume that adoption is solely explained by the technical attributes as many other structural, social, cultural, and geopolitical assumptions need to be considered to arrive at a more realistic and broader explanation. it is also expected that expanding the variable base allows for more complex and natural relations to be modeled. another shortcoming of the findings, besides the limited population and the sample size, is that it does not differentiate between the impact of the adoption rate in early adopters and late adoptions. according to rogers (2003), part of the adoption velocity in late adopters may be explained by the success rate achieved by early adopters. this explains the acceleration rate in late adoption. in a practical sense, people tend to follow a copy-and-paste attitude, and they generally feel more comfortable with a technology that has been tested by a neighbor, a friend, or a relative. as they say, good messages tend to spread through word of mouth and increase adoption rate at an increasing rate. kenya is an emerging market and a middle-income economy. kenya also hosts several international organizations and is the only un office in east africa. the country is therefore poised to play a critical role in the african economic and financial landscape. the success of deploying portable banking technology in kenya has already been copied in all the east african countries (hellstrom & troften, 2010). this cross-border adoption represents a positive promotion for portable bank technology. however, it appears that the east african community is yet to produce effective legislation to pave the way for financial integration, particularly concerning online banking technology (hellstrom & troften, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 27 2010). currently, the integration is limited to cross-border branches of commercial banks that have a presence in other countries. the study has uncovered useful trends in portable bank technology adoption in kenya. the questionnaire feedback and the findings could be used as a basis for policy design and implementation by local banks and financial institutions and invest more resources in attracting more transaction traffic into the online platform. the benefit of online banking is that it is a one-time investment by the banks and will continue to accrue net revenues at relatively low operating expenses. future research should focus on broader variables and carry out comparative studies on both homogeneous and heterogeneous settings to gauge the net effect of technical attributes on technology adoption. the relationship between complexity and adoption is one area that needs further investigation to assess whether this is only specific to digital technology or may apply to all forms of innovation. one might expect that complex innovation considered superior in the social ladder may be adopted at a higher pace by middle and high-income nations while lower classes adopt simple innovations at a higher pace and complex innovations at a slower pace. references addai, o., ameyaw, b., ashalley, e., & quaye, i. (2015). electronic banking and customer satisfaction: empirical evidence from ghana. british journal of economics, management & trade, 9(3), 1-8. barnes, s. j., & corbitt, b. (2003). mobile banking: concept and potential. international journal of mobile communications, 1(3), 273-288. bernard, h. r. (2017). research methods in anthropology: qualitative and quantitative approaches: rowman & littlefield. bessant, j. r. (2003). high-involvement innovation: building and sustaining competitive advantage through continuous change. uk: wiley & sons. black, n., lockett, a., ennew, c., winklhofer, h., & mckechnie, s. (2002). modelling consumer choice of distribution channels: an illustration from financial services. international journal of bank marketing, 20(4), 161-173. cbk. (2018). finaccess survey. retrieved from https://www.centralbank.go.ke/national-paymentssystem/mobile-payments/ christensen, c. (2013). the innovator's dilemma: when new technologies cause great firms to fail. ma: harvard business review press. creswell, j. w., & creswell, j. d. (2017). research design: qualitative, quantitative, and mixed methods approaches: sage publications. galavan, r., murray, j., & markides, c. (2008). strategy, innovation, and change: challenges for management: oup oxford. gikandi, j. w., & bloor, c. (2010). adoption and effectiveness of electronic banking in kenya. electronic commerce research and applications, 9(4), 277-282. hellstrom, j., & troften, p.-e. (2010). the innovative use of mobile applications in east africa: swedish international development cooperation agency (sida). https://www.centralbank.go.ke/national-payments-system/mobile-payments/ https://www.centralbank.go.ke/national-payments-system/mobile-payments/ https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 28 jabri, i. m., & sohail, m. s. (2012). mobile banking adoption: application of diffusion of innovation theory. journal of electronic commerce research, 13(4), 379. jahan, k., & khan, f. (2018). assessment of the factors influencing online banking customer satisfaction: a banking perspective in bangladesh. world, 8(1), 142-158. jahangir, n., & begum, n. (2008). the role of perceived usefulness, perceived ease of use, security and privacy, and customer attitude to engender customer adaptation in the context of electronic banking. african journal of business management, 2(2), 032-040. koenig-lewis, n., palmer, a., & moll, a. (2010). predicting young consumers' take up of mobile banking services. international journal of bank marketing, 28(5), 410-432. laukkanen, t. (2017). mobile banking. international journal of bank marketing, 35(7), 1042-1043. mbiti, i., & weil, d. n. (2015). mobile banking: the impact of m-pesa in kenya. in african successes, volume iii: modernization and development (pp. 247-293): university of chicago press. mutindi, k. m. (2018). factors influencing the adoption of mobile banking technology by bank customers in machakos town. ngugi, b., pelowski, m., & ogembo, j. g. (2010). m‐pesa: a case study of the critical early adopters’ role in the rapid adoption of mobile money banking in kenya. the electronic journal of information systems in developing countries, 43(1), 1-16. norman, d. a., & verganti, r. (2014). incremental and radical innovation: design research vs. technology and meaning change. design issues, 30(1), 78-96. odera, e. a. (2013). mobile banking adoption in the banking industry in kenya. (mba). university of nairobi, nairobi. ongore, v. o., & kusa, g. b. (2013). determinants of financial performance of commercial banks in kenya. international journal of economics and financial issues, 3(1), 237-252. pousttchi, k., & schurig, m. (2004). assessment of today's mobile banking applications from the view of customer requirements. paper presented at the system sciences, 2004. proceedings of the 37th annual hawaii international conference on. puschel, j., mazzon, a., & hernandez, m. (2010). mobile banking: proposition of an integrated adoption intention framework. international journal of bank marketing, 28(5), 389-409. rogers, e. m. (2003). diffusion of innovations (5th ed.). ny: free press. velu, c. (2016). evolutionary or revolutionary business model innovation through coopetition? the role of dominance in network markets. industrial marketing management, 53, 124-135. wamai, j., & kandiri, j. m. (2015). determinants of mobile banking adoption by customers of microfinance institutions in nairobi county in kenya. international journal of science and research, 2279-2286. doi:10.21275/art20174832 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 29 wan, w. w., luk, c.-l., & chow, c. w. (2005). customers' adoption of banking channels in hong kong. international journal of bank marketing, 23(3), 255-272. wang, y.-s., wang, y.-m., lin, h.-h., & tang, t.-i. (2003). determinants of user acceptance of internet banking: an empirical study. international journal of service industry management, 14(5), 501-519. yunus, m. (2014). diffusion of innovation, consumer attitudes and intentions to use mobile banking. paper presented at the information and knowledge management. appendices appendix: questionnaire use of mobile banking technology dear participant this short questionnaire is intended to collect anonymous data about access to banking services on mobile devices. this questionnaire is for research purposes and is not designed to inform or affect any policy that may negatively impact the consumers. i would appreciate it if you could take only five minutes of your time to fill this questionnaire with accurate information to the best of your knowledge. 1. are you male or female? male female 2. what is your age bracket? 3. what is your education level? primary secondary tertiary university 4. what is your social status? single married 18-24 25-34 35-44 above 45 divorced https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 30 5. where do you place your income category? under 50,000 50,000-99,999 100,000 249,000 250,000-499,000 above 500,000 6. what is your professional status? employed self-employed not employed others (student) 7. do you have a smartphone? 8. are you subscribed to any form of mobile banking? subscribed unsubscribed 9. how often do you use this service? yes no 1 2 3 4 5 balance check money transfer loans bill payment airtime purchase cash withdrawal cash deposit https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 31 10. which of the following factors you think have influenced your decision to use portable bank service? 1 2 3 4 5 convenience tested and reliable security better than going to the bank comfort knowledge 1q2`1 a 11. which of the following factors you think might influence your decision not to use the portable bank service? 1 2 3 4 5 costly reliability it can get lost difficult to use restrictive 12. do you think portable bank services are better than going to the bank? 13. do you find the service expensive compared to other services? 14. do you find any technical challenges dealing with this service? 15. do you think that buying a smartphone is a nightmare? 16. would you recommend this service to others? 17. do you have any security concerns using the services? 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) yes no yes no yes no yes no yes no yes no indian journal of finance and banking vol. 4, no. 4; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 1 mathematical modeling of asset liability management in banks using goal programming and ahp jyoti tanwar research scholar department of economics and finance bits-pilani, pilani campus jhunjunu, rajasthan333031, india e-mail: jyotanwar@gmail.com arun kumar vaish assistant professor department of economics and finance bitspilani, pilani campus jhunjunu, rajasthan333031, india n v m rao professor department of economics and finance bits-pilani, pilani campus jhunjunu, rajasthan333031, india abstract asset liability management has gained popularity in the banking sector. earlier banks focused on asset allocation, but now the management of assets and liabilities is equally essential. asset liability management targets the optimum distribution of funds in assets and managing liabilities so that banks can earn higher profits and minimize risk. in this paper, the optimization of assets and liabilities of indian banks has been concentrated using mathematical models. combining the analytical hierarchy process (ahp) and goal programming (gp) model has been used to solve the optimization problem. ahp is a multi-criteria decision-making approach for deriving priority weights. goal programming is a linear programming model to solve complex issues having multiple objectives. in this paper, the primary data gathered from bank senior managers have been analyzed using the ahp approach to derive weights for criteria. these weights are assigned to goals in goal programming to prioritize the goals. secondary data on obc bank is used in goal programming from 2010-2019 collected from obc bank's annual reports and rbi websites. the findings show that obc bank has the scope of improving its assets and liabilities position to increase its profit and minimize the risk. the model generates an optimum balance sheet that achieves the set goals and satisfies all the statutory and planning constraints. the same model can be useful for scheduled commercial banks in india with modifications concerning banks' targets and controls. the model developed in this paper is helpful for bank managers in planning and forecasting. ahp and gp's combined approach is unique in this https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 2 paper, which uses experts' knowledge and applies it in the model. the model is created on the bank's realistic goals and constraints after carefully considering the issues faced by bank officials. the paper is limited to the indian banking system as other countries have different balance sheet structures and constraints. keywords: asset-liability management, goal programming, analytical hierarchy process, indian banking. introduction the history of banking in india is as old as vedic civilization, where usury has been commonly referred to money lenders. banking in india originated in the 18th century and has evolved over the years to the present shape ( tanwar, seth, vaish, and rao, 2020). some of rbi's significant reform events led to greater competition and strengthening of the indian banking sector. in 1969, 14 major indian scheduled commercial banks were nationalized to serve the development of the economy. in 1970, rbi prescribed a minimum interest rate to be charged by banks on advances. in response to inflation, rbi took strong measures to increase bank rates and raised the statutory liquidity ratio (slr) from 25% to 28%. in 1992, rbi introduced income recognition and asset classification norms, putting most of the banks under severe non-performing assets (npas) stress. the capital adequacy standards were specified to be fulfilled by indian banks by 1996. in 1993, rbi released new guidelines that aimed at increasing competition by establishing private sector banks. in 2003, the risk-based supervision of banks was introduced (chronology of events, n.d.). the banking sector has undergone many structural changes, from well defined, directed norms to prudence-based compliance to move towards greater consistency. deregulation and intense competition have led indian banks to compete on the asset side and the liability side of the balance sheet, forcing them to assume greater and newer risk in their quest for higher returns. the composition and risk profile of banks' assets and liabilities have a direct effect on their performance and profitability. the process of managing assets and liabilities of a bank while achieving the bank's objectives and satisfying the constraints is known as asset liability management (alm). alm is a process where risks and benefits go hand in hand. on one side, the risk is minimized, and on the other side, financial goals are maximized by optimally allocating the fund in assets and managing liabilities (samuel, 2011). as banking regulations and management's plans change from time to time; therefore, alm needs continuous formulation, implementation, and control. based on the results, strategies need to be revised to improve performance and reduce risk (romanyuk, 2010). alm policy framework targets achieving higher profitability and minimizing risks after considering the statutory and regulatory constraints such as liquidity, credit quality, capital adequacy, etc. therefore alm aims to improve the quality of assets and balance the number of assets and liabilities in addition to focusing on the riskiness in the future ( naderi, minouei, & gashti, 2013). in this research paper, an attempt has been made to optimize the assets and liabilities of indian banks using the example of the oriental bank of commerce (obc). a combination of the analytical hierarchy process (ahp) with weighted goal programming is used to optimize the assets and liabilities while simultaneously fulfilling the statutory and regulatory compliance. the model developed here tries to satisfy multiple goals that are desired by all banks. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 3 literature review alm is an essential tool for banks and other financial institutions to establish sound financial management that can target higher profits and lower bank risk. a bank faces market risk, operational risk, liquidity risk, interest rate risk, counterparty risk, financial risk, etc. alm was introduced in the indian banking industry with effect from 1st april 1999 1 . even in the absence of a formal asset-liability management program, understanding these concepts is of value to an institution as it provides a more authentic picture of the risk/reward trade-off in which the institution is engaged (fabozzi & konishi, 1991). the study of alm develops a clearer picture of risk and return trade-off for banks. risk and reward are complementary to each other. if banks desire to increase profits, then it has to take a calculated risk. banks and other institutions have to create a balance between risk and reward. therefore, alm deals with narrowing the unfavorable effects of risk in parallel to managing the assets-liabilities. as discussed, the bank's managers face the problem of improving profitability with their limited resources. in past decades, many techniques have been developed to assist bank officials. various studies considered an optimization problem of selecting an optimal portfolio that can yield adequate returns while minimizing risk. a suggested by kosmidou and zopounidis (2002) alm techniques can be deterministic or stochastic. chambers and charnes (1961) applied deterministic linear programming in the model bank to resolve banks' functional problems. the study focuses on implementing the requirements federal reserve system while developing the best profitable portfolio plan. this model focuses on actual problems and optimizing the fund allocation within the defined limits of bank examiners. fielitz and loeffler (1979), cohen and hammer (1967), and many others have implemented chambers and charner’s model with modifications. however, they all had a single objective function, i.e., maximizing profitability within defined constraints. a linear programming model concentrates on maximization or minimization of objective function within a set of relevant constraints. fielitz and loeffler (1979) describe a mathematical model that deals with the liquidity management of commercial banks. liquidity supports the operation of the bank, but if appropriately governed, it can also generate profits. the study aims to maximize the profits that resulted from managing liquidity variables subject to external and internal constraints. cohen and hammer (1967) explain an analytical model using linear programming to improve profitability subject to policy constraints. the model endeavor to create a balance between the assets and liability compositions of the bank. eatman and sealey (1979) developed a multi-objective linear programming model to improve commercial banks' profitability and solvency. the bank managers have solvency and risk minimization as other goals which are employed in the paper. liquidity and risk are measured by capital adequacy ratio and risk-weighted assets to capital, respectively. dash and pathak (2011) proposed a linear programming model for indian banks to optimize the assets and liability mix. the objective of the study is to maximize the profitability subject to liquidity and statutory constraints. apart from deterministic models, various stochastic models were also proposed after the 1970s. markowitz (1959)introduced the portfolio selection theory, which led to the origination of the stochastic model, also known as the static mean-variance method. ziemba and mulvey (1998) determined a multi-period stochastic linear program that defines the target over the 1 reserve bank of india, bombay, asset-liability management (alm) system, dbod circular bp.bc.8/21.04.098/99 dtd. feb. 10, 1999 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 4 planning period. russell-yasuda at the frank russell company used stochastic programming to develop a model that can maximize wealth and income. many scholars have used the goal programming technique for generating an optimized solution for multiple goals. in the real world, a problem deals with numerous goals. every business, bank, a household has not just one but many goals to achieve. goal programming (gp) is one such model that deals with multiple objectives decisions. in this model, many objectives can be achieved while seeking an optimal and feasible solution. in this model, goal constraints are set equal to target values that need not be achieved. d. giokas and vassiloglou (1991) developed multi-objective programming for bank assets and liabilities management. they argued that banks have multiple goals. bank management not only strives to maximize revenue but also put effort to reduce risk. apart from revenue/profit, banks try to gain market share of deposits and credits. as linear programming can only handle a single objective function, goal programming is the right approach for multiple goals. kruger (2011) used a single-period approach and multi-period approach to finds that it is possible to optimize the balance sheet using advanced software. viswanathan and balasubramanian (2007)applied the preemptive gp model and studied optimal deployment of funds across different asset classes of varying risk and return characteristics to attain the profit goals. the regulatory and other constraints are also satisfied while pursuing objectives. sedzro, marouane, and assogbavi (2012) use goal programming models for asset allocation. the authors incorporated the investor's risk profile and future economic scenarios while optimizing asset allocation. jain, dalela, and tiwari (2010) presented the alm model for pensioners. the study discussed the fuzzy programming approach to control the risk of volatility on investment returns and liabilities. viswanathan, ranganatham and balasubramanian (2014) used the goal programming model in alm. goal programming optimally allocated the assets to achieve the target goals, namely other income, deposits, investments, and advances. halim et al. (2015)applied the gp model to attain six goals: asset accumulation, liability reduction, equity wealth, earning, profitability, and optimum management of a bank in malaysia. the proposed model is capable of supporting financial decision making while dealing with diverse economic scenarios. rezaei, ameleh, ghalmegh, and ramezanzadeh (2013), studied assets and liabilities management by comparing the model value with actual values using fuzzy ahp and goal programming. goal programming assists in structured decision-making; however, it has no method of evaluating the priority in goals or assigning weights to goals. all goals do not have the same importance. some goals are more important than others and have to be fulfilled. analytical hierarchy process (ahp) allows pair-wise comparison and shows the domination of one element concerning others. ahp reckon the judgment of experts to obtain priority scales. the ahp is first introduced by saaty (2008)as the most common multi-criteria decision-making method. the use of ahp in the banking industry for ranking and assigning weights is extensive. hunjak & jakovčević (2001) evaluated bank performance by integrating quantitative and qualitative data. the ahp assisted in the activity of comparing and deriving bank ratings. ahp was used to assess the best applicant for irrigation and equipment loans. the purpose is to allocate the loan to rank one applicant and distribute the remaining fund to the best candidate. ahp assisted in ranking based on service, loan history, and insurance (srdevic, blagojevic, and srdevic, 2011). kamil, ismail, and shahimi (2013) tried to establish that islamic banking operates to realize society's socio-economic objectives. ahp method is used to derive the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 5 priorities for financial resource allocation (alm) while considering economic and social objectives. similarly, the bank decision-maker can use ahp to increase customer base and customer satisfaction by understanding their preferences (javalgi, armacost, & hosseini, 1989). tummala, smith, and uppuluri (1983) evaluated companies' credit risk belonging to the construction industry, which applied for loans. the ranking of the criteria was estimated with ahp. the requirements were character, capitalization, collateral, capacity, and conditions. combing ahp with gp will provide a systematic approach to rank/prioritize or weight the goals.ahp can establish relative importance among goals, which can be readily used in the gp model to solve the problems (naderi et al., 2013; sedzro et al., 2012; wang & chin, 2008). the combination of (ahp) with gp to gain an ideal solution is the best approach. objective there are very few studies in the indian banking industry that has applied ahp and gp together. most of the studies have either used ahp to derive the ranking/weights or used gp to solve a multi-decision-making problem. in the indian banking industry, the combined used of ahp and gp to optimize asset-liability management is not yet focused. therefore, in this paper, the weights for the goals or objectives are attained using ahp. those weights are assigned to goals while optimizing the bank's assets and liabilities in the study. the paper aims to determine the optimal structure of assets and liabilities for indian commercial banks. the targets for goals have to be achieved while simultaneously satisfying the constraints. secondly, to analyze whether the model can provide banking management with policy inputs. methodology the main objective of this paper is to design a mathematical model that can optimize the assets and liabilities of the oriental bank of commerce (obc bank) using goal programming. the relative importance of the goals of indian scheduled commercial banks is determined with ahp. analytical hierarchy process interviews were conducted with banks' management in risk profile and balance sheet management to identify the goals or criteria for the banks. the interviews were conducted with obc bank, allahabad bank, punjab & sind bank, icici bank, axis bank, and bank of baroda. the seven main goals were then arranged in a questionnaire for further processing to obtain the priority and weights for the goals from banks' management.ahp used pairwise comparison and relies on the experts' judgments to obtain priority scales (saaty, 2008). the comparison depicts the relative importance of one element over another. the process of ahp follows: 1. define the problem 2. determine the decision hierarchy from top to intermediate level and to the lowest level (if any). 3. construct pair wise comparison matrices. 4. there is n (n-1)/2 judgments required, and reciprocals are assigned automatically. 5. obtain the experts' judgment and calculate the priority scale. 6. check for inconsistency. cr is determined using the consistency index. to determine consistency ratio: lambda-max = σ (weighted sum value/ criteria weight)/ n. consistency index (ci) = (lambda-max – n) / (n – 1). consistency ratio = ci/ri https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 6 table 1. random index table size of matrix 1 2 3 4 5 6 7 8 9 10 ri 0 0 0.58 0.9 1.12 1.24 1.32 1.41 1.45 1.49 the data collected from the questionnaires are analyzed using ms excel. after that, the consistency ratio (cr) and the relative weights vector of goals are calculated. the cr must be less than 0.1 for each pairwise comparison; otherwise, the questionnaire has to be sent again to be filled by experts (vaidya & kumar, 2004). each expert's judgment is combined using geometric means to derive outcomes, as suggested by saaty (2008). table 2 below shows the pairwise comparison scale for ahp preferences: table 2. pairwise comparison scale judgment of preferences numerical value equally important 1 moderately important 3 strongly important 5 very strongly important 7 extremely important 9 intermediate values equally to moderately preferred 2 moderately to strongly preferred 4 strongly to very strongly preferred 6 very strongly to extremely preferred 8 the goals for the banks, as suggested by experts, are liquidity risk, capital adequacy, market share of the deposit, market share of credit, return on asset, return on equity, and reducing non-performing assets. table 3. goals for banks goals definition liquidity liquidity risk is the inability of a bank to meet its obligation when it arises. banks manage their liquidity risk through alm. capital adequacy capital adequacy ratio determines the extent of capital a bank requires against its risk-weighted credit exposure to protect it against losses before the risk of insolvency. market share of the deposit it shows the bank's share of customer deposits in an aggregate deposit of scheduled commercial banks in india. market share of credit it shows the credit available to banks from the aggregate credit facility available to all scheduled commercial banks in india. return on asset it shows the profit-generating capacity of a bank from its total asset available. the higher the ratio better it is for the bank. return on equity it measures the return on investment invested by shareholders. the higher the ratio the better it is for the company. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 7 non-performing asset (npa) the banks want to reduce their nonperforming asset. it is calculated by dividing gross npa with gross advances. the lower the ratio, the better it is for the bank. the results of the ahp are given below in table 4: table 4. weights of goal as per ahp goals weights (using ahp) market share of credit 0.0504 market share of deposits 0.0446 return on assets 0.138 return on equity 0.133 capital adequacy ratio 0.229 liquidity risk 0.208 non-performing asset 0.107 goal programming the priority scale obtained from ahp is used to weight goals and optimize the assets and liabilities. the gp data is obtained from annual reports of obc banks over the last ten years, i.e., from 2010 to 2019 from its website. secondary data has also been collected from the reserve bank of india website for analysis. goal programming is used for solving the asset-liability management problem with the help of lingo version 17 software. ignizio (1981)developed the following steps to formulate the gp model: 1. define the decision variables 2. define the structural constraints and goal constraints 3. determine the relative weight 4. define the objective function 5. state the non-negative requirement the structural constraints are the statutory constraints and management constraints in the bank for the assets and liabilities. goal constraints are the target to be achieved with positive and negative deviations. the objective function in the gp model is to minimize the variations. in this paper, weighted goal programming is used where the objective is to minimize the weighted sum of goal deviations. the weighted goal programming as given by charnes & cooper (1977)is given below: minimize (1) subject to linear constraints goal constraints: (2) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 8 structural constraints: (3) with where m, p, and n represent goals, structural constraints, and decision variables, respectively. wi negative represents weight assigned to negative deviation and wi positive represent weight assigned to positive deviations. di negative represents the negative deviational variable of the i th goal (underachievement of goal). di positive represents the positive deviational variable of the i th constraints (overachievement of goal). bi represents the aspiration level or the target value. z= objective function aij= the coefficient associated with variable j in the i th goal xj= the j th decision variables decision variables identification of the decision variables: the indian bank balance sheet has assets and liabilities. these assets and liabilities are the decision variables. assets cash and bank balance ya1 = cash in hand ya2 = balance with rbi ya3 = balance with banks & money at call & short notice in india ya4 = balance with banks & money at call & short notice outside india investments ya5 = investment in government securities ya6 = investment in approved securities ya7 = shares ya8 = debentures ya9 = investment in subsidiaries/joint ventures ya10 = others (commercial papers, mutual funds, etc.) advances ya11 = bills purchased & discounted ya12 = cash credit, overdrafts, loans repayable on demand ya13 = term loans ya14 = advances in priority sector ya15 = advances in banks in india https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 9 fa = fixed assets and intangible assets oa = other assets liabilities shareholders fund xl1 = capital xl2 = reserves & surplus deposits xl3 = demand deposit xl4 = saving deposits xl5 = term deposits borrowings borrowings from india xl6 = borrowings from rbi xl7 = borrowings from banks and other institutions & agencies borrowings outside india xl8 = borrowings outside india xl9 = other liabilities xl10 = others (including provisions) decision constraints 1. total assets = total liabilities 13 10 i= 1yai + fa + oa = j= 1xlj total asset (ta) = 2719095661 2. cash reserve ratio = 4% ya2 0.04(net demand and time liability) ya2 0.04 (xl3 + xl4 + xl5 + xl6 + xl7 + xl9 -ya3 – ya15) 3. statutory liquidity ratio = 19.5% liquid asset = excess cash and balance with rbi over crr + investment in govt. securities + investment in approved securities liquid assets (la) = ya1 + (ya2)– 0.04 (xl3 + xl4 + xl5 + xl6 + xl7 + xl9 -ya3 – ya15) + (ya3 + ya5 + ya6 ntdl = xl3 + xl4 + xl5 + xl6 + xl7 + xl9 -ya3 – ya15 ya1 + (ya2)– 0.04 (xl3 + xl4 + xl5 + xl6 + xl7 + xl9 -ya3 – ya15) + (ya3 + ya5 + ya6 19.5% (xl3 + xl4 + xl5 + xl6 + xl7 + xl9 -ya3 – ya15) 4. priority sector lending = 40% of the adjusted net banking credit https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 10 ya14  0.40 (ya11 + ya12 + ya13) 5. investments 13 13 %(i= 1yai + fa + oa)  (ya5 + ya6 + ya7 +ya8 +ya9 + ya10)  %(i= 1yai + fa + oa) 13 13 0.26 (i= 1yai + fa + oa)  (ya5 + ya6 + ya7 +ya8 +ya9 + ya10)  0.30 (i= 1yai + fa + oa) 6. investments in government securities & approved securities % (ya5 + ya6 + ya7 +ya8 +ya9 + ya10)  (ya5 + ya6)  % (ya5 + ya6 + ya7 +ya8 +ya9 + ya10) 0.75 (ya5 + ya6 + ya7 +ya8 +ya9 + ya10)  (ya5 + ya6)  0.85 (ya5 + ya6 + ya7 +ya8 +ya9 + ya10) 7. investments in non-slr securities % (ya5 + ya6 + ya7 +ya8 +ya9 + ya10)  (ya7 +ya8 +ya9 + ya10) %(ya5 + ya6 + ya7 +ya8 +ya9 + ya10) 0.15 (ya5 + ya6 + ya7 +ya8 +ya9 + ya10)  (ya7 +ya8 +ya9 + ya10)  0.25 (ya5 + ya6 + ya7 +ya8 +ya9 + ya10) 8. cash & balance with rbi 13 13 %(i= 1yai + fa + oa)  (ya1 + ya2)  %(i= 1yai + fa + oa) 13 13 0.045(i= 1yai + fa + oa)  (ya1 + ya2)  0.06(i= 1yai + fa + oa) 9. balance with banks & money at call & short notice in india 13 13 %(i= 1yai + fa + oa)  (ya3)  %(i= 1yai + fa + oa) 13 13 0.001(i= 1yai + fa + oa)  (ya3)  0.05(i= 1yai + fa + oa) 10. balance with banks & money at call & short notice outside india 13 13 %(i= 1yai + fa + oa)  (ya4)  %(i= 1yai + fa + oa) 13 13 0(i= 1yai + fa + oa)  (ya4)  0.01(i= 1yai + fa + oa) 11. advances 13 13 %(i= 1yai + fa + oa)  (ya11 + ya12 + ya13)  %(i= 1yai + fa + oa) 13 13 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 11 0.58 (i= 1yai + fa + oa)  (ya11 + ya12 + ya13)  0.65(i= 1yai + fa + oa) 12. bills purchased & discounted % (ya11 + ya12 + ya13)  (ya11) %(ya11 + ya12 + ya13) 0.006 (ya11 + ya12 + ya13)  (ya11)  0.035 (ya11 + ya12 + ya13) 13. cash credit, overdrafts, loans repayable on demand %(ya11 + ya12 + ya13)  (ya12)  %(ya11 + ya12 + ya13) 0.35(ya11 + ya12 + ya13)  (ya12)  0.50 (ya11 + ya12 + ya13) 14. term loans %(ya11 + ya12 + ya13)  (ya13)  % (ya11 + ya12 + ya13) 0.48 (ya11 + ya12 + ya13)  (ya13)  0.62 (ya11 + ya12 + ya13) 15. fixed assets 13 fa = 0.01(i= 1yai + fa + oa) 16. other assets 13 13 %(i= 1yai + fa + oa)  (oa)  %(i= 1yai + fa + oa) 13 13 0.035(i= 1yai + fa + oa)  (oa)  0.065 (i= 1yai + fa + oa) 17. deposits 13 13 %(i= 1yai + fa + oa)  (xl3 + xl4 + xl5)  %(i= 1yai + fa + oa) 13 13 0.85(i= 1yai + fa + oa)  (xl3 + xl4 + xl5)  0.90(i= 1yai + fa + oa) 18. demand deposit %( xl3 + xl4 + xl5)  (xl3)  %( xl3 + xl4 + xl5) 0.06 (xl3 + xl4 + xl5)  (xl3)  0.09 ( xl3 + xl4 + xl5) 19. saving deposit %( xl3 + xl4 + xl5)  (xl4)  %( xl3 + xl4 + xl5) 0.17( xl3 + xl4 + xl5)  (xl4)  0.25( xl3 + xl4 + xl5) 20. term deposit %( xl3 + xl4 + xl5)  (xl5)  %( xl3 + xl4 + xl5) 0.68( xl3 + xl4 + xl5)  (xl5)  0.78( xl3 + xl4 + xl5) 21. borrowing limits 13 13 %(i= 1yai + fa + oa)  (xl6 + xl7 + xl8)  %(i= 1yai + fa + oa) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 12 13 13 0.025(i= 1yai + fa + oa)  (xl6 + xl7 + xl8)  0.06(i= 1yai + fa + oa) 22. borrowings from rbi %( xl6 + xl7 + xl8)  (xl6)  %( xl6 + xl7 + xl8) 0 ( xl6 + xl7 + xl8)  (xl6)  0.3( xl6 + xl7 + xl8) 23. borrowings from banks and other institutions & agencies %( xl6 + xl7 + xl8)  (xl7)  %( xl6 + xl7 + xl8) 0.64 ( xl6 + xl7 + xl8)  (xl7)  0.98( xl6 + xl7 + xl8) 24. borrowings outside india %( xl6 + xl7 + xl8)  (xl8)  %( xl6 + xl7 + xl8) 0 ( xl6 + xl7 + xl8)  (xl8)  0.27 ( xl6 + xl7 + xl8) 25. other liabilities 13 13 %(i= 1yai + fa + oa)  (xl9)  %(i= 1yai + fa + oa) 13 13 0.0034(i= 1yai + fa + oa)  (xl9)  0.0084(i= 1yai + fa + oa) 26. provisions 13 13 %(i= 1yai + fa + oa)  (xl10)  %(i= 1yai + fa + oa) 13 13 0.014(i= 1yai + fa + oa)  (xl10)  0.026(i= 1yai + fa + oa) goal constraints 1. market share of credit total credit of bank = ya15 + ya16 + ya17 aggregate credit (agcredit)= 97674300000 ya11+ ya12+ ya13+ d1 d1 + = share in aggregate credit of scheduled commercial bank ya11+ ya12+ ya13+ d1 d1 + = 0.018(97674300000) ya11+ ya12+ ya13+ d1 d1 + = 1758137400 2. market share of deposit total deposit of bank = xl3 + xl4 + xl5 aggregate deposit (agdeposit )= 125725860000 xl3 + xl4 + xl5 + d2 d2 + = aggregate deposit of scheduled commercial bank xl3 + xl4 + xl5 + d2 d2 + = 0.0185(125725860000) xl3 + xl4 + xl5 + d2 d2 + =2325928410 3. return on equity 0.0046(xl1 + xl2) + d3 d3 + = net profit https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 13 4. return on asset 13 0.0004 (i= 1yai + fa + oa) + d4 d4 + = net profit 5. capital adequacy ratio capital + reserves = 11.5 % (risk weighted assets) xl1 + xl2 >= 0.115*( 0*( ya1 + ya2 + ya3 + ya4) + 0.5*( ya5 + ya6) + 1.25*( ya7 + ya8 + ya9 + ya10) + 1*( ya11 + ya12) + 1.25*ya13) xl1 + xl2 + d5 d5 + = 0.115*( 0*( ya1 + ya2 + ya3 + ya4) + 0.5*( ya5 + ya6) + 1.25*( ya7 + ya8 + ya9 + ya10) + 1*( ya11 + ya12) + 1.25*ya13) 6. liquidity risk(liquidity coverage ratio) hqla= cash+ excess balance with rbi over crr + excess govt. securities over slr + 15% of ntdl cashflow in 30 days = 374319700 lcr = hqla/ cashflow in 30 days lcr>=100% hqla + d6 d6 + = 374319700 hqla= ya1 + excash + ya5 0.195*ntdl + 0.15*ntdl excash= ya2 0.04*ntdl 7. gross npa npa<= 10% of gross advances (ya11 ya12 + ya13) npa + d7 d7 + = 10% (ya11 ya12 + ya13) the % is the multiplier symbol here and it is estimated on the basis of the past 10-year data of obc bank. objective function min = z where, z= 0.0504*d1minus+ 0.0446*d2minus+ 0.138*d3minus + 0.133*d4minus + 0.229*d5minus + 0.208*d6minus + 0.107*d7plus results and analysis the model developed can be applied to any bank by modifying the multiplier that appears in front of each expression as per their balance sheet structure. the multiplier can be derived after examining the past balance sheet items. in the case of obc bank, the data for the past 10-years has been studied from 2010-2019. all the figures are presented in ‘000. in this paper, the real balance sheet of 2019 has been compared with the model value for 2019. any deviation in real value and model value is recorded. optimized assets and liabilities of obc banks have been calculated, which shows that the bank can reallocate its assets and liabilities and achieve more than its current position. the model has statutory constraints such as cash reserve ratio (crr), https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 14 statutory liquidity ratio (slr), priority sector lending (psl), and capital adequacy ratio (car). in 2019, crr was 4%, slr was 19.5%, psl was 40% and car was 11.5%. it also shows at what level the bank can be optimized. table 5 presents the results of the model developed in the methodology section. table 5. real value vs. model value oriental bank of commerce 2019 figures in '000 real model deviation assets cash and bank ya1 & ya2 111938820 122359300 -10420480 money at call ya3 & ya4 52822048 2719096 50102952 slr investment ya5 & ya6 583275898 600920200 -17644302 non slr investment ya7, ya8, ya9, ya10 209402321 106044700 103357621 advances ya11, ya12, ya13 1592848135 1758137410 -165289275 fixed asset fa 25892722 33746640 -7853918 other assets oa 142915717 95168350 47747367 total asset 2719095661 2719095696 -35 liabilities capital & reserves xl1 & xl2 189012435 277877600 -88865165 demand deposit xl3 142610850 209333600 -66722750 saving deposit xl4 541258880 534963500 6295380 term deposit xl5 1642584046 1581631000 60953046 borrowing in india xl6, xl7 141193671 67977388 73216283 borrowing outside india xl8 0 0 0 other liabilities xl9 16850484 9245268 7605216 provisions xl10 45585295 38067340 7517955 total liabilities 2719095661 2719095696 -35 bills purchased and discounted ya11 31570620 61534810 -29964190 cash credits, overdrafts, and loans repayable on demand ya12 756933270 795908500 -38975230 term loans ya13 804344245 900694100 -96349855 priority lending ya14 591650822 703255000 -111604178 net profit 549938 1087638 -537700 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 15 table 6. computation of major goals and constraints modal values of goal constraints and statutory constraints constraints model values crr % 5.13 slr % 26.47 ntdl 2382850000 hqla 374319700 cash flow for 30 days 374319700 return on asset % 0.04 return on equity % 0.39 liquid asset 630684500 market share of credit 1.80 market share of deposit 1.85 capital adequacy ratio 11.50 risk-weighted asset 2416327000 liquidity coverage ratio % 100 priority sector lending 40 the above table 6 shows that the model has satisfied all the statutory constraints and decision constraints. the crr achieved here is 5.13%, and slr is 26.47%. the credit in priority sector lending is 40%. the total asset is also equal to the total liability. in the model, the total asset's value was kept the same as real total assets in 2019. the model has successfully achieved all seven goals. the objective is to minimize the deviations that negatively affect the bank's performance. there is no underachievement of goals. the actual market share of the credit of obc bank is 1.63%, whereas we have achieved 1.80% in the model. it shows that the bank can increase its market share of credit, i.e., to reach the optimization level. the real and model market share of the deposit is 1.85% for the bank. it shows that the bank has no scope to increase the market share of the deposit without affecting its performance. likewise, the bank generates a 0.04% return on an asset, which is better than the actual value, i.e., 0.02%. here the bank can earn a higher profit if using its assets and liabilities judiciously. the bank targets to achieve a 0.46% return on equity. however, it has acquired 0.39% (0.4% approximately). this figure is still better than the real return on equity of 0.3%. if the bank could generate 190598.7 more profit, it could achieve the target of 0.46%. however, their model return on equity is higher than the actual value. in the model, the bank has a capital adequacy ratio of 11.50%, as targeted. the liquidity coverage ratio is 100%, which shows that the bank has no risk of liquidity. the gross npa is kept 10% and achieved by the model. in real bank has 12.66% of gnpa ratio to gross advances. table 7 presented below shows that the objective value is 0, which depicts that deviation is minimized to value 0. therefore, it can be said that banks can increase their credit share in the market and generate more interest income and satisfy all the statutory constraints. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 16 table 7. achievement of goals goals objective value d1 minus market share of credit 0 d2 minus market share of the deposit 0 d3 minus return on equity 0 d4 minus return on asset 0 d5 minus capital adequacy 0 d6 minus liquidity risk 0 d7 plus npa 0 the ability to test the sensitivity of the model is the best advantage of goal programming. the variables can be changed to test the effect on the optimal solution. the model has tested sensitivity to arrive at the optimal solution where the deviation is minimized to 0. any change in the constraint may lead to a solution where deviations from the target may arise. it is an integral part of the solution to test the effect of parameters for sensitivity. there are high chances of frequent change in goals, priorities, and available resources in the real world. any change will result in the alteration of the optimum solution (lee, 1981). findings the goal programming model is an effective and straightforward method to set targets and constraints to generate an optimum solution. in goal programming, the goal constraints are set equal to the target, which may or may not achieved. however, the model will generate an optimum solution with deviations that shows all goals are not attainable, yet the best available solution is derived. in this paper, the model has developed the asset and liability mix that fulfill all the goals and constraints. the bank can deploy its resources to generate more returns. if a bank can increase its market share of deposits from 1.63% to 1.8%, it can create more revenue and achieve higher profitability. the bank can restructure its assets and liabilities. a decline in money at call with other banks, and an increase in investment will accelerate the income-earning capacity of the bank. the bank should decrease its fund in non-income generating assets and reinvest those funds in income-generating assets. the optimum utilization of fixed and current assets can also increase the efficiency of the bank (tanwar et al., 2020).this model reveals areas that need focus to attain an optimal level. no institution can run at an optimal level until it knows the particular domain where it can improve. this model helps in pointing out such items in the balance sheet, which need more attention. this model can be used by banks' management to set its target and management constraints to generate an optimal mix of assets and liabilities. this model is helpful in planning, forecasting, and budgeting for banks and other institutions. even a bank can prioritize its goals using the preemptive goal programming method, where the most important goals are optimized before lower-level goals are considered. the bank's management can analyze how to achieve the targets and how it affects the bank's performance and regulations. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 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(1998). worldwide asset and liability modeling. publications of the newton institute. 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/) indian journal of finance and banking vol. 5, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 38 issues and challenges of financial management practices in islamic financial institutions: empirical evidence from bangladesh serajul islam associate professor department of business administration international islamic university chittagong, chittagong, bangladesh e-mail: serajulislamiiuc@gmail.com dr. abdullahil mamun associate professor department of business administration international islamic university chittagong, chittagong, bangladesh research fellow, ytb, turkey e-mail: ahm.economics@gmail.com k. m. anwarul islam associate professor department of business administration the millennium university, dhaka, bangladesh phd candidate university of selangor, malaysia (usm) e-mail: ai419bankingdu@gmail.com dr. mohammad rahim uddin assistant professor department of business administration international islamic university chittagong, chittagong, bangladesh e-mail: mructg@gmail.com tania sultana lecturer department of business administration international islamic university chittagong, chittagong, bangladesh e-mail: taniasultanaiiuc@gmail.com abstract studies suggest several issues and challenges of financial management practices in islamic banks and insurance companies and islamic non-bank financial institutions (inbfis) in bangladesh. the purpose of the research is to examine the issues and challenges of islamic https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 39 financial management (ifm) from an empirical perspective. the study relies on a structured questionnaire survey in prominent islamic financial institutions (ifis) of bangladesh for achieving its objective. after confirming data reliability based on cronbach's alpha, the study proceeds to analyse by applying descriptive statistics and principal component factor analysis using correlation, kaiser-meyer-olkin (kmo) and bartlett's test and varimax rotation. the study finds that there is no separate regulatory framework to supervise and monitor ifis in bangladesh rather the central bank regulates the islamic financial system based on the existing laws and regulations of the conventional financial system. the findings of this study suggest that the government should establish a separate regulatory body for monitoring the ifi’s functions so that they can perform their activities smoothly in the congenial environment in bangladesh. keywords: islamic finance, shariah compliance, bangladesh. jel classification codes: g10, g21, g23. introduction the islamic financial management (ifm) is the application of shariah (islamic law) to banking, insurance, and non-bank financial institutions (khan, 2007). sharing risk and reward between borrowers and lenders is the main principle of islamic finance (divanna, 2009). hence, the pursuance of shariah principles in banking and insurance practices is expected to promote justice and equity confirming efficiency in resource allocation and income distribution and guarding the debt creation through direct borrowing and lending. moreover, the islamic banking system includes a strict framework of sharing risk by the financier for the financial system (ahmed, 2010). as the banking system is changing with time, the islamic financial system is also introducing innovative ideas to come across the changing desires of customers and businesses (aziz, 2006). while the advocates of islamic banking and finance (ibf) claim its superiority because of the fairness in the distribution of risk and return, the opponents criticise the system and its products to be riskier relative to its conventional counterpart. providing justice and honesty to both the parties in all financial transactions is the aim of ibf (abu-tapanjeh, 2009). in contrast, fiennes (2007) pointed out that islamic banks have features similar to conventional banks that include, market risk, investment risk, and business risks. the high riskiness of islamic banking products and services is confirmed by the findings of sundararajan and errico (2002). khan and ahmed (2001) find that risks borne by islamic banks are similar to conventional banks in nature due to a picky arrangement of their financial statements though they have different principles. ather (2007) highlighted some of the crucial issues faced by the ibf industry and ifm in particular. these issues are mainly associated with managerial activities, planning, organizing, motivation, controlling, and legal issues from an islamic perspective. ibf faces challenges concerning institutional and operational aspects (iqbal, ahmad, & khan, 1998). but no empirical research has been performed addressing the issues and challenges the authors‟ pointed out for the case of bangladesh. since the islamic financial industry of bangladesh is growing markedly, the empirical investigation on the issues and challenges of ifm practices faced by islamic banks, islamic insurance companies and inbfis in bangladesh is the demand of time to help policymakers to take policies inappropriate directions. the study is an effort to this end. moreover, management practices of ifis in bangladesh are abstruse among the commons and the study is an attempt to clarify their misconceptions. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 40 literature review financial management, in general, refers to the managerial activity which is concerned with planning and controlling the firm‟s financial resources (pandey & ongpipattanakul, 2015). many factors like financial attitude, parental financial socialization, and financial literacy have a significant and positive relationship with prudent financial management practices (bakar & bakar, 2020). it is concerned with the duties of the financial managers in the firm. it focuses on capital budgeting, capital structure, and working capital management for maximizing its value. in contrast to the conventional management practices, the definition of ifm significantly varies with the former. however, for a better understanding of ifm from the shariah perspective, it is indeed necessary to have an idea of what is ibf and how they operate their business. divanna (2009) defined islamic finance as the application of shariah in banking. parties, the banking institutions, and their client share profit and loss in islamic finance. moreover, islamic law does not allow transactions based on interest (riba) as it is an unjust means of financing from an islamic perspective. mohammed (2005) mentioned that shariah neither allows interestbased business nor the making money nor cheers from the barter system of transaction. islamic finance encourages all to share the profit or loss of the investment. islam requires both the financier and the entrepreneur to equitably share the profit as well as the loss to fulfill the condition of justice. hence, under islamic finance, no one can gain profit without taking the risk. that is why strict discipline is maintained for assessing the risks and monitoring the funds using effectively by the fund users. the fund provider and borrower both the parties are concerned about assessing and reducing risks. islamic banks engage in banking activities based on the various islamic financial contracts available. mudarabah mode is used to mobilize funds in the deposit transactions (qard al hasan). kahf and khan (1992) pointed out that the rate of return cannot be fixed under islamic finance. so, mudarabah is a financing mode and musharakah is an investment mode. salman and nawaz (2018) argued that there is no huge difference between a banking system from an islamic perspective and a conventional banking system in terms of banking services. bakkeri & ali (2020) examine the impact of internal and external factors on the profitability of 30 islamic banks operating in the middle east and north africa over a period from 2005 till 2018 applying the ols panel data analysis technique and identify that quality of management has significance control on the banks‟ profitability. aziz (2006) argued that ifm is playing a vital role to meet the requirements of businesses in the changing arena. it is a new internationally integrated system for satisfying the current needs of clients in the age of globalization and liberalization. financial management is also serving in a competitive modern age and a changing environment. treating the profit-sharing investment schemes in a way consistent with financial stability is one of the most important regulatory challenges faced by ifis (kammer, et al., 2015; mamun, et al., 2017). banning risk sharing, islamic finance is very efficient and effective in handling the global financial crisis. in contrast to the debilitation of major financial institutions in the usa and europe following the global financial crisis, ifis were able to repel shocks owing to the distinctive islamic financial framework (haseeb, 2018). as hasan (2015) argued, the cause of the global financial crisis in 2007-2008 was due to the reliance on an interest-based traditional financial system that completely relies on the transfer of risks. however, islamic finance replaces the convention practices by prohibiting interest and promoting risk-sharing, and thereby ensures a financial system that is fair, firm and free from crisis. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 41 data and methodology data and sample the study has conducted a questionnaire survey using a direct interview method at the capital city dhaka and chittagong, the commercial capital of bangladesh, respectively. the study relies on the direct interview method to reduce the non-response rate and to help to derive conclusions regarding respondents‟ inference and attitudes. the study has covered some selected organizations practicing ifm in bangladesh. the sample contains eight full-fledged islamic banks, six takaful (islamic insurance) companies, and two inbfis to conduct the study. to determine the sample size, a similar approach to islam (2005) is followed in this study. the questionnaire survey of the study conducted an initial target of 500 samples; however, the study observed that only 380 samples can be used after the statistical screening. the overall achievement of collecting survey data was 76% and this is considered relatively fair in the field (ahmed, 2009). so we consider the dataset being sufficient to have a representative sample that would allow the study to form policy prescriptions based on the findings. because of the limited resources, all the branches of the sample were not included in the survey. based on the convention, it was agreed to survey only 2 branches from each of the sample banks, insurance companies, and inbfis. while choosing the branch, several other criteria were also taken into consideration, such as their size (large, medium, and small) based on the number of employees, customers, operating income, etc. purposive sampling was chosen to interview the sample respondents. purposive sampling logically pretend to be responsive to the population using expert knowledge in a non-random manner that represents a cross-section of the population (lavrakas, 2008) a list of clients has been collected from all selected branches through the bank administration. then, two clients from each selected branch are picked following a simple random sampling method. the stated method has been chosen because each member of a population has the same chance of being included in the sample and where all possible samples of a given size have the same chance of selection as directed by west (2016). from each of the branch, a branch manager and a senior level officer surveyed data have been used in the study. so, in total, 65 for specific islamic banking (14 top officials and 51 investors), 40 for takaful (10 top officials and 30 investors), 20 for islamic capital market (officials), and 255 for overall ifm practices in bangladesh. out of 255 samples, top officials are 64, other officers 80, investors (clients) 64, and academicians 47. however, to respect the respondents and maintain unanimity, their identities are not revealed in the study. instrument design based on the literature review, a questionnaire was prepared in consultation with a few selected finance and management professors of different universities, prominent academicians, researchers and bankers. after getting the advice and suggestions from the experts, the questionnaire was finalized. to identify the key issues and challenges for ifm practices in bangladesh, the structured questionnaire was developed based on a five-point likert scale ranging from 1(poor) to 5(excellent). the relevance and validity of the questionnaire are tested by performing a pilot survey before its final use. the study maintained strict confidentiality of the respondents and proper procedures are followed to collect the data. the questionnaire has two parts, part-a, and part-b. part-a consists of basic demographic variables, such as identity, position, name of the organization, job experience, educational qualification, professional education, islamic finance training or experience, and age https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 42 of the respondents. part-b includes 29 questions regarding practices of ifm, compliance with different laws, rules, regulations, and standards and challenges of practicing ifm, and suggestions for overcoming the challenges. notably, the study uses three different types of questionnaires targeting different industries. for example, for islamic banks and insurance companies, the study uses two different sets of questionnaires as the operational dynamic varies between the banks and insurance. then, the study also prepares an overall questionnaire for the remaining respondent categories. statistical techniques cronbach's alpha has been used to measure the data reliability. cronbach's alpha is related to the variation accounted with the score of the underlying construct. cronbach's alpha value that ranges between 0 to 1 describes the reliability (hatcher, 1994). alfa value 0.7 or more is highly acceptable but lower thresholds are also sometimes acceptable depending on the nature of data and population (nunnaly, 1978). apart from that, correlation matrix, principal component analysis (pca) using kaisermeyer-olkin (kmo) bartlett's test and varimax rotation have applied to analyse the data. it focuses to simplify the diver‟s connection from the existing commonplace of experimental variables by finding general magnitudes or aspects that connect jointly the dissimilar variables and thus presents approaching into the fundamental configurations of the facts (dillon & goldstein, 1984). the important dual uses of factor analysis are facts lessening and core elucidation. though there are different versions/types of factor analyses available, in this research, „pcvrm‟ (principle components varimax rotated method) used in this study for identifying the factors that influence cost planning, cost controlling, cost efficiency and constraints to cost management practices of sample banks of bangladesh. since the techniques used in the study are well established in the literature, their discussion is not further extended in the analysis. finally, regression technique has been used to rank the factors based on the scores derived. data analysis and discussion demographic design the age of the respondents in the study varied from 25 years to above 55 years. maximum (28.68%) of the respondents having the age of 30-35 years, 17.89% of them fall in the age range of 40-45 years, 15.26% of them in the age category of 25-30 years and 14.74% of them are in the age of 45-50 years. further, only 7.37% of the respondents having an age of more than 50 years. more specifically 39.77% of the top officials are in the age of 40-45 years; 34.04% of the academicians are in the age of 30-35 years; 32% of the other officials and 40% of the investors are in the age of 30-35 years. reliability testing the results of the study show that the cronbach's alpha coefficient is 0.69 and cronbach's alpha based on standardized items coefficient is 0.78. hence, the primary data have been used by the researcher in the study is found to be reliable and consistent based on the conventional threshold. this study has projected the „zero-order correlation matrix‟ of 28items. from the perusal of the zero-order correlation matrix, it is found that some items have relatively strong correlations among them which are the main basis or justification to create a group or factor. in this study, it is found that some variables have emerged as the most significant factors which https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 43 ultimately from different orthogonal factors. challenges of islamic banks this section of the study presents the result of an opinion survey of 65 respondents from islamic banks‟ personnel and clients to identify the issues and challenges faced by the islamic banks in bangladesh. factors having the mean value greater than 4 are the most challenging factors; followed by factors having a value greater than 3.5 but less than 4 are the moderate challenging factors and factors for which the mean value falls short of 3.5 are the less challenging factors. among the 28 challenging factors, 11 are the most challenging, 16 found as moderate challenging and only 1 is less challenging factors (table 1). the study found that the disparity in theory and practice especially in the case of risk-sharing instruments is the most challenging factor and islamic financial markets offer a wide array of instruments with varying structures of maturity and opportunities for portfolio diversification and risk management is the less challenging factors. the kmo measure shows that the sampling adequacy is 0.486 and bartlett‟s test sphericity result is significant at 1% therefore, shows that the 28 challenging factors hold a minimum standard (eigenvalues greater than 1) to proceed for pca. the result means that the whole variance accumulated to by the most challenging factor is 74.35% (11 factors) and seventeen factors explain the rest of the variance which includes sixteen moderate challenging factors and one less challenging factor. among the most challenging factors, the disparity in theory and practice especially in the case of risk-sharing instruments alone explains 16.31% of the variation. moreover, for the moderate challenging factors the highest variation 3.37% belongs to the shortage of legal support of the central bank in bangladesh and sixteen moderate challenging factors to explain 25.32% of the total variation. additionally, the less challenging factor, islamic financial markets tender a large range of mechanisms with changeable compositions of maturity and chances for group diversification and management of risk explains 0.33% of the variation. table 1. challenges of islamic banks in bangladesh (n=65) most challenging factors mean std. dev the disparity in theory and practice especially in the case of risk-sharing instruments 4.2000 .81394 scarcity of qualified shari‟a scholars in different sectors 4.1538 .83349 small assets and capital size 4.1385 5.13529 lack of islamic interbank market 4.1231 .76050 lack of unified shariah rulings 4.1077 .77304 no course on islamic finance and banking in the education system 4.0923 .82392 lack of debt and derivative markets 4.0462 .95902 lack of appropriate legal framework and supportive policies 4.0308 .82858 economic decelerate and political condition 4.0308 .93490 diversity of the opinions of the shariah scholars on various products 4.0154 .73935 the central bank has no sufficient shariah experts to control the functions of ifis 4.0154 .97616 moderate challenging factors mean std. dev shortage of legal support of the central bank in bangladesh 3.9846 .92690 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 44 providing predetermined return structures (ijarah, murabahah, etc.) rather than profit-sharing scheme 3.9692 1.03031 insufficient risk measures and diversification is the problem for islamic financial market 3.9687 .87230 lack of specialized islamic banks and nbfis 3.9538 .90882 lack of well-functioning secondary markets and liquidity-enhancing and risk-sharing products 3.9077 .97984 lack of apex training institute for the islamic banks 3.8923 .83147 with increased globalization, integration and linkages have become critical to the success of any capital market 3.8615 1.01361 lack of modern banking services 3.8308 1.03937 no active enterprise-level risk management 3.7692 .98058 lack of shariah-based money market 3.7385 1.06473 lack of financial engineering and innovations 3.7231 .92715 lack of an effective supervisory framework 3.7077 1.02657 new banking regulations 3.6769 .83118 absence of internationally recognized legal, regulatory, and supervisory framework for islamic banking and financial management there is yet no internationally generally accepted legal, regulatory, and supervisory framework dealing with islamic banking and financial management 3.6615 1.01976 lack of congenial environment and strong non-banking financial supports 3.6308 .99325 insufficient investment for infrastructure development of the islamic capital market 3.6190 1.00689 less challenging factors mean std. dev lack of standard islamic financial instruments 3.3077 .93413 source: author‟ calculation issues and challenges of islamic insurance companies this section of the study presents the result of an opinion that aims to find out the issues and challenges faced by the takaful industry in bangladesh. factors‟ having the value of the mean of greater than 4 is the most challenging factors; followed by factors having a mean of greater than 3.5 but less than 4 are the moderate challenging factors and factors having a mean of lower than 3.5 are the less challenging factors. out of 19 challenging factors, 5 factors are the most challenging, 10 of them are moderate challenging and the rest of them (4) are less challenging factors (table 2). table 2. challenges of islamic insurance companies (n=80) most challenging factors mean std. deviation technological backwardness 4.25 0.99 shortage of suitable assets 4.18 0.96 too much stress on profit distribution 4.04 0.98 low income of the people 4.03 3.66 lack of standardization in the industry that is due to shariah 4.02 0.91 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 45 interpretations moderate challenging factors mean std. deviation lack of product diversification 3.87 2.28 issue around retakaful 3.75 1.23 misguided by insurance official 3.75 1.01 lack of separate regulatory body 3.74 1.01 high service cost 3.70 1.11 lack of attractive offerings 3.57 1.15 lack of quality controlling process 3.52 1.30 diverging regulatory approaches and the lack of centralized regulations 3.36 1.28 riba 3.34 1.33 lack of government patronizing 3.32 1.38 less challenging factors mean std. deviation lack of marketing research 3.07 1.44 lack of efficient management 3.04 1.31 political instability 2.97 1.40 lack of trustworthiness 2.79 1.47 source: authors‟ calculation pca of challenges of islamic insurance companies pca has been applied to analyse the challenges of islamic insurance companies. the result of the analysis discovers that kmo (kaiser-meyer-olkin) and bartlett's test measurement result of challenges of takaful industry in bangladesh. the acceptance kmo value should be larger than 0.5. field (2000); and pallant (2013) argued that the value should be 0.60 or above. the kmo measure shows that the sampling adequacy is 0.711 and bartlett‟s test sphericity result is significant at 1% therefore, shows that the 19 challenging factors hold a minimum standard to proceed for pca (table 3). there are five most significant issues (technological backwardness, shortage of suitable assets, too much stress on profit distribution, low income of the people and short of standardization), ten significant issues (lack of product diversification, issue around retakaful, misguided by insurance official, lack of separate regulatory body, high service cost, lack of attractive offerings, lack of quality controlling process, deviating dogmatic approaches and short of centralized rules, riba and lack of government patronizing) and four less significant issues (lack of marketing research, lack of efficient management, political instability and lack of trustworthiness). moreover, table 10 shows that the highest variation is 5.42% for moderate challenging factors by the lack of product diversification and the total variation explained by the ten moderate challenging factors is 39.37%. additionally, among the less challenging factors, the highest variation is 2.45% that goes to lack of marketing research and the total variation explained by the four moderate challenging factors is 8.84%. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 46 table 3. total variance explained for challenges of islamic insurance companies challenging factors eigenvalues challenging factors eigenvalues total % of variance cumulative % total % of variance cumulative % 1 3.10 16.31 16.31 11 0.69 3.61 78.82 2 2.42 12.73 29.04 12 0.64 3.36 82.17 3 1.83 9.61 38.65 13 0.60 3.15 85.33 4 1.42 7.46 46.10 14 0.58 3.03 88.36 5 1.08 5.70 51.80 15 0.53 2.81 91.17 6 1.03 5.42 57.22 16 0.47 2.45 93.61 7 0.95 5.00 62.22 17 0.46 2.44 96.05 8 0.91 4.81 67.03 18 0.41 2.13 98.18 9 0.84 4.42 71.45 19 0.35 1.82 100.00 10 0.72 3.76 75.21 source: authors‟ calculation i. technological backwardness islamic insurance companies in bangladesh are using traditional methods for insurance policies whereas some of the conventional insurance companies are following modern systems as computerized systems in their operations (khan et al., 2016),. the clients of islamic insurance companies are deprived of the convenient use of e-insurance, online business, internet, and computerized system. as a result, the customers are vague in some facts such as payment of premium, claim settlement and balance of policy holder‟s account. bashir and mail (2011) mentioned that islamic insurance companies need to be technologically sound and updated in providing their services. this study found that technological backwardness is one of the most significant issues for islamic insurance companies in bangladesh. ii. lack of shariah-based assets lack of shariah-based assets hampers the fastest growth of the islamic financial market. the lack of suitable shariah-compliant, limited range of shariah-compliant, asset-liability management, and the cost of maintaining shariah-compliant are some of the challenges for the islamic insurance companies (jaffer et al., 2010). in this study, 85% of the respondents mentioned there is a lack of shariah-compliant assets. it is also one of the most significant issues for the islamic insurance industry. iii. too much stress on profit distribution the profit motive is the main concern of the conventional insurance companies; they provide generally more profit to the clients than the islamic insurance companies. it presses too much stress on profit distribution that hampers the social corporate responsibilities (csr) activities. it is one of the major issues of islamic insurance companies (maghrebi & mirakhor, 2015). iv. low income of the people bangladesh low-income country and many people live in extreme poverty (hossain, 2014). poor people of bangladesh are working hard to earn their livelihood and are marginalized with to the expenditure with the income. thus, their propensity to save is very small. it is often difficult for them to save some money for future needs (sheheli, 2012). therefore, the overall poor economic https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 47 condition is creating an obstacle to flourishing the islamic insurance business in bangladesh. v. shortage of standardization from an islamic perspective despite the islamic insurance expanding rapidly, there are still some issues currently being debated among shariah scholars and muslim jurists (maghrebi & mirakhor, 2015; fauzi et al., 2016). the contradictions of shariah explanations can be viewed in the aspects: wa‟d (promise), underwriting surplus, choice of takaful models, sources of capital, the type of risk deemed acceptable in takaful, wakala fees and the cost of capital (isa et al., 2017; akhter, 2010). in this study, 70% of respondents have argued that it has a negative impact on the smooth operation of the takaful industry. vi. riba although the takaful practices are free from the elements of riba in bangladesh, their activities and products are limited to a few numbers of investors and a narrow area (sarwar, 2016). according to htay and salman (2013); saleh (2016); and sarwar (2016), the takaful practices are evolved around the elements of mudarabah, tabarru and other shariah justified elements. in this study, some of the respondents raised their voices that it is difficult to convince general investors and clients that they are interest-free a like the traditional insurance system. partly it is true because the money that a client pays is similar to the premium being charged in the conventional insurance industry. vii. issues surrounding retakaful there is a lack of capacity within the takaful industry for reinsurance. therefore, a certain proportion of risk is placed with the international reinsurance companies that operate on a conventional basis (rahman, ahmad & buang, 2011). the study found that some of the respondents admitted that it is a great problem for the industry. viii. lengthy procedure in claim’s settlement according to khan et al. (2016), the claim settlement in bangladesh is a lengthy and timeconsuming procedure. in this study, many respondents agreed that the lengthy procedure in claim settlement hampers the goodwill of the industry. ix. shortage of skilled personnel skilled human resources are one of the major keys to gain success. many countries where financial management is administered by islamic shariah are getting success by utilizing skilled personnel. the leading insurance companies in ksa emerged as the leader of the market in terms of managerial efficiency, and could be benchmarked by other companies operated in the market (naushad, faridi, & faisal, 2020). one of the major challenges faced by the islamic insurance companies in bangladesh and many other countries is the lack of knowledgeable and qualified personnel. most of the companies typically employ human resources having a conventional educational background with traditional experiences. these personnel usually try to implement their conventional insurance experiences to the islamic insurance companies that occasionally hamper the smooth takaful operations (khan et al., 2016; ochieng, 2013). this has been certified from the findings of the study that qualified personnel are scarce in takaful industry in bangladesh. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 48 x. lack of regulatory and legal framework traditional insurance companies in bangladesh are suffering from many customer faces hidden charges, extra fees, account hacked (rahman, 2018). shariah-based insurance companies also suffering here either on the same ground as traditional companies or from the different grounds. since there is no standardization of the takaful authoritarian system globally, only the shariah board of respective islamic insurance companies guides all the activities by maintaining its regulatory constraints (jaffer et al., 2010). in bangladesh, there is no specific legal framework for the takaful industry as highlighted in the earlier chapters. islamic insurance operates under a conventional legal framework (sarwar, 2016). this study also found that some of the respondents acknowledge that lack of regulatory and legal framework is a major obstacle for the takaful industry in bangladesh. analysis of factors of challenges of ifm practices the factor-i explains 25.33% variations of the set. it includes the following items; difficulties in attracting investors (dai), weak regulation for capital budgeting (wrfcb), dual operation (do), the influence of risk-free rate (irfr), shortage of experts in ifm (se), lack of sukuk market (lsm), consideration of whole market risk (cwmr), no benefit of tax shield (nbts), opportunity cost (oc), wacc and pbp (table 4). factor ii explains 36.24% variations in the variables. the variables are: not following ifm (nfifm), dependence on debt-based financing (ddf), partial using of financing instruments (pufi), avoiding musharka financing (amf), lack of innovation (li), absence of islamic derivatives market (aidm), unclear terms and conditions (utc) and absence of clarification (ac) (table 4). factor iii explains 23.42% variations in the variables. the variables are: lack of liquidity instruments (lli), regulatory framework (rf), supervisory framework (sf), economic and political instability (epi), insufficient risk measures and diversification (irmd), crowding effect (ce), call money market (cmm), lack of secondary market (lsm) and accounting standard (as) (table 4). table 4. factors challenges ifm practices factors i – capital budgeting challenges id variables factor loading hcc in calculating the cost of capital for capital budgeting risk-free rate influences islamic capital budgeting 0.971 oc opportunity cost influences the capital budgeting decision of ifm. 0.961 dai ifi faced more difficulties in attracting lenders and borrowers than interestbased institutions. 0.921 se due to the shortage of islamic finance expert, capital budgeting techniques are not fully adopted in ifm. 0.977 wrfcb as ifi is regulated by the conventional authority there are no specific laws and regulations for islamic capital budgeting. 0.966 do due to dual operation with the conventional capital market, ifis get the narrow scope for capital budgeting. 0.963 wacc in calculating wacc, ifm prefers capm rather than dcf. 0.822 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 49 cwmr in calculating wacc for islamic capital budgeting, ifm considers whole market risk including conventional market. 0.956 pbp most of the islamic firms follow pbp for evaluating the capital budget decision. 0.958 irfr in calculating the cost of capital for capital budgeting, risk-free rate influences islamic capital budgeting. 0.938 nbts most of the islamic firms avoid debt financing in capital budgeting which doesn‟t help them to avoid tax. 0.738 lsm due to the lack of the sukuk market, debt-based financing is narrowly followed by ifm. 0.494 variance accounted for 25.33% factor ii – capital structure challenges id variables factors loading nfifm most of the institutions follow conventional methods for ifm. 0.967 ddf in the capital structure of ifm, most of the firms prefer debt-based financing rather than equity based. 0.612 pufi in fundraising islamic finance institutions mostly rely on mudarabah mode rather than musharakah. 0.704 amf ifi avoid musaharakah mode for financing due to distrusted people 0.086 li product innovation in islamic finance is narrowly adopted. 0.043 aidm the absence of islamic derivatives market ifi cannot reduce risk in financing. 0.289 utc the procedure stream of the product is undefined and the parties are unidentified. 0.971 ac there are unclear profit distribution and untraced fund‟s flow on some of the new products 0.961 variance accounted for 36.24% factors iii – working capital management challenges id variables factors loading lli there is a lack of shariah knowledge among the product developers 0.921 rf insufficient risk measures and diversification is the problem for islamic financing decision. 0.977 sf lack of effective and efficient islamic secondary markets 0.967 epi lack of effective supervisory framework influences working capital management. 0.966 irmd economic decelerate and political conditions influence working capital management. 0.963 cmm due to the lack of full pledge islamic call money market, short-term borrowings are not properly utilized. 0.822 ce most of the islamic firms rely on ifi for short-term borrowing which creates a crowding effect. 0.956 as standard islamic accounting methods are not accurately defined to measure working capital management. 0.958 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 50 lack of shariah complaint emergency liquidity instruments. 0.938 variance accounted for 23.42% source: authors‟ calculation overall challenges of ifm in bangladesh to provide the overall answer to the ifm practices of ifi in bangladesh, the study used the opinions of 255 sample professionals on 5-point likert vrfa (“varimax rotated factor analytical”) technique was employed to group the selected variables based on their intrinsic connections and lastly grading the group based on their values. the study has identified the variables undertaken for the study as most significant to less significant based on their mean score of opinions taken of 5-point likert scale. the challenges influencing the ifm based on weighted scores are shown in table 5.challenges having more than 3.9 mean values have been identified as the most significant challenges and the challenges having a mean value ranges from 3.5 to 3.9 are significant challenges. the mean value of less than 3.5 is considered as less significant challenges. based on table 9, eight challenges having a mean score of more than 3.9 are identified as the most significant. three are capital budgeting related, two are capital structure and three are working capital management related challenge. table 5. descriptive statistics of the challenges influencing the ifm (n=255) variables mean std. dev in calculating the cost of finance, islamic capital budgeting uses krfi instead of krf. therefore, the cost of capital is higher than the conventional capital budgeting which limits the investment avenues 4.17 1.05 lack of shariah complaint emergency liquidity instruments 4.17 1.05 ifi faces more difficulties in attracting investors (lenders and borrowers) than interest-based institutions. 4.15 0.96 regulators do not always have the capacity (or willingness) to ensure shariah compliance, which undermines consistency of approaches within and across borders. 4.15 0.96 lack of specific laws and regulations for islamic capital budgeting 3.98 0.91 lack of effective supervisory framework influences working capital management. 3.98 0.91 due to dual operation with the conventional capital market, ifis get a narrow scope for capital budgeting. 3.97 0.98 economic decelerate and political condition influence working capital management. 3.97 0.98 in fundraising islamic finance institutions mostly rely on mudarabah mode rather than musharakah. 3.85 3.35 the absence of islamic derivatives market ifi cannot reduce risk in financing. 3.84 2.30 in calculating the cost of capital for capital budgeting risk-free rate influences in islamic capital budgeting. 3.80 1.27 the procedure stream of the product is undefined and the parties are unidentified. 3.80 1.27 due to the shortage of islamic finance experts, capital budgeting techniques 3.64 1.02 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 51 are not fully adopted in ifm. insufficient risk measures and diversification is the problem for islamic financing decision. 3.64 1.02 lack of sukuk market debt-based financing is narrowly followed by ifm. 3.56 1.01 in calculating wacc for islamic capital budgeting, ifm considers whole market risk including conventional market. 3.54 1.13 most of the islamic firms rely on ifi for short-term borrowing which creates a crowding effect. 3.54 1.13 in the capital structure of ifm, most of the firms prefer debt-based financing rather equity-based. 3.53 1.15 most of the islamic firms avoid debt financing in capital budgeting which doesn‟t help them to avoid tax. 3.49 1.23 product innovation in islamic finance is narrowly adopted. 3.31 1.33 opportunity cost influences the capital budgeting decision of ifm. 3.25 1.27 there are unclear profit distribution and untraced fund‟s flow on some of the new products 3.25 1.27 in calculating wacc ifm prefers capm rather dcf. 3.17 1.28 due to the lack of full pledge of islamic call money market, short-term borrowings are not properly utilized. 3.17 1.28 most of the institutions follow conventional methods for ifm. 3.10 1.35 lack of effective and efficient islamic secondary markets 3.10 1.35 due to uncertainty about getting proper information, islamic finance avoids the musaharakah mode of financing. 2.86 2.29 most of the islamic firms follow pbp for evaluating the capital budget decisions. 2.48 1.39 standard islamic accounting methods are not accurately defined to measure working capital management. 2.48 1.39 source: authors‟ calculation conclusion in the aftermath of the global financial crisis, the government and the bangladesh bank have actively supported islamic finance. but the guidelines for the ibf need to be upgraded for their smooth functioning. thus, the study helps to design a more comprehensive and consistent legal and regulatory framework for the islamic financial services industry in bangladesh. this will support the analysts and decision-makers to outline some contours of a roadmap for further development of the islamic finance industry in bangladesh. in short, it is evident that there is no separate regulatory framework to supervise and monitor ifi in bangladesh, rather the central bank (bangladesh bank) regulates the islamic financial system based on the existing conventional financial system laws and regulations. besides, bangladesh bank provides some guidelines to establish a shariah council for the islamic financial system. hence, the lack of a legal and regulatory framework has stifled the ibf industry in bangladesh. the study analyses financial management practices in ifis of bangladesh and found some conclusions based on findings. although the financial management practices in ifis of bangladesh are endowed, there are several factors the hamper the normal activities of the industry. therefore, it is very essential for the respective practitioners and policymakers for https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 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(2002). islamic financial institutions and products in the global financial system: key issues in risk management and challenges ahead, working paper no. 02, international monetary fund, washington, d.c. west, p. w. (2016). simple random sampling of individual items in the absence of a sampling frame that lists the individuals, new zealand journal of forestry science, 46(1), 15-21. 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/) indian journal of finance and banking vol. 4, no. 3; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 53 the review on the effect of the resources management attributes and aircraft maintenance efficiency of the aviation industries in oman said hamed al rawahi phd research fellow faculty of business and accountancy university of selangor 40000 shah alam, selangor darul ehsan, malaysia e-mail: s_alrwahi@hotmail.com dr. zaharuzaman bin jamaluddin senior lecturer faculty of business and accountancy university of selangor 40000 shah alam, selangor darul ehsan, malaysia e-mail: zaharuzaman@unisel.edu.my dr. abul bashar bhuiyan associate professor faculty of business and accountancy university of selangor 40000 shah alam, selangor darul ehsan, malaysia e-mail: bashariuk@gmail.com abstract as the aircraft maintenance is one of the very essential resources to enhance the aircraft productivities those facilities such as spears, human, and financial add to that the organizational factors in which will help to make the maintenance more efficient and safe because the safety is the priority part in maintenance in which the organization should take in consideration. the main purpose of the study is to investigate existing available literature for determining of relevant factors that have cause and effects on the ensuring of aircraft maintenance efficiency in the aviation industry in oman. therefore, the study uses available sources of existing literature explored to covers from google scholar, proquest, and scopus, and other online resources. based on this extensive review, the study determined the resource management attributes and aircraft maintenance efficiency and have moderating role effective planning and internal control in the aviation industry in the sultanate of oman. the summary review findings of the study will fill the gap in the existing body knowledge especially prime factors affecting the attainment of aircraft maintenance efficiency, resource management attributes, effective planning and ‘internal control mailto:s_alrwahi@hotmail.com mailto:bashariuk@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 54 and aircraft maintenance in the aviation industry in the sultanate of oman. the study recommends for policy guideline for ensuring of determining of relevant factors that have cause and effects on the ensuring of aircraft maintenance efficiency in the aviation industry in oman. keywords: aircraft maintenance, aviation industry, resource management and aviation industry in oman. introduction aircraft maintenance is considered as the most critical activities that airlines should take into consideration with a high priority and never underestimated actions (bowen, 2013). many obstacles and challenges faced this process in the early days, one of them is the consumed time needed to complete the proper maintenance for the aircraft, the detailed and exhausting checking procedure over each part of the plane in a periodical base, and the highly expensive cost of the maintenance and pausing period of the functionality during this time. during the cycle of the major maintenance inspections, the aircraft will be on hold and this downtime can be tremendously increased due to different factors as aircraft maintenance facilities, management of spare parts, organizational factors, financial implications, and human factors. the extended aircraft downtime during aircraft servicing is undesirable to any aircraft operator as it affects the very basic purpose of an aircraft (jeff fitzgerald, 2017). as the aircraft maintenance facilities is one of the very essential factor to enhance the aircraft productivities those facilities such as spears, human, and financial add to that the organizational factors in which will help to make the maintenance more efficient and safe because the safety is the priority part in maintenance in which the organization should take in consideration(bowen, 2013). the aviation industry safety is one of the critical aspect of successful performance, moreover the personnel are the key players in all maintenance activities so it is not only carry out the activity but carry it with safely (bowen, 2013). there are numerous causes for the undesired extended aircraft downtime caused by ineffective maintenance. it has mentioned that up port of a huge armada of airplane postures critical challenges for a commerce in terms of accomplishing the different, and in a few ways clashing, objectives relating to support and operation costs and wanted benefit levels (samaranayake & kiridena, 2012). moreover, to reduce or minimize the extended aircraft downtime by improving the aircraft maintenance efficiency, it is mandatory to know the reasons that are helping the aircraft to remain under hangar maintenance more than the estimated time of maintenance. the study also mentioned that there are two major stream of literature which focus in studying the problems which facing the heavy maintenance, he found that the first problem was focusing in the scheduling of the fleet of the aircraft, which known as “service scheduling” ((bird, 1976);(sherif, 1980);(elkodwa, 1996);(chan, cheung, ip, lu, & lai, 2005)) and the other problems focusing in managing with perspectives of nitty gritty arranging and planning of exercises and support facilities such as materials, resources and maintenance personnel (dijkstra, kroon, van nunen, & salomon, 1991);(chan et al., 2005);(alfares, 1999);(chan et al., 2005);(kilpi, töyli, & vepsäläinen, 2009)). it was obvious from the literature review that the downtime or the aircraft on ground (aog) is the issue of the aviation industry in oman, which was caused by some factors such as aircraft maintenance facilities, organizational factors, and human factors, therefore managing the above causes by proper planning and control will minimize the aircraft downtime. therefore, it is timely initiatives to investigate existing available literature for determining of relevant factors that have cause and effects on the ensuring of aircraft maintenance efficiency in the aviation industry https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 55 in oman. thus, the study aims to investigate and review the effect of organizational factors, aircraft maintenance facilities, human factors, financial allocation, spear parts management, through a mediating variable which is planning and control of maintenance resource in aviation industry in oman. background of the study historical development of aviation industries in oman oman’s civil aviation was started in the year 1929 with a small airstrip made in muscat. initially was used for military purposes and occasionally for the flights of petroleum development oman (pdo) company. in 1960’s gulf air started to operate its dc3 commercial flights to oman. oman started its own national carrier in the year 1970 as oman international services (ois). the sultanate of oman became a member of the international civil aviation organisation (icao) in the year 1973. oman purchased gulf air’s light aircraft division in the year 1977 and became oman air services in the year 1981. a new airport was built at salalah and oas started operating regular domestic flights from muscat to salalah. the real development of oman’s civil aviation started when oman aviation services (oas) became oman air in the year 1993 and started to operate international services to dubai and india. in the year 1996 oman joined the arab civil aviation organisation (acao) and in 1998 oman joined international air transport association (iata). oman air engaged cfm to provide engine maintenance services in muscat. airports were built in adam, butabul ,buraimi , dibba al-baya , duqm , fahud , qarn al alam , haima , ibra, ibri, khasab , lekhwair , marmul , mukhaizna , nizwa , ras al hadd , rustaq , saiq , salalah, sohar , sur and yibal . at present more than 550,000 aircraft overfly oman’s airspace. civil aviation aircraft fly to more than 75 destinations from various airports in oman. flight developments at muscat air terminal developed by 6.3% per year between 2013 and 2018 reaching 125,543 movements in 2018. passenger traffic increased by 12% per year between 2013 and 2018 reaching 18 million passengers in muscat international airport, salalah airport, sohar airport in 2018. cargo traffic grew by 11% per year between 2013 and 2018 reaching 212,674 tons in 2018. the contribution of the direct and indirect civil aviation sector in the gdp of the sultanate of oman amounted to about 3.9 billion us dollars in 2018. in 2017 salam air, the first ever low cost carrier in oman started its operations. oman aviation group was founded in the year 2018 comprising of oman air, oman airports and oman aviation services expanding the civil aviation sector in oman. the civil aviation industry in oman employs more than 10,000 workforces from various countries and has potential to grow in future. concept of aircraft maintenance efficiency and resource management attributes: aircraft maintenance is considered as the most critical activities that airlines should take into consideration with a high priority and never underestimated actions (bowen, 2013). aircraft maintenance should be carried out to continue the aircraft in its airworthiness condition. the airworthiness of an aircraft is a continuous process. in this regard, vitor monteiro correia (2011) presented the methodology of aircraft maintenance program (amp) development in understanding with the necessities of proceeding airworthiness to show the interrelation between the amp and the other regions of proceeding airworthiness. this work demonstrated the importance of the amp for the continuing airworthiness management (cam). the factors which can be controlled to prevent accidents were discovered. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 56 methodology of the study as study aims to investigate existing available literature for determining of relevant factors that have cause and effects on the ensuring of aircraft maintenance efficiency in the aviation industry in oman. therefore, the study uses available sources of existing literature based on the four main keywords ‘aircraft maintenance efficiency’, ‘aircraft maintenance and resource management attributes ‘or ‘effective planning and aircraft maintenance, and ‘internal control and aircraft maintenance, etc, and explored to covers from google scholar, proquest, and scopus, and other online resources. empirical review findings of the study the literature review is carried out by searching and retrieving scholarly articles from scientific journals, research reports, books, and conference proceedings; it is mainly based on finding the major factors related to the aircraft maintenance process. by getting this information, choosing the proper factors to be deployed in the oman aviation sector will be easier and more efficient. several studies were conducted in the past by scholars in the field of flying machine upkeep administration and flying machine upkeep resources management. these papers were covering aircraft maintenance facilities, spare parts, profitability, human factors, planning and control, manpower, and training and organizational factors. these factors were discussed elaborately and covered the impact of these factors on aircraft maintenance. this study will try also to analyze and discuss the main problem that will occur in case the maintenance of the aircraft won’t be done on the time sat during the planning stage of the maintenance activities. aircraft maintenance efficiency aircraft maintenance should be carried out to continue the aircraft in its airworthiness condition. the airworthiness of an aircraft is a continuous process. in this regard, vitor monteiro correia (2011) presented the methodology of aircraft maintenance program (amp) development in understanding with the necessities of proceeding airworthiness to show the interrelation between the amp and the other regions of proceeding airworthiness. this work demonstrated the importance of the amp for the continuing airworthiness management (cam). the factors which can be controlled to prevent accidents were discovered. siddiqui et al. (2012) stated that aeronautics upkeep is an unpredictable and requesting attempt. its prosperity, which is at last estimated by the wellbeing of the flying staff, relies upon correspondence also, cooperation. over the previous decade, the significance of cooperation in the upkeep setting has been broadly perceived. the outcome has been the rise of human variables preparing, maintenance resource management (mrm) projects, and other group focused exercises inside the avionics upkeep network. the subtleties of mrm projects shift from association to association. all mrm projects interface and coordinate conventional human factors points, for example, gear structure, human physiology, the outstanding task at hand, and working environment wellbeing. moreover, the objective of any mrm program is to always improve work execution and security. mrm projects do this by decreasing upkeep blunders through improved coordination, correspondence, and expanded mindfulness. denizhan and dogru (2017) mentioned that in recent years the maintenance facilities gain popularity in the maintenance organization, also facilities management has shown evaluable improvement in different aspects of the maintenance organization, especially in supporting the core business of the organization. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 57 aircraft resource management attributes the present study is covering of aircraft maintenance facilities, spare parts, profitability, human factors, planning and control, manpower, and training and organizational factors. these factors were discussed elaborately and covered the impact of these factors on aircraft maintenance. management of spares for getting the aircraft ready to fly it’s essential to be serviced according to the maintenance manual, moreover some maintenance requires some components to be replaced, which means the spare parts must be available. according to (samaranayake & kiridena, 2012), aircraft maintenance is a very high activity in which does not except a spear part shortage. other researchers concluded that if there is a shortage of spares or limited with spares in the inventory, removing some parts from a similar device which is in phase-out process or grounded for a long time for maintenance and use it to service the aircraft required for an operation will be the proper solution (block, ahmadi, tyrberg, & söderholm, 2014). the parts removed from that retired aircraft can be in three conditions as follows: usable (serviceable, sent specifically into storage), repairable (unserviceable, but can be reused after a repair activity, sent to the repair shop), unfit for a benefit (not one or the other reusable nor worth repairing and ought to be scrapped), as a framework for maintenance spare parts planning and control, (driessen et al.. (2015) served as a valuable beginning point in making specie plans of maintenance save portion arranging and control frameworks. within the leftover portion of this segment, we outline each cluster of choices from the execution pointers mlo's confront organizational factor as it well known there are so many factors we call classified them as organizational factors because the organization has control over them those factors are as listed below: ▪ technical factors: specified as the specialized variables employments markers to watch the execution of a specific framework, handle, maintenance, and components (chong et al., 2019). ▪ financial factors: monetary components are made up of two primary components which are the accessible budget and the required taken a toll. to execute upkeep arrangement, office supervisors got to take into consideration both the budget and taken a toll. budget allotment incorporates a noteworthy effect on the overall upkeep arranging. in the circumstance where an upkeep unit endures budgetary cuts, changes must be made in the support needs. whereas prioritization does not completely solve the financial issue, it can offer a brief arrangement in redirecting assets into tall priorities maintenance works. noncritical support works that don't have the desired funding are more often than not conceded whereas basic upkeep works are executed to begin with (jeff fitzgerald, 2017). according to (rustenburg, van houtum, & zijm, 2001) the final decades, as a result of a changing political scene as well as changes within the public opinion, numerous military organizations have been confronted with genuinely declining budgets. tight budget limitations may lead either to transfer of tasks, or to endeavors to extend the general efficiency and quality of the work, to progress the responsiveness to the regularly inner clients, whereas at the same time a leaner organization is sought after (do more with less). numerous ventures have been begun to implement state-of-the-art data innovation (it) apparatuses, to streamline the organization (less hierarchical levels, presentation of autonomous workgroups) and to rebuild both production and materials administration. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 58 ▪ social factors: social calculation has different implications depending on its utilization. within the field of maintenance management, social components such as security and wellbeing, security, building status, and usage were utilized in choosing support needs for buildings. it can be implied that social components for upkeep administration are related to the prosperity of its users/occupants. the best need to support administration ought to be security and health. as security and wellbeing are related to the well-being of the inhabitants or clients, it should be the beat thought among all others in upkeep arrange ( martin hinsch. 2019). ▪ political factors: the political components are ordinarily related to the partners. partners are individuals with intrigued in an organization and they are based on a chain of command of proprietors, top management, center administration, lower administration, and endusers. these partners will in the long run decide the upkeep heading of the organization. the bearings can be comprised of the support objectives and targets; maintenance policy; support handle; staff preparing and frameworks. as such, their needs and requests must be satisfied. (martin hinsch. 2019) organizational characteristics characteristic of an association has a major influence on the wants on offices and support services of each association. even within the same trade segment, each organization is likely to have distinctive needs in offices and fm functions. the characteristics or natures of the organization reflect its commerce objectives, operation handle, and organizational culture. they impact the organization’s needs and management strategy of its offices (chotipanich, 2004). gefen et al. (2011) addressed without a clear understanding of the wants of the organization, office supervisors would depend on their self-judgment in overseeing support works, which means that the organization managers should be well known about the facilities which essential to get the maintenance activates done efficiently. financial allocation aircraft maintenance involves finance and it is not only important to reduce the manpower wastage but also to reduce the financial wastage. money has to be saved in all possible ways without hampering the aircraft maintenance safety. alfares (1999) conducted a case study that about decided the ideal support workforce plan to fulfill developing work prerequisites with the least cost. the discoveries of this work were as follows: the current over the top extra minutes to cover ends of the week and spontaneous maintenance, the seven-day support prerequisite is related to the flight plan, which is dynamic amid the weekends, the noteworthy increment in planned upkeep workload due to changes in both the upkeep program and the flight schedule. based on the above findings, the paper suggested to fulfill support labor requests for each day of the week, particularly expanding end-of-the-week requests, a seven-day weeks’ worth of work plan is proposed for both morning and evening shifts. exchanging to this plan would kill the requirement for end of the week extra minutes, yielding an evaluated sparing of $98,000 per year. human factors human factors are the term human variables have developed progressively prevalent as the commercial flying industry realize that human blunder, rather than mechanical disappointment, underlies most flying accidents and episodes. human components science or advances are https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 59 multidisciplinary areas consolidating commitments from psychology, designing, mechanical plan, statistics, operations inquire about, and anthropometry. it may be a term that covers the science of understanding the properties of human capability, the application of this understanding to the design, development, and arrangement of frameworks and administrations, and the craftsmanship of guaranteeing the effective application of human factor principles into the support working environment. (shanmugam & paul robert, 2015) it is important to note that human factors play an important role in all industries and aviation is not an exemption. human errors may incur heavy losses in lives and machines. shanmugam & paul robert (2015) published a literature review on human factors in aircraft maintenance engineering. the study concluded that discipline in aircraft maintenance has made an extraordinary effect on airplane plan, operations, support, and standards. all previous are connected to shape the security behavior and culture in flying upkeep working environment. in any case, the survey unfurls the monstrous potential for future investigation. domitrović, & bazijanac (2017) discussed the same idea. this paper presented the influence of human factors in one of the european aircraft maintenance organizations for wide-body aircraft meant for commercial service. their findings pointed out the occurrence of errors committed by employees’ personality errors in communication, and errors in equipment, tools, and the factor of working environment. based on their research paper the recommend creating a working climate within the aircraft maintenance organization that will be stimulated for work and at the same time act preventively on the reduction of human error. recommendation for continuous monitoring and analysis of human errors that occur in aircraft maintenance units were proposed by the study (martin hinsch, 2019). moderating role of planning and control within the constraints imposed by its design, an operation has to be run on an ongoing basis. ‘planning and control’ is concerned with managing the ongoing activities of the operation to satisfy customer demand. all operations require plans and require controlling, although the degree of formality and detail may vary (ayeni et al, 2016). alfares (1999) provided a detailed study on how to determine the optimum maintenance workforce schedule to satisfy growing labor requirements with minimum cost. the study concluded that the existing 5 day week work schedule is 13% costlier than the recommended 7-day workweek for the aircraft maintenance workforce, and as a result of his study he recommended switching from a five-day to a seven-day workweek for aircraft maintenance workers. kinnison & siddiqui (2012) discussed how to distinguish and screen upkeep issues and patterns, minimize airship downtime by legitimate arranging, and minimize support costs. also, sherwin (2000) points out that in all engineering there is a demand and to meet that demand a planning function should be flexible and also have the ability to adjust to the sequence in which it carries out the work. also, the engineering work is complex and expensive so its need to be controlled to meet the objectives were set during the plane stage. furthermore the importance of leadership in aviation maintenance was discussed by (kouzes & posner 2006), where the conducted study that “leadership is everyone business no matter what your position is, you have to take the responsibility for the quality of leadership your constituents” which mean everyone is accountable for the leadership style the demonstrate. aircraft support equipment is one of the major parts of the aircraft maintenance facilities which helps technicians to carry their maintenance activities safely and with the time stated, this is supported by (siddiqui et al., 2012) aviation maintenance management. second edition where the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 60 paper highlighted the importance of the support equipment to aircraft maintenance. the study stated that the support functions can be stated briefly as an ordering, controlling, and handling of parts and supplies. last but not least, samaranayake & kiridena (2012) clarified the importance of unplanned preservation activities, as commonly arise out concerning inspections carried oversea as the part of condition-based maintenance. these procedures have significant implications for spare parts inventory management, assets dodge, and knowledge of maintenance tasks. for example, if there is a 50 by cent risk of an unplanned maintenance activity becoming crucial during an aircraft lay-up, even ought to also lie an equal or greater danger over extra demands life positioned concerning substances yet resources, depending on the degree on additional parts stock yet resources utilization. review summary of the study as it was the aims to investigate existing available literature for determining of relevant factors that have cause and effects on the ensuring of aircraft maintenance efficiency in the aviation industry in oman. the study revealed from analyzing of the review findings that there are different gaps in existing literature and the current research come up with some of the points that should be tackled in the next step of the research. many studies done by the previous researchers provided several theories that contributed extensively to maintenance resource management. (miles, 2012) mentioned that since the late 1700s, scholars have talked about the issue of corporate proprietors contracting others as stewards of their riches. directors of other people’s cash cannot be anticipated to observe over it with the same enthusiasm as the proprietor, so administrative carelessness will continuously be show within the issues of a company. there are different theories related to this issue and try to explain the relation in detail. agency theory is one of these theories which tries to study of the relationship between a client or “principle” and someone who performs a task on his/her behalf or “agent”. this theory tries to show that the principle will act in his/her best interest even if his/her interests conflict with those of his/her agent ((eisenhardt, 1989). on the other hand, the stakeholder theory justifies that the main priority of an organization should be its social performance and not only its financial performance. it stresses that increasing the wealth of shareholders is not an organization's primary function. on the contrary, stakeholders have an ethical responsibility to participate in the corporate decisions of an organization, and an organization must include them in discussions about the directions it is considering moving in (el abboubi & nicolopoulou, 2012). explaining how the organizations maintain dominant positions in competitive environments was done by resource-based theory. this theory verifies that the resources in an organization have influences on its performance in addition to organizations compete against one another for resources (priem & butler, 2001; hoopes, madsen, & walker, 2003; peteraf & barney, 2003 ; miles, 2012). it also assumes the basis of an organization's decisions about which resources to select and accumulate is composed of the following: economic rationality, limited information, biases and prejudices, and casual ambiguity (anderson & richard). other researchers focused on the important role of the human factors in aircraft maintenance. shanmugam & paul robert (2015) published a literature review on human factors in aircraft maintenance engineering. study concluded that discipline in aircraft maintenance has made an extraordinary effect on airplane plan, operations, support, and standards. all previous are connected to shape the security behavior and culture in flying upkeep working environment. in any case, the survey unfurls monstrous potential for future investigate. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 61 virovac, domitrović, & bazijanac (2017) explained that some papers presented the influence of human factor in one of the european aircraft maintenance organizations for widebody aircraft meant for commercial service. tooley (2013) spoke about the training and qualifications the engineers should have in order for them to work as aircraft maintenance staff. to perform a maintenance to the required standards, individual need to demonstrate maturity, commitment, integrity, and ability to see the job through, often under difficult circumstances. once the maintenance tasks have been completed to the required standards, category b licensed engineer’s certain approvals are permitted to sign-off activities and sign the certificate of release to service (crs). according to (berto et al., 2011) human are the planning as an dynamic portion of the flight operations including pilots, support labor, discuss activity controllers, and others. clearly, it’s vital to be able to transfer on exceptionally talented individuals to maintain a strategic distance from mistakes that cause mischances or catastrophes in flight operations. it is at that point vital significance to put these individuals in authoritative and organized setting to ensure a reasonable level of proficient training. by comparing the previous mentioned theories related to maintenance resource management, resource-based theory can be considered as the best choice among them to be the base of the conducted research. the reason for choosing this theory is the resources of an organization possess influence on its performance. in more detail, rbt accepts that organizational choices to choose and collect assets are financially levelheaded and subject to constrained data, predispositions and biases, and causal ambiguity (teece, pisano, & shuen, 1997). causal ambiguity means that it isn't known precisely how an asset leads to above-average execution for an organization. a resource is characterized as anything that can be thought of as a quality for an organization. assets incorporate any unmistakable or intangible resources that are semi for all time tied to the organization. resource-based theory posits that an organization can achieve sustainable competitive advantage by controlling resources that are valuable, rare, imperfectly imitable, and non-substitutable. conclusion and recommendations as the study aims to investigate and review the effect of organizational factors, aircraft maintenance facilities, human factors, financial allocation, spear parts management, through a moderating variable which is planning and control of maintenance resource in aviation industry in oman. it has been carried out by searching and retrieving scholarly articles from scientific journals, research reports, books, and conference proceedings; it is mainly based on finding the major factors related to the aircraft maintenance process. the studies were conducted in the past by scholars in the field of flying machine upkeep administration and flying machine upkeep resources management. studies were covering aircraft maintenance facilities, spare parts, profitability, human factors, planning and control, manpower, and training and organizational factors. after analyzing and studying all the different gaps that might be faced in the previous conducted studies, the current research come up with some of the points that should be tackled in the next step of the research. the summary review findings of the study will fill the gap in the existing body knowledge especially prime factors affecting the attainment of aircraft maintenance efficiency, resource management attributes, effective planning and ‘internal control and aircraft maintenance in the aviation industry in the sultanate of oman. the study recommends for policy guideline for ensuring of determining of relevant factors that have cause and effects on the ensuring of aircraft maintenance efficiency in the aviation industry in oman. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 62 references alfares, h. k. (1999). aircraft maintenance workforce schedulinga case study. journal of quality in maintenance engineering, 5(2), 78-89. chong, a. k. w., mohammed, a. h., abdullah, m. n., & rahman, m. s. a. (2019). maintenance prioritization–a review on factors and methods. journal of facilities management, 17(1), 18-39. chotipanich, s. (2004). positioning facility management. facilities, 22(13/14), 364-372. dijkstra, m. c., kroon, l. g., van nunen, j. a., & salomon, m. (1991). a dss for capacity planning of aircraft maintenance personnel. international journal of production economics, 23(1-3), 69-78. denizhan, b., & doğru, a. (2017). analysis of employability for the civil aviation maintenance graduates of turkey. european journal of training and development. driessen, m., arts, j., van houtum, g.-j., rustenburg, j. w., & huisman, b. (2015). maintenance spare parts planning and control: a framework for control and agenda for future research. production planning & control, 26(5), 407-426. gefen, d., rigdon, e. e., & straub, d. (2011). editor's comments: an update and extension to sem guidelines for administrative and social science research. mis quarterly, iii-xiv. harry a.kinnison (2004). aviation maintenance management. mcgraw-hill. jeff fitzgerald, exploring the perceived influence of organizational culture on aviation maintenance organizations lacking mandatory continual training, san diego, 2017. kouzes, j. m., & posner, b. z. (2006). the leadership challenge (vol. 3): john wiley & sons. martin hinsch, industrial aviation management, springer, 2019 middleton, d. (1993). aircraft maintenance management part 3. aircraft engineering and aerospace technology, 65(2), 6-9. peter ayeni, peter ball, & tim baines. (2016). towards the strategic adoption of lean in aviation maintenance repair and overhaul (mro) industry, journal of manufacturing technology management, 27(1). rustenburg, w., van houtum, g.-j., & zijm, w. (2001). spare parts management at complex technology-based organizations: an agenda for research. international journal of production economics, 71(1-3), 177-193. samaranayake, p., & kiridena, s. (2012). aircraft maintenance planning and scheduling: an integrated framework. journal of quality in maintenance engineering, 18(4), 432-453. shanmugam, a., & paul robert, t. (2015). human factors engineering in aircraft maintenance: a review. journal of quality in maintenance engineering, 21(4), 478-505. sherwin, d. (2000). a review of overall models for maintenance management. journal of quality in maintenance engineering, 6(3), 138-164. siddiqui, m. h., iqbal, a., & manarvi, i. a. (2012). maintenance resource management: a key process initiative to reduce human factors in aviation maintenance. paper presented at the 2012 ieee aerospace conference. tulia badillo, procurement total cost analysis: a supply chain strategy for the aviation industry, walden university, 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/). indian journal of finance and banking vol. 5, no. 2; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 106 the spillover of the coffee: material misstatements at (un) luckin coffee inc. dr. gagan kukreja associate professor department of accounting, finance and banking college of business and finance ahlia university, bahrain e-mail: gkukreja@ahlia.edu.bh abstract the research investigates alleged material misstatements in the financials of luckin coffee, a chinese company listed in nasdaq. the research is exploratory and based on publicly available information. the financial data has been obtained from their quarterly and annual reports submitted to securities and exchange commission. the research shows the alleged corruption by inflating sales and profits by c-suite executives of the company. nevertheless, before doing so, what failures in corporate governance led to this crisis? the admission of such material misstatements resulted in a massive loss to the investors and shaken the investment community’s trust once again. the research tried to determine what kind of audit procedures should have been implemented to earlier detection of fraud? what should have been done to protect stakeholders? what extra measures should the u.s. stock exchange take into consideration before listing foreign companies? what kind of ethical standards must be taught to the students/future executives to avoid such material misstatements? how can accounting bodies address such material misstatements? how can audit procedures be improved? this research will facilitate the policymakers, accounting and auditing regulators, board and various other stakeholders to deter, detect and mitigate such financial material misstatements and offers recommendations. keywords: accounting scam, analytical procedures, audit procedures, confirmation procedure, material misstatements. jel classification codes: m41, m42, m48, m148. introduction in october 2017, the war of market share of coffee sales started in china after the foundation of luckin coffee, a new startup, by jenny qian zhiya. jenny wanted to introduce coffee as part of life to the chinese people. she believed that tea drinkers dominated the chinese market, yet there were ample opportunities in the untapped coffee market. jenny always gave credit to caffeine for her ability to work overtime in her jobs. she was in the firm belief that there is space for another coffee selling company that can position itself in front of international coffee market players such as starbucks and costa. along with jenny, the ceo, jian lu, the coo, and reinout hendrik schakel, the cfo pledged to write luckin’s success story. however, on april 2, 2020, the announcement of the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 107 inflated sales by the coo was on every newspaper’s headline. the coo admitted a huge inflated sale of q3 and q4 of 2019 sales and overstated marketing expenses. it turned the super success story into a failed one. when introducing coffee to an audience bound to tea through religion, culture, and history and having competitors that took ground in the coffee industry for many years, it might be a tough job for many. however, jenny, jian, and reinout made it look like a piece of cake when the number of stores jumped from 1,300 in october of 2018 to 4,507 at the end of 2019, which crushed starbucks store number who entered the market in 1999 and had 4,200 stores (j. wang, 2020). surprisingly, that is a small ratio of the eye-watering growth demonstrated by luckin coffee. the retail trader “wall street bets” was a happy trader after placing a trade at $49, and he might have felt “luckin” as the company was the greatest, and it was releasing astonishing numbers (winck, 2020). although luckin stands for luck, wall street bets were not lucky when the stock took an 80% nosedive on april 2, 2020, which cost him $252,000 or, in other words, his whole life savings. brief profile of the management jenny zhiya was the founder and ceo of luckin coffee. she served as a former operations executive at ucar, an on-demand chauffeured car service. jian liu served as head of yield management before taking on the positing of chief operating officer at luckin coffee. reinout hendrik schakel was an executive director of consumer & retail at standard chartered bank, before taking on the position of cfo at luckin, and still has a job as cfo in ruixing coffee bejing co ltd. reinout, unlike the ceo and coo, was not terminated from his position at luckin coffee to date. coffee found a home at china emerging markets like china, brazil, and india have witnessed changing demographics, cultural transformations, and economic growth (javalgi & grossman, 2016). in addition to a rising middle class, all those prospects combined make emerging markets attractive for international investors worldwide (ferreira & ferreira, 2018). according to the coffee market analysis, the growth rate of coffee consumption in china is 20% annually, which is 2% above the global growth rate (coffebi, 2019). the international coffee organization (ico) also stated that “the rising popularity of coffee shops and coffee culture, in general, is promoting growth in fresh roast and ground coffee (global coffee report, 2019). as the chinese become more interested in coffee, coffee brands have become more involved in china. so why is coffee consumption growing? we have five simple answers: ▪ increasing interest from young professionals ▪ better standard of living and the rise of the middle class ▪ hundreds of coffee shop openings ▪ an increase in the number of local coffee houses ▪ an increased interest in professionalism in coffee service and ceremonies china has witnessed three waves of coffee; the first wave was through fast food and home outlets, the second was through dedicated coffee chains, and the third through speciality coffee shops (ferreira & ferreira, 2018). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 108 the rise of luckin coffee and significant competitors 0 to 4,500 locations in 2 years are one of many ways to describe this company. they defined themselves as the second-largest and fastest-growing coffee company in china in a short span. luckin was highly technology-driven; their prospectus mentioned the word technology more than five times than the word bean. their retail model built around mobile apps and store networks. the entire customer purchase process goes through on mobile apps, which facilitated a 100% cashier-less environment. the store network operated three types of stores, and their strategic focus was their pick-up stores. these stores had limited seating and were in areas with a high demand for coffee, such as university campuses, office building, and commercial spaces. the company went public on may 17, 2019, on nasdaq. the pricing for the shares it offered ranged between $15-$17 with the hopes of raising more than $500 million. the company witnessed rapid growth, and much of its growth resulted from its aggressive marketing strategy. after just one year in business, it was challenging, long term global coffee player, starbucks, aiming for 4,500 outlets by the end of 2019. it exceeded the number of costa coffee stores by october 2018. the company had 4,260 locations on november 11, 2019, equivalent to starbucks (fruhlinger, 2019). it reported 6,500 locations in china in april of 2020, which exceeded starbucks by 2000 sites (fruhlinger, 2020). the top 10 luckin competitors were starbucks, mcdonalds, costa cofee, kfc, burger king, dunkin’ donuts, subway, pizza hut, café coffee day, and wendy’s. the coffee e-retailer had explosive growth. it labelled itself as a “coffee network” as it used its recent funding technology innovation and business development (smith, 2019). the ceo and founder had a straightforward goal of becoming the dominant coffee chain in china. targeting the white collars young generation with cheap coffee and taste optimized for the chinese consumer, jenny qian zhiya focused on the two weak spots of the coffee industry in china “high prices and inconvenience”(writers, 2018). the business model embraced can be described as “grab-and-go.” this aggressive model allowed to open over 4500 stores. the idea is to order via an app, and the customer will be directed to a location near them. the executives chose the cash-burning strategy, which they implied with car inc. more than a decade ago; they burned money from investors to quickly grab market share from rivals. luckin’s business model was the opposite of starbucks, which based on social interaction. they adopted the idea that the customer wants their coffee, but social interaction not so much. professor jeffrey toson described starbuck’s strategy as being based on real estate, where luckin’s based on smartphones. when customers signed up for the first time in the luckin app, they got their first free coffee. although free is always valued, it has its downfalls as well. luckin suffered considerable losses in 2018 and 2019. the losses were even more significant in 2018, with a revenue of 840.7 million yuan and a net loss of 1.619 billion yuan (markoch, 2020). the luckin coffee earnings report included a net loss of -$74.41 million in 2019, which is 7.78% worse than its third-quarter loss in 2018, $69.04. the 2019 results reported misleading, so it is difficult to estimate the losses of 2019 precisely. literature review and hypothesis development luckin’s stock had more than coronavirus to worry about when it was subjected to a sell-off on january 31, 2020, upon the release of an 89-page anonymous report by muddy waters research stating that the company has a “fundamentally broken business” and accused it of “fraud”(aiden https://seekingalpha.com/author/aiden-research?source=content_type%3areact%7csection%3aauthor%7cbutton%3aavatar%7cfirst_level_url%3aarticle https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 109 research, 2020). the company’s stock sunk as much as 27% that day (finman & yang, 2020). however, that was only the beginning. luckin found itself in the middle of a battle when citron research also claimed on twitter that they had received the same anonymous report given to muddy waters research. still, they stated that “they are long lk” as research findings do not “mesh” with current data. they also stressed that they were waiting for lk’s management response”(fineman, & yang, 2020). luckin issued a response to the short thesis by muddy waters, stating that “the methodology of the report is flawed the evidence is unsubstantiated, and the allegations are unsupported speculations and malicious interpretations of events” this headline represented a catalyst to lk’s stock and kept it “moving”(newdesk & writer, 2020). many lives changed on april 2, 2020. the ceo and coo were fired, and “wall street bets” lost his life savings when the stock sunk as much as 81% when the fraud conducted by lk’s coo and other employees was on every financial headline. their internal investigation found that 2.2 billion yuan inflated sales from the second quarter to the fourth of 2019 (business news, 2020). interestingly, this announcement was made shortly after appointing two new independent directors to the company’s board. the first was tianruou, who had over 20 years of work experience. the second was wai yuen chong, who had above 30 years (luckin coffee inc., 2020). initially, the coo accused of financial misconduct. nasdaq exchange halted trading of luckin coffee’s stock for news pending on april 7, 2020, at 9:15 eastern time at the last price of $4.39. the company’s status changed to “additional information requested” by nasdaq. what went wrong with luckin coffee? everything? the short research report released by muddy waters research report covers it nicely and in great detail. the report split into two areas: fraud and the fundamentally broken business. we discuss the five primary pieces of evidence mentioned in their report. evidence #1: sales figures were inflated by 69% in the q3 of 2019 and by 88% in q4 of 2019, supported by 11,260 hours of traffic video. muddy had employed 92 full-time staff and 1,418 part-time staff to record store traffic for 981 store days covering 100% of the operating hours for 620. luckin had 4,507 stores in 53 cities, and muddy waters covered 38 towns that had 98% of luckins stores. they also categorized the stores into malls, schools, residential, transportation, hotel, and others. the research company eliminated footage that missed more than 10 minutes and ended up with a success ratio of 54% with 100% integrity. for every 981 days, they counted the number of customers picking up luckin products and the number of orders picked y delivery personnel. in addition to that, they also found that luckin inflated an average of 72% of online order volumes. all orders placed and paid online. when an order was placed, a three-digit number generated in addition to a qr code. through the random selection of 151 offline tracking store days to track their online orders, they found out that the number of online orders inflated from a range of 34 to 232, and an average of 106 orders per day or 72% of the average of offline orders. evidence #2: the research firm reported a decline in the items per order from 1.38 in 2019 2q to 1.14 in 2019 q4. muddy gathered 25,843 customer receipts from 10,119 in 2,213 stores in 45 cities. the importance of delivery has also declined during the period. cite research stated that transportation is roughly 10% of the business on january 14, 2020. evidence #3: muddy gathered 25,843 receipts and found that luckin inflated their net selling price per item by 12.5%. https://seekingalpha.com/author/aiden-research?source=content_type%3areact%7csection%3aauthor%7cbutton%3aavatar%7cfirst_level_url%3aarticle https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 110 evidence #4: muddy found that luckin overstated its 3q advertising expenses by 150% through third party media. evidence #5: muddy found nearly a 400% inflation on the revenue that luckin labelled as other products. the following hypotheses are developed based on the literature review as follows: ▪ the sales revenue misstatements have an impact on the performance disclosures of the firm. ▪ the expenses misstatements have an impact on the performance disclosures of the firm. problem statement luckin coffee’s ceo’s first violation was the inflation of sales revenue, representing a violation of the revenue recognition principle. if the sales revenue has been overstated, it will overstate the profits. it seems there was negligence on the part of ey, the auditors. if auditors applied proper audit procedures (especially analytical procedures for purchase and sales), there was enough possibility of getting red flags. the misreporting could be detected earlier if the audit was done professionally. ey, the auditor from the beginning, refused to comment on any reporting matters due to the client’s confidentiality. conceptual framework pressure overstatement of sales revenue and expenses material misstatement of financial statements opportunity rationalization capacity figure 1. conceptual framework source: created by the author research methodology this research is exploratory and qualitative. the research information collected from various credible sources such as investigation reports of investigating agencies, whistleblower reports, financial data from the securities and exchange commission, reputed newspapers, business magazines, etc. the information verified by corroborating evidence and comparing the information from other sources. objectives of the research this research aims to examine and investigate the material misstatements done by the senior management of the company. it attempts to figure out the loopholes used in accounting and auditing standards and practices that the few senior executives exploited. it touches upon the failure of fiduciary duties of the board while performing their duties. it deals explicitly with the violation of revenue recognition and matching principles. it will further highlight such an alleged scam’s dominos effects on various stakeholders’ interest, especially shareholders. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 111 discussions financial material misstatement is not new to the world of business. there are several material misstatement cases, but one or more of the four motives mentioned in diamond theory exist in all cases. luckin is no exception to it. the high ambitions of senior management encourage them to indulge in a financial material misstatement. trading for lk’s stock is currently going on over the counter. investors had the option to either hold onto the ownership or sell the stock. nasdaq issued the delisting notice for the reason of “public interest concerns as raised by the fabricated transactions disclosed by the company” and “the company’s past failure to publicly disclose material information, citing a business model through which the previously disclosed fabricated transactions executed”(fantozzi, 2020). chinese market regulators have also started an investigation into lk’s operations, and the company was said to be assisting their work (y. wang, 2020). the chinese government is said to be shielding u.s. listed chinese companies from complying with the sec procedures of audit and disclosure. senate marco rubio stressed that “of the chinese companies want to be listed on the u.s. exchanges, they must comply with american laws and regulations for financial transparency and accountability. table 1. timeline of significant events dates major events october 2017 luckin coffee was incorporated. january 2018 it opened its first shops in beijing and shanghai (yoon, 2018). may 2018 luckin accused starbucks of monopoly by signing exclusive contracts with suppliers and property owners. may 16, 2018 the case was put on file by shenzen intermediate people court. july 2018 the company announced the completion of series a financing (international finance news., 2018). september 2018 tencent signed a partnership with luckin (chan, 2018). october 2018 luckin coffee opened 1300 stores and surpassed the number of costa shops (xinghua, 2018). november 2018 the company had its second fundraising. january 2019 luckin announced its plan to open 2500 stores and become the most significant coffee brand in china. april 2019 the company had its pre-ipo funding. may 2019 luckin coffee ipo announced in nasdaq. may 29, 2019 the company released q1 2019 earnings results. august 14, 2019 the company released q2 2019 earnings results. october 2019 luckin withdrew a monopoly case against starbucks. november 13, 2019 the company released q3 2019 earnings results. december 2019 the company was exceeded starbucks by the number of stores. january 2020 expansion to vending machines. january 31, 2020 muddy waters report published on twitter. april 2020 the company admitted the fabrication of sales. april 7, 2020 nasdaq halted lk shares trading. may 15, 2020 delisting notice issued by nasdaq. june 24, 2020 luckin withdrew delisting hearing requests. june 29, 2020 the trading of shares suspended. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 112 conclusion the luckin scandal shook the investors again after a long series of scandals from across the world. this scandal brought governance issues in the centre stage. an overambitious attitude of the few people at executive management brought trouble to thousands of investors, employees, suppliers, etc. this case raised very pertinent questions on the ability and practices of the audit firm, ey. again it is proved that tight regulations are also not sufficient unless they are executed in true spirit. even the best internal controls can’t detect frauds if top management colludes. in addition to inflating sales, marketing costs and expenses were also overstated (pisani, 2020). auditing procedures were a weak point in oversight. jay clayton and william duhnke iii, the public company accounting oversight board chairman, stressed that u.s. regulators were often prevented from inspecting chinese firms’ audit work and practices. they have called for more cooperation from china. references aiden research. 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(2020, april 3). luckin coffee is a painful reminder of ‘the extreme fraud risk’ of some china-based companies. cnbc. retrieved from https://www.cnbc.com/2020/04/03/luckin-coffee-debacle-is-a-painful-reminder-of-fraudrisk.html smith, k. h. (2019, may 17). luckin coffee and the new retail era. the startup. retrieved from https://medium.com/swlh/luckin-coffee-and-the-new-retail-era-29124507acd1 wang, j. (2020, may 13). fall from grace: luckin coffee’s former billionaire ceo fired amid fraud scandal. forbes. retrieved from https://www.forbes.com/sites/jenniferwang/2020/05/13/fall-from-grace-luckin-coffeesformer-billionaire-ceo-fired-amid-fraud-scandal/#1b659df8572a wang, y. (2020, april 3). chinese regulators target luckin coffee after admission of fabricated sales. forbes. retrieved from https://www.forbes.com/sites/ywang/2020/04/27/chinese-regulators-target-luckincoffee-after-fabricating-sales/#34a05e8a5610 winck, b. 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(2018, july 20). china’s luckin coffee takes on starbucks. cnbc. retrieved from https://www.cnbc.com/video/2018/07/20/chinas-luckin-coffee-takes-on-starbucks.html 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/) indian journal of finance and banking vol. 4, no. 3; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 26 profitability of islamic banks: a panel data analysis amine bakkeri faculty of economics and management of sfax university of sfax, tunisia e-mail: bakkeriamine@gmail.com abdelhakim ben ali faculty of law, economics and management of jendouba university of jendouba, tunisia e-mail:benali.abdelhakim@gmail.com abstract this article aims to examine the impact of internal and external factors on the profitability of 30 islamic banks operating in the middle east and north africa over a period from 2005 till 2018. we use the ols method according to panel data. empirical results indicate that the quality of management, liquidity, and capitalization, quality of services, the presence of women and the competence of staff are significant determinants of profitability. the other determinants including diversification, size and inflation have no significant effect on the islamic banks' profitability. keywords: profitability, islamic banks, panel data, middle east, north africa. jel classification codes: g21, g24, c33, d02. introduction islamic finance is currently enjoying remarkable success after its strong resistance to loss failures following the outbreak of the supreme crisis in 2008. this phenomenon appears to be a real alternative to classical finance (ahmed, 2010). it revolves around a philosophy that is specific to it and allows meeting and satisfying the needs of customers via its legitimacy drawn from the principles imposed by sharia by sharing the risks and the profits with the customers. islamic finance, which offers sharia-compatible products, is attracting the attention of investors, specialists in the field, and policy makers (ougoujil & rigar, 2018). this study is part of the works dealing with the question related to the determinants of profitability within islamic banks, the objective of which concerns the impact of external and internal factors' impact on the islamic banks' profitability. unlike previous research, our work proposes and integrates new factors that affect the bank profitability, in particular the service's quality, the women's presence, and the competence of staff. to answer our research question, this paper is distributed as follows: the section will present the literature review and the research hypotheses. in the second part, we present the mailto:amine@gmail.com mailto:benali.abdelhakim@gmail.com https://scholar.google.com/citations?user=wcdyyz0aaaaj&hl=fr&oi=sra https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 27 research methodology, the results and their interpretations. we will end with the conclusion and the limits of our research. background and hypotheses theoretical and empirical contributions in the literature have shown that the profitability of islamic or conventional banks is assessed by criteria related to the internal management of the banks as well as the environmental factors in which these institutions operate (jadoon et al., 2019; babalola et al., 2012; sufian, 2010; wasiuzzaman et al., 2013). the latter use the use of a variety of external and internal factors that may affect the islamic banks' profitability. the quality of banking management abduh et al. (2013) studied the determinants of profitability in malaysia. they have shown that the development of financial markets, the size of the bank, market concentration and inflation have a positive and significant effect on bank profitability.the latter are called upon to adopt a sound management of cost by exploiting to the best of their resources. the effect of this variable is ambiguous in the literature. indeed, sufian (2010) found that the ratio of total overheads to total assets has a negative and significant impact on the malaysian islamic banks' profitability. hassan et al. (2009) found that this ratio has no significant impact on bank profitability. abduh et al. (2014) indicate a negative and significant effect between banking management quality and the islamic banks' profitability. wasiuzzaman et al.(2014) showed that the capital adequacy ratio and asset quality have a negative and significant effect and that liquidity and operational efficiency, inflation and gross domestic product have a significant and positive effect on bank profitability. similarly, khan and ijaz (2014) assess the factors affecting the profitability of islamic banks during the period 2007 to 2014. the results indicate that capital adequacy, operational efficiency, quality of management and income gross domestic have a significant effect, while inflation has a negative effect on profitability. h1: quality of bank management has a positive and significant effect on the islamic banks' profitability. liquidity eljelly and elobeed (2013) have shown that only factors such as cost, liquidity and bank size have a positive and significant impact on performance. external factors are insignificant determinants. daoud et al. (2016) assessed the banks' performance using the ratio method. the results indicate that capital adequacy, liquidity, operational efficiency are significant ratios of profitability. credit risk is not a significant variable. regarding external factors, gross domestic product displays stimulating effects on the islamic banks' profitability. islamic financial institutions face a major constraint on liquidity, which is justified by the absence of an interbank market on which these institutions can manage their liquidity. the solution to this problem lies in the development and standardization of instruments to manage the liquidity of islamic financial institutions.the majority of studies that have examined the islamic banks' profitability suggest that islamic banks should be more liquid and therefore it will be less exposed to liquidity risk. srairi (2009) reveal a positive effect between liquidity and islamic banks' profitability (samad, 2004). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 28 h2: liquidity has a negative and significant effect on the profitability of islamic banks. capital-adequacy sufian (2010) studied new empirical evidence on the factors that precise the banking sector's profitability in the republic of korea over the period 1994-1996. empirical results show that banks in the republic of korea with high capitalization levels are tending to have higher profitability levels. however, the impact of credit is always negative under macroeconomic and financial conditions (haron, 1996). at the same time, the effect of the economic cycle on bank profitability is mixed. on the one hand, inflation has a pro-cyclical impact, while the gross domestic product has a counter-cyclical influence on the profitability of banks. dodi et al.(2018) have shown that capital adequacy, credit risk and asset size have a significant and negative effect on bank profitability, while liquidity has a positive and significant impact on the banks' profitability. however, only external factors have a significant and positive effect, while gross domestic product has a negative and significant effect on the profitability of banks. hanif et al. (2012) and altamimi et al. (2011) compared profitability in conventional and islamic banks. the results indicate that the capital adequacy ratio is a significant factor in profitability, size has no effect and operational efficiency has a negative impact on bank profitability (munir, 2017). islamic banks must have solid capital to provide them with additional strength to resist the financial crises on one hand, and on the other hand to provide security for depositors' funds during unstable macroeconomic conditions. a high level of equity reflects in fact the degree of solvency of islamic banks and their capacity to meet their commitments (zarrouk et al., 2016). h3: capital adequacy has a positive and significant effect on the profitability of islamic banks. quality of service the quality of services (customer satisfaction or customer retention) is one of the most important elements at present in the face of increasing competition the quality of service reflects a relationship of trust with customers (aisyah, 2018; ali and raza, 2017). this relationship reflects in the framework of the priorities of banks to protect their brand image, their reputation which leads to the valuation of their performance (supiyadi et al., 2019). by adopting strategies and techniques, banks must offer highly qualified and distinguished services to ensure customer loyalty. as banking services are now similar, there are some small parts that make the difference to the clients' ability to answer their queries and provide the services needed in a timely and high-quality manner. based on these findings, we test the hypothesis that: h4: quality of service has a positive and significant effect on the islamic banks' profitability. women's presence in the middle east and north africa region, the majority of countries are adopting a proactive policy in favor of women’s rights and the elimination of gender inequalities. the gender thus involves adopting and implementing innovative equity measures as well as human resource management based on criteria of competence and performance and on the principles of social justice and equality (sinha, 2020). general guidelines on integrating gender and diversity in human resources management have several advantages. the institutions are more specifically responsible for developing strategies on gender mainstreaming and for coordinating and https://scholar.google.com/citations?user=jkvfneiaaaaj&hl=fr&oi=sra https://scholar.google.com/citations?user=bghssdkaaaaj&hl=fr&oi=sra https://scholar.google.com/citations?user=9-5qpboaaaaj&hl=fr&oi=sra https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 29 supervising the implementation of gender-sensitive human resources and mechanisms and management policies. more specifically, the institutions are responsible for developing strategies on gender mainstreaming and for coordinating and overseeing the implementation of gendersensitive human resource management systems and mechanisms (alazzani,2019). establishments, mainly banks, insurance companies and private companies, give importance to the presence of women in the workforce. however, the appreciation of the role of women reflects the adoption of a culture of gender diversity, which enshrines the principle of equality and equal opportunities between the sexes. with intense competition, institutions seek to attract talent of all genders to ensure continuity and efficiency. h5: presence of women has a positive and significant effect on the islamic banks' profitability. market share the literature indicates that the best performing banks are associated with banks with the lowest market share; (sufian & habibullah, 2010; abduh et al., 2014). in some cases, continued expansion of market share could lead to additional costs and thus lead to inefficiencies. sufian (2009) deduced a negative relationship between bank profitability and market share (petria et al., 2015). abdel-hameed (2003) analyzed the effect of bank characteristics and the general financial environment on the islamic banks' performance. his study has shown that by controlling the macroeconomic environment, the financial structure of the market and taxation negatively affect profitability. favorable macroeconomic conditions have a positive and significant impact on the profitability of islamic banks. abduh et al. (2013) studied the determinants of profitability in malaysia and showed that the development of financial markets, bank size, market concentration and inflation have a positive and significant effect on profitability banking. h6: market share has a positive and significant effect on the islamic banks' profitability. diversification the diversification reduces risk and helps minimize the risks they face islamic banks by building a diversified portfolio of holdings. it can be a source of profit for islamic financial institutions as these banks offer a diverse range of products and services or a source of costs. petria et al. (2015) tested the internal and external determinants of the profitability of member states during the period 2004-2011. the results of their study have shown that capital adequacy, size, diversification and gross domestic product have a positive and significant impact on the profitability of european banks and that liquidity, credit risk and inflation negatively affect performance banking. on the one hand, diversification can be a source of cost for newly created banks, which can weigh heavily on the bank's situation especially during critical moments. for a bank whose strategies are clear, transparency in investment matters with the presence of an audit committee and a supervisory board, all these arguments make diversification a source of profit. diversity of products, differentiation at the service level helps the bank to diversify to take advantage of it. h7: diversification has a negative and significant effect on the islamic banks' profitability. https://scholar.google.com/citations?user=bq5ssgmaaaaj&hl=fr&oi=sra https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 30 inflation inflation is widely used in the literature as an external factor that can affect the islamic banks' profitability. abduh et al. (2014) analyzed the factors of islamic banks' profitability over the period 2006-2010 and showed that operational efficiency, inflation have a positive and significant impact on the performance measured by roa. using roe as a measure of profitability, they have shown that operational efficiency and inflation have a negative impact while gross domestic product has a positive effect on the performance of islamic banks. in this sense, sufian et al. (2009) have shown that inflation has a negative relationship with the banks' profitability in bangladesh. others like abduh et al. (2014), srairi (2009) deduced complex results to see ambiguous. h8: inflation has a positive and significant effect on the islamic banks' profitability. the size of the bank this variable is used in several previous works, (sufian 2010; khrawish, 2011). size informs us about the quality of control for cost differences and the ability to diversify. dodi et al. (2018) examined the effect of factors that contribute to the islamic banks' profitability in indonesia over the period 2008 2017. the results of the study revealed that size has a positive effect on roa and roe while capital, credit risk and liquidity had a negative effect on the profitability of the islamic bank in indonesia. likewise, inflation had a positive effect while gross domestic product had no significant effect on the profitability of islamic banks sufian (2010) and khrawish (2011) argued that large banks should have more economies of scale and reduced the cost of collecting and processing information. abduh et al. (2014) indicate a non-significant effect of size on the islamic banks' profitability. wasiuzzaman (2010) indicates a negative but insignificant relationship between the size of the bank on the profitability. the staff competence achieving a high level of profitability is conditioned by requirements, mainly the degree of professionalism of the employed workforce. the bank must devote a portion of its profits to the training and remuneration of the team or the employees employed. the lack of competent and qualified personnel exposes the islamic bank to risks. institutions tend to give considerable importance to the training and specialization of its staff employed and especially in the field of the islamic jurisprudence. the majority of banks give importance to the training of executives. the allocation of costs or costs by increasing the volume of services or gains in terms of profitability results from a specialized workforce. in addition, giving a place for the training of the managers, this leads to increase the professional capacities and to create a good climate for the conduct of the business of the bank (supiyadi et al., 2019). the institution's profitability therefore increases as a result of policies consistent with the quality of the workforce and a staff competence. research methodology sample and data our objective is to study the effect of internal and external factors on the profitability of a sample of 30 islamic banks operating in the middle east and north africa over a period from 2005 to https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 31 2018. or a number of observation equal to 420. all our data are extracted from annual reports published by islamic banks, data from the world bank and the bank-scope database. research model and presentation of variables in line with the work of short (1979), our model is a multiple linear regression. such a linear analysis allows more logical and more robust results. our model takes the following form: profitability = α + ∑ βk xit + εit with: profitability of islamic banking measured by the return on roa assets, xit represents the dependent variables. so, our model is as follows: roait = α + β1 qgbit + β2 liqit + β3 cbit + β4 qsit + β5 genderit + β6 mshit + β7 divit + β8 infit + β9 sizeit + β10 st-comit + εit dependent variable roait: return on assets from bank i to instant t. it is expressed as net income / total assets. independent variables ggbit: quality of banking services from bank i to instant t measured by total fees / total assets. liqit: liquidity of the bank from bank i to instant t is measured by the ratio of cash / total assets. cbit: capitalization from bank i to instant t measured by book value of equity / total assets. qsit: quality of services from banks i to instant t defined by evolution of the number of customers. it measured by difference in the number of customers in year t and in year t-1 divided by the number of customers in year t (number of customers in year t number of customers in year t-1) / number of customers in year t. genderit: the presences of women in human resources from bank i to instant t measured by the percentage of the number of women in relation to the total staff. mshit: market share from bank i to instant t measured by the natural logarithm of total deposit. divit: diversification from bank i to instant t calculated by non-interest bearing income / total assets. infit: inflation rate calculated by the consumer price index. variables of control sizeit: size from bank i to instant t measured by the natural logarithm of total assets. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 32 st-comit: staff skills from bank i to instant t a binary variable which takes the value of the unit if the bank carries out staff training, 0 if not. results and interpretations hausman specification test table 1. hausman specification test coefficients sqrt(diag(v_bv_b)) (b) (b) (b-b) s.e. fe re difference qgb 0,7456 0,6543 0,0913 0,0002 liq 1,3509 0,9844 0,3665 0,1008 cb -1,3456 -1,0765 -0,2691 0.81896 qs 0,8348 0,9653 -0,1305 0,0056 gender 1,3654 0,7298 0,6356 0.01026 msh -0,6072 0,8163 -1,4235 0,0001 div 1,0134 3,0546 -2,0412 0,3921 inf 0,0115 1,0056 -0,9941 0.0046 size -0,0875 0,0778 -0,1653 0.1690 stcom 0,9234 2,4571 -1,5337 0,0034 b = consistent under ho and ha; obtained from xtlogit b = inconsistent under ha, efficient under ho; obtained from xtlogit chi2(10) = (b-b)'[(v_b-v_b)^(-1)](b-b) = 8.94 prob>chi2 = 0.0131 hausman's test will suggest the use of one of two estimation methods (estimation methods with random or fixed effects). this test makes it possible to determine if the coefficients of the two estimators are statistically different. the idea is that under the null hypothesis of independence between the errors and the explanatory variables, the two estimators are unbiased, so the coefficients should differ little. the result follows a law χ2 with k-1 degree of freedom. the comparison of the tabulated value of χ2 (k) at 95% with that calculated from the hausman test can lead us to specify the estimate in fixed or random effect. this test provides us with an idea of the nature of fixed or random effects. the table indicates a probability lower than 10% which implies that the effects are fixed in our study. descriptive statistics and pearson correlations table 2. descriptive statistics variables min max mean std. dev. roa 0.115 0 .188 0.037 2.076 qgb 0 0.724 0.343 0.243 liq 0 0.623 0.187 0.081 cb 0.083 0.656 0.545 1.279 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 33 msh 3.01 5.152 2.065 0.097 qs 0.17 0.336 0.211 0.043 gender 0.12 0.448 0.324 0.115 div -3.167 5.019 0.933 0.615 inf 3.452 8.589 5.016 0.407 zize 1.058 9.483 6.562 1.045 st-com 0 1 0.681 0.012 the table presents the descriptive statistics of the determining factors of the profitability of islamic banks over the period from 2005 to 2018. the roa has an average value of 3.781% and varies between -0.1156 and 0.1865 with a standard deviation of 2.0746. this ratio tells us about the overall profitability of islamic banks. the capitalization varies between 0.083 and 0.656 and registers an average of 0.545. this implies that islamic banks are strongly solid and capitalized in the face of financial shocks. the quality of banking management registers an average value of 0.34 and scales between 0 and 0.724 with a standard deviation of 1.2434. this implies that islamic banks during the study period suffer from a lack of efficiency in terms of quality of management. liquidity is on average 18,726% and varies between 0 and 7,893. this tells us that liquidity is important in islamic banks despite the disruption of economic conditions. islamic bank has a low market share. on average, this ratio registers a value of 2.065 and ranges between 3.01 and 5.15. this ratio provides us with an idea of its role in boosting the economy. the quality of service reaches an average value of 21% and varies between 17 and 33%. an islamic bank attaches importance to customer retention and adopts customer communication strategies. the presence of the woman or the sexual gender records an average of 32% and balances between 12 and 44% of the employed workforce. for political and cultural considerations, the presence of women is of considerable importance and gives an idea of the degree of openness to female skills and their weight in islamic banks. this factor allows for more creativity and productivity. diversification averages 0.945 and reaches a maximum of 5.019. islamic banks seek to diversify to improve their productivity and profitability. this requires adequate means and mechanisms to ensure this objective. inflation has an average value of 5.016 and ranges between 3.452 and 12.543. the unstable macroeconomic conditions caused by the spread of corruption, the supreme crisis and the events of the spring in certain arab countries weighed heavily on their economies. the size of the islamic banks registers an average value of 6.562 and varies between 1.058 and 9.483. large banks are more efficient than small banks. staff competence ranges from 0 to 1, an average of 68%. islamic banks by attracting qualified personnel commit to training them by various means to achieve objectives related to productivity, survival, competitiveness and profitability. table 3. pearson correlation matrix r o a q g b l iq c b m s h q s g e n d e r d iv in f z iz e s t c o m roa 1.000 qgb 0.083 1.00 liq 0.043 0.671 1.00 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 34 cb 0.324 -0.151 0.179 1.00 msh -0.351 0.674 -0.039 0.538 1.00 qs -0.337 -0.476 -0571 -0.389 0.045 1.00 gend er 0.342 0.376 0.095 0.034 0.066 0.041 1.00 div -0.506 0.023 -0.275 -0.093 0.527 0.115 -0.073 1.000 inf 0.198 0.059 -0.011 0.043 0.381 0.056 0.612 -0.107 1.00 size 0.651 0.561 0.042 -0.562 0.018 0.623 -0.143 0.301 0.106 1.00 stcom -0.483 0.642 -0.007 -0.471 0.067 3 0.394 0.223 0.573 -0.431 0.005 1.00 the aim of the pearson correlation matrix table is to detect whether there is a multicollinearity problem between the variables introduced into our model. in this sense, anderson and al (1990) have shown that any correlation coefficient greater than 0.7 indicates a potential problem. ben ali, (2017) sets a critical value equal to 0.7 from which a serious colinearity problem between the independent variables is pronounced. the majority of variables are weakly correlated with each other. our results indicate that the market share, the quality of service, the diversification and the skill of the workforce employed are negatively correlated with the return on roa assets. the quality of banking, liquidity, capitalization, gender, inflation and size seem to be positively correlated with roa profitability. the correlation between the variables is generally accepted and poses no problem. econometric estimation and interpretations of the results table 4.econometric estimation (*,**, *** : the coefficients are significant at the 10%, 5% and 1% thresholds, respectively) the quality of bank management has a positive and significant impact on profitability (p ˃ | z | = 0.00). this implies that islamic banks are efficient in the conduct of their operations and the management of their assets and means the ability of revenues to cover costs, which contributes to improving their profitability. variables coef z p>|z| constant -0.176 1.762 0.081* qgb 1.824 4.903 0.000*** liq -0.169 -1.290 0.002** cb 1.194 2.528 0.000*** msh 0.020 1.667 0.208 (n/s) qs 2.520 1.076 0.012** gender 0.207 2.471 0.004** div -0.017 -0.84 0.031** inf 0.012 1.323 0.188 (n/s) zize -0.156 1.312 0.243n/s st-com 0.003 3.258 0.000*** https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 35 liquidity has a negative and significant impact on profitability (p ˃ | z | = 0.002). islamic banks are subject to a lack of liquidity. they must have a level of liquid assets to meet their short-term commitments. this is justified by the absence of a secondary market on which banks can refinance in case of need. in this sense, they must constitute a reserve to protect themselves against a situation of illiquidity. capital adequacy has a positive and significant impact on profitability (p ˃ | z | = 0.00). this result reflects the ability of islamic banks to withstand loss shocks at critical moments. the higher this ratio, the stronger the strength of islamic banks against shocks. market share has a positive but not significant impact on profitability (p ˃ | z | = 0.208). islamic banks seem to occupy a market share considered to be low. generally, the best performing banks have a high market share. the quality of services has a positive and significant impact on profitability (p ˃ | z | = 0.012). this means that achieving high quality service means putting in place reliable strategies in order to improve customer confidence in the services offered. this allows the creation of an environment of innovation and creativity and more quality. islamic banks have a vested interest in strengthening their communication strategy with their customers, which also contributes to improving their reputation. the gender has a positive and significant impact on profitability (p ˃ | z | = 0.004). the presence of women among human resources is a favorable factor in improving the profitability of islamic banks. indeed, the mixed environment creates competition and motivation. in addition to the psychological effect, availability and patience, women have the mental and behavioral capacities to perform all the functions assigned to them, which improves the profitability of bi. in the middle east and north africa region, the majority of countries are adopting a proactive policy in favor of women’s rights and the elimination of gender inequalities. the gender thus involves adopting and implementing innovative equity measures as well as human resources management based on skills and performance criteria. diversification has a negative and significant impact on profitability (p ˃ | z | = 0.031). this result is explained by the fact that the most diversified banks suffer a high degree of risk. islamic banks do not have enough log experience to engage in diversification which can be a source of cost. inflation has a positive but not significant impact on profitability (p ˃ | z | = 0.188). inflation depends on expectations. islamic banks take a proactive view of the real economy that fights inflation. size has a negative but not significant impact on profitability (p ˃ | z | = 0.243). the sign of this variable is ambiguous in the literature. generally, the larger the size of the banks, the more experience they have in promoting economies of scale and thus improving competitiveness and performance. staff competence has a positive and significant impact on profitability (p ˃ | z | = 0.000). this result implies that islamic banks give importance to staff training in order to increase competitiveness and profitability. otherwise, the lack of qualified and competent personnel exposes the islamic bank to risks. islamic banks are responsible for developing human capital, which manifests itself in individual and collective know-how. conclusion the islamic finance industry is growing in importance and attracting the attention of researchers. this phenomenon which draws its legitimacy from the precepts of sharia prohibits usury or even https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 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(2016). is islamic bank profitability driven by same forces as conventional banks?,international journal of islamic and middle eastern finance and management, 9(1), 46 – 66. 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.emerald.com/insight/search?q=shaista%20wasiuzzaman https://www.emerald.com/insight/publication/issn/1558-7894 https://www.emerald.com/insight/publication/issn/1558-7894 https://www.emerald.com/insight/publication/issn/1558-7894 https://scholar.google.com/citations?user=eef6obkaaaaj&hl=fr&oi=sra indian journal of finance and banking vol. 5, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 56 empowering women self help groups through microfinance during covid-19: a case study of women shg dr. richa sharma assistant professor sharda university, india e-mail: richz2009@gmail.com dr. saurabh mishra assistant professor department of management studies indian institute of information technology allahabad, india e-mail: saurabhmishra@iiita.ac.in dr. shashikant rai assistant professor department of management studies indian institute of information technology allahabad, india e-mail: shashikant@iiita.ac.in abstract the paper describes the mitigating effect of self-help groups in india during and post covid-19 situation. the study examines the potential opportunities and challenges concerning the contextual differences across and within the countries. self-help group has been important in empowering its members by providing opportunities for livelihood support and income generator during the covid-19 situation. the self-help group played a very important role during the covid19 situation as half of the shg was involved in community awareness and infection prevention activities in their community. the study identifies a potential mechanism through which women's groups may be affected by covid-19 situations. keywords: shg, covid-19, micro-finance, social development, local community. jel classification codes: g21, i3. introduction just like other disasters this too has had hits the vulnerable more and had a differential impact on men and women. women are more vulnerable than men in various ways which reveals the continuing gender inequality concern especially in the case of the developing world which was also proved during the outbreak of 2014 ebola and zika virus of 2015 (davies & bennett, 2016).shg has played a major role across the globe in reducing the challenges of livelihood, especially among women. these groups have been very important in generating income for the mailto:richz2009@gmail.com mailto:saurabhmishra@iiita.ac.in mailto:saurabhmishra@iiita.ac.in https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 57 vulnerable section of the society during such pandemic situation. the government of india supporting these sections continuously by various schemes such as daynrlm under the ministry of rural development (mord), which employs around 69 million women under shg (tankha, 2012). for the last 15 years mission is working for the livelihood of poor rural women and has been a valuable contributory source during the pandemic time. shg has contributed holistically towards the engagement of the community for social and economic needs during the outbreak of a pandemic. shg group which is mostly represented by females is creating awareness among in local community through phone calls, wall painting, pamphlets, and social media. the effort of these shg has consolidated to work on the issues such as the use of masks, social distancing, and psychosocial issues of migrants, quarantine, mental health, and well-being of elderly people. these shg has been very important in dealing with the current pandemic situation as thorough their decentralized (rathod, & pooja, 2015). these sgh has been very important in dealing with the current pandemic situation as through their decentralized production around 20,000 shg produced over 19 million masks and 100,000 liters of sanitizer all over india. due to their production at the local level, it has been delivered to the market without involving huge costs for logistics and transportation. shg has also initiated work through vulnerability reduction fund or with the support of state governments and local administration especially in maharashtra such as mahila arthik vikas mahamandal (mavim)and similar other groups, played a crucial role in combating the socio-economic effect of pandemic (mengstie, & singh, 2020; mahajan & kamble, 2011).mavim has contributed around 11 lakhs rupees in state government relief fund through running donation campaign at the community level. jeevika an organization in bihar has used information and communication technology to spread awareness and preparedness during the tough time. many have also used interesting measures in spreading awareness of the pandemic through the number of activities such as wall painting done by prerna in up to communicating the message of social distancing. to deal with deprived migrants workers some shg such as in jharkhand opened a 24×7 helpline called didi to provide authentic information to migrant laborers during the evacuation and return process to their hometown. shg played an important role in financial inclusion in rural areas. during the distressing time, these women shg were helping with the distribution of pensions by providing door to door services to the remote communities to access their account credit from the dbt scheme. the women's are worst suffered during the tough time but through this shg they played a very important role by providing safety to the society through the vulnerable social group during the tough time (llewelyn, 2006) history micro-financing was introduced in asian nations within the eighties as an answer to economic conditions and to empower ladies. being one of the best schemes for rural credit microfinance store faced a lot of challenges in the rural areas (rogaly, 1996). micro-finance may be a style of banking service provided to people who have issues in accessing formal monetary services. the benefit of microfinance is for those who fall into a low-income group and do not have any financial support in rural areas of the country (singh, roy & pandiya, 2020). in developing countries like asian nations, monetary services through formal channels don't meet the strain of the agricultural poor, thus micro-finance will facilitates small-scale businesses by providing them larger monetary stability. one of the major initiatives was taken by kudumbashree, in kerala in 1998. this female-led community organization of neighborhood teams (nhgs) brings girls from https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 58 rural and concrete areas along to fight for his or her rights and helps empower them (venugopalan, 2014). earlier micro fiancé anticipated providing credit to poor in semi-urban areas at the subsidized rate of interest through organized financial institutions. the current microfinance system targets rural and urban poor households with more emphasis on women borrowers. the finance for these assets is based on the principles of borrower knows the best. microfinance creates access to skilled labor through training and education social capital built through representatives by promoting a democratic system enabling poverty reduction. it serves as a tool for liquidity for the poorest in society this helps them in strengthening their consumption pattern and reduces their condition of vulnerabilities. figure1. the flow of microfinance financial resources table 1. lists of top 7 mfis s.no. name of mfi 1. arohan financial services pvt ltd. 2. disha microfin pvt ltd. 3. ujjivan financial services ltd. 4. skdrdp 5. equity as micro finance ltd. 6. madura micro finance ltd. 7. grameen koota financial services pvt. ltd https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 59 microfinance in india prof. mohammad yunus is a name for microfinance and is known as the father of micro-credit for his research work in the year 1979 when bangladesh was in a serious condition of famine. on his visit to the jobra village of bangladesh prof. yunus encountered the problems of poor women who were forced to sell their products at very low prices due to problems of poverty. he helped some poor by providing a small loan which has been denied by the bank due to lack of collateral security against the loan. nabard in india is a bank especially designed to work for rural and poor people and their upliftment took this idea and started the concept of micro finance in india. women condition in india women in india contribute 29% of the labor force, less than the world average which is around 35% in 2004. most of the women's work goes unpaid as the major contribution is towards unorganized and unprotected sector (fletcher et al., 2017). women are less represented in higher educational institutions and organized sectors which also includes the business leader. women contribute around 40% of the labor force in the agriculture sector having a meager 9% landholding in india (nayak & mahanta, 2009). the formal financial system is also not very welcoming for women. in comparison to 37% of the global average contribution towards gdp, women in india contribute a meager 17%. in addition to these women face great physical insecurity (balagobei & aravinthakumar, 2019; sundari, 2020). considering the other above factors microfinance can play important role in poverty elevation and women empowerment as the credit system so designed will act as an instrument to bring social and economic and changes in poor women's condition. the formation of a self-help group with microfinance facilities will help in poor women's empowerment and development. these women organizations act as a separate democratic group with the important instrument to change. self help groups: concepts and measures shg is based on the concept of microcredit which is instrumental for changing the condition of poor people. the concept of shg is a group of people helping each other to achieve the economic and social goal for the betterment of society. shg occupies a large share in the credit disbursement procedure. shg playing a very important role in achieving the objective of economic planning which leads to the development of women and hence leads to women empowerment. shg comprises 10 to 20 women who belong to the same class or category to resolve common problems (agrawal, 2020). apart from providing the opportunity of financial independence these shg also help in the development of thrift and saving among the members. the regular saving is pooled into a fund that is disbursed among the members at an agreeable rate of interest. literature review the study reveals that the self-help group helps in the economics and social development of rural women. it is a group of women who come together to achieve a common goal or objective. the self-help group has developed confidence and provided continuous support to the poor rural women. the self-help group created many women entrepreneurs at the village level and developed leadership skills among the rural women (dhakal & nepal, 2017; kalu & attamah, 2021). the government of india through a microfinance scheme has supported these shg so that it could continue the journey to elevate the poverty in rural areas. it is the shg that has provided https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 60 a lot of support in terms of economic and social to the poor women of rural india by providing them a better opportunity to work and earn. shg is one of the best self-sustain and self-created models for women empowerment (kumar, 2020). self-help group has helped the women's to develop and create micro-enterprises in the rural areas of the country. the self help group has given a new identity to the aural women and created the confidence and environment for the community development program.shg has been important towards poverty elevation and women empowerment. women empowerment helps in realizing their identities, power, and potentially in every aspect of life. the fruits of empowerment can only be achieved when women are more confident, self-motivated, and strong and have more values with greater involvement in family matters. a study by manimekalai and rajcswari (2001) revealed that the shg is the platform that created an opportunity for those having un-utilized skill knowledge.shg act as an important tool for poverty elevation and women empowerment. this empowerment aims to realize identity and power in the very sphere of life. women empowerment through shg play an important role towards rural tribal poor especially women in motivating and supporting through these services within and outside such group (murria, 2020). vishnuvarthini and ayyothi (2016) the women associated with shg are getting more benefits in terms of health and socioeconomic development through the negative effect of shg is not discussed in detail. shg also helps in developing and maintaining socio-cultural balance in the country. methodology research statement the research statement studied is entitled, “empowering women self help groups through microfinance during covid-19 a case study of women shg in meerut district” the present study focuses on the analysis of the performance of women self-help groups in meerut with the help of mean, standard deviation, percentage, chi-square analysis, and t-test. research objectives the broad objectives of the study are as follows:  the impact of microfinance in women empowerment, during covid-19.  to study the income, expenditure, and savings of the members during covid-19.  to analyze the performance of independent women shgs, during covid-19.  to understand the role of women's self-help groups in creating employment opportunities and poverty alleviation in meerut. scope of the study the present study has been undertaken to evaluate the performance of female shgs and their impact on the socio-economic conditions of members during covid-19 in meerut district. the study is based on empirical evidence gathered from the selected respondents to study the progress of shgs in the meerut district. further, attention has also been focused on evaluating the performance of sample female shgs and efforts have been made to examine how far shgs help in the upliftment of socio-economic conditions of members. nature of data and sources of data the collection of the data is an essential part of the research. the primary and secondary data have been collected for the research. the primary data has been collected from the meerut https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 61 district. the secondary data has been collected with help of various sources like newspapers, research papers, articles, and magazines and from the website. sampling meerut district comprises of twelve blocks viz. durarara, hastinapur, jani, kharkhoda, machhara, mawana, meerut, parikshitgarh, rajpura, information from members rohtak, sardhana, sarurpur. the convenience sampling method was used to select the sample for selfhelp groups and member respondents. sampling size the sample size is adopted as 300 women from female shgs and 300 men from male shgs in meerut district based on the following formula. n = z2.p.q.n e2 (n – 1) + z2.p.q……………………………………. (1) where, n = sample size n = population z = value of standard variance at 95% confidence level (1.96) p = probability of success (0.5) q = probability of failure (0.5) e = acceptable error 4% of true value [calculated using the formula e = z. (p.q/n), where z = 1.96] testing of hypothesis the study endeavors to examine the association between demographic variables and the socioeconomic condition of members, for which the under mentioned hypotheses were framed.  h0: there is no significant relationship between the amount of saving and the amount of loan extended to the members, during covid-19.  h0: there is no significant relationship between the loan amount and no. of installments, effected during covid-19.  h0: there is no significant difference between the mean scores of family monthly income, expenses, and savings during covid-19.  h0: there is no significant impact of the selected demographic variables on employment generation and women empowerment during covid-19.  h0: there is no significant relationship between demographic variables and the impact of the training program of healthcare products like masks, sanitizers, gloves. data analysis general and household information of the respondents the general and household information of the respondents is carried by using the following parameters: age, gender, category, house ownership, house type, electricity, telephone/mobile, sanitation facility, source of drinking water, respondent's education level, and bank account information and frequency of bank transactions. these parameters are the primary data collected for the analysis. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 62 table 2. age of respondent s.no the age group of respondent no. of respondents percentage 1. 20-30 age 81 27 2. 31-40 age 140 46.6 3. 41-50 age 53 17.66 4. above 50 age 26 86.66 total 300 100 source: compiled by author from primary data survey education level of the respondent the actual education level of the respondent is presented in table 3 in the tabulation of the primary data we divide education level into four groupsgraduation, up to matriculation, up to primary, and illiterate. table 3. education level s.no the education level of the respondent no. of respondents percentage 1. graduation 19 6.33 2. 10 th 42 14 3. primary 128 42.66 4. illiterate 111 37 total 300 100 table 4. marital status s.no marital status of the respondent no. of respondents percentage 1. married 279 93 2. unmarried 21 7 3. total 300 100 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 63 availability of telephone/mobile telephonic communication has proved a very important and significant role in communication during the lockdown and pandemic period. since cell phones and related wireless technologies can be used to solve one of the problems, called, literacy, and it would solve the problem of communication and will help in economic development. mobile communication has bridged the gap of digitalization and has changed the social and economic life in the rural and semi-urban areas during the pandemic. table 5. availability of telephone/mobile s.no variable(telephone connection) no. of respondents percentage 1. yes 177 59 2. no 123 41 total 300 100 results ho: there is no significant relationship between savings and loan amount, during covid-19 the monthly savings cross-tabulation can be seen in and table 5. to find out the relationship between the amount of saving and the amount of loan extended to the members a chi-square test at 0.05 level of significance was used. table 6. amount borrowed * monthly saving cross tabulation factor calculated chisquare value degree of freedom p-value significance level savings 11.910 4 <0.05 highly significant it is noted from the above table that the „p‟ value is less than 0.05 and hence the result is highly significant. ho: there is no significant relationship between the loan amount and no. of installment, during covid-19 the cross-tabulation between the loan amount and no. of an installment is seen in table 6. to find, a chi-square test is used to observe the relationship between the loan amount and no. of installment. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 64 table 7. loan amount and no. of installment cross tabulation factor calculated chisquare value degree of freedom p-value significance level loan amount 52.695 6 <0.05 highly significant it is noted from the above table that the 'p' value is less than 0.05 and hence the result is highly significant. from the analysis, it is concluded that the null hypothesis is rejected and there is a highly significant association found between the loan amount and no. of installment. number of training programmes attended training is the procedure of learning and improving the skill, knowledge, and attitude required for job performance. training helps in optimum utilization and development of human resources. it boosts the morale of the person by motivation. the group members were given the training to make masks, sanitizers, and gloves for battling against covid-19. table 8. number of training programmes attended s.no no. of training programs attended no. of respondents percentage 1. 1 80 26.66 2. 2-3 154 51.33 3. 4-6 34 11.33 4. above 6 32 10.66 total 300 100 table 9. impacts of training programmes s.no impact of training programs no. of respondents percentage 1. making sanitizers from spirit and alcohol 95 31.66 2. making diy face masks 125 41.66 3. making gloves 38 12.66 4. other sessions 42 14 total 300 100 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 65 ho: there is no significant relationship between education level and the impact of the training program on the working efficiency of shg. table 10. association between impact of training programme attended * level of education factor calculated chisquare value degree of freedom p-value significance level education level 6.679 9 >0.05 not significant from the above table, we can see that the 'p' value is more than 0.05 and the result is not significant. from the analysis, it is concluded that an alternate hypothesis is accepted and there is no significant association found between the impact of training program attended and education level. employment generation microfinance and employment are highly correlated as per the study. microfinance provides an opportunity for those poor and vulnerable who are deprived of the traditional banking system. study shows that the microcredit and shg play a very important role in reducing the unemployment rate. during the covid-19 pandemic, the self-help group members work very hard to come up with financial obstacles because of financial breakdown in the system, but through consistent efforts and moratorium period granted by the banks, they were able to sustain their livelihood during a pandemic. ho: membership experience does not influence employment generation. employment generation exists as a dependent variable on the independent variable on membership experience. as per the result, p≤ 0.001 and f≥1 (i.e. 12.645) hence from a null hypothesis is rejected which shows a significant impact of membership experience on employment generation. the duration of membership has a positive correlation with employment generation. the membership of shg has an impact on employment generation and people after joining shg during covid-19 believe that they are more oriented towards work to fight their financial shortcomings and started their small ventures by making candles, pickles, masks, sanitizers, etc. table 11. employment generation * membership experience n mean std. deviation f p membership experience up to 1 year 146 3.70 1.217 1-2 years 106 3.53 1.347 12.645 <.001 2-3 years 48 4.54 .504 total 300 3.77 1.230 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 66 ho: age group does not influence employment generation. age group is the independent factor and employment generation is considered as the dependent factor. to compare the mean scores of various age groups, anova test procedures are applied. it is noted from the result that the 'p' value is more than 0.05 and the f value is more than one (2.495). hence the result is not significant. from the analysis, it is concluded that an alternate hypothesis is accepted and there is no significant impact of age group on employment generation. there is no significant difference among the mean scores of the age group of shg members. it is concluded that age group does not have a significant impact on employment generation. age is not the factor that influences the employment opportunity for women to be a part of shg. ho: marital status does not influence employment generation. it is noted from the result that the 'p' value is less than 0.05 and the f value is more than one (3.247). hence the result is highly significant. from the analysis, it is concluded that the null hypothesis is rejected and there is a highly significant impact of marital status on employment generation. there is a significant difference among mean scores of the marital status of shg members. it is the old belief, a man's birth completes when he takes a wife with him'. the study proves that the majorities of the members of shg are married and are members of shg and their family supports them to work and become more independent. during a pandemic, both men and women are working hard to earn bread butter for their life. women empowerment ho: education level does not influence women empowerment it is noted from the above table that the 'p' value is less than 0.05 and the f value is more than one (3.437). hence the result is highly significant. from the analysis, it is concluded that the null hypothesis is rejected and there is a highly significant impact of the level of education on women empowerment. there is a significant difference among mean scores of the level of education of shg members. it is concluded that the level of education has a significant impact on women's empowerment. the educated women can help and guide others in the group and can create the group working more efficiently. table 12. education level does not influence women empowerment n mean std. deviation f p level of education graduation 19 3.32 1.293 3.437 .017 high school 42 2.93 1.386 primary 128 3.51 1.409 illiterate 111 3.72 1.370 total 300 3.49 1.401 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 67 ho: marital status does not influence women empowerment table 13. marital status does not influence women empowerment n mean std. deviation f p marital status married 279 3.49 1.404 3.070 <0.001 unmarried 21 3.57 1.399 total 300 3.49 1.401 the above table shows p ≤ 0.001 and f ≥ 1 (3.070). we can see that the result is highly significant and the null hypothesis is rejected which shows marital status has a high impact on women empowerment. family monthly income, expenses, and savings income is one of the main indicators to measure the standard of living of members. the data regarding income, expenses, and saving of beneficiaries was determined at two points of time i.e. pre and post shg membership during covid -19. the family monthly income, expenses, and savings of the sample women shgs' members are analyzed before and after joining shg in this section. null hypothesis: h0: there is no significant difference between the mean family monthly income, expenses, and savings before and after joining shg, during covid-19. table 14. paired samples statistics mean n std. deviation std. error mean pair 1 income before joining shg 2037.00 300 413.725 23.886 income after join shg 2300.10 300 404.469 23.352 pair 2 expenses before joining shg 1722.33 300 391.402 22.598 expenses after joining shg 1907.60 300 385.196 22.239 pair 3 savings before joining shg 99.50 300 34.739 2.006 savings after joining shg 158.93 300 38.372 2.215 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 68 table 15. paired samples test paired differences t df sig. (2tailed) mean std. deviat ion std. error mean 95% confidence interval of the difference lower upper pair 1 income before joining shg income after join shg -263.100 100.57 4 5.807 -274.527 251.67 3 45. 310 299 .000 pair 2 expenses before joining shg expenses after joining shg -185.267 53.871 3.110 -191.387 179.14 6 59. 566 299 .000 pair 3 savings before joining shg savings after joining shg -59.433 18.197 1.051 -61.501 57.366 56. 572 299 .000 the table also shows that the t' statistics, calculated as the ratio of the difference between sample means divided by the standard error of the difference. since the p-value is less than 0.01, the hypothesis was rejected. hence there is a highly significant difference in the mean family income, expenses, and savings after joining the shg during covid-19. this indicates that there is a significant increase in the mean scores of family income, expenses, and savings after joining shg showing the economic empowerment of women shgs members. findings and suggestions  promotion of high saving habit in female shg it is noticed that more than one-half of the sample respondents of female shgs have become members for promoting saving habits and inculcating the habit of saving through their surplus income. it indicates that female shgs have pervaded the minds of women and thereby inculcated the habit of thrift and savings among rural and urban poor women during a pandemic which has helped them to fight the difficult times in the meerut district.  increase in the family income of group members the study also reveals that there is a significant increase in the mean scores of income, savings, and expenses level of members of female shg. after joining the group the income level of members is higher and it is shown their sources of income have increased after joining the group. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 69  marital support the majority of the respondents are married and marriage is support in disguise. marital status has a significant impact on the life of female members of self-help groups. married people feel more confident than unmarried ones. marital status has a highly significant impact on the social aspects of female shg.  fighting spirit during pandemic though the stitching and tailoring are not the primary or part of economic activity as for as the shg is concerned but during the cover pandemic crisis these shg workers decided to produce the mask so that the shortage of mask in the market can be mitigated.  communication empowerment one of the major contributions by the shg in the district was to make the women be connected by providing them training and information regarding the use of internet technology with help of smart phones. they have been trained on how to make use of social media.  female shg helps to reduce poverty and helps in women empowerment after joining the group female members feel more financially empowered and support their family members socially and economically. they feel the sense of pride of being recognized by the public in general as an independent working member supporting her family. poverty alleviation is higher in female shg.  the opinion of different training camps the study found that all the respondents of female shg underwent a training program to fight against the pandemic. they learned to make health care products some have started a new business from attending the training program and some went on with their traditional business. the new businesses that are undertaken by them include mask making, herbal disinfectant, and hand washers, coir products, agarbatti, pickles, fancy stores, etc. conclusion in the covid-19 pandemic, it is implausible to mark the tedious and courageous efforts put in by all the volunteers to meet the essential requirements. the voluntary organizations/individual volunteers or other support agencies are consistently working to reach out to such people with food and other essential commodities. women's self-help groups are working extremely great in india and are fighting to meet the daily challenges with full courage, safety, and enthusiasm. despite the own sufferings, our women are collectively working around the area and taking care of the work with social distancing, making masks, sanitizers, gloves, cooking, and serving hot food to children in the initial days of the lockdown and also the whole pandemic period to sustain their nutrition. women self help groups are an invaluable resource in these difficult times. over the past two decagons of the bank's association, india's shg movement has developed from microsavings and credit groups that hunted to empower poor rural females, into one of the world's largest platforms of the poor. today, 67 million indian women are active members of 6 million shgs. the groups beyond the country are functioning intensely to make up the shortfall of masks and personal protective equipment (ppe). the attempt of these women functioning in shgs has been remarkable https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 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(2014). influence of kudumbasree on women empowerment–a study. iosr journal of business and management, 16(10), 35-44. retrieved from https://kudumbashree.org/storage/files/8zhyr_studyrepot11.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/) a comparative study on investment pattern of self-employed & start-up entrepreneurs with special reference to pan india indian journal of finance and banking vol. 5, no. 2; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 62 a comparative study on investment pattern of selfemployed & start-up entrepreneurs with special reference to pan india kannadas sendilvelu assistant professor of accounting and finance sdm institute for management development mysuru, india-570011 e-mail: kannadas100@gmail.com dr. manita deepak shah professor and associate dean jain (deemed to be) university bengaluru, india-560069 e-mail: manita2736@gmail.com abstract this study connotes the influence of demographical factors on the behavior of two categories of investors especially when they are pre-occupied with commitments and constraints. it also includes the subsequent effects on their risk appetite. it focuses on the fact that investors are not always rational in nature, have limits to their self-control, and are influenced by their own limitations and bounded knowledge. this study is a comparative study between the investment pattern of self-employed and entrepreneurs. for the purpose of the study, we have taken 100 samples from start-up entrepreneurs and self-employed. the data used in the study are both primary and secondary. using the random sampling technique, the responses were collected and analyzed using graphs and tables. many developments were seen during the analysis. the analysis was carried by connecting the factors which are influential on one another and chi-square test tools were utilized. overall, the study has given new perspectives of the financial behavior of both self-employed and entrepreneurs which can further be analyzed by expanding the scope of the study and samples collected. there is still a lot of scopes to study and research in the area for contributing to the field of behavioral finance with various biases influencing the investing behavior. keywords: self-employed, entrepreneurs, investment pattern. jel classification codes: g40, g41. introduction self-employed is the one who works for oneself as a freelancer or the sole proprietor rather than an employer where an entrepreneur is the one who organizes and operates a business or multiple businesses by giving employment to another person or a set of people, taking on greater than normal financial risk in order to do so as there are multiple families are depending on this job for their bread mailto:e-mail:%20kannadas100@gmail.com mailto:manita2736@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 63 and butter. typically, the majority of cottage and household business owners can be grouped in this category of "self-employed". they actually begin with an interest and a skill or a particular skillset in any particular domain or more and search for an opportunity to prove him/herself and reaching the destiny of maximizing his/her wealth. here they play the roles of both employee and employer. on the other hand, an entrepreneur is all about risk and reward. they think out of the box for the best way to succeed and move onto their prospective venture. while the businesses might be of self-interest or a passion of start-up and leading to success that drives the energy each and every day. at times, the entrepreneur turns into a promoter too. entrepreneurs differ from others based on certain demographic factors. they are more individually oriented than the rest. their responsibility quotient and effort on risk-taking ventures are distinguishing characters (beugelsdijk & noorderhaven, 2005) when it comes to a going concern concept, if a self-employed is unable to function or get stuck with other commitments, the business starts getting stagnant and gradually gets eroded but in the case of an entrepreneur, the others in the team who are with the entrepreneurs move on with the business by keeping the vision of the entrepreneur and the business keeps moving forward. generally, the selfemployed are reserved in risky aspects in the business and conservative while taking up a risky investment though it is comparatively tinier than an entrepreneurial venture. the self-employed person tries to do everything on his own because mainly due to a lack of confidence in others efficiency and efficacy. on the other hand, the entrepreneur seeks challenging projects which involve huge risks and tries to involve teamwork, and delegates the suitable task based on the concept of "right people for the right job at the right time". a lot of passionate and talented entrepreneurs who often gamble with the risk of fulfilling their dreams. when we distinguish between the self-employed and an entrepreneur, the equilibrium rate of self-employment seems to be independent of the level of economic development, whereas the equilibrium rate of entrepreneurship is negatively related to the economic development of the country (van stel, wennekers, & scholman, 2014). in the case of investment ideas and strategy of investment, as a normal human being both the category want to come up in life and increase their wealth. but when it comes to the quality of investment, the quantity of investment, and frequency, there may be a difference due to their vision and goal. of course, the academic qualification varies between the two categories, and based on the earlier research, it is found that an entrepreneur is an upper hand when compared to a self-employed. the entrepreneurs are positively selected on highly return-oriented human capital, but self-employed are negatively selected on those same abilities. entrepreneurs are positively chosen on collateral, but self-employed are not. in other words, entrepreneurship is procyclical, but self-employment is countercyclical (levine & rubinstein, 2018). earning differential cannot be explained by the selection of low-ability employees into selfemployment and is similar for more alternative measures of self-employment earnings and across industries. furthermore, the estimated earnings differentials may play down the differences in compensating across the sectors since the non-monetary benefits are not included in the measure of employee compensation (hamilton, 2000). people who become successful self-employed may differ in many aspects of unmeasured ways from those of unsuccessful self-employed individuals. entrepreneurial ability may come from "nature" or " nurture" or both (kim, 2008). for young start-up entrepreneurs who are still too small to be noticed by vcs and have run through most of their own money trying to take off, having an angel investor betting on their idea is a blessing (bhatnagar, 2011). literature review adamu and shakur (2017) opined that it is essentially crucial to understand certain vital factors which contribute to the most necessary for proceeding towards self-employment particularly from the context https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 64 of entrepreneurial traits and yielding factors which would motivate the potential entrepreneurs to achieve success in self-employment interest and initiatives. saini, anjum, and saini (2011) analysed investor's behaviour, buyers' opinion and notion referring to diverse factors like form of mutual fund scheme, its objective, the function of economic advisors/brokers, sources of statistics, deficiencies in the provision of services, investors‟ opinion referring to factors that appeal to them to spend money on mutual and challenges earlier than the indian mutual fund enterprise and so on. the observe discovered that traders seek for liquidity, simplicity in offer files, on-line buying and selling, normal updates thru sms, and stringent follow-up of provisions laid with the aid of amfi (saini et al., 2011). ranjani and chopra (2011) concluded that the respondents showed widespread focus in subjects regarding funding and private monetary planning. contrary to famous notion, the sample population confirmed attention approximately economic making plans and willingness to take funding decisions referring to non-public finance. however, in retirement planning, the majority of the respondents felt that they had now not competently deliberate for their retirement (ranjani & chopra, 2011). a survey of 201 individual investors was conducted to study the information sourcing by investors, their perception of various investment strategy dimensions, and the factors motivating investment decisions and reported that psychological and sociological factors dominated economic factors in investment decisions (shanmugham, 2000). avinash (2014) analysed the investment behaviour by examining various investment avenues. data analyses revealed that most of the respondents have selected bank deposit as their first option for investment followed by real estate. below 30 years respondents invest more in real estate whereas above 60 years preferred lic policies. full-time salaried people are more aware of different investment avenues (avinash, 2014). patel and patel (2012) examined the behavioural pattern of investments and various investment alternatives among salaried people working in the private sector. data analyses state that majorities of male respondents are intended to invest more. the maximum investment in the range between 1 lakh to 2 lakhs (patel & patel, 2012). kirubakaran (2013) analysed the behaviour of an investor. this study brings out the relationship between risk of investment and protection of investment. nearly 59 percent of respondents stick to the protection of investment rather than risk for good returns. respondents have protecting investment as the main priority (kirubakaran, 2013). research problem to analyze the investment patterns of self employed and start-up entrepreneurs and have a comparative study with respective to their investment behavior. objectives of the study  to understand the investment behavior of the investors, specifically focusing on start-up entrepreneurs and self-employed.  to analyze the risk appetite of the respondents based on the occupation  to analyze the independence of investment decision of the respondents based on the occupation  to analyze the investment horizon based on the dependents of the respondents  to analyze the investment horizon based on the monthly income of the respondents https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 65 scope of the study the present study titled "a study on the factors determining the investment decision of small equity investors" aims to probe into the investment decisions, demographic factors influencing small equity investors, pattern, risk-return perceptions, evaluation of post-investment satisfaction, and the problems associated with different investments and savings pattern of small and big self-employed and the startup entrepreneurs investors in pan india that includes kolkata, chennai, mumbai, and bangalore, etc. limitations of the study the interpretation is done assuming the respondents have given the correct answer. the study is confined to pan india that includes kolkata, chennai, mumbai, and bangalore, etc. so the results may not be the exact reflection of the entire population. research methodology descriptive research the type of study or research used in this study is descriptive. the study is based on understanding personal financial planning at the individual level, be it anyone who is working or business professionals and those who are the potential investors. a quantitative observation is the objective collection of data which is primarily focused on numbers and values – it suggests "associated to, of or depicted in terms of a quantity". results of quantitative observation are derived using statistical and numerical analysis methods. it implies observation of any entity that can be associated with a numeric value such as age, shape, weight, volume, scale, etc. method of data collection primary data: primary data is extensively used in the study. the main method by which this primary data was collected is by questionnaires which were prepared in detail. it was then followed by detailed interviews of respondents. secondary data: this report also uses secondary data to some extent. this was collected by magazines and journals. survey the survey involved collecting data with a prepared questionnaire to self-employed and entrepreneurs. questionnaires were given to both types of people and an interview is conducted to identify their investment behavior patterns. sampling techniques for this study, a non-probabilistic judgmental sampling technique is used. the reason behind going for a random sampling technique is to ensure that the analysis done after the data collection from the sample should not be biased or must not be affected by any influence population the population chosen for this study (to study the investment behavior) are self-employed and entrepreneurs. sample size for the purpose of this study, the total sample size chosen was 100. in that, 54 people were selfemployed, and 46 people were entrepreneurs. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 66 data analysis accumulated data were analyzed and summarized. the patterns were analyzed using the objectives of the study and by applying statistical techniques such as the chi-square test. analysis and interpretation sample size = 100 (self employed = 54, start-up entrepreneurs = 46) figure 1. comparison of age group between self-employed and entrepreneurs from the above figure, we can say that majority of the youngsters prefer self-employment over entrepreneurship. some of the reasons might be, youngsters have a lack of experience regarding managing people, funding capital for the business is hard, and decision making is not as complex when compared to entrepreneurship, less business risk is involved in self-employment, etc. figure 2. comparison of the number of dependents between self-employed and entrepreneur in the above figure, people of the self-employed category have less dependents is because the majority of the self-employed are youngsters whereas people of entrepreneur category have large number people depending on them especially most of the start-up entrepreneurs have 4-5 dependents. the reason for high dependents for start-up entrepreneurs is because of their spouse, children, and their parents who have reached very old age. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 67 figure 3. comparison of monthly income between self employed and entrepreneur in the above figure, compared to self-employed, start-up entrepreneurs have the highest income. the reason is, the size of the business is larger, capital invested is larger, a greater number of people will be working for an entrepreneur whereas, in self-employment, it's a standalone business where only 1 person will be managing everything. also, most of the start-up entrepreneurs are of higher age which means they have been present for a long time and hence are able to generate more and more income than self-employed. figure 4. comparison of percentage of income saved between self-employed and entrepreneur in the above figure, the overall income saved by the self-employed category is more than the entrepreneur category. the reasons are since the business is bigger than self-employment, entrepreneur business needs lots of equipment and tools which costs a lot since there are many people working under start-up entrepreneurs their salary has to be paid and also, compared to self-employed, entrepreneur category have a lot of dependents on them and hence start-up entrepreneurs can‟t save much. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 68 figure 5. comparison of investment decision between self-employed and entrepreneur in the above figure, most of the self-employed businessman‟s decision to invest their savings have been borne by themselves whereas, for start-up entrepreneurs „majority of the times their investment decision has been influenced by family/relatives and their friend‟s circle. since entrepreneurship is a business conducted by a group of people, chances of meeting new people are very high, and especially in india compared to other countries, family members are most of the times actively involved in the business activity, hence family members and friends influence start-up entrepreneurs to go for an investment. but it is different in self-employed since it is a standalone business they must take up independent decisions. figure 6. comparison of types of investment avenues as a first preference between self-employed and entrepreneur in the above figure, both self-employed and start-up entrepreneur groups have invested in those avenues that are associated with less risk evenly as their first preference. the only differences are, start-up entrepreneurs have invested more in gold whereas, self-employed has invested more in real estate. in terms of fixed deposits, both are almost even. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 69 figure 7. comparison of types of investment avenues as a second preference between self-employed and start-up entrepreneur in the above figure, as a second preference, investment in real estate‟s for self-employed has remained the same whereas for gold and fixed deposits has gradually come down and instead scheme like insurance has increased by a large margin. for start-up entrepreneur‟s mutual fund investment has increased by a large margin as a second preference and the fixed deposits have also remained the same regarding their second preference. figure 8. comparison of investment horizon between self-employed and start-up entrepreneur in the above figure, the investment horizons between both the categories have only a minor gap. self-employed businessman has invested more in 4-6 years horizon whereas start-up entrepreneurs have invested more in 6+ year‟s horizon. regarding short-term investments, self-employed is slightly behind the entrepreneur category. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 70 figure 9. comparison of alternative income source other than current employment between selfemployed and entrepreneur in the above figure, under both categories, there is more number of people who don't have income from other sources than the people who have income other than their current employment, but the self-employed category has less people than the entrepreneur category who are earning income from multiple sources. since there are a lot of dependents depending on the people belonging to the entrepreneur category, and also costs of running an entrepreneurial business is very high compared to a self-employed business, it is highly necessary to generate income from other sources other than their current employment. figure 10. comparison of investment factor preference while investing, between self-employed and start-up entrepreneur in the above figure, in both the categories, the liquidity factor is given the least preference. for the purpose of safe and secure investment, start-up entrepreneurs have given a very high preference than the self-employed category by a very large margin that is, 56% of the start-up entrepreneurs want their investment to be safe and secure whereas only 31% of the self-employed are expecting the same. instead, the self-employed category gives more preference towards high returns than start-up entrepreneurs that is, 43% for self-employed and 35% for entrepreneurs. a few percentages of people in the self-employed category have a preference towards tax-exemption, which has motivated them to go for investment whereas; in start-up entrepreneurs none of them have opted for tax-exemption. the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 71 reason why a large majority of start-up entrepreneurs have opted for safety and security is because, since the majority of start-up entrepreneurs belong to the older age category, they might not be inclined to take more risk regarding their investment decision. similarly, a greater number of youngsters are expecting high returns than safety. figure 11. comparison of degree of risk undertaken between self-employed and start-up entrepreneurs in the above figure, the majority of the people who belong to the self-employed category are ready to take more risk than the ones belonging to the entrepreneur category that is, 45% of the start-up entrepreneurs are ready to take less risk whereas in self-employed it only 33%, on the other hand, more self-employed people are ready to take both moderate risk and high risk more than start-up entrepreneurs that are 48% and 19% for self-employed respectively and 46% and 9% for start-up entrepreneurs respectively. again, this might be associated with age as well, since the large majority of the youngsters are self-employed, regarding this research, it can be concluded that youngsters might have more appetite for risk than older people. figure 12. comparison of rate of return between self-employed and start-up entrepreneurs in the above figure, a high rate of return is associated with high risk, meaning people who expect high return should also be ready to undertake high risk. since more self-employed people are ready to take high risks, they have opted for more returns. even though the percentage of people who are ready to take more risk is the same between both the categories which is 2%, still self-employed people are expecting more returns. the reason is, out of 100 sample sizes, 54 are self-employed and 46 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 72 are start-up entrepreneurs. 2% of 54 people is higher than 2% of people out of 46 people. even though a greater number of people belonging to the entrepreneur category have opted for less to medium level of risk, they are still expecting high returns. the reason may be because, people of the entrepreneur category have a greater number of people depending upon them, hence they must conserve a lot of money and try to earn as much as possible with as minimum risk as possible. figure 13. comparison of awareness about mutual fund and equities related avenues between selfemployed and start-up entrepreneurs in the above figure, under both the categories, almost all the people belonging to both selfemployed and start-up entrepreneur group are aware of the mutual funds and equities related market barring only a few percentages of people that is, 9% for self-employed and 7% for start-up entrepreneurs. therefore, there is only a minor difference between both groups who are unaware of the mutual funds and equities-related avenues. figure 14. comparison of investment in mutual funds and equities related avenues between selfemployed and start-up entrepreneur in the above figure, under both the categories there are a greater number of people who have invested in mutual funds and equities-related avenues than the people who have not yet invested so far. but the people who are running self-employed business have a higher majority of people who have invested so far that is, 65% of the self-employed compared to the entrepreneur category that is, 52% of the people. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 73 figure 15. comparison of source of information regarding mutual funds and equities related avenues between self-employed and start-up entrepreneur in the above figure, for both the categories, the source of information about investing in mutual funds or other equities-related avenues, are equal regarding through the mode of advertisement and banks. for self-employed, their peer groups have informed them more than the peer groups of the entrepreneurs. but for start-up entrepreneurs, some of the people have heard from a financial advisor that is 7% of them whereas, for self-employed none of them have found this information through an advisor. regardless, for both the categories mode of advertisement is the major source of information for them. figure 16. comparison of diversification of portfolios during the time of market crisis between selfemployed and start-up entrepreneur regarding the self-employed, 40%(combining both the parameters that are, "strongly agree" and "agree") of the people are averse to risk which is very less when compared with the start-up entrepreneurs which is 56%(combining both the parameters that are "strongly agree" and "agree"). overall, 38% (combination of “disagree” and “strongly disagree”) of the self-employed are ready to take more risk regarding their investments when compared to start-up entrepreneurs which are 35% (combination of "disagree" and "strongly disagree"). even though the risk-takers in self-employed are more than the start-up entrepreneurs, the gap is still not that wide between them. there are far many people in the self-employed category who have opted for a "neutral" opinion that is 22% of them compared to the entrepreneur category which is only 9%. this is a point of indecision for the selfemployed meaning they are unsure about what to do regarding their investment during the time of https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 74 market risk. the reason why start-up entrepreneurs are not taking a huge risk is because of their age and entrepreneur categories have a lot of people depending upon them. figure 17. comparison of degree of expertise regarding investing in stock or bond mutual funds between self-employed and start-up entrepreneur regardless of the category, the majority of the people do not have any prior experience or expertise regarding the investment in individual stocks or bond markets. however, more than the selfemployed, entrepreneur category people are even further in-experienced when it comes to investing in individual stock or bond markets that are, 46% for self-employed and 63% percent for start-up entrepreneur. overall, self-employed people have much more experience on their hands regarding the expertise in investing in stock or bond markets. figure 18. comparison of preference for a personal financial planner between self-employed and startup entrepreneur the majority in both the categories have agreed they have/need a personal financial planner to manage their portfolio of investments. the only difference is that the people in the entrepreneur category prefer to hire a personal financial planner more than the people belonging to the selfemployed category. the reason why both the groups have opted to hire a personal financial planner might be since; managing both the business and investment portfolio simultaneously might be very difficult hence hiring a personal financial planner will ease their burden. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 75 hypothesis testing objective 1: to analyze whether age has an impact on the risk appetite of individual-based on occupation research hypothesis – 1.1: the risk appetite of self employed is dependent on age. null hypothesis (h0): the risk is independent of the age of a self employed. alternative hypothesis (h1): the risk appetite of a self employed is dependent on age. type-i error: p (reject h0 / not reject h0) = α p (age and risk appetite are dependent / age and risk appetite are independent) = 0.05 type-ii error: p (not reject h0 / reject h0) =β p (age and risk appetite are independent / age and risk appetite are dependent) = β table 1. observed frequency of self-employed respondents age\ row labels less risk moderate risk high risk 20-30 1 11 5 31-40 6 9 2 41-50 8 6 3 50 and above 3 0 0 grand total 18 26 10 test procedure: assumptions: 1. the sample drawn is independent. 2. the classification is mutually exclusive. construction of test statistics: formula: table 2. expected frequency: (row total*column total)/grand total 1 2 3 4 1 5.67 8.19 3.15 0 2 5.67 8.19 3.15 0 3 5.67 8.19 3.15 0 4 1 1.44 0.56 0 5 0 0 0 0 now, we test for the null hypothesis. calculation of test statistics: under h0, = {(observed frequencies-expected frequencies) ^2}/expected frequencies using excel, the chi-square test has given the following results: chi-square value = 13.971 p – value = 0.0300 decision: alternative hypothesis: the risk appetite of a self-employed is dependent on age. conclusion: from the above analysis, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 76 p-value is less than α (p< α). so, reject null hypothesis. therefore, the risk appetite of a self employed is dependent on age. research hypothesis – 1.2: the risk appetite of a start-up entrepreneur is dependent on age. null hypothesis (h0): age is independent of the risk appetite of a start-up entrepreneur. alternative hypothesis (h1): the risk appetite of a start-up entrepreneur is dependent on age. type-i error: p (reject h0 / not reject h0) = α p (age and risk appetite are dependent / age and risk appetite are independent) = 0.05 type-ii error: p (not reject h0 / reject h0) =β p (age and risk appetite are independent / age and risk appetite are dependent) = β table 3. observed frequency of entrepreneurial respondents age\ row labels less risk moderate risk high risk 20-30 1 3 2 31-40 3 9 0 41-50 11 7 2 50 and above 6 2 0 grand total 21 21 4 test procedure: assumptions: 1. the sample drawn is independent. 2. the classification is mutually exclusive. construction of test statistics: formula: table 4. expected frequency: (row total*column total)/grand total 1 2 3 4 1 2.74 2.74 0.52 0 2 5.48 5.48 1.04 0 3 9.13 9.13 1.74 0 4 3.65 3.65 0.7 0 5 0 0 0 0 now, we test for the null hypothesis. calculation of test statistics: under h0, = {(observed frequencies-expected frequencies) ^2}/expected frequencies using excel, the chi-square test has given the following results: chi-square value = 13.617 p – value = 0.0342 decision: alternative hypothesis: the risk appetite of an individual is dependent on age. conclusion: from the above analysis, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 77 p-value is less than α (p< α). so, reject null hypothesis. therefore, the risk appetite of an entrepreneur is dependent on age. so, from research hypotheses 1.1 and 1.2, we can arrive at a statement that irrespective of the occupation. risk appetite of both start-up entrepreneurs and self employed are dependent on the age factor i.e., with growing age, the ability of the risk-taking will reduce in self-employed and start-up entrepreneurs. objective: 2. to analyze whether the investment decisions are being influenced by others (based on occupation) research hypothesis 2: the decision-making of self employed in terms of investment is independent compared to start-up entrepreneurs. null hypothesis (h0): decision making is dependent on others' influence in the case of a self employed than start-up entrepreneurs. alternative hypothesis (h1): decision making is independent of others' influence in the case of a self employed than start-up entrepreneurs. type-i error: p (reject h0 / not reject h0) = α p (the decision making of self employed in terms of investment is independent compared to start-up entrepreneurs. / decision making is dependent on others influence in the case of a self employed than start-up entrepreneurs) = 0.05 type-ii error: p (not reject h0 / reject h0) =β p (decision making is dependent on others influence in case of a self employed than start-up entrepreneurs / the decision making of self employed in terms of investment is independent compared to start-up entrepreneurs) = β table 5. observed frequency of comparison between self-employed &entrepreneurial respondents row labels self-employed entrepreneur self 15 16 family/relatives 7 15 friends 9 5 investment advisor 0 0 test procedure: assumptions: 1. the sample drawn is independent. 2. the classification is mutually exclusive. construction of test statistics: formula: https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 78 table 6. expected frequency: (row total*column total)/grand total 1 2 3 4 5 14.3 16.7 0 0 0 10.2 11.8 0 0 0 6.48 7.52 0 0 0 0 0 0 0 0 0 0 0 0 0 now, we test for the null hypothesis. calculation of test statistics: under h0, = {(observed frequencies-expected frequencies) ^2}/expected frequencies using excel, the chi-square test has given the following results: chi-square value = 3.7319 p – value = 0.1548 decision: null hypothesis (h0): decision making is dependent on others' influence in the case of a self employed than start-up entrepreneurs. conclusion: from the above analysis, p-value is greater than α (p>α). so, don't reject null hypothesis. therefore, the investment decisions of a self employed are influenced by others (family, relatives, investment advisors, friends, etc.) when compared to start-up entrepreneurs. objective 3: to analyze the influence of dependents on the investment horizon of the individuals (based on occupation) research hypothesis 3.1: the investment horizon of self employed is independent of no. of dependents. null hypothesis (h0): the investment horizon of self employed is dependent on no. of dependents. alternative hypothesis (h1): the investment horizon of self employed is independent of no. of dependents. type-i error: p (reject h0 / not reject h0) = α p (the investment horizon of self employed is independent of no. of dependents/ the investment horizon of self employed is dependent of no. of dependents) = 0.05 type-ii error: p (not reject h0 / reject h0) =β p (the investment horizon of self employed is dependent of no. of dependents / the investment horizon of self employed is independent of no. of dependents) = β table 7. observed frequency of self-employed respondents age/years in self-employment 1-3 years 4-6 years more than 6 years 0-1 3 9 0 2-3 2 18 9 4-5 3 4 4 5 and more 1 1 0 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 79 test procedure: assumptions: 1. the sample drawn is independent. 2. the classification is mutually exclusive. construction of test statistics: formula: table 8. expected frequency: (row total*column total)/grand total now, we test for the null hypothesis. calculation of test statistics: under h0, = {(observed frequencies-expected frequencies) ^2}/expected frequencies using excel, the chi-square test has given the following results: chi-square value = 5.779 p – value = 0.1229 decision: null hypothesis (h0): decision making is dependent on others' influence in the case of a self employed. conclusion: from the above analysis, p-value is greater than α (p>α). so, don't reject null hypothesis. therefore, the investment horizon of self employed is dependent on no. of dependents. research hypothesis 3.2: the investment horizon of start-up entrepreneurs is independent of no. of dependents. null hypothesis (h0): the investment horizon of a start-up entrepreneur is dependent on no. of dependents. alternative hypothesis (h1): the investment horizon of a start-up entrepreneur is independent of no. of dependents. type-i error: p (reject h0 / not reject h0) = α p (the investment horizon of start-up entrepreneur is independent of no. of dependents/ the investment horizon of start-up entrepreneur is dependent of no. of dependents) = 0.05 type-ii error: p (not reject h0 / reject h0) =β p (the investment horizon of start-up entrepreneur is dependent of no. of dependents / the investment horizon of start-up entrepreneur is independent of no. of dependents) = β 1 2 3 4 1 2 7.11 2.89 0 2 4.83 17.2 6.98 0 3 1.83 6.52 2.65 0 4 0.33 1.19 0.48 0 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 80 table 10. observed frequency of entrepreneurial respondents age/years in self-employment 1-3 years 4-7 years more than 6 years 0-1 0 5 1 2-3 1 5 4 4-5 5 13 8 5 and more 3 0 1 grand total 9 23 14 test procedure: assumptions: 1. the sample drawn is independent. 2. the classification is mutually exclusive. construction of test statistics: formula: expected frequency: (row total*column total)/grand total table 11. expected frequencies now, we test for the null hypothesis. calculation of test statistics: under h0, = {(observed frequencies-expected frequencies) ^2}/expected frequencies using excel, the chi-square test has given the following results: chi-square value = 2.9764 p – value = 0.2258 decision: null hypothesis (h0): the investment horizon of a start-up entrepreneur is dependent on no. of dependents. conclusion: from the above analysis, p-value is greater than α (p>α). so, don't reject null hypothesis. therefore, the investment horizon of start-up entrepreneurs is dependent on no. of dependents. so, from research hypothesis 4.1 and 4.2, it is found that irrespective of the occupation, both selfemployed and start-up entrepreneurs change their investment horizon based on the no. of dependents. objective 4: to analyze the influence of investment horizon based on the monthly income. research hypothesis 4.1: the investment horizon of self employed is independent of monthly income. null hypothesis (h0): the investment horizon of self employed is dependent on monthly income. alternative hypothesis (h1): the investment horizon of self employed is independent of monthly income. 1 2 3 4 1 1.17 3 1.83 0 2 1.96 5 3.04 0 3 5.09 13 7.91 0 4 0.78 2 1.22 0 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 81 type-i error: p (reject h0 / not reject h0) = α p (the investment horizon of self employed is independent of on monthly income / the investment horizon of self employed is dependent on monthly income) = 0.05 type-ii error: p (not reject h0 / reject h0) =β p (the investment horizon of self employed is dependent on monthly income/ the investment horizon of self employed is independent of on monthly income) = β table 12. observed frequency of self-employed respondents income level\tenure 1-3 years 4-6 years more than 6 years up to rs.20000 0 2 0 rs.20000-rs.40000 3 14 1 rs.40000-rs.60000 1 13 5 above rs.60000 5 3 7 grand total 9 32 13 test procedure: assumptions: 1. the sample drawn is independent. 2. the classification is mutually exclusive. construction of test statistics: formula: table 13. expected frequency: (row total*column total)/grand total 1 2 3 4 1 0.33 1.19 0.48 0 2 3 10.7 4.33 0 3 3.17 11.3 4.57 0 4 2.5 8.89 3.61 0 now, we test for the null hypothesis. calculation of test statistics: under h0, = {(observed frequencies-expected frequencies) ^2}/expected frequencies using excel, the chi-square test has given the following results: chi-square value = 16.3537 p – value = 0.0120 decision: null hypothesis (h0): the investment horizon of self employed is independent of monthly income. conclusion: from the above analysis, p-value is less than α (p<α). so, reject null hypothesis. therefore, the investment horizon of self employed is dependent on monthly income. research hypothesis 4.2: the investment horizon of start-up entrepreneurs is independent of monthly income. null hypothesis (h0): the investment horizon of start-up entrepreneurs is dependent on monthly income. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 82 alternative hypothesis (h1): the investment horizon of a start-up entrepreneur is independent of monthly income. type-i error: p (reject h0 / not reject h0) = α p (the investment horizon of start-up entrepreneurs is independent of monthly income / the investment horizon of start-up entrepreneurs is dependent on monthly income = 0.05 type-ii error: p (not reject h0 / reject h0) =β p (the investment horizon of start-up entrepreneurs is dependent on monthly income/ the investment horizon of start-up entrepreneurs independent on monthly income) = β table 14. observed frequency of entrepreneurial respondents income level\tenure 1-3 years 4-6 years more than 6 years up to rs.20000 0 2 0 rs.20000-rs.40000 2 3 2 rs.40000-rs.60000 0 12 3 above rs.60000 7 6 9 grand total 9 23 14 test procedure: assumptions: 1. the sample drawn is independent. 2. the classification is mutually exclusive. construction of test statistics: formula: table 15. expected frequency: (row total*column total)/grand total 1 2 3 4 1 0.39 1 0.61 0 2 1.37 3.5 2.13 0 3 2.93 7.5 4.57 0 4 4.3 11 6.7 0 now, we test for the null hypothesis. calculation of test statistics: under h0, = {(observed frequencies-expected frequencies) ^2}/expected frequencies using excel, the chi-square test has given the following results: chi-square value = 13.2950 p – value = 0.0386 decision: null hypothesis (h0): the investment horizon of start-up entrepreneurs is dependent on monthly income. conclusion: from the above analysis, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 83 p-value is less than α (p<α). so, reject null hypothesis. therefore, the investment horizon of start-up entrepreneurs is dependent on monthly income. from the research hypothesis 4.1 and 4.2, we can conclude that in the case of both self – employed and start-up entrepreneurs, the investment horizon is dependent on the monthly income. findings and suggestions findings  both the investment patterns of start-up entrepreneurs and self-employed are resembling the same.  the risk-taking appetites of start-up entrepreneurs are higher than self-employed but, in our study, it is not the same.  in the sample in which we have collected the response, the results depict that self-employed are more aware of equity and other such risk-related avenues when compared to entrepreneurs.  also, it is observed that the investment preferences for self – employed are considered as high returns while start-up entrepreneurs consider safety and security as their major preference.  start-up entrepreneurs are more cautious on the expected rate of return than the self-employed. suggestions  the study has been limited to only 100 respondents with 54 self-employed and 46 start-up entrepreneurs. so, the responses collected have given new insights which are far from the assumptions made in the real world.  also, we cannot say that the research hypotheses tested and proved in the study do not stand good in the real world. to ensure that the study has given real value, the scope and the sample size must be increased,  with the constraints, it was only possible to test few parameters from the questionnaire.  we can also add various other related investment behavior questions to bring in more insights from the respondents and increase the quality of the research done.  more and more focus must be done in this area since the gig economy is currently driving the world economy. conclusion from the study, we can conclude that all the assumptions relating to the aspects in investment patterns of start-up entrepreneurs and self employed in terms of the financial decision may not stand similar. a comparative study between self-employed and start-up entrepreneurs will help the financial advisors, fund managers and other people involved in market analysis understand their investment patterns since these are going to be the major occupations for future generations to come. references adamu, m., & shakur, m. b. 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(2000). factors influencing investment decisions. indian capital markets–trends and dimensions (ed.), tata mcgraw-hill publishing company limited, new delhi. saini, s., anjum, b., & saini, r. (2011). investors‟ awareness and perception about mutual funds. international journal of multidisciplinary research, 1(1), 14-29. van stel, a., wennekers, s., & scholman, g. (2014). solo self-employed versus employer entrepreneurs: determinants and macro-economic effects in oecd countries. eurasian business review, 4(1), 107–136. 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/) indian journal of finance and banking vol. 6, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 1 modeling south african stock market volatility using univariate symmetric and asymmetric garch models warren rusere doctoral candidate faculty of commerce banaras hindu university, india e-mail: warrenrusre@gmail.com forbes kaseke doctoral candidate department of statistics university of kwazulu-natal, south africa e-mail: forbeskaseke@gmail.com abstract contemporary empirical literature is rich in studies that have modelled and forecasted the nature and behavior of volatility of equity returns in both emerging and advanced stock markets. modelling and estimating volatility is crucial in dynamic risk management, equity valuation and portfolio diversification. however, south african financial markets have not received ample attention in this regard. it is against this backdrop that we sought to determine the nature and behavior of volatility inherent in the south african stock market. furthermore, we examined the effect of the 2014 global oil crisis on the volatility spillover in this market. the ftse/jse top 40 index of the johannesburg stock exchange has been selected as the study sample. sample data for the period spans from october 14, 2009 to december 31, 2019, wherein the crisis period is from march 03, 2014 to february 27, 2015. conditional volatility has been modelled and estimated using garch (1.1), garch-m (1.1), tgarch (1.1) and egarch (1.1). the log likelihood, akaike information criterion and bayesian information criterion have been followed for model selection. the results showed that the egarch model is the most suitable for predicting the behavior of equity returns including for the global oil crisis period. keywords: modeling, volatility, equity returns, global oil crisis, ftse/jse top 40 index. jel classification codes: c01, c13, c52, c53, c87. introduction investigating the nature and behavior of volatility exhibited by equity returns is of wider interest for researchers, market analysts, risk assessors and portfolio managers. financial management and investment decisions rely on modelling and estimating equity returns volatility as it aids in asset pricing strategies, risk management and portfolio optimisation (abdalla & winker, 2012). in an efficient stock market, fluctuations in equity return are used to estimate and predict the value of potential market and financial risk. practically, investment decisions and portfolio allocation are invariably futuristic, implying that the expected risks and expected returns must be accurately forecasted. by forecasting equity return volatility inherent on the ftse/jse top 40 index, we establish an important relationship between current values and their expected future values. moreover, econometric based quantitative mailto:warrenrusre@gmail.com mailto:forbeskaseke@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 2 estimation used in this study provides evidence-based knowledge to investors and financial managers with valuable and near accurate forecast of future market trends and cycles. in addition, modelling volatility by taking the influence of the global oil crisis into account serves to accurately unearth how south african markets are influenced by global oil prices spill over effects. there have been widespread studies in different financial markets that have documented the properties of equity return volatility. these properties include; volatility clustering, information symmetry, leverage effects and leptokurtosis. volatility clustering implies that enormous price movements are synonymously ensured by enormous price movements, either positive or negative, and small price movements are synonymously ensured by small price movements. this phenomenon was earlier documented in literature by (fama, 1965; chou, 1988; schwert, 1989; baillie, chung, & tieslau, 1996). information symmetry refers to the postulation that positive and negative past information (news/shocks) inflict similar impact on volatility. numerous studies have observed this symmetric impact on volatility. these include; (butterworth, 2000; srinivasan, 2013; atoi, 2014; gurgul & machno, 2015; singh & tripathi, 2016). first documented by black (1976), leverage effects imply that a decrease in equity returns is superseded by a surge in volatility that is more substantial in comparison to the volatility prompted by an increase in equity returns. this is also referred to as information asymmetry. this feature is noted in the work of (enders, 2008; emenike, 2010; kosapattarapim, lin, & mccrae, 2012; emenike & enock, 2020). mandelbrot (1963) and fama (1965) observed that equity returns have a tendency to be leptokurtic. this means that they are not normally distributed but rather show fat tails. al freedi, shamiri, & isa (2012) have provided evidence to this regard. determining pattens of volatility is crucial as is it indicative of financial risks that have an adverse impact on the portfolio assets and wealth of investors. thus, financial proofing these risk forces their holders to part with high-risk premium indemnity to offset the potential of losses, a situation that results in an increase in the cost of capital. contemporary volatility modelling and estimation is based on an autoregressive conditional heteroscedastic (arch) process that was pioneered by engle (1982). this process was further broadened to a generalised autoregressive conditional heteroskedastic (garch) formulation by bollerslev (1986). although these two earlier models successfully capture stylised facts exhibited by financial markets data series that comprises of volatility clustering, information symmetry and leptokurtosis, they are unable to account for leverage effects and fat tails. hence to overcome this shortcoming, several better sophisticated models that observe non-linearity were developed. nelson (1991) extended the traditional garch formulation into an exponential generalized autoregressive conditional heteroskedasticity (egarch). similarly, zakoian (1994) also refined the garch model to form the threshold autoregressive conditional heteroskedasticity (tgarch), which is much the same as the gjr-garch technique advanced by glosten, jagannathan, and runkle (1993). asymmetric volatility models recognise the different impact that desirable (bad) and undesirable (good) news has on conditional volatility. bad information shocks tend to stimulate greater volatility in comparison to good information shocks. the focal intention of the present work is to primarily capture and estimate the properties of equity return volatility inherent in the ftse/jse top 40 index. it further determines how the global oil crisis of 2014 affected equity return volatility for the concerned period. sample data for the futures index series and cash market index series has been used for the period october 14, 2009 to december 31, 2019. the global oil crisis period under observation, spans from march 03, 2014 to february 27, 2015. a basket of symmetric and asymmetric garch models is harnessed for analysing the returns of the two concerned index series. by doing so, our research contributes and augments current literature two ways. firstly, the study is distinguishable from prior research with particular regard to the dataset sampled, theoretical composition and methodological approach. secondly, we have observed a recent global oil crisis (2014) that has not been assessed in previously, which enables this study to furnish fresh and unique insights on volatility behaviour. our findings are financial decision-making oriented as they assist relevant stakeholders in capital allocation and portfolio selection. https://scholar.google.com/citations?user=dmlbktwaaaaj&hl=en&oi=sra https://scholar.google.com/citations?user=_we5kp4aaaaj&hl=en&oi=sra https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 3 the ensuring part of this work is arranged in this manner: section 2 brings forth a summary of the reviewed academic literature. section 3 presents the research methodology. section 4 contains the results of the descriptive statistics and econometrics analysis. section 5 contains the eventual concluding inferences. review of literature pioneering studies by fama (1965) and black (1976) were the first to uncover volatility clustering, fat tails (leptokurtosis), and leverage effects features in equity returns. engle (1982) developed the autoregressive conditional heteroskedasticity (arch) model to capture and estimate volatility of the conditional variance by allowing it to depend on its error term and the linear combination of the squared previous error terms. this model was further enhanced by bollerslev (1986) who instituted the generalised autoregressive conditional heteroskedasticity (garch) process which allowed the conditional variance to be modelled formulated on its lagged values and squared lagged error term values. the traditional symmetric garch model has received considerable attention in literature. hsieh (1989) and taylor (1994) in their empirical work, considered this model to effectively capture the essential characteristics exhibited by financial and econometric time series, for-instance, volatility clustering, heteroskedasticity, information symmetry and leptokurtosis. similar findings were also observed by (bandivadekar & ghosh, 2003; brook & burke 2003; ryoo & smith, 2004; pok & poshakwale, 2004; de beer, 2008; mangani, 2008; olowe, 2009; dawson & staikouras, 2009; sehgal, rajput & dua, 2012; matanovic & wagner, 2012; babikir, gupta, mwabutwa, & owusu-sekyere, 2012; fong & han, 2015; yao, 2016). however, the major drawback of this model is its inability to model and estimate extreme observations and skewness in equity return series, a drawback that emenike (2010) recorded. this shortcoming stimulated the interest of researchers to study the properties of equity return volatility by utilising asymmetric models that capture asymmetric tendencies. asymmetric garch models were developed to negate the assumption of normal distribution that is held by the garch (1. 1) and its related symmetric counterparts. mandelbolt (1963) argued that extreme observations are prevalent in the variables of financial markets data series for the assumption of normal distribution to bear. as a result, the exponential autoregressive conditional heteroskedastic model (egarch) was expanded by nelson (1991), to capture these extreme events. a similar model by zakoian (1994), the threshold garch was also proposed. this model is identical to the gjrgarch except that the latter specifies conditional standard deviation rather than conditional variance. the effectiveness of these models to effectively capture the properties of time series has been substantiated by (aggarwal, inclan, & leal, 1999; alberg, shalit, & yosef, 2008; onwukwe, bassey, & isaac, 2011) in their empirical studies. the utilisation of asymmetric garch models led to a plethora of research particularly in the developing financial markets and to a limited extent, developed ones. the majority of these studies involves comparing symmetric and asymmetric models to determine the model that is most suitable for capturing stylised facts of stock returns. these include; gulen and mayhew (2000) who modelled volatility of 25 countries, neokosmidis (2009) in usa, atoi (2014) in nigeria, abdalla & winker (2012) in egypt and sudan, alberg et al. (2008) in israel, lim, & sek (2013) in malaysia, chong, ahmad, & abdullah (1999) in singapore, emenike & aleke (2012) in nigeria, siopis & lyroudi (2007) in greece, gunay, & haque (2015) and yilgor & mebounou (2016) in turkey. in the same regard, india’s emerging financial markets have considerably attracted the interest of researchers that include; (pandey, 2003; mall, pradhan, & mishra, 2011; goudarzi & ramanarayanan, 2011; sahu, 2012; banumathy & azhagaiah, 2015; varughese & mathew, 2017; kumar & biswal, 2019; shanthi & thamilselvan, 2019). empirical findings from the above studies substantially validates asymmetric models as best suited for capturing and explaining extreme properties of equity return volatility. numerous studies have also been conducted in south africa’s stock markets to explore and determine the dynamic volatility behaviour using garch models. these studies include the works of; (magweva, munyimi, & mbudaya, 2021; mashamba & magweva, 2019; naik & padhi 2015; kgosietsile, 2015; oberholzer & venter, 2015; masinga, 2015; babikir et al., 2012; samouilhan & https://www.wordhippo.com/what-is/another-word-for/in_this_manner.html https://www.sciencedirect.com/science/article/pii/s0264999312002118#bbb0180 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 4 shannon, 2008; de beer, 2008; mangani, 2008). although the above studies presented empirical findings that provide a crucial understanding of volatility in the capital markets, only (mashamba & magweva, 2021; oberholzer & venter, 2015; kgosietsile, 2015; masinga, 2015) made an empirical attempt to model and estimate the price movements of ftse/jse top 40 index. other studies focused on different indices altogether, hence their findings do not address the objective we seek to achieve. a recent study by (mashamba & magweva, 2021) utilized a modified symmetric garch (1.1) model to analyze how index futures trading impacted volatility, from 03 june 2002 to 31 december 2014. their research objective, methodology and sample period significantly differ from this present study. similarly, the use of different spillover effects such as the global financial meltdown of 2007 used by oberholzer & venter (2015) in determining its impact on volatility, remarkably contradict our study as we consider a more recent event (i.e., global oil crisis, 2014) into account and different model specification. similarly, kgosietsile (2015) and masinga (2015) utilized a different research methodology and other variables in the assessment of volatility, an approach that again is distinguishable from this study. as a result of these methodological differences and unfulfilled research gaps, we are motivated to further revisit their work by improving their findings and adding more recent evidence to related literature in south africa. on the basis of the findings documented in the empirical literature above, it is apparent that traditional symmetric garch models are useful in capturing and forecasting certain stylized facts of equity return volatility. however, their major drawback stems from their inability to capture leverage effects and fat tails. as a result, information asymmetry-oriented models namely egarch and tgarch, were developed to capture and estimate asymmetric behavior of equity returns and these two models have been employed in this study along with a garch (1.1) in conjunction with garch-inm (1.1). research methodology data source and transformation the present work is established on secondary data which has been obtained from the johannesburg stock exchange (jse). the index selected for the current research is ftse/jse 40 top index which represents the johannesburg stock exchange. the data collected was in the form of daily closing prices from 14 october, 2009 to 31 december, 2019. the dataset consists of 2552 number of total observations during the study period. the daily returns have been calculated at first difference of the logarithm of ftse/jse 40 top index of successive days. the calculation of daily returns is based on the given formula: 𝑟𝑡 = log[ 𝑝𝑡 𝑝𝑡−1 ] where, rt represent the return on the current day which is the log of the division of latest day’s price (pt) by previous day’s price (pt-1). empirical tests unit root test the existence of a unit root or stationarity within the financial market data series under observation has been inspected using the augmented dickey-fuller (adf) and philips-peron (pp) tests. using data that is non-stationary results in misleading or spurious regressions which cannot be relied upon. ruxanda and botezatu (2008) documented that, evaluating financial time series variables characterised by nonstationarity, leads to unrealistic association between the returns. normality test the present study utilized the jarque-bera test to check for normality. it is important to check for normality as the validity of our regressions and t-tests are based on the assumption that data conforms https://www.sciencedirect.com/science/article/pii/s0264999312002118#bbb0180 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 5 to normal or gaussian distribution. any deviations from normality implies that the series is not normally distributed. arch/garch effect test before applying arch/garch models, the existence of heteroscedasticity in the return residuals has been tested by applying the lagrange multiplier (lm) test suggested by engle (1982). an absence of arch/garch effect means that the processes are not applicable for the data. modelling volatility this study employs an assortment of univariate garch models to capture and estimate the properties of volatility of the ftse/jse top 40 equity returns. the financial econometric models have been specified to estimate and capture both symmetric and asymmetric features of the data set. symmetric tendencies in the series have been observed using the garch (1.1) and garch-m (1.1). similarly, information asymmetry has also been observed by using egarch (1.1) and tgarch (1.1). a detailed breakdown of the models is given below: symmetric garch models the generalized autoregressive conditional heteroscedastic (garch) model the process and specification of the model relies on a linear function of previous squared values of residuals along with the lagged values of conditional variances. it is computed using the following equation: σ2 = α0 + ∑ 𝛼𝑞 𝑖=1 i 𝜀𝑡−𝑖 2 + ∑ 𝛽𝑞 𝑖=1 i 𝜎𝑡−𝑖 2 + ẟ crisis (1) where α0 is a constant term, and α1, α2, α3, …. αn are the parameters or coefficients of the arch specifications. similarly, β1, β2, β3.… βn are the parameters or coefficients of garch specifications. the p and q are the respective orders of the arch and garch process. the garch equation can be simplified as follows; 𝜎2 = 𝛼0 + 𝛼1𝜀𝑡−1 2 + 𝛽1𝜎𝑡−1 2 + ẟ crisis (2) the parameter constraints imposed on this model are: 𝑎0+ > 0, 𝑎1> 1, β > 0, (𝑎1 + β) < 1. the generalized autoregressive conditional heteroscedastic-in-mean (garch-m) model the specification process for this model was propounded by engle et al. (1987). modelling the properties of equity returns using this approach is ideal if the return on equity is dependent on volatility. the letter ‘m’ represents a mean which indicate the conditional mean representing a successive order relies on the inherent conditional variance. hence, the current equity returns are predicted based on conditional volatility. the mean equation for garch-m is as follows: mean equation 𝑟𝑡 = μ + λσ𝑡𝜏 2 + ẟ crisis + 𝜀𝑡 (3) variance equation 𝜎2 = 𝛼0 + 𝛼1𝜀𝑡−1 2 + 𝛽1𝜎𝑡−1 2 + ẟ crisis (4) where λ given in the mean equation denote the parameter of the risk premium. positive λ represents the direct relationship between returns and its volatility. alternatively explained, a rise in the average equity returns is generated by a rise in conditional volatility. the variance equation is similar to the one mentioned above for the garch model. https://www.thesaurus.com/browse/applying https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 6 asymmetric garch models the threshold generalized autoregressive conditional heteroscedastic (tgarch) model devised by zakoian (1994), the model is used to estimate the leverage effects in conditional variance. it is almost identical to the gjr-garch model. the framework for conditional variance estimation is given below: 𝜎2 = 𝛼0 + 𝛼1𝜀𝑡−1 2 + 𝛾𝑑𝑡−1𝜀𝑡−1 2 + 𝛽1𝜎𝑡−1 2 + ẟ crisis (5) where 𝛾 in the variance equation is the parameter of leverage effect or information asymmetry. when asymmetric parameter is positive and significant, its effect on volatility is 𝛼𝑖 + 𝛾𝑖 where 𝑑𝑡−1 = 1, 𝜀𝑡−1 < 0, otherwise 𝑑𝑡−1 = 0 where the effect on volatility is 𝛼𝑖. positive leverage effect (𝜀𝑡−1 > 0) in tgarch indicates that the impact of negative information (bad news) on equity volatility surpasses that of positive information (good news). the exponential generalized autoregressive conditional heteroscedastic (egarch) model the aforementioned technique is a logarithmic expression of conditional variance. it captures the asymmetries in the positive and negative stock returns whilst constantly maintaining a positive variance. it is specified and computed as shown below: ln (σ2) = α0 + β1ln(σt−1 2 ) + α1 {| εt−1 σt−1 | − √ π 2 } − γ εt−1 σt−1 + ẟ crisis (6) where 𝛾 is an asymmetric parameter or coefficient of leverage effect in conditional variance. as it models the log of conditional variance, the given conditional variance effectively becomes positive supposing that the parameter is negative. in this process, negative the leverage effect indicates that the larger effects of negative information than the positive information. model selection since several models have been employed to unearth the properties and nature of volatility in the stock returns, finding out best fitting model is imperative. in this regard, the most appropriate garch models for conditional volatility are chosen by utilizing the information criteria (javed & mantalos, 2013; bonga, 2019). the best suited model is reached upon when the akaike information criterion (aic) and schwartz information criterion (sic) are minimum and log likelihood and r-square are maximum dhingra, gandhi, & bulsara (2016). hence, the best fitting model for ftse/jse top 40 index has been selected using the same criteria. results descriptive statistics in order to highlight the properties of the statistical distribution of the daily equity returns pertaining to the index prices of the considered sample period, the descriptive statistics have been presented in table 1, below. it displays the values of the mean, standard deviation, skewness, kurtosis and jarque-bera. the skewness statistics is -0.13 which indicates the chances of earning higher than mean returns. kurtosis is also greater than 3 indicating that the index series data has fat tails properties (leptokurtic) and is not in conformance with normal or gaussian distribution. furthermore, the jarque-bera statistics is significant at 1% level which confirms that skewness and kurtosis does not follow normal distribution. table 1. descriptive statistics for the index prices returns particulars statistics mean 0.000132 median 0.000285 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 7 minimum -0.017586 maximum 0.020319 std. deviation 0.004507 skewness -0.135526 kurtosis 4.314803 jarque-bera (p-value) 191.6315 (.0000) observations 2552 test of stationarity the concept of stationarity refers to the property were the mean, variance and autocorrelation do not change in due course, but rather remain constant. to detect this property for the data of the present study, the augmented dickey-fuller (adf) and phillip-perron (pp) tests have been applied at both intercept and trend and intercept for critical values at one, 5% and 10% level of the significance (dickey & fuller, 1979; phillip & perron, 1988). the null hypothesis for stationarity defines data as having a unit root in its series. the findings of the unit root examination are presented in table 2. the outcome of the test exhibits that either the adf and pp alternative tests disavow the null hypothesis ultimately confirming the state of stationarity in the data set. table 2. findings of the stationarity test values adf pp intercept trend and intercept intercept trend and intercept t-statistics -38.16334 -38.17126 -52.78620 -52.83829 p-value 0.0000 0.0000 0.0001 0.0000 critical values 1% -3.432721 -3.961643 -3.432720 -3.961614 5% -2.862473 -3.411570 -2.862473 -3.411569 10% -2.567312 -3.127651 -2.567312 -3.127651 figure 1 presents evidence of volatility clustering in index prices during 2009 and 2019. the period of depressed volatility is succeeded by more depressed volatility periods and periods of soaring volatility is succeeded by more soaring volatility periods. the presence of volatility clustering is essential before specifying arch models. the present study has examined volatility clustering by performing ordinary least squares and then plotting the residuals to observe it. furthermore, the presence of heteroscedasticity in the model reinforces the presence of volatility clustering. this fulfils the requisite conditions essential in the application of arch and garch models. -.020 -.015 -.010 -.005 .000 .005 .010 .015 .020 .025 09 10 11 12 13 14 15 16 17 18 19 index_price figure 1. volatility clustering of index prices daily returns https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 8 in line with assessing heteroscedasticity, arch effect in the series and volatility clustering have been determined by visually depicting them using a graph. the results of the arch effect show the presence of heteroscedasticity in index price daily returns [f (2, 2547) 39.91804, p-value < .0001]. it further asserts the appearance of volatility clustering within index price returns between 2009 and 2019. according to naik and padhi (2015), volatility clustering and arch effect are the essential conditions required for the application of arch and garch model. therefore, the results of the arch effect confirm the fulfilment of essential assumptions required to estimate the garch models. table 3. test of heteroscedasticity: arch effect f-statistic 39.91804 prob. f(2, 2547) 0.0000 obs*r-squared 77.50085 prob. chi-square(2) 0.0000 measurement of volatility after validating the availability of volatility clustering and arch effect within the data series, the next step is to ascertain a well-suited garch model for the present data series. in so doing, both the symmetric and asymmetric garch models are applied for daily index returns to understand the volatility in the returns of ftse/jse top 40 index. the volatility in daily returns is fitted with a garch (1.1) along with a garch-m (1.1) symmetric process. the results are presented in table 4. the results of garch (1.1) model in mean equation display that the respective coefficients of constant term and lagged index price returns are statistically significant at less than 1% significance level. the coefficient of the constant term shows that the current day returns of the index are significantly predicated by the average stock returns. moreover, the lag of index prices returns indicate that the current day prices are predicted by the prices of the previous day. hence, the information at two-lags influences the prices of the index prices today. similarly, in the conditional variance equation of the garch (1.1) model, the arch term (α) for heteroscedasticity, garch term (β) for volatility are established to be statistically significant at less than 1% level of significance. the β coefficient is estimated to be substantial in comparison to the α coefficient which indicates that volatility within the series requires a protracted duration to eventually dissipate. the volatility in the present day is more sensitive to the returns of the previous days. moreover, volatility is recorded to be persistent as the totality of α and β coefficients is 0.973, which is less than one. the sum of coefficients in close proximity to or near unity imply that the shock is bound to persist into the distant future. moreover, the coefficient of the global crisis period is also recorded to be statistically significant at less than 5% level of significance which confirms the effect of crisis period on the volatility of the index prices daily returns. furthermore, the arch-lm test has been employed to assess the existence of any arch effect still present within the residuals of the daily return dataset. the results of the arch-lm test accepts the given null hypothesis which posits that there is ‘no arch effect present’ within the series at more than 5% level of significance. the result of arch-lm test substantiates the non-availability of further arch effect that may have been contained within residuals of the index prices returns, a fact that proves that the variance equation is properly spelled out. table 4. symmetric garch (1.1) models variable garch (1.1) garch-m (1.1) coefficients coefficients mean c 0.000229*** -0.000432 risk premium --0.164372 variance c 5.77e-07*** 5.79e-07*** https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 9 α 0.080002*** 0.079629*** β 0.893468*** 0.893534*** ϕ -2.17e-07* -2.00e-07 log likelihood 10305.01 10306.63 akaike info. criterion (aic) -8.072108 -8.072596 schwarz info. criterion (sic) -8.067955 -8.058855 arch lm test for heteroscedasticity test statistics 0.3719 0.4758 prob. chi-sqaure (2) 0.5418 0.4889 note: α = squared residual (resid (-1) ^2); β = measure of volatility (garch (-1)); *p-value < .05; **p-value < .01; ***p-value < .001 in the garch-m (1.1) process, the influence of volatility on the expected return is estimated. the coefficient of conditional variance is incorporated into the mean equation. the ensuing outcome is shown in table 4 displayed above. for the mean equation, the coefficient of constant terms has been established to be negative and statistically insignificant at 5% level of significance which shows that the average stock price does not predict the current day returns. the coefficient of index prices two-lag on the current day returns is found to be statistically substantial at less than 1% level of significance. in spite of that, the constant term is found to be insignificant which proves the existence of a normal return for the market. the coefficient of risk premium is discovered as positive and statistically significant at 5% level of significance. it implies that the volatility has a significant and positive impact on expected return which indicates that holding an asset in question will be risky. within the variance equation of garch-m (1, 1) model, the coefficients of constant, arch and garch terms are determined to be statistically relevant below 1% significance level. the shocks are also recorded to be persistent for longer periods as the aggregate of α and β parameters which is 0.973 inches towards unity. the effect of the global oil crisis on conditional variance is found to be statistically insignificant. the results of archlm test are estimated to be statistically insignificant denoting the absence of any additional arch effect on the residuals in the index prices returns. to understand the asymmetric tendencies in the series of index prices daily returns, asymmetric garch processes such as tgarch (1.1) and egarch (1.1) are determined. the outcome from the asymmetric garch analysis is displayed in table 5 given below. the results of mean equation in tgarch (1.1) model unearth the constant term to be statistically insignificant and the coefficient of lag of index prices returns is estimated to be statistically significant at less than 1% level of significance. moreover, a review of the conditional variance equation of tgarch (1.1) model, presents a coefficient or constant arch and garch terms that are statistically significant at 1% level of significance. the duration of shocks that persist into future time periods is as also verified since α, β and λ (α + β + λ/2 < 1) parameter is less than one. moreover, the leverage effect is found to be positive and statistically significant at 1 percent level of significance. a positive leverage effect indicates that bad news or negative news has more influence on the returns of the index prices in comparison to positive shocks or good news. the tgarch model also captures the significant impact of crisis on volatility of index prices at 5% level of significance. arch-lm test of tgarch model for heteroscedasticity is insignificant, proving the absence of any additional arch effect in the series. table 5. asymmetric garch (1, 1) models variable tgarch (1.1) egarch (1.1) coefficients coefficients mean c 4.63e-05 2.07e-05 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 10 variance c 5.60e-07*** -0.380215*** α -0.021026*** 0.083949*** β 0.913632*** 0.971075*** λ 0.160154*** -0.132208*** ϕ -1.71e-07* -0.011133* log likelihood 10350.56 10357.81 akaike info. criterion (aic) -8.107023 -8.112702 schwarz info. criterion (sic) -8.093282 -8.098961 arch lm test for heteroscedasticity test statistics 2.0721 0.5383 prob. chi-sqaure (2) .1500 0.4630 note: α = squared residual (resid (-1) ^2); β = measure of volatility (garch (-1)); λ = leverage effect (resid (-1) ^2*(resid (-1) <0); ϕ = dummy crisis; *p-value < .05; **p-value < .01; ***p-value < .001 similarly, the results of egarch model for mean equation show that the constant term is statistically insignificant and the coefficient of past values of index prices returns are estimated to be statistically significant at 1% of significance. in conditional variance equation, the parameter estimates are found to be positive, except β coefficient, and statistically significant at 1 percent level of significance. the egarch (1.1) captures the leverage effect to be negative and statistically significant at 1% level of significance. this signals that bad information has a substantial influence on the index prices return than good information. the coefficient of the global oil crisis is recorded as negative and proved to be statistically significant at 5% significance level. the results of arch lm test portray the absence of additional arch effect in the index prices return series. hinging on the empirical outcome of symmetric processes, the garch (1.1) model predicts the effect of average equity returns on the current equity better than the garch-m (1.1) model. moreover, this difference is also consistent in capturing the influence of the crisis period on the conditional volatility pertaining to index prices returns. as for measuring the persistence of shocks, the garch (1.1) model fits the index returns series better than the garch-m model. a positive and insignificant coefficient of conditional variance presented as risk premium in garch-m model denotes the inconsistencies between higher market risks and higher returns. findings from asymmetric models show that both the tgarch (1.1) and egarch (1.1) models are a good fit to the data. both the models record a significant leverage effect and capture the impact of the global oil crisis period on volatility of stock returns. these findings support the conclusions of kgosietsile (2015) and masinga (2015) who also provided testimony of volatility clustering, fat tails, leverage effects on the ftse/jse top 40 index. according to the log likelihood, aic and sic selection criteria, egarch (1.1) model is the best model for capturing the volatility in index prices returns as estimated log likelihood is highest and aic and sic are lowest for this model. the results in harmony with the outcome of mukharjee, sen, and sarkar (2011) and naik and padhi (2015) who have also made model selection using information criteria provided above. conclusion capturing and forecasting the nature and behavior of volatility exhibited by equity returns has received wide attention from researchers, market analysts and risk and portfolio managers. this is because volatility properties provide a decision-making base for asset pricing strategies, risk management and portfolio optimisation. the present study modelled and estimated volatility in index prices daily returns and examined the impact of crude oil crisis of 2014 on index price volatility. the study used data from https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 11 ftse/jse top 40 index ranging from october 14, 2009 to 31 december, 2019. the global oil crisis period for the current study has been considered from 03 march, 2014 to 27 february, 2015. the data has been pretested by confirming normality with jarque-berra, unit root tests using adf and pp, visualizing volatility clustering and assessing heteroscedasticity using arch lm. the study employed both symmetric and asymmetric conditional volatility models, that is, garch (1.1), garch-m (1.1), tgarch (1.1) and egarch (1.1). empirical findings using symmetric models proved that the garch (1.1) model predicts the effect of average equity returns on the current equity better than the garch-m (1.1) model. moreover, this difference has been consistent in capturing the impact of crisis period on the conditional volatility of the index prices returns. furthermore, the garch (1.1) model fits the index returns series better in measuring the persistence of the shock as compared to the garchm model. evidence from asymmetric models substantiate that both the tgarch and egarch models were better fit for the data as their corresponding leverage coefficient were recorded as positive and significant, and negative and significant respectively. however, based on information criterion and log likelihood estimates, egarch model has been determined to be the best suited for testing volatility in ftse/jse top 40 index. the result of arch-lm test confirmed the non-availability of any additional arch effect within the residuals of the series hence the variance equation has been well specified for the market. references abdalla, s. z. s., & winker, p. 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(1994). threshold heteroskedastic models. journal of economic dynamics and control, 18(5), 931-95. 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/) indian journal of finance and banking vol. 8, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 32 impact of demonetization on indian banking stocks: an event study methodology dr. rajesh raut assistant professor modern institute of business management, pune, india e-mail: dr.rwraut@gmail.com dr. harsha thorve associate professor modern institute of business management, pune, india e-mail: harsha.mibm@gmail.com dr. shrawan owhal professor modern institute of business management, pune, india e-mail: shrawanowhal.mibm@gmail.com received: august 30, 2021 accepted: september 19, 2021 online published: october 25, 2021 doi: 10.46281/ijfb.v8i1.1402 url: https://doi.org/10.46281/ijfb.v8i1.1402 abstract demonetization is the withdrawal of a particular form of currency from circulation. in other words, the notes lose their value as a currency. it is an instrument that is used to manage various economic problems such as inflation, corruption, tax evasion, etc. the indian government on november 8, 2016, decided to demonetize high denomination currencies. this announcement had an impact on several sectors of the indian economy. this study is an investigation to measure the impact of demonetization announcements on the indian banking sector. this study employs cumulative abnormal return (car) and an event study methodology to measure the impact of the decision on the selected banking stocks. the study shows that demonetization had a significant impact on the stock prices of selected banks. the findings of the study suggest that on the event day, none of the selected stock has shown significant positive abnormal returns. further on the event day and followed by the event day positive significant arr is observed indicating demonetization had a significant impact on the stock prices of selected banks. also, car on the event day is not equal to zero indicating the indian stock market was not efficient for demonetization announcement. keywords: demonetization, indian banking sector, cumulative abnormal return, event study methodology. jel classification codes: g10, g14, g18, g21. introduction demonetization is the withdrawal of a particular form of currency from circulation. notes of a particular denomination cease to be legal tender. in other words, the notes lose their value as a currency. the mailto:dr.rwraut@gmail.com mailto:harsha.mibm@gmail.com mailto:shrawanowhal.mibm@gmail.com https://doi.org/10.46281/ijfb.v8i1.1402 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 33 demonetization is usually done to tackle black money, corruption, to curb fake currency and to curtail shadow economy. it is expected that demonetization will also bring down the use of illicit money for funding smuggling and terrorism. countries across the globe have used demonetization at some or the other point to control inflation and to boost the economy. on 8th november 2016, the government of india announced demonetization of inr 500 and inr 1000 banknotes. it was announced in an unscheduled live telecast addressed by prime minister mr. narendra modi. the demonetization may have a different effect on the various industries. this depends on the demand and supply of hard cash in the respective sector. industries in the informal sector where hard cash play significant role had affected more than the formal sector. the impact of demonetization can be studied from the financial statements of companies from the various sector. comparative analysis of sales, profit, etc. over a period of time will help to measure the impact. as demonetization affected various sectors this will be reflected in the share price of companies within those sectors. demonetization was an unexpected public announcement. following the day of the announcement, i.e. on 9th november 2016, the nse’s nifty dropped by 541.30 points i.e. 6.33 % and bse’s sensex by 1688 points i.e. 6.12 %. the indian currency was down by 23 paise and was trading at inr 66.85 per us $. this announcement can be considered under efficient market hypothesis, which states that the stock market is a good indicator of sentiments of investors and it discounts and reflects the information quickly. it is interesting to know the reaction of indian stock market to demonetization. the present study is an attempt to investigate the impact of demonetization on the share price of the selected public sector and private sector banks. literature review bharadwaj, mohith, pavithra, and anaath (2017) studied the impact of demonetization on indian stock market by using efficient market hypothesis. the study is based on the 16 companies listed on nse belonging to four different sectors viz. media, energy, private banking and realty. the observations are based on a period of five years from 2012 to 2016 before demonetization and 5 months november 2016 to march 2017 after demonetization. a sharpe index model is used to construct an optimum portfolio. the risk and return values are calculated to evaluate the stock. the results reveal that there was a significant impact of demonetization on indian stock market along with some fluctuations. chauhan and kaushik (2017) studied the impact of demonetization on indian stock market. the study observed the price movement of the stocks during the pre and post announcement of demonetization for the period of 30th october 2016 to 21st november 2016. the event study methodology used to analyze the impact of demonetization the share price of bse 100 companies. the study used ols market model, market-adjusted return model and mean-adjusted return model and checked the significance of aar and caar for each model using t statistics. the result states that there is no significant impact of demonetization on the indian stock market prices. tiwari and anjum (2017) researched the opinion of management students, faculties and bankers to analyses the impact of demonetization. the study is based on the survey conducted using a questionnaire in pune city of maharashtra state. the results of the study reveal that the respondent considered no significant impact of demonetization on terrorism. it is observed that the respondents were moderately satisfied with the effect of demonetization on reducing fake currency. respondents agreed that demonetization helped in increasing tax compliance. it is also observed that the respondent had a neutral opinion regarding the planning and execution of demonetization. kumar (2018) studied the impact of demonetization on sectoral indices in the indian stock market after one year of announcement. the study used paired sample t-test to understand the impact of demonetization on the indices of various sectors. the study noted an increase in the index value of few sectors like metal, financial services and oil and gas while there was a decrease in the index value of sectors consisting of the automobile, fmcg and pharma. lodha, kumawat, and bapna (2018) studied whether or not indian stock market overreacted to the demonetization news. the study is based on the event study methodology consisting of an event window of 21 days (+10, 0, -10) and an estimation window of 81 days. the study used a market model https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 34 to check the significance of aar using t statistics. the result of the study shows that demonetization has affected different indices differently. financial services and banks yielded positive ar and car, while real estate, it, auto, and media produced negative ars and cars. there are very few studies conducted on the demonetization. furthermore from the literature, it is observed that most of the studies are related to the impact of demonetization on the stock market and sectoral indices. few studies are based on understanding the opinions of various stakeholders of the economy on demonetization. in the literature, the impact of demonetization on the share price of banking companies remain relatively unexplored. this paper attempts to study the impact of demonetization on the share price of banking sector companies with the following objectives: objectives  to study the effects of demonetization on return on selected stocks of banks.  to compare changes in stock prices of selected public sector banks and private sector banks over an event window. hypothesis of the study  h0: demonetization announcement has no significant impact on stock prices of selected banks.  h1: demonetization announcement has a significant impact on stock prices of selected banks data source and sampling to evaluate the objectives of the study, secondary data were used (bse limited, 2021). top 5 public sector banks (psbs) and top 5 private sector banks (pvsbs) based on total assets (as on dated 9 september 2019) are considered for the study. method  the event study methodology is used to measure the market reaction to demonetization news. demonetization is announced on the evening of 8th november 2016 (after trading hours), therefore 9th november is considered as event day (t0). 7 trading days before and after demonetization and event day is considered as event window (30th october to 21st november 2016). 100 days (3rd june to 28th october 2016.) estimation window is considered (eventstudytools).  event study methods quantify the economic impact of an event on abnormal returns. market model (equation 1) is used to calculate the abnormal return. 𝐴𝑅𝑖,𝑡 = 𝑅𝑖,𝑡 − (𝛼𝑖 + 𝛽𝑖𝑅m,𝑡) (1) ari,t= abnormal return, ri,t= actual return rm= market return (bse 200 is considered as a market benchmark.) αi =the excess return of an investment relative to the return of a benchmark index βi =a stock's volatility in relation to the market following equations are used to calculate average abnormal return and cumulative average abnormal return. 𝐴𝑅𝑅 = 1 𝑛 ∑ 𝐴𝑅𝑖,𝑡 𝑁 𝑖=1 (2) 𝐶𝐴𝑅(𝑡1, 𝑡2) = ∑ 𝐴𝑅𝑖,𝑡 𝑡2 𝑡=𝑡1 (3)  the excess return of an investment relative to the return of a benchmark index (α), a stock's volatility in relation to the market (β) and standard error are computed using the market return of estimation window. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 35  t statistics (equation 4)is used to measure the impact of demonetization event on the share price. t statistics=aar (for each day of event window)/ standard error (of estimation window) (4) data analysis descriptive statistics following table (table1) shows values of stock's volatility in relation to the market (β), the excess return of an investment relative to the return of a benchmark index (α) and standard error using regression. table 1. statistical measures bank name beta alpha standard error sbi 0.2273 0.0028 0.0177 pnb 0.5587 0.0070 0.0272 bob 0.2814 0.0014 0.0225 cb 0.3275 0.0050 0.0236 boi 0.5340 0.0035 0.0244 hdfc 0.0885 0.0008 0.0089 icici -0.2222 0.0014 0.0212 axis -0.0743 -0.0006 0.0187 yes 0.1712 0.0022 0.0173 kotak 0.1067 0.0010 0.0113 beta is used to measure the systematic risk of a stock in relation to market risk. beta for each of the banking stock is calculated considering bse 200 as a benchmark. all the banking stocks have positive beta except icici bank and axis bank. as the beta of all the selected banking stocks is less than 1, this indicates that stocks are less volatile than the benchmark. pnb has the highest beta of 0.5587, while hdfc has the lowest beta of 0.0885. a negative beta of -0.0743 and -0.2222 is observed for axis bank and icici bank respectively, indicating movement of stock in the opposite direction from the benchmark. from the beta values, it can be inferred that stocks of public sector banks are riskier than stocks of private sector banks. the alpha value indicates the performance of a stock in comparison with the market. the positive value of alpha indicates that stock is outperforming the market. all the stocks have positive values except for axis bank. the highest value of 0.007 is recorded for punjab national bank, while the lowest value of 0.001is recorded for kotak mahindra bank. overall stocks of public sector banks have a better value of alpha than stocks of private sector banks. standard error value represents the sample. a lower value of standard error indicates the accuracy of the sample. hdfc bank has the lowest standard error of 0.0089, while punjab national bank has the highest standard error of 0.072. from the values of standard error, it can be concluded that the sample is fair and it is representing the population accurately. abnormal return analysis in this section abnormal return of each stock for each day during the event window is analyzed. table 2 presents the abnormal return analysis and tstatistics of public sector banks and private sector banks for event window i.e. for a pre-event period (-7 to -1) and post-event period (7 to 1). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 36 table 2. abnormal return analysis of public sector banks for the event window day sbi pnb bob cb boi ar t statistic s ar t statistics ar t statistics ar t – statistics ar t statistic s -7 -0.50% -0.28 -0.94% -0.35 -0.45% -0.20 -0.72% -0.31 -0.80% -0.33 -6 -0.27% -0.15 -1.87% -0.69 -0.89% -0.39 -1.71% -0.73 -1.81% -0.74 -5 -3.12% -1.76 -5.64% -2.07 -3.49% -1.55 -6.27% -2.66 -4.59% -1.88 -4 -2.62% -1.48 -3.57% -1.31 -2.40% -1.07 -0.08% -0.03 -0.77% -0.32 -3 -1.49% -0.84 -2.05% -0.75 -3.07% -1.37 -2.60% -1.10 -2.83% -1.16 -2 3.97% 2.24 6.37% 2.34 4.03% 1.79 2.90% 1.23 2.10% 0.86 -1 -0.07% -0.04 0.19% 0.07 0.80% 0.36 -0.94% -0.40 0.69% 0.28 0 2.50% 1.41 0.47% 0.17 1.25% 0.56 0.63% 0.27 0.33% 0.13 1 8.19% 4.62 11.30% 4.15 8.96% 3.98 6.31% 2.68 12.74 % 5.22 2 -3.38% -1.91 -3.06% -1.12 -2.63% -1.17 -3.35% -1.42 -2.08% -0.85 3 1.45% 0.82 -1.86% -0.68 8.17% 3.63 0.59% 0.25 0.18% 0.08 4 -0.82% -0.46 -4.94% -1.81 -0.99% -0.44 0.36% 0.15 -2.53% -1.04 5 -0.08% -0.04 -1.42% -0.52 0.73% 0.33 0.75% 0.32 -1.42% -0.58 6 -1.03% -0.58 0.54% 0.20 0.95% 0.42 0.19% 0.08 0.84% 0.34 7 -6.59% -3.72 -9.01% -3.31 -8.53% -3.79 -6.12% -2.60 -3.40% -1.39 day hdfc icici axis yes kotak ar t statistic s ar t statistics ar t statistics ar t statistics ar t statistic s -7 -0.60% -0.67 -0.03% -0.02 0.40% 0.22 -0.70% -0.41 0.32% 0.28 -6 0.34% 0.39 -0.61% -0.28 -2.38% -1.28 -1.78% -1.03 -1.95% -1.72 -5 -1.19% -1.34 -1.37% -0.65 0.16% 0.08 -3.37% -1.95 -0.43% -0.38 -4 0.74% 0.83 -0.86% -0.40 0.07% 0.04 -0.56% -0.32 0.12% 0.11 -3 -1.12% -1.26 -0.15% -0.07 0.63% 0.34 -1.16% -0.67 -0.87% -0.77 -2 0.49% 0.55 3.04% 1.43 1.31% 0.70 0.72% 0.42 0.24% 0.22 -1 0.39% 0.43 1.23% 0.58 1.29% 0.69 1.45% 0.84 1.18% 1.04 0 -0.31% -0.34 -0.71% -0.33 -0.53% -0.28 -0.64% -0.37 1.48% 1.30 1 1.89% 2.11 3.69% 1.74 3.90% 2.09 5.69% 3.28 -0.54% -0.48 2 -0.12% -0.13 -5.48% -2.58 -1.54% -0.82 -6.04% -3.49 -0.78% -0.68 3 -1.73% -1.94 -2.82% -1.33 -3.73% -2.00 -4.99% -2.88 3.37% -2.97 4 -1.04% -1.17 -1.15% -0.54 -1.33% -0.71 1.43% 0.82 2.63% -2.32 5 -1.21% -1.35 0.36% 0.17 0.56% 0.30 -0.61% -0.35 0.79% 0.69 6 -1.56% -1.75 -1.31% -0.61 -0.11% -0.06 0.20% 0.12 0.36% 0.31 7 -1.09% -1.22 -1.46% -0.69 -1.61% -0.86 -5.78% -3.34 -2.17% -1.92 *-t stats is significant at 5 % all the public sector banks reacted positively to the announcement of demonetization. this can be observed in a positive return on the event date. in the private sector, all banks except kotak mahindra bank reacted negatively to the event. it is interesting to note that all banking stocks except kotak https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 37 mahindra bank show a positive return on the (t+1) day. in the long run, most of the banks show a negative return. also, none of the banks except sbi and pnb shows statistically significant positive abnormal return before the event. this approves that people were not aware of the news before its announcement and it was shocking news for everyone. cumulative abnormal return analysis this section analyses the cumulative abnormal returns of each security over a period of 15 days, i.e. within the event window to get an idea about the average behaviour of a particular stock. it can be observed from table 3 that pre-event window; car of all banks except icici bank and axis banks is negative. on demonetization day all psbs has shown an increase in return for investors while all pvsbs except kotak mahindra bank shows a negative return. in the post-event window stocks of sbi and bob earn positive returns while the stock of the rest of the banks earns negative returns. table 3. cumulative abnormal return analysis day sbi pnb bob cb boi -7 -0.50% -0.94% -0.45% -0.72% -0.80% -6 -0.78% -2.81% -1.34% -2.44% -2.61% -5 -3.89% -8.45% -4.83% -8.71% -7.20% -4 -6.51% -12.02% -7.23% -8.78% -7.97% -3 -8.00% -14.07% -10.30% -11.38% -10.80% -2 -4.03% -7.70% -6.28% -8.48% -8.70% -1 -4.10% -7.51% -5.48% -9.42% -8.01% 0 -1.60% -7.04% -4.23% -8.79% -7.68% 1 6.58% 4.26% 4.73% -2.48% 5.06% 2 3.20% 1.20% 2.10% -5.83% 2.98% 3 4.66% -0.66% 10.27% -5.24% 3.16% 4 3.84% -5.60% 9.28% -4.88% 0.63% 5 3.76% -7.02% 10.01% -4.12% -0.79% 6 2.73% -6.48% 10.96% -3.93% 0.05% 7 -3.87% -15.48% 2.43% -10.05% -3.35% day hdfc icici axis yes kotak -7 -0.60% -0.03% 0.40% -0.70% 0.32% -6 -0.26% -0.64% -1.98% -2.48% -1.63% -5 -1.45% -2.01% -1.82% -5.85% -2.05% -4 -0.70% -2.87% -1.75% -6.41% -1.93% -3 -1.83% -3.02% -1.11% -7.57% -2.80% -2 -1.33% 0.01% 0.20% -6.85% -2.56% -1 -0.95% 1.25% 1.49% -5.40% -1.38% 0 -1.25% 0.54% 0.96% -6.03% 0.09% 1 0.63% 4.23% 4.86% -0.34% -0.45% 2 0.52% -1.25% 3.33% -6.39% -1.22% 3 -1.21% -4.06% -0.40% -11.38% -4.59% 4 -2.26% -5.21% -1.73% -9.95% -7.22% 5 -3.46% -4.86% -1.18% -10.56% -6.43% 6 -5.03% -6.16% -1.29% -10.35% -6.08% 7 -6.11% -7.62% -2.90% -16.13% -8.25% https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 38 average abnormal return and cumulative average abnormal return analysis to measure the impact of the event on the selected stock arr and t statistics of day-wise arr is calculated. from table 4 it can be observed that the pre-announcement period there are two incidences of positive arr on t-1 and t-2 day. after the announcement, there is one incidence of positive arr on t+1 day followed by negative arr indicating low confidence of investors in the banking stocks. also on vent day, there is a positive arr of 0.004 % which is significant at 5 %. from this null hypothesis is rejected and an alternate hypothesis is accepted. demonetization announcement has a significant impact on the stock prices of selected banks. table 4. average arr and t statistics day aar t stat -7 -0.004 -6.01* -6 -0.013 -19.28* -5 -0.029 -43.74* -4 -0.010 -14.79* -3 -0.015 -21.97* -2 0.025 37.57* -1 0.006 9.26* 0 0.004 6.67* 1 0.062 92.73* 2 -0.028 -42.46* 3 -0.008 -12.08* 4 -0.014 -20.38* 5 -0.002 -2.29* 6 -0.001 -1.37 7 -0.046 -68.3* *-t stats is significant at 5 % conclusion this study is based on the impact of demonetization announcement on the selected stocks of the banking sector in india. this research is based on the standard event study methodology. the study observed that there is no significant difference in the abnormal returns before demonetization announcement indicating that there was no seepage of information, and therefore we can say that this only handful of people were aware of this event. on the event day, none of the selected stock has shown significant positive abnormal returns. further on the event day and followed by the event day positive significant arr is observed indicating demonetization had a significant impact on the stock prices of selected banks. also, car on the event day is not equal to zero indicating the indian stock market was not efficient for demonetization announcement. references bharadwaj, r., mohith, s., pavithra, s., & anaath, a. (2017). impact of demonetization on indian stock market. international journal of management, 8(3), 75-82. bse limited. (2021). retrieved from https://www.bseindia.com chauhan, s., & kaushik, n. (2017). impact of demonetization on stock market: event study methodology. indian journal of accounting, 127-132. https://www.bseindia.com/ https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 39 eventstudytools. (n.d.). eventstudytools. retrieved from https://www.eventstudytools.com kumar, a. (2018). demonetization effect on sectorial indices with special reference to indian stock marketan empirical analysis. international research journal of management and commerce, 5(4), 358-373. lodha, s., kumawat, e., & bapna, c. (2018). impact of demonetization announcement on indian stock market: an event study. nirnay the journal of decision science, 4-16. tiwari, r., & anjum, b. (2017). review of demonetization in india. saibalaji international journal of management sciences, 1. 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) indian journal of finance and banking vol. 7, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 13 external sources of fund of microfinance institutions (mfi) in bangladesh: do institutional characteristics matter? serajul islam associate professor department of business administration international islamic university chittagong, chittagong, bangladesh e-mail: serajulislamiiuc@gmail.com abstract the external sources of fund for the micro-finance institutions (mfis) include various loans and donor’s fund. the loan financing consists of loan from the government, the loan from other micro credit financial institutions, the loan from the commercial bank and the loan from palli karma sahayak foundation (pksf). there is the impact of capital resources on the profitability performance. therefore, it is important for a firm to know about the significant influences of institutional characteristics on external sources of fund. hence, this study investigates the driven factors of the sources of funds of microfinance institutions, the effect of institutional characteristics on sources of fund especially on external sources. the study is conducted by examining longitudinal data of 169 microfinance institutions (mfis) from bangladesh covering a period of six years from 2009 to 2014. this study employs relevant data from the mix market and microcredit regulatory authority (mra) annual reports. results show that a reliance on external sources of the fund (esf) has a significant correlation with interest rate cap, inflation rate, roa, number of branches (size) and age of the mfis. donations have a significant correlation with the regularity variable and size of the mfis. additionally, apart from location, the rest of the institutional variables significantly influence the external sources of funds (esf). keywords: micro finance institution, external sources of fund, capital structure, and profitability, institutional characteristics, regularity, macroeconomic factor. jel classification codes: g2, g21, g23, o16. introduction the sources of funds for mfi play a vital role on their overall performance. the microfinance industry in bangladesh optimally utilizes the sources of funds (mia & rana, 2018).costs of funds depend on the sources of funds ,and the fund’s sources affect the rate of interest of mfis (al-azzam & mimouni, 2016; assefa & meesters, 2013; cotler & almazan, 2013; dorfleitner & mosch, 2013; fernando, 2006; ghosh, 2013, heinen & baquero, 2013; janda & zetek, 2018; roberts, 2013). policymakers and academicians have been considering interest rates as a major issue in microfinance since its inception (fernando, 2006, mersland & khafagy, 2013; rosenberg et al., 2013). if mfi uses external debt (commercial bank’s debt) as the source of funds, it increases the cost of funds and increases the interest rate. and it could detain mfi’s outreach goal, and clients face financial trouble (sun & im, 2015). cull and morduch (2007) considered mfis as micro banks that aim to gain profitability and poverty alleviation. for promoting these targets, fund’s external sources should be used by mfis (tchuigoua, 2015). however, it has a small research work regarding the effect of institutional characteristics on sources of funds in mfis. therefore, empirically testing the issues driving the fund sources is the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 14 principal focus of this study. so, answering two questions is the attempt of this study. first, what are the influential factors of the capital structure of mfis? second, do institutional characteristics matter on sources of the fund? institutional characteristics influence the sources of funds of large organizations (frank & goyal, 2009; rajan & zingales, 1995), smes (degryse et al., 2012), and little business (aktas et al., 2011). but do institutional characteristics matter in the financing choice of mfis? there is very limited empirical literature on sources of funds in mfis. for instance, the effects of institutional life cycle and maturity on financing choice to the mfis have been identified (de sousa shields & frankiewicz, 2004; ledgerwood & white, 2006).it has a study on factors influencing funding from abroad for the mfis. the study found two determinants like return and good outreach, have a positive relationship with international commercial borrowing (mersland & urgeghe, 2013). hence, there is a research gap investigating the factors influencing mfi's fund choices in bangladesh. the study's main findings reveal that regularity variable, macroeconomic variable and institutional characteristics influence the external sources of funds of mfis in bangladesh. this study will help policymakers and managers minimize the cost of funds and get sufficient funding from both the debt and equity sources. the rest of the study's sections are conceptual framework, research methodology, results and findings and concluding remarks. literature review in the present day, the increasing number of microfinance ngos are focusing more on the deposit collections than giving credit for providing saving service to low-income people. so, they increase their capacity to mobilize and intermediate voluntary savings (ledgerwood & white, 2006). but most of the mfis are trying to eradicate poverty by giving a loan to poor people mostly based on subsidies (morduch, 1999). client savings is one of the sources of fund of mfis. microfinance is a growing flexible means of widening access to financial services to alleviate poverty (armendariz de aghion & morduch, 2010). accessing medium to long term sustainable commercial sources of the fund is one of the major challenges of mfis. the sources of funds of mfis are shareholders fund, customer’s deposit, debenture, qualifying medium to long-term loans, grants or donations from individuals, organizations, government and international sources (anyanwu, 2004). hasan and ahmed (2009) said that members’ savings, commercial banks and the stock market are the future sources of mfis. according to his study, there is a lack of efficiency in the system of mobilizing funds to mfis. it is very difficult to give figures on how much donor funds go to the poor. donor funds are mainly allocated for administrative uses, and only a few percent is spent on the poor (yunus, 1999). hartarska and nadolnyak (2008) found the negative relationship between the leverage of mfis and their sustainability. currently, the source of funds of mfis is a vital issue in finance though there are several barriers to raising capital, which hamper the growth of mfis (bogan, 2012). hartarska and nadolnyak (2008) mentioned that all the rating agencies do not influence mfis' funds' sources. but the commercial investment is necessary to fund the continued expansion of microfinance (cull, demirguckunt, & morduch, 2009). garmaise and natividad (2010) mentioned two reasons for differing financing sources of mfis from banks. first, the demand deposit is not the main source of finance. second, noncommercial lenders provide the debt financing of mfis. adongo and stork (2006) found that a positive relationship between donor involvement in providing start-up funds for the loan portfolio and financial sustainability. the cost of funds is an important issue for all mfis in bangladesh. for example, rosenberg, gonzalez, and narian (2009) found that cost of funds is one of the four influencing factors of interest rates in mfis. they also found that most of the total cost is operating depending on organizational features like the age of the mfi, location and loan size etc. also, jayadev and rao (2012) opined that funds' cost is the most influencing element for fixing the mfis' interest rate. they also mentioned that mfis are less leveraged than commercial banks. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 15 sources of funds are debt and equity. the unique nature of mfi's sources of the fund is the sponsored external financing (tchuigoua, 2015). a lot of mfis still use subsidized funds as their sources of capital (armendariz de aghion & morduch, 2010).the sources of fund composition of mfis in bangladesh are the client's savings, the government's loan, loans from other mfis, the loan from commercial banks, other loans, cumulative surplus, other funds, and the loan pksf, and donor's fund. methodology the methodology part includes modeling the determinants of funds and data sources. modeling determinants of sources of funds janda and zetek (2018) used both the factors (internal & external) to develop an econometric model. for deriving such a model, the same method has been followed here. therefore, the model can be expressed as follows: 1 it 2 it 3 it 4 it 5 it it i 2 t = 0 + lnnob + roa + loc + lnage + (lnage ) + zx + (1)itesf        here 'i' stands for the microfinance institutions with a time, 't' and €it expresses the stochastic error. the dependent variable, external sources of the fund (esf), has been used as a proxy to capture all the major external sources. the major external sources of funds are a loan from the government (govt), the loan from other mfi (mfib), the loan from the commercial bank (bank), the loan from pksf (pksf), and donors' fund (don). the exclusive dependent variables are only csav and cums two internal sources of funds. the model includes the size of mfi that is represented by the number of branches (b), profitability measured by return on assets (roa), location (loc), and age of mfi (age). hence, the model focuses on five institutional characteristics. generally, there is a positive relationship between profitability and debt financing. so, roa affects sources of funds. location is included to examine what location chooses what type of financing more. the number of branches, i.e., the size of mfi, also affects capital structure. normally, it has a positive relation with external financing. besides, the age (age) of mfis represents the consequence of experience and long life on the financing policy. usually, the superior the age, the bigger the practice of a microfinance institution. so it has a hands-on experience that may affect the external financing policy. furthermore, the present study has also included age2 to explore the opportunity of a non-linear correlation with external funding policy to confine the 'learning curve' effect (mia & rana, 2018). also, to overcome simultaneity bias and improve the regression model's goodness of fit, the model transferred age and b into natural logarithms (de bandt & davis, 2000). the model also includes three macroeconomic issues and one regulatory factor. these variables are the control variables to estimate the model (ahlin, lin, & maio, 2011). since an interest rate cap is introduced for controlling the rates of interest in micro-financing, the analysis anticipates the negative impact of intcp on external funding. moreover, the gdp growth rate reveals the economic condition that may positively relate to the funds' external sources. another control variable, the inflation (inf) rate of the model to be expected negatively related with the funding from external sources. however, the model's exchange rate (exc) may positively correlate with the donation and negatively with the capital's remaining external sources. the definitions and measurement units of the variables are given in the table below: https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 16 table 1. definitions and measurement units of the variables variable definition unit external sources of fund (esf): dependent variables government funds (govt) amount of government loans (state-owned bank) and concessionary funds divided by the total amount of fund of an mfi*100 % peer borrowing (mfib) total amount of borrowed capital from peer mfis divided by the total amount of fund of an mfi*100 % loan from commercial bank (bank) total amount of borrowed capital from commercial banks divided by the total funds of an mfi*100 % loan from palli karma sahayak foundation (pksf) amount of pksf funds divided by the total funds of an mfi*100 % donors’ fund (don) total amount of donations divided by the total funds of an mfi*100 % independent variables number of branches (b) size of an mfi is based on the total number of branch number return on asset (roa) total earnings divided by total asset ratio location (loc) dummy variable-1, if the mfi was registered in the capital city of dhaka, 0 otherwise 0,1 age of mfi (age) year of establishment (registration) of an mfi number interest rate caps (intcap) 0 before the interest rates cap in 2011 and 1 after, dummy variable 0, 1 gdp growth rate (gdpgr) annual gross domestic product growth % inflation (inf) rate of price change in the economy as a whole % exchange rate (exc) exchange rate between bangladeshi taka and us dollar ratio exclusion variables savings (csav) amount of savings divided by the total amount of fund of an mfi*100 % cumulative surplus (cums) amount of cumulative surplus divided by the total amount of fund of an mfi*100 % data sources this research used only secondary information, including annual reports of the microcredit regulatory authority (mra), bangladesh. this study has included a period of six years, from 2009 to 2014. during this period, those mfis existed and completed datasets are considered for the study as the number of mfis is not equal. accordingly, one hundred sixty-nine samples are finalized for the study. findings and discussion the winsorized observations are used in descriptive statistics and regressions. descriptive statistics of the variables are given in the table-2. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 17 table 2. descriptive statistics of the variables variable obs mean std. dev. min max intcap 1014.000 0.500 0.500 0.000 1.000 inf 1014.000 7.498 1.678 5.423 10.705 exc 1014.000 78.483 8.973 65.558 86.742 gdpgr 1014.000 5.950 0.525 5.000 6.500 don 1011.000 2.097 7.453 0.000 43.990 bank 1011.000 4.627 11.082 0.000 54.130 govt 1011.000 1.546 4.706 0.000 28.360 mfib 1011.000 1.585 4.832 0.000 28.420 pksf 1011.000 22.610 27.618 0.000 89.540 roa 1012.000 3.226 3.956 -10.170 16.000 age 1014.000 16.878 7.582 4.000 38.000 b 1014.000 56.512 229.056 1.000 2029.000 loc 1014.000 0.290 0.454 0.000 1.000 source: authors from the descriptive statistics table (table#2), we find that pksf is the largest source among all external sources. it has a mean value of 27.62%, whereas its maximum value is 89.54%. the second highest external source of funds is bank, and its mean value and highest value are 4.63% and 54.13%, respectively. the other external sources are don, mfib and govt, and their mean values are 2.1%, 1.59% and 1.55%, respectively. it is also found that some of the mfis only depend on internal sources of funds. on the contrary, some mfis depend mostly on external sources because their maximum values are more than 50%. the average growth rate of gross domestic product (gdp) has been found the medium rate of 5.95% during the sample period. table 3. pair wise correlation lnb lnage intcap inf exc gdpgr roa loc lnb 1 lnage 0.4086 1 intcap 0.024 0.2204 1 inf 0.0033 0.0184 -0.3496 1 exc 0.0203 0.1907 0.6191 0.399 1 gdpgr 0.0186 0.1641 0.4762 0.5176 0.901 1 roa 0.079 0.0277 0.0632 0.011 0.0576 0.06 1 loc -0.09 -0.1619 0 0.0002 0.0003 -0.0001 0.017 1 from the pair wise correlation table, it is found that there is multicollinearity between gdpgr and exc. the correlation of only these independent variables (0.901) exceeds the highest limit of 0.80 (kennedy, 2008).therefore, these two variables are not used together in the same model. the mostly used systems for analyzing panel data are fixed effect (fe) analysis and random effect (re) analysis (torres-reyna, 2007). this study is based on panel data. hence, random effect https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 18 analysis has been chosen through the hausman (1978) test, and the discussion is based on the results of re analysis. robust standard errors have been measured in all the models. table 4. determinants of external sources of funds (random effect) (1) (2) (3) (4) (5) don bank govt mfib pksf intcap -1.1901** (0.4938) 4.4997*** (0.8566) 0.1181 (0.3749) -0.3510 (0.3689) -7.6903*** (1.3972) inf -0.1981 (0.1282) 0.5537** (0.2381) 0.0339 (0.1039) 0.0053 (0.1005) -1.0956*** (0.3347) gdpgr 0.3055 (0.4135) -0.6244 (0.7873) 0.0109 (0.3433) -0.4713 (0.3300) 1.2231 (1.0408) roa -0.0117 (0.0359) -0.1568** (0.0674) 0.0078 (0.0294) -0.0007 (0.0284) -0.2395*** (0.0902) loc -0.5931 (1.1575) 0.6692 (1.4999) -0.7194 (0.6659) -0.6076 (0.7148) -2.1209 (4.1738) lnage 3.8966 (3.7356) 1.9699 (6.5830) 12.7062*** (2.8834) -0.1796 (2.8426) 37.5285*** (9.8969) lnb 0.8014*** (0.3059) 1.5626*** (0.4361) -0.2817 (0.1930) -0.3428* (0.2025) 2.5350*** (0.9515) lnage2 -0.7772 (0.7936) -0.6757 (1.3364) -2.4494*** (0.5863) 0.0216 (0.5846) -5.5776** (2.2312) _cons -3.9232 (4.8487) -1.5115 (8.7333) -13.8632*** (3.8214) 5.8148 (3.7444) -36.5324*** (12.5414) n 1009 1009 1009 1009 1009 f r2_a n_g 169.0000 169.0000 169.0000 169.0000 169.0000 standard errors in parentheses *p< 0.10, **p< 0.05, ***p< 0.01 since the fitness on the whole of the guesstimates is rationally fine, the modeling of determinants of external sources of funds (esf) is robust. though the data has a different scale of importance, fstatistics is significant here. the result of the donation model (model 1) indicates that the regulatory variable, intcap, harms the don, one external source of fund. this result is inconsistent with the findings of a positive relationship between regulation and donation, and the regulatory control administers the activities of mfis that offer intrinsic assurances (demirguc-kunt & maksimovic, 1999). but institutional variable lnb has a positive effect on don. it suggests that donors pay attention to the size of the mfis, which is supported by the findings that donors' attention is high on the effective use of their grants and expansion (tchuigoua, 2015). the result is also supported by the experimental (buchheit & parsons, 2006) and pragmatic study (tinkelman, 1998; trussel & parsons, 2007). there is no significant impact of macroeconomic variables inf and gdpgr on the don. profitability (roa) does not have a significant effect on don. the findings are the direct opposite of the literature, which maintains the affirmative signal of financial soundness with donations (trussel & parsons 2007) and two specific institutional characteristics loc and age, do not have any significant influence on don. the result of the bank model (model 2) indicates that the regulatory variable, intcap has a positive effect on the bank loan, which is an interesting finding because it controls interest rate that https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 19 makes a barrier for external sourcing of funds. this result is inconsistent with the expectation. additionally, macroeconomic variable inf (inflation) has a positive effect on a bank loan that is opposite to the initial expectation. the most striking finding reveals that inflation positively influences mfis for borrowing from commercial banks. but another macroeconomic variable, gdpgr, harms bank loans though it loses its statistical significance. roa has a negative influence on loans from commercial banks. it suggests that mfis should use retained earnings as the new financing to reduce the dependency on borrowing. the result is supported by the profitability that is negatively associated with borrowings (tchuigoua, 2015).there is no significant impact on the location and age of the mfis on debt from commercial banks. however, another institutional variable (lnb), the size of mfi, positively influences commercial banks' loans. hence, the size of mfi is a determinant of debt by bank-loan, where the organization is small or has a small number of branches (almeida & campello, 2007). the result of the govt model (model 3) indicates that the regulatory variable, intcap, has a positive effect on the loan from the government (govt), but it is statistically insignificant. also, macroeconomic variables inf (inflation) and gdpgr have a positive effect on govt that is the opposite of the initial expectation though the variables lose their statistical significance. roa has a positive influence on government loans, and it is also statistically insignificant. there is no significant impact of location and number of branches of the mfis on government debt. however, another institutional variable (lnage), the age of mfi, positively influences the government's loans. hence, the age of mfi is an important determinant for mfi debt financing from government loans. the result of the mfib model (model 4) indicates that the regulatory variable, intcap, hurts the loan from other mfi (mfib), but it is statistically insignificant. besides, macroeconomic variables inf (inflation) and gdpgr have a statistically insignificant impact on mfib. profitability (roa) negatively influences loans from other microfinance institutions, and it is also statistically insignificant. there is no significant impact of location and age of the mfis on debt from other mfib. however, another institutional variable (lnb), the number of branches of mfi, has a positive influence on loan from other mfis. therefore, the size of mfi is an important determinant for mfi debt financing from mfib. the result of the pksf model (model 5) indicates that the regulatory variable, intcap harms the pksf loan, which is very much consistent with the prior expectation because it controls interest rate that makes a barrier for external sourcing of fund. besides, the macroeconomic variable inf (inflation) also harms the pksf loan consistent with the initial expectation. but another macroeconomic variable gdpgr has a positive impact on pksf loan though it loses its statistical significance. roa has a negative influence on loan from pksf. this result proposes that mfis should use equity as the new financing to reduce debt financing dependency. although the negative relation of roa with the debt financing is consistent with the previous studies (hartaska & nadolnyak, 2008; gropp & heider, 2010), the role of operating efficiency or profitability on loan from pksf is significant. there is no significant impact on the location of the mfis on debt from pksf. however, other institutional variables (lnage), age of mfi, and the number of branches (lnb), have positive influences on loan from pksf. therefore, age and number of branches of mfis are the important determinants for mfi debt financing from pksf loans. additionally, the outcome reveals that the size of mfi has a significant association with debt from pksf. reputations of big mfis are higher, and such institutions can manage their risks efficiently. as a result, they are less risky than small mfis. conclusion this research has contracted with a vital micro-finance issue by recognizing the elements influencing external sources of funds. some necessary policy propositions for mfis have been found from the discussion and analysis. gdpgr and loc have no significant influence on the esf. so, other significant determinants of esf are intcap, inf, roa, size and age. except for loc, all the institutional characteristics influence the external sources of funds of microfinance institutions (mfis) significantly, particularly in bangladesh. in the don model, findings prove that the regulatory variable https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 20 and size of the mfis have a significant influence on the donors' fund. it reveals a positive relationship between the number of donations and the size of mfis, suggesting that large mfis attract more donations. also, for the bank and pksf model, the size of mfi has the likely impact on the loan from the bank and pksf. however, there is no consistency with the previous study (tchuigoua, 2015) that states that donors provide higher for sustaining tiny microfinance institutions' growth. additionally, it is found from the donation model that an interest rate cap has a negative effect on the donors' decision. the same negative effect of interest rate cap has been found for the pksf model, and the relationship is also significant between this regulatory intervention and pksf's fund. however, the interest rate cap has a significant positive role on the bank loan. this finding reveals that the bank is willing to give a loan if there is an interest ceiling for controlling excessive interest rates as it reduces their default risk. one interesting finding is that this intervention policy is ineffective for the fund from the government and other microfinance institutions. the result is supported by the empirical study that there is an ineffectiveness of interest rate cap policy on the portfolio yield of mfis (mia & rana, 2018). the macroeconomic factor, inflation, has a significant positive effect on a bank loan and a negative impact on pksf's fund. profitability has no significant impact on donations, the government's fund, and the loan from other mfis supported by tchuigoua (2015). it claimed that donors do not mainly expect a rate of return. but it has a significant negative impact on loans from commercial banks and pksf, which is a very interesting finding. the study reveals that commercial lenders are more sensitive to profitability than noncommercial lenders. the finding is inconsistent with the previous study, as mentioned by matth¨aus-maier and von pischke (2006) that commercial banks are making more investments in microfinance not only for charity but also for getting returns. there is a positive relationship between profitability and commercial bank loan (de mel, mckenzie, & woodruff, 2008). the study also found that the government and pksf encourage small mfis for their sustainability by giving more funds than the larger mfis. this negative relation among the age of the mfis, govt and pksf are statically significant. future studies could be done to find the determinants of cross-border funding of microfinance and examine the effect of the lawful organizational and regulatory framework on the capital formation of mifs in bangladesh. references ahlin, c., lin, j., & maio, m. 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(1999). the grameen bank. scientific american, 281(5), 114-119. appendices appendix: table a1: ols for model-1 source ss df ms number of obs = 1009.00 f( 8, 1000) 4.64 model 2009.26 8 251.157744 prob > f 0.00 residual 54087.87 1000 54.0878711 r-squared 0.04 adj r-squared 0.03 total 56097.13 1008 55.6519177 root mse 7.35 don coef. std. err. t p>t [95% conf. interval] intcap -1.10 .8774924 1.26 0.210 -2.823678 0.62 inf -0.19 .2653463 0.71 0.478 -.7090914 0.33 gdpgr 0.37 .8998563 0.41 0.684 -1.399465 2.13 roa 0.12 .0588385 2.04 0.041 .0048019 0.24 lnage -8.51 4.121602 2.06 0.039 -16.59886 -0.42 lnb 0.63 .166162 3.80 0.000 .3059085 0.96 lnage2 1.55 .7972955 1.95 0.052 -.0137182 3.12 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 24 loc -0.73 .5170545 1.40 0.161 -1.740735 0.29 _cons 11.57 6.291318 1.84 0.066 -.779339 23.91 table a2: ols for model-2 source ss df ms number of obs 1009.00 f( 8, 1000) 12.68 model 11228.15 8 1403.519 prob > f 0.00 residual 110729.05 1000 110.729 r-squared 0.09 adj r-squared 0.08 total 121957.20 1008 120.989 root mse 10.52 bank coef. std. err. t p>t [95% conf. interval] intcap 5.05 1.255522 4.02 0.00 2.58 7.51 inf 0.68 .3796592 1.78 0.08 -0.07 1.42 gdpgr -0.88 1.28752 0.68 0.50 -3.40 1.65 roa -0.32 .0841865 3.82 0.00 -0.49 -0.16 lnage 4.82 5.897214 0.82 0.41 -6.75 16.39 lnb 1.88 .2377456 7.90 0.00 1.41 2.34 lnage2 -1.55 1.140775 1.36 0.18 -3.79 0.69 loc 0.58 .7398049 0.78 0.43 -0.87 2.03 _cons -2.51 9.001657 0.28 0.78 -20.18 15.15 table a3: ols for model-3 source ss df ms number of obs 1009 f( 8, 1000) 6.67 model 1132.734 8 141.591797 prob > f 0 residual 21227.89 1000 21.2278932 r-squared 0.0507 adj r-squared 0.0431 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 25 total 22360.63 1008 22.1831623 root mse 4.6074 govt coef. std. err. t p>t [95% conf. interval] intcap 0.248425 .5497268 0.45 0.651 -0.8303257 1.327175 inf 0.052803 .1662328 0.32 0.751 -0.2734025 0.3790076 gdpgr 0.024483 .5637372 0.04 0.965 -1.081761 1.130726 roa -0.09621 .0368608 2.61 0.009 -0.1685393 -0.0238724 lnage 8.372216 2.582079 3.24 0.001 3.305302 13.43913 lnb -0.39641 .1040963 3.81 0 -0.6006824 -0.192138 lnage2 -1.62487 .4994854 3.25 0.001 -2.605034 -0.6447143 loc -0.75834 .3239216 2.34 0.019 -1.39398 -0.1226917 _cons -8.04466 3.941351 2.04 0.042 -15.77892 -0.3103893 table a4: ols for model-4 source ss df ms number of obs 1009 f( 8, 1000) 3.59 model 658.360957 8 82.2951196 prob > f 0.0004 residual 22916.614 1000 22.916614 r-squared 0.0279 adj r-squared 0.0201 total 23574.975 1008 23.387872 root mse 4.7871 mfib coef. std. err. t p>t [95% conf. interval] intcap -0.5140698 .5711743 -0.90 0.368 -1.634907 0.6067679 inf -0.0141708 .1727183 -0.08 0.935 -0.3531027 0.3247611 gdpgr -0.4985114 .5857313 -0.85 0.395 -1.647915 0.650892 roa 0.1120502 .0382989 2.93 0.004 0.0368947 0.1872058 lnage 3.136983 2.682819 1.17 0.243 -2.127617 8.401583 lnb -0.3190772 .1081576 -2.95 0.003 -0.5313191 -0.1068354 lnage2 -0.5563466 .5189728 -1.07 0.284 -1.574747 0.4620541 loc -0.5572619 .3365593 -1.66 0.098 -1.217705 0.1031816 _cons 1.163388 4.095123 0.28 0.776 -6.872632 9.199407 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 26 table a5: ols for model-5 source ss df ms number of obs 1009 f( 8, 1000) 25.21 model 129095.522 8 16136.9403 prob > f 0 residual 640014.746 1000 640.014746 r-squared 0.1679 adj rsquared 0.1612 total 769110.268 1008 763.006218 root mse 25.299 pksf coef. std. err. t p>t [95% conf. interval] intcap -8.59246 3.018481 -2.85 0.005 -14.51574 -2.669177 inf -1.298126 .9127632 -1.42 0.155 -3.089277 0.4930252 gdpgr 1.510438 3.09541 0.49 0.626 -4.563806 7.584683 roa -1.142845 .2023982 -5.65 0 -1.540019 -0.7456709 lnage 85.6115 14.17787 6.04 0 57.78971 113.4333 lnb 4.193141 .5715795 7.34 0 3.071509 5.314774 lnage2 -14.32086 2.742612 -5.22 0 -19.70279 -8.938924 loc -1.032405 1.778613 -0.58 0.562 -4.522647 2.457836 _cons -101.4312 21.64147 -4.69 0 -143.8991 -58.9633 table a6: robust check for model 1 linear regression number of obs 1009.00 f( 8, 1000) 4.32 prob > f 0.00 r-squared 0.04 root mse 7.35 robust don coef. std. err. t p>t [95% conf. interval] intcap -1.10 0.81 -1.36 0.17 -2.69 0.48 inf -.188 0.25 -0.76 0.45 -0.68 0.30 gdpgr .366 0.81 0.45 0.65 -1.22 1.96 roa .120 0.06 2.14 0.03 0.01 0.23 lnage -8.510 6.10 -1.39 0.16 -20.49 3.47 lnb .632 0.14 4.45 0.00 0.35 0.91 lnage2 1.550 1.14 1.37 0.17 -0.68 3.78 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 27 loc -.726 0.51 -1.43 0.15 -1.72 0.27 _cons 11.566 8.51 1.36 0.17 -5.13 28.26 table a7: robust check for model 2 linear regression number of obs f( 8, 1000) prob > f r-squared root mse robust bank coef. std. err. t p>t [95% conf. intcap 5.046054 1.36 3.70 0.00 2.37 inf .677068 0.39 1.74 0.08 -0.09 gdpgr .878072 1.34 -0.65 0.51 -3.51 roa -.3211897 0.09 -3.54 0.00 -0.50 lnage 4.817849 5.79 0.83 0.41 -6.54 lnb 1.877266 0.31 6.01 0.00 1.26 lnage2 1.547518 1.08 -1.43 0.15 -3.67 loc .5799564 0.73 0.80 0.43 -0.84 _cons -2.513548 8.75 -0.29 0.77 -19.69 table a8: robust check for model 3 linear regression number of obs 1009.00 f( 8, 1000) 7.60 prob > f 0.00 r-squared 0.05 root mse 4.61 robust govt coef. std. err. t p>t [95% conf. interval] intcap .25 0.55 0.45 0.65 -0.83 1.33 inf .05 0.18 0.30 0.77 -0.29 0.40 gdpgr .02 0.61 0.04 0.97 -1.16 1.21 roa -.10 0.04 -2.44 0.02 -0.17 -0.02 lnage 8.37 1.50 5.59 0.00 5.43 11.31 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 28 lnb -.40 0.09 -4.40 0.00 -0.57 -0.22 lnage2 -1.62 0.29 -5.63 0.00 -2.19 -1.06 loc -.76 0.29 -2.63 0.01 -1.32 -0.19 _cons -8.04 2.76 -2.92 0.00 -13.45 -2.64 table a9: robust check for model 4 linear regression number of obs 1009.00 f( 8, 1000) 3.32 prob > f 0.00 r-squared 0.03 root mse 4.79 robust mfib coef. std. err. t p>t [95% conf. interval] intcap .5140698 0.52 -0.98 0.33 -1.54 0.52 inf .0141708 0.16 -0.09 0.93 -0.32 0.29 gdpgr .4985114 0.51 -0.98 0.33 -1.49 0.50 roa .1120502 0.05 2.27 0.02 0.02 0.21 lnage 3.136983 2.18 1.44 0.15 -1.13 7.41 lnb .3190772 0.08 -4.03 0.00 -0.47 -0.16 lnage2 .5563466 0.41 -1.35 0.18 -1.36 0.25 loc .5572619 0.32 -1.72 0.09 -1.19 0.08 _cons 1.163388 3.67 0.32 0.75 -6.03 8.36 table a10: robust check for model 5 linear regression number of obs 1009.00 f( 8, 1000) 38.71 prob > f 0.00 r-squared 0.17 root mse 25.30 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 29 robust pksf coef. std. err. t p>t [95% conf. interval] intcap 8.59246 2.91 -2.96 0.00 -14.29 -2.89 inf -1.298126 0.90 -1.45 0.15 -3.05 0.46 gdpgr 1.510438 3.00 0.50 0.62 -4.37 7.39 roa 1.142845 0.22 -5.27 0.00 -1.57 -0.72 lnage 85.6115 12.90 6.64 0.00 60.30 110.92 lnb 4.193141 0.59 7.08 0.00 3.03 5.36 lnage2 14.32086 2.66 -5.38 0.00 -19.54 -9.10 loc 1.032405 1.78 -0.58 0.56 -4.52 2.46 _cons -101.4312 18.92 -5.36 0.00 -138.56 -64.30 table a11: hausman test ---coefficients -- (b) (b) (b-b) sqrt(diag(v_b-v_b)) f4 . difference s.e. intcap -1.628999 -1.190124 -.4388745 .7756078 inf -.2646382 -.1980557 -.0665825 .1173038 gdpgr .39186 .3054745 .0863855 .17537 roa -.0209966 -.0116552 -.0093413 .0069348 lnage 4.498007 3.896566 .6014411 3.239226 lnb .9795708 .801363 .1782078 .4625556 lnage2 -.6103025 -.7771929 .1668904 1.129302 b = consistent under ho and ha; obtained from xtreg b = inconsistent under ha, efficient under ho; obtained from xtreg test: ho: difference in coefficients not systematic https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 30 chi2(6) = (b-b)'[(v_b-v_b)^(-1)](bb) 7.73 prob>chi2 = 0.2588 table-a12: fixed effect: (1) (2) (3) (4) (5) don bank govt mfib pksf intcap -1.6290* (0.9187) -2.0512 (1.7358) -0.4234 (0.7673) 0.6151 (0.7368) -4.0123* (2.2764) inf -0.2646 (0.1736) -0.4422 (0.3281) -0.0482 (0.1450) 0.1510 (0.1393) -0.5359 (0.4302) gdpgr 0.3919 (0.4487) 0.8799 (0.8478) 0.1172 (0.3748) -0.6760* (0.3599) 0.4054 (1.1119) roa -0.0210 (0.0365) -0.1373** (0.0690) 0.0276 (0.0305) -0.0168 (0.0293) -0.2071** (0.0905) loc 0.0000 (.) 0.0000 (.) 0.0000 (.) 0.0000 (.) 0.0000 (.) lnage 4.4980 (4.9401) -23.5443** (9.3341) 12.3888*** (4.1263) 2.2543 (3.9624) 47.9744*** (12.2415) lnb 0.9796* (0.5541) 0.9699 (1.0469) 0.3492 (0.4628) -0.5916 (0.4444) 0.7988 (1.3730) lnage2 -0.6103 (1.3791) 8.7801*** (2.6057) -2.0764* (1.1519) -1.0837 (1.1061) -9.9900*** (3.4173) _cons -7.1755 (5.1103) -0.9695 (9.6557) -17.2991*** (4.2685) 7.7038* (4.0989) -29.1821** (12.6633) n 1009 1009 1009 1009 1009 f 3.2021 14.0527 3.2088 3.6415 12.2856 r2_a -0.1784 -0.0823 -0.1783 -0.1742 -0.0968 n_g 169.0000 169.0000 169.0000 169.0000 169.0000 standard errors in parentheses *p< 0.10, **p< 0.05, ***p< 0.01 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) indian journal of finance and banking vol. 7, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 51 financing micro and small enterprises: assessing the impact of mudra loans in an emerging economy dr. yogesh mahajan associate professor indira school of business studies pune, india e-mail: yogeshdmahajan@yahoo.co.in abstract this paper studies the impact of mudra on small and micro enterprises in terms of income generation, business expansion, standard of living, and employment generation in the process. the research is socio-economic research. the project applied mean difference method for quantitative data analysis and relative importance index method to analyse qualitative data. paper used schedule to conduct personal interviews to collect data from 384 respondents using convenience sampling. it was found that to some extent, the schemes have been successful in providing loans to msme sector. the enterprises are benefitted due to collateral free mudra loan in terms of income generation and business expansion. but there was no significant impact on employment generation and standard of living as proved from the data collected from the respondents due to mudra loan. also, no significant improvement in human development index was found among the respondents. no significant improvements in quality of food and nutrition were found as informed by the respondents. financial independence has not been achieved for the women entrepreneurs. policy implications for government and bank has been discussed at the end of paper. the paper is based on the project funded by indian council of social science research, new delhi. this is a first kind of study conducted to study the impact of mudra loans on small and micro enterprises in india. keywords: impact, mudra loan, sme finance, income generation, business expansion, standard of living, employment generation. jel classification codes: m10, e21. introduction an economy like india with a population of more than 1.25 billion cannot sustain, if it does not have vibrant small, medium, and micro enterprises (msmes) to create jobs for the burgeoning population. according to the world bank report, growth alone won't be enough for other developing countries to achieve the higher employment rates. more than 1.8 million young people in south asia are expected to reach their working age every month through 2025. economic growth creates jobs in the region is good news, said martin rama, chief economist of the south asian region. however, providing the young entrants with opportunities while attracting more women to the labour market will require even more employment for every point https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 52 of economic growth, added rama. today small, micro and medium scale provide employment to more than 20% of the working population in india (indian institute of banking & finance, 2013). so, it is necessary that this msme enterprises are provided with government support in the form of loans, training, exposure, and support in marketing of their products. the pillars of economic development in india are micro, small, and medium-sized enterprises. they make up 45 percent of the country's gdp with more than 30 million smes unit units in india. after agriculture, msme is the second largest sector to generate jobs. msmes in india contribute 30.27 to the gdp off the country. approximately 31% of the total exports and production, while 45% and 34% of the total are provided by msmes in india. as per national sample survey, there are approximately 633.88 lakh in india (ministry of micro, 2021). the government recently took several steps to boost manufacturing in india, 'make in india' is one such initiative, and is announced for a new industry. the lack of timely and adequate funding is one of the major obstacles to expansion. today the total funding gap for smes is estimated at around 126 billion dollars. the debt gap of this is about 84 billion dollars (kumari & trivedi, 2019). msmes face many problems. they are in backward position compared to large corporates (wasiuzzaman, 2020) in india. the main problems faced by msmes are information availability, credit constraints (sandhu, 2020), policies at the entry level, high costs, infrastructure shortages and barriers to technology. also, sixty-two percent of the cast, tribal and other backward classes are held in the scheduled caste, who have less accesses to loans. it is difficult to get into formal financial services and credit for these low-income groups and the weaker sections. global governments have credit guarantees in place to alleviate loan constraints on medium and small enterprises. these schemes are aimed at encouraging lenders to lend to small companies. credit guarantee schemes (gai et al., 2016) reduce the lender' s risk by ensuring that a portion of the loan is reimbursed in case the borrower is defaulting. smes can therefore receive credit; they would not otherwise have received. government of india introduced collateral free and guaranteed loan scheme pradhan mudra mutra yojana (pmmy), for the non-corporate, non-farm small/micro enterprises, to provide loans up to rs 10 lakh in april 2015. under pmmy, all banks, i.e., public, private sector, rural banks and micro-finance institutions, state co-operative banks and foreign banks are obliged to lend income to the non-farm sector generating activities below rs. 10 lakh. this credit is classified as pmmy's mudra credit. in addition to the micro-finance sector in general, the government has created a new institution for implementing the system called mudra (micro units development & refinance agency limited). it offers refinancing to all small businesses in india. mudra is thus refinancing for all the last-mile finance for banking and non-banking companies, which lend to micro/small companies engaged in the production, trade and other services, mudra was established with the primary purpose of developing the country's micro-business sector by broadening various supports, such as financial refinancing support and entrepreneurship assistance. the mudra loan objective of “funding the unfunded‟ has twin purposes, seeding new entrepreneurs (doan winkel et al., 2013) and expanding existing units. allocation under pmmy has been doubled in union budget in 2017-2018 from previous 1.22 lakh crore to rs. 2.44 lakh crore from with priorities to tribals, dalits, minorities, women and backward class. statement of the problem and relevance small firms play a significant role in contributing to nation-wide gross domestic product (gdp) and in providing jobs to many people in developing countries with a large population (indian https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 53 institute of banking & finance, 2013). the government's objective is to give this sector loans to create jobs in india. the government of india (goi) has launched a new financial inclusion initiative like pradhan mudra mutra yojana to finance the unfunded micro-entities segment. india today, a magazine, submitted a request to the financial services department for an rti request for aggregate loans used and the aggregate sum paid under the mudra scheme to date? the rti also sought to know number of people who had received credits up to rs 10 lakh and how many had been repaid up to now? on 8 august 2018, the response from rti disclosed most of the loans, which fell by approximately 93 per cent in the lower category of rs 50,000. so far about 13.5 crore loans, of which approximately 93 percent (12.1 crore) is 'shishu,' up to 50,000 rs, have been paid out, replied the rti . "such micro loans are only useful for small businesses like single cattle dairy farmers or some 'thela wala' but it will not be sufficient to create substantial employment," ajit ranade, an economist said (india today, 2018). in addition, more than 1,4 crore loans paid out in the mudra regime varied from rs 50,000 to rs 5 lakh (category kishore) and more than 19,6 lakh loans were in the size of rs 5 lakh. the 'sizeable loans' therefore accounted for only 1.45% of the total loans provided under the scheme. the survey, conducted by the (ministry of statistics, 2019) showed that the unemployment rate stood at 6.1 percent between july 2017 and june 2018, higher than the previous high point reached in 19721973. in the light of this data, it is necessary to study the degree of impact of mudra loans on small business in india. it is necessary to study how much employment generation has happened due to mudra loans. also, it is necessary to study how mudra loans had been utilized by entrepreneurs for business expansion and income generation. the study will seek to understand how the loan was utilized, how it had helped the micro enterprises and how much employment was created in the process. the study is conducted in pune city of maharashtra state in india. the research is necessary as it affects society in terms of employment generation and standard of living. the research is a socio-economic research. performance of mudra scheme in india the performance of pmmy scheme for the last 5 years is given below. table 1. total sanctioned amount from 2015-2020 (all india) sr. no year total amount sanctioned (rs. crores) 1 2015-16 137449.27 2 2016-17 180528.54 3 2017-18 253677.1 4 2018-19 321000.00 5 2019-20 337000.00 source: https://www.mudra.org.in based on the initial survey by the researcher, by meeting various stakeholders like bank managers, mudra loan beneficiaries and review of past literature from journal papers, articles in newspapers, magazines etc., we propose following research questions to be studied in this research project. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 54 research questions to be studied  have the micro enterprises benefitted from the mudra loans?  to what extent, they have been benefitted?  measuring the extent of success and founding the gaps?  what has been the impact in terms of income generation, employment generation, standard of living and business expansion? objectives of the paper  to study the benefits derived by micro enterprises from mudra loans.  to study and measure the extent of impact on micro enterprises in terms of employment generation, income generation, business expansion and standard of living.  to study the gaps in providing mudra loans to small and micro enterprises. review of literature every nation steadfastly tries to support small, medium, and micro enterprises because they provide employment to masses and helps to increase gdp of the country. the role of micro, medium and small enterprises is critical for the economy. focusing on developing msmes, they has the potential to improve economic diversification and create jobs. to boost this segment, the government has launched several measures including soft loans and extended financial guarantees. the importance of small and micro enterprises has been highlighted by various others. for example, the role of the lending segment in the upliftment of msmes in india has been identified by raj kumar. the findings showed that the contribution of enterprises (msmes), both in their contribution to gdp and in the creation of jobs, was significant in economic development. in the last decade, researchers have analysed the growth of bank loans for the msme sector. the examination revealed that credits of the bank for the msme sector have increased considerably since government implemented priority sector lending standards, but there is still a major gap that must be met in terms of the loan requirements of this sector (kumar & biswas, 2016). the support to these enterprises from the government is in various forms. it may be in the form of loans, marketing (carmona-lavado et al., 2020) support, technology upgradation, import export support, skilled manpower, strategic support (gosenpud & vanevenhoven, 2011) etc. past research papers have studied this impact and access (bewaji et al., 2015) of various schemes offered by governments all over the world to msmes. below is a review of such literature to understand the methodology, statistical tools, and actual impact of this schemes on msmes in india and around the world. holscher and his co-authors studied the effect of loans on the productive efficiency and performance of smes from transitional countries. by using propensity score matching, regression and stochastic frontier approach, they showed that loans result in enhanced performance and create statistically significant reduction in inefficiency (hoelscher et al., 2016). arraiz studied firm performance when partial credit guarantees are provided to smes. they studied the data of firms across ten years. they found that both production and employment in these companies have grown (arráiz et al., 2014). (aivazian & santor, 2008). kersten et al. (2017) found that few evaluations of sme finance programs were done by experiment methods. it has also found a significant impact of finance on company performance, investment in capital and employment within the supported company, while the summary effect is insignificant on profitability and wages. in short, the degree to which sme funding helps economic development and poverty reduction (morris et al., 2020) remains unclear (kersten et al., 2017). azzim found https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 55 that collateral has positive relation with default and guarantees and default were negative related. secondly, the authors found a negative relationship between collateral and high-credit influences and a good relationship between collateral and low-credit and default influences (duarte et al., 2018). raghu kumari studied the determinants of credit in india for smes. focus group interview were used to determine factors. age and net worth of owner were 2 impact factors while giving credit to smes. authors suggested that banks should focus on start-ups who have creative ideas and innovative products. also, sme owners should have clarity of though and approach, while applying for sme loans (kumari & trivedi, 2019). when the loan was granted to smes, harri examined sme productivity. when lending to small and medium-sized enterprises he found productivity increased (ramcharran, 2017). in the field of business funding, there is an ongoing issue in which women borrowers have more funding difficulties than men because of gender bias on the loan marketplace (shoma, 2019). rahman aimed to analyse the credit constraints of the visegrad countries experienced by female borrowers. it was observed by authors that both male and female borrowers have similar perceptions of financial problems, while demanding bank loans and have a similar priority. it shows, therefore, that in these countries gender discrimination is not the case (rahman & zbrankova, 2019). in surabaya, indonesia's 2nd biggest city, adwin (2015) surveyed more than 100 women entrepreneurs. applied to evaluate social, financial, and human relationships, the ordered probit technique is applied. this research establishes a positive relationship between social capital and human capital and a negative relationship between financial capital and performance. in terms of non-financial factors, policy makers might consider creating and taking account in the design of credit policies incentives for spousal participation in micro-enterprises run by women. meetings should be offered to expedite the participation of representatives in business dialogues and the development of social relations. it seems important that group leaders and loan officers can facilitate such discussions (atmadja et al., 2016). to assess the effects of a micro-credit programme targeted at women, attanasio et al. (2015) from a randomised field experiment, presented evidence in rural mongolia. the authors found that an encouraging impact on women's entrepreneurship is found due to access to group loans and the consumption of home food, but not on income or overall hours. a personally liable microcredit programme simultaneously implemented does not have significant impacts on poverty reduction (attanasio et al., 2015). some researcher examined the restrictions on access to loan for female smes in the municipality of ghana city. the study showed that weak market demand and unavailability of capital and loan are constrained. in addition, even though there are collateral agreements for small enterprises, the patrilineal legacy system in this area discriminates against women microenterprises. garcia-tabuenca and crespo-espert (2010) analysed the assignment of guarantees through the spanish system of guarantee, one of the most traditional support measures for smes using a counterfactual approach. two groups (guarantees, preferential financing, or just preferential funding) of companies forming a treatment group for long-term financial support to companies, as well as other two control groups, were studied. the benefits can be observed mainly in weaker companies that are able to deal with their projects, although their financial costs cannot be reduced until they reach a relatively high level similar to those reached by companies that are not covered by the guaranteed system (garcia-tabuenca & crespo-espert, 2010). the potential presences of credit restrictions faced by irish smes have been investigated by gerlach-kristen et al. (2015), and the effect of those restrictions on jobs and investment by companies are investigated. for companies which are discouraged from applying for credit, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 56 authors found a negative and significant effect on employment by credit constraints of smes. authors also found a negative impact on the likelihood of a sme investment by restrictions. this effect is driven by companies that ration loans when looking for capacity expansion loans (gerlach-kristen et al., 2015). the economic consequences of the smf credit programme for canada were reviewed by chandler (2012). this analysis suggests that programme participation would have increased by 12, 12 and 7 points in salary, employment, and income growth between 2004 and 2006 respectively. programme also have created around 5,000 jobs, approximately 3.8 percent of the jobs created by companies over the period (chandler, 2012). the correlation between earnings retention, commercial loans, trade loans, managerial operations, and the performance of smes was explored by khan and burki (2020). the results confirmed the positive and significant impacts on sme performance of commercial loans, trade credit, and retained earnings. the higher the performance of small enterprises among the firms under study, the greater the amount of trade credit activities (khan & burki, 2020). the evaluation of rural household perceptions of their standard of living in the framework of smes that they operate was conducted by straka et al. (2015). the outcomes are based on the authors' survey of rural households in czech in 2014. the skewed opinion of households on the level of satisfaction and the contribution of sme to positive economic development among households are analysed according to the characteristics of sme, where the home leader works. the article points to the link between the legal form of smes and distance from households to the contribution of smes to economic development and to the distance between smes from home and the satisfaction of the household with living standards (straka et al., 2015). uesugi et al. (2010) examined the efficacy of public credit guarantee programmes in japan. while authors note that loans are more accessible to programme participants, the increased liquidity only lasted a few years when loan from undercapitalized banks were provided. moreover, the ex-post performance of the participants of the programme deteriorated in relation to their non-participating partners with the exception of companies with a significant net value. some researcher studied the efficiency of public credit for the promotion of brazilian companies. in terms of employment growth, labour productivity and export, the authors focus on the impact of credit lines. findings reliably demonstrate that entry to public lines of lending has a substantial and significant optimistic effect on employment and export growth, while authors have not seen any significant impact on productivity measurement (denegri et al., 2011). santoso et al. (2020) conducted research in bantul district, indonesia, by gathering primary information and a structured questionnaire was administered to rural families. the logistical model was used by the authors to assess the social effects of microcredit debtors. the study found that monthly income, loan, mensural expenditure, credit amounts, interest rates, marital status and education have major effects on the likelihood of increasing the benefit of borrowers following access to micro-credit (santoso et al., 2020). the evidence and theory have raised concerns, that microcredit is harmful rather than good, especially when offered at high interest rates. the authors use a randomised household survey of qualifying borrowers and their businesses to calculate the impact of mexico's largest micro lender. average effects of 18-34 months after expansion on a large number of outcomes indicate no transformational consequences (angelucci et al., 2014). bertrand and crepon (2014), by studying the country's largest microfinance institution al amana, reported the results of a randomised assessment of the microcredit programme launched in morocco. it showed that microcredit (mahmood & matlay, 2014) has a large, although https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 57 heterogeneous, impact on the assets and profits made from work, but small, impact on consumption, amongst those who chose to borrow (crépon et al., 2014). tinajero evaluated credit programmes using ten-year panel data from 1994 to 2005 panel data for the firms using did model combined with methods for adjustment of propensity score (psm). this study found evidence of enhancements in key variables such as gross production, value added, and wages for small and medium-sized enterprise programmes. the study also shows that it may take several years to determine some of the positive impacts. (lopez-acevedo & tinajero, 2010), (aivazian & santor, 2008). ondřej evaluated two eu-funded schemes of credit guarantee from czech countries. no statistically conclusive findings for most of the outcome variables were obtained two years after the programme. for the programme participants, authors only found positive changes in real fixed assets. the authors cannot, say that the funded companies are better off in the short term compared with those that are not supported (dvouletý et al., 2019). blasio analysed the impact on credit access for medium and small enterprises of the italian scheme fondo di garanzia. it also evaluates to what extent the scheme has influenced firm performance in investment and sales. by using techniques of regression discontinuity, the paper shows that there are no impacts for company investments and only a mixed sales impact is detected; guaranteed loans have been used mostly for working capital finance (de blasio et al., 2018). the authors have found certain evidence that increasing loans for smes contribute to financial stability by reducing non-performing loans and the likelihood of bankruptcy (morgan & pontines, 2018). an empirical study was carried out to identify the link between mfi microcredits and the financial performance of smes. the results have shown significant links between the amount of micro-loans and the variables dependent on them. in lebanon, the number of women recipients of credits is low, and services and trade are the main categories of companies in lebanon, the beneficiaries of which are located mainly in lebanon, south and the north (moussa, 2020). ibe study looks empirically on the effect on poverty reduction and the improvement of the development of human capital in nigeria in 1999-2008 by the micro-credit provided by microfinance banks. the results show that the intermediation actions of small banks have adverse, negative impacts on the index for poverty and a positive effect on human capital development in nigeria in this period of study (onwumere et al., 2012). access to financing, especially for service-based industries and new firms without real assets to use as collateral has become increasingly difficult. between 1990 and early 2011, authors examined credit guarantee schemes (cgs) literature. authors have largely found descriptive studies of the different conditions and research gaps in guarantee. it appears that the desirability of cgs is assumed while measuring cgs performance results are ambiguous. authors propose study in fields like risk minimisation factors, impacts of different risk sharing ratios, unintentional cgs impacts, social dimension reporting, default rates in asia, and security in a knowledge economy (samujh et al., 2012). gampala studied credit for supporting and stimulating growth and performance of the mse sector for micro and small companies in india. the study showed that the loan has an impact on the performance of msme (gampala, 2018). this research explores the impact of state aid on fiscal performance of firms using a sample of private manufacturing medium and small firms (smes) in the period 2007-2015 in vietnam. unlike many other studies, the research suggests that government support influences the financial performance of companies after control of heterogeneity, dynamic endogeneity, and non-observable issues. the conclusion reinforces the institutional theory perspective. the research also shows that support actions, such as soft loans, tax exemptions, and financial incentives, are vital to vietnam's private smes' development (nguyen et al., 2018). ramcharran https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 58 study expands the literature on sme performance through empirical observation assessing the effectiveness of credit to india's sme firms through data between 1979 to 2013. the results show that bank credit productivity increases (output elasticity) from 0.76 to 1.23; the labour productivity is negligible but rises from -1.57 to -0.628. efficiency of the sector improved from 0.89 to 0.607 returns, largely because of increased bank credit productivity (ramcharran, 2017). the author shows that small enterprises with access to formal funding generate additional jobs than companies without access, with employment in companies with more affordable and bigger loans increasing the quickest. the effects of finance access for production companies are greater than for services and are indicative of sectoral finance targeting as a possible industrialization policy (brixiová et al., 2020). cravo analyses and summarises 40 meticulous assessments of small and medium enterprises assistance services and provides proof to inform policy debates on small and medium-sized enterprises and corporate support. authors show that corporate support measures improve corporate performance and create jobs (cravo & piza, 2019). ruslan examined the connection between the performance of smes and access to microcredit. the article examines how access to microcredits affects employment and sales growth of smes by using data from the 2016 survey of owners and management of smes in malaysia. the study showed, using the propensity score matching (psm) approach, that microcredit sales of smes were 25.6 to 25.7 percent higher than those of non-microcredit lenders. but the impact of microcredit access on sme growth was not disclosed by the psm and the did analyses. these results were confirmed by the endogenous switching regulation (esr) method (ruslan et al., 2020). anke offers a significant outline of the recent research situation and emphasises current study gaps. an alternative approach to research is derived from these lacunae. since further research is required to give a clear statement on the impact of the scheme on smes' loans, implementing this method may aid bridge the existing research gap (valentin & wolf, 2013). the efficiency of micro-business credit on increasing business income and innovation is also being reviewed. it is found that fis provide careful screening and monitoring of micro-enterprise loans linked to appropriate business talents, knowledge, and tools to ensure the efficient utilisation of lending capital. zecchini and ventura (2009) provides a thorough evaluation of the impact of government loan guarantee on smes, without jeopardising their sustainability in finance, in terms of increasing credit availability and cutting borrowing costs. evaluating the results of the medium and small enterprises that benefitted from the guarantees in italy with a sample of similar companies have carried out extensive econometric tests. the results confirm that guarantee and the greater level of loan leverage of guaranteed companies are related to a causal relationship, as is their lower debt cost. in this respect the guaranteed instrument of italy has proven to be an effective instrument. from the above review, the ability of companies with access to guaranteed loans to grow in output and jobs and to increase their income each day can be summarised. some papers indicate that it is still questionable whether collateral free loans play their part in accelerating poverty reduction, since many poor households are unable to access the programme. also, small-scale industries and start-ups perform a key role in increasing the living standards of our population especially in india. there is mixed view in literature regarding impact of loans on business expansion, employment, income generation and standard of living. research gap review of literature provides mix results in terms of impact of loans on income, employment, and business expansion. there is hardly any comprehensive investigation in case of mudra loans https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 59 in india. there is a significant research gap in case of study of impact and gap analysis of mudra loans in india. it is necessary to study the impact of this loans on income, employment generation and business expansion. there is also a need to study the problems faced by small scale industries in availing mudra loans and gaps in providing mudra loans to small scale industries. with the help of a comprehensive and theoretically grounded investigation proposed here, this research intend to bridge an existing gap in literature empirically. hypothesis of the project due to mix reviews in literature and pilot study, project proposed following null hypothesis, hypothesis 1: there are no significant changes in business expansion for small/micro enterprises due to mudra loans in pune city area. hypothesis 2: there are no significant changes in income generation for small/micro enterprises due to mudra loans in pune city area hypothesis 3: there are no significant changes in employment generation of entrepreneurs for small/micro enterprises due to mudra loans in pune city area research methodology the review of literature found use of different methodologies to study the impact of loans on smes. for example, the available approaches to public intervention evaluation are discussed in (khandker et al., 2010). the simplest approach is to have an experiment as described in his most recent article in full randomisation as (bruhn & mckenzie, 2009). the methods used most frequently are the rdd approach (de blasio et al., 2018) and the psm approach (arráiz et al., 2014), did approach (lopez-acevedo & tinajero, 2010), counterfactual method (garciatabuenca & crespo-espert, 2010), focus groups (kumari & trivedi, 2019) and mean difference method. menon used descriptive design with regression analysis to study the impact of credit guarantee on sme’s in italy (alessio d’ignazio & menon, 2012). aivazian and his co-author used accelerator model for the same purpose (aivazian & santor, 2008). our study uses both qualitative and quantitative factors to study the impact of mudra loan on micro and small enterprises in india. we adopt a mean difference method to analyse quantitative data collected from the respondents (kothari & garg, 2019), which considers changes in results before and after the intervention, based on real time data collected directly from the respondents through interview method. we have used relative importance index method to analyse qualitative data collected from the respondents and cronbach alpha to test reliability of the scale. because the beneficiaries are the right source for assessing the impact of mudra loan. the present study is descriptive in nature (kothari & garg, 2019). schedules were prepared and canvassed for the collection of data (blumberg et al., 2011). the data needed for the study was collected from the respondents by personal interviews method using pre-tested schedule prepared for the purpose. a pilot study of 20 respondents was done to further develop the schedule by the researcher. the final schedule was then prepared. the field investigator collected data from 400 respondents from pune city area in a span of 7 months, out of which 384 were considered for analysis. some of the respondents did not keep records of the costs and revenues for the company they took up. the collected data of some respondents were therefore based on the respondents' memory. during the interview, the personal bias of the sample was https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 60 minimised by persuading them that the data was collected for research purpose only. data on the socio-economic status of the sample were collected from the beneficiaries. sample distribution was also gathered, like caste, age, education, and family size. similarly, the data on sales, profit and employment generated through their enterprise before and after mudra loan was collected in the study area. 400 interviews were conducted as per statistical formula, out of which 384 were considered for analysis. each interview was for a period of 20-30 minutes. the data of beneficiaries was obtained from public sector banks such as bank of maharashtra and bank of baroda. the field investigator appointed for the study used to take appointment one day before the interview and conduct interview at the time given by the respondent. the data collection took place within a span of seven months from august 2020 to february 2021. secondary data was collected through reference books, newspapers, websites, discussions with bank officials etc. both qualitative and quantitative data was collected from the respondents. the loans in the all the three categories were considered for this study. only micro and micro enterprises as per new classification of industries were taken for the study. also, enterprises receiving loans in 2016-17 and 2017-18 were only considered, as they can only have meaningful impact on employment generation, standard of living and business expansion. as the micro and small enterprises is well dispersed in pune city, convenience sampling (probability sampling) was used to collect data from the respondents (blumberg et al., 2011). cooper, pamela, schindler, 2018). data analysis and interpretation statistical packages for social sciences (spss) version 25 and ms excel was used for data analysis. data was collected by the field investigator through a schedule from 384 respondents. the data was then converted into a soft copy in ms excel sheet. the data was then cleaned for missing fields and then coded to be used on spss software by the research assistant of the project. the final analysis was done using spss software. maximum respondents (40.6%) were in the age group of 36-45, followed by 37% in the age group of 46-55. remaining respondents were in the age group of 26-355 and 55-67. the average age of respondents was 43 years. the educational qualification profile is as follows. maximum respondents (30.7%) were graduates followed by 10th (32.6%) and 12th (25.8%). 74 % (285) of the respondents were male and 25.8% (99) respondents were females. the social classification based on caste is as follows. 35.7% belong to open category, followed by 27.6% from sc category and 23.6% from obc category. this classification also shows that approximately 65% of backward class has been benefitted under mudra loan scheme. 97.66 % of the respondents were married as can be seen from the table. 69% of the respondents have 2 children, followed by 16.7% of the respondents, who had 3 children. only 10.7% respondents have 1 child. 49.7% respondents said that their spouse does housework. 27.6% respondents said that their spouse is in the same business. 15.4% of the respondents said that their spouse is employed in another firm. maximum 34.6% respondents are in the business from the last 6-10 years, followed by 21.4% and 20.4% in the bracket of 11-15 years and 1-5 years. also 15.6% respondents are in the business from 15-20 years. 65.1% of the respondents has start-up capital which was below 1 lakh rupees. 31.3% of the respondents has start-up capital of 1-5 lakh rupees. maximum 59.6% of the respondents were service provider, followed by 29.7% of the respondents who were in trading business. 8.3% of the respondents were having food stall. service providers include rickshaw drivers, cab drivers, fabrication, salon, beauty parlour, garage, paper agency, tailor, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 61 mess etc. maximum respondents (63.8%) have taken loan in 2017, followed by 31.51% in 2016. maximum respondents (56%) have taken loan in the bracket of 3-5 lakhs rupees. 29.7% of the respondents have taken loan below 3 lakhs rupees. maximum 57.29% of the respondents have taken loan for a period of 3 years, followed by 17.45 % respondents, who have taken loan for 2 years. 16.67% of the respondents have taken loan for a period of 5 years. table 2. purpose for availing loan what is the purpose of taking loan? purpose of loan frequency percent valid percent cumulative percent working capital 155 40.4 40.4 40.4 new equipment/ machinery purchase 179 46.6 46.6 87 business expansion 50 13 13 100 total 384 100 100 maximum respondents (46.6%) have taken loan to buy new equipment’s/machinery for their business, followed by 40.4% respondents, who said they took mudra loan for working capital requirement. remaining respondents have taken loan for business expansion. table 3. products bought after income generation due to mudra loan have you bought some product after this income generation due to mudra loan product frequency percent valid percent cumulative percent yes 18 4.7 4.7 4.7 not taken 366 95.3 95.3 100 total 384 100 100 95.3% of the respondents have said that they have not bought any new household product in the after-income generation from mudra loan. this shows that though there has increase in income of micro enterprises, it has not converted in raising standard of living. this may be due to repayment of loan instalment, fear of corona pandemic etc., as informed by the respondents, maximum respondents (48.44%) said that they have received loan in less than 15 days, followed by 46.09% in 15-30 days. 64.06% of the respondents said that it is easy to obtain mudra loan, while approximately 30% said that it was difficult to get mudra loan from banks. maximum respondents (99.48%) said they have used mudra loan for the purpose, it has been taken. table 4. payment of loan instalment do you pay loan instalment regularly? yes/no frequency percent valid percent cumulative percent yes 216 56.3 56.3 56.3 no 168 43.7 43.8 100 total 384 100 100 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 62 56.25% of the respondents said that they pay mudra loan instalments on time. but 43.75% of the respondents said that they were not able to pay loan instalments on time due to corona, loss in business. hypothesis testing hypothesis testing was carried out to using paired sample t-test as the data was collected from the respondents before and after the mudra loan was taken. hypothesis 1: there are no significant changes in business expansion due to mudra loans in pune city area. table 5. hypothesis 1 paired t-test particular paired differences t df sig. (2tailed) mean std. deviation std. error mean sales (after loan) – sales (before loan) 27328.13 57579.07 2938.32 9.301 383 0 as p<0.05, hence it can be said that there is significant impact of mudra loans on business expansion in pune city area, null hypothesis 1 rejected. the sme’s were able to take advantage of collateral free loan for business expansion as sales of all this firms have significantly increases as per t-test. hypothesis 2: there are no significant changes in income generation of entrepreneurs due to mudra loans in pune city area table 6. hypothesis 2 paired t-test particular paired differences t df sig. (2tailed) mean std. deviation std. error mean profit (after loan) – profit (before loan) 6962.24 28732.87 1466.27 4.748 383 0 as p<0.05, hence it can be said that there is significant impact of mudra loans on income generation in pune city area, null hypothesis 2 rejected. the smes were able to take advantage of collateral free loan for income generation as profit of all this firms have significantly increased as per t-test. hypothesis 3: there are no significant changes in employment generation due to mudra loans in pune city area. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 63 table 7. hypothesis 3 paired t-test particular paired differences t df sig. (2tailed) mean std. deviation std. error mean no. of employee (after loan) – no. of employee (before loan) 0.02083 0.40825 0.02083 1 383 0.318 as p>0.05, hence it can be said that there is no significant impact of mudra loans on employment generation in pune city area, null hypothesis cannot be rejected. the employment opportunities have not significantly increased due to mudra loans. qualitative data analysis qualitative assessment of the respondents was carried out using likert scale to assess the impact of mudra loan on sme’s. cronbach’s alpha test was used to assess the reliability, or internal consistency, of a set of scale or test items. cronbach’s alpha test table 8. cronbach’s alpha test reliability statistics cronbach's alpha cronbach's alpha based on standardized items no. of items 0.759 0.751 12 as cronbach's alpha>0.7, hence the questionnaire is consistent and valid for qualitative analysis. relative importance analysis table 9. relative importance (ri) analysis table qualitative assessment of mudra loan and its impact ri value ri index importance i think mudra loan has been beneficial to me. 1562 0.813542 1 my social status has improved due to increase in income due to mudra loan. 1383 0.720313 3.5 my food and nutrition inputs for family have improved after this loan. 1244 0.647917 7 my family is happier due to income generation due to mudra loan 1313 0.683854 6 my confidence has increased for future self-actualization 1447 0.753646 2 financial independence has been achieved for women 330 0.171875 12 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 64 this mudra loan helped me to send my kids to better school compared to previous school 1098 0.571875 10 i can afford doctor and medical expenses after getting mudra loan 1126 0.586458 9 my self-esteem has increased due to this loan 1383 0.720313 3.5 i now frequently go to religious / social function / temples etc. after my income generation due to this mudra loan 1063 0.553646 11 time pressure due to loan and repayment of loan has increased on me 1334 0.694792 5 family relations has affected due to not able to give time to family 1179 0.614063 8 relative importance index method was used to analyse the qualitative data collected from the respondents. the relative importance values and index were calculated for each factor as represented in table 9. the ranks based on the ri index were calculated. table 9 shows the 5 most important factors which displays the impact of mudra loan on smes. it can be seen that mudra loan has been beneficial to the beneficiaries to some extent. also, the confidence has increased for future expansion and growth of business. social status and self esteem of the respondents have also increased due to mudra loan. but pressure has increased due to commitment to pay back the loan and more time is devoted to the business. also, it is found that financial independence has not been achieved for the women, due to mudra loans in india. as per relative importance index, financial independence is ranked the last number (12), which shows that financial independence is not achieved due to mudra loans. results and discussion the project studied the impact of mudra loans on micro and small enterprises in pune city area of maharashtra state in india. the project studied the impact of mudra loans on micro and small enterprises in terms of income generation, business expansion, employment generation and standard of living. both qualitative and quantitative data was collected from the 384 respondents with the help of schedule prepared for this study by the field investigator appointed for the same. the data was then analysed using spss and ms excel. the analysis found that mudra loan has been beneficial to the smes in pune city area to some extent. the smes were benefitted due to collateral free mudra loan in terms of income generation and business expansion. but there was no significant impact on employment generation and standard of living as proved from the data collected from the respondents due to mudra loan. as no new household product was bought by the respondents, no changes in food and nutrition habits, shows that there is no significant improvement in standard of living. mudra's objective is to encourage businessmen and small business units to expand their skills and operations, reduce over-debt and create a formal loan system (finance). the objective of mudra loan scheme has been achieved as majority of the respondents said that they have taken mudra loan for business expansion, new equipment/machinery purchase and income generation. this is in line with research literature. only 56% of the respondents said that they pay mudra loan regularly. remaining respondents said that they were not paying the loan regularly. this is a cause of concern for banks as it will increase npa of the banks. this may be due to current pandemic situation, which resulted in loss of business, due to lockdown. almost all respondents received mudra loan within one month of application to the bank. it shows that banks have implemented the scheme in an efficient https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 65 manner. qualitative data showed that mudra loan has been beneficial to the smes. but no significant improvement in human development index was found among the respondents. no significant improvements in quality of food and nutrition were found as informed by the respondents. also, this mudra loan has not helped respondents to send children to better school compared to previous school. it can be said from the qualitative data collected that; no significant financial independence was achieved through mudra scheme for women. though the mudra loans were taken on the name of women, the firm was operated by the male member of the family. in case of loans given to females, the application is processed by male family member. females are not aware of the mudra loan scheme. they are also not aware that mudra loan is taken in their name. the documentation is also less while applying for the loan. bank staff is also cooperative. the loan amount received is less than loan applied for. the loan amount should be increased. the disbursement is also quick and fast. social status and self-esteem of the respondents have increased due to benefits from the mudra loan. also, confidence to expand and grow the business has also increased due to mudra loans. time pressure has increased because of mudra loan as they must devout more time to business so that they can repay the loan on time. approximately 65% of respondents were from backward class who have been benefitted under mudra loan scheme. the mudra loan was taken by majority of respondents for working capital, business expansion and new equipment/ machinery purchase. only 5% of the respondents said that they have bought any new household equipment after deriving the benefits of the mudra loan. almost all respondents received mudra loan within one month of application to the bank. 65% of the respondents said that it is easy to avail mudra loan from banks and 30% of the respondents said that it is difficult to avail mudra loan from banks. only 56.3% of the respondents said that they pay the loan instalments regularly. 43.7% of the respondents said that they do not pay mudra loan instalments regularly. this is due to corona pandemic impact for the last one year. most of the mudra loans were given to people who were in contact with the respective banks. most of the respondents were not aware of exact rate of interest on mudra loan. no significant improvements in quality of food and nutrition were found as informed by the respondents. one extra instalment is charged for servicing of loan in each year. implications of the project the project proposes following recommendations to the government, banks, and smes.  most of the loans were given by banks to achieve the targets by the government to the banks at the end of financial year. this dilutes the objectives of such a scheme launched by the government. proper procedure should be followed by banks to provide mudra loans, keeping in view the objectives of the mudra loan scheme.  mudra loans should not be given by the banks based on relation, information about applicant, political interference etc. people, who are genuine, are overlooked in such situations.  proper counselling and detailing of the mudra loan like interest rate, period of loan repayment, etc. should be provided to the applicant. most of the applicants are not aware of these particulars.  proposals submitted for mudra loan are not of good quality. so, banks should undertake training sessions for developing good business proposal for loan. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 66  more awareness about the scheme should be done by the bank through marketing and publicity. banks should properly display banners in the bank premises, showing the procedure and eligibility criteria for mudra loan scheme.  as recovery rate is low, bank managers should connect with beneficiaries to understand their problems and support them in their time of crisis.  smes should prepare proper business proposal before applying for mudra loan.  beneficiaries are facing loan repayment problem due to corona pandemic. banks should provide support by either waiving off interest rate for some period or extending time of repayment of loan.  such study should be conducted by banks, to assess the impact of such loans on enterprises.  in case of loans given to females, the application should be done by the female only.  female entrepreneurs should be promoted by giving special interest rate on mudra loan.  female entrepreneurs should be given separate training for business proposal development.  loan amount should be increased considering the rate of inflation in the present scenario.  separate staff should be provided for mudra loans process in the bank, as implementation of mudra loan scheme increases additional burden on the existing bank employees, which affects the quality of their work. conclusion the project studied the impact of mudra loans on smes in pune city area of maharashtra state. the project studied the impact of mudra loans on smes in terms of income generation, business expansion, employment generation and standard of living. both qualitative and quantitative data was collected from the 384 respondents with the help of schedule prepared for this study by the field investigator appointed for the same. the research found that the mudra loan scheme has been beneficial to the small and micro enterprises in pune city area. it has resulted in increase in income generation and business expansion for the beneficiaries. but there has been no significant improvement in employment generation and standard of living of the beneficiaries due to mudra loan. the research also found that no financial independence has been achieved for women due to mudra loan. limitations and future scope for research every effort has been made to develop the research project. however, there are some limitations of the project, which are mentioned here. the project uses mean difference method and relative importance method to analyse quantitative and qualitative data respectively collected from the respondents. other methods are also available to analyse this data as per literature review. schedule was used to collect data from the respondents. other methods are also available for the same as per literature review. the data collected and its analysis is solely dependent on the responses giving by the respondents to the interviewer. the data was collected in corona pandemic period, the effect of which cannot be ruled out on the project. time was also a major constraint as the project got delayed due to corona pandemic. future research can be carried out in different states of india for more generalisations of the results. also, comparative studies with different countries can be undertaken with india (imarhiagbe et al., 2021). cross sectional studies can be carried out to understand the impact of mudra loans over a period for different https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 7, no. 1; 2021 67 stakeholders. studies with the help of panel data can be carried out in future to provide more validity to the results of this project. acknowledgement the scholar namely dr. yogesh mahajan is the awardee of icssr research projects (minor). this paper is largely an outcome of the research project sponsored by the indian council of social science research (icssr). however, the responsibility for the facts stated, opinions expressed, and the conclusions drawn is entirely that of the author. references aivazian, v. a., & santor, e. 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(2009). the impact of public guarantees on credit to smes. small business economics, 32(2), 191-206. 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) indian journal of finance and banking vol. 4, no. 4; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 48 empirical review on the regulations, integrations of works and local authorization and the attributes of critical success factors and constructions delay of the road projects in oman suleiman said al hinai phd student faculty of business and accountancy university of selangor, malaysia e-mail: s.alhinai36yy@gmail.com dr. abul bashar bhuiyan associate professor faculty of business and accountancy university of selangor, malaysia e-mail: bashariuk@gmail.com dr. setyawan widyarto associate professor and dean centre for graduate studies university of selangor, malaysia e-mail: swidyarto@unisel.edu.my abstract the prime aims of the study to investigates of empirical articles and reviewed on the moderating effects of the regulations, integrations of works and local authorization on the attributes of critical success factors and constructions delay of the road projects in oman. the study used the empirical literature from the all relevant online sources and data `231 based as many as possible. the findings short listed the consultant related factors, the contractor related factors, designed related factors, client related factors, labor related factors, material related issues, equipment related issues respectively. moreover, study also summarized that there are moderating effects of the regulations, integrations of works and local authorization on the attributes of critical success factors and constructions delay of the road projects in oman. the present study recommends doing a conclusive investigation on the above literature gap by real data and justifying above review relationship of moderating effects of the regulations, integrations of works and local authorization on the attributes of critical success factors and constructions delay of the road projects in oman. keywords: critical success factors, road constructions delay, oman. mailto:s.alhinai36yy@gmail.com mailto:bashariuk@gmail.com mailto:swidyarto@unisel.edu.my https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 49 introduction the causes of delays are the primary constraints to achieve the project objectives in the developing world. (abdel khalek, aziz, & abdeen, 2018). alamri, n., et al. in 2017. moreover, delay causes, impacts on the road constructions projects in the sultanate of oman oyegoke, a. s. and n. al kiyumi in 2017. however, the evaluation of the progress reports on the road projects constructed during the period 2011-2015 in saudi arabia concluded that delays are extensive: the average ratio of planned contract duration to the actual completion time is 58.24%, ranging from 2% to 172% mahamid, i. in 2017. empirical findings also concluded that causes of delay have different types of construction, different countries, different periods and different number of causes of delay and groups of delays. therefore, it is important to investigate and analyze the causes of delays in road construction (aziz & abdel-hakam, 2016; elawi, algahtany, & kashiwagi, 2016). moreover, studies also summarized about road construction is considered as one of the most important industries where are exposed to time and cost overrun or both (bekr, 2015) moreover, studies indicated that owners rank poor communication among project participants as the top severe factor affecting the performance in construction projects, followed by poor labor productivity and poor planning and scheduling, respectively. however, contractors’ point of view, concluded the most severe factor is payments delay, followed by escalation of material prices and poor labor productivity, respectively. in case of consultant’s issues, there are top three affecting by poor management of planning, scheduling, site and payment delays respectively (mahamid, 2016). in the same way, causes of project delays was experiencing delays from 50% to 150% in ksa. alzara, m., et al. in 2016 however, identified the cost and time overrun allocated for this type of road projects and cause critical problems for both the developer and the contractor in jordan, which. al-hazim, n. and z. a. salem in 2015. another study discovered causes of delays in road construction projects considered as investments in an unpredictable market in lebanon. tarhini, a., et al. in 2015. moreover, road construction projects delay and causes are differ from one country to another even within the same geographic location (emam, farrell, & abdelaal, 2015; r. hasan, suliman, & malki, 2014). however, jarkas, a. m. and j. h. younes in 2014 revealed about the delays in construction projects are global phenomena and the state of qatar is no exception. moreover, it is the very crucial and important issues to explore on the key determinants of productivity, their relationships and the problem categories responsible for delays of the road construction industry in oman. however, studies also summarized that owners, consultants, contractors, and foremen/worker roles and responsibilities, especially of their competencies of professionalism, fairness in financial transactions, incompetent skill of supervision materials handle, and designing accordingly (emam et al., 2015). in jordan construction industry is a major player in the economy, generating both, employment and wealth. however, many projects experience extensive delays and thereby exceed initial time and cost estimates (sweis, sweis, abu hammad, & shboul, 2008) there are numerous issues and challenges are facing for road constructions industries in all over the countries, especially, improper contract management and some other unexpected events, so many claims and disputes are raised by the owner, consultant, and contractor each other’s. they are usually accompanied by cost overruns. moreover, it is debilitating effect on clients, contractors, and consultants in terms of growth in adversarial relationships, mistrust, litigation, arbitration, cash-flow problems, and a general feeling of trepidation towards each other. nevertheless, it has revealed also caused and effects as time delay in construction projects, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 50 size or its experience, large to small construction firms display greater tendency to time delay, few found that tendency of time delay increases with the experience of construction firm and others found the converse. there is still debate to summarized influential caused and its effects on the road constructions industries. moreover, there is unique study has explored yet to summarized the critical factors in the area of arab counties. therefore, the present study taken initiatives to evaluate the current status delay level of the constructions of road as well as also will identify the critical success factors especially the contactor, owner, consulted, designed, client, manpower and resources, material and suppliers and equipment related attributes caused delay of constructions of road in oman. furthermore, study also will fill-up literature gap by applying of government regulations, departmental integrations of works and local authorization weather there is moderating effects of the on the attributes of critical success factors and constructions delay of the road projects in oman. background of the study issues delay of road construction in oman empirical findings revealed that the construction industries in the gulf cooperative countries are facing severe delays due to management, finance, human resources and empirical findings have shown that the construction industry in gulf cooperative countries faces severe delays due to governance, finances, human resources and design problems, planning delays due to project management, lack of experience of the contractor, and the order of changes due to owner shortage and lack of materials and equipment are in significant problem for delays in project delivery in oman. in the same way, investigation revealed that the causes of delays in dam projects in oman. there are 60 causes of delay were integrated among client, contractor, consultant and external factors. the results reveal, based on pareto’s law of 80/20, that the top causes behind the delays of dam construction projects in oman are: severe weather conditions, change orders, uncertainty in ground condition, poor site management, executive bureaucracy in client organization, feasibility study did not cover all aspects, mistakes in soil investigation, natural effects during construction work, difficulty of defining project requirement, slowness of decision making process, delay of obtaining approval from the different government authorities, and land acquisition (alamri, amoudi, & njie, 2017). moreover, gebrehiwet, t. and h. luo in 2017 investigates the typical causes of delay at different stages of construction and its effect in the ethiopian construction projects. so from the overall, the influential causes of delay investigated are corruption, unavailability of utilities at site, inflation/price increases in materials, lack of quality materials, late design and design documents, slow delivery of materials, late in approving and receiving of complete project work, poor site management and performance, late release budget/funds, and ineffective project planning and scheduling successively (gebrehiwet & luo, 2017). however, oyegoke, a. s. and n. al kiyumi in 2017 identified the causes, impacts and mitigations of delay in megaprojects in the sultanate of oman. there are 53 questionnaires were received and analysed using the relative importance index (rii) method. the five most frequent causes of delay in the sultanate of oman, in rank order, are: selection of the lowest bid, instead of best bid for the client (rii: 0.698); the financial condition of the main contractor (rii: 0.664); delay in decision-making by the client (rii: 0.656); and poor construction planning by the main contractor (rii: 0.649). also, the findings indicate that extra cost (rii: 0.754) and project time overrun (rii: 0.724) are the most significant effects of the delay in the oman megaprojects. the use of experienced contractors and consultant (rii 0.675), efficient construction planning by the main contractor and effective https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 51 site management and supervision (rii: 0.667) are essential mitigation methods of construction delay in oman megaprojects. the study recommends three-part novel solutions to mitigate delay in the oman construction industry (oyegoke & al kiyumi, 2017). moreover, alzebdeh, k., et al. in 2015 examines interpretive structural modelling (ism) as a viable technique for modelling complex interactions among factors responsible for cost overruns in construction projects in the sultanate of oman. there are four factors were found to be at the root of cost overruns: instability of the us dollar, changes in governmental regulations, faulty cost estimation, and poor coordination among projects’ parties. taking appropriate actions to minimize the influence of these factors can ultimately lead to better control of future project costs. thisstudy is of value to managers and decision makers because it provides a powerful yet very easy to apply approach for investigating the problem of cost overruns and other similar issues (alzebdeh, bashir, & al siyabi, 2015). however, lack of professionalism, fairness in financial transactions, incompetent supervisors, lack of materials and incomplete drawing have been found as the top five factors in productivity. management, people, cooperation, health and safety, logistics, involvement, operational activity, authority, quality and financial conditions (bierman, o’donnell, burke, mccormick, & lindsay, 2014). in the same way, other studies examined the causes of delay in construction projects in oil and gas processing facilities in oman and serves as a case study for the gulf cooperation council (gcc) countries. the survey results showed a high degree of agreement among the perceptions of project stakeholders, clients, contractors, and consultants on the causes of project delay, and there is no evidence to suggest that the causes of project delay differ significantly according to organization size or organizational ownership. moreover, seven factors were identified as the major causes of project delay (ruqaishi & bashir, 2013)(alnuaimi, taha, al mohsin, & al-harthi, 2009). methodology of the study as study aims to investigate existing available literature for determining of relevant factors that have cause and effects on the delay of road construction industry in oman. therefore, the study uses available sources of existing literature based on the four main keywords ‘critical success factors and road construction delay in oman’, departmental integrations of works on the attributes of critical success factors and constructions delay of the road projects in oman ‘effects of the local authorization on the attributes of critical success factors and constructions delay of the road projects in oman ‘ to ensure relevant critical success factors especially the contactor, owner, consulted, designed, client, manpower and resources, material and suppliers and equipment related attributes caused delay of constructions of road in oman. empirical review findings the present study summarized and short listed of the factors in the two categories such as internal and external factors have caused to be influenced to delay of road constructions in the arab regions especially in oman. contactor related attributes on the delay of the road construction hamontree, c., et al. in 2018 exploed the list of road construction delay causes gathered from literature having different countries. the study indicates that the 5 top factors affecting road construction delays are: incomplete drawings, lack of equipment efficiency or financial status of contractors, delay in relocating existing infrastructure structures, less of project engineer https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 52 experiences, and delay in relieving environmental impact, respectively (hamontree, thapanont, santi, & pruethipong, 2018). mahamid, i. in 2017 identified factors were ranked according to their levels of severity, frequency, and importance. results indicated that the top five important factors affecting schedule delay in road construction projects are: improper planning, poor labor productivity, additional works, rework, and lack of contractor experience. the study concluded that the main effects of schedule delay in road construction projects as assessed by contractors are: cost overrun, disputes, arbitration, litigation, and poor quality (mahamid, 2017).oyegoke, a. s. and n. al kiyumi in 2017 identified the five most frequent causes of delay in the sultanate of oman, in rank order, are: selection of the lowest bid, instead of best bid for the client (rii: 0.698); the financial condition of the main contractor (rii: 0.664); delay in decision-making by the client (rii: 0.656); and poor construction planning by the main contractor (rii: 0.649). also, the findings indicate that extra cost (rii: 0.754) and project time overrun (rii: 0.724) are the most significant effects of the delay in the oman megaprojects. the use of experienced contractors and consultant (rii 0.675), efficient construction planning by the main contractor and effective site management and supervision (rii: 0.667) are essential mitigation methods of construction delay in oman megaprojects. the study recommends three-part novel solutions to mitigate delay in the oman construction industry (oyegoke & al kiyumi, 2017). santoso, d. s. and s. soeng in 2016 analyzed factors on the list were land acquisition, award of project to lowest bidder, equipment breakdowns, poor site arrangement, management and supervision, unexpected ground condition and terrain, low quality of the contractor human resources, late progress payments, and low productivity of labor. recommendations to manage the delay factors were presented. significant relationships between the delay factors and the three project objectives also were observed and discussed (santoso & soeng, 2016). shah, r. k. in 2016 investigated the causes of delays and cost overruns in construction projects in australia, malaysia and ghana. however, there are reasons for delays for road construction projects, especially wrong planning of contractors, poor construction site, insufficient experience with contractors are the most influential factors in malaysia (shah, 2016). bagaya, o. and j. song in 2016 identified the most frequent, severe, and important causes of schedule delays affecting financial capability of the contractor, financial difficulties of the owner, equipment availability of the contractor, slow payments for completed work, and poor subcontractor performance by the contractor. a comparison of the causes of schedule delays in 11 countries to validate the results of the study showed that financial capability of the contractor was not only the most encountered factor in delays for burkina faso’s construction industry, but also appeared in many other asian and african countries (bagaya & song, 2016). bekr, g. a. in 2015 summarized the 65 causes compiled through the literature review and the pilot study were classified into four groups (client related, contractor related, consultant related and external factors) (bekr, 2015). moreover, there several studies have the semilar result and support with above review findings accordingly (rahman, lee, & ha, 2014), (mahamid, 2013), (rafieizonooz, 2012), (albogamy, scott, & dawood, 2012). (pourrostam & ismail, 2012), (pathiranage, 2011), (enshassi, al-najjar, & kumaraswamy, 2009)(toor & ogunlana, 2008). (assaf & al-hejji, 2006). owner related attributes on the delay of the road construction guida, p. l. and g. sacco in 2019 analyzed of schedule delays is a traditional problem in almost any project of some dimension and complexity. assessing schedule delays and allocating them to responsible parties and activities is a sensitive problem in project management. in client-supplier, i.e. owner-contractor relations, the schedule delays represent a very important issue, often https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 53 escalating into claims and undermining the commercial outcome of the whole project, involving lengthy negotiations and juridical cases, tracing to responsibilities and financial compensations. (guida & sacco, 2019). hamontree, c., et al. in 2018 exploed that the delay in construction project is an important issue in construction management. this is because delay will cause negative impacts on both the owner and the contractor. for owner, it will lead to the late opening of new road. for contractor, it will cause extra operating cost. in this paper, therefore, the causes of delay in road construction projects are researched (hamontree et al., 2018). another study done by islam, m. s. and b. trigunarsyah in 2017 explored factors, delay in progress payment by owner, contractors’ cash flow problem, improper planning and scheduling, poor site management, and change order by (muhammad saiful islam & trigunarsyah, 2017). (mohammad saiful islam, trigunarsyah, hassanain, & assaf, 2015), (bekr, 2015), (mohammad saiful islam et al., 2015), (bierman et al., 2014), (cristóba, 2014), (alnuaimi & mohsin, 2013), (albogamy et al., 2012), (enshassi et al., 2009), (al-najjar, 2008), (assaf & al-hejji, 2006). however, bagaya, o. and j. song in 2016 identified the most top five most important delay factors were ranked as follows: financial capability of the contractor, financial difficulties of the owner, equipment availability of the contractor, slow payments for completed work, and poor subcontractor performance by the contractor (bagaya & song, 2016). moverover, elawi, g. s. a., et al. in 2016 identifies 10 risk factors were identified and were grouped into four categories. average delay in infrastructure projects in mecca was found to be 39%. the most severe cause of delay was found to be the land acquisition factor. this highlights the critical land ownership and acquisition issues that are prevailing in the city. it is concluded that the majority of project delays were caused from the owner's side as compared to contractors, consultants, and other project's stakeholders (elawi et al., 2016). moreover, there several studies have the semilar result and support with above review findings accordingly (mohammad saiful islam et al., 2015), (bekr, 2015), (mohammad saiful islam et al., 2015), (bierman et al., 2014), (cristóba, 2014), (alnuaimi & mohsin, 2013), (albogamy et al., 2012), (enshassi et al., 2009), (al-najjar, 2008), (assaf & al-hejji, 2006). consulted related attributes on the delay of the road construction alamri, n., et al. in 2017 investigate four main categories: client, contractor, consultant and external factors. the collected data was then analysed statistically and ranked according to its significance (alamri et al., 2017). moreover, atout, m. m. in 2016 summarized literature about the construction projects in gulf rejoin presents particular conditions in which the consultant of the project has to concentrate during each phase of design to ensure that it will be accomplished on time, for example, the unrealistic of project duration, foreign designers and consultants, unusual growth of construction industry, the exceptional features of architectural details in the design of projects, and international consultant establishments, firms and office. based on above literature this paper investigates the main causes of the delays contributed by the projects designers and consultants by representing their roles and responsibilities to hand over the projects on time. the outcome and the results of the study is prepared based on the designed questionnaires and interviews conducted with many consultants and designers intended to identify the causes of delays projects in gulf region from the viewpoint of the designers. in addition, the required preventive actions of the designers are studied to avoid any impacts on the progress of the project. the study investigates other factors from the client side, contractor side and the appointed project manager might affect the consultant performance on the project (atout, 2016). aziz, r. f. and a. a. abdel-hakam in 2016 analyzed represents consultants, contractors https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 54 and site as well as design engineers with the exclusion of the owner who represents the government in road projects as a party. revealed the results of serious relationship between campaigns and groups between contractors and site / design engineers and between consultants and site design engineers and a fairly low correlation between contractors and advisors (aziz & abdel-hakam, 2016). bagaya, o. and j. song in 2016 identified the most frequent, severe, and important causes of schedule delays affecting public constructions projects in burkina faso to enhance the managerial capability of project managers. this research was conducted by questionnaire survey to solicit the causes of schedule delays from 140 burkinabé experts (clients, contractors, and consultants) (bagaya & song, 2016). elawi, g. s. a., et al. in 2016 identifies majority of project delays were caused from the owner's side as compared to contractors, consultants, and other project's stakeholders. this finding matched with the research findings of the gulf countries construction (gcc) industry's literature. this study fills an important practice and research gap for improving the efficiency in delivering infrastructure projects in the holy city of mecca and gulf countries at large (elawi et al., 2016). another study done by mahamid, i. in 2016 also conducted to investigate the performance in construction projects in saudi arabia in order to identify the contributors to poor performance and their severity according to public owners, contractors and consultants through a questionnaire survey. inputs of consultant’s underline that the top three affecting factors are: poor planning and scheduling, poor site management and payments delay respectively. key project participants and researchers, could benefit from the findings and recommendations of this study. although this study is related to views for respondents from saudi arabia, other developing countries could benefit from its results (mahamid, 2016). moreover, there several studies have the semilar result and support with above review findings accordingly (r. hasan et al., 2014; u. hasan, whyte, & al jassmi, 2019), (emam et al., 2015), (bekr, 2015),(mohammad saiful islam et al., 2015).(jarkas & younes, 2014), (bierman et al., 2014), (kamanga & steyn, 2013), (albogamy et al., 2012). , (assaf & al-hejji, 2006), (faridi & el‐sayegh, 2006). designed related attributes on the delay of the road construction atout, m. m. in 2016 summarized literature about the construction projects in gulf rejoin presents particular conditions in which the consultant of the project has to concentrate during each phase of design to ensure that it will be accomplished on time, for example, the unrealistic of project duration, foreign designers and consultants, unusual growth of construction industry, the exceptional features of architectural details in the design of projects, and international consultant establishments, firms and office. based on above literature this paper investigates the main causes of the delays contributed by the projects designers and consultants by representing their roles and responsibilities to hand over the projects on time. the outcome and the results of the study is prepared based on the designed questionnaires and interviews conducted with many consultants and designers intended to identify the causes of delays projects in gulf region from the viewpoint of the designers (atout, 2016). bekr, g. a. in 2015 concluded that the most effective delay factors affecting the time overrun in the public projects in iraq are: security measures, government change of regulations and bureaucracy, official and non-official holidays, low performance of lowest bidder contractors in the government tendering system, design and changes by owner, design changes by consultants, delay in progress payments by the owner, problems with local community, owner’s lack of experience in construction and economic local and global conditions (bekr, 2015). emam, h., et al. in 2015 identified major changes in design during construction; ineffective planning and scheduling; ineffective control of progress, and; https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 55 changes in the scope of projects. construction projects need to adopt planning and scheduling methods that deal with its dynamic and changing nature to create robust programmes with buffers to deal with uncertaintie (emam et al., 2015). moreover, there several studies have the semilar result and support with above review findings accordingly (bekr, 2015), (pourrostam & ismail, 2012)(alnuaimi et al., 2009) and (toor & ogunlana, 2008). client related attributes on the delay of the road construction durdyev, s., et al. in 2018 uncover the most significant factors constraining the sc in malaysia related to government, cost, knowledge and information, workforce, and client and market (durdyev, ismail, ihtiyar, abu bakar, & darko, 2018). morever, alamri, n., et al. in 2017 investigate and analyse the causes of delays 60 were integrated in the questionnaires which were grouped under four main categories: client, contractor, consultant and external factors. the collected data was then analysed statistically and ranked according to its significance. the results reveal, based on pareto’s law of 80/20, that the top causes behind the delays of dam construction projects in oman are: severe weather conditions, change orders, uncertainty in ground condition, poor site management, executive bureaucracy in client organization (alamri et al., 2017). in the same way, haugen, a., et al. in 2017 exlored client side as well as representatives from the design team and the main contractor. even though the project is large and complex, the client has used design-bid-build (dbb) as project delivery method. by using this project delivery method, the client faced several challenges during the early stages of the project execution. some of the client's challenges were shortcomings in the design, as well as lack of control of the subcontractors. by involving the contractor's knowledge in the early phase, some of the challenges could have been reduced. since the project will not be fully implemented until the spring of 2019, the paper addresses challenges in the early execution phase of the project (haugen, wondimu, lohne, & lædre, 2017). however, oyegoke, a. s. and n. al kiyumi in 2017 identified five most frequent causes of delay in the sultanate of oman, in rank order, are: selection of the lowest bid, instead of best bid for the client (rii: 0.698); the financial condition of the main contractor (rii: 0.664); delay in decision-making by the client (rii: 0.656); and poor construction planning by the main contractor (rii: 0.649). also, the findings indicate that extra cost (rii: 0.754) and project time overrun (rii: 0.724) are the most significant effects of the delay in the oman megaprojects (oyegoke & al kiyumi, 2017). moreover, there several studies have the semilar result and support with above review findings accordingly (mukuka, aigbavboa, & thwala, 2015), (bekr, 2015), (atibu seboru, 2015), (głuszak & leśniak, 2015), (motaleb & kishk, 2013), (ruqaishi & bashir, 2013), (niazai & gidado, 2012), (albogamy et al., 2012), (pourrostam & ismail, 2012), (rafieizonooz, 2012), ( kaliba, maya, & mumba, 2009) and (alnuaimi et al., 2009). manpower and resources related attributes on the delay of the road construction durdyev, s., et al. in 2018 analyses the barriers to the adoption of the triple-bottom line of sustainability of the construction sector within the developing country of malaysia. findings of this paper uncover the most significant factors constraining the sc in malaysia related to government, cost, knowledge and information, workforce, and client and market. the findings revealed that clear and effective legislative process is crucial for the enforcement of the integration of sc materials and practices as well as economics incentives which will ultimately lead to effective implementation of sc initiatives; hence, sustainable economic growth and efficient resource (energy, water and material) utilization. it is hoped that the findings provide https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 56 guidelines for the government authorities so that they invest their efforts and allocate resources in more efficient way (durdyev et al., 2018). moreover, ghisellini, p., et al. in 2018 explored the construction sector is one of the most impacting economic activities in the world. the results show that cp for c&dwm has not been yet fully implemented in construction companies and industry mainly due to legislative and economic barriers. construction companies are also much resistant to eco-innovation due to the fact they are only profit driven and lack of awareness of environmental protection through c&dwm, as well as lack of culture towards sustainable development. a refining of the current c&dwm regulations, laws and policies as well as the support of the demand of sustainable buildings are suggested as urgent measures to improve the c&dwm by the construction companies and to put the goals of cp, ce and sc at the forefront of their business agenda (ghisellini, ji, liu, & ulgiati, 2018).in the same way, kong, l., et al. in 2018 studies identified issues on the supply chain management of precast construction while considering time-dependent transportation time and on-site assembly time. there are two main contributions of our work. the results also show that the objective of achieving additional environmental performance conflicts with that of obtaining economic performance. however, sensitivity analysis further shows it is not always true to consider only additional environmental performance for the suppliers to achieve ‘green’ value. for a sustainable business, the customer's service-jit delivery should also be considered. the research contributes to batch delivery theory by expanding the approach to a time-dependent delivery model by considering both the economic and environmental effects (kong, li, luo, ding, & zhang, 2018). however, mahamid, i. in 2017 addressed schedule delay in road construction projects in saudi arabia. results indicated that the top five important factors affecting schedule delay in road construction projects are: improper planning, poor labor productivity, additional works, rework, and lack of contractor experience. the study concluded that the main effects of schedule delay in road construction projects as assessed by contractors are: cost overrun, disputes, arbitration, litigation, and poor quality (mahamid, 2017). moreover, there several studies have the semilar result and support with above review findings accordingly (mohammad saiful islam et al., 2015), (shah, 2014). material and suppliers related attributes on the delay of the road construction ghisellini, p., et al. in 2018 explored the construction sector and recommend to improve its environmental performances the sector is innovating in terms of cleaner materials, products and processes (ghisellini, ripa, & ulgiati, 2018). chen, f., et al. in 2018 investigate the structural implications and recommended that more focus should be placed on the possible measures, such as new structures and materials, to improve the structural integrity and thus the overall pavement performance of the integrated system (chen, coronado, balieu, & kringos, 2018). however, durdyev, s., et al. in 2018 analyses the barriers to the adoption of the triple-bottom line of sustainability of the construction sector within the developing country of malaysia. the findings revealed that clear and effective legislative process is crucial for the enforcement of the integration of sc materials and practices as well as economics incentives which will ultimately lead to effective implementation of sc initiatives; hence, sustainable economic growth and efficient resource (energy, water and material) utilization. it is hoped that the findings provide guidelines for the government authorities so that they invest their efforts and allocate resources in more efficient way (durdyev et al., 2018). jiang, w., et al. in 2018 has done an extensive study on traditional and novel engineering materials and the increasing demands by growing traffic have led to tremendous changes of the function of roads. this study focused on state-ofthe-art research on the performance, applications and challenges of six environment-friendly https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 57 functional road materials, namely the permeable asphalt concrete, noise-reducing pavement materials, low heat-absorbing pavement materials, exhaust gas-decomposing pavement materials, de-icing pavement materials, and energy harvesting pavement materials (jiang, huang, & sha, 2018). kong, l., et al. in 2018 studies identified issues on the supply chain management of precast construction while considering time-dependent transportation time and on-site assembly time. the optimal results show that, compared with the supplier's intuitive minimax optimization with deliveries on the earliest due date, there is an average 10.7% reduction of the objective value of a one-day assembly task by our proposed method. the results also show that the objective of achieving additional environmental performance conflicts with that of obtaining economic performance (kong et al., 2018). however, tarimo, m., et al. in 2017 examined construction and maintenance for the sustainable roads in serengeti national park. however, road construction in protected areas should be sustainable in terms of availability of quality materials within economic haulage distance and the entire construction, operation and maintenance process should have less environmental impacts like habitat fragmentation and dust pollution. the data collected were from soil material test in the existing borrow pits, traffic volume counting, document study and interview with fifty (50) road stakeholder. results show that the current poor performance of the studied road sections may be due to lack of financial and human resources, quality gravel materials and existing traffic volume (tarimo, wondimu, odeck, lohne, & lædre, 2017). moreover, gebrehiwet, t. and h. luo in 2017 investigates the typical causes of delay at different stages of construction and its effect in the ethiopian construction projects. they found that the influential causes of delay investigated are corruption, unavailability of utilities at site, inflation/price increases in materials, lack of quality materials, late design and design documents, slow delivery of materials, late in approving and receiving of complete project work, poor site management and performance, late release budget/funds, and ineffective project planning and scheduling successively as unique to the ethiopian construction project (gebrehiwet & luo, 2017). mahamid, i. in 2016 also conducted to investigate the performance in construction projects in saudi arabia . moreover, results indicate that owners rank poor communication among project participants as the top severe factor affecting the performance in construction projects, followed by poor labor productivity and poor planning and scheduling, respectively. inputs of contractors indicate that the most severe factor is payments delay, followed by escalation of material prices and poor labor productivity, respectively(mahamid, 2016). moreover, there several studies have the semilar result and support with above review findings accordingly (mukilan & jayanthi, 2015), (jarkas & younes, 2014), (bierman et al., 2014), (owolabi james, amusan lekan, oloke, olusanya, & tunji-olayeni, 2014), (rahman et al., 2014), (kamanga & steyn, 2013), (haseeb, bibi, & rabbani, 2011), (pathiranage, 2011), (jurf & beheiry, 2010), (enshassi et al., 2009)(kaliba, muya, & mumba, 2009), (al-najjar, 2008). material and suppliers related attributes on the delay of the road construction hamontree, c., et al. in 2018 exploed that the delay in construction project the study indicates that the 5 top factors affecting road construction delays are: incomplete drawings, lack of equipment efficiency or financial status of contractors, delay in relocating existing infrastructure structures, less of project engineer experiences, and delay in relieving environmental impact, respectively (hamontree et al., 2018). moreover, bagaya, o. and j. song in 2016 identified the top five most important delay factors were ranked as follows: financial capability of the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 58 contractor, financial difficulties of the owner, equipment availability of the contractor, slow payments for completed work, and poor subcontractor performance by the contractor. a comparison of the causes of schedule delays in 11 countries to validate the results of the study showed that financial capability of the contractor was not only the most encountered factor in delays for burkina faso’s construction industry, but also appeared in many other asian and african countries (bagaya & song, 2016). however, santoso, d. s. and s. soeng in 2016 analyzed and summarized influencing factors on the list were land acquisition, award of project to lowest bidder, equipment breakdowns, poor site arrangement, management and supervision, unexpected ground condition and terrain, low quality of the contractor human resources, late progress payments, and low productivity of labor. recommendations to manage the delay factors were presented. significant relationships between the delay factors and the three project objectives also were observed and discussed (santoso & soeng, 2016). moreover, there several studies have the semilar result and support with above review findings accordingly (shah, 2014)(owolabi james et al., 2014)(kamanga & steyn, 2013)(mahamid, 2013)(haseeb et al., 2011)(kaliba et al., 2009)(al-najjar, 2008). govt. regulations and laws, departmental integrations local authorization on the attributes and the road construction delay ahmadabadi, a. a. and g. heravi in 2019 evaluate the effects of csfs on the success of ppp projects using pls-sem. the results confirmed the effect of csf on project success and showed that private sector capability has a direct effect on project success during the construction period and government capability is very effective during the project operation stage. in addition, investigating the case studies with respect to the introduced model indicated that a transparent bidding process, risk allocation, and good partnering are among the csfs in ppp projects in developing countries (ahmadabadi & heravi, 2019). however, mahdi, i. and e. soliman in 2018 found about the significant and top ranked delay factors in arabic gulf countries. because of most construction projects are challenged with delays which have substantially negative impacts to any country. the analysis carried out showed that fourteen delay causes are common in the gulf area. the majority of delay factors include shortages of resources, inefficiency of management teams and governmental regulation. analysis showed that significant correlation exists between delay causes rankings in qatar, kuwait and ksa, while oman is differing. this study is a contribution to the efforts required to mitigate construction industry delays in the arabic gulf countries and other countries with similar conditions (mahdi & soliman, 2018).however, alamri, n., et al. in 2017 investigate and analyze the causes of delays in dam projects in oman. an intensive literature review was carried out to identify the causes of delays in dam and infrastructure projects. the results reveal, based on pareto’s law of 80/20, that the top causes behind the delays of dam construction projects in oman are: severe weather conditions, change orders, uncertainty in ground condition, poor site management, executive bureaucracy in client organization, feasibility study did not cover all aspects, mistakes in soil investigation, natural effects during construction work, difficulty of defining project requirement, slowness of decision making process, delay of obtaining approval from the different government authorities, and land acquisition (alamri et al., 2017). moreover, there several studies have the semilar result and support with above review findings accordingly (atibu seboru, 2015), (alzebdeh et al., 2015), (bekr, 2015) and (kaliba et al., 2009). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 59 conclusion and recommendations the prime aims of the study to investigates of empirical articles and reviewed on the moderating effects of the regulations, integrations of works and local authorization on the attributes of critical success factors and constructions delay of the road projects in oman. the present study summarized and short listed of the factors of the consultant related factors, the contractor related factors, designed related factors, client related factors, labor related factors, material related issues, equipment related issues respectively. moreover, study also summarized that there are moderating effects of the regulations, integrations of works and local authorization on the attributes of critical success factors and constructions delay of the road projects in oman. especially, the consultant related factors are effects on the delay of projects, in case of delaying of approval, inaccurate site investigations and delay inspections, inadequate project management assistance, poor of experiences, late reviewing and approval of design, poor communications and coordination’s and conflicting consultant vs. design engineer respectively. moreover, the contractor related factors also revealed to cause to delay of road projects by delaying of payment, insufficient projects planning and scheduling, inadequate experiences contractors, poor site management and supervisions, incompetent project team, inappropriate constructions methods, obsolete technology, unreliable subcontractors, frequent changes of subcontractors, poor communications and coordination’s with other parties and rework due to errors accordingly. on the other hand, designed related factors are also caused to delay road projects by insufficient data collections and survey before design, design errors, mistakes and delay in producing of design documents, poor use of advanced engineering software, complexity of project design, unclear and inadequate details in design drawing and misunderstand of client requirements by designer accordingly. in the same way, labor related factors are also caused to delay of project by low productivity of labor, unqualified and inadequate experiences, low motivation and moral, shortages of labor, absenteeism, slow mobilizations labor, labor sticks and personal conflicts among labor respectively. however, in case of material related issues also identified which has caused to delay road constructions by poor of reliable supplier, escalations of martials prices, poor quality of constructions materials, late delivery of materials, shortage of constructions materials, poor procurement of constructions materials, changes of materials types and specifications and damage of materials etc. similarly, equipment related issues are considered to find the caused to delay of road constructions by inadequate modern equipment’s, low efficiency of equipment’s, shortage of equipment, slow mobilizations of equipment, frequent equipment breakdown, equipment allocations problem and improper equipment respectively. the study also summarized on about the natural disaster (flood, hurricanes and cyclone etc.), conflict, war, global financial crisis, compensation delay to affected property owner, price fluctuated, unexpected ground conditions (soil and high-water level), changing of government regulations and laws, delays in obtaining permission from municipality, loss of time by traffic control and restrictions at job site, problem with inhabitant of community, delays in providing service from utilities (water and electricity’s) and accident during constructions respectively. the present study also concluded the effects of above factors which have delay road constructions through increasing of cost and overrun it, taken overtime, creating of disputes, going for lawsuits, finally happing of abandon of projects. therefore, the present study taken initiatives to evaluate the current status delay level of the constructions of road as well as also will identify the critical success factors especially the contactor, owner, consulted, designed, client, manpower and resources, material and suppliers and equipment related attributes caused delay of https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 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(2008). problems causing delays in major construction projects in thailand. construction management and economics, 26(4), 395-408. 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/10.1016/j.ijproman.2007.09.009 https://doi.org/10.1016/j.procs.2017.11.045 indian journal of finance and banking vol. 5, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 23 value-at-risk based approach for currency hedging rachna khurana chief executive officer southern ridges capital 8 robinson road, singapore 048547, usa e-mail: rachna.khurana@southernridgescapital.com umang khetan phd candidate university of iowa tippie college of business, iowa city, ia 52242, usa e-mail: umang-khetan@uiowa.edu abstract corporate fx risk management has gained complexity with an increased number of currencies involved and varying correlations among them. existing literature has highlighted the need to account for cross-currency correlations when optimizing hedge ratios for portfolio management (dowd, 1999). in this paper, we propose a value-at-risk (var) based model to estimate the optimal hedge ratio for a multi-national corporate that aims to minimize the cost of hedging at a given tolerance level of expected loss arising out of fx movement. the paper illustrates both parametric and historical methods of var estimation at a portfolio level as the first step in risk management. as a second step, an efficient-frontier is derived based on the expected var level at various hedge ratios and compared with associated hedge cost. the benefits of this approach include: identification of net exposures after correlations among currencies are accounted for in order to avoid duplication of hedges, and condensation of the parameters governing hedging decision into a single, intuitively-appealing number. the paper also highlights the need to frequently update the model’s assumptions as currency correlations and corporate exposures remain dynamic. keywords: value-at-risk, fx risk management, correlation, international finance. jel classification codes: c10, f31, g32, m20. introduction increase in cross-border flow of capital and trade has diversified the sources of cash flow for multi-national corporations. these cash flows tend to be denominated in varying currencies, often different from the functional currency of the corporation in which it draws its books of accounts. as a result, corporate treasuries have to manage multi-currency exposures while controlling for cost of hedging. mailto:rachna.khurana@southernridgescapital.com mailto:umang-khetan@uiowa.edu https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 24 existing literature on corporate fx risk management has focused on the merits of undertaking derivative transactions for minimizing cash flow volatility. dufey and srinivasulu (1983) were among the earliest proponents of corporate fx risk management, arguing that firms can hedge more cheaply than individual shareholders and protect the latter in times of financial distress. nain (2004) finds there to be strategic motives for fx risk management that insulates corporate from input price fluctuations in markets with inelastic output prices. smithson and simkins (2005) conducted a survey that found that 92% of fortune 500 companies believed that financial risk management adds value to shareholders. in light of these findings, it is important to adapt risk management strategies in line with the evolving complexities in currency markets and diversified nature of cash flows. this paper highlights one such approach: the value-at-risk. value-at-risk (var) is a globally recognized framework in banks and financial institutions. the methodology became an industry standard after morgan (1996) published the risk metrics framework in 1992. while the financial industry has adopted variations of the framework and several papers and books have been written on implementation and limitations (see for instance dowd, 1999), this paper is the first to apply the framework to corporate fx risk management. the strength of the framework lies in its ability to condense various sources of fx risk into a single metric that can be understood at various levels in an organization. var as a risk assessment parameter has also found applicability in asset management literature. marshall and siegel (1996) consider different approaches to portfolio risk management based on the central idea of var, as detailed in morgan’s risk metrics. in this paper, we illustrate the parametric and historical cash-flow methodologies to estimate var when a corporate has exposures in multiple currencies that are less-than-perfectly correlated with one another. rockafellar and uryasev (2000) proposed a conditional var model that focuses only on downside risk, since that is essentially what an investor tries to protect against. in our paper, however, we assume a corporate philosophy of mitigation of volatility while keeping the cost at a reasonable level, and hence do not go down the conditional var route. at the outset, an organization often evaluates the benefits of hedging currency risks. global treasurers typically face a dilemma because hedging and speculating can be two sides of a coin depending on the view of the organization or that of the senior management. copeland and copeland (1999) illustrate that variance minimization is not the only objective way of assessing a hedge program; the impact of a hedge program on business disruption and the drift in operating cash flow caused by the cost of fx hedging must also be considered. in this paper, we consider the example of an indian exporter that expects to earn usd in the future and can hedge the currency risk by selling usd against inr under a forward contract. if inr were to appreciate in the future, the mark to market on the contract would be positive and the company would benefit by having locked in a rate for its future receivables. on the flip side, if inr depreciates, the mark to market on the contract would be negative. the contract was to fix a rate for its future receivables, and hence is technically not a loss for the company. however, the senior management or shareholders can view it as an opportunity loss where the company could have received higher inr value in absence of the forward contract. if the firm were to opt for an option contract instead, to take advantage of a possible favorable currency movement, it would have to pay a premium which adds to hedge costs. there are other costs associated with hedging as well which need to be considered, including manpower and operational overheads. therefore, it is important for all levels in the organization to clearly set the objectives of a hedging policy to avoid any conflicts in the aftermath of a hedge performance. it is also important for the policy https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 25 and tools to be simple to understand and evaluate. it is with this motivation that a simple metric must be used to evaluate hedge decisions against. we propose the use of var to arrive at an assessment of materiality of risks. the simplicity of var measurement greatly facilitates reporting of risks to senior managers and directors in a standard format. var represents the potential loss that can be expected on a portfolio of assets, associated with a specified level of confidence, based on the correlations among assets and their respective volatilities. the example of an indian corporate used in this paper follows a confidence level of 95%, but variations around it can be easily incorporated hendricks (1996) for other variants of the model. as with any quantitative tool, there are limitations such as reliance on historical data and inability to predict fat-tail events. we discuss some of these issues in the last section of the paper. we set the corporate to centrally manage its fx risks where it can consolidate its exposures and optimize the hedge ratio. the first step in the process is risk evaluation. we develop a framework here to identify various exposures and quantify the risks in terms of impact on the firm’s profitability, using a simple var metric. the second step is to decide how much of the exposure identified should be hedged using fx derivatives. a conservative approach that does not account for cross-currency correlations is to hedge each currency exposure fully – in the spirit of complete mitigation of cash flow volatility caused by fx movements. however, this can result in large costs for the organization including transaction costs, credit limit utilization, margining requirements, and operational overheads. particularly for companies having exposures in emerging market currencies, such costs can be material. we propose a cost-benefit trade-off model that obviates hedging of offsetting exposures and focuses on the net currency risk faced by the corporate. the cost of hedging this net exposure is assessed against the var achieved at different levels of hedge ratio. this results in an efficiency frontier along which the corporate can determine the cost-efficient optimal hedge ratio and the associated var at that level. the model also offers flexibility to a corporate that wishes to target a certain var level and accordingly determine the hedge ratio. targeting a zero var would need 100% hedge ratio of net exposure. the paper therefore provides a scientific way to determine optimal hedge ratios for multinational corporations and accounts for the key variables of fx exposures, expected cash-flow volatility, and hedge cost. the paper concludes with a discussion on the limitations of using var as a standalone quantitative tool. we take the example of covid-19 crisis, which was a tail-risk event that a var model can only provide partial protection against. other limitations of the proposed approach include the need to regularly update the model parameters. companies’ risk profile in terms of currency exposures undergoes changes from time to time, and a correlation among currencies is also not static. the model, once constructed and implemented, can be updated with little effort. a potential extension of this model and that of the paper would be to include other asset classes that the corporate has exposure to, such as interest rates and commodities, and that have non-zero correlation with fx. the rest of this paper is organized as follows: model, empirical illustration, and discussion on limitations of the model and best practices for hedging, and conclusion. this section ends with a brief summary of key foreign exchange risks for a corporate, as below. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 26 key foreign exchange risks every transaction or potential transaction which result in an inflow or outflow in foreign currency is a risk for a company. most companies would identify these risks in below broad categories:  current account transaction risk: this arises due to current payable/receivable and net income in foreign currency. this is part of the consolidated profit and loss statement. for instance, a us based machine tools manufacturer selling products in europe may have receivables in eur and exposure to eurusd currency volatility as the functional currency of the us based manufacturer is us dollar. another example could be a us based company having a subsidiary in singapore for its asia business and consolidating the net income from singapore (in sgd).  capital account (foreign currency debt) risk: this is an important risk to consider as companies may tap various foreign markets for meeting their borrowing needs. these could be long tenor bonds/loans and any significant fx moves could result in a much larger liability for the company.  net investment risk: this is the risk arising from investments in foreign subsidiaries whose reporting currencies may be different from that of its parent. in most cases, this is treated as “other comprehensive income” thereby affecting balance sheet and not the income statement. model we consider a firm with cara utility function that seeks to maximize expected wealth in the following period. the utility function of the firm is given by 𝑈 = −𝑒𝑥𝑝 −𝑎𝑊 where a is the coefficient of risk aversion and w is the level of wealth achieved in period t+1. we take a as exogenously given and proceed to analyze the determination of wealth w. wealth in period t+1 is composed of cash flows arising into or out of currencies other than the home currency of the firm. while the cash flow is certain in the currency in which it is denominated (for example, export contracts or outbound investment flows), there is uncertainty around the future fx rate at which such cash flows will eventually occur 1 . therefore, the corporate attempts to maximize the below wealth function that is parametrized by cash flow in foreign currency and the expected spot rate in period t+1 𝑚𝑎𝑥 e[−𝑒𝑥𝑝 −𝑎(𝑥𝑖 ∗ 𝑆𝑡+1 𝑖 ] (1) where 𝑥𝑖 is the cash flow in foreign currency i and 𝑆𝑡+1 𝑖 is the expected spot rate at the time of actual conversion. note that we do not place a non-negativity constraint on x because it can be both an inflow and an outflow from the corporate’s perspective. however, for the rest of the analysis below, we consider the case of a firm that exports in terms of currency i to earn a 1 we assume 100% certainty of cash flow in the foreign currency to keep the model tractable. however, risk of contract non-performance can be incorporated by multiplying the cash flow with a certainty factor and proceeding with the analysis as described. our results continue to hold in such scenarios. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 27 positive cash flow in foreign currency (𝑥𝑖> 0) and benefits from a higher expected spot rate of conversion. now let us say that the firm chooses to hedge a certain portion of its expected cash flow so as to not depend entirely on the vagaries of fx market in setting the conversion rate when the cash flow becomes due. let 𝛼𝑖 be the proportion of cash flow that is not hedged, and consequently (1-𝛼𝑖) is the proportion that is hedged at a certain rate of 𝐹𝑖 with associated hedge cost of 𝑚𝑖 . then, the expected wealth is given by 𝑊𝑖 = e[ 𝑥𝑖 ∗ (𝛼𝑖𝑆𝑡+1 𝑖 + (1 − 𝛼𝑖)(𝐹𝑖 − 𝑚𝑖))] (2) subject to the constraints that 0 ≤ 𝑥𝑖 , 0 ≤ 𝛼𝑖 ≤ 1 the term (𝐹𝑖 − 𝑚𝑖) can be understood as the net rate realized by the firm that is composed of (i) in case of an option, at least the strike price less premium, or (ii) in case of a forward, the forward rate less transaction costs. further, assume 𝑆𝑡+1 𝑖 to be normally distributed with mean 𝜇 and variance 𝜎2, i.e. 𝑆𝑡+1 𝑖 ~ 𝑁(𝜇, 𝜎2). substituting equation (2) and the foregoing distribution parameters into the exponential function (1), we arrive at the firm’s objective function as max 𝛼 𝑖 −𝑒𝑥𝑝 −𝑎𝑥𝑖(𝛼𝑖𝜇 + (1 − 𝛼𝑖)(𝐹𝑖 − 𝑚𝑖)) + 1 2 𝑎2𝑥2𝛼𝑖2 𝜎2 (3) maximizing this function is akin to minimizing the power of the exponential. we take the first order condition of the power term with respect to 𝛼𝑖 and arrive at its optimal value as below 𝛼𝑖 = 𝜇 − 𝐹𝑖 + 𝑚𝑖 𝑎𝑥𝑖𝜎2 (4) this is the first key result in our paper; the proportion of cash flow in foreign currency that the firm chooses to keep unhedged, 𝛼𝑖 , goes up as: (i) the volatility of the fx pair goes down, (ii) the difference between the expected spot rate and the hedged rate goes up (in this case, the forward premium goes down), (iii) the hedge cost goes up, and (iv) the firm’s coefficient of risk aversion goes down. all of these conclusions make intuitive sense. consequently, the firm arrives at the optimal hedge ratio considering the fx volatility, expected spot rate (which may be the same as current spot rate), the forward quote available from a dealer bank, and the associated option premium or transaction costs. now we can consider these results at an aggregate level for all currency pairs put together. the corporate can treat each stream of cash flow affected by an fx pair separately, thereby deciding on how much to hedge for each currency pair. such an approach assumes that all the fx pairs that the firm has exposure to are independently and identically distributed (iid). while the assumption of identical distribution may be plausible (at least to the extent the currency pairs can be classified as g10 or em), the assumption of independence among fx pairs is clearly not. we show in the empirical section below the correlation between a sample of currency pairs and find that they are almost always non-zero. this is understood to be the case https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 28 because similar macro-factors move currencies, such as geopolitical developments, commodity prices, risk sentiment that drives portfolio flows, and macro-economic data. therefore, we refine the approach of the corporate to account for cross-currency correlations when determining the exposure that needs to be hedged, and then optimizing its hedge ratio of the net exposure. we know from literature that portfolio variance is not a simple summation of variances of individual securities. we apply the same reasoning in the context of a portfolio of currencies that the corporate has exposure to. consider a portfolio of n currency pairs. let 𝐶𝑜𝑣(𝑖, 𝑗) be the covariance between currencies i and j, derived from a covariance matrix that is empirically derived using historical data for all the currencies. then, the portfolio variance is given by, 𝜎𝑝 2 = 𝑤𝑖 2𝜎𝑖 2 𝑛 𝑖 = 1 + 𝑤𝑖𝑤𝑗𝐶𝑜𝑣(𝑖, 𝑗) 𝑛 𝑗 = 1 n 𝑖 = 1 (5) where 𝑤𝑖𝑤𝑗 is the product of the relative weight of the currencies in the portfolio. motivated by the portfolio variance theory, we introduce var as a condensed numerical representation of the risk faced by the corporate considering all currency exposures together. this can substitute for the individual currency variance that we considered in equation (4) when deciding on the optimal hedge ratio. value-at-risk is an attempt to provide a single number summarizing the total risk in a portfolio of financial assets. it gives the maximum loss that an institution can expect to face with a certain confidence level over a specific horizon at a portfolio level. controlling for a certain tolerance level of var, the corporate can ascertain how much of the net currency exposure it should hedge. generally, the corporate can compare the level of var with associated cost of hedging in the numerator of equation (4) to draw an efficient frontier of hedge ratio. we detail this approach in the next section. this section concludes with a brief overview of two var estimation methodologies. var methodologies historical method this method uses historic market data to create theoretical portfolio of the exposure profile at various points in the past. it calculates hypothetical returns for the current portfolio using actual historic market conditions over a certain period of the past, such as the past one year. for instance, we can calculate the change in portfolio value over one year holding period, observed daily, which provides the daily market value change of the portfolio. once we arrive at a hypothetical return for each day, we can calculate the average of the worst twenty days (from a sample set of 252 working days) for 95% confidence to give us the resulting var. other confidence intervals typically used in literature are 97.5% and 99%. historical method requires a significant amount of daily rate history and incorporates tail risk only to the extent of what may have actually occurred in history. however, as a concept this method is easy to understand and implement, with limited mathematical computation. also, correlations and standard deviations need not be separately estimated because the change in portfolio value automatically incorporates them. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 29 parametric method (variance covariance) this method relies on a variance-covariance matrix for all currencies in the portfolio and estimates the portfolio standard deviation using equation (5). 𝑉𝑎𝑅 ($) = ∝ ∗ 𝑡 2 ∗ 𝜎𝑝 ∗ 𝐸𝑥𝑝𝑜𝑠𝑢𝑟𝑒 ($) where, ∝ = number of standard deviations from the mean for given confidence level 95% confidence interval: 1.65 97.5% confidence interval: 1.96 99% confidence interval: 2.33 t = time period in days 𝜎𝑝 = daily standard deviation the benefit of parametric method is that it doesn’t involve analyzing extensive historical data (only volatility and correlation data is required). this makes it applicability easier across new and evolving portfolios. a disadvantage is that it may be less accurate for skewed distributions or distributions with fat tails, because of its inability to learn from past events. empirical illustration we consider an electronics manufacturer based out of india, with exports and imports denominated in eur, gbp, jpy and usd, and foreign currency debt in eur and usd. the below tables summarize the exposures. all exposures have been converted into usd equivalent to enable comparison. table 1. exposure summary (amounts in usd million equivalent) trade exposures exports imports net imports eur 100 10 -90 jpy 250 0 -250 usd 300 50 -250 gbp 50 100 50 foreign currency debt amount tenor eur 500 10y usd 200 5y consolidated exposure affecting the income statement net payables eur 410 jpy -250 usd -50 gbp 50 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 30 the company starts with an analysis of its net exposure which is summarized in the third table above. in usd terms, the largest exposure is a net eur payable of 410 million, followed by a jpy receivable of 250 million. smaller exposures are payable of 50 million in gbp and an equal amount of receivable in usd. we assume the timing of these exposures to coincide. without looking at currency correlations, the corporate treasury would seek to hedge a certain portion of each currency’s exposure individually. however, we have two potential offsets available that the var model can capture. first, due to current and capital account exposures running in opposite directions for both eur and usd, the company has eur payable and usd receivable. additionally, there is a net jpy receivable and gbp payable. in all, the net exposure of the four currency pairs can be consolidated into a common currency unit (say, inr or usd) to arrive at the final, offsetting exposure number. second, there are correlations among currencies which increase or decrease the overall risk faced by the corporate. figure 1 below illustrates rolling correlation for a tenor of 1 year for combinations of these currency pairs. figure 1. historical rolling correlation between select currencies data source: bloomberg looking at correlations, amongst the major exposures, eurinr and jpyinr are offsetting exposures and are positively correlated. these two pairs therefore provide an offset to the company and obviate the need to hedge separately. likewise, eurinr and usdinr are strongly positively correlated and have offsetting cash flows, thereby further reducing the net amount that the company needs to hedge. however, the positive correlation between eurinr and gbpinr with same direction of exposure (net payable in both) means that these exposures add up to overall risk and must be aggregated. we summarize these results into an intuitively appealing var measure using both historic and parametric estimation methods in figures 2 and 3. these figures show, at various levels of confidence, what is the expected daily loss to the company at a portfolio level if the currencies were to move from their present levels. all correlations and volatilities are encapsulated in a single number that provides the basis for the -0.40 -0.20 0.00 0.20 0.40 0.60 0.80 1.00 d ec -1 8 fe b -1 9 a p r1 9 ju n -1 9 a u g1 9 o ct -1 9 d ec -1 9 fe b -2 0 a p r2 0 ju n -2 0 a u g2 0 o ct -2 0 historical 1y rolling correlation eurinr&gbpinr gbpinr&jpyinr jpyinr&usdinr eurinr&usdinr eurinr&jpyinr gbpinr&usdinr https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 31 next step of hedge decision. historical volatility pattern in these currencies, which drives the estimate of var under both methods, is displayed in figure 4. figure 2. daily var in usd (million) using historical method at three levels of confidence data source: bloomberg. figure 3. daily var in usd (million) using parametric method at three levels of confidence data source: bloomberg 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 95% 97.5% 99% v ar ( in u sd m ill io n ) percentile historical method daily var 0.00 0.50 1.00 1.50 2.00 2.50 3.00 95% 97.5% 99% v ar ( in u sd m ill io n ) percentile parametric method daily var https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 32 figure 4. historical volatility in four currency pairs for 1 year tenor data source: bloomberg. there is some difference in var estimation between historical and parametric methods, due to differences in assumptions. also, given that the historic method in our sample includes the covid-19 sell-off of 2020, it is likely to show higher var numbers due to the incorporation of this fat-tail event. annual var can be estimated using the below relation 𝐴𝑛𝑛𝑢𝑎𝑙 𝑉𝑎𝑅 = 𝐷𝑎𝑖𝑙𝑦 𝑉𝑎𝑅 ∗ 252 considering a daily var estimate of usd 2.4 million at 95% confidence level, we arrive at an annual var estimate of usd 37.5 million. the next step is to address two questions: what specific exposure does the company hedge, and how much of it? after netting off offsetting exposures, the company in our example is left with the largest exposures to eur and jpy, which primarily drive var up. given that the correlation between the two pairs is significantly and generally positive, with exposures running in opposite directions, the net amount of eur payable remains as the key source of risk for the company. therefore, the rest of the decision is based on what proportion of eur exposure to hedge using fx derivatives, while hedging a small proportion of jpy exposure. it bears repeating here that the only way to achieve a zero-var is to 100% hedge the net exposure in each currency, which is both costly and overly conservative. as computed above, the starting level of var when all exposures are unhedged is usd 37.5 million. while eurinr and jpyinr have a strong positive correlation, it is less than one. hence, a small part of jpyinr exposure is likely to remain open even after netting with eurinr. in the scenario analysis that follows, we let the company hedge 10% of its jpyinr exposure and then decide how much of eurinr exposure to hedge, while keeping the other two currencies unhedged. table 2 shows the various hedge ratios for eur exposure, the corresponding var after the hedge is implemented, the associated cost of hedging using forwards, and the summation of var and cost of hedging. 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% d ec -1 8 fe b -1 9 a p r1 9 ju n -1 9 a u g1 9 o ct -1 9 d ec -1 9 fe b -2 0 a p r2 0 ju n -2 0 a u g2 0 o ct -2 0 1y rolling historical volatility eurinr gbpinr jpyinr usdinr https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 33 table 2. comparison of var and cost at various hedge ratios for eur exposure hedge ratio (net eur exposure) annual var in $ million (95% confidence) hedge cost (forward) in $ million var plus hedge cost in $ million 0.1 34.1 0.9 35.0 0.2 31.2 3.1 34.3 0.3 28.8 5.2 34.0 0.4 26.8 7.4 34.1 0.5 25.4 9.5 34.9 0.6 24.7 11.7 36.4 0.7 24.8 13.8 38.6 0.8 25.6 16.0 41.6 0.9 27.2 18.1 45.3 1.0 29.3 20.3 49.6 note: the scenario analysis assumes jpy exposure hedge ratio of 10% due to the imperfect correlation between eurinr and jpyinr. forward cost is the net premium paid for eurinr and jpyinr hedge, expressed in usd million. var shows a curvilinear trend: it falls as hedge ratio increases but at a slowing pace. the first order derivative is negative but the second order derivative is positive, indicating a convex function. after a point, var stops reducing, flattens out, and then starts increasing again. this is because a very high hedge ratio begins to nullify the diversification benefit arising from correlations among currencies. cost of hedge, on the other hand, generally follows a linear trend. it rises almost one-to-one with higher hedge ratio, but in cases it could rise faster if large trade size begins to adversely affect market liquidity. table 2 gives us two optima: var is minimized at a eur hedge ratio of 60%, at usd 24.7 million. it has an associated hedge cost of usd 11.7 million. on the other hand, the total cost (var plus hedge cost) is minimized at a eur hedge ratio of 30%, at usd 34 million. the corresponding var is usd 28.8 million. the company can choose to minimize either of the two and settle on a hedge ratio accordingly. the optimal hedge ratio, as in equation (4), is determined by a trade-off between hedge benefit and hedge cost. the equation is re-stated here for reference: 𝛼𝑖 = 𝜇 − 𝐹𝑖 + 𝑚𝑖 𝑎𝑥𝑖𝜎2 from this equation, we know that a higher hedge cost, 𝑚𝑖 , should reduce the hedge ratio. therefore, the ideal measure to minimize would be var plus hedge cost, as opposed to var alone. figure 5 converts this into an efficient frontier where it is clear that a hedge ratio of 60% achieves the lowest var. note that as the hedge ratio increases beyond 60%, var begins to increase because the netting benefit against other currencies begins to get undone. this happens https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 34 while there is concurrent increase in hedge cost, which represents an inefficient region for the corporate undertaking such hedges. bauwens, ben omrane and rengifo (2006) adopt a similar methodology in determining the optimal allocations in an fx portfolio, that maximizes expected returns subject to a var constraint. here in the case of a corporate hedger, the cost is minimized subject to a desired var. figure 5. comparison of var and cost of forward hedge at various hedge ratios. blue dots represent var-cost combinations and are represented along the left axis. orange dots represent the sum of var and hedge cost and are represented along the right axis. discussion limitations of the model value-at-risk has well-documented limitations as a framework. huisman, koedijk, and pownall (1998) highlight how the traditional measure of var does not account for fat-tail events accurately enough. given that var is a statistical measure of the risk that estimates the maximum loss that may be experienced on a portfolio with a given level of confidence, it is always connected with a probability that says how likely it is that losses will be smaller than a given number. measuring risk in this manner can result in the corporate being exposed to fat-tail risk because var does not quantify the potential loss that can occur at the very end of the tail. var model makes an assumption that markets are behaving normally with some likelihood of major movement, while frequently financial markets do not behave normally as we have seen historically. it is important to understand that var is not designed to measure extreme price changes, and would not have been able to fully capture the market movement caused by once-ina-decade crises such as the covid-19 pandemic. therefore, var should always be interpreted along with the associated level of confidence, which is less than 100%. an organization can supplement a var based risk framework with stress testing. financial parameters which demonstrate the greatest risk for the organization can be chosen and one can assess the impact of a certain percentage up or down move of that parameter. for example, in the case of the indian exporter explored in this paper, given that the exposure in 0 10 20 30 40 50 60 0 5 10 15 20 25 20 22 24 26 28 30 32 34 36 v ar p lu s h ed ge c o st ( in u sd m ill io n ) c o st o f h ed gi n g (i n u sd m ill io n ) annual var (in usd million) optimizing var and cost of hedging tangency point lowest total cost https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 35 eur is the largest, the firm should monitor the impact of a +5% daily move in eurinr. taken together with var, this can provide a comprehensive measurement framework. another limitation of standalone var model arises when looking at multi-asset risks together. var takes account of how price changes of different assets are related to each other. however, the correlations between different assets are constantly changing and one has to be mindful to reassess the underlying assumptions of a hedge philosophy. for instance, jpyinr and eurinr are offsetting exposures and are positively correlated and hence can provide a good offset in our example. however, looking at historical data, the underlying correlations are volatile, moving between 0.2 and 0.8 in a year. hence, it is important to review the correlations and resultant hedge ratios on a frequent basis. finally, it is critical for the organization to define hedging goals clearly. hedging and speculating are sometimes indistinguishable (a broader definition of speculation could include amending the hedge ratio to allow for some volatility in the cash flow). inadequate understanding of implication of hedging in terms of additional cost or opportunity loss can result in problems for treasury professionals. using var as a tool to set these objectives is a step in reducing such subjectivity. however, it is important that goals associated with acceptable var levels are set and understood at senior levels in the organization. we briefly discuss hedging best practices in the next section. best practices for hedging hedging can often be an expensive proposition. costs typically include hiring qualified employees in the treasury who understand the use of derivatives, credit limits with banks and associated overheads such as collateral transfer and legal documentation such as isda, operational costs of tracking mark-to-market on the derivative positions, and the potential gains that are foregone when uncertainty of exposure is done away with. some of these costs can be optimized using a few simple techniques that we describe below. exposure optimization: as illustrated in the previous section, the recognition of offsetting exposures (within and across asset-classes) can reduce the net exposure that needs to be hedged. for instance, companies having long-term exports in usd can choose to raise usd foreign currency debt (loan/bond) to act as a natural hedge. likewise, companies can also seek to restrict the number of invoicing currencies for exports or imports in order to keep the scope of currency exposures manageable. as a finer point, there are likely to be tenor mismatches that a corporate needs to be mindful of, such as the short-term nature of trade exposures compared to longer term nature of borrowings. ideally, exposures should be netted off over the same time horizon when they are expected to occur, but in practice there are likely to be mismatches that need to be managed carefully. cross-asset correlations: in addition to the fact that currencies are correlated and hence provide natural hedge depending on the portfolio of exposures, a corporate can also consider cross-asset correlations that include exposures to commodities, fixed income instruments, and equities. such correlations are not static and the company needs to keep monitoring these at a reasonable frequency and take an action when the correlations break down. chen, kritzman, and turkington (2015) explore strategies such as linear and non-linear relations among asset classes to identify second order relationships. the use of machine learning may be particularly helpful in identifying non-linearities among financial assets. while adding layers of quantitative analyses to optimize hedging may be useful, it is computationally expensive and needs regular monitoring. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 36 risk reward optimization: once the company establishes a framework of looking at overall risks by a single measure such as var, a risk-reward analysis can be performed comparing expected loss at a particular confidence level of var and evaluating it against the costs of running a hedge program. an optimum ratio can then be arrived at, similar to the sharpe ratio for investment returns versus risk. this provides an objective, consistent parameter that the company can track to execute its hedge program. the simplicity of this measure does not compromise the quantitative rigor that goes into creating it. conclusion value-at-risk is a widely-applied methodology for measuring risks in financial institutions. as we demonstrate in this paper, the technique can be adopted by corporate risk management as well. the basic tenets of risk measurement remain the same across organizations, whether corporate or financial, which is minimization of volatility at reasonable costs. using var to measure firm-wide currency risk allows corporate to understand, measure, control and communicate the risk in a manner that can be understood at all levels in the organization. currency hedge decisions are always an exercise in cost-benefit analysis. often, in times of financial market volatility, hedging activity could be hindered due to prohibitively high costs and lack of understanding of risk metrics to track. taking a conservative approach and hedging the exposure completely could result in a very high cost for the organization. a mathematical framework that measures the risk as a single number (i.e. the impact of an adverse move to the organization) and looks at efficient ways of hedging the risk can help to resolve the dilemma to a large extent. we illustrate the case with the example of an indian exporter firm that faces current account and capital account exposures in multiple currencies. a simple framework set at organization level can ensure that treasury professionals and senior management have clarity on the goals of hedging and the organization is protected from market volatility in a cost-efficient manner. references bauwens, l., ben omrane, w., & rengifo, e. w. (2006). intra-daily fx optimal portfolio allocation. available at ssrn 912697. chen, w., kritzman, m., & turkington, d. (2015). alternative currency hedging strategies with known covariances. journal of investment management, 13(2), 6-24. copeland, t., & copeland, m. (1999). managing corporate fx risk: a value-maximizing approach. financial management, 28(3), 68-75. dowd, k. (1999). a value at risk approach to risk-return analysis. the journal of portfolio management, 25(4), 60-67. dufey, g., & srinivasulu, s. l. (1983). the case for corporate management of foreign exchange risk. financial management, 12(4), 54-62. hendricks, d. (1996). evaluation of value-at-risk models using historical data. economic policy review, 2(1), 39-69. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 1; 2021 37 huisman, r., koedijk, k. g., & pownall, r. (1998). var-x: fat tails in financial risk management. journal of risk, 1(1), 47-61. morgan, j. p. (1996). riskmetrics technical document. marshall, c., & siegel, m. (1996). value-at-risk: implementing a risk measurement standard. nain, a. (2004, march). the strategic motives for corporate risk management. in afa 2005 philadelphia meetings rockafellar, r. t., & uryasev, s. (2000). optimization of conditional value-at-risk. journal of risk, 2(3), 21-42. smithson, c., & simkins, b. j. (2005). does risk management add value? a survey of the evidence. journal of applied corporate finance, 17(3), 8-17. 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/) indian journal of finance and banking 40 vol. 8, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa evaluation of a national level scheme for uplifting rural population through financial inclusion in a developing country: evidences from rural india utkarsh goel assistant professor department of management studies indian institute of information technology, allahabad, india e-mail: utkarsh@iiita.ac.in shailendra kumar associate professor department of management studies indian institute of information technology, allahabad, india e-mail: shailendrak@iiita.ac.in received: august 30, 2021 accepted: october 14, 2021 online published: december 05, 2021 doi: 10.46281/ijfb.v8i1.1476 url: https://doi.org/10.46281/ijfb.v8i1.1476 abstract this study aims to understand the factors that encourage the people from rural background to access the banking services offered under a financial inclusion scheme, with evidences from a developing country, india. pradhan mantri jan dhan yojana (pmjdy), scheme launched by government of india, has an objective of connecting the banking industry with the people residing in the remote areas of the country. the research is aimed to gauge the pmjdy’s accomplishments in terms of fulfilment of its objectives. the research helps in getting a ground level feedback of the financial inclusion schemes’ achievements and issues involved in its successful implementation. this study also explores the perceptions of the individuals regarding the benefits offered by the scheme. a field survey of 2446 respondents was conducted in purvanchal region of uttar pradesh, india. the questionnaire was constructed based on the theoretical model built after an extensive review of literature in the field of financial inclusion. the results from the analysis indicate that the awareness about the scheme and support by authorities are the two major factors that contribute to the successful implementation of a financial inclusion scheme. overall awareness and availing of banking services under pmjdy scheme has been initiated but not uniformly. keywords: financial inclusion, rural upliftment, developing countries, program evaluation. jel classification codes: o10, g20, g21. introduction in the present scenario, financial inclusion has been considered as one of the most important aspects for the inclusive growth and financial development of the societies (ali et al., 2021). financial inclusion means the delivery of financial and banking services along with credit to a vast low-income group at an mailto:utkarsh@iiita.ac.in mailto:shailendrak@iiita.ac.in https://doi.org/10.46281/ijfb.v8i1.1476 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 41 affordable cost (chhabra, 2015). financial inclusion concentrates on the participation of the vulnerable groups that consist of low-income groups and weaker sections of the society based on their reach and access to the financial services such as payment and saving accounts, pensions and credit insurances (singh et al., 2014). evidences from macroeconomics state that the countries with high degree of financial inclusion tend to improve local economic activity, reduce income inequality and grow faster (beck, demirgüç kunt, & levine, 2007). hence development of financial inclusion system is an important agenda for economic and social progress. various studies have been conducted to compare the impact of financial access at the local economy level with the baseline of quasi experimental setting. self-help groups, microfinance institutions and accessibility to the formal finance institutions provide a better financial model and better penetration has been provided by the adoption of new models and recent technologies. research and policy debates have put on emphasis on the access to the credit while there is requirement of access to full range of financial services by the poor and marginalised groups to effectively manage their economic lives. often weaker sections of the society (such as – the poor, women and rural populations) are deprived of wage-earning employment opportunities thus living and working in informal economy with least access to the formal systems and operating through borrowings from relatives, friends, money-lenders, saving schemes or money under the mattress. such informal systems are abundantly available as well as they are very expensive and unreliable. hence financial inclusion has high opportunity cost and offers a probable solution or the masses suffering from it. the combined effect of high transactional costs and information asymmetries put poor in bad equilibrium of deficient collateral or credit histories (cull, ehrbeck, & holle., 2014). india, a country of 1.33 billion people living in 29 states and seven union territories with 733 districts and more than 600,000 villages (the world bank (twb), 2020). a vast majority of population has been deprived of the easy access to the finance, especially the population residing in rural india (gounasegaran, kuriakose & iyer, 2013). there has been a global concern for the accessibility, affordability and price appropriateness of the financial services thus making financial inclusion an important requirement not only in india but also a primary policy concern in various countries. access to the financial will be a major contributor in upliftment of the financial condition and living standards of the poor and deprived sections. reserve bank of india has been constantly promoting the extension of banking services by setting up new branches and installation of new atms (dangi & kumar, 2013). according to global findex, about 62 percent adults on the global level were having bank account. while this was only 53 percent in india (demirguc-kunt et al., 2015),but there has significant growth in bank account of about 80 percent has been recorded due to the introduction of schemes such as pradhan mantri jan dhan yojana (pmjdy). as the data released by the government, as of 11th march 2020, 38.26 crore accounts have been opened under the pradhan mantri jan dhan yojana (pmjdy, 2020) that clearly states that still a large unbanked population resides in india, which could be potential target in the coming years. the two main factors of financial instability are geographic exclusion (exposed through distance, inaccessibility and depravity of proper infrastructure) and social exclusion (exposed through caste barriers and illiteracy). cooperative sector and commercial banks in india were historically vested with the responsibility of financial inclusion in rural areas but have failed to fulfil the required objectives. the major features that made a majority of population unbanked can be outlined as informal employment, inability of rural population to communicate and negotiate with the formal system and deficiency of collateral. the deficient collateral and institutional credit limit acted as a barrier for the farmers to borrow from the formal system. according to the socio-economic caste census 2011, more than 50 percent of the rural indian population is dependent on the manual causal labour and about 30 percent are dependent on cultivation for livelihood (reserve bank of india, 2015). in a survey conducted by all-india debt and investment survey, it was found that in the year 2012, more than 44 percent of the rural households were dependent on the informal credit agencies (reserve bank of india, 2015) although this number has significantly reduced by the market reforms providing access to more formal systems an initiatives taken by the government. http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 42 the government of india has recently launched pradhan mantri jan dhan yojana (pmjdy) on independence day in the year 2014. with the slogan ‘merakhata – bhagya vidhata’ in the independence day speech, the prime minister of india launched pmjdy as “people’s wealth scheme’ (mohan, 2014). pradhan mantri jan dhan yojana (pmjdy) is a comprehensive programme towards financial inclusion with aim of providing pension and insurance facilities and opening of approximately 7.5 crore new bank accounts within a duration of 5 months as of now in the year 2020 it has raised to 29.30 crore (pmjdy, 2020). the accounts opened under pmjdy scheme will be provided with life insurance of 30,000 inr, an overdraft limit amounting to 5,000 inr and accidental insurance amounting to 100,000 inr but the benefits can only be availed by the account holders who have used the made transactions through this account in 45 days earlier to the claim date. the pmjdy provide beneficiaries with a rupay card that provides an overdraft limit amounting to 5000 inr and an accidental insurance of 100,000 inr. as a step towards financial inclusion, a transaction history will be created for the beneficiaries using debit card for the unbanked population. within the purview of this study it is focussed that whether the state performances are align with central objectives of pmjdy. for this purpose uttar pradesh a largest state (population wise) of india it taken as sample for project study. the findings of the study will call for reconciliation and evaluation of the govt. policies for the states and central as whole and hence in diverse countries like india, financial inclusion will be viewed with a holistic view providing a spectrum of services, thus encapsulating various dimensions of the targeted population. review of literature financial inclusion has been defined as “the absence of both price and non-price barriers in the use of financial services” (demirgüç-kunt, honohan, & beck, 2008). the committee on financial inclusion in india, chaired by dr. c. rangarajan defined financial inclusion as, “the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost”. financial inclusion can be regarded same as banking inclusion since banks are the co-ordinator of majority of the financial services (chakravarty & pal, 2013). as a matter of fact, the definition of financial inclusion states that,” delivery of affordable banking services to broad sections of deprived and low-income groups” (leeladhar, 2006). inability to financial accessibility leads to inequality in earning opportunities and poverty traps and hence financial inclusion forms the core of the economic development (banerjee & newman, 1993; aghion & bolton, 1997; beck, demirgüç-kunt, & levine, 2007; allen et al., 2016). many researchers have been conducted that propose a common viewpoint that providing a wide range of financial services can lead to enhancement of individual savings, investment productivity, women empowerment and upliftment of lifestyle (aportela, 1999; ashraf, karlan, & yin, 2010). (beck, demirgüç-kunt, & levine, 2007) in their study developed cross-country indicators of outreach of the banking system that are comparable and consistent. the study categorised these indicators in two dimensions i.e. usage of banking services and access to bank services. the indicators to measure the access to the bank services aregeographic bank penetration, geographic automatic tailor machine (atm), demographic bank penetration, and demographic automatic tailor machine (atm) penetration. to measure usage of bank services following indicators are useddeposit accounts per capita, credit accounts per capita, deposit-income ratio and credit-income ratio. the study empirically establishes that there exists a positive relationship between outreach of the banking sector and financial services usage. (mialou, amidzic, & massara, 2017) in their research measured financial inclusion through two variables namely usage and outreach of financial inclusion. the financial inclusion usage has been measured bytotal number of borrowers and depositors per 1000 adults. the outreach variable of financial inclusion has been measured by the number of bank branches and automatic tailor machine per 1000 square kilometres. composite index of financial inclusion is calculated by aggregating http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 43 weighted geometric mean to rank the countries based on their financial inclusion score. the issue of imperfect substitutability between the dimensions has also been addressed by this index. researchers studying financial inclusion have explored the relationships existing between specific individual variables and financial inclusion and identified indicators for consideration of household/indicators as financially included. financial services in 123 countries across 124,000 individuals have been measured by allen et al. (2016) though three indicators namely (i) individual/joint account ownership (ii) saving account usage (iii) frequency of account usage. the estimation of relationships between individual and country level variables and financial inclusion has been made in the study by the use of several probit models. the study found a positive correlation between financial inclusion and the environment that facilitates better access to financial services such as bank branches proximity, reduced cost of banking, lesser requirement of documents, low-fee accounts offered by government and government payment through the use of bank accounts. the three indicators used by allen et al. (2016) have been also used by demirguc-kunt et al. (2015) for the measurement of financial services in 148 economies and 150000 adults in the year 2011. the indicators used in the two studies werelikelihood of possessing an account, account usage probability for savings and likelihood of account usage frequency. the study found that around half of the adult population around the world do not possess bank accounts and a wide variation in the account penetration has been observed across regions. one of the key findings of the research is that there is involuntary exclusion of 35 percent adults due to lack of documentation, physical distance and high cost of banking. honohan (2004) analysed the relationship between poverty, financial development and growth. he selected 70 developing countries based on the availability of poverty data and conducted a cross sectional analysis. the study found that there was a relationship between the lower poverty and financial systems or we can say that penetration of banks lead to finance-intensive growth that in turn led to the decline of poverty ratios. financial development is not only based on the penetration of the banking services as a sole component. it was also highlighted that finance played four key roles namely capital allocation, savings mobilisation, entrepreneurial monitoring of the loanable funds and risk mitigation through repackaging and pooling. the study also argues that banking cannot be used as a sole scale to measure the comprehensive development of financial system to measure its function performance efficiencies and effectiveness. financial services are only accessible to small fraction of population in the developing nations. although with the growth of these economies, financial sector is also expanding but there is concentration of financial assets in few hands. in the developing economies, majority of population is not having savings bank account, possess no insurance policies and receive no credit from the formal financial institutions. the demand and supply aspects of the financial inclusion have been studied by kumar & mishra (2011) to evaluate the level of financial inclusion with respect to the outreach of banking services and their accessibility at household level in india. three dimensions proposed by sarma (2008) i.e. availability, access and usage have been used to measure the banking outreach. the accessibility at the household level has determined by the level of knowledge the households have about the credit services, insurance and informal and formal savings. the study found there was huge variation in demand and supply side performance across sates and urban and rural areas. researchers (e.g. dangi & kumar (2013) have also studied the initiatives taken by government of india and policies measures taken by rbi and augmented that for capacity building and building capacity can be boosted by the adoption of the fundamental financial offerings by the banking sector and availability of the credit facility (sen, 2000). suryanarayana (2008) emphasized on defining the exclusion/inclusion based on the outcomes based on the growth scenario that reflected the estimates of production, distribution, consumption and income. the study helps in profiling of the people based on their region, society and occupation that have been excluded from the mainstream growth process. hence the study attempts to propose measures for inclusion based on the distribution of consumption pattern for the year 2004-2005. agrawal (2008) adopted behavioural perspective for studying financial inclusion from the viewpoint two variables i.e. demand and supply. the study proposed scope to marketers and http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 44 policy makers from the behavioural perspective for the alignment of their approaches with the behavioural aspect. in the year 2003, the policy of reserve bank of india on financial inclusion aimed at providing accessibility of the financial services to the unprivileged that can be considered as one of the bold moves to provide financial inclusion to the target consumers. rangarajan committee was formed in 2008 on financial inclusion was of the view that it is crucial to sustain the unprivileged population through financial inclusion and acceleration in growth momentum. to achieve the objective, the committee came up strategies such as rejuvenation of the cooperative and rrbs, establishment of national mission on financial inclusion, introduction of business facilitator and business correspondents model and introduction of mfi model (shg-bank linkage). mukherjee & chakraborty (2012) in their research studied the role played by commercial banks in the state of jharkhand and analysed their capacity and efficiency in comparison with the institutions such as non-banking financial companies (nbfcs), self help groups (shgs) and regional rural banks (rrbs) with the purpose of promotion of financial inclusion. the study found that the failed to achieve the desired objectives and the study recommended that the frequency of financial inclusion report to rbi by every bank should increase. hr & kn (2013) in their study analysed the role of self-help groups in financial inclusion and found that as the membership to shgs increased, an increase in financial inclusion was also observed. also, the increased membership to shgs had a positive impact over the opening of bank accounts, credit availed and loans repayment by the members. (joseph & varghese, 2014) studied the impact of financial inclusion over the development of indian economy with the help of growth rate of the banks that were reflected by the number of bank branches and credit and debit card usage. it was found that through the study period there was tremendous increment in the debit card usage but the accessibility to the products and services offered by the bank was continuously limited even after passage of significant duration since financial inclusion initiative in the country. paramasivan and ganeshkumar (2013) in their study on financial inclusion in india found that the financial inclusion is significantly impacted by the branch density. sriram and sundaram (2015) in their research studied the rural areas of vellore in tamil nadu to identify the variables impacting financial inclusion. the study collected data from 20 village blocks in vellore and outlined the constraints and reasons for lower rates in bank account opening. by the use of statistical techniques such as percentage analysis and index of financial inclusion, the level of financial inclusion in vellore was found to be in mid-range of 0.55. the major constraints in access to financial services have been identified as unemployment and lower level of literacy and income. another study was conducted in the state of karnataka based on a report that claimed the level of financial inclusion in the district of gulbarga was 100 percent. the results of the study were different from the ones claimed in the report and it was found that the accounts opened in the banks were not under the program of financial inclusion rather they were opened under nregp scheme. the awareness about financial inclusion has been constantly low and thus there is need to take initiatives that spread more awareness (ramji, 2009). the tripod of the financial inclusion in shown in figure 3 that has been laid by rbi. there has been much focus given to the financial inclusion while other two components were used as a means to attain the primary objective. a cross country analysis was conducted by two researchers and they found that level of financial inclusion had a positive correlation with level of human development. components such as urbanization, levels of literacy and income inequality were also identified as contributors in explaining financial literacy (sarma & pais, 2011). gloukoviezoff (2007) from this research found that individual’s self-esteem is affected when he/she does not possess a bank account and hence feels isolated and socially disconnected from family and friends. such social implications arise when formal institutions exclude them from credit and as a result such population tends to fall in the clutches of private money lenders and loan sharks. also, there have been incidents recorded where violent and harsh methods of loan recovery have been adopted by the moneylenders and informal institutions. in 2010 due such practices of loan recovery, microfinance sector has been viewed in bad light. in the state of andhra pradesh certain providers of microfinance in their quest to outreach and capture the unserved population used unethical practices of charging very http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 45 high interest rates and strong-arm practices to recover loans the led to complete closure of microfinance operations in andhra pradesh (shylendra, 2006; sriram, 2012). in india, microfinance sector has suffered serious setbacks from the stories where around 40 cases of suicide in andhra pradesh came into light and the reason of these suicides was due to over-indebtedness from the microfinance sector. the consequences were reflected over the whole microfinance sector across the country that was evident from significant decrease in loan portfolio and client outreach for the year 2011-12 (sriram, 2012). in uttar pradesh total no. of bank beneficiaries comes to 62,473,876, with balance in account 24,809.42 crore rupees and 100 percent household coverage. the state has more than 30 percent of its total deposit in banks comprise under pmjdy schemes that reveals a huge success and reflecting a progress year on year (pmjdy official website). pradhan mantri jan dhan yojana (pmjdy) also helps in uplifting the social status of the unbanked people by bringing in the main banking stream through financial inclusion. one of the core objectives of the pmjdy is to deliver the financial benefits such as subsidies to the bank accounts of the beneficiary thus curbing any short of corruption in the transactions (chowhan & pande, 2014). government and banks have launched a collaborative effort to launch massive financial literacy campaigns to spread a holistic awareness among the poor and deprived sections of the population as part of pmjdy core objective. creating better understanding of the financial inclusion schemes such as jan dhan yojana thus making a large population financially literate and enables them to avail advantages and responsibilities attached with such schemes. this research is dedicated to verifying the roles of government and banks in claiming all such above mentioned core objectives of financial inclusion schemes, with evidences from the pmjdy scheme launched in india. this is an attempt to gain a glimpse of current status of milestones covered under the scheme with ground reality and verifying whether all intended pmjdy beneficiaries understand their statutory obligations before claiming the benefits / rights under the scheme. it helps to understand that despite of considering financial inclusion as a compulsion, whether banks in urban, semi urban and rural areas consider it as a business opportunity and utilise in expanding the financial system of the nation. also whether government and banks are able provide protection to financial weaker sections from being exploited by the moneylenders and enhance the effectiveness of the unorganized sectors. research design the essence of financial inclusion is to ensure delivery of financial services which include bank accounts for savings and transactional purposes, low cost credit for productive, personal and other purposes, financial advisory services, insurance facilities (life and non-life) etc. financial inclusion will be successful only when the easy accessibility to financial services is complemented by financial awareness and understanding. under pmjdy scheme, the financial services being offered can be broadly classified into following three categories:  basic banking services  credit facility  financial security products moreover, it is also proposed in pmjdy, to channel all government benefits (from centre/state/local body) to the beneficiaries of the scheme through direct benefit transfer (dbt). http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 46 figure 1. conceptual framework the factors determining the success of the pmjdy scheme have been studied from two angles. first the factors like awareness, ease of availing, usefulness to life, bank support, local administration support and, facets of scheme benefits are studied and then the perceptions of the individuals regarding the benefits offered by the scheme have been explored. for this, the benefits of the financial inclusion schemes such as standard of living, prevention of exploitation, improving financial literacy, safety of money, making transactions online and, investment opportunities are taken as the independent variables. a dependant variable named availing status has been introduced to ascertain whether the respondent is availing the facilities offered by the pmjdy scheme. a draft questionnaire was prepared. taking into consideration the demography, the questionnaire was prepared both in english and hindi language. it consisted of 14 questions mostly choice based objective type for easy understanding by the respondents and coverage of the objectives. the questionnaire consisted of mostly dichotomous and 3-point likert scale questions for understanding the sensitivity of the issues involved. the draft questionnaire was sent to academic experts in the area for getting feedback and was modified accordingly. considering the heterogenous educational, occupational and income background of the respondents, the sensitivity in the objective based questions have been kept low at 3-point likert scale. some of the questions were even made dichotomous for easy understanding and for cross analysis of data. data collection the required information for the study was collected from pmjdy beneficiary households of urban and rural population of u.p. purvanchal region. purvanchal is a geographic region of north-central india, which comprises the eastern end of uttar pradesh state. uttar pradesh is the most populous state in india with a population of ~200 million people. as much as 16.17% of india's population lives in the state. the central and eastern districts of uttar pradesh in particular have very high levels of poverty. the pace of poverty reduction in the state has been slower than the rest of the country. most of the occupational groups within the population of uttar pradesh are involved in agriculture and service industries, which contribute to the largest parts of the state's economy. unskilled labourers form a major portion of the work force. sample size was decided after getting the detailed geography of purvanchal region. looking at the demography of purvanchal region, it was observed that the region is divided into 21 districts containing 101 tehsils. it was decided to collect on an average 25 respondent data from each tehsil of purvanchal region. hence the target sample size was (101 x 25) 2550. out of the target we were finally able to get useful responses of 2446 respondents. http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 47 data analysis and results the data collected through questionnaire was filtered and transformed in order to make it suitable for analysis. the data, thereafter, was analysed and interpreted using various statistical tools and techniques. regression modelling was applied as required to confirm the relationships. descriptive analysis the distribution of data shows that the respondents consisted of 60% male and 40% female (figure 2). age wise distribution shows that the pmjdy scheme is more known among old age group i.e. 55 years and above. in addition the young people (25 to 39 years) who may be more tech savvy, earning and more aware are also found to be attracted towards the pmjdy scheme (figure 3). most people came to know about the scheme through word of mouth from their friends and relatives (fig. 4). data shows that people have less information about financial security benefits and credit facility available under the scheme. dbt seems to be very popular and almost 80% respondents said that they have at least some information about this facility (figure 5). special facility like overdraft is unknown to almost all respondents. full information is available to few people only and it is mostly related to basic banking facilities only. direct benefit transfer scheme also shows the high availing status with almost 60% people availing the same. high stress on the success of dbt by the government is evident from this result. credit facility by way of overdraft shows 0% availing status, which clearly indicates that people were not able to avail any credit facility under the scheme (figure 6). other banking facilities like money transfer and mobile banking have not been availed to great extent and only about 20% to 37% people say that they have been availing these facilities. financial security facilities like accidental insurance and life insurance have also shown negligible usage with less than 20% people mentioning that they have been able to use the same. respondents have found easiness in using the basic banking facilities and thus more than 40% people have agreed that the scheme benefits were easy to avail (figure 7). more than almost 90% people have the opinion that they have not received any local administration support in availing most of the benefits under pmjdy. especially in case of basic banking services, respondents feel that banks have been very supportive with the majority saying that banks were supportive in nature (figure 8). while in case of other facilities like credit facility, financial security benefits and other banking facilities, respondents have not found banks to be supportive. even in case of dbt, people feel that banks are not supporting them in availing the facility. more than almost 90% people have the opinion that they have not received any local administration support in availing most of the benefits under pmjdy (figure 9). for benefits like financial literacy, online transactions and easy investment opportunities, almost 50% or more people have agreed that these have been received by them due to pmjdy scheme. in others like standard of living and preventing of exploitation also more than 25% agree that these have been received by them. figure 2. gender wise distribution of the data gender wise awareness 40% 60% m f http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 48 12% 12% 0% zero bal atm card cash dep. money trf. mob. bnk. overdrft acc. ins. life ins. dbt ac. never heard some information full information figure 3. age wise distribution of data figure 4. age wise distribution of awareness medium awareness status of scheme benefits 100% 2% 2% 3% 90% 80% 70% 24% 32% 23% 40% 45% 39% 60% 50% 51% 66% 80% 40% 30% 20% 75% 63% 77% 57% 37% 53% 59% 10% 22% 20% 0% 1% 4% 2% figure 5. awareness status of scheme benefits age wise awareness 4% 24% 60% 12% 10-24 yrs 25-39 yrs 40-54 yrs >54 yrs 800 600 400 200 0 age wise distribution of awareness medium 734 413 446 243 24 30 41 3 67 88 150 18 40 92 12 45 10-24 yrs 25-39 yrs 40-54 yrs >54 yrs friends & relatives media adv. banks local admin. http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 49 availing status of scheme benefits zero bal ac. atm card cash dep. money trf. mob. bnk. overdrft acc. ins. life ins. dbt yes no 100% 0% 6% 90% 27% 80% 41% 70% 63% 60% 50% 100% 94% 80% 100% 92% 84% 40% 73% 30% 59% 20% 37% 10% 0% 20% 0% 8% 16% figure 6. availing status of scheme benefits figure 7. ease in availing status of scheme benefits figure 8. bank support in availing scheme benefits ease in availing status of scheme benefits 100% 14% 14% 0% 8% 8% 80% 60% 40% 20% 0% 24% 58% 41% 41% 56% 68% 68% 64% 64% 26% 16% 37% 42% 59% 44% 21% 17% 28% 28% zero bal atm card cash dep. ac. 18% money trf. 18% mob. bnk. overdrft 17% acc. ins. life ins. dbt disagree na/nd agree bank support in availing scheme benefits 100% 80% 60% 40% 20% 0% 23% 53% 45% 79% 79% 70% 100% 92% 92% 77% 47% 55% 21% 21% 30% zero bal ac. atm card cash dep. money trf. mob. bnk. 0% overdrft 8% acc. ins. 8% life ins. dbt supportive not supportive http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 50 figure 9. local admin. support in availing scheme benefits regression analysis this study attempts to find the factors which affect the availing status of pmjdy scheme benefits in up purvanchal region. for this we modelled a multiple regression relationship with availing status as dependent variable and awareness, ease of availing, perceived usefulness to life, bank support, local administration support, facets of scheme benefits as independent variables. the regression model is as below: availing status = α + β1 awareness + β2 ease of availing + β3 perceived usefulness to life + β4 bank support + β5 local administration support + β6 facets of scheme benefits. where, β1, β2, β3, β4, β5 and, β6 are regression coefficients and α is the constant. the results of the regression model are as below: table 1. regression statistics regression statistics multiple r 0.7740 r square 0.5991 adjusted r square 0.5981 standard error 0.1071 observations 2446 table 2. anova anova df ss ms f significance f regression 6 41.80341699 6.967236 607.4789055 0 residual 2439 27.9731343 0.011469 total 2445 69.77655129 table 3. regression statistics (*significant at 5% level of significance) standardised coefficients p-value intercept 2.260782396 0 facets of scheme benefits -0.023440527* 1.10402e-11 awareness -0.39746214* 7.7209e-246 local admin. support in availing scheme benefits 100% 80% 60% 40% 20% 0% 41% 50% 90% 77% 97% 98% 100% 92% 92% 59% 49% 10% 23% 3% 2% zero bal ac. atm card cash dep. money trf. mob. bnk. 0% overdrft 8% acc. ins. 8% life ins. dbt supportive not supportive http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 51 ease of availing 0.000726611 0.94363492 perceived usefulness to life -0.029772597* 1.73378e-08 bank support 0.098524834* 9.48922e-12 local administration support 0.10507261* 2.0908e-09 the results of regression analysis in table 3 indicate that the availing status of pmjdy scheme is affected by the independent variables incorporated in equation. this is evident from significant f-score in table 2 and about 60% (value of adjusted r square in table 1) variation in availing status is happening because of the independent variable taken. the influence of each independent factor is as below:  facets of scheme benefits: the relationship of this variable is significant with availing status. the sign of relationship is negative because the dependent variable is reversely coded for avoiding the questionnaire being monotonous. i.e. yes was coded as 1 and no was coded as 2. this shows that as more the scheme benefits are recognised, more the scheme will be availed.  awareness: the relationship of this variable is significant with availing status. the sign of relationship is negative because the dependent variable is reversely coded as mentioned above. this shows that augmented awareness about scheme benefits among people will positively affect the availing status of the scheme benefits.  ease of availing: the relationship of this variable is found not significant with availing status.  perceived usefulness to life: the relationship of this variable is significant with availing status. the sign of relationship is negative because the dependent variable is reversely coded as mentioned above. this shows that as more people start perceiving the scheme to be useful, they tend to start availing the scheme at higher level.  bank support: the relationship of this variable is significant with availing status. the sign of relationship is positive because both the dependent variable and independent variable is reversely coded for the reason mentioned above. here bank being supportive is coded as 1 and not supportive is coded as 2. this shows that more bank support in availing the facilities will certainly increase the availing status of scheme.  local administration support: the relationship of this variable is significant with availing status. the sign of relationship is positive because both the dependent variable and independent variable is reversely coded for the reason mentioned above. here local administration being supportive is coded as 1 and not supportive is coded as 2. this shows that more local administration support in availing the facilities will certainly increase availing status of scheme. therefore we find that the availing status of pmjdy scheme majorly depends on two factors i.e.enhanced awareness and local administration support if available. next we try to examine the relationship between the availing statuses of pmjdy scheme with various facets of benefits perceived by people. this will help us to understand that how different related perceived facets of benefits relate to availing status of pmjdy scheme. for this we have modelled a multiple regression relationship with availing status as dependent variable and facets of benefits i.e. standard of living, prevention of exploitation, improving financial literacy, safety of money, making transactions online and investment opportunities as independent variables. the regression model is as below: availing status = γ + α1 standard of living + α2 prevention of exploitation + α3 improving financial literacy + α4 safety of money + α5 online transactions + α6 investment opportunities. the results of the regression model are as below: table 4. regression statistics regression statistics multiple r 0.465656 r square 0.216835 http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 52 adjusted r square 0.214909 standard error 0.149684 observations 2446 table 5. anova anova df ss ms f significance f regression 6 15.13003 2.521672 112.548 1.3e-125 residual 2439 54.64652 0.022405 total 2445 69.77655 table 6. regression statistics (*significant at 5% level of significance) coefficients p-value intercept 1.530533 0 standard of living -0.02572* 0.003164 prevention of exploitation -0.04114* 1.98e-07 improving financial literacy -0.06037* 5.91e-23 safety of money 0.013182 0.115208 online transactions -0.04521* 2.94e-10 investment opportunities -0.12846* 1.05e-85 the results of regression analysis in table 6 indicate that the availing status of pmjdy scheme is affected by the independent variables incorporated in equation. this is evident from significant f-score in table 5 and about 21% (value of adjusted r square in table 4) variation in availing status is happening because of the independent variable taken. the influence of each independent factor is as below:  standard of living: the relationship of this variable is significant with availing status. the sign of relationship is negative because the dependent variable is reversely coded for avoiding the questionnaire being monotonous. i.e.yes was coded as 1 and no was coded as 2. this shows that as more the scheme is perceived to improve the standard of living, more it will be availed by people.  prevention of exploitation: the relationship of this variable is significant with availing status. the sign of relationship is negative because the dependent variable is reversely coded as mentioned above. this shows that more people will avail the scheme if they feel that the scheme benefits will prevent them from getting exploited in the hands of money lenders.  improving financial literacy: the relationship of this variable is significant with availing status. the sign of relationship is negative because the dependent variable is reversely coded as mentioned above. this shows that higher financial literacy created by the scheme will result in increased availing of the scheme.  safety of money: the relationship of this variable is found not significant with availing status.  online transactions: the relationship of this variable is significant with availing status. the sign of relationship is negative because the dependent variable is reversely coded as mentioned above. this shows that people consider cashless transactions as an essential benefit and thus, they will avail the pmjdy scheme more when online transaction facility is available.  easy investment opportunities: the relationship of this variable is significant with availing status. the sign of relationship is negative because the dependent variable is reversely coded as mentioned above. this shows that a higher level of investment opportunity created by the scheme will result in increased availing of the scheme. http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 53  therefore we find that people might be most inclined to welcome a financial inclusion scheme if they perceive it to be a beneficial investment opportunity. discussion after the detailed data analysis above, this section discusses the results. the results show that the beneficiaries are aware about basic banking facilities like zero balance account, atm debit card, and cash deposit/withdrawal. this shows that scheme has created enough financial literacy about these basic facilities. financial literacy has been found to have a positive impact on the “use of financial services” (grohmann, klühs & menkhoff, 2018). however, it was found that other banking facilities like money transfer and mobile banking are little known to people and hence the availing status is quite low. this might be because the results indicate that the banks and local administration have been supportive to people for the basic banking facilities only and not for others. this is also evident from the results of ‘ease in usage’ of facilities wherein beneficiaries feel it is easy to use basic banking facilities but not the other facilities. the results on financial security benefits under pmjdy scheme, namely accidental and life insurance, show that beneficiaries have some awareness about the availability of such benefits. there are very few people who feel that they have complete information to make a decision and benefit from them. thus although such schemes are very beneficial to them, the availing status of these services was very low. regarding ease of use for these benefits, the opinion was quite mixed and most people were undecided. this may be because of lack of awareness among beneficiaries. another reason that comes out from results is that the support of banks and local administration is not present, resulting in low level of awareness and availing status. pmjdy provides for overdraft facility against the zero balance account opened. from the results it was found that most people have never been told about this facility and its benefits. therefore in spite of being one of the major scheme benefit under pmjdy, intended to help people in times of need by giving them credit facility has not penetrated the up purvanchal region population. this may be attributed to either low emphasis by the authorities, lack of interest by banks or inability of banks/administration in creating financial literacy about such facility. the pmjdy scheme also incorporates other banking facilities like money transfer and mobile banking. it was seen that the awareness regarding these modern facilities are moderate with majority having at least some information. even the support of banks and local administration is found to be low. overall this suggests that although people are financially literate about these benefits, but they are unwilling to avail them because of lack of emphasis and support by authorities. since the government of india started the financial inclusion process through direct benefit transfer scheme in 2013, i.e. well before the launch of pmjdy and there has been a lot of media coverage and awareness campaign on the same, hence we find that majority of people have some information about this benefit under pmjdy. the availing status of various banking benefits under pmjdy scheme suggests that majority of people have been availing the basic banking facilities like zero balance account, atm debit card, cash deposit/withdrawal and they also find using these facilities somewhat easy. however, in case of other banking services like mobile banking and money transfer, similar trend is not shown. here the availing status and ease of use is found to be low. credit facilities have not been emphasised much, resulting into very usage of the same. similarly, financial security benefits are not popular, and evidence of their usage is not present. overall awareness and availing of banking services under pmjdy scheme has been initiated but not uniformly. although people have started being financially literate, but still, for complete usage of all banking facilities under pmjdy scheme, there is a long way to go. implications for policy makers since financial literacy is not uniform across different financial services for enhanced financial inclusion, therefore the policymakers should take necessary steps for augmenting awareness among people regarding all types of banking services. the results of this study suggests that accessibility of financial services at ground level is not uniform. the policymakers should ensure unimpeded accessibility of financial services like credit facility, financial security products and other banking services. the dbt is one of the ambitious scheme of the government for financial inclusion and http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 54 uninterrupted subsidy transfer to needy. the authorities have laid lot of emphases through media coverage and administrative support. linking dbt with pmjdy accounts is a right step and the results show that the efforts have been successful to a great extent. in rural areas there are few atm due to which everyone may not access atm or may don’t know how to use. and secondly, rural areas need to be connected through a complete banking system which throws up connectivity-related challenges that need to be addressed. the policymakers need to address the issue of banking infrastructure by providing support to them. implications for banks/financial institutions study reveals that on ground there were very few financial literacy program conducted in their villages. there should be proper awareness programs in remote locations about the financial schemes so that everyone must aware about need of opening account for realising various benefits available under the scheme. the study found that the support given by banks for various banking services under pmjdy is not uniform. those services where the support was given, were availed most while rest had low availing status. the banks should ensure higher level of support for other essential services like credit facility, financial security schemes and mobile banking etc. since people have mentioned that they were not accessing many financial services due to difficulty in use of those services. therefore, banks should review their procedures for offering various financial services other than basic banking facilities under the financial inclusion scheme for ensuring easy accessibility of banking services. many benefits like atm card transactions require adequate infrastructure facilities, especially in rural areas. therefore banks should ensure presence of atm networks in rural areas and provide adequate training. new age technology solutions like mobile banking need to be supported through easy to use interface and training so that higher usage of banking facilities is ensured. future research directions the study indicates several areas of research which merit investigation in future studies. in future the researchers can undertake such research in other regions of the country to compare the extent of financial inclusion achieved through pmjdy scheme. since this study suggests that there bank’s support for various financial services are low therefore as next step a survey may be conducted over banks/financial institutions for exploring the problems they are facing while implementing the pmjdy scheme. a longitudinal study may be undertaken further, to assess the change in savings and investment patterns of the urban poor, and thereby gauge the effectiveness of the financial awareness programs undertaken by various agencies. seasonal changes in savings and usage pattern of bank services could be studied and probable causes for such changes may be analysed. previous research indicates that women lead households are less likely to have access to formal finance as compared to households with a male head (swamy, 2014; ghosh & vinod, 2017). further research can explore factors that provide deeper insights into this. in today’s scenario, financial inclusion can help in reducing poverty imposed due to covid 19 pandemic (gutiérrez-romero & ahamed, 2021). further research can explore how it can be successfully implemented to achieve the desired results. conclusion the essence of financial inclusion is to ensure delivery of financial services which include bank accounts for savings and transactional purposes, low-cost credit for productive, personal and other purposes, financial advisory services, insurance facilities (life and non-life) etc. in india, while one segment of the population has access to banking service encompassing regular banking facilities & portfolio counselling, the other segment of underprivileged and lower income group is totally deprived of even basic financial services. exclusion of large segments of the society from financial services affects the overall economic growth of a country. it is for this reason that financial inclusion is a national concern. complete access to financial services is not possible without people being financially literate. hence, financial inclusion will be successful only when the easy accessibility to financial services is complemented by financial awareness and understanding. therefore, as revealed by this study policy http://www.cribfb.com/journal/index.php/ijfb http://www.cribfb.com/journal/index.php/ijfb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 55 makers and banks should go hand in hand for creating financial literacy and ensuring uniform accessibility of all financial services through adequate support infrastructure. government should ensure proper implementation of such program by having proper monitoring systems in place. policy makers should be able to ensure that administrative machinery from top to ground level including panchayat level should be in sync. this will confirm that the scheme benefits should reach to the last person through awareness and accessibility of financial services. the policy makers should leverage technological solution to ensure efficient and effective delivery of financial services. acknowledgement the research mentioned in this paper has been carried out with funding received from icssr under its first impress scheme. the authors are thankful to goi and icssr for funding this research. references aghion, p., & bolton, p. 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2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 65 adr on dispute between a client and trading member at the leading stock exchange in india: a case study1 dr. brahmaiah bezawada professor of finance & accounting icfai business school, ifhe, hyderabad also an arbitrator for nse, bse and msel for telangana, india e-mail: brahmaiahb@ibsindia.org https://orcid.org/0000-0001-7602-8630 received: october 24, 2021 accepted: december 25, 2021 online published: january 20, 2022 doi: 10.46281/ijfb.v9i1.1554 url: https://doi.org/10.46281/ijfb.v9i1.1554 abstract this case is an appeal matter with the leading stock exchange of india ltd (lse) about a dispute between a client and a trading member of the lse. the appellant contended that the award passed by the arbitrator had not taken into account the evidence, documents and rules of stock exchange properly while determining the case matter and passed the award. appellant challenged the award because the award was beyond the scope of submissions to the arbitration, non-application of mind, and ignorance of established judicial principles. the appellate member has to determine whether there had been any lapses on the part of the arbitration in applying the trading rules and procedures of the exchange while analyzing the matter, determining the case and passing the award. based on that, the appellant arbitral tribunal had to decide whether to set aside the award passed by the sole arbitrator, modify it, or uphold it. the findings and conclusions provide inputs for developing an appropriate regulatory framework for the futures market. however, the results may be generalized only in the emerging markets environment. hence, researchers are suggested to study margin guidelines of the futures market, appreciate the dynamics of the futures market and apply the same in their future research in india and abroad. keywords: arbitration, stock exchange, trading member, client. jel classification codes: j52, g14. introduction concern with a complaint against andhra broking ltd by mr. k narayana reddy with grievances redressal committee (grc). the complainant's claim was admitted and passed an order directing the trading member, andhra broking ltd, to pay inr.1.5 million against inr.1.6 million. appellant realized that he earned his profit of inr 1.0 million through other trades which were not related/connected to the "intraday auto square off facility" trades. hence, he referred the matter to arbitration of the leading stock exchange (lse) by filing the arbitration application. appellant 1 this paper is based on an arbitration matter adjudicated by the author at the leading stock exchange of india. names of the client (appellant), trading member (respondent exchange and figures were disguised to preserve confidentiality. the facts and circumstances remained the same to maintain the case matter's originality. mailto:e-mail-brahmaiahb@ibsindia.org https://orcid.org/0000-0001-7602-8630 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 66 claims that he had earned a profit of inr one million independent of "intraday auto square off facility trades carried by him. a personal hearing for the matter was held on june 04, 2021, through video conference at hyderabad. appellant, mr. narayana reddy (hereafter referred to as the appellant) appeared himself, and andhra broking limited (hereinafter referred to as the "respondent'') was represented by ms. prema agarwal, vice president, compliance and legal, andhra broking ltd. both the parties presented their respective cases, and they declared that they had nothing more to submit. the appellant was directed to submit the full details of his claim (details of trades and profits) credit balance of inr one million. the respondent was also allowed to reply in response to the appellant's details and submissions. appellant submitted full details of trades and profit of inr 1.0 million, and respondent submitted the response to the appellant's trade and profit details. statement of case by appellant 2.1 appellant submits that he did trading on january 28, 2020, through respondent andhra broking ltd., by depositing inr 4.0 million. appellant earned a profit of inr 1.0 million on the same day. he executed the bank nifty options 30200, put option on january 28, 2021, expiry. he bought 12000 units of put options at inr 311. appellant submits that the respondent had activated his account for "intraday auto square off faculty." hence, the positions of the appellant would be squared off automatically by the respondent's end. but the respondent didn't square off the open positions as per terms of intraday auto square off faculty. the appellant tried to exit at inr 265. but the respondent's system didn't allow him to do so. the response he got from the respondent's end was, "please note the order must have been rejected as 80% square-off order was going to be triggered and the system doesn't allow to place the order at the same time." appellant submits that he tried placing the order at inr 34 .80/and it was executed at 3:03 pm. as per their response, he would not place the order, which was not true in this case. "they had routed the order to exchange, but the order remained pending as no counterparty. all the orders placed are sent to the exchange in a queue, based on price, quantity and time priority. even as the market price keeps fluctuating, orders are executed when the rates and quantity match, and the orders that don't match stand unexecuted and pending. all the orders that are unmatched automatically expire. however, if there is no counterparty, the order gets canceled post trading session." appellant submits that he was treated badly by their customer support division whenever he called them. he pleaded with them to arrange a call with one of the senior executives, but they didn't arrange, and they eventually ended up saying, "within 10 min, he would get a call." finally, he executed the order after the mark to market (mtm) margin exceeded 80% of the loss. his client code was activated for intraday, "auto square off facility." when he raised the complaint to andhra broking ltd., respondent responded that the position was auto squared from their end. further, they said that the order must have been rejected as an 80% square-off order was going to be triggered, and the system didn't allow the order at the same time. appellant submits that the grievances redressal committee (grc) observed and noticed that inr 1.0 million were excluded from the calculations of losses for quantifying the claim. but the respondent didn't return his profit, and further, there was a debit of inr. 0.78 million due to this trade. appellant submitted on june 07, 2021, the full details of trades and profits of inr 1.0 million. appellant also provided the total loss incurred on intraday auto square off was inr 5.5 million and not inr 4.76 million as reported by the respondent. he further claims that the respondent miscalculated and misrepresented the actual loss on account of failure or not functioning of intraday auto square off facility for 12000 units of bank nifty pe 30,200 put option. the details of profit of inr 1.0 million. all the trades are as per the contract note issued by the respondent to the appellant for trades of january 28, 2021. only total net loss for the day inr inr.4.76 million was reflected in the ledger copy against a total loss of inr 5.5 million. appellant further claims inr 5 million towards compensation for mental harassment. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 67 statement of défense by respondent andhra broking ltd. is a member of the leading stock exchange (lse) capital market segment, futures & options segments, and a sebi registered stockbroker. the respondent offers online and offline broking services to its clients. andhra broking ltd. also offers its clients demat accounts and other financial services. the client is an online client. online clients execute trades using their securely encrypted password and user id by placing trade orders over the internet from their own devices; computer, mobile, or ipad. the clients place orders using user id and password. the trading member permits a secure login to the clients to access the trading system of the respondent to place their orders. provided the clients placing orders have sufficient margin in their accounts to carry out the transaction, the orders are transmitted on the order routing system of the exchange for execution of trades. the entire process is automated and does not involve any human intervention. the dispute relates to intraday trades placed by the appellant for optidx banknifty january 28, 2021, 30200.00 pe (put option) bought by the client on january 28, 2021; the appellant reports the same in his statement of claim. the appellant (client) did intraday trading in the derivatives segment on january 28, 2021; the appellant alleges that the trading member did not square off the disputed position at 80% losses of the margin money, and the appellant finally closed the trade at losses which were more than 80%. the appellant had raised this complaint to lse for arbitration. further, the respondent submits that appellant created the debit balance of inr 4.76 million for all his trades for january 28, 2021. the margin report indicates the total available margin of appellant on january 28, 2021, was inr 4.0 million. the amount mentioned in the contract note and the available margin were the basis for consideration by the grc member to pay compensation. the appellant had raised the same dispute with grc for a hearing wherein the trading member expressly stated that square off is the privilege and not an obligation. all clients have to safeguard their positions and accordingly take required steps rather than waiting for a trading member to mitigate each client's risk. however, the trading member was ready to close the issue by settling the matter at an 80% loss of the total margin available. accordingly, the appellant had a total margin of inr 4.00 million, squaring off at 80% losses would have been at 3.1 million for the disputed position. the appellant had claimed an amount of inr 1.6 million, including the entire debit amount, including the disputed trades done by the appellant on the said date. the grc panel member passed an order directing the trading member to cover all the losses incurred by the appellant on the said trading day. the grc member completely ignored the fact that the client made multiple trades executed by the client without any intervention of the trading member or any issues faced by the appellant in all such trades. the appellant (client) was active throughout the day, and almost all his positions were closed by the appellant at his discretion. however, the grc member calculated that all losses for that particular day were above 80% margin. hence all the losses, including the positions the appellant himself closed and incurred losses at whatever juncture, were all covered in the said calculations. this was almost the same amount covering all losses the appellant had himself claimed too. the trading member finds that the order was a little unfair, as nowhere in the replies or oral submission did the trading member mention any technical glitch at its end. however, as a goodwill gesture to retain the client, the trading member honored the grc order dated april 09, 2021, and made the said payments on april 15, 2021. despite making payments and closing the claim with full and final settlement as per the grc order, the appellant has opted to raise the claim with an inflated amount. in grc, the claim amount was inr 1.6 million, and the grc member duly passed an order of inr 1.57 million, which was honored and paid to the appellant. in this present arbitration claim, the appellant went ahead to try his luck and claim mental agony and harassment of inr 5.0 million. as far as the claim of mental harassment is concerned, the respondent refutes and denies the same and would like to update the appellant that there is no provision in sebi/ lse regulations to claim for mental harassment or legal notice charges. the respondent humbly prays and requests the arbitrator dismiss the claim raised since the same issue has been duly dealt with to the utmost satisfaction. the appellant has come back with the same issue with an inflated claim compared to the grc claim and order thereon to derive undue advantage of the regulatory recovery system's available legal process and framework. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 68 in response to the trade and profit details of the appellant, the respondent responded that all profits and losses during the day were adjusted and the net amount payable or receivable stated in the contract note issued to any clients. the amount of inr 4.76 million indicated in the contract note for january 28, 2021, covers and adjusts all profit and losses made by the appellant during the day. this amount of inr 4.76 million payable by the appellant for losses during the day was considered as a base in the grc meeting to compensate the client, hence on what basis the client intends to claim yet again profits of inr 1.0 million that the arbitrator be pleased to pass an order to dismiss the entire claim including mental harassment claim of the appellant that the arbitration is pleased to direct the appellant to pay further for the cost of the arbitration. observations of grc and its proceedings from the documents and the oral submissions made by both parties, the following observations were made by the grc member. the client had a credit balance of inr. 4.0 million /excluding the profit of inr. 1.0 million earned by the client on 28-jan-2021. the client bought a position of bank nifty options 30200 pe of 12000 quantity. on that day, there was huge volatility in the trading price of the put options. as a result, 80 percent of the mtm loss was triggered, i.e., at inr 3.2 million against the credit balance of inr. 4.0 million. the put option was placed under auto square off mode, and the client was not allowed to square off the position though the prices moved up sharply. once the scrip comes under auto square off mode, the client is barred from trading. the trading member automatically squares the positions, or the system drives the trading. accordingly, 80% of the client's credit balance works out to inr. 3.2 million based on which the client's open positions should have been squared off the moment mark to market (mtm) loss touches inr.3.19 million. in the given case, if the positions were squared off at 80% mtm loss, the client would lose inr. 3.2 million against which the positions were allowed to square off at mtm loss of inr. 4.76 million. this resulted in a loss of inr. 4.76 million as against inr. 3.2 million. there was no mistake on the part of the client. however, the trading member should have squared off the client's positions immediately on reaching the 80 percent mtm loss, which the respondent failed to exercise. the trading member neither scrupulously applied and executed the client's positions under the head of the auto square off mode immediately after reaching 80 percent mark to market (mtm) loss nor allowed the client to do so at the appropriate time. further, trading members cited technical snags and glitches due to which the auto square off mode did not get activated. because of the above observations, an order was passed that the complainant's claim for inr.1.57 million was allowed against the actual claim of inr. 1.6 million. analysis, observations, findings and conclusions as per appellant, the loss on account of the failure of the "intraday auto square off facility" is as follows. he bought bank nifty 30200 put option of january 28th expiry of 12000 units at an average price of inr.311 and sold at an average price of inr.34. the actual total loss is inr.5.52 million, not 4.76 million as reported by the respondent. it means the total loss incurred by the appellant due to the disputed trade was inr 5.5 million, but the respondent calculated and reported it as inr.4.76 million. despite the respondent's repeated submissions and arguments, it is neither appropriate nor relevant. the grc member noted and observed that the put options were placed under "intraday auto square off mode" by the respondent, and the appellant was not allowed to square off the position. once the scrip comes under auto square off mode, the trading member automatically squares off the positions or drives the trading. grc member also observed that the client had a credit balance of inr 4.0 million, excluding the profit of inr. 1.0 million was earned by the client on january 28, 2021. grc member calculated the loss on account of failure or non-functioning of auto square off facility as inr https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 69 4.76 million based on client's ledger copy instead of based on the difference between the purchase price and sale price and multiplied quantity. however, grc members recognized and identified the profit of inr 1.0 and excluded the same from the calculation of loss and admission of the claim. therefore, the profit of inr 1.0 million earned by the appellant is independent of the disputed trade losses. it is neither correct nor fair in clubbing this profit with the loss of disputed trade. the respondent could not justify denying the trades carried by the appellant and profits earned by the appellant as per contract note for january 28, 2021, in its additional submissions dated june 14, 2021. award because of the previous submissions, hearings, and documents of both parties, and based on appellant arbitrator observations, findings and conclusions, the profit inr 1.0 million, which was earned by the appellant independent of disputed trade, has to be paid by the respondent, andhra broking ltd to the appellant. the appellant also claimed inr 5 million/damages towards compensation for mental harassment. this arbitration is not an appropriate forum to assess, evaluate and consider the compensation for physical and mental harassment and agony. the appellant is free to approach the competent courts for said compensation and damages from the respondent. accordingly, the arbitrator passed an award on june 15, 2021, directing the respondent, andhra broking ltd, to pay inr 1.0 million (rupees one million only) to the appellant, mr. k narayana reddy and parties were asked to bear their costs. author contributions conceptualization: brahmaiah bezawada data curation: brahmaiah bezawada formal analysis: brahmaiah bezawada funding acquisition: brahmaiah bezawada investigation: brahmaiah bezawada methodology: brahmaiah bezawada project administration: brahmaiah bezawada resources: brahmaiah bezawada software: brahmaiah bezawada supervision: brahmaiah bezawada validation: brahmaiah bezawada visualization: brahmaiah bezawada writing – original draft: brahmaiah bezawada writing – review & editing: brahmaiah bezawada conflict of interest statement the author declares that he has no competing interests. references the arbitration and conciliation act of india 1996, india, 1-26. sebi. (2010). arbitration mechanism in stock exchanges. cir no. /mrd/dsa/29, 1-4. sebi. (2012). rights and obligations of stock brokers. sub brokers and clients issued by the sebi, mumbai, 1-15. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 70 sebi. (2016). circular on comprehensive review of margin trading facility. no. cir/mrd/dp/54/2016, 1-8. 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). http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2020, cribfb | ijfb indian journal of finance and banking; vol. 4, no. 2; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 99 impact of cash deals and related industry merger on synergies gains: a case of indian m&a anjala kalsie phd assistant professor faculty of management studies university of delhi, india e-mail: kalsieanjala@gmail.com neha singh research scholar faculty of management studies university of delhi, india e-mail: nehasingh.usms@gmail.com received: august 17, 2020 accepted: august 30, 2020 online published: september 11, 2020 doi: 10.46281/ijfb.v4i2.760 url: https://doi.org/10.46281/ijfb.v4i2.760 abstract a firm's financial attributes play an essential part in the merger decision. the present paper attempts to improve the existing literature on assessing m&a activity in indian corporate. this research paper aims primarily to analyze the (a) synergies realized when the mode of payment in the merger deal is cash, (b) impact on bidder liquidity when payment is made in cash (c) synergies realized when both target and acquirer in the deal belong to related industry, i.e. the merger is horizontal and (d) assess the impact on bidder leverage when payment is made in equity. the paper has analyzed a panel of 120 major indian m&a deals from 2005 to 2015, having three years of data pre and post-merger. instrument variable probit regression analysis has been employed in the study. the key results from the analysis show that in case of payment method in the deal being cash, m&a appears financially favorable for the bidder companies. the results of the empirical analysis of the study do support the generation of synergies in the case of horizontal mergers. the combined firm has also found to have lower liquidity for indian mergers & acquisitions. significant results have also been obtained for the leverage variables indicating fewer borrowings for the merged firm. keywords: m&a activity, synergies, variable, regression analysis, cash deals, industry relatedness. jel classification codes: g34, c35, m41. 1. introduction corporate restructuring involves any change in the assets or capital structure of a company or its ownership through an inorganic route (godbole, 2013). such a change can be effected through either acquisition of a company, merger or demerger of/into two or more companies, delisting or selling off a company, or its important assets. mergers & acquisitions is the primary mean of corporate restructuring. a merger can be defined as the consolidation of the resources, liabilities , and operations of two or more firms into one, where payment is made in the form of the merger company's equity shares or debentures or cash or else a hybrid of the payment methods listed above (beena, 2000). some of the main objectives to undergo a merger are expanding into new markets, considerable cost savings, and knowledge sharing as well as risk-sharing. however, the prime objective of undertaking any form of restructuring is to gain synergies generated out of the combination. synergy is the potential benefit that is achieved post the amalgamation. apart from the lure of quantum growth associated with the mergers, there are many other motives for which companies resort to m&a, financial and operating synergies being the most important out of them, which add to the enterprise valuation (sudarsanam, holl, & salami, 1996). synergies are of two types – revenue-generating and cost reduction with the former being more difficult to achieve (cullinan, le roux, & weddigen, 2004). financial synergies involve combining both target and acquirer companies’ balance sheets to achieve improved financial parameters (godbole, 2013). operating synergies are the ones that are generated due to improved operating efficiencies of merged entities, which is majorly due to improved tax benefits or investment cutbacks (huyghebaert & luypaert, 2013; hamza, sghaier, & thraya, 2016; loukianova, nikulin, & mailto:kalsieanjala@gmail.com mailto:nehasingh.usms@gmail.com https://doi.org/10.46281/ijfb.v4i2.760 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 100 vedernikov, 2017). the synergies generated are not always positive, and firms can even experience negative synergies, which create the exact opposite outcome to that of positive synergies. in the case of negative synergies, the sum is less than its parts due to value erosion. the theories of diseconomies of scale and scope are used to explain the adverse effects of negative synergies (harding & rovit, 2004). the m&a deals have become common in india in the last two decades. in the post-liberalization period, though they had not been uncommon before, but the frequency was less (bhoi, 2000). the liberal economic policy by the government post-1990s incentivized companies to undergo expansion, diversification, up-gradation of technology, and entering into newer geographical areas. several firms deemed it necessary to combine with related business units and subsidiaries to achieve cost efficiency and improved production. the quantum of deals in india has seen a steady increase since 2013 with a similar increase in the total value of deals undertaken. in 2015, companies announced over 1200 transactions with a total value over 51 billion usd. the number of transactions increased moderately by 15.6 percent compared to 2014, while the value has increased by 63 percent (m&a statistics by countries-institute for mergers, acquisitions , and alliances (imaa), 2019). the financial performance and also the assessment of mergers & acquisitions have dwelled well in the field of financial and industrial economics. despite this, there is debate if mergers & acquisitions boost corporate efficiency. the present study explores the performance of the acquirer and whether synergies are achieved in the post-merger time period, when the mode of payment for the transaction is cash. similar gains are analyzed for horizontal mergers as well. the present study analyses 120 deals of mergers & acquisitions which took place between 2005 and 2015 for the indian corporate. to estimate the relationship, the instrument variable probit regression model is applied in the study. the paper is organized into six sections, which are as follows. literature review of the different methodologies used in the existing studies and their findings have been discussed in section 2. section 3 gives the objective and hypothesis of the present study. section 4comprises the research design, variables, data source, and methodology employed in the research. section 5 pertains to the results based on the econometric analysis. the paper ends with the conclusion and implications presented in section 6. 2. literature review majority of studies to date in mergers & acquisitions relate to economic costs & benefits accrued to acquirers and targets in the post-merger scenario. few studies deal with the stock market returns and misvaluations. majorly, the methodology of event study has been used in the existing literature, which assesses the impact of the merger in the short-run ([-1,+1],[5,+5] ), i.e. to investigate the implications of the announcement of m&as on the wealth of the shareholder. they have concluded either significantly negative abnormal returns or insignificant abnormal returns in the short-run (andrade, mitchell, & stafford, 2001; bruner & mullins, 1987; bradley, desai, & kim, 1988; byrd & hickman, 1992; kaplan & weisbach, 1992; healy, palepu, & ruback, 1992; lang, stulz, & walkling, 1989; mulherin & boone, 2000; servaes, 1991; smith & kim, 1994). whereas the result of the long-run event studies studying post-merger returns after three years have pointed out that firms experience negative abnormal returns (andrade, mitchell, & stafford 2001; lahey & conn, 1990; limmack, 1991; loughran & vijh, 1997; mitchell & stafford, 2000; rau & vermaelen, 1998). despite the strength of the research in this area, there is a lack of consensus on the stimulus mergers and acquisitions have on the economies of the countries in which they occur, especially on the targeted corporations. in the past, several studies have sought to examine the costs and gains of mergers and acquisitions. however, the conclusions of these investigations are so varied that it is impossible to arrive at a clear consensus. although some research supports the benefits accrued to the acquired firm, no consensus can be derived on the benefits obtained by acquiring companies' shareholders (cummins & weiss, 2004; mohanty & mishra, 2011). there are studies, which assess the shareholder wealth by accounting performance through performance measures like operating cash flows to sales, operating cash flows to total assets, return on assets and operating income over total assets; and they come to a variety of conclusions. while some studies like andrade, mitchell, and stafford (2001); ramaswamy and waegelein (2003) shows the gain in accounting performance post-acquisition; there are studies like ravenscraft and scherer (2011)which show retrogression of performance post-m&a. studies undertaking the assessment of synergies in terms of operating performance after undertaking merger & acquisition have shown mixed results. while studies like linn and switzer (2001); moeller and schlingemann (2004); switzer (1996); parrino and harris (1999); powell and stark (2005) looking into pretax cash flows have shown an increase in post-acquisition cash flows; there are studies which shows an overall decline in cash flow (kruse, park, & suzuki, 2003), lower profitability (meeks, 1977), a significant decline in the roa (yeh & hoshino, 2002; dickerson, gibson, & tsakalotos, 1997)and insignificant improvement in operational efficiency following the acquisition by the acquirer (ghosh, 2001; herman & lowenstein, 1988; lev & mandelker, 1972; sharma & ho, 2002). existing literature in financial synergies studying the existence and extent of financial synergies have suggested deterioration in post-m&a profitability measure in respect of eps (hogarty, 1970), return on capital equity (harris, franks, & mayer, 1987), roe (yeh & hoshino, 2002), liquidity, profitability, and solvency ratios (pazarskis, vogiatzogloy, christodoulou, & drogalas, 2006). the results suggest that the result of the acquisition of the profitability of the firm is detrimental (dickerson, gibson, & tsakalotos, 1997). however, an analysis of the financial efficiency of selected indian financial institutions showed that long-term value was created and financial performance improved for the acquired firm post-acquisition; but not on all parameters (sinha, kaushik, & chaudhary, 2010). copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 101 the mode of payment is also one of the determinants of the synergies gained in the post-acquisition. linn and switzer (2001) suggest that the operating efficiency of the combined firm in the us have a propensity to be greater in cases where cash was the key mode of payment. acquisitions financed by stocks are associated with smaller synergy changes than when the payment method is in cash (carline, linn, & yadav, 2005; ghosh, 2001). statistical findings have consistently shown that the target and the acquirer's share prices react more favorably to a cash proposition than to a stock purchase at the time of the initial announcement of the bid (peterson & peterson, 1991; carnes, black, & jandik, 2001; bouwman, fuller, & nain, 2009). another critical issue in the literature is how the horizontal acquisition affects the efficacy of the acquirer, by influencing synergies within the combined organization. it is believed that horizontal acquisitions provide substantial synergy opportunities, because of the similar institutional climate of the acquirer and the target (farjoun, 1994; barai & mohanty, 2014). at the same time, vertical acquisitions are hypothesized to offer lesser potential for synergy (chatterjee, 1986). it is increasingly being recognized that the complementary resources of varied industries may also provide the major potential for synergies (barkema, baum, & mannix, 2002; harrison, hitt, hoskisson, & ireland, 2000; tanriverdi & venkatraman, 2005). meta-analysis results, however, suggest no significant association between the performance of the acquirer and similarity of the industry of the acquired firm (king , dalton, daily, & covin, 2004). an overview of the prominent studies showing the reported variables and the methodology adopted is given in table 1. table 1. summary of literature review existing literature methodology adopted key variables used in the study varaiya and ferris (1987), lang, stulz and walkling (1989), bradley, desai, and kim (1988), asquith, bruner, and mullins (1990), healy, palepu, and ruback (1992), byrd and hickman (1992), mulherin and boone (2000), kaplan and weisbach (1992), andrade, mitchell, and stafford (2001), kuipers, miller and patel (2002), chari, ouimet and tesar (2004), huyghebaert and luypaert (2013), barai and mohanty (2014) event study acquirer return, free cash flow, premium, leverage, relative size, announcement returns, leverage, return on asset, sales, market capitalisation, ebitda to sales, cumulative average abnormal returns hogarty (1970), philippatos, choi, and dowling (1985), ramaswamy and salatka (1996), ravenscraft and scherer (2011) univariate regression analysis operating cash flow return on assets, earning per share, operating expense ratio, operating income over assets ghosh (2001), morag (2011), tanriverdi and uysal(2011), barai and mohanty (2014) multivariate regression analysis integration effectiveness, relatedness, organizational culture, synergy potential, m&a success, cash flows to total assets, profitability, return on asset, leverage, growth of net assets, leverage, free cash flow, relative size, method of payment, book leverage, it capability of acquirer, relative acquisition size cudd and duggal (2000), kumar and rajib (2007), basu, dastidar, and chawla, (2008), ismail (2011), bena and li (2014), ismail, dbouk, and azouri (2014), fich nguyen, and officer (2018) logit analysis liquidity ratio, growth rate, market to book ratio, total assets ratio, sales, cash flow, price to earnings ratio, leverage, tobin q, cash payment, relative size, log assets harris (1982), pastena and ruland (1986), harford (1999), bernile (2005), mooney and shim, (2015), chira, garcía-feijóo, & madura (2017), tremblay (2017), bernile and lyandres (2019) probit analysis size, liquidity, leverage, profitability, growth, price/earnings ratio, dividend policy source: authors’ representation based on the previous literature 3. objective and hypothesis the present paper aims to assess if synergies are gained post the merger for the acquirer. the study examines 120 m&a deals for the indian corporate, which took place between 2005 and 2015. certain parameters have been selected to effectively represent the synergies gained (appendix b). the mergers have been selected from a broad period to ensure representation from different business cycles. the primary objective of the present study is to analyze (a) the synergies realized when the mode of payment in the merger deal is cash, (b) impact on bidder liquidity when payment is made in cash, copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 102 (c) synergies realized when both target and acquirer in the deal belong to related industry, i.e. the merger is horizontal and (d) impact on bidder leverage when payment is made in equity. the models developed in the paper are listed in the table below. table 2. models employed in the study objectives hypothesis dependent variable (binary variable) equations for each model model 1 h1: when payment is made in cash, more synergies are generated. mode of payment is cash payment_cashit= α + 𝛽𝑗 𝑗 𝑗=1 𝑋𝑖𝑡 𝑗 + γitzit+ԑit model 2 h2: when bidder liquidity is high, payment is made in cash. mode of payment is cash payment_cashit= α + 𝛽𝑗 𝑗 𝑗=1 𝑋𝑖𝑡 𝑗 + γitzit+ԑit model 3 h3: when merger & acquisition take place in the related industry sectors, more synergies are generated. relatedness of industry industry_relatednessit= α + 𝛽𝑗 𝑗 𝑗=1 𝑋𝑖𝑡 𝑗 + γitzit+ԑit model 4 h4: when bidder leverage is high, payment is made in equity. mode of payment is equity payment_equityit= α + 𝛽𝑗 𝑗 𝑗=1 𝑋𝑖𝑡 𝑗 + γitzit+ԑit where x is the independent variable and z is our instrument variable. 4. data and methodology 4.1 data description the study considers an unbalanced panel data of the 120 mergers& acquisition deals which took place in india from 2005 to 2015. data of seven years (3 years post-merger, year of merger, 3 years pre-merger) has been taken for each deal. hence, the period of data used in the study is from 2002 to 2018. the study has excluded non-listed acquirer firms, and also financial and banking companies because they have distinct accounting, operational, and risk-based features. the highest representation for the acquirer in the deals under consideration is in the industrial sector with 30 deals. the basic materials sector has been most represented for the target (appendix a). accounting and financial data, which is used as regressors and dependent variables for the probit analysis, i.e. mode of payment (cash or equity) and relatedness of industry have been compiled from bloomberg. appendix b defines the variables that the study uses. for the present study, the combined entity's performance in the post-acquisition period has been equated with that of target and acquirer (a+t) entities. for an appropriate comparison, each variable is deflated by tangible assets of the considered firms and thus eliminating the size effect (healy, palepu, & ruback, 1992). (note 1) the paper has also measured operating cash flow returns on assets to assess operational efficiency changes, as suggested by healy, palepu, and ruback (1992). conceptually, cash flows have been concentrated as they reflect the real economic gains that are generated by assets. operating cash flows were defined as the addition of sales, goodwill expenses, and depreciation; followed by deduction of the selling and administrative expenses and cost of goods sold. as the amount of economic gains is influenced by the assets used, cash flows have been scaled by total assets to form a measure of return that can be measured over time and even across the firms. 4.2 methodology the present study uses the two-step instrument variable probit regression for empirical analysis instead of conventional multivariable regression analysis. binary data models that are of a dichotomous type assume a binomial distribution for the dependent variable which are well described by awogemi and oguntade (2012); gujarati, (2004); krzanowski (1998); hollander and wolfe (1973). the assumptions of normality such as disturbance terms and observations are normally distributed; homogeneity of variance; normality measures are null. the dichotomous quality of dependent variables collapses the assumptions of ordinary least square (ols). variables used in the study for the firms are correlated to each other. this can be observed from the fact that if we have included net income in the model, we cannot say that a firm’s net income is not impacted by the ebitda or total assets of the firm which has not been considered in the equation employed. it suggests that in such a model ebitda or total assets will be represented in the error term. and hence the error term shows a correlation with the model's independent copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 103 variables. this kind of problem is distinctive in such type of studies. hence, instead of employing probit regression, we have used the instrument variable probit regression methodology in the study to tackle the issue of endogeneity. iv-probit suits those probit models in which one or more of the regressorare determined endogenously. this is used when you consider that the error term is associated with one or more of the regressor. the estimator of minimum chisquared is invoked with the option two-step (newey, 1987). it relies on the assumption of the continuous endogenous regressors and unsuitable to use with endogenous regressors which are discrete.the model used in iv probit estimation is: y1i*=y2iγ + x1iδ + µi (1) y2i=x1iφ1 + x2iφ2 +νi (2) where i = 1, . . . , n,y2i is a 1×n vector of endogenous variables, x1i is a 1×m1 vector of exogenous variables, x2i is a 1 × m2 vector of additional instruments, and the y2i is reduced form of the equation. for a typical probit model, it is presumed that the error term has one variance. however, we presume that (µi, νi) is multivariate normal with a matrix of covariance, in the case of a probit model with an endogenous regressor. consequently, γ and δ results would not be yielded by the estimator of newey and two-step estimators of probit. instead, γ/σ and δ/σ estimates are generated, where σ is defined as the square root of var (µi|νi). therefore a direct comparison of the estimates obtained from estimator of newey with those obtained from probit or maximum likelihood is not possible. however, the two-step estimator is still beneficial. the maximum likelihood estimator can struggle to converge, particularly with multiple endogenous variables; but the convergence of the two-step estimator is most definite. furthermore, while the coefficients from the two models are not comparable precisely; it is still possible to use the two-step calculations to check for statistically significant relations. in two-step iv probit estimation, wald test of the null hypothesis h0 (of no endogeneity) works as the exogeneity test. 4.3 robustness test weak iv identification test has been conducted to check that the weak-iv concern is not present in the instruments. the weak iv test of stata module is performed on the endogenous variable(s) in an instrumental variables (iv) model to verify the validity of the instrument used, and create confidence sets for these coefficients. these confidences and tests are robust to weak instruments, in the context that the coefficients are not believed to be known. weak iv test can be used to estimate linear models (including fixed panel effects and dynamic panel data), probit, and tobit iv (finlay, magnusson, & schaffer, 2014). in the case of iv probit, the two-step estimator (newey's, 1987) is required. the weak iv test for iv probit in stata reports the anderson-rubin test (ar). ar test is a joint test of the structural parameter (beta=b0, which represents the coefficient of endogenous regressor) and the exogeneity of the instruments (e (zu) =0, where u indicate the disturbance in the structural equation and z indicate the instruments). 5. empirical analysis and results 5.1 stationary test and correlation matrix fisher-type (choi, 2001) for an unbalanced panel is applied to all variables used in the models to check for stationarity. the study found that a majority of the variables is commonly stationary at their first difference. out of 41 variables, 39 variables were found stationery at their first difference. appendix c, d, e, and f exhibit of correlation among the significant variables of the models. there is a weak correlation reported between the majorities of variables. 5.2 results of iv probit regression and interpretation table 3 reports the findings of ivprobit model 1 results. the paper has estimated three equations for model 1with payment_cash as the dependent variable. the probit model estimates involve reverse causality and possible biases, which raises concerns of endogeneity. to mitigate this concern for endogeneity, two-step instrumented variable (iv) probit regressions (newey, 1987; rivers & vuong, 1988) has been employed. specifically, in the first stage, the paper has estimated the current market cap as the selected instrument. in the second stage, using the predicted values of relative current market cap and other variables as regressors, the study estimates the iv probit regression. the second stage results of the iv-probit model, provided in table 3 columns 2, 4, and 6, indicate that the current market cap is negative and significant at the level of < 1 percent. as can be observed from table 3, net income has a positive and statistically significant relationship with payment dummy for all the three reported models, indicating that if payment for the deal is made in cash then synergy realized in the form of net income is more in the post-acquisition stage. similar positive and statistically significant outcomes have also been observed for r&d expense to net sales in our model, indicating spillover of technology in the post-merger period. significant results have also been obtained for the leverage variables like net debt (eq 3) and net debt to ffcf (eq 1 & 2), indicating fewer borrowings for the merged firm. thus, the results of the empirical analysis of the study support hypothesis 1, which states “when payment is made in cash, more synergies are generated”. prob> chi2-is the probability of achieving this chi-square statistic if collectively independent variables do not influence the dependent variable (ucla: statistical consulting group).this p-value is compared to a critical value, i.e. at 10 percent, 5 percent, and 1 percent to determine the statistical significance of the overall model. in this case, all the three models are copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 104 statistically significant at less than 1 percent level. a wald test of the exogeneity of the instrumented variables is reported at the bottom of the results. on that basis, we refute the null hypothesis that there is no endogeneity. table 3. results of instrument variable iv probit estimation for mode of payment in cashis the dependent variable. this table reports the coefficient estimates and p-statistics from instrument variable probit model 1. eq 1 eq 2 eq 3 first stage (1) two-step probit with endogenous regressors (2) first stage (3) two-step probit with endogenous regressors (4) first stage(5) two-step probit with endogenous regressors (6) cur_mkt_cap -1.9114 (0.7866)*** -1.8289 (0.5748)*** -1.4760 (0.4863)*** net_income 6.4955 (0.570) *** 11.6607 (5.5305) ** 6.6359 (0.627) *** 11.1299 (4.2499) *** 7.679 (0.62) *** 10.4152 (4.1947) ** personnel_expn_ per_employee -1.68e09(3.69e09) -1.54e-08 (1.63e-08) net_debt_to_f fcf -0.00003 (0.0001) -0.0011 (0.0016) -0.0002 (0.0003) -0.0037 (0.00233)* risk_premium -0.0208 (0.020) -0.1561 (0.0499)*** -0.0165 (0.023) -0.1383 (0.0499)*** -0.00565 (0.0198) -0.1157 (0.03873)*** opcfroa_healy -0.0028 (0.004) -0.0708 (0.0304)** -0.0028 (0.009) -0.08294 (0.0364)** -0.00372 (0.0083) -0.0534 (0.0291)* rd_expend_to_ net_sales 0.1342 (0.037) *** 0.2185 (0.1277) * 0.1316 (0.039) *** 0.2012 (0.1040) * 0.1193 (0.03748)*** 0.1801 (0.0876) ** net_debt -1.2330 (0.16332)*** -1.2993 (0.6302) ** goodwill_assets _ 0.016086 (0.0032)*** 0.0276 (0.0098) *** constant 0.4326 (0.127) *** 1.3274 (0.5524) ** 0.3159 (0.148) ** 1.3175 (0.445) 1.1969 (0.4517) wald test of exogeneity 16.78*** 22.07*** 14.60*** anderson-rubin test 17.82*** 26.47*** 18.11 *** wald chi2(9) 17.95 23.02 23.59 prob> chi2 0 0.0064 0 0.0017 0 0.0027 number of obs 660 660 529 529 577 577 robust standard errors in parentheses.***p<0.01, **p<0.05, * p<0.1 source: authors’ estimation table 4 presents the findings of iv-probit for model 2“when payment is made in cash, bidder liquidity is high”. probit regression model has been run with payment_cash as the dependent variable and liquidity variables such as free cash flow and operating cash flow return on assets along with other variables as part of the independent variables. this model estimate net assets as the selected instrument in all three reported equations. as per the results operating cash flow return on asset, working capital, cash and cash equivalent and quick ratio are statistically significant but negative in all the three models when the payment is made in cash. this indicates that the combined firm has lower liquidity for indian mergers & acquisitions, and it is more likely the company will struggle with paying debts when payment is made in cash, thereby negating the hypothesis 2. however, free cash flow was found to have an opposite effect in our estimation. prob> chi2 indicates that the eq 1 and 2 are statistically significant at less than 10 percent level and eq 3 at less than 5 percent level. based on wald's test of the exogeneity of the instrumented variables, we refute the null hypothesis of no endogeneity. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 105 table 4. results of instrument variable probit estimation for mode of payment in cash as the dependent variable. this table reports the estimates of coefficient and p-statistics from instrument variable probit model 2. eq 1 eq 2 eq 3 first stage (1) two-step probit with endogenous regressors (2) first stage (3) two-step probit with endogenous regressors (4) first stage(5) two-step probit with endogenous regressors (6) net_assets 22.553 (8.457) *** 19.506 (8.604) ** 20.024 (8.849) ** working_capital 0.367 (0.046)*** -9.051 (3.435) *** 0.519 (0.061) *** -10.739 (4.778) ** 0.527 (0.062) *** -10.876 (4.987) ** cf_free_cash_flow -0.079 (0.090) 2.315 (2.395) -0.289 (0.122) ** 6.01 (3.505) * -0.280 (0.122) ** 6.338 (3.554) * opcfroa_healy 0.001 (0.0004) -0.060 (0.0269) ** -0.00005 (0.0007) -0.052 (0.028) * -0.00005 (0.001) -0.0464 (0.0274) * invent_turn 0.0001 (0.0001) -0.018 (0.017) 0.0004 (0.0002) ** -0.019 (0.014) 0.0004 (0.00015) ** -0.02114 (0.01525) cce_and_sti_detailed 0.034 (0.0173)** -1.347 (0.657) ** 0.0254 (0.0235) -1.002 (0.649) * 0.0262 (0.0235) -0.953 (0.6674) quick_ratio 0.0149 (0.0047) *** -0.604 (0.232) *** 0.0191 (0.0064)** * -0.634 (0.262) ** 0.0192 (0.0064) *** -0.585 (0.2709) ** ebitda 0.396 (0.1005) *** -8.2799 (3.5739) ** 0.7466 (0.1349)** * -13.72 (6.179) ** 0.7493 (0.135) **** -12.83 (6.377) ** revenue_sequential_gro wth 1.17e06(3.83e06) -0.0013 (0.0017) 3.55e07(5.21e06) -0.0013 (0.0017) 0.0000004 (0.000005) -0.0017 (0.0017) net_fixed_assets_5_ye ar_growth 0.00004(0 .00008) -0.0014 (0.0023) 0.0001(0. 00011) -0.0041 (0.0027) 0.000093 (0.00014) -0.00423 (0.0028) cash_flow_to_net_inc 0.0026 (0.0004) *** -0.075 (0.025) *** 0.0058 (0.0005)** * -0.129 (0.0522) ** 0.0058 (0.0005) *** -0.132 (0.0536) ** total_debt_and_prefer red_equity -0.524 (0.0419)** * 12.560 (4.517) *** -0.169 (0.0525)** * 4.343 (1.8002) ** -0.1725 (0.0527) *** 4.128 (1.877) ** capitalization_ratio 0.00075(0 .0003)** -0.016 (0.0107) -0.00107 (0.0004)** * 0.0212 (0.0117) * -0.0011 (0.0004) *** 0.0214 (0.0121) * cons 5.235 (2.3851)** -6.994 (2.991) 0.3828 (0.034) **** -7.148 (3.073) ** wald test of exogeneity 36.08*** 33.58*** 34.16*** anderson-rubin test 32.21*** 31.63*** 32.28*** wald chi2(9) 23.07 19.81 25.80 prob> chi2 0 0.0591 0 0.0999 0 0.0275 number of obs 577 577 577 577 577 577 robust standard errors in parentheses.***p<0.01, **p<0.05, * p<0.1 source: authors’ estimation copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 106 table 5 reports the findings of iv probit regression model run for the model 3 with industry relatedness as the dependent variable. this model estimates the current market cap as the selected instrument. the second stage results of the iv-probit model, presented in columns 2 and 6 of table 5, reflects that the instrumented current market cap is negative and significant at the less than 1 percent level and less than 10 percent level in eq 3 (column 4). it has been highlighted by the results that significant variables like return on capital, net income growth, total operating expense as a percentage of sales, asset turnover, and free cash flow yield have a positive and statistically significant relationship with the relatedness of the industry of the reported eq 2 and 3, indicating that if acquirer undertakes a horizontal merger then synergy in the form of said variables are gained post the merger. similar positive and statistically significant results have also been observed for inventory turnover in all the reported models. thus, the results of the study's empirical analysis do support hypothesis 3, which states “when mergers & acquisition take place in the related industry sector, more synergies are generated”. however, financial leverage and net debt of the combined firm were observed to have a positive and statistically significant relationship with the relatedness of the industry as depicted in eq 1; indicating an increase in borrowing post-merger for the combined firm. the rise in financial leverage is the result of an increase in debt capacity (ghosh & jain, 2000). prob> chi2 indicates that all the models are statistically significant at less than 1 percent level. we refute the null hypothesis of no endogeneity, based on wald's test. table 5. results of instrument variable probit estimation for relatedness of industry as the dependent variable. this table reports the estimates of the coefficient and p-statistics from instrument variable probit model 3. eq 1 eq 2 eq 3 first stage (1) two-step probit with endogenous regressors (2) first stage (3) two-step probit with endogenous regressors (4) first stage (5) two-step probit with endogenous regressors (6) cur_mkt_cap 0.2758 (0.106) *** 1.636 (0.905) * 0.368 (0.126) *** invent_turn 0.0033 (0.0008) *** 0.0025 (0.0019) *** 0.001 (0.0006) * 0.006 (0.004) * 0.001 (0.001) 0.0069 (0.0032) ** ebitda_to_revenue -0.0009 (0.0007) 0.0179 (0.004) -0.0035 (0.0025) 0.0253 (0.0129) ** oper_margin -0.0023 (0.0015)* -0.0176 (0.0042) ** total_opex_as_a_perc entage_sales -0.0043 (0.0014)** * -0.0049 (0.0027) *** -0.00304 (0.00098)*** -0.0115 (0.0045) *** -0.0049 (0.00 16) *** -0.0196 (0.0078) ** quick_ratio 0.0447 (0.0306) -0.125 (0.0459) -0.0463 (0.02039 )** -0.0143 (0.0657) 0.0234 (0.0313) -0.047 (0.0465) return_com_eqy 0.0007 (0.0012) -0.0144 (0.0031) asset_turnover 0.0292 (0.0905) 0.2066 (0.125) -0.1164 (0.0604) * 0.6911 (0.2234) *** -0.205 (0.098) 0.3964 (0.154) *** free_cash_flow_yield -0.0014 (0.0005)** * 0.0052 (0.0015) *** -0.00011 (0.00035) 0.002733 (0.00142) * -0.0013 (0.00057 ) 0.00163 (0.00125) ebitda -1.724 (1.2352) -2.4798 (2.00431) fncl_lvrg -0.02543 (0.00967)*** 0.0191 (0.0331) capitalization_ratio -0.00595 (0.0012) *** 0.0143 (0.00665)** bs_long_term_investm 0.33778 -1.0551 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 107 ents (0.16034)** (0.5077) ** ebitda_to_revenue -0.000014 (0.00060) 0.0489 (0.01196)*** return_on_cap 0.00473 (0.00240)** -0.0211 (0.00780)*** 0.0192 (0.004) *** -0.0219 (0.0066) *** tobin_q_ratio 0.8315 (0.0288) *** -1.4132 (0.7662) * normalized_net_incom e_growth 0.000038(0. 00002)* 0.00025 (8.27e-05) *** -0.00003 (0.00004 ) 0.00022 (0.00007) *** oper_margin -0.00445 (0.0011) *** -0.043 (0.01091) *** -0.0005 (0.002) -0.041 (0.01186) *** net_debt 0.0453 (0.229) 0.9648 (0.338) *** net_fixed_assets_5_ye ar_growth -0.0001 (0.0005) 0.00742 (0.0023) *** mkt_cap_to_revenue 0.0098 (0.007) -0.0232 (0.0134)* constant 0.6927 (0.181) *** 0.758 (0.318) ** 0.263 (0.1303) ** 1.275 (0.466) *** 0.659 (0.212) *** 1.4216 (0.8551) * wald test of exogeneity 8.43*** 5.51** 11.00*** anderson-rubin test 7.10*** 5.20 ** 9.16*** wald chi2(9) 44.50 40.97 51.77 prob> chi2 0 0.0000 0 0.0003 0 0.0000 number of obs 744 744 725 725 578 578 robust standard errors in parentheses.***p<0.01, **p<0.05, * p<0.1 source: authors’ estimation lastly, iv probit model has been estimated for model 4" when payment is made in equity, bidder leverage is high", for which results are presented in table 6. payment_equity is the dependent variable and leverage variables along with other variables form the part of the independent variables. the current market cap is the selected instrument in eq 1 and 2, along with other variables in the outcome regression in the first stage. for the estimation of eq 3, the total asset has been used as the selected instrument. as per the results, eq 1 suggests long term borrowing to have a statistically significant relationship with payment equity. eq 2 suggests short and long term debt and eq 3 suggests net debt to have a negative and statistically significant relationship with the payment equity. this suggests lower borrowings post the merger when the payment is made in equity, thus not supporting our hypothesis 4. prob>chi2indicates that all the models are statistically significant at less than 1 percent level. we reject the null hypothesis of no endogeneity, based on wald's test. table 6. results of instrument variable probit estimation for mode of payment in equity as the dependent variable. this table reports the estimates of the coefficient and p-statistics from instrument variable probit model 4. eq 1 eq 2 eq 3 first stage (1) two-step probit with endogenous regressors (2) first stage (3) two-step probit with endogenous regressors (4) first stage(5) two-step probit with endogenous regressors (6) cur_mkt_cap 1.33 (0.67) ** 1.169 (0.467) ** bs_lt_borrow 0.318 (0.283) -1.985 (0.51) *** net_debt_to_ffcf -0.00001 0.003 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 108 (0.00006) (0.0021) tot_debt_to_tot_asset -0.014 (0.0024) *** 0.02 (0.0104) * free_cash_flow_yield -0.0014 (0.0006) ** 0.004 (0.0014) *** net_income 6.667 (0.572) *** -8.3663 (4.7636) * quick_ratio -0.0733 (0.03099) ** 0.347 (0.112) *** short_and_long_term_ debt 2.284 (0.32442)*** -5.126 (1.628) *** total_debt_and_preferre d_equity -3.004 (0.354) *** 4.935 (1.838) *** is_oper_inc 7.534 (1.653) *** -12.648 (4.101) *** ebitda -1.652 (1.551) 5.391 (2.5356) ** rd_expend_to_net_sal es 0.1308 (0.03553) *** -0.15142 (0.08326) * bs_tot_asset 3.2273 (0.976) *** net_debt 0.505 (0.033) *** -2.166 (0.563) *** degree_financial_leverag e 0.00014 (0.00025) -0.004 (0.0025) *** totaldebttototalequity 1.00e06(1.61e06) 1.42e-05 (1.63e-05) gross_fix_asset_turn 0.00052 (0.00216) 0.0702 (0.0309) ** cf_free_cash_flow 0.0939 (0.0652) -0.818 (0.464) * pretax_margin 0.00004 (0.00015) 0.0015 (0.00091) * constant 1.0775 (0.259) *** -0.781 (0.9823) 0.5242 (0.1062) *** -0.03086 (0.3362) 0.8347 (0.02295)*** -2.4354 (0.8841) *** wald test of exogeneity 7.76*** 13.40*** 13.74*** anderson-rubin test 8.09*** 12.90*** 13.94*** wald chi2(9) 32.95 28.42 38.70 prob> chi2 0 0.0001 0 0.0001 0 0.0000 number of obs 712 712 732 732 795 795 robust standard errors in parentheses.***p<0.01, **p<0.05, * p<0.1 source: authors’ estimation copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 109 summary of result of hypothesis testing has been detailed below in the table. table 7. summary results of hypothesis testing objectives hypothesis expected sign test result model 1 h1: when payment is made in cash, more synergies are generated. + supported model 2 h2: when bidder liquidity is high, payment is made in cash. + not supported model 3 h3: when merger & acquisition take place in the related industry sectors, more synergies are generated. + supported model 4 h4: when bidder leverage is high, payment is made in equity. + not supported thus, this study contributes to the literature in two ways. the main finding of the present study is the generation of synergies if the mode of payment for merger and acquisition is cash for indian corporate. also, horizontal mergers generate greater value for the indian corporate. the robustness of the results was checked further by estimating the weak iv instrument robustness test as has been discussed in the sub section 5.3 below. 5.3 weak instrument robustness test for the instrument variable (weak iv test) the anderson-rubin statistics, as reported in table 3,4,5,6 for each model specified in the study, are significant at less than 1 percent significance level. it refutes the null hypothesis, which states that the coefficient is zero on the endogenous variable. to put it another way, the instruments developed are not weak. these findings indicate that the instrument is strongly related to the endogenous variable and does not suffer from the weak iv problem. the weak-instrument-robust inference tests are also significantly varied from zero, suggesting that the predicted effects are robust to weak iv problems if any. 6. conclusion a firm's financial assets play a significant part in the decision-making phase of a merger. the present paper aims to improve the existing literature on assessing m&a activity in indian corporate. this research paper aims primarily to analyze the (a) synergies realized when the mode of payment in the merger deal is cash, (b) impact on bidder liquidity when payment is made in cash (c) synergies realized when both target and acquirer in the deal belong to related industry, i.e. the merger is horizontal and (d) assess the impact on bidder leverage when payment is made in equity. a panel of 120 major indian m&a deals from 2005 to 2015, each having 3 years of data pre and post-merger (seven years of data in totality including the year of the merger), i.e. data from 2002 to 2018 has been used in the analysis for the considered firms. the study employs instrument variable probit regression analysis to tackle the issue of endogeneity. summary of results for the models employed in the present study has been detailed in the table below. table 8. significant variables and their relationship with the dependent variable as per the present study objectives hypothesis significant variables as per the study conducted relationship with the dependent variable model 1 h1: when payment is made in cash, more synergies are generated. net income positive r&d expenditure to net sales positive model 2 h2: when bidder liquidity is high, payment is made in cash. operating cash flow return on asset negative working capital negative cash and cash equivalent negative quick ratio negative model 3 h3: when merger & acquisition take place in the related industry sectors, more synergies are generated. return on capital positive net income growth positive total operating expense as a percentage of sales positive asset turnover positive free cash flow yield positive model 4 h4: when bidder leverage is high, payment is made in equity. long term borrowing negative net debt negative short and long term debt negative copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 110 from the above table 8, it is indicated that in the case payment method in the deal is cash; m&a appears to be financially profitable for the bidder companies and synergies are realized for the indian corporate. the major contribution of the present research is in the identification of the sources of synergy creation for the india m&a deals. the study highlight that net income has a positive and statistically significant relationship with cash payment of deal. significant results have also been obtained for the leverage variables like net debt and net debt to free cash flow, indicating fewer borrowing for the merged firm in the post-merger period. similar positive and statistically significant results have also been observed for r&d expense to net sales in our model, indicating spillover of technology post the merger. these results align with existing research such as ghosh (2001), megginson, morgan, and nail (2005), ismail (2011). secondly, we show that there is a significant association between realization of synergies and similarities of industry of target and acquirer firm. it was found that net income growth, return on capital, total operating expense as a percentage of sales, asset turnover, and free cash flow yield contributes to the value creation in case of relatedness of industry in the merger deal. thus, the results of the empirical analysis of the study do support the generation of synergies in the case of horizontal mergers. these results are found to be in resonance with barai and mohanty (2014), rozen-bakher (2018) but in dissonance with mooney and shim (2015). the results also suggested an increase in borrowing post-merger for the combined firm. the improvement in financial leverage is the result of the rise in debt capacity (ghosh & jain, 2000). operating cash flow return on asset, working capital, cash and cash equivalent and quick ratio is statistically significant but negative when the payment is made in cash. this indicates that the combined firm has lower liquidity for indian mergers & acquisitions, and it is more likely the company will struggle with paying debts when payment is made in cash. this is in contrast with jensen's theory of free cash flow (jensen, 1986). our results also indicate that leverage has a negative relationship with equity mode of payment. it implies the lowering of borrowings post the merger when the payment is made in equity. 6.1 implications for the indian market from the results of this analysis can be extracted some significant implications. firstly, it supports the results of previous research that adhere to the point of view that bidder firms in india have achieved better financial performance post the merger and acquisition. the nature and trend of the indian companies' mergers & acquisitions strategies show more horizontal mergers. this lends support to the argument that indian firms are concentrating on their core areas and growing further into similar strength areas that are helping to realize synergistic benefits. the major contribution of the study lies in determining various sources of value creation or destruction for indian mergers and acquisitions. it supports the hypothesis that m&a generates synergy for indian m&as when indian corporate focus on undertaking merger & acquisitions in similar industries, to gain economies of scale and create value post the merger. secondly, the decision to use stock or cash often sends signals about the acquirer's estimate of the risk of failing to achieve the synergies anticipated from the acquisition. repeated empirical research shows that the market responds far more favorably to cash-deal announcements than to stock-deal announcements. synergy has been shown to be created post the merger in case cash is the preferred mode of payment for the merger deal in indian scenario. managers in the merger deal should emphasize on cash payment for the deal to generate higher value creation. references andrade, g., mitchell, m., & stafford, e. 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(2002). productivity and operating performance of japanese merging firms: keiretsu-related and independent mergers. japan and the world economy, 14(3), 347–366. https://doi.org/10.1016/s09221425(01)00081-0 http://www.drogalas.gr/ https://www.sciencedirect.com/science/article/pii/037842669190074v https://doi.org/10.1111/1468-5957.00428 https://doi.org/10.1086/296633 https://doi.org/10.1111/j.1468-5957.1996.tb01148.x https://doi.org/10.1111/j.1468-5957.1996.tb01148.x https://doi.org/10.1287/isre.1090.0250 https://stats.idre.ucla.edu/stata/output/logistic-regression-analysis/ https://doi.org/10.2469/faj.v43.n3.64 https://doi.org/10.1016/s0922-1425(01)00081-0 https://doi.org/10.1016/s0922-1425(01)00081-0 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 114 notes note 1. tangible asset is defined as a total fixed asset. (source: bloomberg terminal) note 2. due to the paucity of space, the result is not mentioned here. the result of the stationary test is available on request. appendix a. distribution of sample across sectors. sectors acquirer industry sector target industry sector industrial 30 23 basic materials 28 29 consumer, cyclical 24 27 consumer, non-cyclical 17 21 technology 9 7 energy 4 2 utilities 4 4 communications 2 6 diversified 2 1 source: bloomberg terminal appendix b. definition of the variables s.no. variable symbol definition of the variable 1 mode of payment dummy payment_cash (dependent variable) value 1 if cash is the method of payment for the deal and 0 otherwise. 2 mode of payment dummy payment_equity (dependent variable) value 1 if the method of payment is equity and 0 otherwise. 3 relatedness of industry dummy industry_relatedness (dependent variable) value 1 if the acquisition is horizontal and 0 otherwise. 4 free cash flow cf_free_cash_flow it is the cash that a firm may yield after outlining the capital necessary to sustain or extend its assets. 5 earnings before interest, taxes, depreciation, and amortization ebitda (net income + taxes+ depreciation+ interest +amortization) it is used to evaluate and equate profitability among firms since the consequences of accounting and financing resolutions are excluded by it. 6 current market cap cur_mkt_cap the total current market value of all the outstanding shares of the firm. 7 working capital working_capital current assets minus current liabilities 8 short and long term debt short_and_long_term_debt summation of short and long term debt. 9 net debt net_debt indicates the company's overall debt. net of liabilities and debts along with cash and other similar liquid assets. 10 financial leverage fncl_lvrg average assets/average equity 11 degree of financial leverage degree_financial_leverage the affect a given amount of financial leverage has on a firm's earnings. 12 net fixed assets 5 year growth net_fixed_assets_5_year_gro wth the geometric growth rate over five years in net fixed assets. 13 gross fixed asset turnover gross_fix_asset_turn net sales / gross fixed assets. 14 personnel expenses per employee personnel_expn_per_employee personnel expenses/number of employees. 15 r & d expenditure to net sales rd_expend_to_net_sales research and development (r&d) expenditures as a percentage of the net sales. 16 goodwill to assets % goodwill_assets_ goodwill / total assets. copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 115 17 ebitda margin ebitda_to_revenue the ratio of ebitda to revenue. 18 cash flow to net income cash_flow_to_net_inc a firm's total net income that is accessible as cash for investing and financing the current business. 19 operating margin oper_margin operating income (losses) / total revenue * 100 20 total operating expenses as a percentage of sales total_opex_as_a_percentage_ sales measures the total operating expenses (including the cost of goods sold and selling, general, and administrative expenses) as a percent of sales. 21 invent_turn invent_turn the ratio shows the number of times a firm's inventory is sold and gets replaced over a period. 22 net income net_income amount of profit of the firm after settling all of its expenses. 23 net debt to fcff (free cash flow to firm) net_debt_to_ffcf it is a leverage ratio indicating a firm's ability to pay off its debts after deducting the cash outlays necessary to maintain its current operation. 24 risk premium risk_premium an investor requires an average incremental return as compensation for investing in equities rather than as a risk-free instrument. 25 quick ratio quick_ratio cash and near cash+ account receivables + short term investments / current liabilities 26 total assets bs_tot_asset sum of short and long-term assets. 27 operating income or losses is_oper_inc (net sales + other operating income) – (cost of goods sold + other operating expenses) 28 free cash flow yield free_cash_flow_yield return expected per share. 29 return on common equity return_com_eqy measure how much income a corporation earns, in percentage, with the money shareholders invested. 30 asset turnover asset_turnover amount of sales or revenues generated per assets. 31 capitalization ratio capitalization_ratio long-term debt as a percentage of total equity and long-term debt, including preferred equity and minority share. 32 long term investments bs_long_term_investments includes long-term investments. 33 return on capital return_on_cap measures, in percentage, the return generated by an investment for capital contributors. 34 tobin's q ratio tobin_q_ratio the ratio of a firm's market value to the cost of replacement of its assets. 35 normalized net income growth normalized_net_income_grow th year over year growth in normalized net income. 36 market cap to net revenue mkt_cap_to_revenue market value of equity/trailing 12 month net revenue. 37 long term debt bs_lt_borrow all interest-bearing financial obligations which are not due within a year. 38 total debt to total assets tot_debt_to_tot_asset the total amount of debt relative to assets. 39 total debt and preferred equity total_debt_and_preferred_eq uity sum of short term borrowing, long term borrowing, and preferred equity at the end of the period end date. 40 total debt to total equity totaldebttototalequity total debt/total shareholders' equity. 41 pretax margin pretax_margin earnings before tax for a firm as a proportion of overall income or profits. 42 net asset net_assets total assets current liabilities long-term borrowings other long-term liabilities 43 cash and cash equivalents cce_and_sti_detailed cash in vault + deposits in banks + short term investments having a maturity of less than 90 days. 44 revenue sequential growth revenue_sequential_growth period to period sequential growth rate in revenue. source: bloomberg terminal copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 116 appendix c. correlation matrix for model 1 cur_mkt _cap net_inco me net_deb t_to_ffc f risk_premi um opcfroa_h ealy rd_expend _to_net_s ales net_de bt goodwill _assets_ cur_mkt_ca p 1 net_income 0.182 1 net_debt_t o_ffcf -0.053 -0.067 1 risk_premiu m -0.060 -0.078 0.009 1 opcfroa_hea ly 0.016 0.025 -0.009 -0.021 1 rd_expend_ to_net_sale s 0.135 0.024 -0.017 -0.081 -0.024 1 net_debt -0.120 0.034 0.037 0.025 -0.059 -0.098 1 goodwill_as sets_ 0.134 0.051 -0.034 -0.026 0.020 -0.044 0.122 1 source: authors’ estimation appendix d. correlation matrix for model 2 net_ass ets workin g_capit al cf_free _cash_ flow opcfroa _healy invent_ turn cce_and_ sti_detaile d quick_ ratio ebitda cash_flo w_to_n et_inc net_assets 1 working_ca pital 0.264 1 cf_free_cas h_flow 0.004 0.018 1 opcfroa_he aly -0.021 0.017 0.093 1 invent_turn 0.162 0.095 0.011 -0.008 1 cce_and_sti _detailed 0.178 0.164 0.004 -0.025 0.029 1 quick_ratio 0.170 0.139 -0.039 -0.010 0.109 0.149 1 ebitda 0.144 0.080 0.140 0.002 0.088 -0.141 -0.025 1 cash_flow_ to_net_inc 0.154 0.006 -0.020 -0.016 0.005 0.057 0.048 -0.156 1 source: authors’ estimation appendix e. correlation matrix for model 3 cur_mk t_cap invent_ turn total_o pex_as_ a_percen tage_sales free_cash_fl ow_yield return_o n_cap normalized _net_inco me_growth oper_mar gin cur_mkt_cap 1 invent_turn 0.197 1 copyright © cc-by-nc 2020, cribfb | ijfb www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 2; 2020 117 total_opex_as_a_per centage_sales -0.054 -0.023 1 free_cash_flow_yield -0.158 -0.03 -0.134 1 return_on_cap 0.230 0.166 -0.078 -0.0546 1 normalized_net_inco me_growth -0.070 0.097 0.114 -0.005 -0.005 1 oper_margin 0.039 0.013 -0.273 0.144 0.080 -0.054 1 source: authors’ estimation appendix f. correlation matrix for model 4 cur_m kt_cap bs_lt_b orrow free_ca sh_flow _yield net_in come quick_ ratio short_an d_long_ term_de bt total_de bt_and_ preferred _equity rd_exp end_to _net_s ales bs_t ot_as set degree_fi nancial_le verage cur_mkt_ cap 1 bs_lt_bor row -0.19 1 free_cash _flow_yie ld -0.151 0.129 1 net_inco me 0.172 -0.127 -0.091 1 quick_rat io 0.006 -0.026 -0.058 0.074 1 short_and _long_te rm_debt -0.122 0.327 0.130 -0.091 -0.108 1 total_deb t_and_pre ferred_equ ity -0.29 0.787 0.171 -0.19 -0.14 0.205 1 rd_expen d_to_net _sales 0.137 -0.149 -0.034 0.055 0.029 -0.124 -0.15 1 bs_tot_as set 0.162 0.130 -0.073 0.02 0.013 0.162 0.240 -0.028 1 degree_fi nancial_le verage -0.02 0.069 -0.001 -0.04 -0.02 0.060 0.069 0.021 0.05 1.0000 source: authors’ estimation copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an openaccess article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking vol. 9, no. 1; 2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 47 comparative analysis of employees’ perspective on asset-liability management in banks jyoti tanwar senior research scholar department of economics and finance bits-pilani, pilani campus jhunjunu, rajasthan333031, india e-mail: jyotanwar@gmail.com https://orcid.org/0000-0001-6929-9512 arun kumar vaish assistant professor department of economics and finance bitspilani, pilani campus, india e-mail: akvaish@pilani.bits-pilani.ac.in https://orcid.org/0000-0003-4881-2588 nvm rao professor & head of cpu department of economics and finance bits-pilani, pilani campus, india e-mail: nvmrao@pilani.bits-pilani.ac.in https://orcid.org/0000-0001-6329-7663 received: october 21, 2021 accepted: december 20, 2021 online published: january 19, 2022 doi: 10.46281/ijfb.v9i1.1552 url: https://doi.org/10.46281/ijfb.v9i1.1552 abstract asset-liability management is critical for the successful working of banks. the indian financial system is very dynamic and growing rapidly. banks focus on both the assets and liabilities due to liquidity risk, interest rate risk and foreign exchange risk. the implementation and understanding of alm policies, and procedures will provide insight into the approach of banks towards alm. a primary survey is conducted among employees of twelve public and twelve private banks to collect data related to employees' experience, understanding, and knowledge about the alm. the questionnaire used in the study carries yes/no type questions, multiple-choice questions, checklist questions, scaled questions. the data is analyzed using spss. the results suggest that public and private banks' employees have a similar understanding and knowledge of the alm. both types of banks follow identical practices and policies in the implementation of alm with few deviations. the employees of the banks were hesitant to answer complex questions, and therefore questionnaire has to be kept generic and straightforward. this paper studies alm in banks using primary data. all other studies have been conducted using secondary data or literature surveys. these studies did not feature the banks' approach in alm policies, practices, and procedures. keywords: banking, assets-liabilities management, risk management, interest rate risk, liquidity risk. jel classification codes: e58, e43, g33, g32, d81. https://orcid.org/0000-0001-6929-9512 https://orcid.org/0000-0003-4881-2588 https://orcid.org/0000-0001-6329-7663 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 48 introduction most banks in international economies started strategic planning for asset and liabilities management in the 1970s (goodman & langer, 1983). at that time, indian banks were free from interest rate risk as it was regulated and governed by the reserve bank of india (chatterjee & dutta, 2016). when other economies were planning for deregulation and asset-liability management (alm), indian banks were getting nationalization (in 1969). the restructuring phase that started in 1991 brought a paradigm shift in the banking sector. the purpose of the reform was to make the banking system sensitive to the changes happening in the market environment (tanwar et al., 2020). to achieve the purpose, the function of rbi as micromanagement of banks’ operation needs to be switched to macro governance (das & ghosh, 2001). prior to liberalization, banks were required to manage their balance sheets in accordance with regulatory and government directives. following liberalization in 1991, interest rates were deregulated, and banks were granted complete control over their balance sheets. hence, the alm rules became critical for banks to assist them in avoiding major losses by aligning asset and liability mismatches. in february 1999, the reserve bank of india issued the first alm implementation directions, which took effect on april 1, 1999 (singh & tandon, 2012). the alm procedure was carried out by banks in accordance with rbi rules. the successful adoption of alm relied heavily on information technology and information system management. banks had to rethink their tactics to address future difficulties. asset liability management (alm) is a monetary arrangement process in which strategies for maintaining the firm's assets and obligations are planned, implemented, monitored, and scrutinized. it aids in the achievement of organizational financial goals by analyzing risks and restrictions (romanyuk, 2010). alm is also regarded as an essential tool banks use to conduct risk management activities such as market risk, financial risk, interest rate risk, and others (fabozzi & konishi, 1991). it is responsible for performing economic activities such as risk management of liquidity, project planning, trading, growth projection, capital planning, funding, and market risks (adebisi et al., 2020; haddad et al., 2019; riyazahmed & baranwal, 2021). the alm practices are implemented through a three-tier structure:  alm information system,  alm organization (structure and responsibilities) and  alm process (recognizing risks, estimation, administration, and setting of policies) (chaturvedi, 2014; jayanthi & umarani, 2014; joshi & sontakay, 2017; singh, 2013). this paper discusses the alm policies and their implementation in public and private banks in india. the paper presents an extensive literature review of alm and finds gaps that are addressed here. the other sections describe the methodology, results, findings, and lastly, the conclusion. literature review on asset liability management in banking asset and liability management (alm) is a practice used by financial institutions to mitigate financial risks resulting from a mismatch of assets and liabilities. alm strategies employ a combination of risk management and financial planning and are often used by organizations to manage long-term risks that can arise due to changing circumstances. it helps in attaining organizational financial objectives by estimating the risks and constraints. (romanyuk, 2010). alm is also regarded as an essential tool banks use to conduct risk management activities such as market risk, financial risk, interest rate risk, and others (fabozzi & konishi, 1991). efficient management of interest rate risk and liquidity risk are two main activities of banks managed by alm. umarani and jayanthi (2015) analyzed alm in sbi & associate banks. the liquidity position of banks is determined through the maturity profiling method, and the maturity gap was analyzed and compared to measure the liquidity risk in banks. meena and dhar (2014) and vij (2001) studied few banks in india using traditional gap analysis to measure liquidity risk and interest rate risk. mismatch in assets and liabilities exposes the balance sheet to liquidity risk. dash et al. (2011) used maturity gap analysis to determine and compare the liquidity position of public, private, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 49 and foreign sector banks. chattha et al. (2020) used duration gap analysis to comparative analyze alm practices in islamic commercial banks (icbs) and conventional commercial banks (ccbs). the findings report that icbs have 2.41 times more variation than ccbs and are exposed to liquidity risk. antony and manimegalai (2018) studied the impact of alm on profitability using ratios such as the current asset to deposit ratio, credit-deposit ratio, debt-equity ratio, current ratio, and quick ratio. nugroho et al. (2020) studied the effect of alm on the financial performance of banks using the camel approach. chakraborty and mohapatra (2009) studied alm in banks and applied canonical correlation to explore the relationship and strength between assets and liabilities. abou-el-sood and elansary (2017) also determined the interdependencies between asset and liability portfolios in islamic banking using canonical correlation. it was analyzed that decision for a funding source depends on an asset portfolio. islamic banking depends less on equity to finance investment during an economic boom than in financial turmoil. kosmidou et al. (2004) applied the statistical cost accounting method to investigate the correlation between profitability and asset-liability composition. it was found that high-profit banks manage to procure funds at lower cost, which helps manage losses from lower returns on assets. jain et al. (2010) presented a fuzzy programming model for pensioners to control the risk of underfunding. it dealt with unusual uncertainty of return on investment and future liabilities. black et al. (2003) determined the essential factors for instigating alm transformation, i.e., market risk management, amendments in accounting and regulatory rules, and lastly, technological advancements. fiedler et al. (2002) described that due to advancement in software, earnings and value could be supported by a single, integrated, and analytical framework to determine earnings sensitivity and future market valuation across dynamically modeled balance sheets. tanwar et al. (2021, 2020) used a goal programming model to optimize the asset and liabilities of the banks while compiling the various constraints. the 1991 banking system reorganization, together with various worldwide developments, exposes banks to liquidity risk, foreign exchange risk, credit risk, interest rate risk, and other risks, all of which have a direct impact on bank productivity and profitability. there is a need to evaluate interest rate exposure since loosening interest rate controls has exacerbated market volatility. interest rate risk was quantified by charumathi (2008) and singh (2013) using re-pricing gap analysis and duration analysis. seshadri et al. (1999) studied strategic asset-liability management by building a simulation model that can generate dividends, market value, and capital duration for arbitrarily generated interest rate scenarios. asset-liability strategies can be developed, tested, and refined using this method. the alm process has a direct impact on financial institutions' financial performance, thus having an effective alm process that can closely monitor and manage both assets and liabilities is critical. the importance of the alm manifold has grown because of the complexities of our economy and its growing scale. as a result, this topic is being studied (vossen, 2010). hence to effectively guarantee the highest growth, it is critical to investigate the interrelationship between the asset and liability sides of the balance sheet (singh & tandon, 2012). research gap based on our exhaustive literature search, we have not found any study that conducts a primary survey of alm. the breadth of the literature reviewed necessitates a better understanding of the extent to which banks are applying alm strategies and policies. we also want to look into how bank personnel in various bank departments comprehend the alm process. previous research on alm is based on secondary data. research questions  do employees of banks in india understand alm policies and implement those policies as prescribed by the rbi?  is there a difference between public and private banks in understanding and implementing alm strategies, function, and importance? https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 50 research objectives the objectives related to the study are:  to study, understand, and analyze strategies employed by banks to manage their assets and liabilities.  to determine whether public and private banks follow a similar approach towards alm. research methodology rbi lays down alm strategies, policies, and procedures in circular 'asset liability management (alm) system (1999)' and 'guidelines on alm systemamendments (2007)'. these rules establish a standard of practice for banks to follow. the rbi, on the other hand, established a basic framework and procedure. depending on their risk management techniques, banks have the freedom to improve and extend them. hence, a questionnaire is issued to banks' risk departments, alm cells, treasury departments, and balance sheet management departments to learn about alm techniques used by public and private banks. yes/no questions, multiple-choice questions, checklist questions, and scaled questions are all included in the study's questionnaire. in multiple-choice questions, the respondent selects one response from a list of alternatives, but in checklist questions, the respondent has the option of selecting numerous options. answers to scaled questions are rated on a scale, such as the likert scale. pretesting the questionnaire for reliability and validity was done using a pilot survey. pretesting aids in ensuring that the questions are phrased correctly and in plain english. it specifies that the order of the questions is correct. pretesting allows you to make sure the respondent understands the questions and that the directions for filling out the questionnaire are clear. during pretesting, unnecessary and repetitive questions can be removed, and extra required questions can be added to the final questionnaire. a statistical test called cronbach's[alpha] is applied to test internal reliability. most literature argues that the acceptable value of cronbach'salpha is 0.7. a value between 0.6-0.7 is an acceptable level of reliability, and 0.8 or greater is considered a very good level (hulin et al., 2001; ursachi et al., 2015). hinton et al. (2004) mentioned that alpha value from 0.5 to 0.7 shows moderate reliability, whereas 0.5 and below is considered low. cronbach'salpha] value for yes/no questions is 0.634, where inquiries related to the alm, and risk management are covered. the alm significance and alco functions have scores of 0.790 and 0.701, respectively. the questionnaire is internally reliable, according to the literature. sampling techniques judgmental non-probability sampling, also known as the purposive non-probability sampling technique, is used in the current study. only relevant opinions/views are required for the study job; hence this sampling method involves the deliberate selection of candidates. quota sampling is used in this study because samples are divided into private and public sector banking groups, and banks were chosen based on the ease of obtaining replies. banks from both the public and private sectors are chosen as target banks. data collection and sample the primary methods are used for the overall data collection process to examine the alm and risk management strategies and policies followed by private and public banks. the data collecting tool for primary data gathering is a questionnaire-based survey method. surveys of officials from the risk department, the balance sheet management department, and other bank divisions were used to gather primary data. banks from both the public and private sectors are targeted. the questionnaire is delivered to the bank's headquarters, regional offices, and branches. the survey is given to 400 public and private sector bank workers who work in the risk department, balance sheet unit, treasury department, and other departments. the study takes into account all 264 responses. the questionnaire was distributed to 16 public banks before the merger in 2019-2020, and 12 public banks responded. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 51 the questionnaire was also sent to 17 private banks, and responses from 14 banks were received. only 12 private banks were taken in the study as two banks declined to answer most of the questions in the questionnaire. a non-probability purposive sampling technique was employed to collect data of 264 employees for the study. a sample of 264 was adequate considering one item/question to five responses ratio (hair et al., 2014; israel, 1992; ruparel, 2020) for the questionnaires. the public sector banks included in the study are allahabad bank, bank of india, bank of baroda, canara bank, corporation bank, indian bank, indian overseas bank, oriental bank of commerce, punjab national bank, punjab and sind bank, state bank of india, and uco bank. the private sector banks included in this study are the federal bank, hdfc bank, icici bank, indusind bank, axis bank, yes bank, kotak mahindra bank, dcb bank, indusind bank, south indian bank, rbl bank, and idbi bank. the data collected is then analyzed with the help of ibm spss software. data analysis data analysis holds vital importance in the overall interpretation of the collected data. data analysis involves the use of several statistical tools that allows efficient computation of the data. the study is exploratory and descriptive as it attempts to study the strategies and procedures applied by banks for the asset-liability management practice. herein data analysis would mainly be attempted with the help of a statistical tool like the mann-whitney u test, mean, rank, frequency, etc. when two independent sets of dependent variables are ordinal or continuous but not normally distributed, the mann-whitney u test is used to compare them. the mann-whitney u test is a nonparametric test. the test provides an opportunity to make conclusions about data based on assumptions about data distribution. it helps in determining whether there is a difference between the two compared groups or not. the shape of the distribution of data determines the results. the null and two-sided research hypotheses for the nonparametric test are stated as follows: h0: the two populations are equal versus h1: the two populations are not equal. descriptive statistics describe the quantitative characteristics of the data set. it includes frequency analysis. the repetition of an event is referred to as frequency. frequency analysis determines the number of occurrences of an item and calculates the central tendency, dispersion, percentile, etc. results and analysis of the study respondents’ profile the respondents are both male and female bank employees. male respondents are 66.7%, and female respondents are 33.3% of the total sample size, i.e., 264 (as shown in figure 1). most of the respondents are aged 31-40 years (52.7%), followed by 41-50 years (30.7%), 21-30 years and 51-60 years as 8.3% each (figure 2). most respondents have a master’s degree (66.7%) as the highest education. few respondents also have professional qualifications (33.33%), i.e., chartered accountants, caiibs, etc. the respondents are well qualified and experienced in their field of banking. at present, given the educational level, employees are even eligible for a higher position at the age of 31-40 years. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 52 figure 1. gender of the respondents figure 2. age of respondents the data for the study was gathered from a number of top bank executives. assistant general managers, assistant vice presidents, and managers make up the majority of the respondents. employees in roles such as chief manager, branch manager, senior trader, and regional manager are also eligible to participate in the survey. the respondents were chosen from a variety of characteristics to have a better understanding of the policy process from start to finish. the majority of respondents have worked at their present bank for at least five years. respondents' terms range from one year to fifteen years. twelve public sector banks and twelve private sector banks were chosen as respondents. structure and resources a separate risk management function as per rbi guidelines, banks must have separate risk management functions supervised by the board of directors. they meet with other executive-level committees to ensure that the bank has accepted the risk management principle and regulations. the board of directors of each of the banks chosen for the survey (i.e., 100 percent) has its own risk management function. availability of chief risk officer according to the rbi circular, all scheduled commercial banks (except local area bank and regional rural bank) are required to frame a board-approved policy that should state the roles and responsibilities of the chief risk officer (cro). cros’ have professional qualifications or experience in risk management. 100% of the respondents said their bank has a chief risk officer. independent alm function as a mandatory requirement from rbi, all scheduled commercial banks are advised to have independent alm function. alm function of bank keep check on whether alco adhere to the limits set by the board, design the business strategy of the bank (on the assets and liabilities sides) after incorporating the bank's budget and risk management objectives. 100% of the respondents said their bank had a separate asset-liability management function. 67% 33% male female 0 20 40 60 21-30 31-40 41-50 51-60 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 53 reporting of independent asset-liability management table 1. frequency table for reporting of independent asset-liability management response frequency percent cumulative percent balance sheet management unit 11 4.17 4.17 risk department or alm cell in risk department 187 70.83 75 treasury and risk department 11 4.16 79.16 treasury department, treasury operations 55 20.84 100 total 264 100 from table 1, it is evident that all the respondents are engaged in alm-related work. however, as the question is open-ended and responses are captured from their replies, many of the respondents might be handling multiple tasks, and all of them are aware of the alm process. 70.83% of the respondents said their bank’s independent asset-liability management reporting area is the risk management department or alm cell in risk management department. then 20.84% of the respondents said it is the treasury department or treasury operations, where they work on alm-related issues. the rest of the respondents said it was the balance sheet management unit, treasury and risk department that looked after the independent asset-liability management. formal committee for asset-liability management as per rbi guidelines, all commercial banks must form an asset liability management committee comprising senior management. the alco in banks is responsible for balance sheet planning from the risk-return perspective that undertakes interest rate risk management and liquidity risk management. the board of directors decides the role and responsibilities of alco. alco is responsible for the decisions taken by it. alco ensures that it incorporates the risk management practices and parameters set by the board while making decisions. alco works on product pricing of deposits and advances, and maturity profile of assets and liabilities, etc. alco also reviews the work of the alm desk related to the progress and results of the implementation of decisions made in the previous meetings. the committee is headed by either the managing director or chief executive officer. also, the chiefs of other departments such as investment, credit, funds, international banking, economic research, and information technology department are committee members. depending upon the complexity of the bank hierarchy, some banks also have sub-committees to assist alco. all the respondents (i.e., 100 percent of respondents) said they have a formal committee for asset-liability management. statement of principles and objectives concerning asset-liability management a member of the risk management committee, which is made up of members of the bank's board of directors, sets the objectives and principles. other executive committees are informed of these objectives, principles, boundaries, and targets. alco is also one such committee that follows the goals and targets set by the board of directors and incorporates them in planning. the alco recommends the action needed to stay within the bank's internal boundaries based on the risk profiles' analysis, monitoring, and reporting by the alm cell. 100% of the respondents said their banks had statements of principles and objectives concerning asset-liability management. frequency of asset-liability management committee meet when asked about the frequency of the asset-liability management committee meetings, 50% of the respondents said alm committee members meet every quarter for an asset-liability management meeting, whereas 33.3% of the banks have monthly meetings. further, only 16.7% of respondents https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 54 ticked others which shows that these banks comply with the minimum requirements of 4 meetings in a year (see figure 3). however, such banks also conduct meetings as and when required to discuss important matters. figure 3. alco meeting it should also be emphasized that all banks meet regularly to discuss the monitoring, progress, and execution of alco decisions. indicate the measure that the alm financial objectives are based on table 2. measurement of alm financial objectives responses percent of cases frequency percent financial objectives are based on economic value 209 51.4% 79.2% accounting earnings 187 45.9% 70.8% other 11 2.7% 4.2% total 407 100.0% 154.2% the profit produced by the bank is subtracted from the cost of financing the company's capital. it is a widely used management technique for assessing a bank's performance. economic value is built on ideas including maximizing the return on existing assets, investing in a portfolio with a return greater than the cost of capital, and freeing up cash flows. economic value is defined in banks as free cash flow and its present value. deducting the mark-to-market value of liabilities from the assets yields economic value. a risk premium is included in the funding cost. respondents were given the option of selecting multiple options. according to the survey, table 2 shows that 79.2 percent of respondents indicated their bank used economic value to measure financial asset-liability management objectives. accounting profit is net income after all explicit expenditures have been deducted. accounting earnings were used as a metric of financial objectives in asset-liability management by 70.8 percent of respondents. risk limit, ratio, and regulatory criteria are also taken into account when measuring alm financial objectives, according to 4.2 percent of respondents. 50% 33% 17% alco meetings quarterly monthly other* https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 55 level at which alm is performed table 3. frequency table for level at which alm is performed responses percent of cases frequency percent indicate level at which alm is performed for each financial product/asset segment separately 187 60.7% 70.8% at the divisional level 33 10.7% 12.5% at the total organization company /business unit level 88 28.6% 33.3% total 308 100.0% 116.6% we need to understand the organizational structure of private and public sector banks before we can analyze the responses in table 3. a vertical system governs the operation of private sector banks. each vertical system has a product, or a function associated with it. capital market or wholesale banking operations, for example, are examples of verticals. public sector banks, on the other hand, follow a pyramid form (see figure 4). figure 4. structure of public sector banks alco is the apex committee, and product-wise (whether asset or liability) targets at the ho level are selected based on alco, treasury, and finances department recommendations, and then disaggregated using a top-down or bottom-up strategy. within limits, targets are disaggregated down to the branch office level. when the ho establishes boundaries, criteria, and aims, the other units are ordered to meet those goals. each controlling level takes care of deviations. the branch office/regional office/zonal office, on the other hand, plays a minor role in determining alm. table 3 shows a similar result, with 70.8 percent of respondents stating that alm is carried out independently for each product/asset. only 10.7% of respondents indicate that alm is performed at the divisional level, while 28.6% claim that it is performed at the organizational/business unit level. significance of asset-liability management in the banking system statistics acquired regarding the significance of asset-liability management in the banking system reveals, 75% of the respondents felt that all the reasons given in the questionnaire are important reasons for having alm in banking and rbi rigorously monitor it. these reasons are:  to minimize the volatility in interest income and economic value.  the reason for the growing importance of alm is the rapid innovation taking place in the financial products of the bank. h o zonal offic e regional office branches https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 56  it provides a framework for banks to tackle the market risks that may arise due to rate fluctuations and excessive credit risk.  recognizes the vision of the management. in contrast, 16.7% of respondents believed that the most important purpose for asset-liability management in the banking system is to reduce interest revenue and economic value volatility. additionally, 8.3% of respondents stated that it provides a framework for banks to address market concerns such as rate fluctuations and excessive credit risk (see figure 5). figure 5. significance of alm in banking department responsible for the asset-liability management all other bank departments, such as the credit department, loan department, finances department, and so on, are linked to alm. alco is a high-level executive body that reports to the risk management department. 66.7 percent of respondents indicated their bank's risk department is in charge of assetliability management. furthermore, 33.3 percent of respondents claimed that alm in their institutions is handled by the treasury department, which deals with market risk (see figure 6). figure 6. department responsible for the asset liability management key driver for change in strategic asset allocation asset allocation depends on goal factors, risk tolerance, age-based asset allocation, etc. according to the reasons described above, the most important motivator for change in strategic asset allocation is matching liabilities with assets, according to 66.7 percent of respondents. while 29.2 percent of those surveyed stated that the shift in strategic asset allocation was made to reduce risk. furthermore, 4.2 percent of respondents reported that a move in asset allocation was caused by an increase in return. 0 10 20 30 40 50 60 70 80 to minimize the volatility in interest income and economic value it provides a framework for banks to tackle the risks. all of the above treasu ry 33%risk 67% https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 57 other drivers to be considered while changing asset allocation table 4. frequency table showing other drivers for change in asset allocation drivers for change in asset allocation responses percent of cases frequency percent lowering risk 176 28.1% 66.7% increasing return 220 35.1% 83.3% matching liabilities 99 15.7% 37.5% changes in perception of the market 33 5.3% 12.5% changes caused by variations in market values 44 7.0% 16.7% availability of new asset classes 55 8.8% 20.8% total 627 100.0% 237.5% respondents were given the option of selecting multiple options if they so desired. table 4 shows that 83.3% of the respondents considered increasing returns as other drivers for changing asset allocation. 66.7% of the respondents said it was for lowering the rate of risk. furthermore, 37.5 percent of respondents stated that it was for the purpose of matching the liabilities. following that, 20.8 percent of respondents stated that a change in asset allocation is prompted to access new asset classes. on the other hand, 16.7% of respondents stated it was because of changes in market valuations, while 12.5 percent said it was because of changes in market perception. the basic motive for change in asset allocation strategy in the bank 91.7% of the respondents believed that the motive for strategic asset allocation was an asset-liability matching study. even though 45.8% of respondents disagreed, the decision was made based on the board's knowledge and research. however, 12.5% and 8.3% of respondents said the shift in asset allocation strategy was attributable to corporate influence or actuarial value for employee benefits, respectively. figure 7. the basic motive for change in asset allocation strategy in the bank asset-liability management functions the bank must comply with all the statements made in the questionnaire about alco functions. alco's functions are decided by the board of directors. all functions are determined in accordance with rbi directives. even though all of alco's functions are essential and useful for balance sheet planning, respondents were asked about their opinions on the importance of alco services (see table 5). 0% 10% 20% 30% 40% 50% 60% 70% actuarial valuation to be done for employee benefits asset liability matching study it was the decision based on the board’s knowledge and research the change in asset allocation strategy was due to corporate influence https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 58 table 5. significance of asset liability management statements related to the asset liability management responses count percentage % 1. asset liability management comprises of managing effectively both the assets and liabilities sides of the bank balance sheet neutral 46 17.4% agree 127 48.1% strongly agree 91 34.5% 2. asset liability management comprises of managing liquidity risk and market risks in an effective manner neutral 57 21.6% agree 112 42.4% strongly agree 95 36.0% 3. asset liability management consists of managing maturity gaps and mismatches neutral 57 21.6% agree 113 42.8% strongly agree 94 35.6% 4. asset liability management involves managing structural, static, and dynamic gap neutral 46 17.4% agree 115 43.6% strongly agree 103 39.0% 5. management of overall liquidity of the bank neutral 29 11.0% agree 87 33.0% strongly agree 148 56.1% 6. facilitates, coordinates, communicates and control balance sheet risk planning neutral 44 16.7% agree 109 41.3% strongly agree 111 42.0% 7. ensures bank’s risk lies within parameters set by the board neutral 50 18.9% agree 118 44.7% strongly agree 96 36.4% 8. undertakes regular maturity analysis of assets and liabilities to identify liquidity gaps neutral 42 15.9% agree 101 38.3% strongly agree 121 45.8% respondents' opinions about their practice, expertise, and experience are based on their responses. 34.5 percent of the total respondents strongly agreed that asset-liability management entails properly managing both the assets and liabilities sides of a bank's balance sheet, while 48.1 percent simply agreed (table 5). it was already mentioned in the literature study before. when asked whether asset-liability management comprises managing liquidity risk and market risks effectively, 36% of the respondents strongly agreed to it, whereas 42.4% only agreed to it. 35.6% of the respondents strongly agreed that asset-liability management consists of managing maturity gaps and mismatches, whereas 42.8% agreed (table 5) alm is used to manage the risks that are faced by the banks in the form of a mismatch of the asset and liabilities. in addition, 39% of respondents strongly agreed that asset-liability management entails addressing structural, static, and dynamic gaps. the remaining 43.6 percent and 17.4 percent either agreed or were unsure. when asked if alm oversees the bank's overall liquidity, 56.1 percent said yes, while 33 percent said no. asset-liability management facilitates, coordinates, communicates, and manages balance sheet planning, according to 42 percent of respondents, while 41.3 percent agreed. 16.7% of respondents were undecided, meaning they didn't agree or disagree (table 5). according to 36.4 percent of respondents, asset-liability management guarantees that the bank's risk is within the board's guidelines, and 44.7 percent of respondents agree to it. the remaining 18.9% of respondents, on the other hand, are split between agreeing and disagreeing. furthermore, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 59 45.8% of respondents strongly agreed that alm conducts regular asset and liability maturity analyses to identify liquidity gaps, whilst 38.3% just agreed (table 5). to obtain ranks for the significance of alm that primarily define alm, the sum and mean are determined. alm is defined as the management of the bank's overall liquidity, according to the significance that is rated first. alm also conducts frequent maturity analyses of assets and liabilities to identify liquidity gaps, according to respondents. table 6. mann whitney test resultssignificance of alm test statisticsa 1 2 3 4 5 6 7 8 mannwhitney u 7939.5 8533.5 8688.0 8577.0 8216.0 8504.0 8200.0 7117.5 wilcoxon w 16717.5 17311.5 17466 17355 16994 17282 16978 15895. 5 z -1.357 -.309 -.042 -.236 -.902 -.364 -.892 -2.798 asymp. sig. (2tailed) .175 .757 .967 .814 .367 .716 .372 .005 a.grouping variable: bank h0: there is no difference between public banks and private banks regarding the understanding and implementation of alm. h1: there is a difference between public banks and private banks regarding the understanding and implementation of alm. in table 6, the p-value is less than 0.05, showing that public and private banks have a similar understanding and implementation of alm and use the same alm approach. the p-value for the last statement on alm, however, is less than 0.05. hence, it can be concluded that public banks and private banks hold contrary opinions on whether alm should conduct regular maturity analyses of assets and liabilities to identify liquidity gaps. according to a private sector bank, asset-liability management is functional beyond maturity analysis. it is not limited to maturity analysis only. findings of the study the findings of the research on alm practice in banks in india are:  both public and private banks adhere to all of the rbi's mandatory standards. all of the study's banks have well-documented alm policies, separate risk management functions, autonomous alm functions, a separate alm goal, and a formal alm committee to monitor, manage, and control risk. to manage risk, the banks have hired a chief risk officer.  with alm-related issues, bank personnel report to the alm cell, risk management department, treasury department, market risk department, or balance sheet management unit. all banks' alm committees meet at least once a quarter to address alm policy, investment policy, derivatives policy, and other topics. the market risk management group, on https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 60 the other hand, holds regular monthly meetings to discuss any changes to policies, methods, or techniques.  alm's financial objectives are measured by economic value, as they are for most banks. according to bis ii, banks must have interest rate measuring systems in place to analyze the effects of rate changes on economic values and earnings.  most banks do alm individually for each product/asset division. the importance of alm is to reduce interest income and economic value volatility. alm is required due to rapid innovation in the bank's financial offerings. alm sets the groundwork for banks to handle market risks such as interest rate volatility and excessive credit risk. it also acknowledges the management's goals.  to meet liabilities and increase profits, most banks change the strategic allocation of an asset.  the primary motivation for the bank's asset allocation strategy to alter is the asset-liability matching concept.  in most banks, interest rate, liquidity, market, and foreign exchange risks are all considered part of alm. there is no significant difference between employees of private and public banks concerning the fundamental understanding of alm and its functions. conclusion when a primary survey was conducted, it was found that both public and private banks adhere to the rbi's rules. regardless of their type or nature, every bank strives to optimize return while also focusing on their risk appetite. in terms of alm, both private and public banks have formed a formal alco committee to examine asset and liability mismatches, rate-sensitive assets and liabilities, and other risks that could affect the bank's performance. the alco is regarded as the decision-making unit responsible for balance sheet planning from the risk-return perspectives. it also includes articulating and decision-making related to future business strategies based on current interest rates movement. the decisions regarding the funding policy are based on interest rate movement. the size of alco depends on each financial institution's size, organizational complexity, and business mix. all the executives that belong to the top levels of management are included in the committee. it has a ceo, chiefs of investment fund managers, treasury (forex and domestic) head, officials of international banking and economic research, and managers from the funds management section that form an integral part of alco. it is advisable to include senior officials of the information technology division in the composition of alco so that guidance provided by them will support in developing adequate information systems and computerization. support groups and sub-committees are also formed depending on the organizational size and need. all banks have to decide the frequency for holding their alco meetings. management of the bank holds formal and timely meetings to discuss any alm issues. banks hold at least four formal meetings every year, with additional meetings held as needed. banks were discovered to have a proper communication channel, standard procedure, and well documented alm objectives. liquidity risk, market risk, foreign exchange risk, credit risk, interest rate risk, legal risk, and so on are all managed by formal policies and departments of banks. interest rate risk and liquidity risk, on the other hand, are two types of risk that are part of alm in any bank under investigation. it demonstrates that banks' alm cells are primarily concerned about the interest rate and liquidity risk. the mitigation of all stated risks are crucial for banks and undertaken by alm committee while framing policies yet most risks are handled through specific department. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 61 author contributions conceptualization: jyoti tanwar, arun kumar vaish data curation: jyoti tanwar formal analysis: jyoti tanwar funding acquisition: jyoti tanwar investigation: jyoti tanwar methodology: jyoti tanwar project administration: jyoti tanwar resources: jyoti tanwar, arun kumar vaish software: jyoti tanwar supervision: a k vaish, n v murlidhar rao validation: jyoti tanwar, arun kumar vaish, n v murlidhar rao visualization: jyoti tanwar writing – original draft: jyoti tanwar writing – review & editing: jyoti tanwar, arun kumar vaish, n v murlidhar rao 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 antony, k. p. p., & manimegalai, j. a. 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(2001). asset liability management in banks and financial institutions: a case study of https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 64 idbi. journal of management research, 1(1), 111–120. retrieved from http://www.businessworld.in/article/asset-liability-management-in-financial-institutions/0411-2018-163493/ vossen, b. van der. (2010). bank liquidity management. busienss/business administration. 39. https://doi.org/10.1007/978-0-230-37048-7_8 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). http://creativecommons.org/licenses/by/4.0/) indian journal of finance and banking vol. 4, no. 3; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 8 an empirical review on the graduate attributes and readiness for employability among the engineering graduates in the higher education institutions (heis) masoud rashid al hinai phd research fellow faculty of business and accountancy university of selangor 40000 shah alam, selangor darul ehsan, malaysia e-mail: alhinai6602@gmail.com dr. abul bashar bhuiyan associate professor faculty of business and accountancy university of selangor 40000 shah alam, selangor darul ehsan, malaysia e-mail: bashariuk@gmail.com dr. nor azilah husin associate professor & deputy dean faculty of business and accountancy university of selangor 40000 shah alam, selangor darul ehsan, malaysia e-mail: nor_azilah@unisel.edu.my abstract the graduates’ readiness for employability has become a major issue for heis in the world due to growing concern from governments and industries on the quality of the graduates. as thus, this paper intends to determine the most required skills for engineering graduate’s readiness for employability. therefore, the main objective of the current study is to determine the skills required for graduates’ readiness for employability for engineering graduates. specifically, this study intends to review the most current literature to specify the most required skills for the readiness of engineering graduates for employability in the higher education institutes (heis) in the world. the study reviews the current literature on graduates’ readiness for employability especially for engineering graduates as the main source of information. the study is designed to analyze and determine the engineering graduates’ readiness for employability required skills. the literature utilized for this study covers the latest literature (from 2014 to 2019) extracted from google scholar, proquest, and scopus. the three main keywords used were ‘higher education’, ‘employability skills ‘or ‘readiness for employability skills, and ‘skills gap in the world. the study determines the engineering graduates’ readiness for employability required mailto:alhinai6602@gmail.com mailto:bashariuk@gmail.com mailto:nor_azilah@unisel.edu.my https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 9 skills for the heis in the world. it analyses the most influential required skills for the graduate readiness for employability that will be considered as an empirical study on the graduates of the engineering colleges in the world. the study conceptualizes graduate readiness for employability requirements from the latest literature and papers. the results of the study will fill the gap in understanding the main required engineering graduates’ readiness for employability skills in the world. this study is intended to determine the most required graduates’ readiness for employability skills for engineering in the heis in the world. besides, it will be used to advise a policy guideline for heis and researchers for the understanding of graduates’ readiness for employability skills requirements in the heis in the world. keywords: employability, graduate, higher education, readiness, engineering skills. introduction the higher education (he) has received close attention from his majesty sultan qaboos in the earlier stage of the oman renaissance. higher education (he) has been considered as a major factor in improving the social development and the economic growth of the sultanate. the omani students were sent abroad for their he until 1986 when the sultan qaboos university (squ) was established. the first academic year of 1986/1987, squ accepted 1,127 students distributed based on gender as 678 males and 449 females. two years later, 1989/1990, total of enrolling students were 1,550 (al-marjan, 2004).the he system has expanded dramatically to include 63 higher education institutions both public and private that offer different varieties of higher educational programs. statistically, the number of higher educational students has been steady with 80,000 students since 2015 (ncsi, 2015).to improve the quality of the he, the ministry of higher education (mhe) motivates this section to have academic internship and cooperation with local and international widely recognized public and private heis. as a result, he has established affiliation agreements and partnerships with 18 highly ranked british heis (taha, 2011). the he system in oman has an essential objective aiming to enhance the skills and qualities of the graduates required by the labor market, however, this objective has yet to be met (forstenlechner & rutledge, 2010). also, other studies concluded that the skills gap of the graduates is due to the shortfall of heis to provide adequate programs that link their curricula and the requirements of the industries (al-sulayti, 2002; nour, 2002). others had recommended that the heis need to embed the required skills into their programs curricula and create better connections and cooperation with the industries (almunajjed, sabbagh, & insight, 2011).due to the skills gap of omani graduates, the number of unemployed graduates has reached 75,000 in 2016 (oman daily, 2016). to improve the employment of omani graduates, the government of oman has created important policies to enhance national employment, however, workplaces, private firms, and oil and gas industries have raised continuous concern about the quality of the he structures. those employers confirmed that the he system graduates lack many important graduate readiness of employability skills (matherly & hodgson, 2014). therefore, this paper aims to conduct an extensive secondary data analysis on recent literature and related papers from years of 2015 until the present to determine the most required graduates’ readiness for employability skills required to be used as a guidance for heis in oman to align their programs to produce ready for employment graduates. background of the study https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 10 the omani heis graduates, as many private work providers claimed, lack most of the required employability skills (coenjaerts, ernst, fortuny, rei, & pilgrim, 2009; swailes, al said, & al fahdi, 2012). the skills gap is harshly affecting the fresh graduate’s employability and achievement in their workplaces (al-lamki, 2006; swailes et al., 2012). besides, graduates having adequate generic soft skills are eminently hired by industries and many employers consider highly the graduates who attained both soft and hard skills (al-azri, 2016). many types of research conducted on citizens of oman reveal that unemployment figures for nationals under the age of 30 are high and the private industries are reluctant to adhere to the official employment policies, fundamentally, it is because of the skills gap (barnett, malcolm, & toledo, 2015; belwal, priyadarshi, & al fazari, 2017; forstenlechner & rutledge, 2010; silatech & bank, 2010).therefore, the main principle connection between he and the private sector is understood through the magnitude and level of graduates’ readiness for employability skills that the heis inject into the graduates which match the employer’s needs (al-harthi, 2011; allen & de weert, 2007). this principle connection is considered as an initial factor for graduate readiness for employability which connects graduate attributes and graduates’ employability skills and competencies. concept of graduate readiness for employability and graduate attributes the definition of graduate readiness for employability and its concept affect the individuals and their communities in general. employability or graduate readiness for employability has been the focus of many types of research. some of the newly conducted studies reveal that the concept of employability still has major considerations by researchers, academia, and the industries (finch, hamilton, baldwin, & zehner, 2013; smith, ferns, & russell, 2014; sumanasiri, yajid, & khatibi, 2015). since the last two decades, there have been high considerations to link higher education graduates and their employment outcomes. this link was related to the graduate attributes which means the generic attributes gained by the graduates. however, ‘employability’ or ‘graduate readiness for employability’ is recently the more widely used word by governments, higher education institutions, and across industries. though, its exact specific description has not yet been finalized (brown & scase, 2005; hillage & pollard, 1998; yorke, 2006). the definition of graduate employability or graduate readiness for employability can be understood to indicate the readiness of heis graduates to be employed. it signifies the graduates’ possession of the required employable skills, knowledge, graduate attributes, attitudes, and workplace tasks requirements to assess them to achieve the workplace objectives (mason, williams, & cranmer, 2009). it indicates that graduates have to know the careers’ requirements in their future vacation path. a new description of graduates’ employability which combines the weight of generic soft skills and graduate attributes reveals the usefulness of industrial and work skills attainment (jackson, 2016).therefore, graduate readiness for employability refers to the capability of the graduate’s competence in terms of gaining the most general and specific employability skills (stiwne & alves, 2010). therefore, this definition of graduate readiness for employability marks the high value of the graduates’ attributes factors, and the attainment of technical industrial work skills and knowledge over theoretical excellence. methodology of the study https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 11 the methodology of this paper is done by conducting extensive secondary data analysis. the related literature and papers from years of 2014 until the present are collected and then summarized to determine the graduates’ readiness for employability skills required by today’s employers and industries in general. the required graduates’ readiness for employability skills was determined by implementing a meta-analysis technique of the literature findings. empirical review of literature readiness for employability an important study conducted by lane (2017), intended to analyse the systemic recommendations of important course of action of higher instruction level learning results and supervisor or professional entities-based competency frameworks. in this case study, intellectual abilities (information and understanding), practical abilities, communication abilities, personal and professional skills were evaluated and concluded that there are different ways in which an academic subject can relate to proficient work and contended that the valuable arrangement of such frameworks can best be accomplished through steady and continuous discussions between the performing artists so as to resolve any pointless contrasts but to empower essential differences to meet the numerous complexities of the actual world (lane, 2017). another interesting study about the “the myth of job readiness” focusing in written communication, employability, and the ‘skills gap’ in higher education, job readiness was analyzed by emphasizing in written communication skills and the writing capacities of students in perspectives including; the nature of written communication in specific working environment settings, issues concerning scholastic and proficient written communication, strategies to bargain with the writing issues of students, ways to better develop graduates for communications within the proficient work environment (lane, 2017). in a study conducted by monteiro (2016), engineering graduates’ perception of competencies and preparation to the labor market transition was analyzed. the aim of this study was to investigate how building graduates from a portuguese college assess the competencies obtained by the end of their master courses, to investigate how these engineering graduates assess their readiness for work move, and at last, to investigate in case there's any affiliation between higher positive recognition competencies, and the planning for work transition. for that reason, a sample of 332 portuguese senior students taking an engineering masters’ degree filled surveys. the founded outcomes pointed that practical competencies, in conjunction with communication, methodological and socio-emotional competencies appear as the foremost vital indicators of labor work transition. these findings improve the significance of the integration of an effective practical component in designing educational modules as a better way to prepare graduates and to enhance their employability. the study suggested the consideration of other external components related with graduates' readiness for employability, such as the work providers conditions in future studies (monteiro et al., 2016). in a study conducted by gaughan, craps, pinxten, saunders, and leandro-cruz (2017), professional roles and employability of future engineers were evaluated using a sample of 108 participants. the objectives of the study were intended to increment engineering students’ understanding of the magnitude of industrial roles in engineering. additionally, to make students reflect on their own students’ character and their passion, qualities, and shortcomings. thirdly, to investigate how to actualize these imaginative instruments within the engineering educational modules by running sample studies within the participating higher education institutes. the focus of the study was to analyze the effects of entrepreneurial skills, innovation skills, communication and networking skills, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 12 teamwork and ways of thinking, and lifelong learning. the study concluded that those soft skills are essential for engineers to attain and to enhance their employability. also, all participants of the prefer consortium concede that engineering colleges should allow a first incentive to students’ developing self-awareness, and secondly provide to students’ strengthening potential for individual and proficient development (gaughan, craps, pinxten, saunders, & leandro-cruz, 2017). in a study on the influence of domicile of engineering colleges and competency profile of industrial aspirants with the aims to enlighten the gap between the expected competencies by the industries and to help the engineering colleges to understand and strengthen the competencies of the industrial aspirants. this study had number of objectives to be achieved which are: to know the competency profile of the respondents with regard to domicile of engineering colleges, to analyse the significant relationship, differences among the selected variables with competency profile of the respondents and finally to suggest suitable measures to re-build effective competencies among the respondents. for this study and in order to close the gap by (development of competencies), domicile of engineering colleges viz. rural, urban and major city and understand the engineering colleges influence technical competencies and practical and behavioural skills of industrial aspirants were the main factors. the study was conducted with a sample size of 149 respondents using the spss (statistical package for social science). the study recommended that special module on development of competencies can be included in the curriculum, soft skills can be taken as one of the mode to develop behavioural competencies, technical sessions require more duration and demo of certain mechanisms can be done, for easy understanding, engineering colleges may enter into a memorandum of understanding with nearby industry to strengthen the hands on technical competencies and final, industrial experts may be called for special lectures at engineering colleges (manoharan & arockiam, 2017). in a research carried out by ramanakumar, ramanan, and kumar (2016), adoption of quality management approach to achieve excellence in employability of engineering graduates of india was analysed to use the effective six sigma quality management approach embraced by the industry in tending to their process defects, by considering higher educational institutes comparable to process workplace. this research analysed gap in application knowledge of theory to practice, impacts and employability by evaluating the effects of soft skill gap, analytical and problem-solving skill gap, lack of quality knowledge, lack of domain knowledge and lack of industry interaction. this research was conducted by interviews and surveys with 713 practicing industrial professionals and 200 engineering students from 11 different institutions as respondents utilising the six sigma for developing a conceptual model utilises the tools hypothesis testing, anova, regression, correlation studies and monte carlo. from the research 97% of the employers’ opinion stressed that the knowledge gap of applying theory to practice is a significant issue in employability of mechanical engineering graduates during the explorative study. also, 97.4% of the respondents recognised the applied knowledge gap is the major concern for them in mechanical engineering graduate’s employability. it was recommended that the research can be extended to other branches of engineering domain as there is no domain specific employability research covering the domain knowledge aspects and other factor interactions. also, carrying research on effectiveness of employing practicing industry professionals teach the academic curriculum of theory papers that have a practical significance to percolate industry’s needs. moreover, conducting research on the effectiveness of engaging industrial professionals as experts for lecture classes includes practical importance, practical labs and also as examiners to facilitate building bridges between industry and institution and finally. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 13 finally, making research on soft skills and its impacts on engineering education focus on policy decisions of government like language for medium of instructions (ramanakumar, ramanan & kumar, 2016). in an an analysis study of school-to-work readiness by evans et al. (2017), a number of concerns were raised regarding the readiness of students to enter the workplace. this study had investigated many issues some of which are: the readiness of school-to-work, the business required skills that are needed and necessary for success in the workforce of the 21st century, the current curriculum contents of such skill and what alternative methods can schools explore in order to ensure a successful school-to work transition. this study was conducted by interviews and electronics checklist. the readiness for employment was examined by analyzing a number of variables grouped as new skills, survival skills and soft skills. the finding of this study indicated that graduates need more applied skills such as critical thinking, the ability to collaborate, and communication skills emerged as the most important. also, the need and importance for critical thinking, the ability to collaborate, and the necessity of communication skills for their graduates to be successful in the workplace. the checklist and interviews revealed that currently there is a “gap” between what employers need and what high schools were producing, more important, a fact of measurable results showing the emerging evolution of graduates better prepared prior to entering the workforce. finally, this study endorsed the need to continue to make sure there is rigor and higher order thinking skills embedded in the curriculum. in addition, curriculum needs to be relevant and technology must be integrated to make sure all students were given the opportunities needed to be college and career ready (evans et al., 2017). in a comprehensive report on developing graduate employability through partnerships with industry and professional associations by jollands et al. (2015), there were number of aims examined. firstly, identifying the key issues and challenges that impact graduate employability from the perspective of a wide extend of partners over wide range of disciplines. besides, distinguishing the gap between industry desires and graduate and academic viewpoints of graduate employability. thirdly, building staff capacity to create educational programs and learning affordances that enhance graduate procurement of employability abilities, information and qualities. at last, distinguishing the key challenges for staff in creating educational programs for employability abilities in graduates. in this study, the graduate employability was examined using career edge framework combined with stakeholders’ share a professional character, employability is embedded into outlined educational modules, collaborative instructing staff utilizing student-focused instructional method and programs are outlined for the work of present and future. the study was conducted by a literature review investigating the key topics, pressures and improvements concerning student employability within australia and expanded globally and discussions with 287 partners from a wide extend of disciplines: “engineering, ict, life sciences, media and communications and psychology”. the finding of the study pointed to that an employability system is valuable if it recognizes learning goals for reestablishment of educational programs modules for employability. nevertheless, it must be coherent, precise, comprehensive and versatile. it ought to provide a broad understanding of employability issues and encourage improvement of sequenced educational modules. it recommended for developing a new framework that has regulated categories with scaffolded advancement. this would help staff to distinguish scaffolded learning goals appropriate for diverse academic levels. furthermore, a high-quality educating assets are required to help staff to embrace and adjust great practice to cultivate their graduates’ learning for employability, superior association and simpler access to assets is required and more prove of viable practice is required to guarantee https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 14 practices advanced for selection are without a doubt successful. finally, the report proposed a modern program plan is required with employability impeded consistently into educational modules and evaluation where partners share a professional character (jollands et al., 2015). in a study conducted by marilyn clarke (2018), a new approach to employability was considered by developing a framework that incorporates six key dimensions in which human capital, social capital, individual attributes, individual behaviours, perceived employability, and labour market factors. the study was based on uk and australian data. such study model contributed to our understanding of the individual, institutional and contextual variables that impact employability and career results among graduates. moreover, the model also identified zones of individual obligation (for students and graduates) and zones for potential collaboration between colleges, work providers and industry sections. at last, this model advertised a multidisciplinary point of view in this manner laying the establishment for future investigations and collaborations between higher education specialists, career analysts and researchers from related areas, such as administration and psychology. the paper suggested to be expanded to incorporate labour market factor (clarke, 2018). in a research paper on graduate attributes and employability skills conducted by belwal et al. (2017) with a purpose to investigate the foremost prevalent graduate attributes as they apply to graduates’ employability in oman, the aims of the paper were to survey the key graduate attributes or employability aptitudes from the point of view of business in oman in specific and the gcc nations in general, to know and acknowledge students' recognitions of the foremost common abilities that managers in oman give esteem for admitting the entry level employments, and to analyze and contextualize graduate qualities and employability aptitudes from all-encompassing point of view, including higher educational institutions (heis), employers, and the students. the research conducted by surveys and interviews with omani graduates using the principles of ‘hypothetic-deductive logic’ and inferential analysis using a combination of focus group and survey approach. the findings of the research paper indicated that the domain of higher educational institutes in oman is basically confined to the essential nonspecific abilities in creating the graduate properties. students’ viewpoints on employers’ determination criteria uncover that computing abilities, the capacity to work in groups, proficiency of english language, earlier training, and the graduate’s identity are the five most critical employability skills in oman. the study also concluded that at present, there's small interaction among higher educational institutions (heis), alumni, and industry in oman for enhancing the employability of students. it is recommended that all the partners in oman have to be compelled to come together to characterize employability skills judiciously by extending the domain beyond generic skills and abilities (belwal et al., 2017). in a study conducted by al-mahrooqi and denman (2018), the english language proficiency and communicative competence in oman was studied to evaluate the implications for employability and sustainable development. this study raised a major concern about the tremendous collections of human and financial assets the government commit into supporting english language instruction, nevertheless,, this venture has clearly failed to convey the anticipated outcomes with both secondaryand tertiary-level graduates regularly characterized as being weak in the english and as having communication abilities that are insufficient for the workforce. this paper considers a number of issues related to the ways in which english language proficiency and communicative competence are created in omani schools and colleges, with a focus on the challenges that exist inside the government education system. the suggestions of these challenges for graduate employability and feasible advancement were investigated. the study recommended methods of aligning the gap between https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 15 students’ english language abilities and the requests of the industry in oman (al-mahrooqi & denman, 2018). another earlier study also conducted by al-mahrooqi and denman (2016) addressing an investigating into the significance that hiring omani school and college graduates accept the english-language communication abilities have for their work environments and the challenges they confront when utilizing these abilities in a work environment. the aims of this study were to explore the importance of employed omani school and universities graduates admit of english-language communicative abilities are for the workforce, and the challenges, in case any, do these graduates confront when utilizing english-language communicative abilities upon entering the workforce. the study was conducted involving the organization of a 4-part survey to 321 respondents who had graduated from omani schools and colleges and who were utilized in organizations around the nation. the findings of this study put a great emphasis to the capacity of the education bodies to deliver graduates with the abilities that the private and public segments require. maybe one of the foremost vital of these abilities, as examined, is the capacity to communicate effectively in english – a supposition backed by discoveries detailed here. the study recommended that it is critical for directors and academic staff to concentrate on adjusting instructing more closely with the english language communication needs of the local work providers. it is additionally fundamental that genuine endeavors are made over the entire education system to supersede conventional teacher-centered strategies with student-centered, communication focused approaches (al-mahrooqi & denman, 2016). in a phd thesis conducted by al azri (2016) regarding “academics', students', employers', and graduates' perceptions towards business management and administration undergraduate employability: implications for higher education and industry in oman”, he analyzed the undergraduate employability of omani students undertaking bma program. he examined the roles and responsibilities of different parties to produce graduates ready for employment including; heis, the quality of bma programs and bma workplaces in promoting bma graduates’ readiness for employability; graduates’ anticipations; adequate of technical abilities and quality of learning intelligence presented by bma programs in comparison with those required by work providers; the effectiveness of implementing certain additional-curricular and other related academically suitable activities within heis; and also the success of the intra he-industrial connection in flourishing quality bma graduates’ who are ready for employment. al azri, by using the “human capital theory”, he aimed to examine the effect of he academic bma programs and work placement on graduates’ employability. this study involved collection of data using surveys and interviews from a broad range of respondents including; “academics, students, graduates, and employers” implementing both quantitative and qualitative techniques. his thesis study concluded that collaboration between heis and workplaces was considered as extremely important factor for enhancing bma graduates’ employability. moreover, having continuously live commitment among the public sector, he management, heis, and industry in realizing graduates’ technical required abilities was extremely recommended. in addition, results identified the strong influence of both soft and technical abilities to assist graduates readiness for employability (al-azri, 2016). the effect of graduates’ attributes on the graduates’ readiness for employability graduates’ readiness for employability is the main driver for heis all over the world. to achieve this objective, the heis have added a range of employable readiness required competencies including soft, and generic technical skills-based learning outcomes that are integrated into their https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 16 degree curricula programmes hoping to improve their graduate readiness for employability. moreover, many heis including oman universities and colleges have also added internships and work placements modules aiming to enhance graduate readiness for employability. however, the feedback coming from work providers still have some concern about the readiness for employability of the newly recruited graduates. to understand the lack of the heis graduate’s attainment of employability skills, we will need to consider other critical factors which influence graduate readiness for employability. since the last two decades of the 20th, governments and employer’s groups have put high pressure at heis to provide evidence of the effectiveness of their higher educational programmes in providing ready to work graduates. from academic prospective, there is a concern about the effectiveness of heis used strategies in developing transferable employability skills into their students (holmes, 2013) analysed the ways universities deliver graduate employability required skills and their methods of impeded them into their programme curricula. he also analysed three influencing factors which affects graduate employability. those factors are the human capital factors, the social capital factors and the individual behaviour factors. he proposed an employability frame work consisting of the above factors as main independent variables and contains for the human capitals; skills, competencies and work experience, for social capital; network, social class and university ranking and for the individual behaviour; career self-management and career building skills as shown in figure 1. figure 1. graduate employability – a higher education model (holmes, 2013). others vanhercke, de cuyper, peeters, and de witte (2014), emphasis essentially at selfperception for graduates employment success. they have different definition for employability to be based in the individual’s perception of the possibility of getting and sustaining employment. their perception is depicted by the employability framework illustrated in figure 2. thus, individual perception of employability is connected to what the graduate himself do to attain competencies including his abilities, capacities and skills along with his behavioural attitude towards employment and future career. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 17 figure 2. determinants of individual employability (vanhercke et al., 2014). in his paper, clarke (2018) combined both frameworks; the higher educational literature framework and the determinants of individual employability framework and combined them in one framework. in this new integrated framework, he added another variable to include an employability gap called as the labour market variable which is consisting of both the demand of workers and the supply of available workers in the labour market. this new model of graduate readiness for employability combines what he believed as the influencing factors for graduate employability which consisted of human capital, social capital, and individual behaviours and their attributes towards employability taking into account the labour market contribution which in total influence the graduate readiness for employment as shown in figure 3. figure 3. an integrated model of graduate employability (clarke, 2018). other factors also influence graduate readiness for employability. as chan, fong, luk, and ho (2017), stated that they are a number of factors influence job attainment which are https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 18 considered to be institution-related factors such as course quality and graduate identity. also, finch et al., (2013) in their study of factors affecting undergraduate employability, stressed in many factors some of them are related to human capital factors others are institutional related such as the academic reputation, pre-graduate experience and job specific functional skills. another important factor is the utilisation of active lab environment for delivering technical industrial related skills. hassan and puteh (2017) analysed the importance of active learning in teaching practical competencies to enhance the quality of engineering graduates for their readiness of employability. they stated the importance of online learning, blended learning, collaborative learning, laboratory learning and interactive learning. for our research we can add other specific active but smart variables such as computer programs, computer based training (cbts), virtual learning environment (vle) and simulators. to enhance the importance of the use and the implementation of smart active labs to equip engineering graduates with employability competencies. also, shetty and xu (2018) analysed the strategies of addressing the idea of “design thinking” in the curriculum of engineering programmes of heis . they recommended the utilisation of virtual reality environment technologies to fulfil the requirement of actual needs and visualize close to reality design solutions of new ideas and technologies. also they suggested the use of basic design tools such as essential thinking, creative problem solving and emulation and simulation concepts. the gender and career and moral mindset effect on the graduates on graduate’s readiness for employability so far, many factors have been analysed and identified which are widely believed to have great impacts and influence in the graduate readiness for employability. those factors are human capitals, social capital, individual attributes, institutional and the implementation of smart active labs and environment. however, those factors are the main elements and for each factor there exist a number of antecedents which contribute in total to the design and the examination of the influence of each factor in attaining required skills for graduate readiness for employability. moreover, many researchers believed that other factor such as gender, career mind-set and moral mindset have direct influence in the implementation and attainment of graduate readiness for employability skills at the heis. considering omani working women, in recent decades they have contributed effectively to the workforce activities. as a result, the gender gap in work force participation has reduced. according to mansour (2018), policy makers has made positive contribution to reduce the gender gap, especially in oman and other gcc countries. this wide gender gap has resulted because of the nature of cultural ethics and believes in the region. to reduce the gender gap in oman, in 1997, government of oman gave a proposal to the united nations at the arab meeting for planning event. one of the objectives of this proposal was to promote women’s independence and increase their participation in the workforce (un women watch 1997). this objective intended to ensure gender equality and social justice, which was later enhanced by a royal decree on labour law in 2003(mansour, 2018). similar to oman, suleman (2018) conducted a study about the employability skills of malaysian university students. he concluded that attaining employability skills differ among students depends in the gender of the student. he analysed 12 required employability skills, he found that there was a considerable relationship between attaining required skills and genders. he listed the top 4 skills as organization skills, problem-solving, teamwork, and good time management (suleman, 2018). moreover, one paper stated that there is a significant gender gap in the field of technology, engineering and physics studies in spite of the efforts of heis to https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 19 overcome it in the latest era. its findings recommended the industries to employ variety of workforce including more women. this approach will make a gender balance which is vital to encourage women to enrol themselves in engineering majors and therefore attain the employable skills required by industries for the future (strachan, peixoto, emembolu, & restivo, 2018). in a study conducted by turen (2015), titled as “gender identity in career decisions: masculinity and femininity in stem and non-stem fields”. he analysed whether gender affects females’ career choices in stem and non-stem areas. with a sample of one hundred eighty-two female employees. he found women who have greater masculinity characteristics are more represented in stem career type’s jobs. he concluded that gender may affect female employees’ career choices (turen, 2015). another thesis submitted by strachan, emembolu, peixoto, and restivo (2018), titled as “a quantitative examination of gender bias and language paradigm in the evaluation of source code”. he examined gender bias in stem aiming to explore whether or not the development of software source code built up by male or female engineers has different evaluation. in addition, he also wanted to examine if there is a close relation between the gender of the developer and the programing paradigm. his study conducted based on social cognitive career theory. the reason for using the social cognitive career theory is because is because it “encompasses perspectives of career choice, occupational roles, and gender bias, and their impact on self-efficacy”. he focused on software developers and other he students in the united states. he used an online survey. the findings of the study revealed that there were nil interaction effect, however there were clear effects in the relationship between the gender of code author and its quality, and to code paradigm and its readability. he recommended that there is a requirement to study and search on the complexities of gender related to software engineering. (rangel, 2018). in a recent study conducted by rebecca strachan in 2018 titled as “women in engineering: addressing the gender gap, exploring trust and our unconscious bias”. the aim of this study is to examine ways to understand the gender gap by exploring people conception of trust and unconscious bias. the study focuses on the views of four females during long periods of their career and experiences as females in the engineering industry (strachan, emembolu, peixoto, & restivo, 2018). the study recommended that certain steps should be consider to reduce the gender gap in engineering related disciplines including awareness of bias against females. in addition, providing adequate and welcoming educational workplace that value females engineers. finally, the study insisted that gender gap can be eventually changed over time. for example, even though females are minorities at engineering disciplines, some of them can be raw models as stem ambassadors for other females to enter this discipline. different empirical studies reveals that there is an enormous gender disproportion remains in the field of technology, engineering and other sciences in many regions of the world. in the united states (us), statistics reveals that there is important difference in gender across the engineering (8%) and technology (26%) sectors compared to the health and life sciences (43%) (statistics, 2012). other statistics concerning the situation in higher education is showing a similar picture where females students counts for 58% in biological and biomedical sciences and (18%) in engineering and technology (snyder, de brey, & dillow, 2016). similar cases also stands in different european and other world countries. for instance, in 2016, the female workforce in australia comprised less than 13% as engineers (lewis & mckenzie, 2017). in japan, females makes up only 2% of all engineers (balakrishnan & low, 2016), and in canada, 13.7% (emembolu, peixoto, & restivo). other world countries such as india, females accounts for 32% in engineering and technology https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 20 (g. joshi & bhattacharya, 2018). in the european union, only 32% percentage of females are majoring in high technology manufacturing (lesinskis). in the united kingdom, females accounts only for 18% of engineering, technology and computer science undergraduates in 20152016 (national academies of sciences & medicine, 2016) and less than 10% of professional engineers in 2016 with small rise to 11% in 2017 (peers, 2018). another recent thesis conducted by taliaferro (2018) titled as “influencing gender specific perceptions of the factors affecting women’s career advancement opportunities in the united states”. this thesis intended to study the effect of the sociological, psychological, and physiological factors that influence the career development of female workers in the united states and also analyse the effect of awareness and knowledge influenced gender specific perceptions about the factors affecting women’s workplace opportunities. this study carried out by using both qualitative and quantitative methods. according to the author, this study was conducted because gender inequalities is still extremely in the u.s. workplace in 2018. statistics show that women are paid 21% less than their males counter parts doing the same work and having similar abilities and experience. the researcher concluded “the overall statistical results demonstrate a strong impact on men’s and women’s perceptions and a largely reduced gender perception gap following the #metoo media events”. finally, the researcher recommends that more future research should be conducted regarding awareness, education, and accountability initiatives. such studies would be more adequate to address gender effects and gaps in the workplace (taliaferro, 2018). to explore the gender effect in employability, taliaferro (2018) conducted a study titled as “a study on corporate perceptions on employability skills of engineering graduates in information technology industry based on gender”. the aim of this study was to examine if employability skills based on gender candidates affect the hiring process. therefore, this study aims to analyse any major difference in the employability skills of male and female students that causes lower percentage employment of female engineers. this study found that there were no significant differences regarding skills among males and females graduates which could significantly influence the hiring process in workplaces. as a result, this study concluded that gender employability skills was not the main reason for the lower employment ratio of female engineers in it organisations (taliaferro, 2018b). another aspect many researchers are directing the heis to implement is directing the students for self-employment. such making their graduates ready for employment by starting their own business. this important competency is related mainly to the moral mindset and career mindset of the students. in a study conducted by (brewer, 2018), he emphasised the importance of heis to prepare its students to attain an important employability skill which is making the students to think like entrepreneurs. this career mind set will open the mind of the graduates into a career path as self-employed rather than waiting to be employed by an industry. therefore, career mindset has an important influence in the graduates in their quest for possessing readiness for employability skills. it changes the way graduates see their current abilities and encourage them to expand their skills and ultimately making them experiment more ideas, and exploring better work opportunities. mohd zaidi abd rozan and masoumeh zibarzani (2018) conducted a “study of entrepreneurial mindset through the dual sided role as service seeker and service provider among university students”. the study was concentrated to answer if graduates have a suitable career entrepreneurial mindset to follow entrepreneurship? their study was based on qualitative method and sample population were the undergraduate students of universiti teknologi malaysia (utm). the findings of the study highlighted the career mindset of students. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 21 unfortunately, most students were found to lack future career mindset as entrepreneurs. however, minorities had ideas to start their own businesses (rozan & zibarzani, 2018). results and findings this study covers many aspects of the study literature review of the required and intended elements of the study explored literature gap. it covered conceptual insight of employability and graduates’ readiness for employability, skills required for engineering graduates’ readiness for employability, the importance of proficiency of both written and spoken english language for the workplace, the graduates attributes factors the effect the acquisition of the graduates’ readiness for employability skills, and finally the influencing factors of gender, career and moral mindset of engineering graduates in the attainment of graduates’ readiness for employability. it has examined the conceptual insight of “employability” and graduates’ readiness for employability. “employability” is delineated as the “ability of a graduate to be employed as a result of the skills and attitudes he attained, and the way he promotes himself to potential employers”. while graduates’ readiness for employability is known as the readiness of a graduate student through the attainment of most required skills, career ethics, an individual’s attributes, and behaviors which aid the graduates to conduct tasks of the workplace efficiently. the study also explored the most skills required by work providers. researchers including (coenjaerts et al., 2009; v. joshi & ghosal, 2009; randeree, 2009; swailes et al., 2012) claim that the spread of unemployment among graduates is because of their skills gap. they concluded that the heis are failing to provide the industries with skilled graduates. as a result of this shortfall of the he system to produce highly qualified graduates, the work providers continued to recruit highly skilled workers internationally. “the world economic forum on the global competitiveness (2014-2015)”, has emphasized the fact that the second most obstacle to investment in oman is unskilled graduates. many recent empirical pieces of research have classified the most required graduate readiness for employability skills that are aiming to eliminate the skills gap of he system graduates, as; firstly soft skills consisting of critical thinking and problem-solving skills, communication skills, lifelong learning, and information literacy, team-working skills, professional ethics and morality, entrepreneurship skills, and leadership skills (adnan, daud, alias, & razali, 2017; al-azri, 2016; anastasiu et al., 2017; belwal et al., 2017; craps et al., 2017; evans, davis, & wheeler, 2017; finch, hamilton, baldwin, & zehner, 2013; gupta, singh, & kaushik, 2018; lane, 2017; moore & morton, 2017; neisler, clayton, al-barwani, al kharusi, & al-sulaimani, 2016) the study also agreed proficiency of english is considered as one of the most required employability skills in oman that must be attained by graduates in order to be attracted by the private sector employers. despite the huge public investment towards improving omanis students’ english language skills, graduates are still suffering from their weak proficiency in english and it is considered as an obstacle to their employability (a. al-issa, 2011; a. s. al-issa, 2014; alrawas, 2014). similarly, in an earlier study by (al-lamki, 1998), 72% of student respondents considered the lack of written and oral proficiency of english language skills as a major obstacle that prevents them from getting employment in the private sector. additionally, many other kinds of research specifically indicated that one of the most important graduate’s employability skills for omani graduates is the ability to communicate effectively in english (al-lamki, 1998, 2006; al-mahrooqi, 2012; al-mahrooqi & denman, 2016; allen & de weert, 2007; arkoudis, baik, bexley, & doughney, 2014; manoharan & arockiam, 2017). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 3; 2020 22 there is a practical hard skill related to academic programs and engineering specializations are also considered highly by the private sector employers. according to (anastasiu et al., 2017). the importance of technical skills is also supported by (holmes, sheehan, birks, & smithson, 2018) and (cooper, gallagher, collins, & shahir, 2015). the stress to the importance of technical skills for omani graduates were the core aspects of (belwal et al., 2017) and (al-azri, 2016). the literature reviews also focused on the graduates’ attributes which influence the attainment of graduates’ readiness for employability skills. it was intended to identify such attributes for later provide enough evidence to build the intended study explored literature gap. graduate readiness for employability is the main driver for heis all over the world. to achieve this objective, the heis have added a range of employable readiness required competencies including soft, and generic technical skills-based learning outcomes that are integrated into their degree curricula programs hoping to improve their graduate readiness for employability. moreover, many heis including oman universities and colleges have also added internships and work placements conclusion and recommendations graduate employment is considered an important success factor for higher education institutions. however, the perception of graduates' readiness for employability has a slight sophistication, meaning graduate jobs. graduates' readiness for employability is directly related to the achievement by graduates of the required deployable skills and abilities required by stakeholders, in particular, the private sector, which calls for the acquisition of graduate skills and employable skills to ensure sustainable and productive maintain employment. therefore, coordination between private industries and higher education institutions is essential to determine graduates' readiness for employability and identify the most required skills to produce graduates who add and endorse more values and productivity. this paper, by adapting a rigorous systematic research evaluation and performing a meta-analysis technique, has classified the key willingness required for employability grades identified by researchers. the findings can be used by graduates to increase their readiness for employability. also, heis and other prospective academics and policymakers who use readiness for employability can use to improve academic curricula, promote employability requirements, and appropriate policies to produce graduates for work. therefore, higher education system programs should be designed to provide the required knowledge, skills, and capabilities of the graduates' future employers. higher education institutions should include the most readiness of graduates for employability skills in their curriculum. this is an essential issue to enable students to acquire the required skills that are important to their readiness for employability. from where heis adopt this required readiness for employability skills and also offer internships, recent graduates will be ready for work. references adnan, y. m., daud, m. n., alias, a., & razali, m. n. 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(2006). employability in higher education: what it is what it is not (vol. 1): higher education academy york. 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/) indian journal of finance and banking vol. 4, no. 4; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 66 deposit insurance coverage limit: how much is enough? evidence from india ms. varda sardana assistant professor department of commerce, shri ram college of commerce university of delhi, india e-mail: varda.sardana@gmail.com dr. abha shukla assistant professor department of commerce, faculty of commerce and business university of delhi, india e-mail: abhajshukla@yahoo.co.in abstract deposit insurance is one of the safety nets employed by nations to ensure banking stability and depositor protection. determining the appropriate coverage limit for depositors under a system of explicit deposit insurance is one of the most important policy decisions. this study examines the adequacy of deposit insurance coverage limit, through a case of india, to determine the appropriate level of coverage. the study also investigates the suitability of the recent five-fold increase in the coverage limit of india. time series data from 1993-94 to 2017-18 has been employed for the regression analysis. india’s data has been compared with several countries with similar deposit insurance characteristics, using a t-test of sample means, over the period 2003 to 2017. the results show that the real coverage limit as well as the coverage ratio in india has been declining over the sample period. moreover, india’s position has tumbled vis-à-vis its peers in terms of coverage ratio. the findings suggest that the increase in india’s coverage limit, after almost 27 years, is a much-needed move. the increase is enough to bring back india’s coverage limit to comparable levels; however, this one-time increase is not sufficient in isolation of other policy variables. keywords: coverage limit, deposit insurance, indian banking. jel classification codes: c12, c22, g21, g22. introduction during the budget speech 2020, ms. nirmala sitharaman, the finance minister of india announced an increase in the deposit insurance coverage from rs. 0.1 million to rs. 0.5 million per depositor (sitharaman, 2020). this five-fold increase in deposit insurance coverage has brought cheer amongst the depositors. the increase comes almost 27 years after the coverage limit was last revised to rs. 0.1 million, from rs. 30,000, in the year 1993 (deposit insurance and credit guarantee [dicgc] act 1961, 2006). the punjab and maharashtra co-operative mailto:varda.sardana@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 67 (pmc) bank crisis of september 2019, followed by the deposit withdrawal restrictions on sri guru raghavendra sahakara bank in january 2020, has led to anguish among several depositors. these crises have not only thrown light on the regulatory deficiencies among co-operative banks but also brought forward concerns regarding the sufficiency of deposit safeguards. the 59-year old deposit insurance system (dis) of india, therefore, had to be reexamined for the extent of coverage provided to the depositors. but on what grounds is this increase justified? is a one-time increase in coverage limit enough to solve the depositors’ woes? this study seeks to provide answers to these questions. understanding deposit insurance the banking system in a country is of prime importance for the development of the nation. by mobilizing funds from the surplus to deficit units, and allocating them among productive investments, banks play an active role in the development of businesses, financial intermediation and, the economy (akani & oparaordu, 2018; gololo, 2017). this sector has been rightly called the ‘lifeblood’ of an economy; hence, any country must ensure that the banking system is well protected through the adoption of certain safeguards. deposit insurance is one such safeguard. deposit insurance is a system under which bank depositors are offered full or partial protection of the deposits held by them in their accounts (garcia, 1996). this system aims to ensure banking stability by assuring the depositors about the safety of their deposits. banks, across the globe, face various kinds of issues such as loan defaults, misgovernance, etc. and all of these tend to jeopardize banks’ performance and output (rezina, chowdhury & jahan, 2020). in such scenarios, deposit insurance reduces the incentive of depositors to run on banks witnessing distress, and hence, helps to contain the contagion effect of a bank failure (cecchetti, 2008). apart from banking stability, a system of deposit insurance helps to achieve many other objectives. firstly, a dis enhances public confidence in the banking system, thereby reducing the incentives to participate in bank runs based on rumors (cecchetti, 2008). second, and a major aim that deposit insurance seeks to serve, is the protection of small depositors (demirgüç-kunt & kane, 2002). third, deposit insurance serves the objective of financial inclusion. small depositors or depositors in rural areas may be wary of keeping their hard-earned money in bank accounts. deposit insurance assures such depositors of the safety of deposits and also facilitates banking activities. this ease of banking promotes financial inclusion among such small depositors, including self-help groups (singh, roy & pandiya, 2020). such a system, however, carries with it certain concerns that any general contract of insurance entails. the introduction of an explicit scheme of deposit insurance in a country may lead to a problem of moral hazard, with banks taking excessive risk in the hope of shifting this risk to the deposit insurer (hooks & robinson, 2002; wagster, 2007; ioanniduo & penas, 2010; delong & saunders, 2011). moreover, it may also make the depositors more casual and complacent towards their banks, leading to a decline in bank monitoring (demirgüç-kunt & huizinga, 1999; iaonnidou & penas, 2010). these two major concerns can push the banks towards highly risky behavior and ultimately result in bank failure and instabilitysomething which the deposit insurance system aims to avoid. despite these issues, over 110 jurisdictions in the world have established an explicit system of deposit insurance with varying design features (world bank, 2019). these features are substantially influenced by the regulatory and supervisory environment of a country (demirgüç-kunt & kane, 2002). germany, for example, has a privately funded and managed dis, wherein member banks monitor each other’s activities (beck, 2002). countries like japan, canada, italy, the united states, etc. have more than one deposit insurer operating within the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 68 jurisdiction, to provide coverage to different classes of banks. while the majority of the countries restrict the authority of their deposit insurer to reimbursing the depositors in case of a bank failure, korea, the united states, norway, germany, etc. have provided extensive powers to the insurer to act as an administrator and liquidator to the failing banks (international association of deposit insurers [iadi], 2018). the deposit insurance system of india is the second oldest in the world, with the united states having the oldest and largest deposit insurance (iadi, 2018) (note 1). the insurance facility of deposit insurance and credit guarantee corporation (dicgc), the deposit insurer of india, extends to all commercial banks, as well as all eligible co-operative banks (note 2) in india. as per the dicgc act 1961, all types of deposits are covered except certain types of deposits specifically excluded from the scheme by act. the insurance coverage was limited to a maximum of rs. 0.1 million per depositor (now rs. 0.5 million from february 2020), for principal and interest amount together, held at all branches of a bank in the same right and same capacity. membership to the scheme of deposit insurance is compulsory, and no bank can withdraw from the scheme voluntarily. the deposit insurance fund in india is an ex-ante fund, with premium income and investment income comprising the major sources of revenue for the fund. all insured banks are required to pay a premium of 0.1% p.a. of their total assessable deposits to dicgc. the system follows a pay-box mandate, which means that the insurer’s powers are limited to paying the depositors to the extent of coverage limit as per the provisions of the dicgc act, 1961. the decision of coverage limit the limit of the insurance coverage is probably one of the most challenging decisions for a country establishing an explicit system of deposit insurance. as per lee and kwok (2000), full coverage or a blanket guarantee promotes banking stability and allows some extra time for the banks to revive themselves in the absence of constant pressure from depositors. this may be true to some extent, but one can always argue that full coverage can only reduce but not eliminate the incentives for a run on banks, as the depositors may still be wary of the temporary inability to withdraw their deposits from the ailing banks. a cross-country study by demirgüç-kunt and detragiache (2002) suggests that an explicit system of deposit insurance jeopardizes banking stability, and this negative impact is intensified with the increase in levels of coverage. this is supported by the study undertaken by kim, kim and han (2015) in asean countries, which suggests that higher levels of coverage invite more moral hazard on part of banks, with banks engaging in riskier activities. the more generous the deposit insurance scheme is, the greater is the moral hazard (ngalawa, tchana & veigi, 2016). additionally, demirgüç-kunt and huizinga (2004), through their cross-country study, provide evidence that higher levels of deposit insurance coverage lower market discipline in banks, thereby making them more vulnerable to failures. comparing three different types of deposit insurance regimesno insurance, limited insurance coverage, and full insurance, shy, stenbacka and yankov (2016) found that limited insurance coverage weakens the competition between banks for the deposit market by allowing large depositors to transfer their funds from one bank to another to increase their overall coverage, thereby reducing the deposit rate sensitivity of deposits. also, it increases the cost of the depositors by inducing them to open several accounts to achieve a higher level of coverage (in those countries where there is no restriction on the number of accounts held by a depositor). hence, limiting insurance coverage may have a negative effect, not only on banking stability but https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 69 also on overall social welfare. finally, for countries setting up coverage limit for the first time, or revising the amount of the limited coverage, a rule of thumb may be to set a limit that fully covers a high percentage of depositors or deposit accounts (90-95% of depositors) while leaving a majority portion of the value of deposits uninsured (garcia, 1999). in india, the dicgc act, 1961 empowers the dicgc to change the coverage limit with the prior approval of the central government. since its inception, the dicgc has enhanced the coverage limit five times. in the first instance, the limit of rs. 1,500 per depositor was increased to rs. 5,000 in 1968, after the extension of coverage to co-operative banks. in the light of an increasing number of co-operative banks being converted into ‘eligible’ co-operative banks, the limit was further doubled to rs. 10,000 in 1970. in 1976, with the enactment of the regional rural banks (rrbs) act, rrbs were brought under the purview of deposit insurance and subsequently, the insurance coverage was, once again, doubled to rs. 20,000per depositor. the limit was further increased to rs. 30,000 in 1980, and finally the limit was enhanced to rs. 0.1 million in 1993, considering the loss to the depositors due to the failure of bank of karad, which was involved in the harshad mehta scam of 1992 (dicgc act 1961, 2006).there is no visible pattern in the periodicity of such changes, which suggests that the increments in the coverage limit were either undertaken in response to the extension of coverage to new groups of banks or to pacify the public during bank distress. since 1993, the limit of rs. 0.1 million had been kept intact. in the wake of the recent announcement to enhance the coverage limit to rs. 0.5 million, it is essential to understand if this five-fold increase is justified. objective and hypotheses the objective of this study is to determine the adequacy of the coverage limit of the indian deposit insurance system, by studying the movement of variables of interest over the sample period of 1993-94 to 2017-18. for this, the following hypotheses are framed and tested: h1: there is no significant trend in india’s real coverage limit during the sample period. h2: there is no significant trend in india’s coverage ratio during the sample period. the study also compares the deposit coverage limit and its changes in india, with that of countries having similar deposit insurance characteristics, at three points of time: december 2003, december 2010, and december 2017. for this, the following hypotheses are framed and tested: h3: there is no difference between the change in coverage limit of india and the average change in coverage limit of comparable countries from 2003 to 2010. h4: there is no difference between the change in coverage limit of india and the average change in coverage limit of comparable countries from 2010 to 2017. h5: there is no difference between the coverage ratio of india and the average coverage ratio of comparable countries in 2003. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 70 h6: there is no difference between the coverage ratio of india and the average coverage ratio of comparable countries in 2010. h7: there is no difference between the coverage ratio of india and the average coverage ratio of comparable countries in 2017. by testing these hypotheses, the study seeks to investigate whether the recent five-foldincrease in deposit insurance coverage limit of india is justified or not. method data and sample the study relies on secondary data for analysis. the data for the coverage limit of india for the sample period has been extracted from the amendments to dicgc act, 1961 (deposit insurance and credit guarantee act 1961, 2006). to study this coverage limit, the consumer price index (cpi) for india (base: 2010) has been collected from the world bank open database (https://data.worldbank.org/) for the sample period 1993-94 to 2017-18. the coverage ratio, one of the most important variables of deposit insurance, has been calculated using gdp per capita for india (base: 2004-05) from 1993-94 to 2007-08, based on total gdp at current prices and the population of india, available in the reserve bank of india (rbi) handbook of statistics on the indian economy (reserve bank of india, 2018). from 2008-09 to 2017-18, the value of coverage ratio has been extracted from the annual reports of dicgc. the sample period of study starts from 1993-94 because this year witnessed the last increase in india’s deposit insurance coverage limit, from rs. 30,000 to rs. 1,00,000 per depositor. hence, the year acts as a reference point for studying the coverage limit for subsequent years. as for the countries included in the sample for comparison, the deposit insurance characteristics of each country have been sourced from the deposit insurance survey 2018 conducted by the international association of deposit insurers (note 3). the coverage limit of these countries (in $) has been extracted from two sources: the deposit insurance survey (iadi, 2018) and the database provided by demirgüç-kunt, kane and laeven (2014). for calculation of coverage ratio of these countries, gdp per capita (in $) has been collected from the world bank open database. this data for the sampled countries has been extracted for only three periods of time: december 2003, december 2010, and december 2017. these three periods allow us comparison over a consistent 7-year period from december 2003 to december 2010 and december 2010 to december 2017, and at the same time, these take into account the pre-crisis and post-crisis periods. the countries chosen to be included in the sample have been determined through a ‘comparable characteristics’ driven process. under this process, all the countries that responded to the iadi deposit insurance survey 2018 have been compared to india based on certain characteristics of a deposit insurance system. on the basis of literature review and available databases, we identified 8 characteristics of a deposit insurer that play a big role in shaping the system (see appendix a for details). out of these 8 characteristics, those countries which had atleast 5 characteristics similar to that of india have been included in the sample. the cut-off of 5 characteristics has been taken to ensure similarity in more than 50% of the selected characteristics. for comparing the average change in coverage limit across countries, the number of countries in the sample is 43 for the period december 2003 to december 2010, and the number is https://data.worldbank.org/ https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 71 61 for the period december 2010 to december 2017. the difference in the number of countries in the sample arises because many countries established a system of deposit insurance after the global financial crisis. for comparing the average coverage ratio across countries at three time periods, the number of countries sampled is 47 for december 2003, and 61 for december 2010 as well as december 2017. methodology for analyzing the adequacy of the deposit insurance coverage limit of india, the study uses regression analysis, in a semi-log form. a semi-log regression equation, wherein we take the logarithm of the dependent variable, allows us to study the impact of a unit change in the independent variable on the rate of growth of the dependent variable. for this, two variables are employed, the real value of coverage limit, and the coverage ratio of deposit insurance in india. to study their movement, we use a semi-log regression equation with time trend: log(yt)= α + β.t + ɛt (1) where, log(yt) is the logarithm of the variable of interest at time t, i.e. real coverage limit, and coverage ratio t ranges from 1993-94 to 2017-18 and has been coded as 1,2,3, etc. α is the intercept, which represents the percentage change in the dependent variable at t = 0 β is the slope coefficient, which represents the compound annual growth rate (cagr). the cagr is the average annual rate at which a variable grows from its initial value to its final value, assuming that the returns (if any) each year are invested back into the system, and compounded over the life of the variable. ɛt is the error term the details of the two dependent variables used are as follows: i) the real value of the coverage limit of rs. 1,00,000, introduced in the year 1993-94, for the sample period of 1993-94 to 2017-18. the real value of coverage limit for each year is calculated as: the real coverage limit for year t = cpi for the year 1993-94 * nominal coverage limit for year t cpi for year t this variable brings down the value of the coverage limit in india during the sample period to its real value that is the value after taking into account the impact of inflation. a fall in the value of this variable is indicative of the deterioration in the worth of the benefit that the depositors get from the deposit insurance scheme. a rise in the value, on the other hand, indicates that the benefits offered by the insurance scheme beat the rate of inflation. a constant value indicates that the coverage limit is in line with the movement in inflation rates. this variable assumes relevance because the rate of inflation is an important macro-economic variable, used for determining the purchasing power of consumers. ii) the coverage ratio (cr) of deposit insurance in india for the sample period 1993-94 to 201718. the coverage ratio is calculated as: the coverage ratio for year t = coverage limit for year t gdp per capita for year t https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 72 the coverage ratio is one of the most widely used measures of the adequacy of deposit insurance coverage, accepted and calculated across nations that have established a dis. this variable is relevant because it measures the coverage limit of a country with respect to the per capita gross domestic product (gdp) of that country. changes in the coverage ratio indicate if the coverage limit is keeping in line with the national income of the country. from 1993-94 to 2007-08, the coverage ratio has been calculated using the above method. however, from 2008-09 to 2017-18, the data on coverage ratio has been sourced from the annual reports of dicgc. to compare the coverage limit of india with that of sample countries we use the singlesample t-test. this test enables us to determine if the average value of the variables in sample countries is equal to the value of the variables in india. in other words, this statistical tool helps to determine the situation of india in comparison to other countries with similar deposit insurance design features. the following variables are calculated and analyzed: i) the average change in coverage limit from december 2003 to december 2010, and from december 2010 to december 2017, for the sampled countries. the change in coverage limit is calculated as: change in coverage limit from period t to period h = coverage limit at h – coverage limit at t coverage limit at t change in coverage limit has been used instead of the absolute amount of coverage limit, due to the difference in the currency of countries in the sample. the percentage change in coverage limit removes the unit of currency and hence makes comparison feasible. ii) the average coverage ratio as of december 2003, december 2010, and december 2017 for a sample of countries. the formula for coverage ratio suggests that the ratio is independent of the unit of measurement of currency, and hence, is comparable across countries. the study compares the average change in coverage limit of sampled countries over the years with the change in coverage limit of india and further compares the average coverage ratio of sampled countries at different points in time with the coverage ratio of india using the singlesample t-test. results the international monetary fund (imf) working paper (garcia, 1999) suggests that the coverage limit should be such that it covers a large number of total accounts but a relatively small amount of total deposits in value. this trade-off ensures that the aim of protecting small depositors is fulfilled, without compromising on market discipline (international association of deposit insurers [iadi], 2013). in india, the number of fully protected accounts as a percentage of total insured accounts with all insured banks has been between 90% to 100% since 1970. as of 2017-18, 91.45% of the total eligible accounts were fully protected. this high depositor coverage has been used as a justification for no change in the deposit insurance coverage limit since 1993.the value of deposits covered by insurance, as a percentage of the total insurable deposits, stood at 29.24% as of 2017-18. these two values show that as per the suggestions made by imf, the coverage limit https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 73 of rs. 1,00,000 was apt. however, this limit was introduced in the year 1993-94 and had remained unchanged over the past 27 years. the scope and extent of coverage should be reviewed regularly, and periodic adjustments should be made to take into account inflation and changes in the composition of deposits, as well as the introduction of new deposit instruments (iadi, 2013). over the past 25 years from 1993-94 to 2017-18, inflation has led to deterioration in the real coverage limit, which stood approximately at rs. 20,000 per depositor as of 2017-18. the real coverage limit has a significant downward trend with a cagr of -6.6% p.a. (β=-0.066, p<0.000), indicating that the effective coverage for the deposits in india has fallen sharply (hypothesis 1). indexing the coverage limit to inflation, as is done in the usa and mexico, is one alternative to ensure that the coverage limit adjusts automatically to maintain the real value of coverage. if we index the coverage limit of rs. 0.l million in 1993-94 to the relative inflation in 2017-18, the coverage limit should have been increased to a whopping rs. 0.49 million in 2018.however, the continuous adjustments may be difficult and costly to implement and may lead to confusion among the depositors. a widely accepted measure of the adequacy of the coverage limit is the coverage ratio, defined as the ratio of coverage limit to gdp per capita. in india, the coverage ratio for the year ended 2018 was 0.9, as against the world average of 2 (iadi, 2013). although there is no international benchmark or policy recommendation regarding the coverage ratio, it should be comparable to the global scenario, taking into account the differences in the banking conditions of a particular country. the coverage ratio of india has a significant downward trend with a cagr of -10.31% p.a. (β=-0.103, p<0.000), indicating that the coverage limit has failed to keep up with the increasing per capita gdp (hypothesis 2). this issue can be dealt with by appraisal of the coverage limit at regular intervals to adjust it to the changes taking place in the financial markets. cross-country comparison moving on to the cross-country analysis, the study compares the change in coverage limit of india as well as the coverage ratio in india with a sample of countries having similar deposit insurance features. to ensure consistency in the coverage ratio being used for comparison, we calculate the coverage ratio of india for december 2003, 2010, 2017 from the same database which is used for calculation of coverage ratio of all other countries. the results of the t-tests have been presented in table 1, followed by a discussion on their interpretation. table 1. results of t-tests comparison with results of t-test the average change in coverage limit from december 2003 to december 2010 t2003-10(42) =4.558, p<0.000* the average change in coverage limit from december 2010 to december 2017 t2010-17(60) =3.628, p<0.000* average coverage ratio as at december 2003 t2003(46) =-0.043, p=0.965 average coverage ratio as at december 2010 t2010(60) =3.002, p<0.003* average coverage ratio as at december 2017 t2017(60) =4.973, p<0.000* note. *significant at 1% level of significance https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 74 india did not change (increase or decrease) its coverage limit over the 7 years from december 2003 to 2010, whereas an average change in coverage limit of 213.56% was undertaken by the countries in our sample, which is significantly different from that of india (hypothesis 3). it may be argued that many countries increased their coverage limit in response to the global financial crisis of 2008. therefore, we further compare india’s change in coverage limit from the period after the crisis (i.e. from december 2010) till december 2017. similar results were found for this comparison over these 7 years. while comparable countries increased their limit by 53.8% on an average, india has undertaken no such action, and the difference is significant (hypothesis 4). as far as coverage ratio is concerned, for december 2003, the average coverage ratio of countries in our sample is 3.80, which is not significantly different from india’s coverage ratio of 3.84 (hypothesis 5). on the contrary, for december 2010 and 2017, the average coverage ratio of sampled countries (5.16 and 4.35 respectively) is significantly different from and higher than the coverage ratio of india (1.52 and 0.81 respectively) (hypothesis 6 and 7). the results suggest that while india has made no efforts to improve its coverage ratio, the same is not true for other similar countries. moreover, india’s coverage ratio, which was similar to the average of other countries up till 2003, has taken a sharp dip over the years and stood way below the average coverage ratio of other comparable countries.figures1, 2, and3 indicate the falling position of india’s coverage ratio vis-à-vis its peers over the 14-year period from 2003 to 2017. figure 1. coverage ratio of india and comparable countries in 2003 note.yemen, tajikistan, nepal, montenegro, moldova, malaysia, kyrgyz republic, hong kong sar, ecuador, brunei, barbados, bahrain, and afghanistan established their deposit insurance systems after 2003. they are included in the above graph just to ensure consistency in comparison with the years 2010 and 2017. source: authors’ calculations based on demirgüç-kunt et al. (2014), iadi (2018), and world bank open data 0 5 10 15 20 25 30 p ar ag u ay m ex ic o n ic ar ag u a m ac ed o n ia p er u z im b ab w e h o n d u ra s t u rk ey jo rd an it al y v ie tn am l ao p d r in d ia a lg er ia m o ro cc o k o re a c o lo m b ia a rg en ti n a k en ya l it h u an ia b an g la d es h e l s al v ad o r u n it ed s ta te s ja p an b ah am as b ra zi l c ro at ia s u d an p o rt u g al p h il ip p in es u n it ed k in g d o m h u n g ar y c an ad a ja m ai ca g u at em al a b o sn ia a n d h er ze g o v in a s er b ia r u ss ia n f ed er at io n e st o n ia t ri n id ad a n d t o b ag o f in la n d n ig er ia b el g iu m t an za n ia n et h er la n d s ir el an d s w it ze rl an d l u x em b o u rg y em en t aj ik is ta n n ep al m o n te n eg ro m o n g o li a m o ld o v a m al ay si a k yr g yz r ep u b li c h o n g k o n g s a r e cu ad o r b ru n ei b ar b ad o s b ah ra in a fg h an is ta n c o v er a g e r a ti o countries in sample (comparable countries)  in d ia https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 75 figure 2. coverage ratio of india and comparable countries in 2010 source: authors’ calculations based on demirgüç-kunt et al. (2014), iadi (2018), and world bank open data figure 3. coverage ratio of india and comparable countries in 2017 source: authors’ calculations based on demirgüç-kunt et al. (2014), iadi (2018), and world bank open data as of 2003, the coverage ratio of india was among the top 30% of all comparable countries. after 7 years, that is, in 2010, there was a drastic fall in india’s position, with it becoming part of the bottom 20%, and in another 7 years it worsened off to the bottom 15%. 0 2 4 6 8 10 12 14 16 18 m ex ic o s er b ia l it h u an ia h u n g ar y e st o n ia m al ay si a m ac ed o n ia p ar ag u ay y em en n ic ar ag u a m o n g o li a p o rt u g al e cu ad o r p er u b o sn ia a n d … c ro at ia u n it ed s ta te s p h il ip p in es h o n d u ra s n ep al a fg h an is ta n m o n te n eg ro it al y b ra zi l u n it ed k in g d o m a rg en ti n a m o ro cc o t u rk ey jo rd an b el g iu m f in la n d ir el an d n et h er la n d s ja p an e l s al v ad o r s u d an k yr g yz r ep u b li c n ig er ia l ao p d r b ah am as c an ad a t aj ik is ta n r u ss ia n f ed er at io n k o re a t an za n ia b an g la d es h v ie tn am h o n g k o n g s a r a lg er ia b ah ra in c o lo m b ia k en ya in d ia ja m ai ca s w it ze rl an d l u x em b o u rg b ru n ei g u at em al a b ar b ad o s t ri n id ad a n d … m o ld o v a z im b ab w e c o v er a g e r a ti o countries in sample (comparable countries) 0 2 4 6 8 10 12 14 16 18 jo rd an m ex ic o s er b ia c ro at ia y em en h u n g ar y b ra zi l m o n te n eg ro l it h u an ia m ac ed o n ia p ar ag u ay m al ay si a e st o n ia b o sn ia a n d … p o rt u g al e cu ad o r p er u n ic ar ag u a u n it ed s ta te s a lg er ia h o n d u ra s it al y t ri n id ad a n d t o b ag o p h il ip p in es n ep al u n it ed k in g d o m b el g iu m m o ro cc o c o lo m b ia e l s al v ad o r f in la n d t u rk ey n et h er la n d s t aj ik is ta n a fg h an is ta n ja p an k yr g yz r ep u b li c l ao p d r r u ss ia n f ed er at io n b ah ra in m o n g o li a c an ad a ir el an d a rg en ti n a b ah am as k o re a v ie tn am h o n g k o n g s a r b ru n ei s w it ze rl an d l u x em b o u rg ja m ai ca z im b ab w e n ig er ia in d ia b an g la d es h b ar b ad o s s u d an t an za n ia k en ya g u at em al a m o ld o v a c o v er a g e r a ti o countries in sample (comparable countries)  india  in di a https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 76 discussion is the deposit insurance coverage increase in india justified? the increase in the coverage limit in indian deposit insurance has come almost 27 years after the last revision. during this period, a number of variables, such as the proportion of fully protected accounts, the value of deposits insured, real coverage limit, and coverage ratio have declined substantially. in real terms, the coverage limit had dropped to 20% of its initial value, and the coverage ratio remained less than 1 for several years. while india’s coverage was higher than most of its peers in the 1990s, it had plummeted from the top to the bottom in recent years. considering this, the enhancement in the coverage limit from rs. 0.1 million to rs. 0.5 million per depositor, is a welcome move. one may ask if the increase in coverage by five times is sufficient or not. the appropriate amount of change is, however, still a matter of debate. as per imf, two times per capita income can be taken as a rough rule of thumb for determining the appropriate coverage limit (garcia, 1999). if we were to provide insurance as per imf’s rule of thumb, the coverage limit should have been rs. 0.2 million approximately for the year ended 2018. on the other hand, the report of the committee on customer service in banks (reserve bank of india, 2011) suggested an increase in the coverage limit to rs. 0.5 million to encourage individuals to keep their deposits in banks. on the contrary, the narasimham committee report on the banking sector reforms (reserve bank of india, 1998), as well as the report of the working group on reforms in deposit insurance in india (reserve bank of india, 1999) recommended that there is no need to increase the coverage limit beyond rs. 0.1 million. however, these recommendations were made just 5 to 6 years after the improvement in the coverage limit from rs. 30,000, and that too at a time when the coverage ratio of india’s deposit insurance system was one of the highest amongst other countries. not too many studies have been conducted on the adequacy of coverage limit. however, reports of the reserve bank of india support the finding of our study, which states that the coverage limit should be enhanced. after the increase in coverage, india would, once again, feature among the top 30% of comparable countries in terms of deposit insurance coverage. hence, the five-fold increase in the coverage limit seems justified. however, an increase in coverage limit is not a decision that can be taken in isolation from other policy variables. one needs to calculate the impact of an increase in coverage limit on the sufficiency of the deposit insurance fund. an excessive or undesirable increase in the coverage limit may make the fund unviable in extreme situations, such as a contagious banking panic. since a major portion of the deposit insurance fund comprises premium contributions in many countries, the decision to raise the coverage limit may have a direct impact on the premium charged from banks. currently, india charges the same rate of premium on the deposits of all banks, irrespective of their risk profilesa practice which is called the flat-rate premium system. however, it has to be realized that simply raising the level of insurance coverage, in a system of flat-rate premium structure, may aggravate the problem of moral hazard among banks (shiers, 1994). in such a situation, a switch to a risk-based premium system may become indispensable. the report of the committee on differential premium system for banks in india (reserve bank of india, 2015) provided extensive recommendations for the adoption of a risk-based premium structure suitable to india. experience also suggests that more often than not, countries enhance their deposit insurance in the aftermath of a banking crisis. many countries expanded the scope and limit of their deposit insurance in response to the global financial crisis, including the united states of america (usa), where the insurance limit was increased from $0.1 million to $0.25 million. in https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 77 underdeveloped countries as well, such as nigeria, apart from capital injections, deposit insurance has been expanded following the financial crisis (oyerinde, 2017). in india, the decision to revise the coverage to rs. 0.5 million has been taken in the wake of the pmc bank crisis. however, enhancing the coverage limit as a reaction to a bank failure may turn out to be only partially successful in preventing bank runs, and may lead depositors to believe that the system does not have any credible limits (boyle, stover, tiwana & zhylyevskyy, 2015). the approach, instead, should be to undertake a periodic review of the coverage at specified intervals and adjust it over time to reflect the changes in certain economic variables such as per capita gdp and rates of inflation. as per bank regulation and supervision survey (world bank, 2019), in several countries, including the usa and japan, the coverage limit is linked to inflation. in some countries, such as indonesia, the limit is indexed to gdp. the policymakers also need to make sure that these adjustments are neither very frequent, as it may create confusion and implementation problems, nor too rare, as it may create doubt on the ability of the banking system to withstand a crisis. the one-time, episodic increase in coverage limit is, therefore, not sufficient in isolation. such an increase needs to be accompanied by a careful evaluation of the viability and the strength of the deposit insurance system as a whole. conclusion deposits are one of the key inputs for the banking industry, and mobilization of these deposits is an essential function of banks (nwangolo & ogechi, 2018). since banks hold liquid liabilities in the form of demand deposits which are further used for investment in illiquid assets, they expose themselves to liquidity risk, which may materialize if many depositors together wish to withdraw money from their accounts. this primary function performed by banks makes them vulnerable to bank runs. the responsibility of banks to safeguard their depositors and ensure the stability of the banking system leads to stricter regulations for them (bezawada, 2020) and also entitles them to deposit insurance. the evidence of deposit insurance from india suggests that the country, with the second oldest deposit insurance system in the world, was in dire need of a coverage limit upgrade. a five-fold increase in the country’s deposit insurance coverageis a move that has been accepted with open arms. the results indicate that the coverage limit of india’s deposit insurance had fallen way behind the inflation levels. it was also insufficient as far as the per capita gdp of india is concerned. changes in macroeconomic policy variables, such as inflation and per capita gdp, along with a steep fall in india’s coverage limit as well as coverage ratio vis-à-vis other countries with similar deposit insurance features, warrant this increase. however, this is not an all-in solution. it has to be ensured that such a revision is not reduced to a mere cosmetic exercise. countries that are contemplating a modification in their deposit insurance coverage should, therefore, consider a few essential pointers. first, since enhancement of coverage increases the burden of the deposit insurer, efforts have to be made to ensure the viability of the insurance fund. second, enlarging the fund would require additional premium contributions from banks, and moving towards a more sustainable risk-based premium structure. third, a policy framework to review and revise the coverage limit as per the changing dynamics of the banking industry and the economy needs to be formulated. such a revision shall take into account the average level of deposits in insured banks, the rate of inflation, per capita gdp, and types of deposit instruments covered, among other things. lastly, steps must be taken to move from a https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 78 reactive system to a proactive system, where policy variables are reviewed periodically, instead of being reviewed in the aftermath of a bank or financial crisis. which specific variables need to be considered for determining the coverage limit, and how often should the limit be changed, are questions which are still open for deliberations. this study uses basic statistical tools and simple methods to analyze the trend of coverage limit in india, and determine its adequacy. although, for comparison, the study attemptsto include countries that share important deposit insurance traits with india, yet these countries differ in terms of other macroeconomic aspects. hence, these limitations should be kept in mind while interpreting the results. the findings and recommendations of this study are relevant for all countries with an explicit system of deposit insurance, as it would allow them to examine their deposit insurance coverage limit and the system as a whole in the light of multiple other policy variables such as market discipline, depositor protection, deposit insurance fund, premium and the like. references akani, h. w., & oparaordu, b. 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(2019). bank regulation and supervision survey. retrieved from https://datacatalog.worldbank.org/dataset/bank-regulation-and-supervision-survey#tab2 notes note 1. a nation-wide deposit insurance system was established in the usa in 1933, due to the failure of multiple banks during the great depression. note 2. eligible co-operative banks, as defined under section 2(gg) of the dicgc act, refers to those co-operative banks whose states or union territories have amended their cooperative societies act to empower rbi to take certain actions superseding the registrar of cooperative societies of the respective state/union territories. note 3. the international association of deposit insurers (iadi) is an association of countries around the world that have adopted an explicit system of deposit insurance. it was formed in the year 2002 with the objective of providing a platform to conduct research, provide guidance, share knowledge and promote international cooperation among countries in the field of deposit insurance. appendices appendix a: determination of countries to be included in the sample table 2 lists down the 8 characteristics of a deposit insurance system that have been selected as criteria for comparison with india’s deposit insurance system, along with their meaning and the number of countries whose dis have features similar to that of india. table 2. dis characteristics selected for comparison characteristic used as criteria details no. of countries with characteristics similar to india administration of dis a dis can be government legislated and administered, government legislated but privately administered, privately established and administered or administered by the central bank. 72 mandate a country can choose to adopt one of the four system mandates: pay-box, pay-box plus, loss minimizer, or risk minimizer. 40 institutions covered the institutions that can become members of the dis can vary from commercial banks, credit unions, cooperative banks, investment banks, islamic banks, rural banks, savings banks, to investment companies, securities companies, and other deposit-taking institutions. 16 membership membership to the dis of a country can be mandatory or voluntary. 108 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 82 types of deposit products eligible for coverage countries may provide protection to savings account, checking account, certificate of deposits, traveler’s checks, money orders, foreign currency deposits, interbank deposits, government deposits, and some other deposits which may be specified in the law and may be peculiar to the country. 105 coverage per depositor per institution a dis may set coverage limits per depositor per institution, or per depositor across all institutions, or may specify separate limits for different types of deposits. 106 type of funding funding of the deposit insurance fund can either be exante or ex-post or a combination of the two. 98 method for levying premium the premium can be levied at a flat rate or at a variable rate or can be a combination of both. for some countries, no premium is levied due to the employment of ex-post funding. 48 as mentioned under the research methodology, we used a ‘comparable characteristics’ driven process for selecting the countries to be included in the sample for each analysis. for the comparison of the change in coverage limit from december 2010 to december 2017, as well as for the comparison involving coverage ratio for december 2010 and 2017, the sample size is 61. figure 4 shows the process used for arriving at this sample size of 61 comparable countries. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 83 figure 4. process of selection of countries in the sample further, for the analysis concerning the comparison of coverage ratio as of december 2003, the sample size reduced to 47, due to exclusion of 14 countries that were established after the year 2003. for the analysis concerning the comparison of the change in coverage limit from december 2003 to december 2010, in addition to excluding the above 14 countries, we also excluded 4 additional countries for which reliable data on coverage limit in 2003 was not available, thereby reducing the sample size to 43. 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/). sample size • step-by-step process 109 • total 111 countries responded to the iadi survey 2018, excluding india, out of which british virgin islands and south africa are still in the process of fully establishing their dis. hence, these 2 coutries have been excluded. 97 • those countries for which the dis was established after 2010, the comparison for change in coverage limit and comparison for coverage ratio in 2003 and 2010 was not possible. hence, 12 such countries were excluded. 89 • there were 8 countries for which reliable information on coverage limit or coverage ratio was missing for the relevant years. these were excluded for want of information. 77 • out of the remaining 89 countries, we removed those countries from the sample which had less than 5 characteristics similar to india. 61 • furthermore, we excluded those countries from the sample which, despite satisfying the cut-off of 5 similar characteristics, had certain peculiarities in their dis in the form of unlimited coverage, additional coverage limits for different class of deposits, etc., which rendered them incomparable with india. indian journal of finance and banking vol. 8, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 1 measuring attitude towards mutual fund investment decisions: evidences from tripura, india dr. ranjit singh professor department of management studies indian institute of information technology allahabad prayagraj, india e-mail: ranjitsingh@iiita.ac.in dr. sujit deb associate professor icfai university, tripura, india e-mail: sujitdeb@iutripura.edu.in dr. bhartrihari pandiya assistant professor centre of management studies presidency college, bangalore, india e-mail: bhartrihari.pandiya@presidency.edu.in dr. arjun gope assistant. professor department of commerce ramthakur college, tripura, india e-mail: arjungope@rediffmail.com received: august 30, 2021 accepted: september 15, 2021 online published: september 22, 2021 doi: 10.46281/ijfb.v8i1.1350 url: https://doi.org/10.46281/ijfb.v8i1.1350 abstract the purpose of this paper is to assess the attitude of bank employees in tripura towards investment in the mutual fund and investigate the impact of attitude on volume of investment. the study methodology is based on the responses of a questionnaire received from 262 employees of banks in tripura. on the basis of primary data, the attitude of the employees has been assessed and ordinal logistic regression is used to find out the impact of attitude on their volume of investment in mutual fund. it is found that overall attitude of bank employees in tripura towards investment in mutual fund is favorable. it can also be concluded that attitude and volume of investment in mutual fund is positively related. the study is useful for the fund managers of mutual funds. once the attitude to employees towards investment in mutual fund is ascertained, then suitable strategy regarding imparting training can be designed to improve attitude towards investment in mutual fund. the study is original in nature. keywords: attitude, bank employees, investment behaviour, mutual fund. jel classification codes: d63, d25. mailto:sujitdeb@iutripura.edu.in mailto:arjungope@rediffmail.com https://doi.org/10.46281/ijfb.v8i1.1350 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 2 introduction mutual fund becomes a popular investment vehicle for the common man who has no technical expertise in share market for investment. it is also suitable for the employees who want to appreciate their savings but do not get time to monitor modern investment vehicles such as share market. employees are busy for their work. it is very difficult to find time to monitor the performance of stock market for getting higher return and to take own decision (lynch & musto, 2003). employees of banks are, generally, educated and aware of the current financial systems that make significant impact while deciding the investment avenues (palanivelu & chandrakumar, 2013; deb & singh, 2018a). most of the banks have also started offering mutual fund under their own brand name. therefore, the attitude of bank employees towards mutual fund is a rising area of behavioral science. according to the behavioral finance theory, decisions could be influenced by unavoidable, psychological and emotional factors (singh, 2009a; singh, 2010; singh, 2019). out of several factors affecting their investment behaviour such as risk perception (deb & singh, 2018b; singh & bhowal, 2011; singh and bhowal, 2012; singh, 2012; deb and singh, 2016; singh & bhattacharjee, 2019; bhattacharjee, singh, & kajol, 2020), awareness (bhattacharjee & singh, 2017; bordoloi et al., 2020), familiarity bias (singh and bhowal, 2010a) etc., one such factor is attitude of the investors. attitude may be defined as evaluative effect of individuals’ positive or negative feelings toward conducting a specific behaviour (fishbein & ajzen, 1975). at different level of attitude, the individual investors view differently about their investment and make decisions differently. in this situation, the present study has made an attempt to gauge the impact of attitude of bank employees on their investments in mutual funds. attitude influences an individual's choice of action and responses to challenges, incentives, and rewards. if an individual has a favorable attitude toward a specific behaviour, the chances will be increased that they have an intention to conduct the behaviour and, if they are unfavorable towards behaviour, they are likely not to have the intention (fishbein & ajzen, 1980).the extent to which one views a behaviour as favorable or unfavorable depends upon perception of a person that if there were positive outcomes resulting from an activity, then his or her attitude towards performing that behaviour is likely to be positive (ajzen, 1991). the relationship between attitudes and behavior has become vital theme of investigation in social psychology (eagly & chaiken, 1993). many studies have claimed that attitude has a significant impact on behavioral intention (mathieson, 1991; teo & pok, 2003; shih & fang, 2004; ramayah & suki, 2006). numbers of studies have been conducted regarding impact of attitude on investment behaviour. the investment decision is influenced by investor's attitude (ajzen, 1991; chandra & kumar, 2011; liu, et al., 2007; jothilingam & kannan, 2011). the study found that psychological factors such as attitude have a direct impact on investment behaviour of individuals (sehgal & singh, 2012; phan & zhou, 2014). the decision of asset allocation in risky and riskless assets is affected by the risk-taking attitude of investor (nosic & weber, 2007). investment decision on stock market is influenced by investor who is having positive attitude towards equity investment (kabita, 2015). the decision to change funds within a fund family was affected by investor's attitude towards risk (lenard et al., 2003). so far as investment in mutual fund is concerned, it was found in studies that investors have a positive attitude towards their investment made in mutual funds (gaglani & rao, 2014; subramanian & murthy, 2013; pariharet al., 2009; singh & vanita, 2002). das (2012) has observed that, of late, many institutions are engaged in providing wealth management services to the investors. however, these services are very costly. therefore, mutual fund is gaining popularity for both small and big investors as it is guided by fund managers at a very small cost. mutual fund becomes popular investment vehicle that allows small investors access to a well-diversified portfolio of equities, bonds and other securities (kumar & ahmed, 2012; singh, 2009b). it was established that employees have positive attitude towards mutual fund that leads to high volume of investment (murugan, 2012). it was also found that employees and self-employed persons of the north eastern region have positive attitude towards investment in mutual fund (sikidar & singh, 1996). therefore, in this study, impact of attitude on mutual fund investment is considered to be examined in the context of bank employees of tripura state of india which is one of the smallest states in india. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 3 having established the relationship between attitude and investment in mutual fund, next challenge is to develop a scale to measure attitude of the investors. attitude toward the investment is defined as one's general feelings signifying their favorableness or un-favorableness to a particular investment (phan & zhou, 2014). policy makers are interested in finding ways of measuring attitude since it is an important component in any decision-making process. it has been established from the earlier studies that if people’s have positive attitude towards a particular type of investment then it is reflected in the volume of investment (singh, 2012; rathore et al., 2014). subramanya & murthy (2013) asked respondents to rate their level of attitude towards investment. they provide three options of to measure attitude which were high, medium, low. murugan (2012) and gaglani and rao (2014) measured attitude by giving three options such as positive, neutral and negative. the tools mentioned in the above literature to measure the attitude of the investors towards mutual fund suffer from some limitations. first of all, three point scales suffers from some limitations such as reliability and validity (singh & kar, 2011). it is observed that respondents have the tendency to provide their response which usually happens to be the neutral point or middle point. furthermore, they are not aware regarding their own appropriate attitude towards mutual fund, if it is asked in general. it is also possible that some respondent may pretend to be having very favorable attitude and opt for the option accordingly, whereas in reality they happens to be critic of mutual funds. so, present study measures the attitude regarding mutual funds differently from the above-mentioned measurement scale. therefore, after the above the discussion the objective of this study is as follows:  to ascertain the attitude of bank employees in respect of investment in mutual fund;  to find out the impact of attitude of bank employees on their investment decision in mutual funds. the study attempts to establish the relationship between attitude and investment in mutual fund and therefore, tests the following hypothesis: h01: there is no significant association between attitude of individual investors and their investment in mutual fund. rest of the paper is organized as follows: section 2 deals with the research methodology of the study; section 3 presents the analysis and findings of the study; section 4 contains the conclusion and policy implications of the study. research methodology the present study is descriptive in nature. the universe of the study consists of all the bank employees in tripura who belong to a bank which are having their own sponsored mutual fund. the numbers of such employees were 815 as on 1.10.2019. using random sampling design at 95% confidence level and 5% confidence interval, a sample of 262 employees was obtained. the sampling unit was the individual bank employee who is from the bank which is having their own sponsored mutual fund. primary data was collected using a well-structured questionnaire. secondary data was collected from various journals, magazines, books and newspapers. to collect primary data, a scale was constructed to measure attitude of bank employees towards mutual fund investment. initially 13 items were considered to construct the scale. these items were identified from the review of literature, theories, discussion with the experts and experience of the pilot study. the details of the items and their source are given in the table 1. table 1. details of questionnaire sl. no. items source(s) 1 investment in mutual fund is easy than any other mode of investment singh, 2009b; deb and singh, 2018a 2 adequacy of return from mutual fund deb and singh, 2016; https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 4 3 managing of risk involved with mutual fund singh, 2008; singh & bhowal, 2009a 4 mutual fund schemes are adequate to cater to the need of every investor in stock market kajol et al. (2020) 5 easiness of redemption in mutual fund deb and singh, 2018b 6 mutual fund as good investment avenues for tax saving deb and singh, 2018a 7 gambling in mutual fund singh & tiwari (2013) 8 investor's recommendation to others to invest in mutual fund singh & bhowal, 2011, singh & bhattacharjee, 2019 9 mutual fund is better investment option than bank fixed deposit singh, 2009b 10 mutual fund investment is the best way to invest in equity shares singh, 2009b 11 investor’s regularity in gathering information on mutual fund singh & bhowal, 2011 12 investor’s giving some time to monitor mutual fund performance singh & bhowal, 2011 13 investor’s eagerness to listen if some agent explains regarding mutual fund singh & bhowal, 2011 source: compiled by the authors from various sources for measuring attitude, the responses on above-mentioned items were obtained on a five-point scale ranging from 5 to 1 where 5 denotes very favorable attitude and 1 denotes very unfavorable attitude. further, to know about the investment of the bank employees in mutual fund, the present volume of investment in mutual fund was sought. they were asked to provide information about their investment in mutual fund and the options given to them were as follows: no investment, less than 25% in mutual fund out of their total investment, and 25% to 50% in mutual fund out of their total investment and above 50% of their total investment in mutual fund. singh & bhowal (2010c); singh & bhowal (2009b) have used similar kind of questionnaire to assess the volume of investment. to assess the attitude of investors in mutual fund, statistical tests such as mean, standard deviation, etc. were used.the reliability of the questionnaire was assessed by cronbach’s alpha that measures the internal consistency of the items. alpha was developed by lee cronbach in 1951 to provide a measure of the internal consistency of a test or scale. internal consistency describes the extent to which all the items in a test measure the same concept or construct and hence it is connected to the inter-relatedness of the items within the test (tavakol & dennick, 2011). for assessing the influence of attitude on investment in mutual fund, ordinal logistic regression analysis has been used as the investment in mutual fund is considered on an ordinal scale. in the work of singh & bhattacharjee (2010a) and singh and bhattacharjee (2010b) the investment was considered on binomial scale and therefore, binomial logistic regression was used, however, in this case this cannot be applied. deb and singh (2017); deb and singh (2018a); singh et al. (2020) have used similar analysis to arrive at logical conclusion in the similar studies. analysis and findings the analysis and findings of the present paper is given in the following paragraphs: measuring attitude towards mutual fund investment the reliability of the scale was performed and coefficient of cronbach’s alpha was found to be 0.924 for 13 items (or statements) considered for the study which is more than 0.70 and indicative of very high degree of reliability of scale (nunnaly, 1978). having established the reliability of the scale constructed https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 5 to measure the attitude of the investors towards mutual fund, the item statistics for the attitude of bank employees to the various items considered for the study is presented in table 2. table 2. item statistics sl. no particulars mean std. deviation 1 investment in mutual fund is easy than any other mode of investment 3.6412 .94742 2 return from mutual fund is adequate 3.5496 .86847 3 risk involved with mutual fund is manageable 3.3969 .96434 4 the mutual fund schemes are adequate to cater to the need of every investor in stock market 3.4160 .94616 5 redemption from mutual fund is easy 3.5763 .91386 6 mutual fund is good investment avenues for tax saving 3.7519 .94863 7 investing in mutual fund is not gambling 3.6107 1.02887 8 i recommend others to invest in mutual fund 3.6145 1.02846 9 mutual fund is better investment option than bank fixed deposit 3.4122 1.09943 10 mutual fund investing is the best way to invest in equity shares 3.6641 .91485 11 i regularly gather information on mutual fund 3.4275 .97108 12 i give some time to monitor mutual fund performance 3.3893 1.00628 13 i am eager to listen if some agent explains regarding mutual fund. 3.4962 .93771 source: compiled from questionnaire the respondents were asked to rate their responses according to their attitude on a five point likert scale. a score of 1, 2, 3, 4 and 5 was given to each statement for the responses strongly disagree, disagree, neutral, agree and strongly agree respectively. then a total score for attitude has been found by adding the scores of all the statements related to attitude. for 13 statements (or items), the maximum possible score was 65 (13x5) and minimum possible score was 13 (13x1). the difference between maximum possible score and minimum possible score was 52 (65-13). in order to make five points scale to measure attitude of individual investor, range of 52 was divided by 5 and it was found to be 10.4. adding 10.4 with 13 (lowest possible score), the attitude score range of 13-23.4 was found which was categorized as ‘very unfavorable attitude’. similarly adding 10.4 with subsequent values, next higher range was obtained. singh and bhowal (2012); singh (2012); choudhury and singh (2015a); choudhury and singh (2015b); choudhury and singh (2015c) have framed similar interpretation table using similar upper limit exclusive scale in table 3, attitude score is interpreted. table 3. interpretation of attitude score scale value interpretation of scale value 13-23.4 very unfavorable attitude 23.4-33.8 unfavorable attitude 33.8-44.2 neutral attitude 44.2-54.6 favorable attitude 54.6-65 very favorable attitude source: compiled from questionnaire the overall attitude of the entire respondent was calculated by adding their score in the likert scale. then its value was interpreted using table 3. the overall level of attitude is presented in table 4. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 6 table 4. overall attitude frequency percent highly favorable 21 8.0% favorable 129 49.2% neutral 45 17.2% unfavorable 43 16.4% highly unfavorable 24 9.2% total 262 100.0 overall mean 45.9466 overall standard deviation 9.10418 source: compiled from questionnaire from the table 4, it is observed that overall mean score is 45.9466 which fall under favorable category as per interpretation score given in table 3. thus, it can be concluded that bank employees have favorable attitude towards their investment in mutual fund. impact of attitude on investment in mutual fund to ascertain the impact of attitude on mutual fund investment, ordinal logistic regression was used. investment in mutual fund was considered as dependent variable and attitude, as calculated above, was the predictor variable. the dependent variable was present investment in mutual fund, where y=1(not invested in mutual fund), y=2(less than 25% investment in mutual fund out of total investment), y=3(25%-50%investment in mutual fund out of total investment) and y=4(more than 50% investment in mutual fund out of total investment). predictor variable is attitude of bank employees, where x=1(very favorable attitude), x=2(favorable attitude), x=3(neutral attitude) and x=4(unfavorable attitude) and x=5 (very unfavorable attitude).as dependent variable was on ordinal scale, linear regression model cannot be used as a good model in order to find the impact of attitude on investment in mutual fund. linear regression model provides good model if dependent variable is in metric scale (such as interval or ratio scale (hair et al 2009). so, ordinal logistic regression was suitable for this case. table 5. case processing summary investment in mutual fund at present not invested 142 54.2% less than 25% 61 23.3% 25%-50% 46 17.6% more than 50% 13 5.0% attitude very high favorable 21 8.0% high favorable 129 49.2% neutral 45 17.2% unfavorable 43 16.4% very unfavorable 24 9.2% valid 262 100.0% source: compiled from the questionnaire table 6. model fitting information model -2 log likelihood chi-square df sig. intercept only 140.156 final 42.883 97.273 4 .000 compiled from the questionnaire https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 7 in order to explain the effects of each explanatory variable (attitude) in the model, it is required to ascertain if the model improves the ability to predict the outcome. it has been done by comparing a model without any explanatory variables (‘intercept only’ model) against the model with the explanatory variables (attitude) (the ‘final’ model). final model is compared against the intercept only model to see if it has significantly improved the fit to the data. roy, singh, hr & singh, r. (2017a); roy, singh, h. r., & singh, r. (2017b) have used similar methodology to arrive at their conclusions. the result of chisquare test, as presented in table 7, shows that the final model gives a significant improvement over the intercept-only model, since p-value is less than 0.05. thus, this model gives better predictions. table 7. goodness-of-fit chi-square df sig. pearson 5.777 8 .672 deviance 6.970 8 .540 compiled from the questionnaire table 7 contains pearson's chi-square statistic for the model (as well as another chi-square statistic based on the deviance). this statistics is used to test consistency of the observed data with the fitted model. the results indicate that the model does fit very well as p-value is higher than 0.05. table 8. pseudo r-square cox and snell .310 nagelkerke .347 mcfadden .165 source: compiled from the questionnaire in table 8, it was found that the cox and snell r2 value for the fitted ordinal logistic regression is 0.347 which does indicate a good fit. table 9. parameter estimates parameter estimates 95% confidence interval estimate std. error wald df sig. lower bound upper bound proportion of total investment, invested in mutual fund(threshold) not invested 3.146 1.026 9.396 1 .002* 1.135 5.158 less than 25% 4.558 1.039 19.235 1 .000* 2.521 6.595 25%-50% 6.601 1.077 37.567 1 .000* 4.490 8.711 attitude very favorable 5.525 1.121 24.292 1 .000* 3.328 7.722 favorable 3.759 1.042 13.018 1 .000* 1.717 5.801 neutral 2.057 1.081 3.619 1 .057** -.062 4.177 unfavorable 1.482 1.107 1.791 1 .181 -.688 3.652 very unfavorable 0a . . 0 . source: compiled from questionnaire http://www.restore.ac.uk/srme/www/fac/soc/wie/research-new/srme/glossary/index34aa.html?selectedletter=e#explanatory-variable https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 8 table 9 investigates the estimated parameter. these are the ordered log-odds (logit) regression coefficients. it indicates that when predictor variable, i.e., attitude is increased by one unit, the dependent variable level is expected to change by its respective regression coefficient in the ordered log-odds scale while the other variables in the model are held constant. the threshold coefficients just represent intercept. it is found from the table 10 that all the intercepts are significant at 5% level of significance. it indicates that intercepts are not equal to zero. beta coefficient of certain levels of attitude such as very favorable attitude, favorable levels are significant at 5% level of significance as p value is less than 0.05. beta coefficient for neutral level of attitude or in other words it can be said that neither favourable nor unfavourable level of attitude is significant at 6% level of significance as p value is less than 0.06. estimated beta values are positive which indicates favorable attitude and investment in mutual fund is positively related, meaning thereby, if an investor’s attitude is changed from unfavorable to favorable, his/her investment volume will be increased from low level to high level. so, it is concluded that different attitude levels have significant impact on volume of investment in mutual fund. beta coefficient is found highest, i.e., 5.525 in case of very favourble attitude which means if an investor’s attitude is changed from very unfavorable (reference level) to very favorable, his/her investment volume will be increased from low level to high level at the highest rate. policy implication and conclusion it can be concluded that attitude and volume of investment in mutual fund is positively related. it is found that overall attitude of bank employees in tripura towards mutual fund is favorable. investors with favorable attitude towards mutual fund are investing relatively higher volumes of investment in mutual fund, and investor with unfavorable attitude are either not investing in mutual fund or investing at low level, given the test and methodology of this study. subramanya and murthy (2013) were also of the same view. however, the findings of singh (2012) and black (2004) are contradictory to this finding. most of the respondents are confused about the mutual funds and have not formed any attitude towards the mutual fund for the purpose of investment (singh, 2012; black, 2004). this study is very significant for the policy maker as these findings are true picture of attitude of bank employees towards mutual fund and its impact on their investment decision. if bank employees develop positive attitude towards investment in mutual fund, then it will lead to encouragement to invest for the other members of the society since somehow majority of the people of the society are directly related to bank employees for doing their monetary transactions and used to seek the opinion of bank employees or value their opinion for the purpose of making investment. ramanathan and meenakshisundaram (2015) suggested that awareness programs should have to be conducted to educate the bank employees towards capital market investment. so, in order to increase the investment volume in mutual fund for the bank employees, proper awareness program should be arranged to make their attitude favorable. singh and bhowal (2010b) have suggested that employer should take initiative to impart investment education to their employees. opening of learning investors club or similar kind of initiative can also go a long way in infusing positive attitude about mutual fund investment (singh & barman, 2011). references ajzen, i. 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(2003). adoption of wap-enabled mobile phones among internet users. omega, 31(6), 483-498. https://doi.org/10.1016/j.omega.2003.08.005 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/10.1177/0971890720100103 https://doi.org/10.3390/risks7010012 https://doi.org/10.46281/ijfb.v4i2.745 https://doi.org/10.5116/ijme.4dfb.8dfd https://doi.org/10.1016/j.omega.2003.08.005 indian journal of finance and banking vol. 5, no. 2; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 44 impact of information technologies’ investments on the profitability of tunisian banks: panel data analysis syrine ben romdhane assistant professor high institute of management of tunis university of tunis, tunisia e-mail: syrine_br@yahoo.fr abstract this study examines the relationship between information technology investment and the profitability of tunisian banks, via static and dynamic panel regression models. our study focused on 15 tunisian banks for 19 years (2001-2019). to assess the profitability of these banks, three measures were used: two traditional accounting ratios and net interest margin. our research has shown the importance of the role played by it in tunisian banks since it investments improve their profitability. this finding contradicts the “productivity paradox” that high it investments are not associated with better performance. indeed, tunisian banks are acting on their size to boost their performance, and the more the banks take the risk by granting more loans, the more profitable they are by increasing their return on assets. finally, public banks are more profitable than private banks when considering their net interest margin. keywords: information technology, profitability, banks, statistic panel, dynamic panel. jel classification codes: b21, c58, g21, g32, o32. introduction today, in banks, different information technologies (it) has become the key to the financial engineering process for organizations wishing to survive and continue to thrive in this rapidly changing financial environment. the advent of the internet has revolutionized the world of communication, making it possible to optimize the strategy of globalization advocated by the contemporary vision of the business world. this technological revolution has led to the decompartmentalization of financial markets and necessary deregulation, which has profoundly transformed market structures and forms of competition (hoque et al., 2020). financial institutions have not escaped this upheaval and, under the pressure of new technologies and customer expectations, have been forced to change their structure and modify their strategy as well as the conditions of performance. it is an essential tool that banks must manage and master to ensure their competitiveness. this gives them a privileged place in the banking production process and raises permanent questions about the relevance of their strengthening and the methods of their optimization. a new conception of banking performance then emerges and an appropriate performance evaluation system must be implemented. mailto:syrine_br@yahoo.fr https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 45 the massive use of it by banks has created a need to assess its impact on bank profitability. profitability assessment is a ubiquitous activity proving even more a necessity with any technological change operating within the company (teru et al., 2017). however, finding suitable analytical tools for these technologies is proving difficult. this has resulted in a lack of empirical validation on the impact of it on bank profitability. in this research work, we will attempt to study the impact of it on the profitability of 15 tunisian banks for 19 years (from 2001 to 2019). to this end, three parts will be presented: the first will introduce a review of both theoretical and empirical literature. the second will present the hypotheses and the methodology of the research. finally, the results of the regressions estimated on a static and dynamic panel will be the subject of the third part. literature review from the beginning of the 1990s, the various waves of technological innovation have aroused the interest of many economists. however, most of these different studies have focused on the relationship between investments in it and the increased productivity of firms. their main hypothesis is as follows: investments in it provide improvements in productivity, hence management efficiency (landauer, 1995). with the development of it, the objectives of firms continued to vary between two poles: improving efficiency and developing market power (chowdhary, 2017). in the following, we will present a literature review on the effects of it investments on productivity, then on the evolution of bank profitability. it investments and productivity “we can see computers everywhere except in productivity statistics” (solow, 1987: 36). this “productivity paradox”, formulated fifteen years ago by robert solow during his speech to receive the nobel prize for economics in stockholm in 1987, has given rise to countless applied studies in the united states as in europe and has identified the most diverse explanations. what has led solow to say this famous quote is that numerous studies have shown that investing in it has little or no impact on productivity. in other words, the massive it spending over the past two decades did not seem to have any effect on the productivity of its users, either at the micro-level or at the macro level. berndt in 1991 was the first theorist to attempt to measure the productivity from it investments. he relied on the assumption that investments contribute positively to the output measured by the gross marginal profit. his work was followed by that of loveman (1994) and morrison and berndt (1990) who asserted the absence of a link between it investments and improved productivity using a production function of the cobb-douglas form. studies recently carried out by several authors have highlighted several factors that have contributed to the “productivity paradox”. first, and according to triplett (1997), some it spillovers, especially in the service sector, have not been captured in productivity statistics. second, the implications of using it could take a considerable amount of time to materialize. finally, and to measure the impact of it on the performance of firms, several earlier studies relied on relatively small samples of firms. this could lead to less robust and statistically less significant results. as a result, many studies conducted on this question notably those of brynjolfsson and hitt (1996), oliner and sichel (2000) have qualified solow's assertion. brynjolfsson (2001) has shown, from the estimation of a cobb-douglas production function of a sample of 367 firms over the period 1987-1991, that it investments give firms higher productivity than other types of investment. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 46 several explanations have been put forward to explain the poor efficiency of it in improving the performance of banks. firstly, some researchers have identified errors in performance measurement with traditional tools proving to be ineffective in determining precisely the costs and performance associated with computerization. the problems encountered are at the level of inputs than outputs (thenet & guillouzo, 2002). also, entorf et al. (1999) add that the impact perimeter of an it investment is difficult to define especially in the banking sector with the organization of network branches and the establishment of edi (electronic data exchange) links with client companies. secondly, the existence of problems in defining general concepts such as it and bank performance is therefore in measuring the impact of the former on the latter. the notion of it is indeed difficult to define: it is not limited to materials and equipment, but also includes intangible investments. on the other hand, some studies on the “productivity paradox” have found a positive relationship between investment in it and firm performance. industry-level research has yielded several results. this is partly because it is indirectly linked to the performance of the firm (chen & zhu, 2004). indeed, according to these authors, the link between it investment and firm performance is indirect because of the mediating and moderating variables. while most of the work on the effects of it investments has focused on evaluating productivity, very few economists have tried to study the effects of these investments on the evolution of firm profitability. it investments and profitability the profit function offers the advantage of measuring performance through output but also input. it is made up of the "income" variable resulting from specialization or diversification and the "costs" one resulting from the combination of a certain number of inputs. controlling a company's performance requires mastering managerial practices, but measuring them is a real challenge. also, manufacturing performance appears to be much easier to measure than that of services (akber, 2019). unlike the traditional economy which often associates the production and consumption of commodities with the quantities of output which were considered to be performance indicators, the modern economy is characterized by a diversity of products and services (singh & singh brar, 2016). in this environment, the traditional tools of productivity are no longer appropriate. in the case of the banking industry or financial institutions defining performance reverts to measure certain indicators such as roa (return on assets) which is an instrument used by many authors such as barua et al. (1991). they found a positive correlation between investment in it and bank performance as measured by roa and roe (return on equity) which assesses the efficiency of firms by the use of their financial capital. this tool has been used in many studies. while alpar and kim (1990) found that by measuring the impact of it investments on the performance of manufacturing firms reasoning on the value generated by it can mislead, prasad and harker (1997) and brynjolfsson and hitt (1996) have shown the existence of a negative correlation between it investments and firms' roe. however, bakos (1993) showed the ambiguity of the relationship between these two variables. in addition to the roa and roe, some authors have considered the total shareholder return which makes it possible to calculate the value created by the firm for the shareholders. this tool was introduced by dos santos and al. in 1993. these authors have shown the existence of a positive correlation between investment in it and the performance of firms measured by the total shareholder return. finally, gayathri and suvitha (2018) tried to measure the impact of it on the profitability of 21 indian banks (12 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 47 public and 9 private banks) over the period 2011-2015. their results show that it investments have a positive impact on the profitability and performance of banks more than marketing expenses, knowing that profitability was measured by profit after tax (pat). they concluded that indian banks should promote technology in their operations. to sum up, we can say that the results of studies on the impact of it on the profitability of banking firms are often contradictory. the various studies on the effects of it investments on the profitability of user firms often show that these investments have no impact on the profitability of banking firms. however, several authors claim the opposite, that is, the existence of a positive association between these two variables. method for this research, we considered a database made up of variables whose choice was guided by recent studies on bank performance. research hypothesis the literature review exposed above enabled us to identify a set of variables supposed to explain variations in performance levels among banks. we have selected those which seem to better characterize the tunisian banking system and whose data are available throughout the study period (2001-2019). each of these variables is translated by a separate assumption. hypothesis 1: effect of information technology works studying the effects of it investments on the profitability of the user companies often show that these investments have no impact on the profitability of banking firms. most of these studies have concluded that there is no link between these two variables, notably the work of licht and moch (1999), gayathri and suvitha (2018). in our study, a positive sign of this variable is expected since it has the potential to reduce operating costs. we then state our first hypothesis: h1: investment in it has a positive impact on bank profitability. hypothesis 2: effect of the “intermediation” variable the “intermediation” variable will be measured by the “interest margin/gnp” ratio. a low ratio could lead to increased profitability of banks to the extent that they benefit from economies of scale. in this context, ben naceur (2003) adds that the lower this ratio, the higher the interest and profit margins. we then state our second hypothesis: h 2: the “intermediation” variable has a positive effect on profitability. hypothesis 3: effect of size cook and al. (2000) emphasized that large banks, generally publicly owned, operate on a suboptimal scale and tend to grant loans regardless of their profitability to promote primarily political priorities. they thus find themselves with a large volume of irrecoverable credits. we can therefore expect a negative effect of size on banking performance. h3: the size variable has a negative effect on bank profitability. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 48 hypothesis 4: effect of credit risk according to yao (2005), the issue of banking risk is one of the recurring actual themes. according to kupper (1998), financial institutions face three main types of risk: credit risk, market risk, and operational risk. according to the basel committee (2007), the most important banking risk is credit risk. the latter is generally measured by the weight of provisions in the result of gross receivables. indeed, the rise in risks can be explained by the allocations to provisions made by banks. this increase in provisions affects banks' results. we thus conclude the higher this risk, the greater the probability of having bad debts, and therefore lower bank profitability. h4: the risk variable has a negative effect on bank profitability. hypothesis 5: effect of the staff supervision rate according to zaghla and boujelbene (2008), the more the bank employs high-quality staff the more, it manages to control its use of inputs and therefore maximizes its output level. this idea is retrieved from the work carried out on the banking industry by chaffai (1997) who have shown that productivity gains expected from an improvement in managerial efficiency are more significant than those achieved by size effect. therefore, the "staff supervision rate" ratio positively influences the profitability of banks since it leads to an improvement in agents' productivity. h5: the variable “staff supervision rate” has a positive effect on profitability. hypothesis 6: bank public ownership versus private ownership several studies have shown that a bank's capital ownership can be an important variable in explaining bank profitability. according to bourke (1989), there is a negative relationship between the public ownership of a bank and its profitability. this is explained by the fact that the objective of public banks is not always profit maximization but rather the financing of strategic sectors with a relatively high-level risk. however, molyneux and thornton (1992) found that there is a positive relationship between bank public ownership and return on equity. state-owned banks generate a higher return on equity than their private sector counterparts as the government implicitly covers the transactions carried out by the latter by the fact that public banks generally maintain a lower capital ratio. we then expose our last hypothesis: h6: the variable “bank ownership” has a negative effect on profitability. sample presentation to determine the impact of it investment on bank profitability, we will use a sample of 15 tunisian banks. the database that we have built for this analysis depends on the availability of data in tunisia. however, the only publicly available individual banking data are those published in banks' activity reports and by databases of the tunisian professional association of banks and financial institutions (tpabfi), the latter themselves taken from balance sheets and accounts of results published by banks. the data are collected over 19 years from 2001 to 2019, that’s to say 285 observations. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 49 definition of variables in the model that we will adopt, profitability will be regressed on the use of it (variable of interest) and other appropriate variables (control variables). table (1) defines the different variables retained in our study and specifies the expected signs: table 1. definition of variables variables definition sources expected sign the dependent variable profitability (p) the roa: net income/total assets. it measures the bank's ability to convert assets into net income and is therefore interested in the overall value of the bank, in other words, economic profitability. the roe: net income/equity. this ratio makes it possible to assess the performance from the point of view of the shareholders. the nim: (sum of interest income sum of interest expense) / total assets. tpabfi and arb the independent variables variable of interest: investments in it (it) tangible (material), intangible (software), training, and maintenance investments related to the bank's equity questionnaire* + control variables: intermediation (int) size (size) credit risk (crisq) staff supervision rate (ssr) bank ownership (bown)  interest margin/gnp  natural logarithm of total assets (in dt)  litigation rate calculated by overdue debts ratio to total credits  share of senior executives in relation to the total workforce.  dummy variable (mute) which takes the value 1 at year t if the bank is public, 0 if the bank is private. tpabfi tpabfi cbt tpabfi + + arb: annual reports of banking activities. tpabfi: tunisian professional association of banks and financial institutions. cbt: central bank of tunisia. * to collect data relating to it investments from tunisian banks, we opted for a questionnaire to be sent to management control directors or information system directors of these banks. this questionnaire aims to find out the amounts invested in it during the period 2001-2019. econometric approach and model specification we will follow a standard form, adopted by beccalli (2007), to estimate the relationship between it investment and profitability measurement. therefore, we decline the it investment and control variables against the measure of profitability. the model we are going to estimate is as follows: https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 50 pit = αi + β1it itit + β2it sizeit + β3it intit + β4it ssrit + β5it crisqit + β6it bownit + εit (1) where pit measures the profitability of bank "i" at date "t" either through the roa and roe ratios or through the net interest margin (nim), itit is the variable "it investments". note that in the literature, several ratios have been used to measure it investments. these ratios refer to different size measures such as the number of staff, equity, total cost, and sales. based on the convention established in the literature using it ratios to test the relationship between it investments and financial performance, in this study we use the it/equity ratio (share of it in banks' equity). the current choice of the denominator for it measurement will not significantly affect the results (beccalli, 2007). sizeit is the "size" variable measured by the logarithm of the active total, intit is the intermediation variable measured by the ratio of interest margin to gnp, crisqit is the “credit risk” variable calculated by the ratio of overdue debts to total loans, ssrit is the "supervision rate" variable measured by the share of senior managers in relation to the total workforce, bownit is a dummy variable = 1 if a bank "i" at period "t" is public and = 0 if a bank "i" at period "t" is private, εit: error term. the estimation of our model will be done using two approaches: the first is static and the second is dynamic. model (1) is first estimated using the assumption of uniformity of behavior over time and among banks. we estimate the model using the ordinary least squares (ols) method by assuming that the error is the same and follows the normal distribution n(0,ζ). the specification of the above model implies that the coefficients obtained are identical for the 15 banks considered. however, it is possible to think that there are differences between tunisian banks in their activity and functioning. it is, therefore, appropriate to adopt a specification that highlights individual effects. this is why we resume the specification (1) again by introducing heterogeneity between the banks. by performing the fisher test (f-test) and the breusch and pagan lagrangian multiplier (lm) test, we accept the rejection of a perfectly homogeneous panel structure and therefore our model is either a fixed individual effects model or a random individual effects one. based on the values of this statistic, we reject the h0 hypothesis (lack of autocorrelation). this implies that the fixed effects model is preferable to the random effects model in the case where we consider the banks' net interest margin as a variable to be explained. the choice then relates to the “within” estimator. the same approach was followed to determine the best estimator of the model where performance is measured by the banks' roe. the results show that the random-effects model is preferable to the fixed effects model according to the hausman test. however, considering the roa as an explanatory variable, the estimated results have shown that there are no individual effects specific to each bank. since the specific deterministic effect symbolized by constant values specific to each bank is not proven, it might seem more natural to treat this effect as a random and non-deterministic effect. the random-effects model to be estimated is written: pit = α + β1it itit + β2it sizeit + β3it intit + β4it ssrit + β5it crisqit + β6it bownit + εit (2) εit = µi + ρit to introduce the specific effect as a random effect into the analysis, we consider that the error, or residue εit, is composed of two elements: the first represents the individual effect, reflecting the influence on the performance of variables not taken into account, as long as they are stable over time; the second represents the influence of the other omitted variables also https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 51 varying over time from one bank to another. we assume that the εit are identically and independently distributed and that the µi are not correlated with the explanatory variables. the estimated model for performance equations is usually written in the following form: pit = β itit + δ x k t + + µi + ρit (3) in this specification, the variable pit represents the performance variable of bank i at time t, such as nim, roa, and roe. x corresponds to a vector composed of (k) control variables; µi represents the specific effect specific to each bank, which remains invariable over time, while ρit is a random perturbation. the index (i) refers to the banks in our sample and "t" is the time index. the estimation of this model will be done according to a static approach and a dynamic approach. in our study, the partial adjustment approach is applied to our equation. model (3) was estimated on panel data according to two methodologies that take into account the characteristics of our sample. initially, the estimation is carried out by the ols method. secondly, the announced model is estimated with delays of the endogenous variable. thus, the estimated dynamic equations take the following form: pit = σ φm pi,t-1 + β itit + δ x k t + µi + ρit (4) the vector of control variables x k t has the same meaning as before. the variable pi,t-1 is the delayed endogenous variable. we also assume that the absolute value of the sum of parameters φm is less than unity and that ρit is the error term with zero expectation and variance e (ρit 2 ) = ζρ 2 . moreover, these stochastic disturbances are independent of the specific effects (µi) and taken in pairs; they are not correlated. on the other hand, the presence of a lagged variable makes the usual estimation techniques on panel data inappropriate. this is due to the correlation between the endogenous variable and residuals from the regression. to overcome this problem, the method of instrumental variables applied to the first difference model allows endogeneity to be taken into account by the use of delayed explanatory variables as instruments. arellano and bond (1991) proposed a procedure of estimations by the generalized moments’ method (gmm) to improve the efficiency of the method proposed by anderson and hsiao (1981-1982) and which proved to produce consistent estimators that are not necessarily effective. this procedure contains two steps. first of all, it is necessary to rewrite the dynamic model in first differences to eliminate the specific effects (µi), and in a second step, this equation is estimated according to the gmm method by adopting a set of instrumental variables. the vector of instrumental variables retained in this analysis is composed of all the delayed values of the endogenous variable. results and discussion table (2) shows the disparity in the mean values of the explanatory variables, the variables to be explained, and their standard deviations for the different banks in the sample. table 2. descriptive statistics of the variables to be explained and the explanatory variables average standard deviation min max nim .0256356 .0174386 .0075367 .0763757 roa .1174876 6.83454 -74.0456 9.26575 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 52 roe 7.834567 80.5646 -428.4564 954.3454 it .0114998 .087343 -1.116654 .266536 int .652881 .136754 .2154757 .9583346 size 13.64798 1.28343 10.5267 15.28674 ssr .2147646 .0856464 0 .4364674 risq .1486752 .1176954 .02 .565 looking at table (3), we see that the average net interest margin of tunisian banks decreases slightly from 0.0364 in 2001 to 0.0357 in 2019. on the other hand, the average roa increased by 0.024 in 2001 to reach 3.758 in 2019. the same goes for the roe which goes on average from 0.157 in 2001 to 12.748 in 2019. the average numbers of it investments clearly show that our sample is based on banks installed in a growing country in terms of technology. to get around the multicollinearity problem, we were able to select only the best variables (table 4). table 3. annual descriptive statistics of performance measures and it investment in tunisian banks nim 2001 2004 2007 2010 2013 2016 2019 average .036475 .0336467 .0306613 .0267485 .0264566 .0249437 .0357654 deviation standard .008175 .0105987 .013549 .0098103 .0094424 .0070653 .0072169 min .0149432 .0196912 .0113846 .0124497 .0076826 .0114803 .0090055 max .0673452 .0522107 .0638269 .0428411 .0397337 .035338 .1564324 roa 2001 2004 2007 2010 2013 2016 2019 average .024563 .820709 7.839602 .8706546 .411611 1.191564 3.75832 deviation standard .0095347 1.179944 21.01162 1.346316 2.591446 1.084216 .8212117 min .0054411 .6155183 75.19608 -1.711013 8.130311 0 .0414251 max . 1435653 5.016689 1.977789 4.086188 3.931209 3.608938 5.970182 roe 2001 2004 2007 2010 2013 2016 2019 average .1574643 0.68589 29.29276 4.490838 6.716453 8.801352 12.74893 deviation standard .0614159 9.350515 111.8833 5.113827 47.21951 7.761342 5.522733 min .0117211 1.167886 429.0495 -4.225255 176.4798 0 .2059946 max .2032746 39.89513 13.0334 14.55628 15.07121 29.76911 29.44269 it 2001 2004 2007 2010 2013 2016 2019 average .026578 0152642 .0143741 .0149916 .0282695 .0334631 .468532 deviation standard .0204895 .0214314 .0231528 .023959 .0529575 .0784827 .0779477 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 53 min .0001479 .000317 .0004975 .0002913 .0009346 .0014959 .0016363 max .0748671 .0834234 .0907636 .09402151 .1974172 .3046716 .4953611 table 4. matrix of the variables’ correlations variables nim roa roe int size ssr crisq it nim 1.0000 roa -0.0576 1.0000 roe -0.0734 0.3267 1.0000 int 0.6816 -0.046 -0.1156 1.0000 size -0.6728 0.1574 0.1465 -0.4564 1.0000 ssr 0.1276 -0.0564 -0.0463 0.0054 -0.1267 1.000 crisq -0.4536 0.0264 0.2546 -0.2675 0.2564 -0.1683 1.000 it -0.0356 0.1258 -0.021 -0.0265 0.0564 -0.0536 0.0375 1.000 we present here the empirical results concerning the determinants of bank profitability as measured by the three indicators explained above namely the nim, the roe, and the roa. interpretations of the obtained results will allow us to clarify the sign and extent of the estimated relationships. the sensitivity of the net interest margin to it investment to determine the impact of it investment on the nim of tunisian banks, we estimated the previous dynamic and static specifications where the endogenous variable to be explained is the ratio of the bank interest margin to the total assets of each bank. the results of the estimations are displayed in the table (5). table 5. results of the estimation of the net interest margin equation model 1: fixed effects model 2: random effects dynamic panel variables coefficient (student's t) coefficient (student's t) coefficient (student's t) coefficient (student's t) nim (-1) it int size ssr crisq 0,0045 (0,34) 0,0347*** (4,23) -0,0242*** (-8,14) 0,025*** (3,76) -0,0165** (-2,78) 0,121 (6,54) 0,035*** (6,21) -0,0095*** (-5,61) 0,0081 (0,83) 0,0039 (0,76) 0,0091 (0,54) 0,017*** (6,43) -0,0082*** (-4,23) 0,0275 (1,83) -0,0361 (-1,62) 0,0163 (0,83) 0,0018*** (5,41) 0,3711*** (6,37) -0,0281*** (-10,62) 0,0037** (2,82) -0,5130** (-2,46) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 54 constant bown 0,237*** (8,58) 0,182*** (5,73) 0,085*** (5,12) 0,026** (2,62) 0,282* (11,41) r 2 64,75% 45,82% 43,78% *** significant at the 1% threshold, ** significant at the 5% threshold, * significant at the 10% threshold. fisher's test indicates that the model is globally significant up to the 1% threshold (prob> f = 0.0000). the goodness of adjustment is acceptable since the model explains 64.75% of the total variance. the results show some similarities. the two static models, fixed effects and random effects show that it investments have no impact on the nim of the banks in the sample. this result confirms that found by prasad and harker (1997) who concluded in their work that there is no link between these two variables. the third model is based on the assumption that all the explanatory variables are exogenous as in the static case. the delayed profitability variable (in first differences) is instrumented by its own delays at level t-3. for the sake of comparison, estimates by the gmm method suggested by arellano and bond (1991) applied to the dynamic performance equation are also included in table (5). although the lagged coefficient is not significant, it appears that it has a positive and significant relationship at the 1% level with the nim of banks. importantly, the size and intermediation parameters remain statistically significant at the 1% level in all estimates, whether dynamic or static. this result thus observed suggests that these two variables, combined with it, influence the nim of tunisian banks. however, this significant influence is positive for the "intermediation" variable but negative for the "size" variable. it, therefore, appears that the intermediation activity, combined and accentuated by the development and use of new technologies, plays an important role for tunisian banks since it improves their nims. this result can be explained by the complementarity between bank credit and deposit policies and the use of it. indeed, the strengthening of the credit policy should be carried out in symbiosis with an efficient strategy of draining additional resources and with efficient use of it. this will undoubtedly lead to an increase in the interest margin of the banks. on the other hand, and concerning the significant but negative relationship between the size variable and the nim, it appears that the larger the size of the banks the more their interest margin deteriorates. this result confirms that found by hermalin and wallace (1994), isik and hassan (2002), bakkeri and ali (2020) who found a negative relationship between the size and the profitability of banks. on the other hand, this result contradicts the conclusions of aly and al. (1990), berger and al. (1993) who argue that the larger the size, the more banks have a positive attitude towards the development of new technologies, and therefore the more their performance improves. the simplest explanation is the existence of substitution between it and labor to produce more and at a lower cost. according to the results of the static panel with fixed effects, the managerial capacity of staff is significantly and positively linked to the nim of tunisian banks at the 1% threshold. this result is similar to that found by the dynamic panel with a positive significance at the 5% level. it, therefore, appears that a high staffing rate and good training of executives lead to an improvement in the productivity of agents and a significant managerial capacity, which has a positive influence on the min of banks. this result confirms that found by zaghla and boujelbene (2008) who showed that an increase in the supervisory rate positively affects the level of profitability of tunisian banks and that the latter therefore do not suffer from weak https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 55 managerial capacity. ben naceur (2003) insisted on the major positive impact of managerial variables since they positively affect interest margins. as for the "risk" variable measured by the ratio of overdue debts to total bank credit, the estimation of the model by the static panel with fixed effects and by the dynamic panel reveals that this variable significantly and negatively affects the nim of tunisian banks at the 5% threshold. the policy of compliance with international standards in terms of prevention against insolvency risk encouraged tunisian banks to increase their capital volumes, which deteriorated the volume of loans granted to individuals and therefore the interest margin received. finally, concerning the dummy variable, the results of the static random-effects model show a positive and significant sign at the 5% level. this result suggests that public banks are more profitable than private banks when considering their nims. this confirms the results previously found by chaffai and dietsch (1998), smida and ayadi (2006), anwar and al. (2020). the sensitivity of profitability measures to it investment econometric tests show that our model is globally significant and that the quality of adjustment is practically good. this means that there are other variables, in particular economic zones, which would explain performance apart from financial, environmental, or managerial factors. table (6) shows that according to the model estimations by the dynamic panel method, the roe is negatively affected by the it investments of banks. this relationship is significant at the 1% level. this finding argues that large it investments are not associated with high returns. this confirms the "productivity paradox" and implies that tunisian banks which devote large budgets to it investment do not improve their roe. in contrast, the random-effects model presents a contradictory result: investment in it is significantly and positively linked to the roe of banks at the 1% threshold. the results also show that the relationship between it investment and banks' roa is less clear. the random-effects model showed no link between these two variables. on the other hand, according to the results of the dynamic panel, with a significant lagged coefficient at the 1% threshold, it appears that it has a positive relationship with the roa of banks. table 6. results of the estimation of the equation on roe and roa variables model 2: random effects dynamic panel variables model 2: random effects dynamic panel coefficient (student's t) coefficient (student's t) coefficient (student's t) coefficient (student's t) roe (-1) it int size ssr crisq -645,13*** (-32,45) -24,75 (-0,65) 6,82 (1,37) -13,82 (-0,88) 121,45** (1,72) 1,625*** (0,08) -32,11 (-0,68) 6,128 (0,71) -7,295 (-0,42) 120,53** (1,64) 0,022*** (2,54) -735,69*** (-5,43) 55,712* (1,68) 79,412*** (7,59) -54,933* (-1,75) -21,907 (-0,61) roa (-1) it int size ssr crisq 7,143 (1,67) 0,013 (0,04) 0,746** (1,72) -1,471 (-0,08) -2,114 (-0,83) 8,174 (6,336) 0723 (4,08) 1,518** (0,903) -8,621 (9,68) -0,735 (6,993) 0,074*** (4,76) 4,732*** (32,78) 18,62*** (18,72) 9,75*** (2,82) 0,114 (0,03) -3,896 (-0,64) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 56 constant bown -76,34 (-1,36) -76,13 (-0,87) 1,341 (0,09) -45,247*** (-7,82) constant bown -11,97 (-1,51) -25,72** (11,95) 5,735 (2,00) 86,45*** (-7,72) r 2 47,18% 38,62% r 2 37,93% 39,44% *** significant at the 1% threshold, ** significant at the 5% threshold, * significant at the 10% threshold. the lack of a clear relationship between it investment and measures of bank profitability is consistent in early work by brynjolfsson and hitt (1996). these authors have found different reasons for this result. they referred to the ability of it to reduce or increase barriers to entry, and therefore to intensify or decrease competition. they also cited, as another reason, the effect of it on competitive strategy and the structure of the industry. also, the work of omri and hachana (2008) provides a better explanation for this ambiguity in the relationship between it investment and measures of bank profitability. these authors have confirmed in their work one of the explanations of the "productivity paradox" which is the existence of delay. indeed, they raised, on the one hand, that taking into account the delay between investment in it and financial measures of profitability slightly improves the relationship between these two variables, and that efficiency-x explains better than traditional ratios the relationship between it investment and bank profitability on the other hand. the results of the dynamic model show that the "intermediation" variable is favorable to the profitability of banks. this variable is positively and significantly linked to roe and roa at the respective thresholds of 10% and 1%. it, therefore, appears that this managerial variable constitutes an important source of profits for tunisian banks. this result seems to indicate that the most active banks in the customer lending segment tend to perform better by increasing their roa and roe. as for the "size" variable, empirical results indicate that there is a positive and significant relationship between the size of the bank and the return on assets and equity. indeed, according to the results of the dynamic panel, size is positively and significantly related to roe at the 1% threshold. the relationship between the same explanatory variable and the roa of tunisian banks is positive and significant at the 5% threshold according to the random-effects model, and at the 1% threshold according to the results of the dynamic panel. these results suggest that the tendency to improve the level of economies of scale generates products and tends to improve profits. these econometric results show that tunisian banks, with efficient use of it, have the managerial capacity necessary to manage a large total of assets. according to the results of the dynamic panel, it is surprising to find that the managerial capacity of staff is significantly but negatively linked to the return on equity of tunisian banks. the random-effects model shows that there is no positive relationship between this managerial variable and the roa of tunisian banks. this result suggests that the executive supervision rate is not high enough to improve and positively influence the profitability measures of banks. it appears that tunisian banks suffer from low managerial capacity given the low added value of senior executives. as for the "risk" variable, the estimation of the model reveals that this variable does not affect the roa of tunisian banks. however, the influence of non-performing loans on the roe of these banks is positive and significant at the 5% threshold according to the results of the random-effects model. this result, although it is different from what is expected, corroborates the results found by ndeffo and ningaye (2007) in their study analyzing the impact of the financial reforms implemented in the cemac zone since the end of the 1980s on the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 57 profitability of the banking system of the countries of this sub-region. it, therefore, appears that the more the banks take the risk by granting more loans, the more profitable they are by increasing their roa. therefore, banks should extend credit to businesses more to address the excess liquidity problem that has characterized them for several years. finally, concerning the dummy variable, the results of the estimated models show that the ownership of the bank, whether public or private, does not affect the profitability measured by the roa and roe. conclusion as part of this research, we examined the relationship between it investment and the profitability of tunisian banks, via static and dynamic panel regression models. our study focused on 15 tunisian banks for 19 years (2001-2019). to assess the profitability of these banks, three measures were used: traditional accounting ratios, roa and roe, and net interest margin. our research has shown the importance of the role played by it in tunisian banks since it investments improve their profitability. this finding contradicts the “productivity paradox” that high it investments are not associated with better performance. indeed, an analysis of the empirical results of our study shows that it has a high share of the explanation of bank profitability in comparison with other variables. the dynamic panel estimations suggest that it favors bank profitability as measured by roa and nim, while it is against profitability measured by roe. it appears that large investments in it are associated with high returns as measured by the bank's roa and nim. we confirm then that tunisian banks have an interest in investing more in it and promoting technology in their operations. the results also show that tunisian banks are acting on their size to boost their performance, which explains the continuous expansion of the networks of tunisian banks, and which confirms that the latter have not yet reached a level of the size that will be harmful to their profitability, even if a negative correlation between the size variable and profitability measured by the nim is detected during our study. it appears that the large tunisian banks do not follow the concept of economy of scale. also, the managerial variable "intermediation" is favorable to the profitability of banks measured by the roa, roe, and nim. it is thus an important source of profits for tunisian banks. the most active banks in the customer loan segment tend to be more efficient by increasing their profitability. the results also showed that tunisian banks suffer from low managerial capacity given the low added value of senior executives and that the more the banks take the risk by granting more loans, the more profitable they are by increasing their roa. therefore, banks should extend credit to businesses more to address the excess liquidity problem that has characterized them for several years. finally, the results of the estimated models show that the ownership of the bank, whether public or private, does not affect profitability measured by roa and roe, but that public banks are more profitable than private banks when considering their nim. references akber, s. m. 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(2008). explanatory factors of x-efficiency in the tunisian banks: a stochastic frontier approach. mpra munich personal repec archive, february, 124. 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/) indian journal of finance and banking 9(1) (2022), 159-163 159 finance and banking ijfb vol 9 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa role of banks as financial succor amid covid fight: an indian perspective deboshree chatterjee (a)1 savanam chandra sekhar (b) m. kishore babu (c) (a) research scholar, kl business school, koneru lakshmaiah education foundation, vaddeswaram-522502, andhra pradesh, india; e-mail: deboshreechatterjee1@gmail.com (b) associate professor, kl business school, koneru lakshmaiah education foundation, vaddeswaram-522502, andhra pradesh, india; e-mail: savanam.sekhar@gmail.com (c) professor, kl business school, koneru lakshmaiah education foundation, vaddeswaram-522502, andhra pradesh, india; e-mail: kishore@kluniversity.in a r t i c l e i n f o article history: received: 01 january 2022 accepted: 20 february 2022 online publication: 12 march 2022 keywords: covid-19, financial crisis banking sector, economic impact financial succor jel classification codes: e50, g20, g21, i10, p36 a b s t r a c t at present time, the existence of coronavirus in the environment continues to bother the globe. as an aftermath effect, the entire economies are at a standstill. reduced economic activities, mass unemployment, and financial crunch have emerged as the most realistic prospects and so, people are struggling for their livelihoods. whether it’s developed, developing, or underdeveloped economies, no country could save them from its tragic consequences. the economy of india has also been severely affected due to this pandemic. amid this situation, the role of banks has become more evident in the public eyes in recent times. the banking sector is the spine of the country’s economy. as a result, common people started expecting banks to step forward as financial succor for them in these difficult times. the current paper tries to put the spotlight on the significant roles of the banks in supporting the people, the lives, and the economies in this unpredicted state of affairs. the study offers an analysis of secondary data which is gathered from different research articles published on the covid-19 outbreak. further, this paper offers suggestions to indian banks on the adoption of innovative strategies for the improvisation of financial lives and the economy. © 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 the existence of deadly coronavirus was first time identified in wuhan, the sprawling capital of china’s hubei province, in december 2019. later, an unpredicted emergence and spread of this virus were seen all over the globe. it created an unpleasant situation throughout the world as the masses lost their lives in all the countries. after this, on 11th march 2020, the situation was declared as a pandemic by world health organization. further, to reduce the spread of this virus and to safeguard real lives, governments imposed some restrictions on everyday life like social distancing, quarantines, and shutdown of non-essential activities in the economies. consequently, the economic slowdown has come out as an uninvited output. to cushion this poor economic situation, people obtained reasonable expectations from their banks to perform like financial succor. the banking sector is a responsible and constructive member of society. so, this sector is presumed to illustrate an essential role in supporting the financial lives of the people, economies and sharing the pain of economic slowdown. as the pandemic started, buying activities of consumers started decreasing due to country-wide lockdowns. it caused a slowdown in sales volume and a sudden drop in the firm’s profitability. as a result, many big companies in india started reducing their industrial operations, which led to a continuous rise in unemployment. consequently, the revenue of the economy decreased and high stress was created on supply chain management. many sectors of the indian economy 1corresponding author: orcid id: 0000-0002-0207-245x © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v9i1.1650 to cite this article: chatterjee, d., sekhar, s. c., & babu, m. k. (2022). role of banks as financial succor amid covid fight: an indian perspective. indian journal of finance and banking, 9(1), 159-163. https://doi.org/10.46281/ijfb.v9i1.1650 mailto:deboshreechatterjee1@gmail.com http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v9i1.1650 https://orcid.org/0000-0002-0207-245x https://orcid.org/0000-0003-4469-5345 https://orcid.org/0000-0001-8625-106x chatterjee et al., indian journal of finance and banking 9(1) (2022), 159-163 160 experienced a sudden downfall which includes the hospitality sector, tourism sector, travel sector, automobile sector, real estate, construction sector, etc. people of the society started facing poor economic conditions and financial problems in their real lives. here, the bank customers began to seek financial relief and support from their banking partners. the covid-19 crisis the impact of covid-19 has been devastating all around the globe. the outcomes of this natural calamity are physical suffering and death, shut down of economic activities to save human lives, recessions, and huge economic damage. covid19 originated the public health crisis which further gave birth to an economic crisis as the economic activities were stopped to mitigate the spread of coronavirus. the countrywide lockdowns reduced customers’ demand for goods and services. the employers shut down their workplaces to avoid personal contacts and so, the production and supply contracted. shutdowns of various business organizations, educational organizations, travel services, etc. also reduced economic supply. due to shutdowns, the working population started earning comparatively lower incomes and started reducing their demand in many cases. the industries, where remote working is not possible, experienced really hard times, like hospitality and construction industries. the serious health issues also led to the weak financial condition of common people. consequently, an economic crisis arrived. further, because of the economic slowdown and financial difficulties of people, the banks started getting affected significantly. however, many researchers observed the indian banking “surprise” during the covid-19 crisis. the banking industry performed so well and extended its support to economic recovery. in india, the major section of the population got connected with the banking industry as during lockdowns they were completely dependent on their banking partners for discharging their monetary transactions. and on the other hand, people started developing their trust in online banking when they were not left with any other option. hence, society started considering the banking industry as financial succor during this hardship (kunt, 2021). pivotal roles of banks in covid-19 situation the indian banking sector operates with a wide network of over 1.6 lakh branches and 2.1 lakh atms, which ensured the availability of cash during this stressful period.  all the bank branches facilitated payments for crores of online transactions every day to keep the economic engine running during lockdowns as people could not move out freely.  the 38 crore jan dhan accounts operated with banks helped the government to transfer the government’s fiscal packages to its beneficiaries especially women and old age people, timely and safely during this difficult time.  all the banks accelerated the transformation towards digitalization for conducting everyday business and also to empower the vulnerable section by offering access to credit and other financial services.  as per the rbi measures, banks are trying to ease the rates of interest accumulated on a variety of shorter-term products like working capital loans to minimize the stress of the msme sector and to facilitate their growth in this slowdown.  as in the upcoming period, the lockdowns will be opened up, so the demand for funds will be elevated and so, a strong banking sector will be needed for a strong recovery. to meet the requirements for smooth economic recovery, the banking sector is making all the necessary arrangements under the guidance of rbi governor shaktikanta das, as he is ready to offer ‘whatever is necessary to shield the domestic economy’ (amitabh chaudhry, 2020). research objective  the ultimate objective is to expose the significance of the banking sector in the pandemic situation. research methodology this study is desk research that involves using secondary data for interpreting findings and perspectives. an effective and well-structured literature review is explored and summarized for facilitating knowledge enhancement and theory development. this is a realistic paper framed on the information obtained from past studies. we investigated the reserve bank of india website, reports of rbi, authorized websites of banks, various books, conference proceedings, journal articles, and newspapers. based on significant findings, we manifest the significance of the banking sector in the indian economy, especially in the covid-19 pandemic. literature review limbore (2014) states that today’s banking sector is fairly mature. it is equipped with a wide and innovative products range, a broad supply network, and easy accessibility by all the sections of society. however, the reach of the banking sector in rural areas remains a challenge. goyal (2019) highlight the significance of the banking sector in terms of providing financial stability to the economy. the phase of financial stability develops the capacity of the country’s economy to absorb any economic shock and uncertainty. mathew (2022) reports in the indian express, banks recognize that as the third wave of the pandemic reached, the curbs on economic activities started prolonging. the ongoing downward movement of the economy is due to closing times of malls, night or weekend curfews, restrictions on the operations of theaters, hotels, and restaurants, parks, gyms, etc., and the closing of physical educational institutions. some sectors are facing lay-offs also like travel, tourism retail, and hospitality sector. consequently, the present banking organizations are experiencing an increase in non-performing assets, and slow growth and profitability. alex (2020) specify that in the present situation, banking chatterjee et al., indian journal of finance and banking 9(1) (2022), 159-163 161 organizations are focusing on facilitating a flexible and healthy working environment for their employees and training them on innovative working methods to serve the customers effectively. due to the fast spread of the virus, a good reform started in india. as common people started depending on online banking, it helped the banks to adapt smoothly to internet banking and digital marketing. as covid-19 created an economic crisis in india, rbi and the government jointly entered into action mode to provide financial relief to the people. eleanor bensley (2020) believe that in the covid period, the bank customers are distressed. to serve distressed customers the banks need to offer more awareness, simplicity, transparency, digitalization, and frequent status updates. during the financial slowdown situation, the banks need to concentrate on remaking the banking customer experience as the banks along with the government are considered to be the financial succor for common people at this hard time. by addressing evolving customer needs and delivering an effective customer experience, banks can stabilize people's financial lives in society. volin (2020) strongly feels after they research covid’s situation that there is a change in customer behavior as they started adopting digital platforms of banking. but at the same time, customers need human touch to take the important financial decisions as they trust human advisors more. so, the banks need to offer a perfect blend of digital banking services and trusted human forces to satisfy the customers to the highest extent. claims that in the pandemic situation the banking sector is at the pivotal of the country’s economy as it provides funding to individuals and corporates. so, banks’ stability is crucial for the smooth running of the economy. perwej (2020) put the light on the challenges created by the covid-19 pandemic. there is a huge fall in revenue generation due to lower customer walk-ins. stress on net interest income due to job loss and low earning of customers. economic activities got reduced because of lockdowns and so there is a fall in demand. remote working of bank staff is another big challenge. amid these challenges, there is a huge scope of the transformation of banks in the areas like customization, digitalization, innovation, excellent customer experience, etc. and to become resilient and profitable. the banks are required to adopt an effective blend of digital platforms and human touch for providing all types of banking services. kumar (2021) named the covid situation as a ‘black swan event’ for the economies. this study clearly shows that in india 19 sectors experienced a negative impact with 15.5 lakh crore of debt. however, before the pandemic, these sectors were free from any crisis. this created a major hindrance to the smooth running of the banking sector. the government of india and rbi has taken many initiatives to reduce the effect of the covid pandemic on the economy and financial lives of the people. implementation of these initiatives calls for strong and resilient banking organizations to protect the country’s economy from long-term damage. panchal (2021) specifies the implications of the covid-19 pandemic on the indian banking sector. the study reveals that to avoid the spread of the virus, the government announced a countrywide lockdown. because of this shutdown, economic activities were almost stopped and so the sources of revenue got decreased. however, day today’s expenses were unaltered. to meet the expenses, common people increased their demand for loans and advances but at the same time, they were not having sufficient money to repay loans. consequently, a liquidity crisis arose for the banks. to lessen the financial stress and to maintain sufficient liquidity in indian banks, rbi has started taking initiatives to face the present covid situation. banks are also focusing on implementing systematic measures to maintain liquidity and to revive profitability to support the economy further. mathur (2021) explains that at present the situation of the indian economy has become poor due to lockdowns and shutdowns to avoid the spread of deadly coronavirus. however, the study suggests that during the post-pandemic also, it will take a significantly long time for the economy and the people to return to normal lives and stable economy. the banking sector is expected to produce a new working model and to take innovative initiatives to help the people and the society achieve secured financial lives and a stable economy. measures, taken by rbi to support the economy during the covid pandemic since march 2020, the apex body of the indian banking sector, the reserve bank of india has announced various strategies to face the impacts of the covid pandemic. these measures were taken to provide special economic package and to support the ‘atmanirbhar bharat abhiyan’ announced by the prime minister of india, narendra modi during the covid pandemic. various developmental and regulatory measures were taken by the reserve bank of india to address the present economic slowdown and financial stress that arose due to the covid-19 outbreak are discussed below:  rbi initiated to reduce the cash reserve ratio of all the banks to 3% of net demand to enhance liquidity.  the statutory liquidity ratio of all the banks has also been increased from 2% to 3% to allow additional liquidity.  rbi has allowed all the banks to offer a moratorium of three months initially and later of six months on payment of installments of all types of term loans, outstanding as of march 1, 2020.  rbi also permitted the banks to allow a postponement of three months on payment of interest outstanding as of march 1, 2020.  all the lending institutions got allowance by the reserve bank of india to ease the working capital financing.  rbi granted an extension of one year for commencement of commercial operations to the real estate sector. discussion on findings as the covid pandemic is getting prolonged all around the globe, all the countries are experiencing a slowdown in economic activities, financial lives, growth, and development. india is also facing similar issues. the spread of deadly coronavirus has produced poor health issues at an initial phase that slowly got converted into economic issues. at present india is undergoing an economic slowdown and financial stress. to get the better of the situation, the banking sector is believed to support the financial lives of the people, economies and share the pain of economic slowdown with innovative measures. here, the major take away from the study are discussed below: chatterjee et al., indian journal of finance and banking 9(1) (2022), 159-163 162  due to the countrywide lockdowns and restrictions, the economic activities were almost stopped. this further led to a reduction in the income of common people and the revenue of corporates. consequently, the present banking organizations started experiencing an increase in non-performing assets, and slow growth and profitability.  however, during this financial slowdown, the banks need to concentrate on remaking the banking customer experience as they are considered to be the financial succor for common people at this hard time.  so, under the guidance of rbi and the government, the indian banking sector entered into started providing financial relief to the people.  the covid situation caused a change in customer behavior as they started adopting digital platforms of banking. however, they need human touch to take the important financial decisions as they trust human advisors more. so, the banks are trying to offer a perfect blend of digital banking services and trusted human forces to satisfy the customers to the highest extent.  to lessen the financial stress of common people, banks are also focusing on implementing systematic measures and initiatives taken by rbi.  amid these challenges, there is a huge scope of the transformation of banks in the areas like customization, digitalization, innovation, excellent customer experience, etc. and to become resilient and profitable.  the researchers suggest that in the present pandemic situation the banking sector is at the pivotal of the country’s economy as it provides funding to individuals and corporates. so, banks’ stability is crucial for the smooth running of the economy.  in the new normal, the banking sector is expected to produce a new working model and to take innovative initiatives to help the people and the society to achieve secured financial lives and a stable economy. concrete steps to be taken by banks in futuresuggestions based on findings it is too early to make such predictions and offer related suggestions. however, there are some very clear trends in the banking sector, based on that the following suggestions are offered:  the economic slowdown and financial difficulties of people started affecting the banking sector significantly. however, the indian banking sector experienced a “surprise” during this covid-19 crisis. the large population got connected with banks to discharge their economic transactions during lockdowns. customer trust and connectivity with their banking partners got improved during the covid situation.  banks are expected to check the spread of coronavirus immediately by motivating the customers to opt for digital banking to a maximum extent. banks of developed countries have launched integrated digital coronavirus programs and new online portals to provide a comprehensive knowledge of available banking services, wealth management services, advisory content, and information on how to use digital channels of banking, etc. banks in india can also do so.  banks can take initiative to spread awareness among customers regarding how to use existing digital services. before the covid situation, too few customers were availing of digital offerings due to a lack of awareness, trust, and confidence. however, at present time all the customers were forced to get connected with digital banking because of the countrywide lockdowns and fear of the spread of coronavirus. banks need to frame reskilling programs for the employees to offer the best customer experience on the digital platform as well.  as an aftermath effect of this pandemic, there is a change in customer behavior. the customers have become more connected with their banking partners to stabilize and secure their financial lives. consequently, banks get more opportunities to flourish their businesses. hence, banks should focus on understanding evolving needs of customers. they should try to improve their efficiency and effectiveness. and personalized services delivered through physical as well as digital platforms should become the priority of every bank. conclusion the economy of india has severely been affected due to the covid-19 pandemic as it encountered a continuous slowdown and the people are suffering from unstable financial lives and stress. amid this situation, the role of banks has become more evident in the public eyes in recent times. masses started expecting that banks should step forward as financial succor for them in this difficult time. customers are seeking financial relief, customized products, assistance regarding digitalization, security, and transparency from their banking partners. further, the post-pandemic period may show a completely different picture for the indian banking sector. customers have learned a lesson from this pandemic to always have a financial cushion to meet the uncertainties and so, there is a change in customer behavior. the customers would like to become more connected with their banking partners to stabilize and secure their financial lives. the banks should focus more on understanding the evolving needs of customers. and personalized services delivered through physical as well as digital platforms should become the priority of every bank. consequently, banks may get more opportunities to flourish their businesses. author contributions: conceptualization, d.c. and s.c.s.; data curation: d.c. and s.c.s.; methodology: d.c., s.c.s. and m.k.b.; validation: d.c. and s.c.s.; visualization: d.c. and s.c.s.; formal analysis: d.c., s.c.s. and m.k.b.; investigation: d.c. and s.c.s.; resources: d.c. and s.c.s.; writing – original draft: d.c. and s.c.s.; writing – review & editing: d.c., s.c.s. and m.k.b.; supervision: s.c.s. and m.k.b; software: d.c. and s.c.s.; project administration: d.c. and s.c.s.; funding acquisition: d.c., s.c.s. and m.k.b. authors have read and agreed to the published version of the chatterjee et al., indian journal of finance and banking 9(1) (2022), 159-163 163 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. 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 alex, p. b. (2020). study the effect of covid-19 in indian banking sector. proceedings of 2nd international research econference on " corporate social responsibility and sustainable development (pp. 179-184). pune: global business school and research centre. amitabh chaudhry, m. c. (2020). view: the pivotal role of banking in india's covid fight. the economic times. eleanor bensley, s. c. (2020). remaking banking customer experience in response to coronavirus. mckinsey and company. goyal, n. r. (2019). indian banking sector a major contributor to economy: constancy major concern. international journal of recent technology and engineering, 8(4), 11596-11608. kumar, v. k. (2021). impact of covid-19 on indian economy with special reference to banking sector: an indian perspective. international journal of law management and humanities, 4(1), 12-20. kunt, a. n. (2021). banking research in the time of covid-19. world bank group. limbore, n. v. (2014). a study of banking sector in india and overview of performance of indian banks with reference to net interest margin and market capitalization of banks. review of research journal, 3(6), 1-8. mathew, s. v. (2022). as third covid wave sets in, bankers see likely npa surge, growth impact. mumbai, new delhi: the indian express. mathur, p. s. (2021). covid-19 impact of banking sector. in covid-19 impact of banking sector (pp. 155-159). jaipur: jps scientific publications. panchal, n. (2021). impact of covid-19 on banking in india: an empirical analysis. towards excellence, 13(2), 446-459. perwej, a. (2020). the impact of pandemic covid-19 on the indian banking system. international journal of recent scientific research, 11(10), 39873-39883. srivastava, n. (2017). history of indian banking sector. volin, m. (2020). rapid shift to digital banking during covid-19 accelerating erosion in customer trust, accenture report finds. newyork, london and hongkong: accenture. 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking vol. 9, no. 1; 2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 19 the effect of demographic characteristics on risk perception and investment decision: an empirical study in vietnam dr. shu-hui su assistant professor department of accounting i-shou university, taiwan e-mail: shuhuisu@isu.edu.tw https://orcid.org/0000-0002-7254-6155 dr. yao-ling liu associate professor & chairperson department of hospitality management i-shou university, taiwan e-mail: ylliu@isu.edu.tw https://orcid.org/0000-0001-8710-3309 dr. hsiu-ling lee assistant professor department of accounting i-shou university, taiwan corresponding author e-mail: shannon@isu.edu.tw https://orcid.org/0000-0002-6932-2062 tran thi kim quy mba student college of management i-shou university, taiwan e-mail: kimquy1303@gmail.com https://orcid.org/0000-0002-7254-6155 received: october 19, 2021 accepted: december 17, 2021 online published: january 16, 2022 doi: 10.46281/ijfb.v9i1.1548 url: https://doi.org/10.46281/ijfb.v9i1.1548 abstract the purpose of this study is to investigate how demographic characteristics, such as gender, age, income, investing experience, education, marital status, and occupation, affect risk perception and investment decision by surveying of investors in vietnam. the research also examines the relationship between risk perception and investment decision. this paper helps researchers have a clear understanding of how vietnamese investors with different demographic profiles will invest their money and how the demographic characteristics will affect their risk perception. the research discovers that demographic factors such as age, income, occupation, and investing experience have significant effects on the risk perception of investors meanwhile income, gender, and investing experience are mailto:ylliu@isu.edu.tw mailto:kimquy1303@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 20 strongly related to investment decision. the analysis result also verifies that risk perception is associated with investment decision. the survey data were collected from 167 samples including students, company employees, or people who run their own business with the age of 18 to 45. it was conducted for general investors and had practical implications for mutual funds, financial advisors, and bankers. keywords: financial behavior, demographic characteristics, risk perception, investment decision. jel classification codes: g11, g40, g41. introduction nowadays, financial behavior is a crucial part of the decision-making process, because it substantially affects investors’ behavior and decision making. risk is always an essential factor need to be considered when making an investment decision. in recent years, the impact of risk perception on investment decisions is an emerging subject in the financial behavior literature. hence, a better understanding of financial behavior in general and risk perception, in particular, will assist the investors to make a better investment decision. there are several economic and behavioral financial theories assuming that investors act rationally; however, they are only human. they act according to the majority’s opinions and some even follow their instinct and feeling when making financial decisions (raiz, hunjra, & azam, 2012). demographic profile and risk perceptions play an important role to select a particular choice of investment as the result of previous researches. rohrmann (1999) focused on six issues that influence an individual’s perception of risk, one of them being the issue of personality characteristics and demographic differences among a diversified population of subjects and respondents. bashir, shaheen, batool, butt, and javed (2014) investigated what factors influence risk perception of the individual investors and found demographic characteristics (such as age, gender, income, and education) have significant effects on risk perception in the case of pakistani investors. abdeldayem (2015) found that individual investors’ decision-making is influenced by risk perception when they invested in the bonds market. yuliani, isnurhadi, and jie (2017) discovered that emotion, moods, and other factors of investors affect perception. patel and modi (2017) revealed that demographic factors (age, gender, and income) have significant effects on investment decisions. risk is an inherent feature of all types of financial investments. risk in investing always attracts attention from an investor because of its uncertainty and unpredictability. the researches of risk perception have been well studied in developed markets for a long time. this study will extend previous researches to examine the effect of risk perception on investment decisions in the case of emerging market such as vietnam. vietnam is a developing country that has the advantage of a stable political system and various investment opportunities. however, the majority of individual investors in vietnam still make their investment decisions trending without assessment and perception of the potential risks. that is the reason why this study is made to discover the factors that affect their risk perception as well as how risk perception affects their investment decisions. financial investment is increasingly popular with vietnamese people; they do not simply deposit money in the bank and get profit from a small interest rate. they have access to other new investment types like stock (established in 2007), bond, and mutual fund (established in 2014). the common feature of these investment types is higher risk than traditional investment types. however, most individual investors haven’t equipped sufficient knowledge and information about risk in investing. this study will help investors to have a better understanding of how risk perception affects their investment decision and have appropriate action. different groups in terms of demographic characteristics such as age, gender, education background, income, occupation, investment experience, and marital status may have different risk perceptions and through this study, they will get some useful information for themselves. in addition, there are just a few studies about risk perception and investment decisions of individual investors, particularly in vietnam. therefore, this study will extend the previous studies to research the impact of demographic characteristics include age, gender, income, education, occupation, investment experience, and marital status on an individual’s risk perception in vietnam to contribute to further https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 21 researches in the field of financial behavior. this study also helps investment organizations like mutual funds, stock companies, brokers understand at a certain degree how demographic factors affect investors’ risk perception and to find appropriate investment types for each group of investors. literature review investment decisions could have been influenced by psychological or emotional factors like risk perception. to make an optimized investment decision and avoid repeating their mistakes in the past, investors need to understand those factors (charles & kasilingam, 2013).there are numerous researches which studied the relationship between risk perception and investors’ decisions. risk perception is defined as how investors recognize and assess the potential risk of financial assets, based on not only their concerns, experience but also the market situation, expert’s opinion. baghani and sedaghat (2016) found risk perception and risk tolerance have a direct and positive relationship with investors' decisions. sindhu and kumar (2014) examined the relationship between individual investors’ risk perception and their investment decision in mutual funds and found that investors tend to perceive of principle that if they can take a higher risk, they can get a higher return. simultaneously those mutual fund investors tend to agree that diversified portfolios will reduce the risk. athira and kakkakunnan (2020) found demographic traits of the investors such as gender, occupation, and monthly income have a significant effect on their risk-bearing capacity. additionally, the study of yadav and narayanan (2021) revealed there is a significant relationship between personality traits and investment decision-making. charles and kasilingam (2013) indicated that behavioral biases are directly influenced by demographic characteristics such as age, gender, education, occupation, and income and specifically mentioned that age plays a critical role in their behavior and may decide the success of their investment decisions. bashir et al. (2014) also found age has a positive and significant relationship with risk perception. however, sachsea, jungermanna, and belting (2012) implied there was a significant negative correlation between age and perceived risk. there was a consensus that women make more conservative decisions than men when investing. fisher (2010) showed that females are less risk-seeking than males irrespective of familiarity and framing, cost, or ambiguity. islamoğlu, apan, and ayvali (2015) studied and sought to understand the patterns of differences in the risk-taking habits of men and women. their studies reaffirmed the result that women significantly differ in their investment behaviors than men. wang, keller, and siegrist (2011) revealed that women’s risk perception is more than that of men after working and comparing various investment avenues like valuable securities, bonds, stocks. in the contrast, sachsea et al. (2012) revealed there is no significant difference between men and women in terms of perceived risk. bashir et al. (2014) supported income level of investors affects their behavior toward investment. relative risk aversion of persons reduces as the income level rises. gutter and fontes (2006) stated that education plays an important role in risky investment decision. investors with a higher level of financial knowledge will prefer stock equities and with a low level of financial knowledge investors choose a safer option is bank deposits. on the contrary, yao, sharpe, and wang (2011) concluded that the general education level of investors is not always an effective factor in investment decision. occupation means the activity in which people engaged for pay, it can be a job or profession. those people who work for others and receive monthly salaries tend to take a lower risk level than those who generate their income directly from their own business, trade, or profession (sindhu & kumar, 2014). people with higher ranking occupational status are more risk seekers as compared to low ranking occupational status. according to the research of dhiraj and mandot (2012), occupations and qualifications have a major impact on the investment decisions of investors in rajasthan (india). experience is a characteristic of perception which is accumulated from similar events, situations, or activities in the past. therefore experienced investors and financial risk perception might differ according to the degree of experience that can range from very low to very high. lodhi (2014) surveyed pakistan to examine the impact of experience and age on the investment decision of individual investors. with correlation analysis, the survey’s result suggested that when age and experience increase, investors tend to make less risky investments. aren and zengin (2016) indicated https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 22 that single tend to take more risks than those who are married. according to the study of islamoğlu et al. (2015), marital status has a significant effect on investment decisions. married investors are demonstrating more aggressive investment behavior than single investors and they are more willing to take risks than others. research methodology hypotheses this study was conducted to investigate the effect of demographic characteristics (age, gender, income, education, occupation, experience, marital status) on risk perception and investment decision. in addition, this study also examined the relationship between risk perception and investment decision. based on the literature review, the study developed three null hypotheses as follows: h10: there is no significant difference between demographic factors and risk perception. h20: there is no significant relationship between demographic factors and investment decision. h30: there is no significant relationship between risk perception and investment decision. data and sample this study used primary data collected by questionnaire. the questionnaire is adapted from the research of bashir et al. (2014) and sindhu and kumar (2014). participant in this study is individual investors including professional investor and non–professional investor in vietnam. different respondent groups will be chosen to distribute the questionnaire such as university students, employees working in investment companies and other industries, service companies, members in professional investing groups/forums. the questionnaire was divided into two parts. in the first portion, nine statements were designed to identify the risk perception of respondents and its relationship with investment. the second portion was designed to collect demographic information. the questionnaire was distributed to target respondents by google survey. risk perception is defined as the way that investors recognize and assess the potential risk of financial assets, based on not only their concerns, experience but also the market situation, expert’s opinion. to measure the risk perception of individual investors, nine statements were developed based on these factors and the opinions of the respondents and measured on a ten-point rating scale. these statements include “my approach is to be cautious and avoid all risky investment”; “an investment that involves a great deal of risk is not really investing but it is gambling”; “the more money one has, the more investment risk one can take”; “my broker decides the best investment level for me”; “the more familiar an investment, the less risky it is”; “a diversified portfolio reduces risk”; “the older people take lesser investment risk”; “the need to liquidate quickly prohibits me from considering riskier products”; and “the higher an investments' yield or rate of return, the greater is its associated risk”. a scale of ten–points designed by decreasing from 10 to 1 was given to each statement for the responses from strong agreement to strong disagreement respectively. making investing decisions is related to many aspects of an investment like how much to invest, how long to invest, which type of investment, and other concerns. because of the limitation of time and resources, this study only uses the total amount of money invested in stock out of the total investing fund to measure investment decision. stock equity is one of the investment types in which investors can get a high return along with high potential risk. data analysis technique this research uses the manova test to discover the effect of demographic factors on multi dependent variable–risk perceptions. multiple regressions test was used to discover the relationship between risk perception and investment decision and the effect of demographic factors on investment decision. the two-way manova was used to compare the mean differences between groups that have been split into two demographic factors (independent variables). the primary purpose of a twoway manova is to understand if there is an interaction between the two demographic factors on the risk perception (dependent variable). before the statistical analysis, age and experience year are grouped. the age of participants is in the range from 20 to 45 years old and it was divided into three https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 23 groups: 25 or less: this group includes students and graduate who start working, do not have too much experience and high income. 26–30: this group has more working experience (over 3 years) and has a higher income and most people in this range of age get married. over 30: people in this group have a more stable income and life. participants have investing experience from 1 to 10 years, there are a few participants who have experience over 5 years, therefore experience variable was divided into three groups as below: 1 year or less: in this stage of investing, people focus on learning experience and practicing investing. 2–3 years: in this stage, people got some experience and invest more skillfully. over 3 years: investors have accumulated their own experience and have their perception, thinking about investment as well as risk. multiple regressions were used to test the relationship between investment decision and demographic factors (age, gender, marital status, occupation, education, experience, and income). yi = α + β1agei + β2genderi + β3marital statusi + β4ocupationi + β5educationi + β6experiencei + β7incomei+ i y: percentage in stock (investment decision) to analyze the relationship between risk perception and investment decision, multiple regression was conducted with the dependent variable (investment decision) measured by percentage in stock and independent variables measured by nine risk perceptions. yi = α + β1s1-portfolioi + β2 s2-yieldi + β3 s3-familiari + β4 s4-cautiousi + β5 s5-liquidatei + β6 s6moneyi + β7 s7-gamblingi + β8 s8-olderi + β9 s9-brokeri + i y: percentage in stock (investment decision) results and discussions descriptive statistics most of the participants are working and have stable incomes. a total of 167 respondents was analyzed in this research. table 1 showed that the percentage of male and female participants in this research is not too different, respectively is 47.9% and 52.1%. the findings showed male participants have a higher mean of risk perception and percentage of investing in stock than females. this result supported the conclusion of previous researches that men have a higher rate of investing stock than women. more than 50% of participants are from 26–30 years old, participants over 30 years old account for 26.9% and the rest is 25 years old or less. participants over 30 years old have the highest mean of risk perception and percentage in stock. there is 40.7% of participants are married and 59.3% of participants are single, they have a higher mean of risk perception and percentage of investing in stock than married participants. percentages of the three groups of income are not too different, investors in the group have income over 15 vnd millions have the highest percentage of investing stock. the second group has a 13.05 percentage of investing in stock is investors have income from 10–15 vnd millions. most of the participants have education level are bachelor (62.3%). people with education level are college or under college, having the highest mean of risk perception, while people with master’s or ph.d. degree have the highest mean of the percentage of investing in the stock. 40.7% of participants invested in stock in one year or less than one year. participants with over 3 years of experience have the highest mean of risk perception and percentage of investing in the stock. participants who work in private and foreign companies account for 41.1%, 31% of participants are working in government, 17.4% participants are students and 10.8% participants have their own business. investors who have their own business have the highest mean of investment decision while students have the highest mean of risk perception. there is 54.5% of participants send their money in bank deposits and 29.3% spend their money on stock equities. those who invest their money in gold have the highest mean of risk perception. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 24 table 1. descriptive statistics of the respondents characteristics number percentages mean of risk perception mean of investing in stock (%) gender male 80 47.9 7.28 21.81 female 87 52.1 7.02 6.92 age 25 or less 31 18.6 7.18 6.29 26-30 91 54.5 6.98 12.99 over 30 45 26.9 7.46 21.56 marital status single 99 59.3 7.17 13.4 married 68 40.7 7.12 15 income less than 10 million 53 31.7 7.04 2.64 10-15 million 59 35.3 7.26 13.05 over 15 million 55 32.9 7.14 26.13 education college or under 21 12.6 7.44 10.24 bachelor 104 62.3 7.08 13.41 master or phd 42 25.1 7.16 17.55 experience 1 year or less 68 40.7 6.85 3.68 2 – 3 years 60 35.9 7.27 18.87 over 3 years 39 23.4 7.48 24.74 occupation student 29 17.4 7.38 9.31 private company employee 69 41.3 7.11 20.03 government employee 51 30.5 7.21 5.29 own business 18 10.8 6.73 23.61 type of investing gold 16 9.6 6.89 3.44 bank deposit 91 54.5 7.15 5.93 real estates 11 6.6 7.56 6.36 stock equities 49 29.3 7.14 34.33 percentage in investing stock 5% or less 92 55.1 6.95 0.05 6% 25% 35 21 7.5 14.14 26% 45% 17 10.2 7.31 31.88 over 45% 23 13.8 7.3 56.74 source: compiled from questionnaire the risk perception scale was assessed by cronbach’s alpha, this is a common measure used to determine internal consistency or reliability of a survey with multiple likert questions, and 10 point scales were applied in this survey. the result of cronbach’s alpha scale test is 0.878 which was above the acceptable minimum of 0.70.table 2 illustrated the mean and standard deviation for each statement of risk perception. the statement “the older people take lesser investment risk” has the highest mean of 7.99; this finding implied that participants highly agreed that the older people prefer to take lesser investment. and investors also perceive that “an investment that involves a great deal of risk is not really investing but it is gambling” which has a mean of 7.47. the statement “my broker decides the best investment level for me” has the lowest mean of 6.61 which implied people do not consider a broker can decide the best investment for them. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 25 table 2. means of statements related to risk perception variables mean std. deviation statement s1-portfolio 7.22 2.349 “a diversified portfolio reduces risk.” s2-yield 6.81 2.550 “the higher an investments' yield or rate of return, the greater is its associated risk.” s3-familiar 7.41 2.086 “the more familiar an investment, the less risky it is.” s4-cautious 6.76 2.462 “my approach is to be cautious and avoid all risky investment” s5-liquidate 7.25 2.203 “the need to liquidate quickly prohibits me from considering riskier products.” s6-money 6.81 2.461 “the more money one has, the more investment risk one can take.” s7-gambling 7.47 2.641 “an investment that involves a great deal of risk is not investments but it is gambling.” s8-older 7.99 1.911 “the older people take lesser investment risk.” s9-broker 6.61 2.349 “my broker decides the best investment level for me.” risk perception 7.15 1.231 mean of nine statements. source: compiled from questionnaire test hypothesis h10 to examine the effect of demographic factors on risk perception, two–way manova test was conducted in four pairs of demographic factors, they are age and experience, occupation and income, education and marital status, as well as gender and income; dependent variables are risk perception. as shown in tables3 and 4, the results of multivariate tests suggested that age, experience, income, and occupation have significant effects on risk perception. in addition, there is an interaction effect between income and occupation on risk perception. therefore, null hypothesis one was rejected. the finding of this study support demographic factors have significant effects on the perception of risk. table 3. multivariate tests of risk perception by age and experience wilks’() = 0. 822 wilks’() = 0.815 wilks’() = 0. 807 age group experience group age* experience multivariate 1.717 .036* 1.796 .025* .923 .601 univariate f p f p f p s1-portfolio .483 .618 1.402 .249 .745 .563 s2-yield 3.690 .027* 1.256 .288 2.141 .078 s3-familiar .664 .516 1.018 .364 .809 .521 s4-cautious 3.457 .034* 1.164 .315 1.585 .181 s5-liquidate 2.505 .085 .578 .562 .486 .746 s6-money .968 .382 1.828 .164 1.164 .329 s7-gambling 1.604 .204 .481 .619 .233 .919 s8-older 1.336 .266 8.764 .000* .276 .893 s9-broker 3.691 .027* 4.804 .009* 2.178 .074 note. *significant at 5% level source: compiled by the authors https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 26 table 4. multivariate tests of risk perception by occupation and income wilks’()= 0.752 wilks’() = 0.780 wilks’() = 0.598 occupation group income group occupation*income multivariate 1.633 .025* 2.160 .005* 1.481 .016* univariate f p f p f p s1-portfolio 3.581 .015* 5.577 .005* 2.398 .030* s2-yield 1.495 .218 1.317 .271 .317 .927 s3-familiar 3.305 .022* 4.181 .017* 3.148 .006* s4-cautious .995 .397 3.450 .034* 1.755 .112 s5-liquidate .722 .540 .762 .468 .566 .757 s6-money 2.680 .049* 5.962 .003* 1.733 .117 s7-gambling 1.134 .337 .568 .568 .166 .985 s8-older .063 .979 .562 .571 1.107 .361 s9-broker 1.515 .213 .225 .799 1.410 .214 note. *significant at 5% level source: compiled by the authors according to the means shown in table 5, the result implied that younger investors tend to disagree with the risk perception “the higher an investments' yield or rate of return, the greater is its associated risk”, compared to older ones. the finding also implied that younger ones are new in the field of investment and tend to be more cautious, compared to older ones. the result also showed that younger investors tend to agree with the risk perception “my broker decides the best investment level for me”, compared to older ones. this finding implied that younger investors with less experience and skill believe that brokers will help them decide the best and profitable investment. the finding also implied that investors with shorter experience years tend to disagree with the risk perception “the older people take lesser investment risk”, compared to those with longer experience years. the result also showed that investors with longer experience years tend to be more cautious in their investment decisions, compared to the investors with shorter experience years. the result may imply that the longer experience years make investors more understand about risk and become more careful when making an investment decision. table 5. mean of age and experience to risk perception risk perception age group experience 25 or less 26-30 over 30 1y or less 2y-3y over 3y s1-portfolio 6.9 7.16 7.53 6.9 7.1 7.79 s2-yield 6.00 6.92 7.16 6.54 6.82 7.28 s3-familiar 7.29 7.38 7.56 7.28 7.45 7.59 s4-cautious 7.87 6.11 6.51 7.01 6.73 6.36 s5-liquidate 7.48 6.91 7.78 6.96 7.45 7.46 s6-money 6.32 6.52 7.76 6.26 6.93 7.59 s7-gambling 7.74 7.04 8.16 7.22 7.33 8.13 s8-older 8.00 7.79 8.38 7.10 8.6 8.59 9-broker 7.03 6.6 6.33 6.4 6.93 6.49 source: compiled by the authors based on the means shown in table 6, the result implied that investors such as students tend to diversify their portfolios to reduce risk, and private and foreign company employees believe that the more familiar an investment, the less risky it is, compared to investors who run a business. the result https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 27 also showed government employees tend to agree with the risk perception “the more money one has, the more investment risk one can take”, compared to those who run their own business. this finding implied that if investors who work in government tend to take more risk in investing if they have more capital. according to furthermore analysis on the effect of income, the result implied that investors with higher income tend to agree with the risk perception “a diversified portfolio reduces risk”, compared to those who have lower income. the finding implied that the investors who have higher income tend to believe that the more familiar an investment, the less risky it is, compared to those who have lower income. the result also showed that investors with lower income tend to be more cautious in their investment decisions, compared to the investors who have higher income. the finding implied that investors with lower income levels will be more cautious in making an investment decision because if the result of the investment is a loss that may destroy their life. the results also showed that investors with higher income tend to agree with the risk perception “the more money one has, the more investment risk one can take”, compared to those who have lower income. the result shown in table 7implied when income levels increase, investors tend to agree that a diversified portfolio can help them reduce risk. the results also indicated that when income levels increase, private and foreign company employees tend to agree with the risk perception “the more familiar an investment, the less risky it is”, however, investors such as students were discovered on the opposite side. table 6. mean of occupation and income to risk perception risk perception occupation income student private and foreign company employee government employee own business less than 10vnd million 10-15 vnd million over 15 vnd million s1portfolio 8.07 7.45 6.65 6.56 6.6 7.39 7.62 s2-yield 7.34 7.28 5.78 7.11 6.02 6.86 7.53 s3-familiar 7.52 7.58 7.31 6.89 7.4 7.07 7.8 s4cautious 7.14 6.52 7.29 5.56 7.34 7.00 5.95 s5liquidate 7.03 7.3 7.55 6.56 7.19 7.44 7.11 s6-money 6.86 6.8 7.02 6.22 6.08 6.98 7.35 s7gambling 7.97 6.9 8.02 7.33 7.85 7.69 6.87 s8-older 7.97 7.99 7.98 8.06 7.89 8.24 7.82 9-broker 6.52 6.22 7.29 6.33 7.02 6.63 6.2 source: compiled by the authors table 7. mean of an interaction effect between income and occupation risk perception occupation income s1-portfolio less than 10vnd millions 10-15 vnd millions over 15 vnd millions student 7.8 8.08 8.43 private and foreign company employee 7.67 7.38 7.42 government employee 6.30 6.94 7.33 own business 2.50 7.33 7.82 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 28 s3-familiar student 8.30 7.17 7.00 private and foreign company employee 7.42 7.5 7.71 government employee 7.48 6.89 7.83 own business 4.5 4.0 8.55 source: compiled by the authors test hypothesis h20 the result of regression analysis in table 8 showed that r2 =0.592 and gender, experience years, and income level have statistically significant effects on investment decision. the estimated parameter of gender is significantly negative and experience and income have a positive sign. therefore, null hypothesis two is rejected. there is a significant relationship between demographic factors (gender, investing experience year, and income level) and investment decision. according to the results of further analysis by anova, males have a higher mean percentage in stock than females at all income levels. the finding supported that men are more risk-taking than women in their attitudes and behaviors toward investment decisions. investors with higher income levels tend to invest more capital in stock, compared to those with lower income levels. the results also showed that individual investors with more investing experience tend to invest a higher percentage of their total fund in stock than those with less investing experience. based on the results shown in table 8, the general form of regression model predicting the relationship between demographic characteristics and investment decision can be described as follows: y = 6.626-8.511gender + 1.819experience +6.763income y: percentage in stock (investment decision) table 8. regression analysis of demographic factors and investment decision model unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) 6.626 12.886 .514 .608 age -.130 .491 -.032 -.266 .791 gender -8.511 2.956 -.210 -2.879 .005* marital status -5.524 3.700 -.134 -1.493 .137 occupation -.122 1.652 -.005 -.074 .941 education -.072 2.521 -.002 -.029 .977 experience 1.819 .770 .250 2.363 .019* income 6.763 1.749 .312 3.866 .000* r2 = 0.592 note. *significant at 5% level /-**+-8 source: compiled by the authors test hypothesis h30 the result of regression analysis in table 9 showed that r2 =0.62. risk perceptions (s4-cautious, s8older, and s9-broker) have statistically significant effects on investment decisions. the estimated parameter of s4-cautious and s9-broker is significantly negative while s8-older has a positive sign. risk perception “my approach is to be cautious and avoid all risky investment” had a negative relationship with an investment decision, which means the more investors agree with this statement, the less they invest in stock. risk perception “the older people take lesser investment risk” had a https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 29 positive relationship with an investment decision, which means investors who agree with this statement tend to invest more capital in stock. finally, risk perception “my broker decides the best investment level for me” showed a negative relationship with investment decision; this result implied that investors who disagree with this statement tend to invest a lot of their funds in stock. therefore, null hypothesis three is rejected. there is a significant relationship between risk perception and investment decision. the finding supports the study of prabhakaran and karthika (2011), which indicated that the risk perception of investors is an essential factor that influences investment decisions. based on the results shown in table 9, the general form of regression model predicting the relationship between risk perception and investment decision can be described as follows: y = 7.442– 2.869cautious + 1.773older – 2.415broker y: percentage in stock (investment decision) table 9. regressions analysis for risk perception and investment decision model unstandardized coefficients standardized coefficients t sig. risk perception b std. error beta (constant) 7.442 8.496 .876 .382 s1portfolio .983 .692 .114 1.421 .157 a diversified portfolio reduces risk. s2 yield .745 .591 .093 1.261 .209 the higher an investments' yield or rate of return, the greater is its associated risk. s3familiar .374 .688 .038 .543 .588 the more familiar an investment, the less risky it is. s4cautious -2.869 .584 -.348 -4.917 .000* my approach is to be cautious and avoid all risky investment s5liquidate 1.439 .766 .156 1.878 .062 the need to liquidate quickly prohibits me from considering riskier products. s6 money .224 .714 .027 .313 .755 the more money one has, the more investment risk one can take. s7gambling .121 .600 .016 .202 .840 an investment that involves a great deal of risk is not really investing but it is gambling. s8 older 1.773 .865 .167 2.051 .042* older people take lesser investment risks. s9 broker -2.415 .651 -.279 -3.706 .000* my broker decides the best investment level for me. r2 = 0.62 note. *significant at 5% level source: compiled by the authors conclusion and recommendations in order to have a comprehensive and insightful study of the relationship among demographic profile, risk perception, and investment decision, this research extends previous researches with the case of vietnam. the research tried to get reach of people in various educations, occupations, ages, and incomes to have a more general status of investing in vietnam. the analysis results of this research show that demographic factors such as age, income, occupation, and investing experience have https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 30 significant effects on the risk perception of investors, which was consistent with the findings of bashir et al. (2014) that demographic characteristics (age, gender, and income), except education, affect risk perception. the result further discovers that gender, income, and investing experience have a significant relationship with investment decision, which is similar to the finding of patel and modi (2017). the result also reveals that there is a relationship between risk perception and investment decision, which supported the finding of bairagi and chakraborty (2018) that psychological or emotional factors like risk perception have effects on investment decision. the findings of this study provided various effects of demographic characteristics on risk perception as well as investment decision, which have practical implications for mutual funds, financial advisors, bankers, and individual investors. references abdeldayem, m. m. 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(2017). risk perception and psychological behavior of investors in emerging market: indonesian stock exchange. investment management and financial innovations, 14(2-2), 347-358. http://dx.doi.org/10.21511/imfi.14(2-2).2017.06 author contributions conceptualization: shu-hui su data curation: shu-hui su formal analysis: shu-hui su funding acquisition: hsiu-ling lee investigation: shu-hui su methodology: shu-hui su project administration: hsiu-ling lee, yao-ling liu resources: shu-hui su software: tran thi kim quy supervision: hsiu-ling lee validation: yao-ling liu visualization: hsiu-ling lee, tran thi kim quy writing – original draft: shu-hui su writing – review & editing: shu-hui su, hsiu-ling lee https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 32 conflict of interest statement the authors declare that they have no competing interests. acknowledgments all authors contributed equally to the conception and design of the study. 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) indian journal of finance and banking vol. 6, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 31 understanding determinants of domestic mergers and acquisitions through literature review dr. sheeba kapil professor indian institute of foreign trade (iift), delhi, india e-mail: sheebakapil@iift.edu kanika dhingra research scholar indian institute of foreign trade (iift), delhi, india e-mail: kdhingra01@gmail.com abstract for a firm entering into m & a is sometimes a choice and other times it is a compulsion. but if a corporate wants to grow, it has to undergo organic as well as inorganic growth in form of m & a. the study of determinants of mergers and acquisitions has thereby become of utmost importance and relevant in times of intense competition among firms. the current study explores the determinants of mergers and acquisitions for domestic deals in india in comparison to other nations. the determinants can be categorized into firm-specific, macro-economic, strategic determinants, financial determinants. thorough research is done by following a rigorous process from exploring the papers to synthesizing the research. the study also gives insights regarding how the relevance of factors determining mergers and acquisitions is changing in india with an impact of covid-19 and other global level uncertainties. keywords: domestic mergers, acquisitions, determinants, inbound m & a, covid-19. jel classification codes: f23, f65, g34, l25. introduction expansion of business is an imperative decision which is taken by the firms who crave to increase customer base, so, as to further enhance the sales or profitability. firms at this point of judgement either decide to focus on strength of internal processes or instead enter the new markets by the means of greenfield or brownfield fdi. greenfield investment involves creation of new assets however brownfield fdi or mergers and acquisition (domestic as well as inbound) leads to modification in control of the target firm, koerniadi et al. (2015). “a merger refers to two companies joining together, generally through shares exchange, as peers to become one single firm to run the business. an acquisition involves a purchaser company (acquirer) that buy the shares or assets like a plant, a division of business or whole company (target company) by making the payment in cash, shares or assets.” merger involves parleys among target company (board of directors) and acquirer company, as it a friendly transaction taking place. in acquisition the local firm get converted into affiliate of foreign company. entering new economy by greenfield investment offers risk of starting from beginning which together with time and efforts investment does not guarantee success. though brownfield investment in https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 32 form of mergers and acquisition entry into the new markets has its own benefits and drawbacks, but these can prove to be an engine of growth if handled and processed diligently. m & a are an important characteristic of corporate restructuring in form of different types of arrangements like mergers, acquisitions, amalgamations and hostile takeovers. they had emerged as mergers waves, which were pragmatic since 1880s directing european markets mergers and now the recent wave which begun following financial crisis of 2009 was ended in first half 2020 by pandemic, covid 19 lockdowns, galpin (2021). whereas the second half of 2020 has witnessed record deal leap. historically, when the economies became globalised, the developing nations were entering into m & a, the developing nations like india got engaged fervently in bigger and substantial deals to contest with advanced nations. the success rate of acquisition in terms of shareholders wealth maximisation is less than 20 percent (economist, 1999). even then the marathon of corporates to enter into mergers and acquisitions deals has not slow down, which stimulates the researchers to find the answer to the question: what are the determinants of mergers and acquisitions? whether determinants are same for domestic, inbound and outbound merger and acquisitions? these questions specifically later one is a research space yet to be explored upon. figure 1. number & value of m&a asia-pacific source: imaa analysis, 2021 asian countries always striving for growth have observed mergers and acquisitions activities from middle of 1990 year, the deals have increased from 954 to 3,551 in number till may 4, 2021 (imaa). india also participated in the merger activity from 1991, subsequently to liberalisation and globalisation reforms. it is worth noting that the number of mergers and acquisitions have increased substantially from 115 deals in 1996 to 798 till 2020 (imaa). in comparison to other years like in 2018, when the number of deals were all time high at 1870; covid 19 has pulled down the activities of mergers & acquisitions by dipping the number of mergers activity. on the other hand, the value of merger and acquisition have increased from 1.6 billion usd to 33.299 billion usd in 2021 whereas in 2018 it was, 119.77. the number of hostile takeovers in 2021 in india has got reduced to only 3 in count due to covid situation prevailing in the economy. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 33 figure 2. number of mergers & acquisitions (world)hostile takeovers source: imaa analysis, 2021 figure 3. strategic deal value (world) in trillions us dollars since, in acquisition, the acquirer firm takes the control of the assets as well as the business of the other firm even when both the firms are still independent beings, the control has got changed. the term acquisition is defined in mrtp act, 1969 as the acquirer should have the voting power of 25 percent or more in the acquired entity. on the other hand, initial threshold limit for acquisition or takeover according to old sebi regulation of takeover was 15 percent which has been now improved to 25 percent of voting power in the target firm as per sebi (sast) regulations, 2011. an acquisition can be minority where 10 to 45 percent voting right shares are with the acquirer or majority, where 50 to 99 shares are with the acquirer. the payment made for the merger and acquisition can be in form of cash, stock or hybrid (cash and stock). a swap ratio is fixed among both the companies. corporate restructuring in form m & a has long term both positive and negative impacts on firm as well as the stakeholders including the human resources, shareholders and value of the firm. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 34 figure 4. types of acquisitions author’s own compilation figure 5. global foreign direct investment inflows source: unctad https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 35 motivation for the study the increase in mergers activity, though has slow down during 2021 than past years but still insistently occurring in asian regions as well as india. incidence of mergers and acquisitions is studied in developed economies, rhodes-kropf and vishwanathan (2004) and in case of developing economies like india studies are fewer. these can be some of the reasons to study the factors determining m & a in inbound and domestic context as it can give clarity for the reasons of restructuring of the corporates at such an immense level. also, indian markets are more involved in cross border acquisition with the changes in sast, 2011. the reasons for which indian firms are expanding through m & a is very much different from the motives of developed nations. most of the times, the developing economies are globalising to seek resources or technology. on the other hand, the developed nations are engaged in activity for gaining ownership and seeking markets. the theory development for mergers and acquisitions in india is also in emerging stage. with handful of research and studies, this area specifically is demanding more research, in context of domestic as well as inbound m & a. corporate restructuring is an attractive activity, which can be better understood by studying the characteristics of firms and industry involved in the same. though there is research on these characteristics, still there is a gap in terms of the comparison of firms characteristics for domestic acquisitions and inbound acquisitions. according to li et al, 2016, initially there was a trend of mergers and acquisitions in developed nations, which has now shifted towards the increase of developing nations m & a activities. m & a studies are vast and catered in different areas starting from strategy, finance, international business, economics, and marketing, human resource aspect. the focus of our study is a try to fill the gap existing in field of international business and finance, in terms of studying the motives of domestic m & a and inbound m & a. the studies existing in exploring determinants of cross border m & a are numerous, many studies are profounding giving sturdy findings (globerman & shapiro, 2005, rossi and volpin (2004)). the studies which are explicitly explaining determinants of domestic and inbound mergers and acquisitions for india, an emerging nation are insufficient, giving a base to delve more into this topic. research methodology and problem statement this study is an attempt to carve a comprehensive literature for determinants of domestic mergers and acquisitions in india. for in-depth analysis of the same, the search criteria of research papers included is based on search criteria specified we found, piles of research done in mergers and acquisitions, i.e., from huge database of 820 studies in different perspectives, retrieved from databases like emerald, elsevier, ebsco, proquest, science direct from year 1985 till 2021 (table 1). from this database, 60 studies are taken into framework to analyse further for determinants of domestic mergers & acquisitions which are characterised broadly into country specific, firm level specific, industry specific, deal specific characteristics, and macroeconomic factors (table 2). the inclusion and exclusion criteria are taken into contemplation while compiling the studies. the research papers are retrieved by searching different keywords related to determinants of mergers and acquisitions. the studies are related in terms of the factors studied but empirically the definitions of the factors included are different in terms of proxy factors selected. also, the conclusion and the results are different in pointing the significance of the factors. so, we can say that the determinants of mergers and acquisitions are still lacking in stating similar conclusions. this further serves as noteworthy gap for research. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 36 table 1: search of literature from source databases key words countries no. of papers emerald, elsevier, ebsco, proquest, science direct determinants of m & a, determinants of mergers and acquisitions, determinants of acquisitions, determinants of country specific factors of mergers & acquisitions, determinants of domestic mergers and acquisitions, macro-economic factors of m & a, firm level determinants of mergers and acquisitions india, denmark, usa, china, romania, netherlands, switzerland, united kingdom, greece, botswana, egypt, kenya, nigeria, south africa, tunisia, malaysia, singapore, thailand, vietnam, turkey, northern europe, other developed and developing nations 60 author’s compilation table 2. determinants of mergers and acquisitions in literature type of study inclusion criteria exclusion criteria period of study firm specific determinants, deal specific characteristics, industry specific factors, financial factors, market specific factors, macroeconomic factors, country specific factors the studies related to determinants of developed nations, developing nations, indian context are included. secondly, studies involved in determinants of domestic, inbound and outbound mergers and acquisitions are reviewed. the studies related to performance of mergers and acquisitions are not taken into analysis. 1985-2021 author’s compilation https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 37 figure 6. conceptual model author’s compilation theoretical context mergers and acquisitions can be driven by a lot of causes. in general, acquirer company can weigh up the target company in terms of a gainful venture or an alternate investment. the regular topic of research for the scholars in mergers and acquisitions area is studying the benefits or motives of the firms including expanding markets, adding new product lines, acquiring r & d, knowledge and skills seeking, providing effectual management for running business and handling the assets of the firm. m & a is considered as an investment activity, thereby depicting that the factors affecting investment decisions in business are also considered as factors impacting mergers and acquisitions. on the contrary, simons (1992) concluded firm is not considering cost involved in merger but for corporates, m & a is as a part of long term strategy for seeking benefits. there exist different theories of m & a which describes the motives of mergers and acquisitions, these theories are summed up by buckley et al. (2007) and trautwein (1990). according to buckley, fdi is determined by four purposes including, search for new market, search for an asset, for achieving efficiency, for natural resource. on the same lines, trautwein stated that mergers and acquisitions are driven by empire building model, efficiency model, valuation model, process model and monopoly model. dunning (2013) in his eclectic theory explained that the firms are interesting in entering foreign markets only when it has ownership advantages as these benefits leads to increase in the propensity of mergers activity on the basis of location advantages. there are researchers who disagree with dunning by stating that the eclectic theory is insufficient to explain m & a occurrence. mathews (2017) has given lll (linkage, learning & leverage model) in this regard, whereby he elaborated that firms from emerging markets are skipping levels of internationalization by ensuring strategic assets through joint ventures, strategic alliances and other modes. mathew has named these firms as late comers which can grow by seeking for strategic assets. johanson and vahlne (1977), johanson and vahlne (2020) in upsala model, referred to closeness of domestic firm to the foreign market as key factor to enter into international mergers and acquisitions •820 studies determinants of mergers & acquisitions (cross border, inbound, outbound, domestic including general overview) •300 studies determinants (country specific, firm level, industry level & macro economic) of domestic mergers & acquisitions •60 studies https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 38 markets on the basis of existing theories and models, determinants of m & a are explored by the researchers. danzon et al. (2004) have studied the determinants of m & a on the basis of firm size, i.e., large and small firm proxied by the enterprise value. they concluded that the small firms seek m & a as strategy to stabilise their financial condition and large firm seek m & a for fulfilling their excess capacity which is there due to factors like fear of patent expiration, channel gaps, cash to sales ratio, mne affiliation, tobin’s q, firm size. factors responsible for corporate restructuring in india are also explained by venkiteswaran (1997). regarding the trend of m & a, research by kumar (2000) has shown that 35% of acquirer firms purchase local firms as joint ventures, 5% acquirer firms had enhanced their share in own subsidiaries and less than 10% mergers are for patents mergers. india being emerging nation is growing rapidly by entering global markets or allowing other country firms to engage in m & a with india. due to which, it’s very much required to study the firms characteristics which are involved in corporate restructuring particularly, m & a. the firms are either growing organically or by domestic m & a or by means of cross-border mergers and acquisition. the literature is lacking in differentiating the characteristics of firms involved in m & a domestic or cross border. before 1990s theories revolved more around domestic market, but after economic reforms in india, cross border m & a deals came into the trend. researchers like shimizu et al. (2004), shimizu (2016), cartwright and cooper (1995), cartwright (1998) stated that studies were getting more inclined towards the cross border deals. they also defined that with passage of time, mergers and acquisitions are getting popular among different disciplines. cartwright (1998) elaborated that initially the research on m & a started from domestic transactions in usa. further haleblian et al. (2012) confirmed that 1990s was the year from which, researches were revolving around cross border of europe then in asia and after that most of the studies for international deals in emerging markets. mergers & acquisitions are considered as inorganic growth strategy for a firm, much research has been done in developed as well as developing economies. in developed economies, the studies are diverse starting from research by kogut and singh (1988) and nkongolo et al. (2010), acquisition having certain determinants is a means to go global, post-acquisition benefits by bhagat et al. (2002), barakat et al. (2020), bhagat and bolton (2019) performance of acquisitions by arens and brouthers (2001). on the other hand, studies by contractor et al. (2014), gubbi et al., 2010, chittoor (2009) for developing economies concluded that strategic asset seeking is the main motive of m & a, though there are other reasons also for going global. shimizu et al. (2004) observed that the meaning of cross border mergers and acquisitions must be broadened as according to them domestic deals also have similar characteristics like that cross border deals. in the same line, the research by noeliasarah reynolds and teerikangas (2016) elaborated differentiating clearly between domestic m & a. and cross border m & a is challenging because the firms involved in domestic m & a also pretend they scope includes international market. according to sarah, this directly has an impact on experience of employee by creating a stress and emotional turmoil on them, on these grounds they claimed that pure domestic mergers and acquisitions is an illusion. on the contrary, international m & a are being distinguished by the researchers on basis of cultural challenges, stahl and voigt (2008), teerikangas and very (2006), language barriers welch et al. (2005), varra et al. (2010), institutional boundaries, geppert et al. (2013), these are the international variables which do not impact domestic deals as they are more of routine and unvaried in nature. another area of differentiation in studies in context of domestic and cross border deals are regarding the performance or value creation by these activities. in comparison to developed economies, the developing economies have over performed (gubbi et al. (2010), chakrabarti, (2001)) which is opposite of general views that developing economies do not perform well. captivatingly, according to the findings of kang (1993), markides and ittner (1994), foreign acquisition have affirmative https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 39 performance in comparison to domestic deals. the studies also differentiates among domestic deals and cross border deals by elaborating that fdi inflows are impacted by uncertainty in domestic or local economic policy whereas uncertainty in global economic policy enhances fdi inflows in economy, nguyen (2019), nguyen and vu (2021). regarding the differences in type of payments made by the firms at the time of m & a, it can be paid in cash or stock or hybrid, though it is observed by the researchers that the shareholders of previous firms are interested in receiving cash as via stock the synergy risk can pass on the investors in firms. on these theoretical contexts, it’s fascinating as well needed that the factors impacting domestic m & a as well the motives determining crossborder deals should be studied thoroughly as well as empirically. determinants of domestic mergers & acquisitions mergers and acquisitions initiated in india with industrial policy reforms in 1991, it was further expediated by removal of restrictions in mrtp act, 1969 then changes in fera, 1993 followed by fema, 2000, it was checked upon by competition policy act, 2002 to prevent dominance by cartels or mergers and acquisitions, so, that these activities do not curtail healthy competition among firms. the economic reforms, 1991 improved the firm level stiffness. according to basant (2000) india’s domestic firms have positively responded to the economic policy changes and growth of economy by steadily undertaking m & a activities domestically as well as by off shore investments or deals. this is a reply by the corporates to ever growing competitive environment. gantumur and stephan (2007) stated that the it firms in global economy consider technical know-how to be a critical factor to achieve success in comparison to other factors like firm size etc. the trend of increase in domestic mergers and acquisitions can be clearly seen from figure. 7 figure 7. number and value of mergers in india https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 40 capron and shen (2007) and ahuja et al., 2001 stated that resource seeking motives as well as the knowledge seeking motives were main motives of merger and acquisition by a firm. as, knowledge along with resource leads to operational synergy and provides economies of scale which further improves performance of firm after acquisition. another motive explained by stigler (1968) was mergers for monopolistic powers. according to world investment report, 2007, the motives for acquisitions in developed countries are different from that of developing economies. as per report even the firms have changed their role post liberalisation, the firms of developing countries, which were target earlier now are acquirer. khanna and rivkin (2001) explored that the developing countries have scarcity of factors like good management, sophisticated technology, funds due to economy’s legal and political environment flaws. due to which developing economies seek developed economies for assets and resources (strategic assets seeking theory) whereas, hitt et al., 2009, hitt et al. (1996) confirmed that developed economies enter into m & a to use their existing capacity and for entering new markets. fortanier and tulder (2010) in their study found that the acquisitions in china and india are dependent on technology seeking motives as technology can be easily attained by acquisitions at less cost than by licensing. rasiah et al. (2010) conclude that all the three country firms, india, brazil and china want to attain intellectual assets (strategic resources) through acquisition which was further confirmed for bric countries. this was also explained in theory given by moon and roehl (2021), imbalance theory of weak competitive advantage, as per this, the firm in order to complete the gap between needed and present resources, enter into merger and acquisitions. indian firms enter into m & a in developed countries mostly due to lack of business essential factors which is because of difference in institutional environment of both the types of economies, madhok and keyhani (2012). figure 8. number, value & consideration of acquisitions in india https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 41 according to impa insights 2016, in india, the sectors which are more prominent in m & a in previous four years include mining, energy, utilities, telecommunications, fmcg, pharmaceuticals. it has been observed that m & a activities are driven by objectives like gaining market power, entering new geography, market access, to access channel of distribution as well as technological motives which cannot be the sole motive. due to surge in competition in liberalisation in financial sector, capital flow has increased which is aiding m & a for domestic firms, which is further helping firms in re-building the core competencies, vyas and narayanan (2012). mangers in indian firms are not clear about the reason their firms should enter into mergers and acquisitions, whether they are entering to access resource, r & d, location, also the awareness about the process for various types of m & a is not there. additionally, the consultant firms hired by the indian firms for m & a are having imperfect expertise. moreover, the planning part is good and the implementation part is weaker in context of m & a for the indian firms, bhattacharya (2019). also, christensen et al. (2011) explained that managers in indian firms should draw out detailed procedure regarding the process to be followed and resource to be acquired. pandya and sisombat (2017) stated that m & a fastens firms to realize gains of market share and decrease in cost which leads to improvement after merger, pandya and sisombat (2017). pandya (2018) also confirmed that after 1990s, the mergers and acquisition activities have increased in india but the non-manufacturing sector role in mergers and acquisitions have decreased. according to unctad and imaa, the number of m & a deals in india has increased as well as value of m & a has also increased to a significant extent. according to dhingra and kapil (2019), the firms involved in domestic as well as inbound m & a are motivated by different factors. they clarified that the motives can vary from resource seeking theory, boateng et al. (2008), institutional theory, nayyar (2008), strategic asset factor, entrepreneurship theory. they further elaborated that techbased firms got motivated by resource and asset seeking, fmcg for resource and market entry, pharma sector and healthcare sector by resource, market and strategic asset motive, banking or finance sector for institutional theory and resource seeking. denyer and tranfield (2006) claimed that a sector can have specific drivers for m & a which are not applicable in other sector. according to denyer, a systematic literature can explain it effectively with the help of diverse literature. after lpg in 1991, there were important policy changes which were introduced by government of india to enhance research & development and for security of ipr. trips was intended to give to the first discoverers or inventors. m & a was also facilitated by new provisions in companies act, 2013. dhingra and kapil (2020) concluded that after economic reforms of 1991, a thought was that foreign mnes can lead to destruction of markets in india by acquiring indian firms. but contrary to that indian firms have succeeded when got merged with foreign firms thereby creating synergistic benefits for both the firms. wilson (2003) stated that india as well as china are growing fast and have prosperous future growth, due to which, the survival of firms and achieving success at the same time in the markets has become difficult. as per the study of yagil (1996) and dhingra (2019) there are two main drivers of firm for m & a in international markets, the firm differentiation (including the strategy of firm and resources of firm or firm size) and country differentiation (characteristics of host country of firmsignificant factors considered include, country openness and country risk). the determinants of domestic mergers and acquisitions can be concluded as: macro-economic determinants ramakrishan (2010) and kumar (2009) explored that m & a has two major dimensions, first is determinants of m & a and the post-acquisition performance. the variables of host country, which support m & a activities are political environment, economic environment, cultural or social environment, institutional environment, legal protection for investors, openness of country, strategic https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 42 assets, group affiliations of economy. fdi flows are impacted significantly by the economic environment of host nation. according to nenova (2002), the economies which have strong legal rules for protection of the investors, the frequency of m & a is more there. bris and brisley et al. (2008), bris and cabolis et al. (2008) concluded that if two economies have same type of investor or shareholder protection, then there are high chances of m & a between them. bertrand et al. (2007) clarified that acquisition cost which consists of the host country’s prevailing tax rate, financial market openness and about laws also impact m & a occurrence. ali-yrkko (2002) emphasised the importance of gdp, no. of corporates listed on stock exchanges of country, market capitalisation in m & a activities. laamanen (2007) stated that the decisions of m & a are dependent on factors like economic as well as political risk of economy. in study by bhargavi et al. (2016) market size of host economy is taken as gdp of host nation. studies of kravis and lipsey (1982), chakrabarti (2001), buckley et al. (2007) confirmed that market size of an economy is considered as an important location determinant of m & a as it generates cost effectiveness in terms of economy of scale and labor specialization. according to athreye and kapur (2009) after exploring market and resources, the next significant determinant of m & a is strategic assets for improvement in technology. balasubramanyam and forsans (2010), pradhan and karl (2010), kaartemo (2007) confirmed that the strategic assets play a vital role as this aids the firm specific gains while going for mergers and acquisitions. bhargavi et al. (2016) has included r & d expenses by host economy, patent filing, trademark filing and secondary school enrolment ratio in strategic assets. bhargavi et al. (2016) had proxied gdp deflator as measure of inflation and corporate taxes as the components of economic environment of host nation. schneider and frey (1985) concluded opposite relationship among inflation and fdi flows. according to baniak and cukrowksi (2005) and dunning (2009), fdi is attracted by the institutional environment of host nation and weak institutional environment impact fdi negatively. pradhan and karl (2010) examined that in case if a firm belongs to weak institutional environment of a country then even political risk may not create a limitation for fdi. also, researchers like root and ahmed (1979), schneider and frey (1985), chakrabarti (2001) and dunning and lundan (2008) confirmed political stability of a nation as utmost important factor for fdi. mata and portugal (2000), mata and portugal (2004) and ilmakunnas and topi (1999) noted that macroeconomic factors impact fdi inflow and outflow. as per them, factors like sunk cost has positive impact but factors like labor cost and advertisement intensity have negative effect on fdi and m & a. moreover, it was also observed by the researchers that the cultural environment of a host nation also has bearing on m & a activities. leamer and storper (2001) clarified that cultural environment which included geographical distance between india and other country impacts the occurrence of mergers and acquisitions. common language among host nation and home nation, which is also a part of cultural environment acts as a significant determinant of m & a (barkema and vermeulen (1998), kogut and singh (1988) and evans et al. (2000)). likewise the number of indian firms mergers and acquisitions are growing in usa, uk, germany, denmark and other european as well american countries, this is showing one of common language english between india and host country, to some extent possible for these m & as. gastanaga and nugent (1998) and chakrabarti (2001) claimed that a country openness can lead to increase in fdi, where openness is measured by proxy of percentage of trade in gdp. country openness can be defined as removal of unnecessary barriers on imports & exports of a country. group affiliations like a country if member of groups like asean, commonwealth countries, g15 and g20 impact the acquisitions in india is studied by few researchers. murtha and lenway (1994) states that if a home country has bilateral treaties or is member of international bodies, thereby maintaining global relations impacts as motivation for m & a activities. the acquirer companies are also entering into m & a with the target companies who are related to them in terms of accounting practices https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 43 by following ifrs, which are universally followed instead of local gaap. srivastava (2018) stated that in order to apprehend merger and acquisition more rigorously, in place of following emotional approach rational approach should be followed as proposed by srivastava in rerc ma theory. george et al. (2016) explained that firms when enter into related mergers and acquisitions, look for the activities are related or not and on the basic of deal value, productivity of the other company, whereas in case of unrelated m & a, financial position of company is taken into account and not productive capacity while comparing with india, the m & a studies are studied more in china. factors driving m & a are country specific as well leading to differences in the number and deal value of m & a in a country. mergers and acquisitions are dependent on different factors like gdp, common language, culture, financial markets. all mergers cannot be successful always, dhingra (2019). due to scarce literature on determinants of m & a in india specifically, more study need to be done, as well as more m & a research should be conducted in emerging nations. financial market variables liang et al. (2016) found that the motives of mergers and acquisitions in emerging asia is different from the motives of corporate restructuring activities in asian nations in various forefronts. the financial determinants including the home country’s stock market performance and capitalization can motivate m & a but the credit provided by financial institutions and banks in form of private credit as not impacting m & a activity in these asian nations. also, they stated that liquidity in stock market is negatively impacting m & a activity from asia to other regional areas. according to them, the asian nations are intrigued by the economic growth in terms of high gdp growth, market size, that means they are exploring other nations for seeking new markets, on the other hand gdp growth and gdp of host nations are found not significant for mergers and acquisitions activity in domestic acquisitions by asian nations. as domestic acquisitions are not done for motivated by new markets and nor efficiency related motivation, which is lower cost of labor in host nations. as per their study both the types of m & a domestic as well as cross border in asia and non-asian nations are motivated by fuel seeking. the technology motive (or resource leading motive) is found insignificant for both domestic & cross border m & a in asia and non-asian nations. common language is found significant in both the categories domestic & cross border m & a. whereas, financial openness and institutional environment of host nation is statistically significant for cross border m & a in asia and nonasian nations. the variables like patent applications, exports were found negatively associated with m & a activity in both domestic and cross border transactions. erel et al. (2012) documented the different factors which impact positively mergers and acquisitions include, distance between locations, stock market performance in form of high returns, market to book ratio, accounting disclosure, home country currency appreciation, bilateral trade. brooks and jongwanich (2011) explored in his study that private bond market do not support m & a, except that all the other financial determinants impact m & a positively in the emerging nations under study. rose (2000) explained that the m & a activities are impacted in terms of volume of trade if both countries have common currencies. kamaly (2007) pointed out that the determinants which enhance the mergers and acquisitions activity in emerging nations are stock index (s&p 500), trade or country openness, currency depreciation, interest rate depreciation. di giovanni (2002) confirmed that the ten motives which facilitates m & a activities are: financial depth, financial or country openness, for resources, for market, for assets, for efficiency, real exchange rate, quality of institutions, cultural similarity, location distance. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 44 strategic determinants most of the times firms want to undergo m & a due to the synergy gains associated with these, even when there is no guarantee of post-acquisition success. berkovich and narayan (1993) stated that operational synergies are a significant driver of m & a. chatterjee (2007) concluded that operational synergies makes the process of integration difficult which cannot be copied easily by the competitors leading to gains. vasilaki and o’ regan (2008) explained the importance of the role played by the management of the firms in terms of the commitment to the process of m & a thereby generates returns and synergistic gains. seth (1990) further explained that the synergy is created due to economies and cost effectiveness, which are achieved as outcome of m & a thereby leading to enhanced market power of the firm. according to suk byun et al. (2013) research of determinants of m & a was fixated towards country related, firm related and industry related factors whereas less studies were defined for emerging nations of asia, duppati and rao (2015). researchers like dunning (1993), caves (1996) were more concerned about exploring the factors which are making a location favorable for global production. lall (2002) concluded that the research is highly inclined towards identifying the country specific, industry specific and firm specific factors for fdi in general and considered that all types of modes of fdi are motivated by same factors. kang and sara (2000), letto et al. (2001), chen and findlay (2002) clarified that though maximum proportion of fdi is created through m & a but the studies related to cross border m & a are limited. certain studies exploring the determinants of m & a specifically are been done. (globerman et al., 2005, di giovanni (2002). beena (2004) find out that firms merge with same group firms to prevent themselves from takeovers and to merge their control as well. hitech industries in classification of oecd which includes pharmaceutical sector as well is a sector which is systematized sector. this sector has features of intense competition, oligopoly market, patent rules, r & d expenses are high, innovations in process as well as product resulting in unforeseen outcomes. with the present restraints, pharmaceutical firms grow organically together with inorganically, where, they enter mergers and acquisitions and strategic alliance. this help them grow globally and also fulfilment of the restraints they have like patents, resources. indian government is also facilitating mergers and acquisitions in the all the industries including pharmaceutical, which is a national importance industry. firm specific determinants many studies have tried to explain the determinants of mergers and acquisitions by evaluating firm specific determinants and the industry specific determinants. for achieving synergistic benefits also m & a are undertaken by firms. maquieira et al. (1998) observe mergers in years 1963 to 1996 in us where they found significant synergistic benefits in conglomerate m& a and not so significant synergistic gains in non-conglomerate m & a. bradley et al. (1998) reported that mergers when successful leads to gain in combined firm value at least less than 10 percent. one more reason to enter merger and acquisition is to have benefits in form of efficiency. rhoades (1998) explored this efficiency benefits in case of banks mergers in usa where 50 percent i.e., 4 out of 9 bank got the efficiency gains. bruner, 1988 noted another determinant of m & a, which is capacity of excess cash, capacity of debt. laamanen, 2007 stated that financial performance and target firm’s market value are significant firm level factors of acquisitions. de santis et al. (2004) study the dependent variable in the study as the no. of mergers and trade cost as independent variable to explain m & a determinants. jayadev and sensarma (2007) evaluated occurrence of mergers and no. of mergers in india in their study. this approach gives additional information regarding m & a determinants. in most of the acquisitions, managerial capability and financial position as well as performance of the firms are prime determinant of m & a. worthington (2004) states the target firm factors like asset quality, credit unions and managerial competencies impact the mergers and https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 45 acquisitions. hunter et al., 2000 explored that the acquirer firms select target firm on the basis of financial health including debt facility. on the contrary, danzon et al. (2007) concluded that the small size firms which do not have financial soundness and the large firms which have access capacity in form of future risk of patent expiration are fascinated to enter into m & a. golbe and white (1988) found that the acquirer consider the purchase or replacement value of assets of target firm as important motive of m & a. andrade et al., 2001 confirms that the gains of mergers and acquisitions is in the form of profit and financial efficiency of the merged entity. helen louri, 2001 explained in detailed manner that the variables which impact m & a include: net profitability, ratio of capital and labor, net profit (positive impact), inventory ratio and liquidity ratio (negative impact). they further stated that earlier variables including growth, profit of firm, market concentration are not impacting entry size of firm considering m & a whereas research development expenses of firms positively impact. andrade et al. (2004) used the dependent variable, investment in mergers as proxy variable for m & a, which is a continuous variable in the study. to enhance the study the dependent variables were taken as occurrence of m & a, i.e., a qualitative variable and the frequency of m & a, which is a discrete variable. for occurrence of m & a, logistic regression and for number of m & a, count data regression was applied (rudra jayadev and sensarma (2007). erdogan (2012) confined the variables impacting m & a to pbit and debt equity ratio of the firm. the research has evolved around the firm specific factors and financial factors thereby showing that these are an attractive motive for firms to enter m & a. whereas there are rare studies which show that the acquirer firm has certain specific characteristic which motive them to perform merger activity. dermine (2003) the main motivation behind merger activity was neither traditional nor the interest income related activities, which is altogether a different motive from general motives of m & a. das and kapil (2015) confirmed that the firm who have characteristics of financially strength, low debt and elevated market capitalization acquired the other firm frequently. das and kapil (2011) stated that the deal characteristics of both indian and chinese firms deal types were not found to be significantly different statistically. agrawal and sensarma (2007), found the importance of industry specific determinants of mergers and acquisitions activity in indian firms. they have taken occurrence and no. of mergers as proxy variable for m & a activity. results were contrary to earlier existing results that industry shocks are not significantly impacting m & a whereas the variables like cash flow, market concentration and the growth prospect for firm impact m & a activity. beena (2008) explored mergers and acquisition by taking the data of 115 firms in manufacturing industry of india from 1995 to 2000 and the sample consists of 84 indian domestic acquisitions and 31 foreign shareholding firms which were acquired. she confirmed that the performance of acquired firms have shown positive signs in respect of exports but the capacity of the operation have shown negative signs in terms of expansion or efficiency. basant and mishra (2016) explained that though trend of firms depending on mergers and acquisitions have increased but firms are still dependent on internal technology, research and development and other factor. on the other hand they stated that the firms are exploring the foreign or fdi linked technology or inflows for growth. they attempted to identify the determinants of mergers and acquisitions in in pharmaceutical industry in india, they have shown that the firm specific factors are most significant factors of m & a activity. they have used statistical test like panel probit model and panel ordered probit model in study. on the other side of this relevant topic, the industry specific determinants also impact together with firm specific determinants of mergers and acquisitions. brealy and myers (2003) stated that merger waves are found by the researchers to operate within industries. mitchell and harold (1996) confirmed that merger and acquisitions are clustered in industries and they then connected and further evaluated this industry clusters of m & a by industry shock in respect of economic level shocks, technology level https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 46 shocks, government system and regulatory shocks. but, there are diverse results for the causes of these mergers waves. rhodes-kropf and viswanathan (2004) stated that the causes of mergers and acquisition waves are behavioral in nature. jovanovic and rousseau (2002) concluded that the firms with high value of tobin q takeover firms with low tobin q. also, harford (1999), harford (2005) documented that the cash available with the firm is also related with the internationalisation or m & a activity. covid 19 & mergers and acquisitions covid 19 pandemic together with the prescribed lock down in indian states has impacted the number of mergers and acquisitions significantly, i.e., the deals have decreased from 461 deals in 2019 year to 382 deals in 2020 year and further it is following downward trend in 2021 as well. also, the inbound mergers and acquisitions in india in terms of value has increased in year 2013 to highest around 30 percent more than from year 2019, outbound mergers and acquisitions declined by 13 percent in value. there were changes in the policies governing mergers and acquisitions of india with other countries. while china has a significant and negative impact of these policies due to which the deals have slow down among these countries. cross border deals have a declining result of the policies which came out from the government due to covid 19. on the other hand, the domestic mergers and acquisitions was positively impacted by the policies, resulting in m & a in banking sector, retail sector whereby, public bank m & a was approximately 25 percent of the mergers and acquisition activity in 2020. the impact of private equity funds on mergers and acquisitions in india has increased and reported to be approximately half value of mergers and acquisitions in 2020. it is presumed by the policy makers and researchers that the impact of covid 19 vaccination will be positive on the mergers and acquisitions leading to increase in investments. success or failure of mergers and acquisitions a major issue which is faced by the international investors while investing in m & a in india is that they are having misunderstanding regarding the system which govern m & a, indian judicial system and acts, regulations. the firms mostly adopt deals which are regulated by english or foreign law as they think that following indian law may result in risk and adversities. most of the times, government of india is pro-active in making and amending laws for motivating the commercial arbitration transactions which are of global nature. also, mumbai is considered as location in india for commercial arbitration transaction of international nature. the firms involved in mergers and acquisitions often have limiting beliefs regarding the fact that interim relief can be provided systematically by indian courts. government of india have worked a lot to improve court system and to grant foreign arbitral awards in ease out manner. the other problems which the investors are facing while entering mergers and acquisition with indian firms include: unsatisfactory due diligence process in industries demanding specific regulation, not writing down the transaction document properly in terms of outcomes expected out of m & a, at the closing of negotiationinvolving and expressing the investors about the compliances and regulation to be adhere while closing and post-closing the deal. the advisors and legal managers should be asked to identify difficulties in the regulations and approval of process of m & a. the information which is specifically price sensitive which can invite insider trading if leaked or published related to listed firms which are target firms, should be handled very carefully. india is in initial stages of deal making through technology, the enforced working remotely because of covid 19, more online tools and platforms are adopted. future prospects are showing that for completing due diligence procedure, ai will be involved. digitalized technology can prove to be beneficial in post-merger performance and processes as well in aspects related to employees and other operations. one of the limitations in defense sector as 49 percent fdi as allowed in this sector earlier now allowed up to 74 percent by automatic route. for insurance https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 47 industry up to 100 percent fdi is allowed. also, the changes in legislations include the control to heightened for fdi from china. for restricting the opportunistic m & a of indian companies from chines companies in times of covid-19, fdi regulations was changed, now the government of india approvals will be needed for the same priorly. according to harsh et al., 2021, the approvals form concerned authorities and regulatory bodies will be needed for sectoral investments. covid-19 together with the enforced lock down in india lead to slow down of economy but on the other hand the timely amendments by government of india and by concerned regulatory authorities which are business friendly in nature has been a sigh of relief for the firms. intriguingly, indian companies are exploring new areas and economies due to their enhanced production capabilities and is growing at fast pace as a substitution to production by the china firms. the studies related to international investment confirmed that the nations which adopted lpg during end of 1980s have paced up in the field of cross border as well domestic m & a. india also got motivated by to outgo for investment in form of m & a abroad. firms in india are creating income in form of exports and fdi from 1990s. conclusion and discussion firms entering into corporate restructuring in form of mergers and acquisitions is a topic which is researched by the researchers, policy makers as well different international organizations, the focus was on greenfield investment as well m & a there. after reviewing the literature, the exact determinants cannot be defined in form of a fixed frame, as these determinants are having specificity for a particular country, firm and industry, also the research on the topic is ever green which keep on updating in terms of empirical results. it can be noted that information related to macro-economic factors, industry related factors and firm related factors are available and can be used to search new avenue like research for determinants of mergers and acquisition in india, study for determinants of domestic and inbound mergers and acquisitions in india. as, when relevant factors are taken into study, it becomes much easier for explaining the outcome and determinants of m & a. the years 2019, 2020 and 2021 were most challenging years for business firms in whole world and also for indian firms due to covid-19 pandemic and geopolitical stress which resulted in tensions and uncertainties related to usa elections, 2021 israelpalestine crisis. the situation in one nation has ripple effect on other nation fdi and mergers and acquisition activities as location factors are also a significant determinant of m & a. inspite of all the unfavorable circumstances and with some positive factors in term indian government’s business amicable policies, indian firms have grown in terms of domestic deals and cross border deals during 2020. the value of deals crossed $82 billion which is 22.9 percent increase from the year 2019 deal value. fascinatingly, the market for mergers and acquisitions has bounce back to recovery and growing sustainably in 2021. references ali-yrkko, j. 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(1996). mergers and macro‐economic factors. review of financial economics, 5(2), 181-190. 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/) indian journal of finance and banking vol. 5, no. 2; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 115 indian it firms creating management codes for foreign exchange risk dr. nitin shankar assistant professor amity business school, amity university, uttar pradesh, lucknow campus, india e-mail: nitinshankar19@gmail.com dr. fatima beena associate professor american college of dubai, united arab emirates e-mail: fatimabeena@gmail.com abstract purpose: india has been a preferred i.t. service sourcing nation globally and has been registering high growth. india has a significant pie of the global sourcing market, accounting for nearly 55 % share. it covers significant global through its more than one thousand centres spread across continents. with a year-on-year growth of 6.1%, india’s i.t. and ites industry will increase to the u.s. $ 350 million by 2025. the extensive expanse of geographical coverage also translates into foreign exchange risk; hence foreign exchange risk management becomes an important strategy. the current study attempts to assess the impact of foreign exchange risk management on the indian sector over 2007-2017; the period includes the 2008 financial crisis taken up in the current study. design/methodology/ approach: we analyzed the indian i.t. companies listed on the bse ltd on their exposure, approach, and management towards foreign exchange risk. we investigated their annual reports from 2007 -2017 to understand their exposure and the adopted external foreign exchange risk management techniques. we further assessed the impact of these foreign exchange risk management techniques on the firm’s value. findings: the impact of foreign exchange risk management was significant on small-cap i.t. companies for the study period. though for the during the 2008 crisis term, it was found to be insignificant. practical/implications: foreign exchange risk management is crucial for indian i.t. companies indulging in cross-border trade. the current study incorporates external methods of managing foreign exchange risk management; hence even if the impact were found to be insignificant for mid cap and some large-cap companies, they would be practicing internal hedging methods, which puts a strong case tapping trillion-dollar business through a fully functional competitive international financial centre. originality/value: our paper contributes to the literature on foreign exchange risk management by indian i.t. companies, which contributes handsomely to india’s gdp and foreign exchange reserve. keywords: foreign exchange risk management, i.t., bse. jel classification codes: f31, g32. mailto:nitinshankar19@gmail.com mailto:fatimabeena@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 116 introduction the objective of this current study will be to investigate foreign exchange exposure of indian i.t. (information technology) sector companies, its measurement, and the steps taken to manage it. in particular, the paper would focus on measuring foreign exchange exposure of indian of pharmaceutical sector, external control techniques to manage foreign exchange risk & impact of the internal control techniques to manage foreign exchange risk. risk exists whenever real outcomes deviate from the desired outcomes (butler, 2002). hence, the present study's risk is the possible event where outcomes are uncertain, leading to losses for the corporation involved. (jorion, 2007) business and risk are not unknown to each other. risk has been defined in various ways. the uncertainty in the value of an asset, equity, or earnings due to unfavourable movement in the exchange rate is known as risk. as per dun & bradstreet, risk is defined as any possible event that can hinder the corporation's current and future reading. foreign exchange risk is also one of the multiple risks faced by the companies; however, for companies exposed to cross border trading, i.e. foreign currency, it becomes one of the critical factors affecting the firm‟s performance. the amount of trade in which firms engage in cross-border trade is exposure, and the volatility related to foreign exchange is a risk. hence exposure and risk both are pretty different concepts (levi, 2009). it becomes an essential block in the firm's financial management if its objective is to minimize losses or maximize gains. with the current government's initiatives to increase crossborder trade through various initiatives like 'make in india' to boost our economy, the integration of our economy with that of the world will become more intense and increase our firm's exposure multi-fold. the amount of trade in which firms engage in cross-border trade is exposure, and the volatility related to foreign exchange is a risk. hence exposure and risk both are pretty different concepts (levi, 2009). pramborg (2005), firmwide risk management is a popular term representing a combined and harmonized risk management outlook. other expressions utilized to explain this combined and coordinated risk management are intercontinental risk management, strategic risk management, and enterprise risk management. the exchange risk exposure on both short and long term on a global basis is addressed by firmwide risk management. muller and verschoor (2006), from the survey of nine hundred thirty-five u.s firms, twenty-nine percent of firms significantly impacted the foreign exchange currency movement/ fluctuations between 1990 and 2001. meier (2000), firmwide risk management is one of the most widely used out of a group of synonyms that describe a broad and comprehensive view of managing risk across the firm. other terms used to describe this type of coordinated risk management are enterprise risk management, global risk management, and strategic risk management. firmwide risk management addresses exposures globally in that it considers all parts of the firm and tries to cope with both short-term and long-term exposures. for example, the tower group uses the term enterprise risk management. it defines it as “the process of managing the risk faced by an institution on a global, institution-wide basis.” marshall (2000), a high proportion of u.k. respondents ranked foreign exchange risk management as significantly essential or most important, which is expected as the u.k. mncs rely on a high degree of overseas business. one u.k. respondent explained that foreign exchange risk „„impacts directly on the creation of shareholder value and competitive position‟‟. however, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 117 this view does not seem to be shared in the usa as 45% of usa respondents report that foreign exchange risk management is marginally essential or least important. one usa respondent explained that „„foreign exchange risk management is another attribute of doing business globally. it is one of the many items necessary to do business but is no more a burden than another item‟. it is a pearl of market wisdom that a firm's cash flow and valuation are affected by exchange rate movements, i.e. firms are exposed to foreign exchange exposure. tracking foreign exchange exposure and devising its management strategies has garnered considerable attention, resulting in much research. for firms operating out of bustling economies like india, foreign exchange risk management becomes imperative gendreau (1994) finds it difficult and unconvincing that the weak results imply that exchange rate changes do not affect exporters‟ stock returns. bartov and bodnar (1994) attribute the observed insignificant relationship between exchange-rate changes and stock returns to potential problems associated with the previous studies‟ sample selection procedure or mispricing caused by investors‟ errors in estimating this linkage. jorion (1990) finds that dollar depreciation exposure is positively related to the ratio of a firm‟s foreign sales to total sales. however, these studies were based on an economy whose exchange rate is very stable. so it has called for more to study this phenomenon in the indian context. the study takes on the indian i.t. sector as its testing ground. being a sector that developed and flourished on business from developed countries and bought foreign exchange in tonnes for the country, this is a perfect sector to undertake this study. the exposure we are trying to measure is transaction risk which can be mitigated at a firm level, unlike economic exposure. rodriguez (1974) states that proponents of the transaction exposure definition argue that a foreign operation is a long-term proposition. the only relevant exchange risks are those involved in short-term fluctuations in the host country's currency and other currencies. al-momani & gharaibeh (2008), transaction exposure is related to the risk that arises from day-to-day transactions dealt with foreign currencies subject to volatility in value against the local currency. external techniques are used by both exporters and importers as well as by multinational companies. the costs of the external exposure management methods are fixed and predetermined. the main external exposure management techniques are forward exchange contracts, short-term borrowing, discounting, forfeiting & government exchange risk guarantees. dufey & srinivasulu (1983), hedging can be accomplished either by forwarding contracts or by foreign currency borrowing and lending. the former is known as a forward market hedge and the latter as a money market hedge. hence, obstacles to individuals in foreign money markets are also, in essence, obstacles to investor hedging. in many foreign money markets, nonresidents are denied access to local borrowing facilities or face discriminatory taxes. joseph (2000), a firm's degree of internationalization can affect the extent to which it uses hedging techniques (mathur, 1985). since firms appear to initially use internal techniques to hedge exposure (hakkarainen et al., 1998), a positive relationship is expected between the measures of internationalization and the degree of utilization of internal techniques. in contrast, a negative relationship is expected between the rate of utilization of external techniques and the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 118 internationalization measures since the greater use of internal techniques implies less use of external techniques. joseph (2000), in general, external techniques appear to play a much more important role in hedging decisions than internal techniques. as the firms are large, scale economies in the use of external techniques and the availability of skilled treasury personnel may contribute to their greater use. carter, pantzalis, and simkins (2001), the use of currency forwards and other derivatives, decrease the firm‟s foreign-exchange exposure. neither foreign-exchange options nor swaps appear to be associated with a reduction, or an increase, in exposure (in context to u.s. multinational corporations). el-masry (2006), large-sized firms are more likely to use derivatives because of the economies-to-scale argument for derivative use. large firms are better able to bear the fixed cost of derivatives uses compared to small firms. el-masry (2006), it is interesting in knowing, if a firm uses derivatives for hedging, the most important reasons for using derivatives for hedging purposes. four reasons for hedging are identified, and firms are asked to indicate the importance of these aspects. it was found that the most important reason for using hedging with derivatives is to manage the volatility in cash flows at 37% of the responding firms. the firm's market value is considered the second most important reason for using derivatives for hedging purposes, with 29% of the responding firms. this is followed by managing the volatility in accounting earnings at 25% and managing balance sheet accounts or ratios at 19%. baranauskas, jonuška, and samėnaitė (2003), the main reason why forwards preferred options was that it costs less to use forwards. the majority of derivative users claimed that they are not willing to pay option premiums. rupeika-apoga (2005), recently, most firms have adopted a more comprehensive approach to foreign exchange risk management, sometimes motivated by poor results of active foreign exchange management research methodology researchers believe that foreign exchange risk management is essential for the firms exposed to cross-border trade, as it may directly impact the firm‟s performance and profitability. particularly in india, the research in this aspect is little, so the researcher wants to throw light on the exchange risk management's effectiveness. thus, the present study used annual reports of listed companies across five sectors as the companies act, 2013 made it compulsory to disclose foreign exchange earnings/ outgo and their risk management policy. further authenticity of the data made the study more robust. the firm‟s stock return data was taken from the stock exchange itself, i.e. bse ltd. thus, the present study quantitative method is better. validity and reliability the present study data has been from the firm‟s annual reports taken from its official website and their returns on the stock exchange from bse ltd. the data was analyzed carefully with valid tools to ensure the present study's reliability. the present study period is for 20072017, so the results will be changing if the year or period changes. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 119 data collection method the current study was being based on six listed indian i.t. companies; two each from large cap, mid cap & small cap will be selected from the stock exchange (bse). risk calculation through a model developed based on stock price and comparing it with base year price. the present study is done over ten years, from 2007 to 2017, to reflect the economic cycle in the findings. the periods also encompass one of the most turbulent times from 2007 to 2010, thus making study more enjoyable. sources of data data forms the bedrock and basis for any relevant and authentic research. the present study, in its endeavour to ferm policies and their impact on indian i.t. firm‟s secondary data sources were utilized. secondary data was mined from the company's authentic sources, bombay stock exchange ltd. (2018). (bse ltd.), securities and exchange board of india (sebi), reserve bank of india (rbi), world economic forum (wef), world trade organisation. tools & techniques regression-based impact analysis. the study will be structured in two steps: i step: to study the foreign exchange exposure of indian non-financial companies by scrutinising their financial statements and annual reports. ii step: once the risk has been established, we try to determine the methods/techniques adopted by the indian non-financial companies for foreign exchange risk management. objective of the study the main objective of this study is to investigate the relationship between foreign currency risk and international business involvement, legal structure, firm size, sector, and management practices in the indian environment. the impact of firm-specific characteristics on the value of indian it companies will also be investigated by examining the level of foreign sales hedging, roa, c.r., err problem there is a necessity to study the risk management methods adopted by the indian i.t. companies to cover their exposure and its effectiveness to achieve the same in the absence of specialized financial services. (shapiro, 1975; hodder, 1982; levi, 2009; bodnar & marston, 2002), whether a firm operates in the domestic or global market, it is affected by the exchange rate movement. further, it is a standard theoretical view that exchange rate movements are one of the reasons for macroeconomic uncertainty model the study evaluates the impact of foreign exchange on the firm value; it uses regression impact analysis. to make the model more comprehensive, three more independent variables were included in the model. y = a + b1x1 + b2x2 + b3x3 + b4x4 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 120 y representing the firm's value and the independent variable is hedge foreign exposure, current ratio, return on assets ratio, earnings return ratio. anticipating the impact on a firm‟s value due to fluctuations in exchange rates has been a challenge for firms operating on a global scale. the risk management tools and techniques' effectiveness becomes the next challenge as different markets may demand different exchange risk management methods. the present study has two primary areas of focus and inquiry the value of a firm and exchange risk exposure. figure 1. conceptual framework hypothesis ho1. there is no impact of tools techniques used to manage foreign exchange risk indian nonfinancial companies. data analysis table 1. it tcs co-efficient coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 253193.569 241486.511 1.048 0.335 hce_tcs 1.51 0.568 0.648 2.657 0.038 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 121 roa_tcs 485.766 711.228 0.185 0.683 0.52 cr_tcs 68187.365 176674.561 0.143 0.386 0.713 err_cs -3136.109 2560.868 -0.212 -1.225 0.267 2 (constant) 330900.813 124965.134 2.648 0.033 hce_tcs 1.684 0.326 0.723 5.17 0.001 roa_tcs 710.037 384.363 0.271 1.847 0.107 err_cs -2502.675 1842.435 -0.169 -1.358 0.217 3 (constant) 172830.561 47892.19 3.609 0.007 hce_tcs 1.668 0.342 0.716 4.872 0.001 roa_tcs 867.248 385.398 0.331 2.25 0.055 source: above table is compiled by the scholar table 2. i.t. infosys co-efficient coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1100142.737 190801.873 5.766 0.001 hce_infosys -0.319 0.411 -0.161 0.777 0.467 roa_infosys -37685.422 7529.584 -0.893 5.005 0.002 cr_infosys 22383.187 40557.228 0.121 0.552 0.601 err_infosys 685.044 2584.716 0.052 0.265 0.8 2 (constant) 1099284.614 177653.663 6.188 0 hce_infosys -0.371 0.337 -0.187 1.101 0.307 roa_infosys -36702.056 6101.35 -0.869 6.015 0.001 cr_infosys 29162.843 29308.391 0.158 0.995 0.353 3 (constant) 1216289.661 133085.264 9.139 0 hce_infosys -0.192 0.285 -0.097 0.674 0.519 roa_infosys -37412.406 6055.687 -0.886 6.178 0 4 (constant) 1228294.241 127832.811 9.609 0 roa_infosys -38925.188 5451.933 -0.922 -7.14 0 source: above the table is compiled by the authors https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 122 table 3. it tata elxsi co-efficient coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) -3897.464 3387.637 -1.15 0.294 hce_telx 0.751 0.833 0.239 0.902 0.402 roa_telx -71.765 102.342 -0.231 -0.701 0.509 cr_telx 6587.028 2850.181 0.892 2.311 0.06 err_telx -27.757 69.564 -0.158 -0.399 0.704 2 (constant) -4037.79 3160.513 -1.278 0.242 hce_telx 0.727 0.779 0.231 0.933 0.382 roa_telx -84.794 90.982 -0.273 -0.932 0.382 cr_telx 5924.369 2172.788 0.802 2.727 0.029 3 (constant) -3946.699 3132.949 -1.26 0.243 hce_telx 0.798 0.769 0.254 1.038 0.33 source: above table is compiled by the authors table 4. i.t. mind tree co-efficient coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) -2959.707 3253.533 -0.91 0.398 hce_mtree 0.495 0.515 0.305 0.963 0.373 roa_mtree 8.085 56.83 0.034 0.142 0.892 cr_mtree -568.669 415.285 -0.304 -1.369 0.22 err_mtree 63.456 37.999 0.462 1.67 0.146 2 (constant) -2938.613 3014.128 -0.975 0.362 hce_mtree 0.455 0.399 0.281 1.14 0.292 cr_mtree -558.146 378.969 -0.299 -1.473 0.184 err_mtree 65.147 33.471 0.475 1.946 0.093 3 (constant) -3975.841 2927.021 -1.358 0.211 cr_mtree -666.867 373.598 -0.357 -1.785 0.112 err_mtree 87.797 27.441 0.64 3.199 0.013 4 (constant) -7572.36 2367.008 -3.199 0.011 err_mtree 110.707 27.041 0.807 4.094 0.003 source: above table is compiled by the authors https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 123 table 5. i.t. hexaware co-efficient coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 140.822 2794.133 0.05 0.961 hce_hexa 5.572 1.155 0.949 4.825 0.003 roa_hexa 39.618 110.255 0.087 0.359 0.732 cr_hexa -606.528 917.223 -0.077 -0.661 0.533 err_hexa 4.636 13.176 0.065 0.352 0.737 2 (constant) 860.486 1780.52 0.483 0.644 hce_hexa 5.545 1.078 0.945 5.146 0.001 roa_hexa 18.176 85.942 0.04 0.211 0.839 cr_hexa -643.382 852.288 -0.081 -0.755 0.475 3 (constant) 761.058 1611.544 0.472 0.649 hce_hexa 5.733 0.575 0.977 9.967 0 cr_hexa -599.698 775.943 -0.076 -0.773 0.462 4 (constant) -250.501 918.936 -0.273 0.791 hce_hexa 5.635 0.548 0.96 10.277 0 source: above the table is compiled by the authors table 6. it niit co-efficient coefficients model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 70.467 335.111 0.21 0.84 hce_niit 0.694 0.126 0.809 5.492 0.002 roa_niit -17.104 18.807 -0.173 -0.909 0.398 cr_niit 164.55 74.513 0.167 2.208 0.069 err_niit 7.692 9.27 0.11 0.83 0.438 2 (constant) 281.831 212.824 1.324 0.227 hce_niit 0.766 0.09 0.893 8.548 0 roa_niit -3.888 9.776 -0.039 -0.398 0.703 cr_niit 164.596 72.835 0.167 2.26 0.058 3 (constant) 213.713 119.52 1.788 0.112 hce_niit 0.793 0.055 0.925 14.482 0 cr_niit 152.687 62.806 0.155 2.431 0.041 source: above the table is compiled by the authors https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 124 result & discussion table 7. results i.t. (information technology) sector sector cap large mid small firm name tcs sig infosys sig tata elexi sig mind tree sig hexa sig niit sig a coefficient table y = a+ b1x1+b2x2+b3x3+b4x4 intercept 𝛼 253194 1100142 3897 -2960 140.82 70.5 b1, hce 1.51 0.0 -0.319 0.5 0.75 0.4 0.495 0.4 5.572 0.0 0.69 0.0 p value b2, roa 485.766 0.5 -37685 0.0 71.8 0.5 8.085 0.9 39.618 0.7 -17 0.4 p value b3, cr 68187.4 0.7 22383 0.6 6587 0.1 568.7 0.2 -606.5 0.5 165 0.1 p value b4, err p value -3136.1 0.3 685 0.8 27.8 0.7 63.46 0.1 4.636 0.7 7.69 0.4 source: author‟s compilation the present study findings of the i.t. sector show a clear trend that (slope) β, i.e. rate of return per unit hedged funds, of the small-cap firms, are significant. table 8. hypothesis assessment summary objective hypothesis sector/ company independent variable significance ho: null hypothesis accepted/ rejected to study the impact analysis of tools and techniques used to manage ho: there is no impact of tools techniques used to manage foreign exchange risk indian nonfinancial companies. it/large/tcs hce significant rejected https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 125 foreign exchange risk indian nonfinancial companies. h1: there is an impact of tools techniques used to manage foreign exchange risk indian nonfinancial companies. it/small/hexaware hce significant rejected it/small/niit hce significant rejected financial crisis times india has been a preferred i.t. service sourcing nation in the world and has been registering high growth. india has a significant pie of the global sourcing market, accounting for nearly 55 % share. it covers significant global through its more than one thousand centres spread across continents. with a year-on-year growth of 6.1 %, india‟s i.t. and ites industry will increase to the u.s. $ 350 million by 2025. figure 2. stock returns (large) the above graph reflects a sluggish it large cap movement of tcs and infosys on bse in the crisis years 2007-09 and only starts picking up at the inception of 2010. hoβ0, the slope term in the regression of returns on hedged forex exposure, is statistically insignificant. ho for large it firms tcs and infosys is significant at 5% level with p values 0.025 and 0.027 for 2007-2010. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 126 though during the period of the present study, i.e. 2007-2017, the ho only holds for tcs and not for infosys figure 3. stock returns (mid) the above graph clearly reflects the it mid cap stocks movement of tata elxsi and mindtree on bse in the crisis years 2007-09 and only starts looking up at the inception of 2010 and then dips in 2010 again. hoβ0, the slope term in the regression of returns on hedged forex exposure, is statistically insignificant. ho for it mid cap companies tata elxsi and mindtree is found to be is insignificant at 5% level with p values 0.428 and 0.73 for the period 2007-2010. during the present study period, i.e. 2007-2017, the ho is also insignificant for both mid cap firms. figure 4. stock returns (small) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 5, no. 2; 2021 127 the above graph reflects a very rocky stock's movement of hexaware and niit on bse in the crisis years 2007-09, with business picking up in 2009. hoβ0, the slope term in the regression of returns on hedged forex exposure, is statistically insignificant. ho for it small cap companies hexaware significant at 5% with p-value 0.046 and niit is found to be is insignificant at 5% level with p values 0.238 for the period 2007-2010. during the present study period, i.e. 2007-2017, the ho is significant for small-cap firms. conclusion the study concludes foreign exchange management has a relationship with firms‟ stock performance on bse; however, this impact varies with the size of the company in the indian i.t. sector. the impact of foreign exchange risk management was significant for small-cap i.t. companies, hexaware and niit, and large-cap companies, tcs. the current study undertakes only external hedging techniques as the same is available in the public domain. the firm also undertakes internal hedging practices like swapping, netting, etc. it also opens the opportunity to establish a sophisticated financial centre on the standard playing field as with other established international financial centres. the foreign exchange risk is imperative when a firm adopts an internationalization strategy to grow; hence its management also impacts its value, as found by the current study. references al-momani, r., & gharaibeh, m. r. 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(1975). exchange rate changes, inflation, and the value of the multinational corporation. the journal of finance, 30(2), 485-502. 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/) indian journal of finance and banking vol. 9, no. 1; 2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 104 impact of company income tax on corporate profitability in nigeria dr. akadakpo bukola adefunke senior lecturer department of accounting faculty of management sciences university of benin, benin city, edo state, nigeria e-mail: adefunke.akadakpo@uniben.edu dr. akogo obehioye usiomon lecturer department of accounting faculty of management sciences university of benin, benin city, edo state, nigeria e-mail: ehioshioobehioye@gmail.com received: october 27, 2021 accepted: december 30, 2021 online published: january 25, 2022 doi: 10.46281/ijfb.v9i1.1567 url: https://doi.org/10.46281/ijfb.v9i1.1567 abstract the study examined the impact of company income tax on corporate performance. the study used data from twelve (12) listed firms on the nigerian stock exchange, of which data for the study was collected from the annual reports of the companies, and regression analysis was used as a technique for data analysis using spss 2020. the data span across ten (10) years from the period of 2011-2020. findings from the study revealed that company income tax (cit) has a positive and significant effect on profit after tax (pat) and returns on equity (roe). change in shareholders’ funds (cshf) has a negative yet significant effect on roe, while cit has a significant and positive effect on shareholders' earnings. following the results from the research analysis, the study recommended that the fiscal policy adopted in nigeria should consider the circumstances surrounding the activities of companies located in the country and the special role they play in the pursuit of the economic growth of the nation. tax incentives and positive tax reforms that could reduce the burden and liability of tax on companies in nigeria should be incorporated in the fiscal policy to encourage their business activities and going concerns. keywords: company income tax (cit), profit after tax (pat), returns on equity (roe), change in shareholders’ funds (cshf). jel classification codes: h25, o16. introduction the company income tax (cit) was created by the companies income tax act (cita) which was enacted in the year 1979 which originates from the income tax management act of 1961. the federal government of nigeria implemented its voluntary assets and income declaration scheme (vaids) which kicked off from july 2017 down to june 2018, purpose of which was to present defaulting mailto:adefunke.akadakpo@uniben.edu https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 105 taxpayers an opportunity to regularize their tax affairs with full amnesty (kpmg nigeria, 2019). according to kpmg nigeria (2019) “the approach was modestly successful since it assisted the firs in its ability to expand the tax net and achieve its record tax revenue collection of ₦5.3 trillion in 2018”. in 2019 the actual tax revenue generated was ₦5,263.1013 trillion of which company income tax was ₦1607.3201 trillion which is about 31% of total tax revenue for 2019 (federal inland revenue service, 2020). to further explicate, there are three tax authorities in nigeria charged with the ability to collect various designated taxes, the federal inland revenue service (firs) which is the operating arm of federal inland revenue service board, is responsible for collecting taxes on behalf of federal government, example of which include (company income tax, withholding tax, petroleum profit tax, value added tax etc.), the state inland revenue services (sirs) collecting state taxes, some examples of which include (personal income tax, paye, individuals withholding tax, road tax etc.) and the local government revenue committee (lgrc) which collect taxes like shop and kiosk rates, tenement rates, on and off liquor license etc. (institute of chartered accountants of nigeria, 2019). corporate organizations all over the world are required to pay what is known as company income tax. company income tax is a mandatory payment imposed for various years of assessment on the profit of companies deemed to have been accrued, derived or brought into a country. for taxation purpose, companies are broadly classified into nigerian companies (which are companies incorporated under the companies and allied matters act (cama) 2020 as amended, and any profits made by such companies may be deemed to have accrued, derived or brought into nigeria) and foreign companies (which are companies established under laws not enforceable in nigeria, and any profit made by such company may be deemed to have accrued, been derived from or arisen from outside nigeria, to the extent that they are not attributable to activities within nigeria). the importance of tax as a major form of revenue to nigerian government expenditure cannot be overemphasized. although the nigerian economy is centered on oil revenue, taxes over the years have contributed significantly to the gross domestic product (gdp) of the country. one of the major problems with nigeria’s tax system is the way and method of tax administration and the failure of the government to effectively utilize such funds. nigeria today is facing series of challenges when it comes to optimizing tax revenue for economic and social growth. the role of tax revenue with regards to promoting economic activities and growth is not felt in nigeria because despite tax revenue and expenditure reported year in year out by government, the physical conditions of the nation in terms of social amenities and infrastructure is dwindling and gradually moving to a pit of no return. this can evidently be seen in the lack of basic social amenities. another problem being faced in the country is finding the optimal balance between a tax regime that is business and investment friendly while at that same period generating enough revenue to cover public expenditures which in turn attracts potential investors. corporate organizations are faced with the issue of being subjected to tax on the profits made by its holding company and that of its foreign subsidiaries and branches. some firms indulge in tax evasion and avoidance practices, all in a bid to avoid the issue of double taxation and some other challenges posed by corporate taxes. in other to curb these challenges, a balance between government goals and objective in terms of revenue generation through tax and the goals of corporate organization should be reached so as to ensure sustainable growth and development (agbetunde, 2010). corporate organizations loose huge amount of profit in form of tax year in year out, where such loss of profit is ploughed back into the company and effectively utilized, it can change the fortunes of the company and that of its stakeholders. the importance of corporate profitability and of keeping a low corporate tax rate cannot be overemphasized. it is such that every government that considers economic and employment growth a priority must reflect in their fiscal policy (cordelia & amah, 2018). there is an urgent need to examine deeply the relationship between various corporate taxes (petroleum profit tax (ppt), company income tax (cit) and personal income tax (pit)) on the performance firms in nigeria. the corporate taxed examined for the purpose of this study is the company income tax. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 106 conceptual framework tax charged by government is based on the profit of the organization, and the profitability depends on the ability of a firm to produce more revenue which is capable of absorbing all expenses incurred in generating such revenue, including tax and still have a balance called retained earnings which could be absorbed back into the business for expansion (omodero & amah , 2018). corporate taxes are one of the major sources of revenue available to finance government expenditures and it’s also an important factor that determines capital investment in every nation of the world (ileana, aurelia, minzu, popa, & niculescu, 2016). companies income tax (cit) is a tax imposed on the profits of registered companies in nigeria and those of foreign companies carrying on any business in nigeria. companies income tax act, 2007 (as amended) is a principal law that regulates the taxation of companies in nigeria and also empowers the federal inland revenue service board (firsb) with the ability to assess and collect taxes from all limited liability companies that carries out their operation from or within nigeria except those specifically exempted from tax by the act. tax system is structured in a way that allows domestic corporations to be taxed on its assessable profit which is generated from all its activities carried out globally while foreign corporations are subjected to tax only on income from domestic activities within the jurisdiction (adejare, 2015). after all allowable expenses have been deducted of as specified by the act; companies are required by the act to pay 30% of their assessable profit to the government as tax. however, the cit rate for small companies is 0% for companies with gross turnover of n25 million or less and that of medium companies with gross turnover greater than n25 million and less than n100 million to be 20% (pricewaterhousecoopers, 2021). organizations are also subjected to various taxes such as property tax, withholding tax, customs duties, payroll tax, and excise tax, value added tax and other taxes which however, are rarely referred to as “corporate tax.” (adejare, 2015). the federal inland revenue service (firs) is the body charged primarily with the responsibility to administer tax on behalf of the government (omodero & amah , 2018) corporate performance corporate performance is a compound evaluation of how well a firm effectively and efficiently carries on its vital functions which are typically the market, financial and shareholder performance. the corporate performance of a firm deals with the "health" of an organization, which over time has been traditionally evaluated in terms of financial performance (wigmore, 2015). corporate performance entails the actual output of a firm as measured against its projected results (or goals and objectives) which aims to reflect the effectiveness and efficiency to which management have utilized its resources. a high performance rating of an organization eschews disagreement between the management and the shareholders. many measures over time have been adopted in evaluating corporate performance. ra'ed, idries, and mohammad (2015) suggested that performance could be evaluated either subjectively or objectively. the objective measurement in general relies on financial data which are usually of its historical nature, while the subjective evaluation is determined by managerial assessments. various performance indicators have been employed by researchers and other users of the financial statement in its studies, some of which includes the use of statistical techniques such as multiple regression and discriminant analysis. others consist of single variables that are based on absolute values, percentage or ratios, example of which can be found on accounting-based measures, i.e., figures and ratios that are gotten from the financial statements such as return-on-assets (roa), return-on-equity (roe), return on capital employed (roce) etc. (kurawa & saidu, 2018). for the purpose of this study, corporate performance is restricted to the return-on-assets (roe), earnings per share (eps), profit after tax (pat). theoretical framework two major theories adopted by this study are the benefit theory and the ability to pay theory. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 107 the benefit theory the benefit theory assumes that tax payers pay for the proportionate amount of government benefit they receive. that is, it is founded on the assumption of an exchange relationship that exists between taxpayers and the state government and that the taxpayers with the largest benefit from benefits made available by the government pay`s the most taxes (wikipedia, 2020). two models that analyzed the benefit approach are: the lindahl and bowen models. the ability to pay theory according to this theory, taxes should be founded upon the earnings of people and the amount they can pay without quid pro quo. for example, those who earn more money are expected to pay a higher rate of tax, compared to the low income earners (wikipedia, 2020). the ability to pay theory implies that individuals with higher income should bare the tax burden. that is, money for public expenses should be gotten from “him with surplus” not “him with deficit”. in other words, individuals and companies should pay taxes based on their earnings (omodero & amah , 2018). this doctrine has been in vogue for at least as long as the benefits theory. the taxes paid under this theory are perceived as sacrifice by taxpayers who increase the issue of what the sacrifice of each taxpayer should be and how it should be calculated. empirical review nwaorgu, oyekezie, and abiahu (2020), who considered five years of data from ten listed manufacturing enterprises in nigeria from 2013 to 2017. the ex-post facto research design data was used in the study, and were analyzed using basic linear regression. the findings confirmed that the corporation tax rate has no substantial impact on firms' returns on equity. olaoye and oluwatoyin (2019) explored determine the impact of corporate income tax on company profitability in nigeria for the period 2007 to 2016. the estimate approach used in the study was pooled ordinary least squares, and the results revealed that corporation income tax has a positive coefficient and significant value of 2.418830, with p-values of 0.0000. omodero and amah (2018) conducted research on corporate tax and deposit money bank profitability in nigeria. because the data were secondary and already existed, the study used employed the use of causal research design. the data were acquired from public audited financial statements of twenty-one (21) nigerian money deposit institutions. and employed the multiple regression analysis and the student t-test were utilized as statistical techniques in the investigation, and the hypothesis was tested at a 5% level of significance. based on their results, they urge that the country's fiscal policy take into account the circumstances surrounding banks' activities in nigeria, as well as the role they play in the nation's search for and pursuit of economic progress. to assess the impact of corporate income tax on financial performance, otwani, namusonge, and elizabeth (2017) used a mixed research design. using secondary data and also a sample size of 59 companies publicly listed on kenya's stock exchange (kse) were acquired. firm size and liquidity, investment, and age/debt were the independent variables, whereas profitability and return on investment of enterprises were the dependent variables. the findings of their study found that corporate income tax has a considerable positive impact on the financial performance of companies listed on kenya's nairobi securities exchange (nse), and they supported regulations that ensure and guarantee that companies pay their corporation taxes on time. ileana et al. (2016) investigated the effect of corporate taxes on firm financial performance. the data for the study came from the firms' published audited financial statements for the three (3) years from 2012 to 2014. their study used a total of twenty (20) enterprises registered on the bucharest stock exchange as a sample size. the multi-regression analysis was used to analyze the data, and two representative indicators, net profit and economic profitability (return on assets), were chosen as dependent variables, while the independent variables were the effective tax rate, firm size, asset structure, long-term debt to total assets ratio, and financial leverage. independent factors having no substantial impact were left out of the study. the study came to the conclusion that corporation taxes and the effective tax rate had a detrimental impact on firm financial performance. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 108 chude and chude (2015) used the brewery industry as a case study to investigate the influence of corporate income taxation on company profitability in nigeria. all of the variables in the analysis were based on secondary data acquired from brewery firms' published annual financial statements. the organization's earnings per share (eps) was the dependent variable, whereas the business income tax was the explanatory variable (cit). the effect of cit on eps was tested using the augmented dickeyfuller (adf) unit-root test at a 5% level of significance. the findings revealed that there is a long-run equilibrium relationship and that cit has a positive substantial impact on eps (p-value 0.0000.05). the study found that company income tax (cit) had a substantial impact on the profitability of nigerian breweries, and it presented recommendations to improve tax management. ezugwu and akubo (2014) conducted an empirical study on the impact of high corporation tax rates on firm profitability in nigeria. the study's problem was the extent to which nigeria's high corporation tax rate threatens the viability of businesses. the study employed a causal research methodology and a multi-regression statistical technique to analyze secondary data from the federal inland revenue service (firs), with a population of 45 corporate organizations in lagos and a sample size of 41 participants. corporate profitability (dependent) and corporate tax rates (independent) were the study variables, and the data was analyzed using the statistical package for social sciences (spss 17). the study discovered that the corporation tax rate and realized profit of enterprises have a favorable link. as a result, it was suggested that the nigerian corporate tax rate, which is now set at 30% of assessable profit, be cut in order to avoid negative economic consequences in the country. oloidi (2014) investigated the impact of company income tax (cit) on investment decisions made by enterprises subject to the nigerian company income tax act. a questionnaire was created and distributed to 180 businesses in the southwest zone. the findings demonstrated that corporate income tax has an impact on the rate of return on investment and the criteria used to evaluate investments; tax incentives encourage investment. when analyzing the factors that influence investment decisions in the country, taxation was perceived as playing a larger effect. the research did, however, make a proposal to the government to create a tax policy that would encourage economic growth and development and also encourage investment. from 1980 to 2010, edame and okoi (2014) investigated the impact of taxation on investment and economic growth in nigeria. secondary data was gathered from the nigerian central bank (cbn), statistical bulletins, and the national bureau of statistics (nbs). the results of the analysis revealed that the parameter estimates for corporate income tax (cit) and personal income tax (pit) are both negative, indicating an inverse relationship. the implications of the findings are that a one percent increase in the corporate income tax (cit) will result in a decrease in the level of investment in nigeria, and a one percent increase in the personal income tax (pit) will result in a reduction in the level of investment, demonstrating that taxation is negatively related to investment. the influence of corporation taxation on firm reserves and dividends in nigeria was investigated by onuorah and chigbu (2013) using the ordinary least square (ols) technique. secondary data from selected banking, construction and related companies, insurance, petroleum and marketing, breweries, food and beverage companies, and conglomerates was used in the study, which covered the period 20002011 and was obtained from a variety of sources, all of which are listed on the nigeria stock exchange. annual dividend payments were used as the dependent variable, with annual corporate tax expenses, earnings per share, and returns on earnings per share as the independent factors. according to the study's findings, corporate taxes have no impact on a company's reserve or dividend payment. as a result, the study recommends proper tax restructuring that will not affect regular dividend payments in order to encourage the public to invest and businesses to develop. gatsi, gadzo, and kportorgbi (2013) investigated the impact of corporate income tax on the financial performance of ghana's publicly traded manufacturing enterprises. the study discovered a negative but substantial relationship between manufacturing enterprises' financial performance and corporate income tax in ghana. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 109 methodology the study adopted causal research design since the data gathered on the selected variables were historical and already in existence thereby reducing the chances for data manipulation. all the data collected were secondary and was obtained from published audited financial statements of the selected companies listed on nigerian stock exchange (nse). the data covered the period from 2011 to 2020 (ten years). the population of this study comprised all listed companies on the nigerian stock exchange (nse) which stands at (161) as at april 2021. due to the population size, the study adopted a stratified random sampling method based on the judgment of the researcher after considering the following; firstly, the companies must be incorporated before 2011. secondly, all firms selected for the purpose of this study must have their audited financial statement for the period under consideration (2011-2020) and finally, the firms must not have been delisted by nse between the periods under consideration. the total sample drawn is was fifteen companies. two of the three economic models were adopted and the third modified for the purpose of this research and are specified as follows: pat = ἀ + β1 (cit) + ε as adopted from omodero and amah (2018) where pat is profit after tax, ἀ is the intercept term, β1 is the regression coefficient cit is the company income tax, ε is the error term. eps = ἀ + β1 (cit) + ε as adopted from chude and chude (2015) where eps is the earnings per share, ἀ is the intercept term, β1 is the regression coefficient cit is the company income tax, ε is the error term. roe = ἀ + β1 (cit) + β2 (cshf) + ε as modified from kurawa and saidu (2018) where roe is the returns on equity, ἀ is the intercept term, β1 is the regression coefficient of cit, cit is the company income tax; β2 is the regression coefficient of cshf, cshf is change in shareholders fund, ε is the error term. data analysis and presentation descriptive statistics the summary statistics of the explained and the explanatory variables are presented in table 1 where minimum, maximum, mean, standard deviation, and skewness of the data for the variables in the study are described. table 1. descriptive statistics pat roe eps cit cshf mean 14415307.09 0.24132204 13.22508333 5832316.72 9049029.883 standard error 1855322.653 0.020076144 2.542546973 697119.4739 2166330.895 median 7477704 0.190190995 3.77 3042050.25 2523087.5 standard deviation 20324041.37 0.219923136 27.85220662 7636561.222 23730965.96 sample variance 4.13067e+14 0.048366186 775.7454134 5.83171e+13 5.63159e+14 kurtosis 6.70788082 2.789054818 23.67067161 4.131825957 12.94341918 skewness 2.375764647 1.532932919 4.306784558 1.970328623 3.280868387 minimum -17073641 0.210657474 -16 -5122092.3 -20683282 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 110 maximum 106009690 1.047684916 211 37776636.9 144301406 sum 1729836851 28.95864474 1587.01 699878006.4 1085883586 count 120 120 120 120 120 source: spss 2020 table 1 shows the detail account of the descriptive statistics for the explained and explanatory variables respectively. the table shows a mean of 14415307.09 for profit after tax (pat) with the minimum and maximum of -17073641 and 106009690 respectively and a standard deviation of 20324041.37. this shows that on the average, companies earned n14415307.09 as profit after tax with a maximum loss of n-17073641and a maximum profit of n106009690. the standard deviation of n 20324041.37 implies that profit after tax of the companies under study deviated from its mean value up to n 20324041.37. similarly, the study records a mean of 0.24132204 for returns on equity (roe) meaning that the average returns on equity of the companies for the period under study is 0.24132204 with a minimum and a maximum -0.210657474 and 1.047684916 respectively and a standard deviation of 0.219923136 which suggest a considerable level of dispersion within the period under study. earnings per share (eps) also have a mean of n13.22508333 with a minimum and a maximum of n-16 and n211 respectively. the standard deviation of n27.85220662 suggests that earnings per share through the analysis deviate from its mean value up to a considerable level of n27.85220662 during the period under review. company income tax (cit) as measured from the financial statement has a mean of 5832316.72 with the minimum and maximum of -5122092.3 and 37776636.9 respectively and a standard deviation of 7636561.222. this shows that on the average, companies paid n5832316.72 as profit after tax with a maximum loss of n-5122092.3 and a maximum profit of n37776636.9. the standard deviation of n 7636561.222 implies that profit after tax of the companies under study deviated from its mean value up to n 7636561.222. also the change in shareholder’s funds (cshf) has a mean of 9049029.883, with a minimum and maximum number of -20683282 and 144301406 respectively. skewness measures the degree of asymmetry of the distribution of the series around its mean (spiegel & larry, 2011). furthermore, the skewness of any given normal distribution is zero. a distribution is positively skewed if that distribution has a long right tail and negatively skewed if that distribution has a long left tail. from the above table we observe that pat, roe, eps, cit and cshf all have positive skewness and as such they have long right tails. similarly, kurtosis measures the extent to which a given distribution is peaked or flat i.e. the peakedness or flatness of the distribution, usually taken relative to a normal distribution (spiegel & larry, 2011). if the kurtosis is above three, then the distribution is peaked or leptokurtic relative to the normal and if the kurtosis is less than three, the distribution is flat or platykurtic relative to normal distribution. from table above, it is observed that pat, eps, cit and cshf are all above three therefore this suggests that these variables are leptokurtic while roe is platykurtic. correlation analysis table 2. below shows the extent of correlation coefficients of the relationship between the dependent variables (pat, eps, and roe) and explanatory variable (cit, and cshf). table 2. correlation analysis pat roe eps cit cshf log (eps) log (cit) pat 1 roe 0.296443799 1 eps -0.036091468 0.261549 1 cit 0.988367985 0.333942 -0.032 1 cshf 0.665462028 -0.01867 -0.09622 0.64638 1 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 111 log (eps) 0.054599694 0.472163 0.756482 0.063963 -0.07992 1 log (cit) 0.503833933 0.455984 0.099784 0.519126 0.320938 0.242736632 1 source: spss 2020 the values of any correlation coefficient should range from -1 to 1 indicating the direction of the relationship (positive or negative), with larger values representing stronger relationships. the result reveals that all the explanatory variables are positively correlated (move in the same direction) except cshf, cit which are negatively correlated with roe and eps respectively. the figures reveal that company income tax (cit) is more correlated with profit after tax (pat) as it gives a correlation figure of 0.988367985, followed by the log (eps) which has the least correlated figure of 0.242736632. discussion of findings from the foregoing analysis, it was observed that cit has a positive and significant effect on profit after tax (pat) in nigeria that is if there is a unit increase in company income tax (cit), profit after tax (pat) will increase with 2.630455. this finding is in line with that of olaoye and oluwatoyin (2019) who carried out a study to ascertain the effect of company income tax on the profitability of companies in nigeria from 2007-2016 using regression analysis. their study revealed that there is a positive and significant relationship between company income tax and profit after tax of the firm. the result was also consistent with ezugwu and akubo (2014) who also carried-out a study on the effect of high corporate tax rate on the profitability of corporate organizations in nigeria. with an observation of forty-one firms using the regression analysis, their study revealed that there is a positive relationship between corporate tax rate and realized profit. it was also observed that cit has a positive and significant effect on roe while cshf have a negative but yet significant effect on roe. the result obtained is in line with that of otwani, simiyu, and makokha, (2017) that carried out a study to ascertain effect of corporate income tax on financial performance of companies listed on the nairobi securities exchange in kenya. the results established that corporate income tax was found to significantly and positively influence financial performance of companies listed on the nse in kenya to a very high extend. in addition, the findings indicate that the ratios of firm’s profitability have the most significance in determining the financial performance of companies listed on the nse in kenya. the result was however not consistent with the findings of (gatsi, gadzo, & kportorgbi, 2013) which revealed a negative but significant relation between financial performance and corporate income tax of manufacturing firms in ghana. lastly, it was observed that logcit has a positive and significant effect on logeps. the result obtained is in line with that of chude and chude (2015) that carried out a study on the nigerian breweries using thirteen (13) observations on the impact of company income taxation on the profitability of companies in nigeria. the results established that company income tax (cit) has significant effect on the profitability of nigeria breweries (eps). however the findings was inconsistent with nwaorgu, oyekezie, and abiahu (2020) who examined a five years data spanning from 2013-2017 of ten listed manufacturing firms in nigeria revealed that there is no significant effect of corporate tax rate on returns on equity of the firms. conclusion and recommendations the importance of taxation on the revenue generated by the federation cannot be overemphasized however the tax environment needs to be made better by both the government and its agencies. effective tax administration designed to enhance revenue generation should also take into consideration the effect it would have on firms finance. taxation, an instrument of fiscal policy is supposed to regulate, control and manage the economy in all ramification should be neutral and unbiased in its dealings so as to encourage companies to retain some of their profit, to invest, diversify and create employment opportunities in the country. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 112 from the result of this study, it is concluded that company income tax significantly affect the profit after tax, performance of the firms and earnings of shareholders. this implies that as corporate performance increases, so also does the company income tax levied against the company, thereby cutting down on the company’s ability to retain profit which could be channeled into other productive activities. from the analysis carried out the study recommends the following:  the fiscal policy adopted in nigeria should consider the circumstances surrounding the activities of companies located in the country and the special role they play in the pursuit of economic growth of the nation.  tax incentives and positive tax reforms that could reduce the burden and liability of tax on companies in nigeria should be incorporated in the fiscal policy to encourage their business activities and going concern.  new regulations to curtail excess corporate tax rather than eliminate corporate tax is necessary to enable companies have enough liquidity to meet its short term liabilities as they fall due should be adopted. a reduction in the corporation tax rate will therefore cause a decrease in the reasons to shift profits out and will indirectly upsurge the level of investment flowing into the country.  the government should ensure that revenue generated from corporate tax especially company income tax (cit) should be utilize in the development of the general economy so as to improve the standard of living of her citizenry and increase its gross domestic product (gdp). author contributions conceptualization: akadakpo bukola adefunke, akogo obehi data curation: akadakpo bukola adefunke, akogo obehi formal analysis: akadakpo bukola adefunke, akogo obehi funding acquisition: akadakpo bukola adefunke, akogo obehi investigation: akadakpo bukola adefunke, akogo obehi methodology: akadakpo bukola adefunke, akogo obehi project administration: akadakpo bukola adefunke, akogo obehi resources: akadakpo bukola adefunke, akogo obehi software: akadakpo bukola adefunke, akogo obehi supervision: akadakpo bukola adefunke, akogo obehi validation: akadakpo bukola adefunke, akogo obehi visualization: akadakpo bukola adefunke, akogo obehi writing – original draft: akadakpo bukola adefunke, akogo obehi writing – review & editing: akadakpo bukola adefunke, akogo obehi 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 adejare, a. t. (2015). the analysis of the effect of corporate income tax (cit) on revenue profile in nigeria. american journal of economics, finance and management, 1(4), 312-319. agbetunde, a. l. (2010). principles and practice of nigeran personal income tax. lagos: feetal consulting. chude, i. d., & chude, n. p. (2015). impact of company income taxation on the profitability of companies in nigeria: a case study of nigerian breweries. european journal of accounting, auditing and finance research, 3(8), 1-11. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 113 cordelia, o. o., & amah, k. o. (2018). corporate tax and profitability of deposit money banks in nigeria. journal of accounting, business and finance research, 47-55. edame, g. e., & okoi, w. w. (2014, july). the impact of taxation on investment and economic development in nigeria. academic journal of interdisciplinary studies, 3(4), 204. ezugwu, c.i, & akubo, d. 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(2015). accounting vs market based measures of firm performance related to information technology investments. international review of social sciences and humanities, 9(1), 129-145. spiegel, m. r., & larry, s. j. (2011). schaum's outlines (fouth ed.). united state of america: mcgrawhill companies, inc. wikipedia. (2020). nst income. retrieved from https://en.wikipedia.org/wiki/net_income wikipedia. (2020, december 21). theories of taxation. retrieved from https://en.wikipedia.org/wiki/theories_of_taxation wigmore, i. (2015). corporate performance. retrieved from https://whatis.techtarget.com/definition/corporateperformance#:~:text=corporate%20performance%20is%20a%20composite,financial%2c%20 market%20and%20shareholder%20performance. 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). about:blank indian journal of finance and banking vol. 6, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 17 digitalize witnessing the ally of cash? m. radhika phd research scholar department of business management osmania university hyderabad, telangana, india e-mail: radhikamba02@gmail.com p. madhu kumar reddy phd research scholar department of business management klef (deemed to be university) greenfields, vaddswaram andhra pradesh, india e-mail: madhukumarreddy@gmail.com dr. a. rama kumar professor & pro-vice chancellor klef (deemed to be university) greenfields, vaddswaram andhra pradesh, india e-mail: provc@kluniversity.in abstract recently banks have switched their operations from paper to the latest app-based solutions like mobile banking, internet banking, etc. that empower the customers to arrive at banks virtually with mobile apps. india posture an enormous challenge in the financial sector with a rise in the latest applications services turns into fresh and essential financial services users anywhere at any time with a single click. it had hitherto developed from conventional business to mobile piloted business. there is no doubt the double hit covid-19, jumble the people lives, economy, and what not everything has changed. banks are now working towards digitalized operations to increase customer's digitalized expectations that have been expediting in this pandemic. the main aim of the study is to analyze the impact of the double hit of covid19 on the banking sector in providing a digital solution to the mobile banking user. the present study delves for an empirical test of pandemic witnessing the ally of cash with digitalize solutions indian banker’s customers. the study is planted by descriptive research design with survey method in the form of convenience sampling to collect the data. the intuition of the study prospective fruitful in digitalize financial services, customers digitized expectations, and mobile apps implementation in this viral environment. keywords: mobile banking, digitized operations, pandemic, customer satisfaction, security. jel classification codes: g01, g21, i15, i18, j17. mailto:madhukumarreddy@gmail.com mailto:provc@kluniversity.in https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 18 introduction the globe has endured an extensive switch with the latest technological expansion effect existence of a normal person. india with caseload from november to january was quite slow and low. but by march it has been outbreak with the second wave of covid-19 (abiad et al., 2020); frequently rise in the caseload more quickly in addition to that of black, white, and yellow fungus. central government ingenuity again imposing a lockdown abetted in keeping people indoor with social distancing that expedited to shattered the chain. due to nationwide lockdown, india faced several difficulties in rendering banking services. most of them lost their regular cash flows, myriad people have become cashless. the current scenario with the virus-infected surface is high were plugged back them from the regular payment and routine transactions. therefore the live hood switches from in row to online transactions, mobile banking, internet banking, etc. the government also prolonged its support with several banks and it companies for the adoption and acceptance of mobile wallets. the usage of m banking has been increased in pandemic based on two factors that do transaction safely and securely in the home that aid the social distancing and majority of the services are on online platform were without any choice customers are turn up to mobile banking. the development of the latest technology by collaborations between the various it companies enhances the mobile wallet services in india. recently india turns up as the agile stretch in the mobile, internet market in the world with more than a billion mobile subscribers and becomes a youngster for mobile communication. it was estimated that over 760 million in 2021 are smartphone users in a digital journey. india is the world's second-largest internet population with 483 million users in 2018 and is forecasted that it exceeds to 500 million by 2023. in 2019, india was around 2.8 exabytes per month in total mobile data, and an increase in usage of smartphones was estimated to be over 21 exabytes per month in 2025. demonetization merged the rise in digitalizing india. in the financial year 2014, about 2.38 digital transactions per capita increase to 22.42 digital transactions per capita in the 2019 financial year a shred of evidence that india is a cash dominant country with positive significant growth in digital transactions. over 1.2 billion in 2020, india was the second-largest telecommunication market subscriber in the world (keelery, 2020). cov2 challenges traditional banking habits due to this double hit of the pandemic, banks plan to safeguard their employees and customers from this virus spread with fully lighted hands and remote working. world health organization also guided people to go for digital transactions or contactless payments by avoiding handling paper currency or bank notes frequently due to a life of novel coronavirus on banknotes that speed spread of the virus. traditional banking service seem more customer focused with face to face, but in reality customer wants more speed and convenience that comes from digital. pandemic is fueling banking sectors toward digitalization. the continuous elevation in the area of information and technology has given emanate to digital solutions and services in the banking sector. with new entrants challenging in banking sector, may enjoy provisional regulatory and supervisory relief with a large moments. many banks move from the traditional oligopoly system with some supreme platforms and big tech firms to meet the requirements of the customers. but some medium size banks suffer managing cost efficiencies in crucial environment (carletti et al., 2020). review of literature agarwal et al. (2020), in india, banking infrastructure has completely revolutionized mobile banking with certain factors like smooth accessibility, probing in the smartphone and web user, comfort, and secured digital transactions. in india a 34.33% population comprises youngsters with well-being used in mobile banking, e-wallets developed banking infrastructure as a platform for digital solutions. by overcoming g the fear of safety and security with digital payment the usage of, mobile banking will rise to 100% in the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 19 future (kumar et al., 2016). the proper training facilities to the user in the utilization of m banking service will ensure safety and privacy in digital payments with the support of rbi guidelines (thilagaraj, 2018). certain training services must be measures to reduce the payment issue and connectivity problems in digital transactions (balakrishnan & sudha, 2016). due to this pandemic customers are in readiness to adopt the innovative and digitalized banking model and operations in a very safe and secure way for shopping and payment. added to this several mobile network issues are also faster than their internet services (sahu & deshmukh, 2020). mobile banking considered as an important supporting factor for the performance of the banking sector (kato et al., 2014), highlighted to boost up the mobile banking services and to create it as a platform in digital transactions. in this pandemic situation, banks need to meet the requirements of the facilities in offering various credit products at a low rate of interest. highlight the offered benefit; maintain good communication with the customer by providing a highly secured online transaction that climbs the optimistic in online banking service (baicu et al., 2020). with the change and adaptation in the innovative technology, bank advertises their online operations with several media platforms that influence the customers to use more mobile applications ( aldiabat et al., 2019) reliability, efficiency, security, responsiveness, empathy, and easy use are the six dimension variables that influencing the customers on the maximum utilization of m banking services with a satisfying digital solution. (gomachab, 2018), revealed about the factors like reliability, convenience, cost-effectiveness, a mobile network that contributes towards the expectation of the customers in mobile banking service with 75% of overall satisfaction. research methodology scope of the study: the study is confined to the limited number of indian mobile banking users during the double hit of covid-19 from march 1st, 2021 to 31st may 2021. statement of the problem: in 2021, india estimated over 760 million smartphone users traveling the digital journey. due to this double hit of covid-19, banks are now digitalized so efficiently in making the system accurate, quick, and comfortable to the customers by adapting several training sessions in technical aspects to reduce the factors like in-process transaction, network issues, etc. to get away from this pandemic, mobile banking users grabbing the opportunity of transportation, physical banking truncations, easy accessibility, with a single click with their tips that ally the physical use of cash. therefore the study was perceived adaptation of digital solutions during the pandemic has declined the cash transactions in india. research objectives: the main aim of the study is to analyze the impact of the double hit of covid-19 on the banking sector in providing a digital solution to the mobile banking user. it also concentrates on the present scenario of the indian economy with the consequence of the second wave of covid -19 by associating certain factors and variables connected to mobile banking in india. research design: the study adopted a descriptive research design with a survey method by convenience sampling to collect the data. the study was meant to impact of double hit of covid-19, on the adaptation of the mobile banking users that reduce the physical cash transactions with the digital solution with various mobile apps like upi’s, rtgs, e-wallets, internet banking, (bob m+ connect, sbi yono/ bhim sbi pay, boi mobile), etc. https://www.researchgate.net/publication/346442755_the_impact_of_covid-19_on_consumer_behavior_in_retail_banking_evidence_from_romania https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 20 sample size: it is based on both primary and secondary sources of data. primary data was collected through a structured questionnaire to determine the second wave of covid-19, impact on the increase in the digital transactions, and reduction in usage of physical cash in this viral infected surface and environment with the respondents in the form survey method with a convenience sample of 146 indian mobile banking customers to evaluate hypothesized relationship. a sample of 146 was drawn with the help of yamane’s formula (1967) with a 5% level of significance. secondary data was gathered with the help of websites, annual reports, articles, journals, etc. statistical tools: various statistical tools were used to analyze the collected data by inferential statistics, multiple regressions, pearson’s correlation, anova, etc. to determine the impact of double hit of covid-19 on the digital solutions to the mobile banking users with spss. hypothesis of the study h01: factors influencing the increase of mobile banking transactions during the second wave of covid19. h02: digital solutions shifted to a cashless society during the pandemic. result and discussion table 1. demographical profile of the sample mobile banking customers s.no demographical profile of the sample respondents no. of response valid percent 1 gender male 97 66.43 female 49 33.56 2 age below 20 years 6 4.10 21-30 years 49 33.56 31-40 years 73 50 41-50 years 18 12.32 above 50 years 3 education intermediate 11 7.53 graduation 56 38.35 post graduation 79 54.10 other 4 occupation private employee 56 38.35 government employee 24 16.43 business 59 40.41 retired employee 7 4.79 others 5 annual income below 1,00,000 17 11.64 1,00,001-2,00,000 54 36.98 2,00,001-3,00,000 46 31.50 above 3,00,000 29 19.86 the above table 1 represents various demographical factors of sample mobile banking users (n=146) with male 66.43% (n=97) and female 33.56% (n=49), followed to this highest percentage under https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 21 the age group are of 31-40 years 50% (n=73), 33.56% (n=49) are under the age group of 21-30 years, 12.32% (n=18) are 41-50 years and the reaming 4.10% (n=6) are below 20 years. likewise, 54.10% (n=79), are post graduates forming a highest percentage in educational qualification, 38.35% (n=56) are graduates and 7.53% (n=11) with intermediate. similarly, majority of the respondents are business people with 40.41% (n=59), 35.35% (n=56) are private employees, 16.43% (n=24) are government job holders and the least percentage for the retired employees with 4.79% (n=7). among the total sample 36.58% (n=54) are earning 2,00,001-3,00,000, 31.50% (n=46) yields 1,00,001-2,00,000, 19.86% (n=29) are earning above 3,00,000 and finally with 11.64% (n=17) are earning less than 1,00,000. table 2. frequency distribution of the bank account of sample respondent banks no of response valid percent sbi 36 24.65 bob 48 32.87 boi 22 15.06 axis bank 12 8.21 icici bank 28 19.17 total 146 no. of years less than 2 years 7 4.79 2-3 years 18 12.32 3-4 years 36 24.65 more than 4 years 85 58.21 total 146 account type savings account 22 15.06 current account 53 36.30 salary account 69 47.26 fixed deposit account 2 1.36 recurring deposit account others total 146 table 2 depicted the frequency distribution of the sample respondents based on holding their accounts in the bank. out of sample (n=146), 32.87% (n=48) respondents are having their account with bob, 24.65% (n=36) respondents in sbi, 19.17% (n=28) are icici bank account holders, 15.06% (n=22) are with boi and the remaining 8.21% (n=12) respondents are with axis bank. the table clearly explains the account holder's experience with the bank. the results show that with the majority of 58.21% (n=85) are with their banks more than 4 years, 24.65% (n=36) are with 3-4 years, 12.32% (18) are 2-3 years and 4.79% (n=7) are dealing their account with less than 2 years. the analysis of the above table explains about the type of account of a sample respondent account holder with respect to their bank were shows around 47.26% (n=69) are having salary account, 36.30% (n=53) are current account holders, 15.06% (n=22) were dealing with a savings account and 1.36% (n=2) are fixed deposit account holders. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 22 table 3. use of mobile banking in pre and second wave of covid-19 response pre covid-19 second wave of covid-19 no of response valid percent no. of response valid percent yes 97 66.43 132 90.41 no 49 33.56 14 9.58 total 146 mode of banking physical banking/ visiting 69 47.26 2 1.36 internet banking 9 6.16 46 31.50 mobile banking 14 9.58 96 65.75 atm’s 54 36.98 2 1.36 total 146 usage of mobile banking in pre and second-wave of covid-19, frequency distribution was exhibiting with the above table. the results show that nearly 66.43% (n=97) are dealing with mobile banking transactions before covid-19, that increase to 90.41% (n=132) during the second-wave of covid19 with the variation of 23.98% (n=35) and the same positive variation found with the decrease in regular banking transactions 23.98% (33.56%-9.58%), (n=35) (49-14). the above table describes the utilization of the banking services through different modes at the time pre-covid-19 and during the second wave of covid-19 with sample respondents of 146. before the pandemic, it is observed that 47.26% (n=69) respondents are dealing transactions with physical banking whereas after this double hit of pandemic physical/visiting banks are reduced to 1.36% (n=2) with a variation of 45.9% (n=67) in the fear of spreading the virus through the infected area or surface or things. in the same line it is observed that nearly 36.98% (n=54) are utilizing the banking facilities/services through atm’s in pre-covid-19, change to 1.36% (n=2) with the effect of the pandemic with a variation of 35.62% (n=52) that leads to increase of digital solutions by reducing the cash related dealings. similarly, the highest percentage was observed for mobile banking with 65.75% (n=96) during the second wave of covid-19, which was only 9.58% (n=14) in pre-covid-19 with a variation of 56.17% (n=82). followed this second highest found for internet banking with a 31.50% (n=46) during covid-2, where it was 6.16% (n=9) in normal days a variation of 25.34% (n=37) observed. finally, the analysis is the evidence of the increase of digital transactions or digital solutions through mobile banking and internet banking during this second wave of covid-19. table 4. frequency distribution of mobile banking transactions during pandemic use of bank atms in pandemic no of response valid percent never 79 54.10 once in a month 36 24.65 once in a week 27 18.49 twice or thrice in a week 4 2.73 total 146 services /transactions balance enquiry 36 24.65 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 23 mini statement 28 19.17 upi payments 64 43.83 funds transfer 12 8.21 investments 6 4.10 others total 146 no of transactions 1 to 10 23 15.75 11-20 72 49.31 above 20 51 34.93 total 146 the table shows the frequency distribution of the sample respondents based on using the banks atm’s services during the second wave of covid-19. it observed that 54.10% (n=79) respondents are never using or utilizing the services from the bank atms due to fear of the second wave of covid-19 and forthcoming of the third wave also influencing them for digital solutions to be safe and secured. 24.65% (n=36) are visiting once in the month, 18.49% (n=27) are once in a week and the least percentage of 2.73% (n=4) are twice or thrice in a week. the table exhibits the services/transactions of the respondents through mobile banking like balance enquiry, mini statement, upi payments, etc. it is mentioned that the majority of the transactions are upi payments with a valid percent of 43.83% (n=64), 24.65% (n=36) and around 19.17% (n=28) respondents are for enquiring their balance and for mini statement because in our study majority of the sample mobile banking user is doing business with a 40.41% (n=59) (see table 1). and the remaining 8.21% (n=12) for fund transfer, at last with a 4.10% (n=6) for investments especially for insurance policy comprehensive covid-19 hospitalization cover. as mentioned in the above table about the frequency distribution of the respondents on the number of transactions through mobile banking per month with our confined sample size. it is depicted that 49.31% (n=72) respondents are doing digital transactions (survey, consumer usage of digital banking and contactless payments surges in india during pandemic, finds new fis survey, september 10, 2020) with a range of 11-20, 34.93% (n=51) are above 20 transactions as we mentioned in our study majority of the respondents are from business and finally 15.75% (n=23) within a range of below 10 transactions. table 5. factors effecting usage of digital transactions during second wave of covid-19. reliability statistics cronbach's alpha if item deleted mean std. deviation mobile banking is easy, secured and safe at home (mbess) .930 1.32 .495 aid in social distancing with instant payments (asdip) .935 1.23 .424 pandemic shifted in cashless society (pscs) .938 1.18 .424 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 24 majority of the transactions/ services are digitalized during pandemic (mtddp) .922 1.49 .816 the use of internet and mobile banking services increase the efficiency of the banks in pandemic (mbsiep) .911 2.16 1.418 increase of digital transactions during covid-19 (idtcov2) .910 2.08 1.292 speed of mobile and fixed broadband internet networks (smfbin) .915 2.38 1.396 the table reveals the internal consistency of the responses with the help of cronbach’s alpha test for all the items that show more than .07 indicating that the test shows that scale is acceptable for the present study. the table depicts respondents’ factors for the utilization of mobile banking during the second wave of covid-19 and rates themselves on a five-point likert scale. the results indicate an average mean score of the respondents agreed (1.32) with mobile banking is easy, safe and secured at home during this pandemic, assist to maintain social distancing by instant payments forming a mean of (1.23), a drastic increase in the digital transaction by shifting to cashless society forming around a mean of (1.18), with a mean of (1.149) a majority of the digital transactions or services has increased, banks are also increasing their efficiency in providing the services with mean of (2.16), with a speed in mobile and broadband internet width with (2.38) that increase the speed of digital transaction with a mean of (2.08) during the second wave of covid-19. table 6. chi-square (χ2) test pearson chisquare value df asymp. sig. (2-sided) mobile banking is easy, secured and safe at home (mbess) 47.132a 2 .000 aid in social distancing with instant payments(asdip) 51.009a 1 .000 pandemic shifted in cashless society (pscs) 79.801a 2 .000 majority of the transactions/ services are digitalized during pandemic (mtddp) 85.819 a 3 .000 the use of internet and mobile banking services increase the efficiency of the banks in pandemic (mbsiep) 146.00 a 4 .000 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 25 increase of digital transactions during covid-19 (idtcov2) 116.860 a 4 .000 speed of mobile and fixed broadband internet networks (smfbin) 146.00 a 4 .000 the present study hypothesis was analyzed with the help of chi-square (χ2) indicate that increase of mobile banking transactions during the second wave of covid-19, dependent on various factors like mobile banking is easy, secured and safe at home (mbess), helps in social distancing with digital payments (asdip), shifted to cashless society (pscs), the majority of the transactions or services are digitalized during the pandemic (mtddp), bank has increase the efficiency in services for internet and mobile banking (mbsiep), an increase in digital transaction’s during the pandemic tdtcov2, and an increase in the fixed broadband internet speed (smfbin) with a sample 146 respondents at 5% level of significance. since the p values for all the factors are less than 0.05, the null hypothesis is rejected that there is a significant difference in the increase of digital transactions during the second wave of covid19 table 7. non-parametric correlations between factors coefficient of correlation df asymp. sig. (2-sided) n mobile banking is easy, secured and safe at home (mbess) .819 .000 146 aid in social distancing with instant payments (asdip) .831 .000 146 pandemic shifted in cashless society (pscs) .740 .000 146 majority of the transactions/ services are digitalized during pandemic (mtddp) .808 .000 146 the use of internet and mobile banking services increase the efficiency of the banks in pandemic (mbsiep) .912 .000 146 increase of digital transactions during covid-19 (idtcov2) .836 .000 146 speed of mobile and fixed broadband internet networks (smfbin) .892 .000 146 the above table shows the result of the correlation of the various factors that indicate an increase in digital transactions during cov-2. the results show that the factors like mobile banking is easy, secured and safe at home (mbess) (.819), helps in social distancing with digital payments (asdip) (.831), shifted to cashless society (pscs) (.470), the majority of the transactions or services are digitalized during the pandemic (mtddp) (.808), bank has increase the efficiency in services for internet and mobile banking (mbsiep) (.912), an increase in digital transaction’s during the pandemic (idtcov2) (.836), and an increase in the fixed broadband internet speed (smfbin) (.892) are positively correlated with an https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 26 increase in the digital transactions during the second wave of covid-19 with a significant (p values=.000) at 5% level of significance. table 8. use of mobile banking in second wave covid-19 * mode of banking facilities in second wave of covid-19 cross tabulation mode of banking facilities in second wave of covid-19 tota l pearso n chisquare value d f asymp . sig. (2sided) physical banking / visiting interne t bankin g mobile bankin g atm’ s use of mobile bankin g in second wave covid19 ye s 2 46 84 0 132 24.886a 3 .000 no 0 0 12 2 14 total 2 46 96 2 146 with latest entrants challenging in banking sector, may relief with regulatory and supervisory with a large moments and most of the customer shifted from traditional banking oligopoly system to new variant. the above table clearly explains about the utilizations of various banking services during pandemic shifted to cashless society. the analysis was done with the help of chisquare at 5% level of significant with a sample of 146 respondents and it shows that the p value is less than .005, therefore it is concluded that pandemic made the changes in usage of mobile banking transaction that shifted a drastic changes of cashless society. finding demographical profile the study reveals the demographical profile of the sample mobile banking respondents with a sample of 146. among them, the majority are male forming a valid percent of 66.43%, followed by this 50% are categorized under the age group of 31-40 years. 54.10% are postgraduates with the majority of 40.41% business people with yields of 2, 00,001-3, 00,000 forming a mean of 36.58%. bank account holder out of 146 sample respondents, (n=48) forming a mean of 32.87% are holding their bank account with bob, 24.65% with sbi, 19.17% with icici bank and 15.06% with axis bank and shows around 47.26% are having salary account, 36.30% are current account holders and 15.06% are having saving account. mobile banking transactions and services a variation of 23.98% (n=35) is dealing with the mobile banking transactions in the pre and second wave of covid-19. followed to this a drastic decline in the utilization of atm services in this pandemic was forming a mean of 54.10%, on the same line mode of availing banking services. with a variation of https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 27 45.9%, respondents are dealing their banking transactions digitally, 35.62% are shifted to a cashless society due to this pandemic and finally, the study mentioned that nearly 49.31% of respondents are dealing with digital transactions within a range of 11-20 times per month. therefore, it shows a positive in dealing with digital solutions. conclusion a special pattern switch in the behavior of the indian consumer-initiated for where and how payments are made, digital transactions, shopping, investments, etc. during the second wave of covid-19, indi has been rush in digital payments that shows results nearly 68% of the indian using mobile banking for their financial transactions, and 51% are expected to move on using these digital transactions after the pandemic (fis survey, september 10, 2020). and most of the youngsters and middle age group (22-39) consumers are very enthusiastic attracted for this digital solution due to increase in the clamor for own banking transactions and the personalization of products and services has fired the growth of the mobile banking market and that results useful with various feature like friendly user interface, customer assistance at real-time, immediate transactions, etc. according to (rbi, 2019-2020), an increase in the use of m-banking-wallets with total digital wallet transactions nearly doubled to 253.2 cores in may from 124.3 cores in february amidst pandemic. finally, banks also adopted innovative digital services like video conferences while dealing with the clients; customers, etc. related to any issue with bank services. authors’ contribution: we are happy that authors have contributed to the study in different ways at different times.  m. radhika: theoretical background, introduction, review of literature, and analysis of the data  p. madhu kumar reddy: research methodology, data collection  dr. a.rama kumar: discussion of the results. conflict of interest: the study is free with conflicts of interest in authors. funding acknowledgement: the study has no explicit funding for its author’s individual/ personal capacity. references aldiabat, k., gasaymeh, a. s., & rashid, a. 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(2018, feburary). customer satisfaction towards mobile banking – a study. international journal of applied research, 8(2). appendices q 1. gender of the respondents. a. male b. female https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 29 q 2. age of the respondents. a. below 20 years c. 31-40 years b. 21-30 years d. 41-50 years e. above 50 years q 3. education qualification of the respondents a. intermediate b. graduation c. post-graduation d. other q 4. occupation of the respondents. a. private employee b. government employee c. retired employee q 5. annual income of the respondents a. below 1,00,000 b. 1,00,001-2,00,000 c. 2,00,001-3,00,000 d. above 3, 00,000. q 6. account holder of the bank. a. sbi b. bob c. boi d. axis bank e. icici bank q 7. no. of years account holder in a bank. a. less than 2 years b. 2-3 years c. 3-4 years d. more than 4 years q 8. type of account holder. a. savings account b. current account c. salary account d. fixed deposit account e. recurring deposit account f. others q 9. what kind of a kind of transactions/services done through mobile banking? a. balance enquiry b. mini statement https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 6, no. 1; 2021 30 c. upi payments d. fund transfer e. investments f. others q10. number of mobile transactions per month. a. 1-10 b. 11-20 c. above 20 q 11. what is the mode of banking facilities in pre and second wave of covid-19? mode of banking precovid-19 during second wave of covid-19 physical banking/ visiting internet banking mobile banking atm’s q 12. what are the factors affecting usage of digital transactions during second wave of covid-19. factors strongly agree agree neutral disagree strongly disagree mobile banking is easy, secured and safe at home aid in social distancing with instant payments pandemic shifted in cashless society majority of the transactions/ services are digitalized during pandemic speed of mobile and fixed broadband internet networks 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/) indian journal of finance and banking 10(1) (2022), 12-17 12 finance and banking ijfb vol 10 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa european union and the united states of america: an econometric investigation on the paradigm shift in the gdp’s growth rate trend dibin kodanghat karuvalappil (a)1 archana balakrishnan (b) (a) assistant professor, berchmans institute of management studies, s. b. college, india; e-mail: dibin1188@gmail.com (b) assistant professor, department of economics, mannaniya college of arts and science, india; e-mail: archanabalakrishnan765@gmail.com a r t i c l e i n f o article history: received: 14th march 2022 accepted: 24th april 2022 online publication: 30th april 2022 keywords: gdp growth rates, regression, granger causality, impulse response jel classification codes: f40, f43, f44 a b s t r a c t the recent war between ukraine and russia is yet another instance that emphasizes that economic overdependence may destroy the economic fabric of a nation. taking this premise into consideration, this study aims to examine the long-term and short-term connection between the european union and the united states gdp growth rates using tools like linear regression, granger causality test, and impulse response function. quarterly gdp figures of the european union and the united states were taken for the period spanning 22 years, starting from quarter 2 of the financial year 1998-1999 to quarter 4 of the financial year 2018-2019. the regression model and the granger causality test prove that the united states’ gdp growth rate is influenced by that of the european union in the short-run as well as in the long-run, but the eu’s gdp is independent and does not follow the former. the possible explanation can be the trade surplus of the european union over the united states in the recent past. hence, the authors are of the opinion that a much more balanced trade between these two powerful economies would ensure the stabilization of the global trade and stability of the global power equation. © 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 the world has seen a lot of examples that have proven the fact that trade and economic growth dictate the hierarchy of power. gone are the days, when military power alone could make a nation a global leader. now, the globe is driven by the quantum of trade and export advantage. for instance, the chinese hegemony in global affairs is because of her strong trade policies and her having 15% of the overall global trade pie (china: the rise of a trade titan | unctad, n.d.). likewise, with a nominal gdp of 22.89 trillion dollars, the united states of america’s economy is the largest in the world and is a leader in terms of armed power as well as representations in important global bodies. the european union on the other hand is a powerful block that was established in the year 1993 after signing the maastricht treaty. the nominal gdp of the european union is 15 trillion dollars and they constitute 15 percent of the global trade. the archive collection of the european union (comission, 2008) that was released in 2008 quotes the following: the richness and diversity of american society owe a great deal of debt to the successive arrivals of immigrants from all over europe over the past 500 years. this results in the degree to which europeans and americans share common values and maintain close cultural, economic, social, and political ties. of course, this is reflected in the close transatlantic relationship. in addition, the usa has been a strong supporter of integration among european nations. the eu and the usa are major trading partners (taking goods and services together) and account for the world's largest trade relations: when combined, they make up about 40% of world trade. transatlantic relations define the state of the global economy as the eu or usa and are a major trading and investment partner in almost every other country. the above-given extract showcases the historical relationship between these power blocs. however, the latest economic figures (bea, 2021) of the united states showcase a changing trend. for instance, the goods and services deficit 1corresponding author: orcid id: 0000-0002-8692-9990 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v10i1.1705 to cite this article: karuvalappil, d. k., & balakrishnan, a. (2022). european union and the united states of america: an econometric investigation on the paradigm shift in the gdp’s growth rate trend. indian journal of finance and banking, 10(1), 12-17. https://doi.org/10.46281/ijfb.v10i1.1705 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v10i1.1705 https://orcid.org/0000-0002-8692-9990 https://orcid.org/0000-0002-6819-0651 karuvalappil & balakrishnan, indian journal of finance and banking 10(1) (2022), 12-17 13 of the united states in 2020 stood at $678.7 billion and was the highest since 2008. with 2.1 trillion dollars, her export figures were also in decline. above all, the 2020 deficit with the european union ($182.2 billion) was the highest on record and is the core reason behind the current research. this research is an attempt to understand the changing dynamics in gdp of the two of the most important and powerful blocs in the world; the united states of america and the european union (hereafter called the us and eu respectively) the below discussed related literature throws light on similar areas of research bywalec (2020) aims to identify and evaluate trade exchange between the european union and india, as well as provide an indicator of the process' primary factors. the findings suggest that trade between the eu and india is very crucial for india, as exports to the eu account for roughly 17-20% of overall indian exports. konovalova and ushanov (2019) examines the trade and economic ties between the united states and the european union. the purpose of this paper was to identify the key qualities and characteristics of this collaboration. the research led to the coining of the term "economic anamorphosis," whose concept is the critical dominance of the weight and share of a limited list of partners in a system of bilateral cooperation, when one of the partners is regional economic integration, and these determined limited lists of countries attract the largest share of trade, capital, human, and other flows. according to cabedo (2017), the e.u. and the united states account for over 60% of global gdp, and the e.u.'s investment in the united states is more than 8 times that of china and india combined. while the united states invests more than three times as much in the european union as it does in the rest of asia. the article went on to say that the trade flow between the eu and the us accounts for one-third of all global trade. in their study, hussain and haque (2016) concluded that there is a link between foreign direct investments, trade, and bangladesh's per capita gdp growth rate. the research was carried out using annual time series data from 1973 to 2014. the vector error correction model (vecm) research revealed that these variables have a long-term association. the researchers ran a few post-estimation diagnostic tests to see if the vecm model was valid, and discovered that the regression residuals had a normal distribution and no auto-correlation. the variables of trade and foreign investment had a considerable impact on the gdp per capita growth rate, according to the findings. golinelli and parigi (2014) suggested a straightforward approach for examining monthly estimates of quarterly world gdp and trade short-run views. through bridge models, it combines high-frequency data from emerging and advanced nations to explain quarterly national accounts variables. in their study, abosedra et al. (2020) used a portfolio technique to look at gdp growth volatility spillovers across 120 countries from 1960 to 2017. a study was done to discover the sources of growth volatility dynamics in the world in terms of volatility proportions from and to others using a spillover index based on variance decompositions under a vector autoregressive framework. they discovered that high-income growth nations were net transmitters of growth volatility, while low-income growth countries were net recipients. the literature relating to the gdp-based econometric study on eu and usa was not much to be seen which makes this study relatively unique. from the literature, it could be seen that most of the studies in the related area make use of tools like the granger causality test and regression to find out the gdp-based relationship. this study has developed the following hypotheses using similar techniques: h1a: eu’s long-term quarterly gdp growth rates can be explained using us’s quarterly gdp growth rates. h1b: us’s long-term quarterly gdp growth rates can be explained using eu’s quarterly gdp growth rates. h2a: eu’s short-term quarterly gdp growth rates can be explained using us’s quarterly gdp growth rates. h2b: us’s short-term quarterly gdp growth rates can be explained using eu’s quarterly gdp growth rates. methods data description the study is secondary in nature and the data used for the study was collected from the world banks' official website. the quarterly gdp growth rate figures of the u.s. and e.u. for 20 years from 1998 june to 2019 june comprising 85 observations were used for the analysis. regression the data fulfilled the criteria of stationarity, and hence the simple linear regression model has been used to estimate the effect of e.u's gdp growth rate on the u.s. the regression model was primarily used to explain the dependence of the u.s. economy's gdp growth rate on e.u. granger causality test granger said in 1969 that a time series yt produces another time series xt, which can be anticipated knowing yt's and xt's prior values. the f-statistics aid in the interpretation of causality data. the granger causality test utilised in this study is based on the var framework, and the methodologies used follow granger (1969) and engle and granger's protocols (1987). impulse response function in econometric analysis, the impulse response is a crucial technique that uses vector autoregressive models. this response allows you to trace the impact of a shock on the independent variable to the dependent variable, making it a useful tool for economic analysis. the impulse response function (irf) and variance decomposition are two prominent methods for depicting the dynamic behaviour of a var model and identifying the causes of variability. pesaran and shin (1998) proposed generalised impulse response functions, which were proven to be more effective. as a result, the generalised impulse response function is used to assess the dynamic behaviour of the variables in this study. karuvalappil & balakrishnan, indian journal of finance and banking 10(1) (2022), 12-17 14 discussion stationarity test to check for the long-term relationship using the regression model, it is essential to ensure the stationarity of the data. the augmented dickey-fuller test (adf) shows that both u.s. and eu gdp data points are stationary at level. table 1. test for stationarity null hypothesis: eu_gdp has a unit root augmented dickey-fuller test statistic t-statistic: prob.* test critical values: 1% level: -3.510259 -4.013220 0.0022 5% level: -2.896346 10% level: -2.585396 null hypothesis: us_gdp has a unit root augmented dickey-fuller test statistic t-statistic: prob.* test critical values: 1% level: -3.510259 -6.260726 0.0022 5% level: -2.896346 10% level: -2.585396 inference at i(0) source: authors data, eviews output regression model now that the essential condition of stationarity has been fulfilled, it is crucial to run the regression model to test for the longterm relationship between the variables. the regression model results show that the e.u's growth figures explain the u.s. gdp growth rate. the researcher could not build a regression model that explained the e.u.'s gdp growth rates using the us gdp figures. y us_gdpt = a+bx eu_gdpt + 𝜺𝒕 (1) table 2. test for regression r-squared 0.395497 mean dependent var 0.761961 adjusted r-squared 0.388214 s.d. dependent var 0.800184 s.e. of regression 0.625878 akaike info criterion 1.923927 sum squared resid 32.51308 schwarz criterion 1.981401 log likelihood -79.76690 hannan-quinn criter. 1.947045 f-statistic 54.30282 durbin-watson stat 1.864780 prob(f-statistic) 0.000000 source: authors data, eviews output residual diagnostic test the regression model cannot be considered successful without running the residual diagnostic tests. hence, the breuschgodfrey serial correlation l.m. test, breusch-pagan-godfrey test for checking the heteroskedasticity, and the residual normality test was also run for checking the normality principle. the model has successfully met all of the above-given conditions. table 3. serial correlation test and heteroskedasticity test breusch-godfrey serial correlation lm test: null hypothesis: no serial correlation at up to 2 lags particulars f-statistic probability f-statistic 0.316873 prob. f (2,81) 0.7293 obs*r-squared 0.659879 prob. chi-square (2) 0.7190 heteroskedasticity test: breusch-pagan-godfrey null hypothesis: homoskedasticity f-statistic 0.919345 prob. f (1,83) 0.3404 obs*r-squared 0.931184 prob. chi-square (1) 0.3346 scaled explained ss 0.902871 prob. chi-square (1) 0.3420 source: authors data, eviews output variable coefficient std. error t-statistic prob. eu 2.728743 0.370298 7.369045 0.0000 c 0.387076 0.084833 4.562828 0.0000 karuvalappil & balakrishnan, indian journal of finance and banking 10(1) (2022), 12-17 15 normality test figure 1. normality test (residuals) figure 2. line plots of variables studied over the period the regression model has fulfilled all the necessary conditions like normality, stationarity, serial correlation, and homoskedasticity. the model states that 40% of the u.s. economy's growth can be explained using the gdp growth rates of e.u. since the late 1800s, the u.s. has been treated as a world power, and the economic size stood at 21 trillion dollars (world bank, 2022). these data emphasize her economic supremacy, but overdependence on a particular regional bloc alone for economic activities may threaten economic superiority in the long run. the study has duly explained that these two economies move in tandem in the long run. the primary reason for this could be the ever-growing trade relations. the u.s. government data states that the u.s. goods and services trade with the e.u. 27 totaled an estimated $1.1 trillion in 2019. the exports accounted for $468 billion, and imports were a whopping $598 billion. u.s. goods imports from the e.u. 27 totaled $452.0 billion in 2019, up 6.0 percent ($25.8 billion) from 2018 and up 93 percent from 2009. u.s. imports from the e.u. 27 account for 18.1 percent of overall u.s. imports in 2019. the u.s. goods and services trade deficit with the e.u. 27 was $130 billion in 2019. u.s. goods trade (exports plus imports) with the e.u. 27 was $720 billion in 2019. goods exports were $268 billion; goods imports totaled $452 billion. the u.s. goods trade deficit with the e.u. 27 was $184 billion in 2019 (european union, 2020). these figures substantiate the views given earlier that claimed the u.s.'s overdependence on a particular regional block. trade relations can be a two-edged sword; overdependence on a specific block or nation may be undue leverage to other countries or trade blocs. var granger causality test as the variables were found to have a long-term relationship, the var-based granger causality test was run to understand the short-run relationships between the gdp growth rates. the variables were found stationary at the level. a bi-directional granger causality test was carried out using the granger causality in a var environment. ∆𝐔𝐒 𝑮𝑫𝑷𝒕 = µ + ∑ 𝜶𝒊 𝒏 𝒊=𝟏 ∆𝑼𝑺 𝑮𝑫𝑷𝒕−𝟏 + ∑ 𝜷𝒋 𝒏 𝒋=𝟏 ∆𝑬𝑼𝑮𝑫𝑷𝒋−𝟏 + 𝜺𝒕 (2) table 4. granger causality test var granger causality block exogeneity wald tests sample: 1998 q2 -2019 q2 included observations: 84 dependent variable: us gdp variable chi-square value degree of freedom probability eu_gdp 21.3667 1 0.0000 dependent variable: eu gdp us_gdp 0.6949 1 0.4045 source: authors data, eviews output table 5. var granger causality test (sub-periods) dependent variable sub-period ch-sq probability us gdp 1998, q2 -2002, q2 0.8400 0.6570 eu gdp 1998, q2 -2002, q2 0.4283 0.8072 us gdp 2002, q3-2006, q3 0.4596 0.4978 eu gdp 2002, q3-2006, q3 0.3229 0.5698 us gdp 2006, q4 – 2010, q4 26.0158 0.0000* eu gdp 2006, q4 – 2010, q4 2.9547 0.3987 us gdp 2011, q1 – 2015, q1 0.6484 0.8853 eu gdp 2011, q1 – 2015, q1 4.4173 0.2198 us gdp 2015, q2 – 2019, q2 0.2665 0.6057 eu gdp 2015, q2 – 2019, q2 0.3811 0.5370 source: authors data, eviews output 0 1 2 3 4 5 6 7 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 series: residuals sample 1 85 observations 85 mean -2.84e-16 median 0.000944 maximum 1.631899 minimum -1.764631 std. dev. 0.622142 skewness 0.012408 kurtosis 3.033771 jarque-bera 0.006220 probabil ity 0.996895 series: residuals sample 1 85 observations 85 mean -2.84e-16 median 0.000944 maximum 1.631899 minimum -1.764631 std. dev. 0.622142 skewness 0.012408 kurtosis 3.033771 jarque-bera 0.006220 probabil ity 0.996895 -100 10 1 7 13 19253137 43495561677379 85 eu and us gdp's quarterly growth rate (1998-2019) us gdp indian gdp karuvalappil & balakrishnan, indian journal of finance and banking 10(1) (2022), 12-17 16 the granger causality test had proved the short-run relationship between the above-stated variables when taken as a whole. however, the results turned out a bit different when the short-term split-ups of the periods were used for understanding the short-term relationships of gdp figures. the granger causality test was run for five different split-ups: f.y.1998-2002, f.y.2002-2006, fy.2006-2010, f.y.2011-2015, and f.y.2015-2019 and proves that baring in the 20062010 sub-period wherein us gdp had depended on the e.u.'s gdp, the gdp growth rates do not explain each other. impulse response function the impulse response function was done to determine the u. s’s gdp growth response to a unit of risk or shock in e. u’s gdp growth rate. figure 3. impulse response graph one standard deviation shock in e.u.'s gdp growth rate causes an increase in the gdp rates of the u.s. the growth peaks at period two (0.8) and then declines gradually becomes close to zero by the 9th period. hence, the shock to e.u.'s gdp may positively impact the u.s.'s gdp growth rate in the short-run and long-run. conclusion and further scope of the study the research tries to talk about the interdependence of the two of the world's most significant trade blocs, the united states of america and the european union. the study has pointed out that the e.u’s gdp can explain the u.s. economy's gdp growth rates. the possible reason is the trade volume between these two trade blocs and the trade surplus position of the e.u. regression analysis, the granger causality test, and the impulse response function had duly substantiated the research with positive findings. as previously mentioned, global trade can be a double-edged sword, and the u.s. is found dependent on a block like e.u. on trade hence, it is advisable to either bring down the trade deficit or diversify the scope of trade by searching for other trade blocs so that the u.s. remains economically consistent and stable in the long run. else, other economic giants like china may overtake the u.s. as an economic power that would change the world's power equation. the author feels that the world is not ready to accept this change. further studies in this area should include more economic indicators like unemployment rates, central bank policy rates, and inflation and build an econometrics-based model that fully clarifies the interdependence aspect. author contributions: conceptualization, d.k.k. and a.b.; data curation, d.k.k. and a.b.; methodology, d.k.k.; validation, a.b.; visualization, d.k.k.; formal analysis, d.k.k. and a.b.; investigation, d.k.k.; resources, d.k.k.; writing – original draft, a.b.; writing – review & editing, d.k.k.; supervision, d.k.k.; software, d.k.k.; project administration, a.b.; funding acquisition, d.k.k., and a.b. 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. 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 abosedra, s., arayssi, m., ben sita, b., & mutshinda, c. (2020). exploring gdp growth volatility spillovers across countries. economic modelling, 89, 577–589. https://doi.org/10.1016/j.econmod.2019.11.015 bea. (2021). annual 2020 press highlights (issue december 2020). retrieved from https://www.census.gov/foreigntrade/statistics/highlights/index.html bywalec, g. (2020). dynamics and determinants of trade exchange between the european union and india. optimum. economic studies, 3(101). https://doi.org/10.15290/oes.2020.03.101.10 cabedo, j. v. c. (2017). t.t.i.p.: usa vs eu... the dark side of trade? chimica oggi/chemistry today, 35(2), 25-27. china: the rise of a trade titan | unctad. (n.d.). retrieved from https://unctad.org/news/china-rise-trade-titan -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1 2 3 4 5 6 7 8 9 10 response of us_gdp to eu_gdp cholesky one s.d. (d.f. adjusted) innovation ± 2 analytic asymptotic s.e.s karuvalappil & balakrishnan, indian journal of finance and banking 10(1) (2022), 12-17 17 comission, e. 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(2022). world bank national accounts data, and oecd national accounts data files. retrieved from https://data.worldbank.org/indicator/ny.gdp.mktp.cd?locations=us 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 10(1) (2022), 1-11 1 finance and banking ijfb vol 10 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa the governance role of labor unions in improving investment efficiency yong-chul shin (a) surjit tinaikar (b)1 yu zhang (c) (a) ph.d., associate professor, college of management, university of massachusetts boston, boston, u.s.a.; e-mail: yong-chul.shin@umb.edu (b) ph.d., associate professor, college of management, university of massachusetts boston, boston, u.s.a.; e-mail: surjit.tinaikar@umb.edu (c) ernst & young, u.s.a.; e-mail: yu.zhang0326@gmail.com a r t i c l e i n f o article history: received: 14th march 2022 accepted: 24th april 2022 online publication: 27th april 2022 keywords: corporate governance investment efficiency labor union jel classification codes: j51, j59, o16, g31 a b s t r a c t we focus on the role that labor unions can play in influencing firms’ efficiency in corporate investment decisions where investment efficiency is defined as the extent to which deviations from optimal investment levels are minimized. we argue that unions may not simply be adversaries of managements as is often believed but have incentives to monitor managements in ways similar to that of other corporate governance players. these incentives stem from the fact that unions, like other corporate stakeholders, are adversely affected by investment inefficiencies that may result from firm-level overinvestment and underinvestment decisions. consistent with this explanation, we find that labor unionization is indeed positively associated with improvements in investment efficiency and that these effects are generally stronger in bargaining environments that are favorable to unions. for instance, union effects in improving investment efficiencies are stronger in states where the democratic party is more influential and in states which have not enacted legislations that restrict union activities. these results indicate that union monitoring of investment efficiency is more likely to occur through channels that are a part of unions’ collective bargaining processes. our results are robust to different measures of investment efficiency, different empirical specifications, and endogeneity of union membership. © 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 this study examines the governance role that labor unions can play in guiding a firm’s investment expenditures in physical capital and r&d towards more optimal levels. deviations from these optimal levels are seen as inefficient investment decisions that may cause firms to overinvest in negative net present value (npv) projects or underinvest in positive npv projects. it is widely held in the neo-classical economy that corporate investment is a function of marginal q (abel, 1983). firms generally invest until the marginal benefit of capital equals the marginal cost. however, imperfections due to the information asymmetry may cause firms to deviate from optimal capital investment policy (jensen, 1986; stiglitz & weiss, 1981). prior literature has explored several factors that can mitigate these agency problems and thereby improve investment efficiency. for example, an effective corporate governance system that encompasses managerial incentives and optimal organization of external resources could minimize problems relating to sub-optimal investment decisions. firm-level corporate governance structures in the form of managerial ownership, institutional holdings, equity-linked compensation and board independence could reinforce managerial incentives to make optimal investment decisions. we extend this line of literature by examining the monitoring of investment efficiency that is associated with yet another important corporate governance institution labor unions. labor unions, as representatives of workers constitute an important stakeholder group and are increasingly assuming the role of insiders. unlike shareholders and institutional owners who can reduce the risk associated with a firm’s bad performance by holding a diversified portfolio, employees are unlikely to be able to diversify their earnings from the firm (amihud & lev, 1981). this makes employee welfare even more dependent on the firm value which in turn makes employee incentives to monitor the firm’s capital investment policy even more important than in the case of shareholders. 1corresponding author: orcid id: 0000-0003-2654-0366 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v10i1.1698 to cite this article: shin, y.-c., tinaikar, s., & zhang, y. (2022). the governance role of labor unions in improving investment efficiency. indian journal of finance and banking, 10(1), 1-11. https://doi.org/10.46281/ijfb.v10i1.1698 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v10i1.1698 https://doi.org/10.46281/ijfb.v10i1.1698 https://orcid.org/0000-0002-0832-0696 https://orcid.org/0000-0003-2654-0366 https://orcid.org/0000-0003-0024-4569 shin et al., indian journal of finance and banking 10(1) (2022), 1-11 2 workers and unions could impact corporate investment decisions directly by securing board representation through equity ownership or indirectly by engaging in disruptive activities such as strikes and political lobbying (chen, kacperczyk, & ortiz-molina, 2011). the focus on unionization therefore allows us to examine an important channel through which investment projects may be monitored viz. the collective bargaining process. this is a relatively unexplored area in the literature examining corporate governance structures and their role in contributing to investment efficiency. the governance role of labor unions has often been understated in prior literature. yet unions have the potential to contribute positively to firm performance by facilitating a cooperative labor relations environment (freeman & medoff, 1979), monitoring contracts between management and shareholders (jensen, 2010; banning & chiles, 2007) and inducing better financial reporting practices by demanding higher quality audits and internal control systems (chung, cho, lee, & son, 2017). we envisage that labor unions can play a similar constructive role in nudging managements towards making more efficient investment decisions. prior literature in this area has generally documented a decline in investment in physical capital and r&d in unionized firms. in the union rent-seeking framework of hirsch (1991), firms respond to the increased wage premiums by reducing investment levels. however, not all reduction of investment expenditures can be seen as evidence of union rent-seeking. if managers overinvest solely with the purpose of consuming perquisites and growing the firm beyond the optimal size (jensen, 1986), then a decline in such investments in unionized firms could reflect a monitoring effect of labor unions rather than a rent-seeking one. when it comes to managerial underinvestment, there is an intuitive explanation for unions to possess incentives in limiting underinvestment. unions acting on behalf of employees have much at stake if the underinvestment problem becomes severe particularly during times of structural change and economic and social upheaval. unions’ demand for higher wages can end up being redundant if companies are not resourceful enough to work out the higher labor costs. the textile workers’ union of america (twua) often encouraged companies to modernize and invest even though such measures often ended up eliminating jobs. aware that underinvestment was often an early warning signal of eventual liquidation, the twua sought to preserve a number of high paying positions by coupling wages with corporate investment policy (hartford, 1996). union leader jimmy settles once said to the press, "when they invest in plants, plants stay open” (priddle & snavely, 2015). unions thus have an incentive in ensuring that managements do not underinvest in assets that may threaten future employee job security and consequently unions’ own survival and relevance in labor markets. using a large sample of 3,658 firms over a period of thirty-one years, we document that firms in industries that are unionized are less likely to overinvest or underinvest in physical assets and r&d. to measure investment efficiency, we rely on the overinvestment and underinvestment measures discussed in biddle, hilary, and verdi (2009). we are aware that any test of unionization effects on overor underinvestment is a joint test of the union effects as well as the appropriateness of the model that defines “optimal” investment. hence, we also conduct our primary empirical analyses using alternative investment efficiency measures such as those discussed in richardson (2006) and continue to obtain similar results. our results are also robust to inclusion of several firm-level characteristics and endogeneity of union membership. we also study the cross-sectional variation in investment efficiency that may arise from differences in the quality of the bargaining environment. our focus on the bargaining environment is for the following reason. if the positive association between unionization and investment efficiency is not driven by the monitoring role of unions exercised as a part of bargaining, then we should find no observable differences in this relationship when the bargaining environment is allowed to differ. it is not obvious why the positive union effects on investment efficiency would be systematically higher in situations where unions have an advantage in bargaining. stronger union effects on investment efficiency in settings where unions have greater bargaining power would thus strengthen our hypothesis of unions assuming a monitoring role during the collective bargaining process. consistent with this explanation, we find that the positive union effects on firms’ investment efficiency are generally stronger in states where the political party to which unions are affiliated viz. the democratic party is more influential and weaker in states which have enacted legislations that make it harder for unions to acquire new members. (note 1) our results are also largely unchanged even when we decompose investments into physical capital investments (capex) and r&d. (note 2) this study contributes to the literature in at least two ways. first, using a large sample of 3,658 firms we discover an important governance institution that may influence corporate investment efficiency viz. labor unions. second, we find that union monitoring of managerial overinvestment is more likely to occur as a part of unions’ collective bargaining processes. this is evidenced by the stronger union effects on investment efficiency observed in environments where unions have greater bargaining power. related literature and hypotheses development a number of studies have examined the role of labor unions in influencing corporate strategic decisions. for instance, denny and nickell (1991) and bradley, kim, and tian (2017) find that unionized firms invest less in innovation related r&d in an attempt to offset union rent-seeking. others have examined how unionization can induce firms to increase information asymmetry (hilary, 2006), reduce ceo compensation (banning & chiles, 2007) and reduce strategic cash holdings (klasa, maxwell, & ortiz-molina, 2009). our development of the hypotheses below is in line with these studies. relationship between overinvestment and unionization examining the relationship between union strength and managerial incentives to overinvest necessitates an understanding of the two competing views in the labor economics literature about union effects on investment. hirsch (1991) contrasts these two views in his book. the traditional view argues that unions’ ability to raise wages above competitive levels causes firms to move up along the labor demand curve. investment in capital or innovation then depends on scale and substitution effects that work in opposing directions. hence this view argues that the net effect of unionization on investment is thus shin et al., indian journal of finance and banking 10(1) (2022), 1-11 3 unclear. the union rent-seeking view hypothesizes that firms reduce investment to levels similar to those firms with a nonunion labor force. these models posit that unions divert some of the firm’s quasi-rents from capital to themselves. this in turn reduces the incentives of firms to invest. more formal models of the union rent-seeking view are described in baldwin (1983) among others. empirical studies have generally documented results that are consistent with the union rent-seeking view (bronars & deere, 1993). however, to assume that unions always play an adversarial role with respect to the interests of the firm in its choice of investment projects may be an incomplete characterization of the problem. a labor union can be a key player in maintaining a system of checks and balances within the governance structure relating to monitoring overinvestment. managers consider the firm a source of extracting private benefits (jensen & meckling, 1976) and increasing their own human capital (zingales, 1998). hence, managers sometimes make investment decisions that may not be purely valuemaximizing. for example, when profitable investment opportunities are limited, managers may prefer to use excess free cash flows for opportunistic reasons (jensen, 1986). these activities ultimately result in an increase in firm size, but not firm value. a dilution in firm value hurts all other stakeholders, including employee unions. unions are hurt because diversion of corporate resources away from unionized members to those who run the corporation reduces the magnitude of rents available for unions to negotiate and capture during collective bargaining. in effect, overinvestment has the consequence of diluting the unions’ bargaining power vis-à-vis the firm. furthermore, overinvestment of free cash flows takes away valuable funds that could be used to finance growth options that may arise in the future. lack of financing options during these times could then lead firms to a state of underinvestment (opler, pinkowitz, stulz, & williamson, 1999) thereby leading to an increased probability of liquidation and bankruptcy. unions therefore have incentives to monitor managerial overinvestment. the monitoring may happen through several channels – by making wage demands that affect managerial flexibility to choose projects, by organizing protests or strikes that may delay new investment plans, through threats to use political connections which in turn can create uncertainties for new plans or through more aggressive posturing in give-andtake during collective bargaining negotiations. based on the set of arguments described above, we state our first hypothesis in alternate form as follows: h1: unionization is positively associated with investment efficiency that results from mitigating overinvestment problems. relationship between underinvestment and unionization the implications of unionization for underinvestment can be understood in context of theories developed to understand debt holders and shareholder conflicts. stiglitz and weiss (1981) show that debtholders can anticipate the opportunistic behavior of managers and shareholders and attempt to limit it by raising the cost of debt or by rationing credit. consequently, a positive npv investment opportunity ends up not being taken due to the high cost of debt. because employee renumeration cash flow streams are similar to the payouts on risky debt (chen, kacperczyk, & ortiz-molina, 2012) underinvestment could occur if unions pressure firms to raise wages which may reduce shareholders’ incentives to invest in positive npv projects. the union rent-seeking theories also predict similar outcomes. in these models, unions end up capturing a portion of the firm’s economic rents from capital thereby creating incentives for firms to underinvest. these theoretical arguments would imply that unionization exacerbates underinvestment problems. yet anecdotal evidence abounds that unions have incentives to prevent underinvestment because underinvestment is often a precursor to bankruptcy and eventual loss of jobs. unions therefore have to balance their demands for higher wages with concerns relating to continuation of future employment. the twua union often encouraged companies to modernize their plants in post-war america when the textile industry was seen as extremely unstable, even if it meant the elimination of some jobs. hartford (1996) documents that union leaders faced the difficult problem of not only convincing mill owners to make much needed investments, but also persuading workers and union representatives that such economic modernization measures were in their own best long-term interests. labor economist, solomon barkin has argued that workers do not approve of managements who neglect the company’s physical, competitive and financial capital (hartford, 1996). the mega-billion dollar agreement between the united automobile workers (uaw) and ford in november 2015 has new investment in plants and products as its cornerstone. uaw vice president jimmy settles in a statement to the press said "when they invest in plants, plants stay open”. unions thus have an incentive in ensuring that managements do not underinvest in assets that may threaten future jobs. this seems to suggest that unions are not myopic and are concerned about management investment decisions that may erode the competitiveness and financial stability of the firm in the long run. liberty and zimmerman (1986) note that labor negotiations often take place every three years suggesting that unions care about long-term issues. given the strong anecdotal evidence available, we propose the second hypothesis as: h2: unionization is positively associated with investment efficiency that results from mitigating underinvestment problems. cross-sectional variation in investment efficiency in this section we examine the cross-sectional variation in investment efficiency arising from differences in the quality of the bargaining environment. (note 3) if the positive association between unionization and investment efficiency that we document in this study is unrelated to the governance role of unions, then we should find no observable difference in this relationship when the bargaining environment is allowed to differ. it is not obvious why union effects on investment efficiency would be systematically higher in situations where unions have greater bargaining power. a more facilitative bargaining environment may allow unions to better exercise their governance role by having a more forceful say on corporate shin et al., indian journal of finance and banking 10(1) (2022), 1-11 4 strategic investment plans through give-and-take during negotiations, through threats of strikes, and through threats to bring in legislation by using their political connections. favorable bargaining environments may also spur unions in demanding better quality financial information from employers (chung et al., 2017) which in turn may help unions to better assess investment plans and projects and detect managerial opportunistic behavior in investment decision-making. right-to-work (rtw) laws enacted in many states prohibit agreements between unions and employers and put restrictions on the extent to which employees can join unions. these restrictions can create free-rider problems for unions and dilute their bargaining power (ellwood & fine, 1987). lower bargaining power implies that unions are unlikely to have a forceful say at the bargaining table or be able to garner enough financial resources to organize effective protests when managers take investment decisions that are unfavorable to the union. thus, one would expect union effects of improving investment efficiency to be lower in states that have enacted rtw laws. the first part of the third hypothesis is thus stated in alternate form as: h3a: the positive association between unionization and investment efficiency is weaker in states that have enacted right-to-work legislation. unions have also developed close ties with the democratic party ever since unions benefitted from the friendly labor policies of president roosevelt in the 1930’s. union members typically tend to vote democratic party candidates. union leaders can threaten to use their political connections to bring in legislation unfavorable to employers or better use their political contacts to garner organizational resources in an attempt to prevent management opportunism or indifference in investment decision making. we therefore argue that unions tend to be more powerful and have greater bargaining power in states ruled by the democratic party. thus, the positive union effects on investment efficiency may be stronger in states ruled by the democratic party. the second part of the third hypothesis is thus stated as: h3b: the positive association between unionization and investment efficiency is stronger in states that are ruled by the democratic party. research design measurement of investment efficiency (inveff) biddle et al. (2009) employ a model of firm-level investment as a function of growth opportunities (as measured by lagged growth in sales). the residuals are then interpreted as a firm-specific measure of unexplained investment. their model of expected investment is described below as: 𝐼𝑁𝑉𝐸𝑆𝑇𝑀𝐸𝑁𝑇𝑖,𝑡+1 = 𝛽0 + 𝛽1 ∗ 𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻𝑖,𝑡 + 𝜀𝑖,𝑡+1 (1) equation (1) is estimated within each industry-year level using fama-french 48-industry classification and with at least 20 observations in each industry-year. firm-years that are grouped in the lowest quartile (i.e., the most negative residuals) are classified as the underinvesting group while those in the highest quartile (i.e., the most positive residuals) are classified as the overinvesting group. firm-years that are grouped in the middle two quartiles are classified as the benchmark group. we estimate a logistic model that predicts that a firm will be more likely to be in the benchmark group (inveff =1) as opposed to each of the extreme quartile (i.e., the underinvesting and overinvesting) groups (inveff =0). measurement of union strength (union) since firm-level unionization data is not required to be disclosed by u.s. firms, many large-sample u.s. prior studies of labor unions have relied on the unionization data from the industry-level union database that hirsch and macpherson constructed (see hirsch & macpherson, 2003) (e.g., chen et al., 2011; klasa et al., 2009; chen et al., 2012). some others have transformed the industry-level unionization rates into a firm-level measure by using the product of the unionization rate and the number of employees for each firm-year scaled by the book value of total assets (hilary, 2006; hamm, jung, & lee, 2018; hsieh, jung, & yi, 2017). we adopt this approach for our study as we believe that this approach strikes a good balance between preserving the sample size and recognizing the fact that unionization is both a firm level and an industrylevel decision. we also perform our analyses by directly using the industry-level unionization rates. (note 4) our results continue to remain qualitatively unchanged. all empirical results are presented using the firm-level unionization measure. empirical models for testing unionization effects on investment efficiency the primary logistic regression model to test the association between inveff and union is described below. 𝐼𝑁𝑉𝐸𝐹𝐹𝑖𝑡 = 𝛼 + 𝛽1𝑈𝑁𝐼𝑂𝑁𝑖𝑡 + 𝑋𝑖𝑡 ′ + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐸𝑓𝑓𝑒𝑐𝑡𝑠 + 𝑌𝑒𝑎𝑟 𝐸𝑓𝑓𝑒𝑐𝑡𝑠 + 𝜀𝑖𝑡 (2) where i indicates firm and t the year. 𝑋𝑖𝑡 ′ is a vector of firm specific control variables that have been known to drive capital investment (biddle & hilary, 2006; biddle et al., 2009; richardson, 2006). 𝜀𝑖𝑡 is an error term. (note 5) endogeneity of union membership a potential econometric problem in our study could arise if firms choose to unionize based on unobserved factors that could be correlated with our measures of investment efficiency. this would make our union variable an endogenous variable that could confound our findings. we attempt to address this problem using an instrumental variables approach. we use three instruments to address endogeneity – state-level unemployment rates (unemprate), industry concentration (hhi), and old economy industry (oldecon). blanchflower, crouchley, estrin, and oswald (1990) argue that when local unemployment rates are high, the penalty associated with being sacked would be higher due to fewer job opportunities, spurring more individuals to join unions. employees in concentrated industries are also more likely to be unionized due to shin et al., indian journal of finance and banking 10(1) (2022), 1-11 5 high expected benefits that can be captured in a firm facing less competition and lower coordination and organization costs. industry concentration implies higher economic profits and unionism may provide a means of redistributing some portion of these profits to workers (hirsch & berger, 1984). unionization is also more likely to occur in highly regulated environments as is often associated in “old economy” industries such as transportation, utilities and government, where entry is regulated and minimum prices are set by regulatory commissions. if profits are enforced through price regulation, individual firms may have fewer incentives to confront unions on wages, thereby encouraging unionization (hendricks, 1977). sample and empirical results sample selection our initial sample for calculating the overinvestment and underinvestment residuals consists of all firm-year observations from the period 1974-2013. we then merge this data with the labor union coverage data which is first available from 1983. so our final sample includes observations from the period 1983-2013. we match industry-level union coverage data at the 4-digit sic level to each firm-year in compustat north america. we exclude financial firms with sic codes from 6000– 6999 because financial firms typically have different operating, investing, and financing activities from other firms in the economy. our final sample after deleting missing observations for union, inveff and control variables consists of 23,475 firm-years and 3,658 unique firms. empirical results table 1 describes the characteristics of the sample. the mean (median) investment for the firm is about 17% (10%) of total assets, while that for capex is about 41% (22%) of a firm’s property, plant and equipment. the median firm has total assets of around $88 million (log of total assets i.e. logat = 4.48). the average market-to-book ratio (mktbook) for our sample is around 1.74, which means our sample is dominated by firms with relatively fewer growth opportunities. the median industry-level and firm-level unionization rates for the firms in our sample are around 10% and 7% respectively. correlation statistics (not reported) also reveal that unionized firms typically tend to be older, more leveraged, have fewer growth opportunities, are less likely to be financial distressed or loss-making and show lesser firm-level uncertainty as evidenced in volatility of cash flows. this is consistent with the profile of unionized firms documented in prior literature (liberty & zimmerman, 1986). table 1. descriptive statistics variable mean std 25% median 75% inveff 0.50 0.50 0.00 1.00 1.00 investment 16.71 32.85 4.87 10.28 19.79 capex 41.46 156.97 11.60 21.89 41.02 noncapex 8.89 24.11 0.00 1.87 9.91 union 0.13 0.15 0.03 0.07 0.18 logat 4.63 2.19 2.89 4.48 6.25 d/a 0.17 0.16 0.02 0.14 0.29 mktbook 2.47 2.11 1.09 1.74 3.02 ϭ(cfo) 0.09 0.08 0.03 0.07 0.12 ϭ(sales) 0.32 0.27 0.12 0.24 0.44 ϭ(i) 0.61 1.33 0.00 0.04 0.39 zscore 4.03 3.90 1.61 3.11 5.29 tangibility 0.60 0.42 0.28 0.51 0.86 cfosale 0.05 0.25 0.01 0.08 0.17 slack 0.63 1.16 0.02 0.11 0.56 opcycle 4.76 0.65 4.33 4.82 5.25 age 15.60 15.64 5.00 11.00 21.00 note. this table presents descriptive statistics of selected variables used in the main analyses. the sample includes 23,475 firm-year observations over the period 1983-2013. all variables are defined in appendix a. table 2 describes the relationship between the unionization rates and investment efficiency using logistic regressions. columns (1) and (2) compare optimal investment with overinvestment and underinvestment respectively. consistent with our primary hypotheses h1 and h2, investment efficiency resulting from mitigating both underand overinvestment is positively associated with unionization rates. the results also reveal that larger firms (as measured by logat) with a higher proportion of tangible assets (tangibility) and better growth opportunities (mktbook) are more likely to overinvest (i.e. they display lower investment efficiency). we believe that firm size, growth opportunities and tangibility of assets proxy for the complexity of the firms’ operations making it harder for outsiders to accurately observe managerial action, thereby making overinvestment more likely. consistent with prior literature, larger firms are more likely to display investment efficiencies resulting from lower underinvestment due to more financing options available for larger firms. however, more leverage (d/a) increases underinvestment (i.e. it decreases investment efficiency) because any benefits from investing are captured primarily by debt holders thereby reducing managerial incentives to invest in marginally positive npv projects. the pseudo r-squared ranges from 0.09 to 0.23 indicating that the models are well specified. shin et al., indian journal of finance and banking 10(1) (2022), 1-11 6 table 2. unionization and investment efficiency (1) overinvestment (2) underinvestment union 0.49** 0.76** (2.07) (2.46) logat -0.04*** 0.18*** (-1.84) (9.03) d/a 0.75** -0.84*** (4.05) (-4.27) mktbook -0.17*** 0.04** (-14.36) (3.22) ϭ(cfo) -0.21 0.24 (-0.64) (0.68) ϭ(sales) -0.41*** -0.15 (-4.09) (-1.29) ϭ(i) -0.03 0.01 (-1.34) (0.57) zscore -0.00 0.04*** (-1.33) (3.89) tangibility -1.01*** 0.99*** (-9.25) (8.84) cfosale 0.85*** -0.26*** (7.42) (-2.27) slack -0.09*** 0.08*** (-3.76) (3.21) dividend -0.40 1.02* (-0.57) (1.89) age 0.02*** -0.00*** (8.41) (-3.73) opcycle 0.16*** 0.22*** (2.97) (3.61) loss 0.42*** -0.40*** (7.71) (-7.78) industry fixed effects yes yes year fixed effects yes yes firm cluster yes yes observations 17,392 17,398 pseudo r-squared 0.09 0.23 note. this table presents results from logistic pooled regressions of inveff on union. column (1) presents the results for a sample that includes overinvestment and benchmark observations. column (2) presents the results for a sample that includes underinvestment and benchmark observations. all variables are defined in appendix a. standard errors in parentheses are robust and adjusted using one-way clustering by firm. ***, **, and * indicate statistical significances at the 1%, 5%, and 10% levels, respectively. tests are two-tailed. table 3 provides evidence on the cross-sectional variation in investment efficiency that may arise from differences in the quality of the collective bargaining environment. panels a and b show the unionization effects on investment efficiency partitioned by states where the democratic party is more influential and by states which have enacted right-towork (rtw) legislation, respectively. we find in panel a that while unionization tends have a stronger effect on mitigating overinvestment in democratic party states, there seems to be no such difference in instances of underinvestment. in the underinvestment sample, the coefficients on union in both democratic and non-democratic party states are significant but a test of difference of coefficients reveals that the coefficients are not statistically different from each other. one reason for this could be that underinvestment in republican states has been traditionally high due to the republican party’s skepticism of big infrastructure projects (surowiecki, 2016). thus, while unions may not be as powerful in republican states, there may be more opportunities of underinvestment for unions to have a significant impact on, relative to those in democratic party states. our results in panel b on the union effects on investment efficiency partitioned by states that have and have not enacted rtw legislation, appear more robust. in both overinvestment and underinvestment situations, the coefficient on union tends to be stronger in states which have not enacted rtw laws, i.e., in states where unions have greater bargaining power. table 3. cross-sectional variation in the effect of unionization on investment efficiency panel a: unionization effect and political affiliation overinvestment underinvestment democrat non-democrat democrat non-democrat union 0.59* 0.47 0.84* 0.97** (1.87) (1.25) (1.84) (2.19) control variables yes yes yes yes industry fixed effects yes yes yes yes year fixed effects yes yes yes yes firm cluster yes yes yes yes state fixed effects yes yes yes yes shin et al., indian journal of finance and banking 10(1) (2022), 1-11 7 observations 9,956 7,390 7,442 9,860 pseudo r-squared 0.11 0.11 0.26 0.23 panel b: unionization effect and right-to-work overinvestment underinvestment no rtw rtw no rtw rtw union 0.66** 0.31 1.42*** 0.22 (2.12) (0.80) (3.71) (0.43) control variables yes yes yes yes industry fixed effects yes yes yes yes year fixed effects yes yes yes yes firm cluster yes yes yes yes state fixed effects yes yes yes yes observations 10,775 6,571 10,838 6,490 pseudo r-squared 0.09 0.09 0.23 0.26 note. this table presents results from the logistic pooled regressions of inveff on union and other control variables, partitioned by democrat and right-to-work (rtw). panel a presents the regression results of inveff on union and other control variables, partitioned for democrat and nondemocrat states. panel b presents the regression results of inveff on union and other control variables, partitioned for rtw and no-rtw states. all variables are defined in appendix a. standard errors in parentheses are robust and adjusted using one-way clustering by firm. ***, **, and * indicate statistical significances at the 1%, 5%, and 10% levels, respectively. tests are two-tailed. as a robustness check, we decompose the overall investment into two components in table 4 – capex and noncapex. panel a shows that unionization improves investment efficiency associated with mitigating capex underinvestment but not that associated with mitigating capex overinvestment. the coefficient on union is not significant in the case of capex overinvestment. one reason for the relatively weaker results in the case of capex overinvestment is that unlike noncapex expenditures such as r&d that is often governed by science and/or regulation, capex investment decisions have more managerial discretion and may be more opaque in nature, making it harder for unions to monitor whether an investment is efficient or excessive. panel b shows that unionization tends to increase noncapex investment efficiency resulting from mitigating both overinvestment and underinvestment. table 4. capex vs. noncapex investment efficiency and unionization panel a: unionization effect and capex investment efficiency overinvestment underinvestment union 0.15 0.76*** (0.66) (3.29) control variables yes yes industry fixed effects yes yes year fixed effects yes yes firm cluster yes yes observations 17,362 17,415 pseudo r-squared 0.08 0.21 panel b: unionization effect and noncapex investment efficiency overinvestment underinvestment union 0.78** 1.38*** (2.08) (3.23) control variables yes yes industry fixed effects yes yes year fixed effects yes yes firm cluster yes yes observations 17,302 15,187 pseudo r-squared 0.27 0.51 note. this table presents pooled time-series cross-sectional regressions of models predicting capex and noncapex investment. panel a presents the regression results of inveff on union where inveff is based on the residuals computed from industry-year regressions of current capex investment on lagged sales growth. panel b presents the regression results of inveff on union where inveff is based on the residuals computed from industryyear regressions of current noncapex investment on lagged sales growth. all variables are defined in appendix a. standard errors in parentheses are robust and adjusted using one-way clustering by firm. ***, **, and * indicate statistical significances at the 1%, 5%, and 10% levels, respectively. tests are two-tailed. table 5 addresses the endogeneity of union membership by using an instrumental variables approach. column (1) of table 5 shows the first-stage results relating union to hhi, unemprate and oldecon. columns (2) and (3) report the second-stage results of the regression of inveff on the instrumented union value for the overinvestment and underinvestment sub-samples respectively. (note 6) consistent with our conjecture, union is positively associated with hhi, unemprate and oldecon in column (1). the second-stage results in columns (2) and (3) continue to confirm our prior evidence from table 3 on the strong association between unionization rates and investment efficiency. the instrumental variables coefficient is positive and statistically significant for both the overinvestment and underinvestment sub-samples. shin et al., indian journal of finance and banking 10(1) (2022), 1-11 8 table 5. instrumental variables estimation for addressing endogeneity of union membership (1) first stage regression dep. variable = union (2) second stage regression. dep. variable = inveff (overinvestment) (3) second stage regression. dep. variable = inveff (underinvestment) hhi 0.07*** (3.32) unemprate 0.01*** (10.01) oldecon 0.05*** (8.97) instrumented union 1.55** 2.97 (2.04) (3.55) control variables no yes yes industry fixed effects no yes yes year fixed effects no yes yes firm cluster yes yes yes observations 23,425 17,359 17,363 adj. r-squared 0.05 0.09 0.23 note. this table presents results from the instrumental variables regressions for addressing endogeneity of union. column (1) reports the results from the 1st-stage regressions of union on the instrumental variables (hhi, unemprate, and oldecon). columns (2) and (3) present the results from the 2nd-stage probit regressions of inveff on the instrumented union and control variables for the overinvestment and underinvestment sub-samples respectively. all variables are defined in appendix a. coefficients on control variables are excluded for brevity. standard errors in parentheses are robust and adjusted using one-way clustering by firm. ***, **, and * indicate statistical significances at the 1%, 5%, and 10% levels, respectively. tests are twotailed. finally, table 6 presents our main results using alternative measures of investment efficiency from richardson (2006). panel a presents the results from the expected model of investment in his study. the coefficients on all control variables load as expected—new investment expenditure increases with firm size, lagged cash holdings, lagged stock returns and prior investment expenditure and decreases with firm age and leverage. the positive and negative residuals from the model are then stored and analyzed separately in panel b. positive residuals (𝐼𝑂𝑣𝑒𝑟𝑖𝑛𝑣,𝑡 𝜀 ) from this model are deemed as overinvestment while negative residuals (𝐼𝑈𝑛𝑑𝑒𝑟𝑖𝑛𝑣,𝑡 𝜀 ) are interpreted as underinvestment. panel b shows both pooled and fama-macbeth (1973) regressions separately of 𝐼𝑂𝑣𝑒𝑟𝑖𝑛𝑣,𝑡 𝜀 and 𝐼𝑈𝑛𝑑𝑒𝑟𝑖𝑛𝑣,𝑡 𝜀 on union. the results continue to confirm our main hypotheses. union is negatively associated with 𝐼𝑂𝑣𝑒𝑟𝑖𝑛𝑣,𝑡 𝜀 (i.e. unionization makes the most positive residuals less positive) but positively associated with 𝐼𝑈𝑛𝑑𝑒𝑟𝑖𝑛𝑣,𝑡 𝜀 (i.e. unionization makes the most negative residuals less negative). table 6. alternative investment efficiency measures panel a: expected model of investment predicted sign v/pt-1 -0.01*** (-10.75) leveraget-1 -0.03*** (-18.82) casht-1 + 0.04*** (19.76) aget-1 -0.00*** (-7.29) sizet-1 + 0.00*** (3.86) stock returnt-1 + 0.01*** (18.38) inew,t-1 + 0.47*** (63.30) year indicators yes industry indicators yes adjusted r-squared 0.381 panel b: relation between investment efficiency and unionization rates (1) (2) (3) (4) dependent variable 𝐼𝑂𝑣𝑒𝑟𝐼𝑛𝑣,𝑡 𝜀 𝐼𝑂𝑣𝑒𝑟𝐼𝑛𝑣,𝑡 𝜀 𝐼𝑈𝑛𝑑𝑒𝑟𝐼𝑛𝑣,𝑡 𝜀 𝐼𝑈𝑛𝑑𝑒𝑟𝐼𝑛𝑣,𝑡 𝜀 (pooled) (fama-macbeth) (pooled) (fama-macbeth) union -0.06*** -0.08*** 0.04*** 0.05*** (-7.62) (-5.91) (9.65) (6.96) observations 8,529 8,141 11,786 11,243 adjusted r-squared 0.04 0.08 0.07 0.09 shin et al., indian journal of finance and banking 10(1) (2022), 1-11 9 note. this table investigates the relationship between investment efficiency and unionization rates using investment efficiency measures from richardson (2006). panel a described the expected model of investment: 𝐼𝑁𝑒𝑤,𝑡 = 𝛼 + 𝛽1𝑉/𝑃𝑡−1 + 𝛽2𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑡−1 + 𝛽2𝐶𝑎𝑠ℎ𝑡−1 + 𝛽2𝐴𝑔𝑒𝑡−1 + 𝛽2𝑆𝑖𝑧𝑒𝑡−1 + 𝛽2𝑆𝑡𝑜𝑐𝑘 𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑡−1 + 𝛽2𝐼𝑁𝑒𝑤,𝑡−1 + σ𝑌𝑒𝑎𝑟 𝐼𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟 + σ𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝐼𝑛𝑑𝑖𝑐𝑎𝑡𝑜𝑟. 𝐼𝑁𝑒𝑤 is the difference between 𝐼𝑇𝑜𝑡𝑎𝑙 and 𝐼𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒. 𝐼𝑇𝑜𝑡𝑎𝑙 is total investment expenditure, calculated as the sum of capex, acquisitions and r&d expenditures, minus sales of ppe. 𝐼𝑀𝑎𝑖𝑛𝑡𝑒𝑛𝑎𝑛𝑐𝑒 is investment expenditure necessary to maintain assets in place, using depreciation and amortization as a proxy. all other variables are as described in richardson (2006). panel b shows the regression of residuals estimated in panel a on union. positive residuals from this model are deemed as those representing overinvestment and are depicted by 𝐼𝑂𝑣𝑒𝑟𝐼𝑛𝑣,𝑡 𝜀 . negative residuals from this model are deemed as those representing underinvestment and are depicted by 𝐼𝑈𝑛𝑑𝑒𝑟𝐼𝑛𝑣,𝑡 𝜀 . standard errors in parentheses are robust and adjusted using one-way clustering by firm. ***, **, and * indicate statistical significances at the 1%, 5%, and 10% levels, respectively. tests are two-tailed. conclusion we examine the effects of labor unionization in the u.s. and their interactions with political and legislative factors on firms’ investment decisions. we believe that this study is an important contribution to academic literature in this area given the recent focus on the political ramifications of unions’ collective bargaining. (note 7) in this context, any study that is involved with revisiting or critiquing the contributions of unions to workers, firms and the economy at large, is likely to be of immense help not only to labor economists but also corporate finance academics and practitioners involved in understanding the determinants of corporate investment efficiency. prior empirical evidence in the literature on union effects on economic performance has held the view that unions tax investments inducing firms to invest less in physical assets and r&d. the implication is that unions cause underinvestment that causes companies to shrink thereby creating a significant cost to the economy. we re-examine the evidence in this area by looking at whether the documented union effects on investment are a result of underinvestment or whether they are a mitigation of managerial inclinations to overinvest. we find evidence that unionization is associated with mitigating both overinvestment and underinvestment problems in firms. in other words, unionization appears to reduce significant deviations from optimal investment policy in both directions. this result is consistent with the larger governance and long-term role that unions play in firms’ strategic decisions. furthermore, we generally find that the union effects on managerial inclinations tend to be stronger in environments where unions have greater bargaining power, indicating that the positive union effects on investment efficiency could likely be driven by the monitoring exercised by unions as part of its collective bargaining duties. our results are robust to endogeneity of union membership, different empirical specifications, and alternative investment efficiency measures. author contributions: conceptualization, y.s., s.t., and y.z.; data curation, y.s., s.t., and y.z.; methodology, y.s., s.t., and y.z.; validation, y.s., s.t., and y.z.; visualization, y.s., s.t., and y.z.; formal analysis, y.s., s.t., and y.z.; investigation, y.s., s.t., and y.z.; resources, y.s., s.t., and y.z.; writing – original draft, y.s., s.t., and y.z.; writing – review & editing, y.s., s.t., and y.z.; supervision, y.s., s.t., and y.z.; software, y.s., s.t., and y.z.; project administration, y.s., s.t., and y.z.; funding acquisition, y.s., s.t., and y.z. 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. 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 abel, a. b. 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(1998). survival of the fittest or the fattest? exit and financing in the trucking industry. journal of finance, 53(3), 905-938. https://doi.org/10.1111/0022-1082.00039 notes note 1. the positive union effects in states where the democratic party is more influential, is observed only in instances of overinvestment. note 2. unionization is positively associated with mitigating overinvestment of noncapex investments only but not capex investments. note 3. cho, lee, lee, and sohn (2017) using 343 korean firms also examine union effects on investment. in their setting, channels for variation in investment efficiency arise from corporate governance structures such as equity and foreign ownership. note 4. to link the industry-level labor union data to firms in compustat, we map the cic or naics industry codes to sic for all compustat firms for each year. note 5. all continuous variables are winsorized at the 5th and 95th percentile. note 6. we use a probit model in the second stage so that error terms in both the first and second stage can be assumed to be jointly bivariate normal. note 7. the u.s. supreme court heard a case in 2016, challenging rules that force government workers to pay hefty fees to shin et al., indian journal of finance and banking 10(1) (2022), 1-11 11 unions that they have no interest in joining. the unions had argued that such fees are vital to insure the operating efficiency and survival of companies. appendices appendix a: variable measurement for regression models inveff = coded as 1 if a firm’s investment residual belongs to benchmark group; and 0 otherwise. investment = the sum of r&d expenditure, capex, and acquisition expenditure less cash receipts from sale of property, plant and equipment (ppe) multiplied by 100 and scaled by total assets (ta). capex = capital expenditure multiplied by 100 and scaled by lagged ppe. noncapex = the sum of r&d expenditure and acquisition expenditure multiplied by 100 and scaled by lagged ta. union = calculated as the product of a firm’s number of employees and the percentage unionization rate within the firm’s sic industry scaled by the book value of ta. logat = the natural logarithm of ta. d/a = the ratio of total debts to ta. mktbook = the ratio of the market value of ta to book value of ta. ϭ(cfo) = standard deviation of the cash flow from operations deflated by average ta from years t-5 to t-1. ϭ(sales) = standard deviation of the sales deflated by average ta from years t-5 to t-1. ϭ(i) = standard deviation of investment from years t-5 to t-1. zscore = z-score = 1.2*(working capital to ta) + 1.4*(retained earnings to ta) + 3.3*(ebit to ta) + 0.6*(market value of equity to total liabilities) + 1.0*(sales to ta). tangibility = the ratio of ppe to ta. cfosale = the ratio of cfo to sales. slack = the ratio of cash to ppe dividend = an indicator variable that coded as 1 if the firm paid a dividend; 0 otherwise. age = the number of years a firm has been listed in crsp. opcycle = natural logarithm of the ratio of receivables to sales plus the ratio of inventory to cogs multiplied by 360. loss = an indicator variable that coded as 1 if net income before extraordinary items is negative; and 0 otherwise. democrat = coded as 1 if a firm’s operations are primarily located in a state that has consistently voted for the democratic party in most of the presidential elections during the sample period; and 0 otherwise. rtw = 1 if the state in which the firm is primarily located, has enacted a right-to-work legislation; 0 otherwise. hhi = herfindahl-hirschman index (hhi) measures the concentration of sales within a 3-digit sic industry. oldecon = coded as 1 if a firm primarily operates in an “old-economy” industry where a firm’s sic code lies between 0100 and 3999, except computer industry (sic codes: 3571, 3572, 3575 and 3577) and communications equipment industry (sic codes: 3663, 3669 and 3674); 0 otherwise. unemprate = state-level unemployment rate in a particular year. 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 11(1) (2022), 1-14 1 finance and banking ijfb vol 11 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa impact of covid-19 pandemic on fintech and financial inclusion in india megha gupta (a) suhasini verma (b)1 (a) research scholar, department of business administration, manipal university jaipur, india; e-mail: meghagupta.jai@gmail.com (b) associate professor, department of business administration, manipal university jaipur, india; e-mail: verma.suhasini@gmail.com a r t i c l e i n f o article history: received: 10th september 2022 accepted: 20th october 2022 online publication: 2nd november 2022 keywords: covid-19, fintech, digital payment, financial inclusion, financial literacy jel classification codes: f65, o32, q55, h80, m10 a b s t r a c t the study seeks to investigate how the pandemic of covid-19 has impacted customer engagement in using fintech services and resultantly the status of financial inclusion in india. this study is empirical and analytical in nature. digital payment is taken as a proxy of fintech. the data is collected from primary and secondary sources. to understand what persuades a customer to use fintech services, the response to a survey questionnaire has been obtained from 310 respondents through e-mail and hand collection. factor analysis is used to investigate the factors that impacted customer engagement in digital payment, before and after the covid-19 pandemic. the factors used in this model are access, usage, technology, and financial literacy. results show that there is a significant positive relationship between all the factors and the use of fintech services. there is a significant positive relationship between fintech and financial inclusion, as already established by the previous studies. the findings of this review are pivotal as they can serve as useful input for the ongoing debate directed towards increased use of fintech in achieving greater financial inclusion. the findings suggest that by advancing the technology and increasing financial literacy, access, and use of fintech services can be increased which in turn will increase financial inclusion in developing countries. © 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 the pandemic of covid-19 has impacted every walk of life in a great way. the finance sector has also been greatly impacted by this pandemic, because of lockdown they could transact in cash. this situation called for an environment, where the entire population have a bank account, so that they may transact electronically. unfortunately, this is not the case with india. india is a developing country, and its population is 1380 million. around 20% people of in india do not have bank accounts (statista, 2020) and millions more do not use their bank accounts regularly (ernst & young, 2019). financial inclusion in india till now is 80% and the second largest-unbanked population in the world. according to the world bank's global findex database report, "when we dug deep, we discovered that approximately 48 percent of the country's bank accounts have seen no transaction records." the data indicates the grave issue in achieving financial inclusion, which is one of the frameworks through which inclusive growth can be accomplished in developing countries like india (morgan & pontines, 2014). “financial inclusion is intended to pull the “unbanked” people into the official financial system, with a view to providing financial services covering from payments, savings, and transfers to credit and insurance.” financial inclusion encompasses access to financial products and services such as bank insurance, bank accounts payment services & remittance, financial consultancy, etc. (durai & stella, 2019). sustainable development goals (2030) financial inclusion is positioned noticeably as an enabler of other developmental goals, with a target in eight of the seventeen goals. sdg 1 is about eliminating poverty; sdg 2 is about achieving food security, ending hunger, and promoting sustainable agriculture; sdg 3 is about profiting from health and well-being; sdg 5 is about achieving gender equality and economic empowerment of women; sdg 8 is about promoting jobs and economic growth; sdg 9 is about supporting innovation, industry, and infrastructure; and sdg 10 is about reducing inequality (truby, 2020). furthermore, there is an implied role for greater financial inclusion in sdg 17 on improving the means of implementation through increased savings mobilization for investment and consumption, which 1corresponding author: orcid id: 0000-0001-5795-5412 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v11i1.1815 to cite this article: gupta, m., & verma, s. (2022). impact of covid-19 pandemic on fintech and financial inclusion in india. indian journal of finance and banking, 11(1), 1-15. https://doi.org/10.46281/ijfb.v11i1.1815 https://orcid.org/0000-0001-5795-5412 mailto:verma.suhasini@gmail.com* http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v11i1.1815 https://orcid.org/0000-0002-7763-1375 gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 2 can stimulate growth. financial inclusion is a process of providing access to the financial services and products for the most vulnerable groups such as people from low-income and weaker sections of society at a very low affordable cost in a proper and transparent way by the recognized institutional participants (rbi report, 2022). in order to increase the rate of financial inclusion in india, the government introduced a very promising scheme, named pradhan mantri jan dhan yojana (pmjdy) in 2015. the primary reason for this scheme is that each resident of india should have easy access to open saving accounts and the advantages of this scheme such as rupay debit and credit cards, zero balance accounts, and a simple loan option. this scheme gives them trust in a superior tomorrow (joshi & rajpurohit, 2016). after all these steps taken by the government of india, there is uneven access to financial services with 20% of the population being unbanked and in 80% of financial inclusion, half of them or half of the bank accounts are inoperative means they are not using their accounts or no transactions since long (world bank report, 2020; statista, 2020). to address this problem, financial technology (fintech) is one of the most widely researched areas at the present time. fintech is the use of modern innovation in the field of finance. it is fundamentally the utilization of creative and disruptive innovation for offering financial services (rabbani et al., 2020). the term “fintech” refers to corporations or company representatives combining financial services with new innovative technologies (dorfleitner et al., 2017). vasiljeva and lukanova (2016) “they look like banks, they talk like banks, but are not regulated like banks.” furthermore, the expression fintech is fresh to the new development and integration. in the banking business, there are several innovations and developments that are transforming customers’ behavior and their knowledge of financial services. firms are offering novel digital solutions as alternatives to traditional banking services (senyo & karanasios, 2020). the more extensive objective of financial technology is to meet the unmet demand of those, whose financial needs are not being fulfilled by traditional financial players. so, in a way, fintech expects to add to the more extensive objective of financial inclusion (popescu, 2019). mehrotra (2019) fintech is helping women, the poor, farmers, and youngsters to avail of financial services riding on the technology of smartphones, network coverage, mobile-based banking, and financial solutions and thus bringing them under the ambit of financial inclusion. nair et al. (2021) the fintech revolution creates new avenues for financial inclusion. this applies specifically to the utilization of digital money, mobile accounts, e-wallets, and the formation of biometric smart cards (naumenkova et al., 2019). the covid-19 epidemic has forced adjustments in many segments of the economy and business plans, along with customer behavior in a wide range of fields, including day-to-day payment patterns. many digital solutions have enabled cashless payments. the links between payments, pandemics, and technology are becoming clearer, particularly since the covid-19 epidemic has been identified as a driver of the digital transition (huterska et al., 2021). the pandemic has given rise to the need for contactless payment and this fact has significantly increased the use of digital payment. as a result, the use of alternative payment methods is increasing. the mobile wallet has been one of the tools in use. mobile payment methods have provided convenient and simple services to a multi-functional network. mobile payment refers to a specific payment method performed on mobile devices. there are several types of mobile payment services available. in addition, due to the covid-19 outbreak and the virus's rapid global spread, various procedures such as alternative payment options instead of cash have been modified. several experts advise decreasing the use of cash so that consumers can apply alternate techniques (alwi et al., 2021). prior research has been heavily focused on opportunities and challenges, trends, and growth in the payment system (fintech) same country or across countries (suryono et al., 2020; nurfadilah & samidi, 2021; tonuchi, 2020; tripalupi & anggahegari, 2020). the impact of fintech on financial inclusion in the setup of a covid-19 pandemic is a less explored area and very limited research available on this. to fill this void, this research attempts to specifically understand the impact of digital payment on financial inclusion in india under a covid-19 situation. the study is empirical and analytical in nature and depends on both primary and secondary data. 310 respondents completed a self-administered questionnaire in primary data, and secondary data were obtained from the rbi report (2022), global fintech reports, fintech company’s reports, articles, blogs, and other scholastic journals during the year 2018-2021. the study employed factor analysis to assess the impact of the covid-19 epidemic on india's payment system, fintech, and financial inclusion. this result indicates there is a significant and positive relationship between digital payments and financial inclusion. covid-19 has caused a tremendous amount of volatility and has changed the segment for good. access, usage, technology, and financial literacy are the factors significantly contributing to increasing the use of fintech and ultimately the rate of financial inclusion. our study suggests that financial literacy is a very crucial factor in accelerating the growth of financial inclusion. policymakers must emphasize to increase the rate of financial literacy to achieve the objectives of financial inclusion and inclusive growth. the rest of the work is organized as follows: first part gives an overview of the subject matter. then we conducted a literature review on covid-19 surrounding fintech, digital payment, and financial inclusion. the third section consists of research methodology, formulation of objectives, and hypothesis development. the fourth part includes testing of hypothesis, analysis of data, and discussions. lastly, the fifth part highlights the research outcomes, conclusion, limitations, and further research. objectives of the study  to study the adoption of payment systems before, during, and after the lockdown.  to identify the reasons for the shift towards digital payments.  to evaluate the impact of covid 19 pandemic on fintech and financial inclusion in india.  to analyze the growth of fintech and financial inclusion in india during covid 19. gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 3 literature review the pandemic covid-19 has had a substantial effect on speeding up the trend toward a cashless society everywhere. in the context of this pandemic condition, the tendency toward financial technology transactions has intensified. in their financial transactions and activities, consumers are aiming to reduce the use of cash. they are exploring alternate contactless payment techniques, without any physical intervention, to execute this electronically (abu daqar et al., 2021). although conventional banking procedures have been questioned, covid-19 has been used in digitization and novel ways such as mobile e-wallets as an important step in individual banking and in cash. world health organization (who) warns individuals not to utilize cash as much as possible since coronavirus remains alive. the disease will therefore continue to spread. this has encouraged bankers to take imaginative and new payment options such as e-wallets into consideration (alwi et al., 2021). tut (2020) worked on pandemic evidence on electronic payment systems and find that consumers are moving away from the more expensive modes of payment and toward less expensive modes of payment. the first step toward financial inclusion is to have an account. a genuine inclusion necessitates the ability to use these accounts conveniently and safely (payments, digital payments via a mobile phone, or the internet) (kasradze, 2020). the global findex dataset includes information on who holds the account, as well as whether people make payments from these accounts. 1/5 of accountholders indicated that in the last 12 months they have been unable to put or withdraw money from their accounts and these accounts are therefore regarded inactive and, of course, cannot be seen as supporting financing inclusion (ozili & arun, 2020). despite the mammoth efforts of the government, the problem of financial exclusion is still haunting. to solve this issue, fintech is widely used nowadays by different countries. the term financial technology (fintech) is the use of modern innovation in the field of finance. it is fundamentally the utilization of creative and disruptive innovation for offering financial services (rabbani et al., 2020). the word “fintech” refers to companies or representatives of companies that integrate financial services with advanced and modern technologies (dorfleitner et al., 2017). fintech functions in the finance industry are obvious and are aimed at offering cheaper prices, and greater and better access to all financial services (24/7) (tam & hanh, 2018). senyo and karanasios (2020) find that fintech leverages existing infrastructure, acts as an aggregator and innovator, and uses a combination of strategies of competition and cooperation to solve the problem of financial inclusion. fintech is the primary engine for financial inclusion in developed and emerging countries with the growth of industrial revolution 4.0 (duvendack & mader, 2019). conducted a meta-analysis to understand the impact of fintech on financial inclusion and found that the result was positive but not transformative. table 1. selected research on payment, fintech, covid-19, and financial inclusion in india and worldwide years author of the study/ report the subject of the study main findings of the study 2022 chowdhury et al., 2022 the goal of this study is to determine e-banking customers' faith in the influence of customer satisfaction on the e-banking infrastructural facility and ebanking communication environment.  it is found that the private bank's e-banking customer trust value is much greater than that of the public banks. customers, both male and female, have equal faith in the constantly expanding e-banking transaction procedure.  in the event of a covid-19 pandemic, the ebanking transaction procedure should swiftly expand in the future to ensure good health. 2021 latta & sarkar, 2021 this paper examined the role of the digital economy prior to and during covid19, and also discuss the scope of digital use in the economy in various sectors and domains.  the pandemic caused terror in people's thoughts as financial bills may be considered to convey the fatal infection. this made more complicated transactions for the common person.  mobile banking has been very useful in promoting social distancing policies and offering clients 24/ 7 financial services during times like covid-19. 2021 huterska et al., 2021 the aim was to discover the elements that cause customers to select cashless payments in retail and service locations during the covid-19 epidemic using card payments.  the extraordinary circumstances of the covid-19 outbreak influenced consumer behavior. it has been a driving force behind greater consumer acceptance of non-cash payments by emphasizing the significance of factors that were previously overlooked in customer choice and payment preferences research. 2021 vasenska et al., 2021 the study is to use the financial technology of individual consumers in bulgaria before and after the crisis. a questionnaire survey by 242 individual respondents is included in the approach.  the results acquired from the current research show that most people do not yet know whether using fintech instruments for financial transactions in banks or non-banks will influence the financial stability of economic objects during this crisis. gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 4 2021 puthusserry et al., 2021 this study looks into a very essential but underutilized channel and focuses on its function in overcoming the multilayer mental distance experienced by internationalizing smes originating in an emerging economy.  they consider board members' roles in solving key internationalization difficulties, especially pd mitigation. even when compared to global trends, the indian fintech sector, which is characterized by creative start-ups, is seeing dramatic and quick expansion. 2021 purba et al., 2021 to make an attempt by developing an approach for evaluating the digital innovation viewpoint in the use of financial technology by buyers, particularly in the period of the covid-19 epidemic in indonesia in 2020.  with the presence of digital application technology, consumers can be placed using a financial technology installment stage just as a food conveyance include.  this innovation can be introduced in the two ios and android cell phones to give safe, pleasant, beneficial, and efficient online ordering. 2021 sharma et al., 2021 the research investigates the possible benefits and problems associated with contextual variations between and within nations. during the covid-19 scenario, self-help groups were critical in empowering their members by offering options for livelihood support and money generation.  it is implausible to commemorate the arduous and heroic efforts made by all volunteers to achieve vital needs during the covid-19 epidemic. volunteer organizations/individual volunteer support agencies work tirelessly to provide food and other necessities to such persons.  the shg movement in india has grown from micro savings and credit organizations that sought to empower poor rural ladies into one of the world's largest forums for the underprivileged. 2020 mogaji, 2020 to address financial vulnerability as a specific challenge for nations, institutions, and, individual citizens in the aftermath of covid-19.  changes in personal circumstances, like being made unemployed, can make people financially vulnerable, leading them to change their financial behavior and interact in gambling activities to get more money or use payday loans, which are not sustainable. 2020 al nawayseh, 2020 the purpose of this research is to look into the influence of fintech apps in building resilience during the covid-19 disease outbreak. the study examines empirically the elements that influence jordanians' desire to adopt fintech applications.  this suggests that a user's willingness for using fintech apps is influenced by his or her perception of societal impact, benefits, and beliefs. customers' risk perceptions did not affect their intention to utilize fintech apps during the covid-19 pandemic, but they did affect their belief in the service. 2020 sheng et al., 2021 this paper gives an outline of methodological advances in the study of big data analytics and how they might be better applied to contemporary hierarchical concerns.  concerning these promising regions, they discussed various freedoms that will arise for the administration to research local areas to utilize different logical ways to deal with help global and local endeavors to manage the extraordinary difficulties achieved by the covid-19 epidemic and its fallout, which will have long haul suggestions for the worldwide economy. 2019 wonglimpiyarat, 2019 this paper examines the spread of financial technology, or fintech, in the banking industry.  they draw insightful conclusions from the fact that the systemic characteristics of the innovation process change over time. along the stages of innovation, innovators may employ various strategies for exploiting the innovation, and this process determines the systemic nature of the innovation. source: researcher’s compilation hypothesis of the study h1: access, (ac1, ac2, ac3, ac4) usage, (us1, us2, us3, us4, us5, us6) technology (th1, th2, th3, th4) and literacy (lt1, lt2, lt3, lt4) are positively related to the use of fintech and financial inclusion. materials and methods this study is empirical and analytical in nature. digital payment is taken as a proxy of fintech. the data is collected from primary and secondary sources. for gathering the primary data convenience sampling was conducted using a selfadministered questionnaire, completed by 310 respondents and this study employed both an offline (face-to-face) and an electronic (online) strategy to collect applicable data with the plan of viewing the image from two viewpoints firstly, the researcher used google forms to distribute questionnaires to indians through several social media channels (facebook, whatsapp, email, and telegram, among others). second, the researcher targeted responses gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 5 from market wage earners, taxi drivers, street vendors, unemployed individuals, and among others. secondary data has been collected from rbi report (2022), global fintech reports, fintech company’s reports, articles, blogs, and other scholastic journals. the factor analysis is conducted to examine the relationship between the factors and financial inclusion. the factors used in the model are access, usage, technology, and literacy. the duration of the study is 20182021. the cronbach’s alpha is 0.699/0.7, proving its reliability and validity. this test was pursued with relevant data analysis and evaluation. to conduct this statistical test, ibm statistical package of social sciences (spss) statistics 28.0.1.0 (142) is used. results analysis of data is separated into two sections which are a) analysis of demographic and b) factor analysis. descriptive statistics is used to analyze data. the data collected is significant because the study has collected 310 responses. for one variable, the minimal sample size proposed was five; additionally, a sample size of one hundred is satisfactory, but a sample size of more than two hundred is considerably more acceptable to complete the factor analysis (hassan et al., 2012). factor analysis is conducted to comprehend the relationship between access, (ac1, ac2, ac3, ac4) usage, (us1, us2, us3, us4, us5, us6) technology (th1, th2, th3, th4), and literacy (lt1, lt2, lt3, lt4) and financial technologies and financial inclusion. descriptive analysis the number of respondents who participated in this study was 310, out of which respondents 41.6% were between the ages of 25-35 years, 39.4% were between the ages of 15-25 years, were 13.5% between the ages of 35-45 years, 3.9% between the ages of 45-55 years, 1.6% between the ages of 55-65 years and 0% above the age of 65 years. according to their gender, 58.1% are males, 41.9% are females and 0% are others. in terms of, educational qualifications 25.5% are undergraduates, 27.4% are post-graduates & most of the respondents 47.1% are graduates. according to the employment status of the 310 respondents, 26.8% are students, 31.0% are self-employed, the highest 41.3% are employees, and 1.0% are retired. the greatest part of the responder’s income level is less than 20000rs p/m (51.6%), pursued by 25.8 percent who have an income of 20000-40000 rs. p/m, 10.00 percent who have an income of 4000060000 rs. p/m, 5.2 percent who have an income of 60000-80000 rs. p/m, and 7.4 percent who have an income of more than 80000 rs. p/m. as for the place of residence 47.4% lives in the village followed by 21.3% of people who lives in the city with a population over 500000 followed by 16.8% of people who live in the city with a population up to 500000 and followed by 14.5% people lives in the city with population up to 100000. table 2. demographic profile of 310 respondents demographic frequency percentage age 15-25 years 25-35 years 35-45 years 45-55 years 55-65 years above 65 years 122 129 42 12 5 0 39.4% 41.6% 13.5% 3.9% 1.6% 0 gender male female others 180 130 0 58.1% 41.9% 0 education under-graduate graduate post-graduate & above 79 146 85 25.5% 47.1% 27.4% employment status student self-employed employee retired 83 96 128 3 26.8% 31.0% 41.3% 1.0% income less than 20000rs p/m 20000-40000 rs p/m 40000-60000 rs p/m 60000-80000 rs p/m 80000 & above rs p/m 160 80 31 16 23 51.6% 25.8% 10.0% 5.2% 7.4% place of residence village the city with a population of up to 100000 the city with a population of up to 500000 the city with a population of over 500000 147 45 52 66 47.4% 14.5% 16.8% 21.3% source: primary data, the author created the questionnaire. note: this review's demographic analysis of all responders is presented in this table. appendix a contains a list of all the questions. gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 6 factor analysis first factor – access (table 3) factor first, is referred to as the primary factor, and it is the most important and fundamental factor that accounts for the largest variance percentage (27.922). the variables and their loadings are tabulated below table 3. significant loadings of variables for factor 1access sn. statement variables significant loadings 1 do you own a smartphone? ac1 0.730 2 do you operate a bank account? ac2 0.798 3 do you use your smartphone for any financial transactions? ac3 0.622 4 do you have an atm card? ac4 0.737 note: the table shows the results of the questionnaire's access level. appendix a contains a list of all variables. under this factor, a total of four variables were loaded. this major factor seems to have a high loading on the majority of commonly developed variables. the affirmative loading indicates that all variables are significantly connected with one another, implying the importance of customer access to financial information. second factor – usage (table 4) there are so many variables connected to usage has significantly positive loadings in the subsequent factor. a positive correlation between variables causes positive loading. this second component is responsible for the second-most percentage of variance, 6.395. table 4. significant loadings of variables for factor 2usage sn. statement variables significant loadings what are the advantages of using digital payment over conventional payment during a lockdown? 1 user friendly us1 0.892 2 secured us2 0.872 3 faster settlements us3 0.879 4 how many times have you made online transactions through digital platforms before lockdown, in a week? us4 0.831 5 how many times have you made online transactions through digital platforms during the lockdown, in a week? us5 0.825 6 how many times you are using digital payments post lockdown, in a week? us6 0.855 note: the table shows the results of the questionnaire's access level and the total factors were 6. appendix a contains a list of all variables. there is a total of six variables that loaded relatively in this factor. based on the data in the above table, we can conclude those usage variables are positively related to one another. third factor– technology (table 5) the third factor accounts for 5.752 of the total variances. this factor has significant positive loadings as well. below is a list of variables and their significant loadings. table 5. significant loadings of variables for factor 3technology sn. statement variables significant loadings why was there a shift in preference from offline to online payment during a lockdown? 1 fast and convenient th1 0.906 2 safe and secured th2 0.889 3 no physical contact in making payments th3 0.864 4 rewards th4 0.696 note: the table shows the results of the questionnaire's technology factor. appendix a contains a list of all variables. in this factor, four variables were heavily loaded. the variables' positive loadings indicate that they have a positive relationship with one another. fourth factor– literacy (table 6) the fourth factor accounts for 5.564 of the total variances. this factor has significant positive loadings as well. below is a list of variables and their significant loadings. gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 7 table 6. significant loadings of variables for factor 4literacy sn. statement variables significant loadings what factors hampered the use of digital payment systems during a lockdown? 1 digital illiteracy lt1 0.722 2 lack of infrastructure lt2 0.717 3 security lt3 0.816 4 do you feel digital literacy is a must for using a digital payment system? lt4 0.897 note: the table shows the results of the questionnaire's literacy factor. appendix a contains a list of all variables. in this factor, four variables were heavily loaded. the variables' positive loadings indicate that they have a positive relationship with one another. kmo statisticsvalidity of test (table 7) this table displays two tests that indicate our data's eligibility for structure detection. the kaisermeyerolkin measure of sampling adequacy is a statistic that mirrors the level of fluctuation in our variables that could be clarified by basic variables. high scores (around 1.0) imply that factor analysis may be effective with our data. if the value is less than 0.50, the factor analysis results are unlikely to be meaningful (chan & idris, 2017). bartlett's sphericity test examines the hypothesis that the correlation matrix is a personality framework, indicating that our variables are inconsequential and accordingly unsatisfactory for structure location. little upsides of the significance level (under 0.05) show that a factor analysis might be beneficial to our information. table 7. result of kmo and bartlett’s test kaiser-meyer-olkin measure of sampling adequacy. .853 bartlett’s test of approx. chi-square sphericity df sig. 7066.620 595 .000 the kaiser-meyer-olkin measure of sampling adequacy for these data is 0.853, which is in the meritorious category. as a result, the data's validity has been confirmed. furthermore, bartlett's test of sphericity is highly significant (p<0.001), indicating that factor analysis will be appropriate. table 8. communalities of 34 items initial extraction 1 do you own a smartphone? 1.000 .746 2 do you operate a bank account? 1.000 .717 3 do you use your smartphone for any financial transactions? 1.000 .747 4 do you have an atm card? 1.000 .636 5 do you have access to financial inclusion mechanisms like self help groups, microfinance institutions, banks, post office, etc.? 1.000 .628 6 tick the first financial institutions you have interacted with1.000 .534 7 do you have an internet facility in your smartphone? 1.000 .680 8 are you using any payment apps (applications)? 1.000 .844 9 what are the applications you are using most? 1.000 .667 10 if you are using the application, since how long you are using. 1.000 .726 11 if you are not using any application, it’s because, 1.000 .648 12 what are the advantages of using digital payment over conventional payment during a lockdown? (ranking, 1 – least and 5 – high) [user friendly] 1.000 .853 13 what are the advantages of using digital payment over conventional payment during a lockdown? (ranking, 1 – least and 5 – high) [secured] 1.000 .830 14 what are the advantages of using digital payment over conventional payment during a lockdown? (ranking, 1 – least and 5 – high) [faster settlements] 1.000 .839 15 how do you typically pay your bills? 1.000 .473 16 why do you use cash for transactions? 1.000 .621 17 how many times you made online transactions through digital platforms before lockdown, in a week? 1.000 .810 18 how many times you made online transactions through digital platforms during a lockdown, in a week? 1.000 .822 19 how many times you are using digital payments post lockdown, in a week? 1.000 .850 20 do you like to test new technologies? 1.000 .727 gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 8 21 have you registered for any new e-wallet transactions during a lockdown? 1.000 .660 22 do you prefer using digital payment for high-value transactions? 1.000 .544 23 why was there a shift in preference from offline to online payment during a lockdown? (ranking, 1least and 5high) [fast and convenient] 1.000 .865 24 why was there a shift in preference from offline to online payment during a lockdown? (ranking, 1least and 5high) [safe and secured] 1.000 .844 25 why was there a shift in preference from offline to online payment during a lockdown? (ranking, 1least and 5high) [no physical contact in making payments] 1.000 .818 26 why was there a shift in preference from offline to online payment during lockdown? (ranking, 1least and 5high) [rewards] 1.000 .653 27 how do you rate the security of digital payment? 1.000 .703 28 do you think the government should mandate digital payment in place of cash payments post lockdown? 1.000 .481 29 what factors hampered the use of digital payment systems during a lockdown? (digital illiteracy) 1.000 .772 30 what factors hampered the use of digital payment systems during a lockdown? (lack of infrastructure) 1.000 .618 31 what factors hampered the use of digital payment systems during a lockdown? (security) 1.000 .743 32 what factors hampered the use of digital payment systems during lockdown? (additional charges) 1.000 .632 33 what factors hampered the use of digital payment systems during lockdown? (others) 1.000 .641 34 do you feel digital literacy is a must for using a digital payments system? 1.000 .825 total 1.000 .991 note: extraction method: principal component analysis. (table 8) the principal component analysis is based on the fundamental assumption that all variance is shared prior to the extraction of the communalities. the level of variance in every factor that is represented is shown by networks. introductory communalities are assessments of the change in every factor that can be clarified by the parts in general or factors. for correlation analysis, this is dependably equivalent to 1.0 for principal component extraction. the amount of variance explained by the retained components in each variable is indicated by the communalities after extraction, which demonstrates that loadings less than 0.6 are minimized in the conclusion. extraction communalities are assessments of the change in every factor that the parts represent. because the sample size is more than 300, the average communalities in this table are greater than 0.7, indicating that the extracted components accurately represent the variables. table 9. total variance of factors components initial eigenvalues extraction sums of squared loadings rotation sums of squared loadings total % of varia nce cumulative % total % of variance cumulative % total % of variance cumulative % 1 11.448 27.922 27.922 11.448 27.922 27.922 7.975 19.452 19.452 2 2.622 6.395 34.317 2.622 6.395 34.317 3.257 7.944 27.396 3 2.358 5.752 40.069 2.358 5.752 40.069 3.127 7.627 35.023 4 2.281 5.564 45.633 2.281 5.564 45.633 2.175 5.305 40.327 5 1.761 4.295 49.928 1.761 4.295 49.928 1.878 4.580 44.907 6 1.655 4.036 53.964 1.655 4.036 53.964 1.818 4.434 49.341 7 1.307 3.187 57.152 1.307 3.187 57.152 1.719 4.194 53.535 8 1.214 2.960 60.111 1.214 2.960 60.111 1.684 4.106 57.641 9 1.149 2.802 62.913 1.149 2.802 62.913 1.408 3.435 61.076 10 1.115 2.718 65.631 1.115 2.718 65.631 1.399 3.413 64.489 11 1.032 2.517 68.148 1.032 2.517 68.148 1.326 3.235 67.723 12 1.006 2.453 70.602 1.006 2.453 70.602 1.180 2.879 70.602 13 .908 2.215 72.817 14 .895 2.183 75.000 15 .826 2.014 77.014 16 .782 1.907 78.921 17 .732 1.786 80.707 18 .689 1.682 82.389 gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 9 19 .636 1.552 83.941 20 .621 1.514 85.455 21 .577 1.407 86.863 22 .555 1.354 88.217 23 .505 1.232 89.449 24 .484 1.180 90.629 25 .462 1.126 91.755 26 .420 1.024 92.779 27 .403 .982 93.761 28 .368 .899 94.660 29 .329 .803 95.463 30 .307 .749 96.212 31 .265 .646 96.858 32 .247 .603 97.462 33 .210 .513 97.975 34 .185 .451 98.426 35 .151 .367 98.794 36 .139 .338 99.132 37 .120 .292 99.424 38 .102 .249 99.673 39 .084 .204 99.877 40 .050 .123 10.000 note: this table displays the extraction method: principal component analysis. (table 9) total variance explained is shown in the above table, while eigenvalue really represents the quantity of extricated factors whose aggregate ought to be equivalent to the quantity of things exposed to factor analysis. primarily inspired by initial eigenvalues and extracted sums of squared loadings for examination and understanding. the presence of eigenvalues is more noteworthy than one is needed for perceiving the quantity of parts or factors communicated by chosen factors. the proportion of variance column indicates how much variance within the concept that component accounts for. a total of 12 factors are identified from the data, with the eight factors accounting for over 60% of the variance within the construct. rotated component matrix (table 10) the rotational component matrix assists us in determining what the components stand for. the goal of the rotation is to minimize the range of factors that have strong loadings on the variables under consideration. the rotation has no effect on the analysis itself, but it simplifies interpretation. table 10. rotated component matrixa component 1 2 3 4 5 6 7 8 9 1 0 1 1 12 do you own a smartphone? .34 3 .73 0 do you operate a bank account? .79 8 do you use your smartphone for any financial transactions? .62 2 do you have an atm card? .73 7 do you have access to financial inclusion mechanisms like self help groups, microfinance institutions, banks, post offices, etc..? .47 9 tick the first financial institutions you have interacted with .6 28 do you have an internet facility in your smartphone? .7 61 are you using any payment apps (applications)? .7 04 gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 10 what are the applications you are using most? .7 05 if you are using the application, since how long you are using? . 4 5 8 .4 17 .3 52 if you are not using any application, it’s because of, .7 92 what are the advantages of using digital payment over conventional payment during a lockdown? (ranking, 1– least and 5 – high) [user friendly] . 8 9 2 what are the advantages of using digital payment over conventional payment during a lockdown? (ranking, 1– least and 5 – high) [secured] . 8 7 2 what are the advantages of using digital payment over conventional payment during a lockdown (ranking, 1 – least and 5 – high) [faster settlements] . 8 7 9 how do you typically pay your bills? .3 17 .3 27 why do you use cash for transactions? .6 57 how many times you made online transactions through digital platforms before lockdown, in a week? .8 31 how many times you made online transactions through digital platforms during a lockdown, in a week? .8 25 how many times you are using digital payments post lockdown, in a week? .8 55 do you like to test new technologies? . 5 9 4 have you registered for any new e-wallet transactions during a lockdown? .6 15 do you prefer using digital payment for high-value transactions? .4 10 .4 00 why was there a shift in preference from offline to online payment during a lockdown? (ranking, 1 least and 5high) [fast and convenient] . 9 0 6 why was there a shift in preference from offline to online payment during a lockdown? (ranking, 1 least and 5high) [safe and secured] . 8 8 9 gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 11 why was there a shift in preference from offline to online payment during a lockdown? (ranking, 1least and 5 high) [no physical contact in making payments] . 8 6 4 why was there a shift in preference from offline to online payment during a lockdown? (ranking, 1 least and 5high) [rewards] . 6 9 6 how do you rate the security of digital payment? . 5 8 4 do you think the government should mandate digital payment in place of cash payments post lockdown? .6 16 what factors hampered the use of digital payment systems during a lockdown? (digital illiteracy) .72 2 what factors hampered the use of digital payment systems during a lockdown? (lack of infrastructure) .7 17 what factors hampered the use of digital payment systems during a lockdown? (security) .8 16 what factors hampered the use of digital payment systems during a lockdown? (additional charges) .6 21 what factors hampered the use of digital payment systems during a lockdown? (others) .75 0 do you feel digital literacy is a must for using digital payments system? .897 total .83 3 .3 83 .3 10 note: table displays the extraction method: rotation method and principal component analysis: varimax with kaiser normalization.a rotation converged in 10 iterations there is a moderate to strong correlation between among 12 items in (table-11) and a component of factor 1. and in such cases, the correlations between -0.628 and -0.750 are considered relatively tiny and are excluded from the matrix. table 11. component transformation matrix comp onent 1 2 3 4 5 6 7 8 9 10 11 12 1 .787 .364 .3 47 .1 22 .11 1 -.191 .0 80 .203 -.060 -.098 .03 2 .035 2 .34 8 .532 .2 12 .6 76 .0 34 -.262 .0 85 .045 .013 -.066 .01 1 .101 3 .257 .14 4 .6 32 .0 06 .48 0 -.203 .4 23 .018 .154 -.093 .04 3 .172 gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 12 4 .376 .44 7 .3 80 .4 20 .4 03 .069 .3 43 -.112 -.159 .030 .0 3 1 -.116 5 .196 .283 .0 47 .0 60 .3 73 .229 .4 20 -.312 .516 .293 .04 8 -.236 6 .047 .254 .2 44 .0 94 .16 6 .530 .2 92 .129 .216 -.341 .5 2 5 -.129 7 .023 .09 8 .2 06 .2 72 .51 2 .062 .1 14 -.381 -.034 .554 .3 7 5 .017 8 .04 2 .14 1 .0 32 .1 71 .25 3 .286 .2 80 .447 .417 .253 .53 4 -.042 9 .00 6 .03 4 .0 05 .1 50 .1 73 .267 .4 31 .605 -.312 .331 .3 0 0 .162 10 .093 .387 .3 28 .3 07 .0 44 .262 .2 34 -.190 -.333 .328 .28 3 .424 11 .017 .13 0 .0 54 .1 12 .2 59 -.265 .2 04 .086 .501 .102 .3 0 3 .654 12 .016 .14 8 .2 74 .3 27 .04 4 .469 .2 33 -.274 -.026 -.419 .17 7 .486 note: extraction method: principal component analysis. rotation method: varimax with kaiser normalization. the variables' values are described in the table above following factor extraction using the rotation method: varimax with kaiser normalization. discussions the current research looked at the relationship between customer-related factors and their impact on fintech and financial inclusion in india. the findings show that there is a significant positive relationship among such variables. ease of use, safety, and security of their fund; frictionless transactions, etc. are the variables that give people the confidence to involve in online financial transactions. the result is in the line of findings of (daragmeh et al., 2021). the results also indicate the areas where more emphasis should be given to accelerate the use of fintech services and the rate of financial inclusion. though the study indicates that the use of smartphones for any financial transactions is significant, there is further room to create an eco-system where people can use their smartphones for almost all financial transactions. reward system is one area, which can be used to persuade more and more people to use online modes of transactions. financial literacy is considered a base of financial inclusion and increasing the rate of financial literacy will increase the pie of fintech and resultantly financial inclusion in india. our study confirms the outcome of (ahmad et al., 2021). that fintech could accelerate the growth of financial inclusion conclusions this study is as one of the first in developing countries to cover fintech (payment system) and financial inclusion, in the setup of the covid-19 epidemic. the study sought to investigate how this covid19 pandemic has impacted the use of fintech services and in turn financial inclusion and concludes that the advancement of technology has accelerated the use of fintech services. the study emphasizes the fact that a well-developed eco-system, with increased level of financial literacy can significantly boost the adoption of fintech services and in turn financial inclusion. albeit this investigation makes several contributions, it has limitations also, like we have taken just one of the factorsdigital payment, as the proxy of fintech. most quiet that we could also focus on other fintech proxies such as micro insurance, lending, equity financing, and so on, though it is a very broad part of the fintech, that's why we have taken only the digital payment. future studies will likely investigate the influence of the covid19 pandemic on fintech adoption in both progressed and arising economies. second, further study can be conducted to discuss how to enhance digital literacy, and last is to analyze the same situation after the covid-19 incident to see whether people are using these services. author contributions: conceptualization, s.v.; methodology, m.g.; software, s.v.; validation, m.g.; formal analysis, m.g. and s.v.; investigation, m.g.; resources, s.v.; data curation, s.v.; writing – original draft preparation, m.g. and s.v.; writing – review & editing, m.g. and s.v.; visualization, s.v. and m.g.; supervision, s.v.; project administration, s.v.; funding acquisition, s.v. and m.g. 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. gupta & verma, indian journal of finance and banking 11(1) (2022), 1-14 13 funding: the authors received no direct funding for this research. acknowledgments: n/a. 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 daqar, m., constantinovits, m., arqawi, s., & daragmeh, a. 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(2020). retrieved from https://www.worldbank.org/en/topic/financialinclusion 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. https://rbi.org.in/scripts/bs_speechesview.aspx?id=607 https://hdl.handle.net/10520/ejc-105861a0dd https://www.statista.com/statistics/942795/india-financial-institution-account-ownership-rate/ https://www.statista.com/statistics/942795/india-financial-institution-account-ownership-rate/ https://www.uncdf.org/financial-inclusion-and-the-sdgs https://www.uncdf.org/financial-inclusion-and-the-sdgs http://dx.doi.org/10.35808/ijfirm/220 https://www.worldbank.org/en/topic/financialinclusion http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking vol. 4, no. 4; 2020 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 30 empathy of the bancassurance channel: an empirical study dr. mousumi choudhury assistant professor department of business administration university of science and technology meghalaya-793101, india e-mail: mousumichoudhury6@gmail.com dr. ranjit singh associate professor department of management studies indian institute of information technology, allahabad prayagraj-211015, uttar pradesh, india e-mail: ranjitsingh@iiita.ac.in ms. k. kajol research scholar department of management studies indian institute of information technology, allahabad prayagraj-211015, uttar pradesh, india e-mail: rsm2018003@iiita.ac.in dr. shashi kant rai assistant professor department of management studies indian institute of information technology, allahabad prayagraj-211015, uttar pradesh, india e-mail: shashikant@iiita.ac.in abstract purpose: the purpose of the study is to assess the customers’ perception regarding empathy exhibited by the bancassurance channel and factors affecting it. design/methodology/approach: using random sampling, the data was collected from customers of several branches of state bank of india in guwahati city of assam, who have availed life insurance services from these branches. tool of structured questionnaire was used to collect primary data. mean, standard deviation, regression analysis was used to analyze the data and draw logical conclusions. mailto:mousumichoudhury6@gmail.com mailto:ranjitsingh@iiita.ac.in mailto:rsm2018003@iiita.ac.in mailto:shashikant@iiita.ac.in https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 31 findings: the study shows that customer perceives bancassurance channel to have a high level of empathy towards customers. it was also found that none of the demographic variables considered in the study have any impact on influencing perception. therefore, policymaker can adopt one fits all approach in the case of demographic aspects to improve the empathetic nature showed by the bancassurance channel. research limitations: the study takes into consideration the customers who have bought life insurance service from various branches of state bank of india, guwahati, assam, india. originality: the study is first of its kind in assessing customer’s perception of empathy shown by the bancassurance channel. the study will be useful for researchers, academicians and those working in the area of bancassurance and in their understanding about factors influencing customer experience, satisfaction and retention strategy. major conclusion: the study finds that customers of the bancassurance channel perceive that the channel demonstrates high empathy. therefore, policymaker can advocate for an increase in penetration of life insurance through the bancassurance channel. as there is no association between the demographic factors and customers’ perception towards empathy shown by the bancassurance channel, policymaker can adopt one fits all approach in the case of demographic aspects to improve the empathetic nature showed by the bancassurance channel. keywords: bancassurance, bank, empathy, employees, insurance. introduction bancassurance is a business model to sell insurance products to bank‟s customers through banks branch network (sharma et al., 2012; aggrawal, 2004; malik, 2014; neelamega & veni, 2009; viswanadham, 2005; venugopal, 2011). of late, globalization, liberalization, and technological advances have turned customers demanding, thus raising the concept of consumerism and there is a very high probability for customers to switch to the competitors‟ product if the desired level of satisfaction is not achieved. banks are also not an exception to this and therefore, they are leaving no stone unturned to retain their customers (aksoy, 2013; giovanis & athanasopoulou, 2018; tsoukatos & rand, 2006; vera & trujillo, 2017; wieseke et al., 2012). it is found that the key to a successful business is satisfied customers (kristensen et al., 1992; zeithaml et al., 1996; mccoll-kennedy & scheider, 2000). parasuraman et al. (1988) have shown the significant impact of service quality on customer satisfaction. he identified five dimensions of service quality i.e., reliability, responsiveness, tangibility, assurance and empathy. choudhury and singh (2015a); choudhury and singh (2015b) and choudhury and singh (2016) have studied the measurement of reliability, responsiveness, and assurance dimension of bancassurance and its impact thereon, however, empathy and its measurement has not yet been exclusively dealt by any specific studies and thereof, in this study, this dimension is exclusively addressed. among the servqual dimensions, empathy and security are significantly related to customer satisfaction in the banking industry (islam & ali, 2011). empathy impacts customer satisfaction (bahia & nantel, 2000; rijwani, et al., 2017; zaim et al., 2013). siddiqi (2011) found that empathy had the highest positive correlation with customer satisfaction. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 32 empathy is defined as “a person‟s ability to sense another‟s thoughts feelings, and experiences, to share other‟s emotional experience, and to react to the observed experiences of another person” (wieseke et al., 2012; davis 1996; rogers 1959; duan & hill 1996; moore, 1990; redmond, 1989). several researchers highlighted the importance of the empathy dimension in respect of establishing better customer employee communication (markovic et al., 2015; solomon et al., 1985; surprenant & solomon, 1987). empathic workers completely comprehend their clients' needs and are subsequently ready to tailor their interactive behavior to a particular client (giacobbe et al., 2006; pettijohn et al., 2011; weitz, 1978; gremler & gwinner, 2008). coan (1984) inferred that empathy is a switching barrier for customers (dewitt & brady 2003). empathy is an essential requirement for providing successfully the desired services (parasuraman et al., 1988; zeithaml et al., 1996; gabbott & hogg 2001). the empathy of employees has a significant impact on customer satisfaction (markovic et al., 2015; wieseke et al., 2012, daniels, et al., 2014; meneses & larkin, 2012). in the case of the banking business, a significant number of communications between employees and customers took place to complete various procedures (chakrabarty, et al., 2012; lee, et al., 2011). the empathy shown by an employee to customer contributes positively to satisfaction of customer (gorry & westbrook, 2011; lee et al., 2011; homburg et al., 2009; boorom et al., 1998; comer & drollinger 1999; drollinger et al., 2006; pilling & eroglu, 1994). the combined effect of all these is free word-of-mouth publicity by the customers and repurchase of the same brand by the same customers (barnes et al., 2016; barnes et al., 2015; nyadzayo & khajehzadeh, 2016). however, lacks of empathy can damage customers‟ perception of the service quality of a brand (abbasi &alvi, 2013; agnihotri & krush, 2015). demographic factors also affect the customers‟ perception regarding empathy of the bancassurance channel but with a varying degree (choudhury & singh, 2018). therefore, the policymakers of bancassurance channels need to identify the factors that positively influence customer‟s perception regarding empathy shown by employees. this will help the bancassurance channel in generating a competitive advantage over its competitors. this would further help a bank in designing a framework that will contribute to form a positive perception of customers regarding empathy shown by the bancassurance channel. banks earn significant non-interest income through the bancassurance channel. this makes the bancassurance channel a profitable business model for banks (leepsa & singh, 2016; leepsa & singh, 2017). thus, it becomes vital to know the customer‟s perception towards employees‟ empathic manner in the bancassurance channel as it elevates the level of satisfaction among customers (weitz, 1981). hence a study on measuring customer‟s perception regarding empathy shown by bancassurance channel is important to reveal the customers‟ perception regarding the empathetic nature of employees of bancassurance channel and for policy recommendation. the key objectives of the study are: i. to assess customers‟ perception regarding empathy shown by the bancassurance channel; ii. to study the impact of demographic factors on customers‟ perception regarding empathy in the bancassurance channel. key measurable questions that address these objectives are as follows: a. what is the perception of customers towards the empathy shown by the bancassurance channel? https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 33 b. is there any impact of demographic variables on customers‟ perception towards empathy shown by the bancassurance channel? the rest of the paper is ordered as follows: section 2 presents a review of related studies, section 3 consists of data and methodology, section 4 describes the analysis and findings, section 5 presents the conclusion and policy implications of the study. review of related studies there have been many studies documenting the importance of empathy and its measurement in several industries. empathy leads to the continuous use of banking services by its customers (van iwaarden et al., 2003; lo et al., 2010; nupur 2010; santhiyavalli, 2011; shanka, 2012; devi & ramburuth, 2012). ilyas (2013) and rajalakshmi (2016) found that empathy is one of the most significant factors considered by customers while assessing service quality. empathy helps in bringing customer satisfaction (lau et al., 2013; hamzah et al., 2017). customers have a favorable perception regarding the bancassurance channel (singh & choudhury, 2017). barot et al. (2012) found that an insurance company wins customers based on empathy, responsiveness, and corporate image. empathy has a role in influencing the customer perception in respect of service quality in the life insurance industry (singh et al., 2014). empathic services with the help of tangibles lead to and improve customers‟ satisfaction (jothi, 2016). anandhi (2016) found that the most important service quality dimension in respect of life insurance companies is reliability and empathy dimension. empathy helps in building positive emotions toward the brand (lee et al., 2011). employee‟s ability to understand customer emotions, expectations, and responding accordingly in the coordination with appropriate interactive behaviors increases loyalty towards the brand (jones & shandiz, 2015). empathic employees have the ability to provide personalized assistance to customers (wieseke et al., 2012) resulting in higher customer satisfaction. the empathetic employee develops a long-lasting relationship between customers and the brand (agnihotri & krush, 2015; itani & inyang, 2015). age is an influences customer perception of service quality (homburg & giering, 2001; siu & cheung, 2001; kumbhar, 2011; ganesan-lim et al., 2008; ahmad et al., 2010). however, elangovan and sabitha, (2011) and ramez (2011) observed no such relationship between age and service quality perception. min and khoon (2013) found that male and female customers to be different in their perceptions about the dimensions of service quality. but there exist a few studies that report no significant influence of gender on service quality perceptions e.g., ganesan-lim et al. (2008); kumari and rani (2011) and kumbhar (2011). marital status is one important factor affecting the customers‟ perception regarding service quality (sasikala, 2013). however, there exist a few studies that report no such relationship (anand & selvaraj, 2012). some studies also found income to be a significant influence of customer's perception of service quality (siu & cheung 2001; kumbhar, 2011). a few studies, however, have found no significant relationship between the income of customers and their perception regarding service quality (elangovan & sabitha, 2011; anand & selvaraj, 2012; dewan & mahajan, 2014). the relationship of service quality perceptions with education level is indicated by studies such as kumari and rani (2011); kumbhar (2011) and min and khoon (2013). a few studies, on the other hand, show no such relationship between educational level and service quality perception (elangovan & sabitha, 2011; anand & selvaraj, 2012; dewan & mahajan, 2014). safakli (2007) and kumbhar (2011) found the occupation of customer have an impact on the service quality https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 34 perceptions. in contrast, a few studies have found no such differences prevailing in customers' quality perceptions concerning for the occupation (urban & pratt, 2000; kumari & rani, 2011). it is evident from the above discussion that several studies have been carried out on empathy displayed in the banks, insurance, and other industries. however, in respect of bancassurance no such study exists. thus, there is a need to study the empathy exhibited in the context of bancassurance and its related aspects. moreover, conducting this kind of study in the context of india is another important dimension because, in the indian context, limited studies are conducted. this study is expected to fill all these gaps. given the mixed findings of past studies regarding demographic profile‟s influence on customer perception of service quality, the present study attempts to study the impact of demographic variables on customers‟ perception towards empathy dimension of service quality in bancassurance channel. data and research methodology the present study is a descriptive one. the 33,31,050 numbers of customers as of 31 st march 2019 availing life insurance services from the 37 branches of the state bank of india, guwahati, assam constitute the population of the study. a sample of 345 customers was chosen using a simple random sampling method at a 95% level of confidence and a 5% confidence interval. a structured questionnaire specifically designed to measure the customers‟ perception regarding empathy shown by the employees of the bancassurance business channel was used to collect primary data. four numbers of variables were identified which can be used to measure empathy towards the bancassurance channel. the likert scale was framed using those variables. a score was given from 5 to 1 for each of the selected dimensions, where 5 denotes a very high level of empathy (strongly agree) and 1 indicates a very low level of empathy (strongly disagree).the variables identified through the literature review were „convenient working hours for customers‟, „working to gain customers confidence‟, „individualized attention to customers‟, and „assessing customers‟ actual need of insurance‟. demographic variables such as age, gender, marital status, number of family members, family income, education, and occupation were considered to examine the influence of demographic profile on customer‟s perception towards empathy shown in bancassurance channel. the important statistical tools used in this study were mean, standard deviation; cronbach‟s alpha, and multiple linear regression analysis. analysis and findings the analysis and findings of the study are as follows: measuring perception of customers in respect of empathy shown by bancassurance channel the value of cronbach‟s alpha, a measure to assess the reliability of the questionnaire, was found to be 0.834 for a scale consisting of 4 items. this indicates that the scale used to measure empathy is reliable (nunnaly, 1978) and the items are taken to measure the latent variable, i.e., empathy is measuring it. the mean value and standard deviation of all the four variables considered to measure empathy of the employees in the bancassurance channel are considered and summarized in table https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 35 table 1. item statistics with respect to empathy particulars mean standard deviation convenient working hours for customers 3.89 0.444 work to gain customers‟ confidence 3.77 0.651 individualized attention is given to customers 3.59 0.672 assessing customers actual requirement of insurance 3.21 0.796 overall mean 14.46 overall standard deviation 2.135 source: compiled by authors from questionnaire table 1 shows that customers perceive the bancassurance channel to be highly empathetic in respect to the factors such as „convenient working hours for customers. it is relatively low in respect of the factor such as „assessing the actual need for insurance of the customers. the scale considered to measure empathy of employees working in the bancassurance channel contains 4 items. a score of 5,4,3,2 and 1 was given to the respondents for their responses of strongly agree, agree, moderately agree, disagree, and strongly disagree respectively. the maximum score a respondent can score in each of the items was 5. therefore, the maximum possible score was 20 (4x5). similarly, the minimum score a respondent can score in each of the items was 1. therefore, the minimum possible score was 4 (4x1). the difference between the maximum and minimum possible score was 16 (20-4). to ascertain the degree of empathy at five levels, this range (16) was divided by 5 which come out to be 3.2. adding 3.2 with 4 (lowest possible score), the very low level of risk perception range (4-7.2) was obtained. similarly, adding 3.2 with subsequent value, the next higher range was obtained. in table 2, the empathy score is interpreted. singh and bhowal (2011) and singh (2012) have framed a similar interpretation tables using the similar upper limit exclusive scale. table 2. interpretation table to interpret the empathy score perception score interpretation 4-7.2 very low level of empathy 7.2-10.4 low level of empathy 10.4-13.6 moderate level of empathy 13.6-16.8 high level of empathy 16.8-20 very high level of empathy source: compiled by authors from questionnaire the overall mean value as per table 1 is 14.46 which falls under the interval of the high level of empathy as interpreted in table 2.it can, thus, be inferred that customers perceive bancassurance channel to have a high level of empathy in making available insurancerelated services. this is in the alignment with a study conducted by vikas (2011). demographic profile of customers and its impact on their perception regarding empathy shown by bancassurance channel https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 36 to measure the effect of the demographic profile of customers on their perception towards empathy shown by the bancassurance channel, multiple linear regressions were performed the result of which is summarized in tables 3 and 4. table 3. model summary model r r square adjusted r square the std. error of the estimate 1 0.159(a) 0.025 0.005 0.66722 source: compiled by authors from questionnaire table 3 demonstrates that only 2.5% of the variations in the customers‟ perception towards empathy demonstrated by the bancassurance channel of an insurance company is explained by the select demographic factors such as age, gender, marital status, number of family members, family income, education, and occupation. table 4. coefficient model sum of squares df mean square f sig. 1 regression 3.903 7 0.558 1.252 0.273(a) residual 150.027 337 0.445 total 153.930 344 source: compiled by authors from questionnaire table 4 shows that the relationship between the demographic profile of customers and their perception towards the empathy exhibited by the bancassurance channel is not significant since the p-value of 0.273 is more than the threshold limit of 0.05 to get it accepted in the given statistical test. since the value of r square is very low (.025) and, the p-value is more than 0.05, no significant association can be discerned between the demographic profile of the customers and their perception towards the empathy shown by the bancassurance channel. conclusion and policy implications the study finds that customers of the bancassurance channel perceive that the channel demonstrates high empathy. this acts as an advantage for the bancassurance channel. the reason is that empathetic behavior shown by the bancassurance channel will eventually result in higher levels of customer satisfaction (homburg et al., 2009).therefore, policymaker can advocate for an increase in penetration of life insurance through the bancassurance channel. rbi in connotation with irda has already passed the guidelines for banks to be a broker of insurance services (rbi, 2015).this new regulation will allow each bank to tie up with up to three life insurance companies. this brokerage system, thus, will give more freedom of choice to the customer of the bank in availing insurance service from the bank. since the customers perceive the bancassurance channel to be empathetic in providing insurance service, therefore, freedom of choice will make the customers more inclined and satisfied towards this channel. life insurers in the rural markets have not done well (vimala & alamelu, 2018). rural people do not believe ininsurers (siddiqui & das, 2017). as the bancassurance channel seems to have high empathy https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 37 towards customers, therefore, bancassurance channel can be beneficial to tap the untapped rural market (siddiqui & das, 2017).bancassurance channel can be made compulsory for rural banks, regional banks, and other small finance banks operating in rural areas because the rural market has tremendous potential, and thus, it can be a good model for bringing financial inclusion as well (choudhury & singh, 2015c). empathic employees can fully understand the needs of their customers and can tailor the communication according to the interest and need of their customers (giacobbe et al., 2006; pettijohn et al., 2011; weitz, 1978) which leads to successful service encounter (boorom et al., 1998; comer & drollinger, 1999; drollinger, et al., 2006; pilling & eroglu, 1994; barot et al., 2012) and thereby customer satisfaction (bahia & nantel, 2000; rijwani et al., 2017; zaimetal., 2013). thus, the bancassurance channel should consider appropriate strategies to make the employees empathetic towards their customers. employees can be trained to make capable of sensing the customer‟s expectations and emotions and sharing this emotion while interacting with customers (schneider & schechter, 1991). employees‟ abilities to sense customer expectation can be developed by role playing or mystery shopping method which will give the employees scope to keep themselves in the place of customers and to better understand how the customers perceive the service encounters (finn & kayande, 1999; grove & fisk, 1992). an approach called „„interaction routing‟‟ can also be implemented to make employees empathetic towards customers (van dolenet al., 2002).an empathetic approach among employees will also influence their emotional intelligence in the workplace (goleman, 2005). implementation of the it-governance framework can also be one such alternative (singh et al., 2020). through bancassurance, life insurance policies can be sold to the customers of the bank who opened their bank account due to the initiative taken by the government such as pradhan mantri jan dhan yojana (pmjdy) in india, to bring financial inclusion among the people at the grass -root level. buying a life insurance policy is yet not preferred by most of the people in india (tagra & dhiman, 2016; raju & murugeshwaran, 2017). creating awareness about life insurance can help in bringing this desired change (banne & bhola, 2014). awareness empowers people (bhattacharjee & singh, 2017; roy et al., 2017; singh & kar, 2011). bancassurance being perceived as empathetic by customers can increase customer‟s awareness about a life insurance policy. this is because empathy is a key factor in positively impacting the dynamic exchange of information between the customer and a company (parasuraman et al., 1985 and 1991). higher levels of empathy yield stronger and more meaningful interpersonal relationships (rychlak, 1973). thus, the bancassurance channel can arrange awareness camps, communicate properly about the benefits of life insurance policy, and can educate people about the utilities of the life insurance policy. the present study, however, does not identify any association between the chosen demographic factors and customers‟ perception towards empathy shown by the bancassurance channel. this indicates that to improve the empathetic nature of bancassurance as perceived by the customer, policymaker can adopt one fits all approach in case of demographic aspects (singh & bhattacharjee, 2010a; singh & bhattacharjee, 2010b; deb & singh, 2017a, deb & singh, 2017b). further studies can be conducted to identify the association between psychographic features of customers and their perception of empathy shown by bancassurance. a comparative study can also be conducted to find out the perception of customers regarding empathy shown by the bancassurance channel and the traditional channel of buying insurance so that tailormade policies for the bancassurance channel can be framed to enhance empathy of the channel. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 4, no. 4; 2020 38 volume of insurance premium paid may also have an impact on the overall empathy shown by the bancassurance channel. future study can be directed towards this as it was done by singh and bhowal (2009). references abbasi, a. s., & alvi, a. k. 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(1996). the behavioural consequences of service quality. journal of marketing management, 60(2), 31–46. 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/10.2307/3150621 https://doi.org/10.1177/1094670512439743 https://doi.org/10.19030/iber.v9i5.8145 indian journal of finance and banking vol. 8, no. 1; 2021 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 59 credit management strategies and financial performance of industrial goods sector in nigeria ismail alhassan department of accounting school of business education, federal college of education (technical), gombe, gombe state, nigeria e-mail: alhassan1412@gmail.com k. m. anwarul islam associate professor department of business administration the millennium university, dhaka, bangladesh e-mail: anwarul@themillenniumuniversity.edu.bd received: august 30, 2021 accepted: november 15, 2021 online published: december 14, 2021 doi: 10.46281/ijfb.v8i1.1495 url: https://doi.org/10.46281/ijfb.v8i1.1495 abstract the influence of credit management methods on the liquidity and profitability of listed industrial goods firms in nigeria was investigated in this study. it was decided to use a descriptive survey study design. the sample population for which copies of the questionnaire were distributed was 400 respondents, representing 65% of the population. the participants provided 355 valid responses, which were examined. for descriptive statistics, one-way anova was utilized, and to test the hypotheses, a basic regression analysis method was applied. the results showed that the credit risk assessment, debt recovery strategy, and receivable collection policy sub-variables have a positive and statistically significant impact on the liquidity sub-variables ability to pay, level of bad debt, and cash inflow. liquidity had a positive and statistically significant effect on profitability. the study thus, suggest that companies in the industry should enhance their liquidity in order to achieve the targeted profit level by having effective credit terms and proper risk assessment strategy, designing and implementing debt recovery plans to aid collection of the overdue debt, adopting a stringent credit collection method, and employing and retained qualified accountants and credit administrators with excellent knowledge of credit control techniques. keywords: credit management strategies, credit sales, industrial goods, liquidity. jel classification codes: f65. introduction for quite a long time marketing professionals have recognized that giving credit is one of the tactics used by businesses to increase sales volume. it serves as a critical marketing link for the transportation of goods from manufacturing to distribution to a large number of customers who cannot pay right away. in the firm's statement of financial position, trade credit establishes an account receivable, which the firm records under current assets and anticipates to receive in the future. apart from increased sales https://doi.org/10.46281/ijfb.v8i1.1495 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 60 volume, companies give credit to consumers for a variety of reasons, including gaining a large percentage of the industry market, achieving a certain level of profit, commanding client loyalty, and retaining customers in the company (wireko & forson, 2017). in credit transactions, the economic worth of the items flows to the buyer at the time of purchase, but the seller anticipates receiving an equivalent amount at a later period. the seller may face some liquidity risk as a result of a partial or complete payment delay at the moment of sale (kaitibi1, ganawah, yokie, jalloh, & koroma, 2018). as a result, credit sales imply both current and future transactions, posing a receivable risk that must be carefully assessed and handled. credit is unavoidable in any business circle, yet it remains a threat to any company's financial health and performance (agu & basil, 2013; nwanna & oguezue, 2017). many quoted industrial businesses in nigeria have failed because to a lack of liquidity to launch sustainable investments, resulting in lower profitability levels to continue operations, according to previous studies (owolabi & obida, 2012; ifurueze, 2013). bad debts from consumers who were unable to pay for products offered to them on credit when they were due accounted for a large portion of the liquidity problem. to increase sales, several manufacturing corporations give customers a lot of credit at the expense of liquidity, volume and control of a fair part of the industry market are prioritized. a corporation with sufficient liquidity can satisfy its short-term operating obligations to creditors and invest in promising ventures. profitability would be boosted by proper investments, such as in projects with a positive net present value, as well as quick creditor payment and a cash discount advantage (banu, sayaduzzaman, & sil 2021). long-term credit without a credit policy to control debts will have a detrimental impact on liquidity and profitability (raymond & adigwe, 2015). to assess, manage, and avoid bad debts, a firm should use credit analytical tools and tactics created by credit professionals. management uses sound credit sales to maximize debt collection, reduce credit expenses, and provide credit solely to creditworthy consumers in order to eliminate the problem of bad debts and improve cash flow. to stay ahead of the competition, businesses should develop competitive financing conditions (ofoegbu, duru, & onodugo, 2016). management should control credit to guarantee adequate liquidity, according to owolabi and obida (2012), by designing an acceptable credit model that would offer a collection of receivables at appropriate time. credit terms and client risk assessment, credit collection, and better debt recovery at low cost are all part of the plan. according to ifurueze (2013), proper liquidity has a considerable moderating effect on an organization's profitability. this assumption has prompted the question of how credit management practices affect liquidity and, as a result, profit. in nigeria's chemical and paint manufacturing subsector, the answer to this study question was omitted. as a result, further research is needed to determine the influence of credit management practices on the liquidity and profitability of businesses. the overall goal of this study is to look into the impact of credit management practices on the liquidity and profitability of nigerian industrial goods sector. the subsidiary objectives to achieve the main goal are: to examine the impact of credit conditions and risk assessment on the customer's ability to pay; to examine the impact of debt collection method on the customer's ability to pay, to assess the impact of credit collection policy on the company's cash flow and to assess the extent of bad debt. credit management procedures in industrial goods sector whose instruments are not traded on the nigeria stock market floor, as well as companies in other sub-sectors, were excluded from this study. the study's justification is to contribute to the literature by providing analytical evidence on the link between the variables. managers in the manufacturing industry, researchers pursuing more research in this area, bankers, and analysts would all benefit from the findings. the research could potentially be used as a reference material for credit management applications. literature review the concept of credit management strategies one of the most essential decisions sellers must make is whether or not to issue credit, and if so, how the credit will be managed. credit control decisions differ from one business to the next, yet certain firms' decision templates may be similar, especially within the same industry (okpala, osanebi, & https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 61 irinyemi 2019). though credit sales transactions create trade debts in a business, they can also result in questionable and bad debts in some situations. where existence is dependent on the volume of turnover, credit sales, regardless of the risk, is critical (khan, tragar, & bhutto, 2012). according to the debtors' payment strength, debt can be classed as excellent, dubious, or terrible. the quality of accounts accepted by the firm, the state of the purchasers' country, and credit management practices are all factors that influence the extent of dubious or bad debt losses (kamal 2021). the danger of questionable and bad debts can be reduced when debtors are properly managed. while improper trade debt management can result in a high sum of money being set aside for dubious and debt debts, bad debt losses occur when a company is unable to collect its receivables (adegboye, 2021; agu & basil, 2013). regardless of the virtues of credit sale in accomplishing firms' objectives, according to uzoh (2012), it was proven to be accountable for financial failure in some manufacturing organizations, particularly when trade credits were not adequately managed. most companies overlook the risk connected with sale credits and utilize it as a marketing technique in order to increase sales to beat the competition, increase customer loyalty, encourage additional cash flow, and aid in negotiating leverage. when the degree of competition in the industry is high, a firm will provide more credit and will have strong bargaining power if it has a strong product, monopoly power, brand name, huge size, and strong financial position. credit sales are also used as a marketing tactic when a new product is brought to the market or when a corporation wants to push a product that isn't performing well (ehiedu, 2014). credit management strategies the terms policy and strategy have been used interchangeably in the past. a strategy is a special plan created to gain a market position and meet the company's objectives, whereas a policy is a set of guidelines created by the organization for rational decision making. as a result, policies take second place to strategy. credit management policy is an operational document that lays out several operating rules for the credit sales process that the entire organization must follow when granting credit to customers (taiwo & abayomi, 2013). this research focused on credit management strategy, which is defined as a design that assists a firm in achieving organizational credit objectives, gaining customer trust, gaining a competitive edge through sales volume, and gaining a solid market position. a firm's intended position is achieved by a combination of well-thought-out intent and actions. this organizational approach aims to be effective (raise sales), manage events and problems (financial risk), capitalize on opportunities (increase cash inflow), fully utilize resources (make suitable expenditures), and deal with threats (reducing bad debt losses). credit sales are managed, and bad debt losses are reduced using the credit management technique. establishing credit conditions, credit information analysis and scoring to determine credit worthiness of organizations and individuals, and developing credit plans to aid receivable collections when due are all routine practices of credit management (ifurueze, 2013). establishment of terms of credit the terms of credit refer a combination of three factors: the period of credit, cash discount, and the type of credit instrument employed. credit periods refer to the time between sales and payment, which varies depending on the industry and the type of items supplied. when determining a credit period, a corporation must assess the likelihood that the client would not pay on the due date, the size of the account to allow for a shorter credit period for smaller accounts and vice versa (akinleye, & olarewaju 2019). the degree of durability of the collateral used as security is also important. secondly, a monetary discount is frequently permitted as part of the loan terms, and the purpose of the rebate is to expedite the collection of receivables. finally, the invoice is commonly used as a credit sales tool. a seller sends a customer an invoice to sign as proof of receipt of goods, which also serves as a source document for the receivable accounting record (akinsulire, 2017). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 62 analysis and scoring of credit information credit information analysis and scoring are two methods for determining a prospective customer's creditworthiness (firm or individual) and influencing the quality of the firm's customers who are provided credit (ifurueze, 2013). financial statements of the prospective credit customer are a common source of information used to assess a customer's creditworthiness. the seller would then be able to perform a ratio analysis. the customer's payment history, the quantity of the customer's important assets, at least three trade credit references, and full details of all directors, partners, or owners are also necessary for credit reports. customers who are financially vulnerable should be required to submit a "credit bond" from a reputable financial institution (akinsulire, 2017). it is based on these factors that the decision to award or deny credit is made. the defined criteria for evaluating credit risk, according to ifurueze (2013), should be based on the "5cs" of credit, which comprise character, capacity, capital, collateral, and condition. the willingness of a consumer to meet financial obligations is referred to as character. the term "capacity" refers to a customer's ability to pay his debt from his operating cash flows. conservatism is examined using a broad financial ratio analysis, with a focus on risk ratios including debt-to-asset ratios, current-to-current ratios, and interest-earned-to-interest-paid ratios. this criterion demonstrates the customer's capital sufficiency. furthermore, collateral refers to the assets that consumers pledge as a guarantee for the loan given. finally, the requirement refers to the avoidance of economic and other national situations that could affect the customer's ability to pay. adverse economic conditions may influence a customer's ability or inclination to pay a loan when it is due (ofoegbu, duru, & onodugo, 2012). monitoring receivables debts should be monitored by the finance manager to ensure that all receivables are collected on time. he should use techniques like the average collection period, the aging schedule, and the collection experience matrix to help him. the average collection period is a credit policy that specifies a credit period that is compared to the calculated average collection period to determine how long it takes to collect an account receivable on average. cash inflows are hampered by collection delays, which increases the risk of bad debt losses (kroes & manikas, 2014). this scenario would inevitably wreak havoc on the company's liquidity and profitability. this is how the formula is calculated: acp = d / cs x 365 days. where: acp = average collection period; d= debtors, and cs = credit sales this approach of reviewing and monitoring receivables aids in the tabulation of receivables by debt period. it shows how long the receivables have been outstanding, which is normally within 30 days, 60 days, and 90 days or more (uwalomwa, uwuigbe, & oyewo 2015). traditional ways of evaluating receivables include the average collection period and the aging analysis schedule, both of which have drawbacks. failure to link receivables to sales from the same period is one of the flaws, making control difficult (owolabi & obida, 2012). the collection experience matrix is a scientific method for analyzing collection experience that uses disaggregated data. this method connects receivables to sales from the same time period. the model displays transactions in a horizontal hierarchy and associated receivables in a vertical hierarchy for a particular period. liquidity and profitability relationship liquidity in the manufacturing environment refers to the amount of cash or near-cash instruments a firm has on hand to pay its obligations immediately or in the short term (okpala, 2017). the term "sufficient https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 63 liquidity" refers to an entity's ability to satisfy its financial obligations when they become due. liquidity has a quantity and a time dimension, according to ezejiofor, adigwe, and john-akamelu (2015). your liquidity is sound if you have cash or quickly realizable assets like government securities. liquidity is determined by the ability and willingness of debtors to pay. if that is made up of goods, liquidity is determined by their salability, which can be low if they're not in demand. the above statement examines liquidity using current assets and their ability to be converted into cash (olagunju, david, & samuel, 2012; owolabi & obida, 2012). liquidity is believed to be at its optimum level in this study when credit clients can pay their bills on time, and proper policies are implemented to avoid or reduce bad debt (muritala & taiwo, 2013; ofoegbu, duru, & onodugo, 2016). any business venture's primary goal is to maximize profit, which defines its short-term viability. profit is important, but management decisions should not be made solely for the sake of profit at the expense of wealth maximization. profit is defined as the difference between revenues and expenses over a period of time, usually a year, and is considered the final outcome of a business's operations. without sufficient earnings, a company's future is bleak. profitability ratios assess a company's overall performance of by analyzing the company's overall performance and viability (uwuigbe, uwuigbe, & oyewo 2015). the ratios used to quantify profitability are margin and markup, return on equity (roe), and return on assets (roa). the leftover profits are distributed to regular stockholders. this means that their return is the net profit after taxes. as a result, the return on equity (roe) is used to determine the profitability of the owners' investment (roe). the formula is as follows: roe = net profit after tax/shareholders ‘equity also known as return on assets, profitability can be assessed by a company's net income expressed as a percentage of total assets available for use (roa). companies with higher asset values should be able to make more profits, according to roa. management's capacity to effectively employ available assets and achieve good returns is measured by roa. the formula is as follows: roa = profit after tax/total assets factoring different companies use different credit management approaches as long as the end result is positive. when a finance manager recognizes his company's unique situation, he or she may decide to employ debt risk reduction measures, one of which is factoring. factoring, also known as debtor finance or receivables factoring, occurs when one company purchases another's debt or invoice (onuora & nwafili, 2017). the debtors' accounts are discounted in this transaction to allow the buyer to profit from the debt settlement. factoring is the process of transferring ownership of receivable accounts to a third party who will pursue the debt. factoring buys debt at a discount, releasing the original debtor and providing them with working capital to continue trading, while the debt buyer chases down the loan for the full amount and profits when the receivable is collected (olarewaju & akinleye 2018). clients can get the information and reports they need regarding market trends and patterns from this element. they also conduct a systematic study of the client's data in order to ensure proper debt monitoring and management (uwalomwa, uwuigbe, & oyewo, 2015). empirical review numerous studies have been conducted by researchers on credit management and its ability to improve profitability. muritala and taiwo (2013) in their studies used ten years of bank data from 2001 to 2010 to examine the relationship between credit management, liquidity position and profitability of some selected banks in nigeria. the alternative risk absorption hypothesis, according to the study, stipulates efficient credit management, which improves enterprises' ability to create liquidity. furthermore, it was discovered that return on assets has a large positive impact on current ratio, corroborating the financial fragility crowding out concept. oyadonghan and bingilar (2014) examined the effects of effective credit https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 64 policy on the liquidity of manufacturing enterprises in nigeria and found a link between credit management and liquidity. liquidity is at a desirable level when a company's credit policy is favorable, according to the study. it also revealed that manufacturing organizations do not constantly check and review their credit policies, and as a result, cash discounts are not allowed as often as they should be. according to kaitibi, ganawah, yokie, jalloh, and koroma (2018), who evaluated the influence of efficient credit management on commercial bank profitability in sierra leone between 2010 and 2014, credit management shows a positive and significant link with profitability. the findings revealed that the effectiveness of loan management has a substantial impact on the profitability of commercial banks in sierra leone. sabenhang (2015) looked into the impact of credit management on commercial bank performance in rwanda. the study discovered that there was a substantial link between equity bank's financial performance and client appraisal, credit risk management, and collection policy. between 2006 and 2015, okpala (2017) conducted research on the relationship between credit management and deposit money bank profitability in nigeria. the study found that good credit management helps dmbs maintain their financial strength (liquidity), which boosts their profitability. as a result, kungu, wanjau, waititu, and gekara (2014) investigated the impact of loan policy on manufacturing firm profitability in kenya. profitability and credit policy have a significant link, according to the findings. these findings are consistent with those reported by martnez-sola et al. (2010) and khan et al (2012). the finding of alarcon, on the other hand, contradicted the positive effect of credit management on profitability (2008). the purpose of this study is to determine the importance of trade credit as a means of business financing in the spanish agro-food industry. credit policy and liquidity management, according to onuora and nwafili (2017), have a significant negative association with return on assets. liquidity management is critical, especially during times of financial crisis and high costs of getting loans in the financial market, as well as investors' reluctance to engage in company shares due to capital market problems (owolabi & obida, 2012). owolabi and obida (2012) investigated the association between liquidity management and corporate profitability in nigerian manufacturing enterprises. liquidity management, as assessed by the company's credit policies, cash flow management, and cash conversion cycle, has a considerable impact on profitability, according to the findings. in addition, ezejiofor, adigwe, and john-akamelu (2015) investigated the impact of credit management on the liquidity and profitability of a nigerian manufacturing firm. according to the findings, there is a link between liquidity situation and debtor turnover, as well as liquidity management and profitability. trade credit promotes items and increases sales, whereas credit management tactics have a direct relationship with a firm's liquidity situation and an indirect association with profitability, according to the research. kumaraswamy and george (2019) replicated the association between liquidity management and profit performance in the nigerian listed pharmaceutical manufacturing subsector (2016). the liquidity ratio and the profitability of the companies were shown to be strongly and favorably connected. the findings of uzoh (2012) and ifurueze (2012) support the conclusions of these studies (2013). omenguele and mazra (2013) warned that if trade credit isn't properly managed, the system's profitability and performance will suffer. gaps and hypotheses development most researchers had established the relationship between credit management and liquidity and profitability in the banking sector, according to the literature reviewed in the previous subsection (muritala & taiwo, 2013; kagoyire & shukla, 2016; kaitibi et al., 2018). however, just a few studies in nigeria have linked credit management to liquidity and profitability in the industrial sector (owolabi & obida, 2012; oyadonghan & bingilar, 2014; ezejiofor, adigwe, & john-akamelu, 2015). in the quoted chemical and paints manufacturing sub-sector in nigeria, it is clear that the relationship between credit management strategy, liquidity, and profitability sub-variables and in aggregate has been deleted from the body of knowledge. this omission left holes in the research, which the current study aimed to fill. to fill in the gaps in the literature, the following null hypotheses (h0) were developed to investigate the relationship between the variables.  credit risk assessment has no significant impact on the customer’s ability to pay. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 65  debt recovery strategy has no significant influence on the level of the firm’s bad debt.  receivable collection policy has no significant effect on cash inflow and  firm liquidity has no significant influence on profitability. theoretical review according to the literature, the supply of trade credit in an unequal situation between the vendor and the customers offers a variety of ideas to explain trade credit's existence and use. tax theory, liquidity theory, product quality theory, financing advantage theory, pricing discrimination theory, and transaction cost theory are examples of these theories. although not exhaustive, the preceding list reflects the writers' understanding of trade credit in a nigerian context (ali & dhiman 2019). to explain the merit supplied to both sellers and purchasers, the financing advantage theory of trade credit and transaction costs theory were employed as the foundation of this study. theory of financing advantage according to the financial advantage idea of trade credit, suppliers may have an advantage over traditional lenders in determining the creditworthiness of their customers, as well as a superior ability to monitor and enforce credit repayment. in extending credit to a buyer, the seller may have a cost advantage over financial institutions because of the financing advantage (schwartz, 1974). gaining knowledge, influencing the buyer, and salvaging the value of existing assets are all cost advantages offered to the credit supplier. when a supplier visits the buyer's location more frequently than financial institutions, it gains an edge in information acquisition. by analyzing the amount and timing of the buyer's orders, as well as his response to taking advantage of early payment to gain discounts, the information may be derived from the buyer's business state. the incapacity of a buyer to take advantage of early payment reductions may disclose the extent of his creditworthiness and serve as a red flag (chaudhury, 2020). the nature of the items sold and the seller's position should be examined whether the vendor must control the buyer. if the supplier observes that the buyer has few cost-effective substitute sources, the supplier can threaten to shut off future deliveries if the buyer account represents a small percentage of the provider's total sales volume. in the case that the buyer defaults, the supplier can seize the items given to preserve the value of the current assets. if the items provided are long-lasting, the lien situation may be feasible. as a result, the larger the risk, the more durable the buyer's collateral is (singh & sharma, 2018). if the supplier observes that the buyer has few cost-effective substitute sources, the supplier can threaten to shut off future deliveries if the buyer account represents a small percentage of the provider's total sales volume. in the case that the buyer defaults, the supplier can seize the items given to preserve the value of the current assets. if the items provided are long-lasting, the lien situation may be feasible. as a result, the more durable the buyer's collateral is, the more credit the supplier can extend (tuladhar, 2017). a financial institution, on the other hand, may have limited capabilities to withdraw future financing, which may have no immediate impact on the borrower's activities. in addition, bankruptcy regulations may limit the financial institution's ability to withdraw previous loans. financial institutions might potentially seize the company's assets to repay the loan. however, if the supplier already has a network for selling its goods, it can achieve reclamation and resale at a lower cost than the banking institution. alalade, binuyo, and oguntodu (2014), and taiwo et al. (2017) all employed the financing advantage hypothesis of trade credit. transactions costs theory the buyer's benefit in using trade credit as a form of financing, as well as the seller's cost-cutting strategy, is supported by transaction costs theory. it claims that using trade credit can help you save money on your bill-paying transactions (uzoh, 2012). rather than paying bills as soon as items are delivered, a customer with credit sales accumulates responsibilities and pays them only at agreed-upon intervals — weekly, monthly, or quarterly. the vendor would also be able to decouple the payment cycle from the delivery timetable in this way. other versions of the transaction cost theory are applicable to https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 66 goods with a high degree of seasonality in their consumption patterns. to maintain smooth production cycles, the company may need to build up large inventories, which will result in stock warehousing costs and a reduction in working capital. these costs could be cut by (a) lowering the price of the goods to encourage early sales and demand. though this may reduce earnings, (b) selectively giving trade credit to consumers and over time to enhance sales and inventory management (mian & smith, 1992). ezejiofor, adigwe, & john-akamelu, 2015; kagoyire & shukla, 2016; nwanna & oguezue, 2017; ezejiofor, adigwe, & john-akamelu, 2017; ezejiofor, adigwe, & john-akamelu, 2017; ezejiofor, adigwe, & john (2017). the trade credit theories of financing advantage and transaction costs are crucial to this study because they explain why both sellers and buyers under trade credit in a perfect market offer and accept trade credit. methodology in order to empirically analyze the influence of credit management techniques on liquidity and profitability of quoted industrial goods companies in nigeria, a descriptive survey study approach was used. this design was chosen because it captures the study's research goals and deals with nonmanipulated complex interactions between variables (zamira, 2016) as of may 2019, the study's population consisted of 834 management workers (top, medium, and lower level managers) from seven (7) selected listed industrial goods firms in nigeria. the participants had to meet the following criteria: i have at least 5 years of calculative experience in the industry, (ii) have at least a b.sc. educational level, and (iii) be involved in trade credit and receivable decision making in the organization. there are ten firms included in the study, these are: dn meyer plc, beta glass nigeria plc, cap plc, berger paints plc, dangote cement plc, portland nigerian plc, cutix plc, lafarge plc, greif nigeria plc and premier paints plc. the sample consists of 400 respondents, or 65% of the overall population, who were chosen at random. the executive directors, general managers, sales & marketing managers, finance managers, accountants and others were chosen as participants. 5 points for 20 items the likert-scale response instrument was created by the researcher and divided into sections a and b for demographic data and sections b to e for inferential data. the answers to the questions in each section about the quantity of relationships between variables were coded as follows: 1= weak. 2 indicates a slight weakness, 3 indicates an average performance, 4 indicates a strong performance, and 5 indicates a very high performance. to reach relevant analysis and conclusion, the respondents' impressions and opinions were recorded and assessed. exploratory factor analysis was used in the research instrument to see if the proposed variable indicators had significant factor loadings and to choose the best model for the study. at a 5% level of significance, descriptive statistics and regression analysis were used to assess the primary data gathered. the descriptive statistics were determined using a one-way anova to determine the average respondents' perception and the mean score on each of the three constructs. in addition, a basic regression analysis method was used to examine the impact of credit management strategy on liquidity and profitability in nigeria's publicly traded industrial goods firms. the rule was that the independent variable's probability value was compared to a critical value of 5%. credit management strategies, which are separated into three proxies: credit risk assessment approach, debt recovery strategy, and credit collection strategy, are the independent variables. liquidity is the dependent variable, which is divided into three sub-variables: ability to pay, bad debt level, and cash inflow, which is thought to have the potential to modify profitability. the variables employed in the investigation were described in table 1. table 1. depiction of variables used in the study variables abbre status definition credit risk assessment strategy cra independent this is an examination of a prospective credit customer's information to determine whether the customer will be able to meet his commitments under the terms of the contract. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 67 credit management strategies cms independent are plans by a firm to guarantee that credit sales are kept under control, receivables are collected on time, and bad debt losses are kept to a minimum in order to meet the firm's goals. credit collection strategy rcp independent this is a set of receivables collection policies that control how a company extends credit and collects receivables. debt recovery strategy drs independent this is a method that aids a company in debt collection by lowering costs, shortening collection time, and increasing liquidity. profitability pro dependent this is the amount of profit or financial gain generated by an organization's activities. it's calculated by subtracting total expenses from total revenue over the same time period. liquidity lid dependent liquidity refers to how much cash or close cash a company has on hand to pay short-term obligations. bad debt. lbd dependent a bad debt is a sum of money owing to a creditor that is unlikely to be repaid. cash inflow cfl dependent the net amount of cash and cash equivalents transferred into a business is referred to as cash inflow. ability to pay atp dependent this is a financial theory that demonstrates a credit customer's ability to pay his obligation when it is due. source: researchers’ compilation (2021) other dummy variables in this study include the credit manager's expertise, industry restrictions, the type of credit items sold, and the usage of collateral as security. these variables, however, were not employed in the regression analysis because they expected a value of "0." econometric specification at a 5% level of significance, the data were examined using a descriptive and basic regression approach. lid + pro = f is the functional form of the model specification (cma). where lid stands for liquidity, with atp, lbd, and cfl as sub-variables as a function of credit management approach (cms). cra, drs, and rcp are all proxies for the cms. the following are the linear regression equations that were used adopted from ehiedu (2014) with modification: impact of credit risk assessment on customer’s ability to pay the debt atp=β0 +β1 (cra) + ε1………………………………………….. model 1 impact of debt recovery strategy on the company’s level of bad debt. lbd= β0 +β2 (drs) + ε2 ……………………………………..…. model 2 impact of credit collection policy on cash inflow cfl=β0 +β3 (rcp) + ε3 …………………………………….….model 3 impact of liquidity on profitability pro=β0 +β4(lid) + ε4 ………………………………………..model 4 the overall model for the study is indicated as follow: influence of firm liquidity on profitability lid+pro =β0 + β1 (cms) + ε where: cms = (cra) + (drs) + (rcp) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 68 lid+pro =β0 + β1 (cra) + β2 (drs) + β3 (rcp) + ε…….model 5 a prior expectation cra> 0, drs> 0, rcp> 0 data analysis and interpretation of statements a total of 400 copies of the questionnaire were distributed to the sample population, and 355 copies were returned, reflecting a response rate of 89 percent. the data were collected and analyzed using descriptive and regression analysis to test the null hypotheses about the effect of credit management strategy on liquidity and profitability. descriptive statistics to summarize the average respondents' perceptions of each of the credit management strategy subvariables credit management, credit risk assessment, and debt recovery plan descriptive statistics were conducted using one-way anova. one-way analysis of variance (anova) table 2. summary of results (one way anova) firms crs (model 1) drs (model 2) rcp (model 3) n mean sd n mean sd n mean sd meyer plc 37 3.442 0.344 37 4.452 0.346 37 3.843 0.238 beta glass 40 3.028 0.354 40 4.465 1.456 40 3.665 0.357 greif plc 41 3.502 0.564 41 4.028 0.453 41 3.583 0.448 cap plc 36 3.243 1.345 36 4.922 0.982 36 3.879 0.639 lafarge plc 40 3.345 0.657 40 4.502 0.485 40 3.658 1.338 cutix plc 38 3.452 1.024 38 4.563 0.398 38 3.904 0.511 premier paint 30 3.112 0.376 30 4.237 1.398 30 3.831 0.378 berger paint 39 3.426 1.101 39 4.598 0.765 39 3.773 0.444 portland 25 3.246 0.345 25 4.722 0.439 25 3.905 0.346 dangote 29 3.222 0.392 29 4.832 0.267 29 3.643 0.398 total 355 3.302 0.650 355 4.539 0.699 355 3.768 0.510 fstatistics 22.34 24. 11 20.86 p-value 0.012 0.0 35 0.009 source: researcher's computation note: cra = credit risk assessment; drs = debt recovery strategy; rcp = receivables collection policy hypothesis 1: credit risk assessment has no significant impact on the customer’s ability to pay as demonstrated in table 2, model 1, the average opinion of each population strata suggested a strong but mixed perception of the impact of credit risk assessment on customer ability to pay in each category. when all the items were collapsed, the overall average impression of all categories yielded a total mean score of 3.302, with an fvalue of 22.34. with a p-value of 0.012 < 0.05, the differences in mean impression of the ten firms were statistically significant. as a result, the aggregate mean score of respondents' opinions between the cra and the atp suggests that credit risk assessment is strongly linked to the customer's ability to pay. this falls above “slightly strong” option on the scale of 1 to 5 on the research instrument. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 69 hypothesis 2: debt recovery strategy has no significant influence on the company’s level of bad debt as demonstrated in table 2, model 2, the average view of each population strata suggested a high but mixed perception of the impact of debt recovery strategy on the company's level of bad debt in each category. when all the items were collapsed, the overall average perception of all classes yielded a total mean score of 4.539, with an fvalue of 24.11. with a p-value of 0.035 < 0.05, the differences in mean assessment of the ten firms were statistically significant. as a result, based on the total mean score of respondents' opinions between the drs and bde, debt recovery method appears to be firmly tied to the company's amount of bad debt. this falls within the “strong” option on the scale of 1 to 5 on the research instrument. hypothesis 3: receivable collection policy has no significant effect on cash inflow in table 2, model 3, the common view of each population section revealed a strong but mixed opinion in each group on the impact of receivable collection policy on cash inflow. when all the items were compressed, the overall average perception of all categories resulted in a total mean score of 3.768, with an fvalue of 20.86. with a p-value of 0.009 < 0.05, the variations in the mean viewpoint of the ten firms were statistically significant. as a result, based on the overall mean score of respondents' opinions between the rcp and cfl, the receivable collection policy is highly related to the degree of cash inflow. this falls within the “strong” option on the scale of 1 to 5 on the research instrument. test of hypotheses table 3. summary of regression results of the impact of credit management strategy on firms' profitability n model 1 model 2 model 3 model 4 model summary r 355 0.554 0.498 0.472 0.643 r2 0.592 0.589 0.640 0.601 adj. r2 0.521 0.573 0.581 anova sig. 0.005 0.025 0.017 0.000 f. statistics 355 18.321 16.477 14.528 coefficients tstatistics 10.532 8.912 9.487 7.367 ( constant) 4.617 3.839 3.541 4.783 cra, drs, rcp 355 0.421 0.568 0.462 0.576 std. error 0.043 0.064 0.0867 0.053 dw 2.342 1.346 1.092 2.003 source: researcher's computation the bivariate analysis of hypotheses 1, 2, and 3 revealed that r = 0.554, 0.592, and 0.521 for the three constructs, respectively, as shown in table 3. these findings show that independent variable proxies (credit risk assessment, debt recovery technique, and receivable collection policy) have a favorable impact on dependent sub-variables (ability to pay, bad debt level, and cash inflow). the fstatistics of 18.321, 16.477, and 14.528 support this. the r2 values of 0.592, 0.573, and 0.581 indicated that cra, drs, and rcp were responsible for 52 percent, 57 percent, and 58 percent of the variation in liquidity and profitability of quoted industrial goods businesses in nigeria, respectively. the independent sub-variables had statistically significant effects on dependent sub-variables (p = 0.005, 0.025, and 0.017). the t-statistics of 10.532, 8.912, and 9.487 verified this. the null hypotheses 1 to 3 were rejected based on the data presented above, whereas other hypotheses were not. atp = 4.617 + https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 70 0.421 (cra); bde = 3.839 + 0.568 (drs); and cfl = 3.541 + 0.462 (cfl) are the basic linear equations for the three structures (rcp). in the industrial goods sector in nigeria, a unit increase in cra, drs, and rcp would push 42 percent, 57 percent, and 46 percent increases in atp, lbd, and cfl, respectively. the overall r= 0.643, indicating that liquidity (lid) has a considerable positive impact on profitability, according to the results of null hypotheses 4. (pro). lid was responsible for 60% of the variation in the pro in the industrial goods sector in nigeria, according to the r2 = 0.601 result. lids had a statistically significant effect on pro (p = 0.000 < 05). pro= 4.783 + 0.576 (lid) was the simple linear equation, which meant that a unit change in lid resulted in a 57 percent rise in pro. as a result, null hypothesis 4 is rejected, while the alternate hypothesis is not. based on the statistically significant positive effective of the cms three components, it can be concluded that the cms multi-variance has adequately described liquidity and profitability in aggregate. hypotheses one to four produce results that are consistent with the a priori expectation: cra > 0, drs > 0, rcp > 0. discussion of findings the findings of muritala and taiwo (2013), who said that return on assets has a strong positive effect on current ratio, supported hypothesis 1, 2, and 3, validating the financial fragility crowding out hypothesis. also, according to oyadonghan and bingilar (2014), a favorable company's credit policy pushes a desirable degree of liquidity. the findings are also consistent with kaitibi et al. (2018)'s report, which concluded that better bank profitability in sierra leone was due to effective lending policy. these hypotheses were supported by the report studies of martnez-sola et al. (2010); khan et al. (2012); kungu et al. (2014); kagoyire and shukla (2016); ofoegbu, duru, & onodugo, (2016); nwanna and oguezue, (2016); martnez-sola et al. (2010); khan et al. (2012); khan et al. (2012); khan et al. (2012); khan et al. (2017). however, the findings of this study contradict those of alarcon (2008), who asserted that while credit management may promote items and increase sales, it will impair financial system profitability and performance if not properly managed. the findings also contradicted onuora and nwafili (2017), who found a significant negative link between credit policy and liquidity management and return on assets. hypothesis 4 demonstrated not just a positive but also a significant association between liquidity and profitability. ifurueze (2013), owolabi and obida (2012); ismail (2016); jindal, jain, and vartika (2017); and ezejiofor, adigwe, and john-akamelu (2013) all came to similar conclusions (2015). summary, conclusion and recommendations summary of findings credit management strategies are plans of action aimed to guarantee that trade credit is granted and controlled appropriately. it would improve receivable collection from trade debtors by implementing appropriate methods, resulting in improved sales volume, total revenue, and lower financial risks. the goal of this research is to see how credit management tactics affect liquidity and profitability. this was determined by examining the influence of credit risk assessment strategy on customers' ability to pay, the impact of debt recovery strategy on bad debt levels, and the impact of credit collection method on cash inflow levels. the fourth sub-objective looked at the impact of liquidity on profitability as a moderating factor. the following is a summary of the research findings based on the analysis: 1. hypotheses one to three revealed that the three tactics of credit risk assessment, debt recovery, and credit collection all had a positive and significant impact on a company's liquidity as assessed by customer ability to pay, bad debt level, and cash inflow. 2. giving customer's credit would enhance sales and raise the industry's market share. 3. credit management solutions increase liquidity through proper plans of action, improve receivable collections, and help the organization achieve its goals. 4. adequate liquidity allows businesses to take advantage of the cash discount rate and engage in initiatives with a positive net present value, which boosts profits. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 8, no. 1; 2021 71 conclusion credit management strategies, as measured by credit risk assessment, debt recovery strategy, and credit collection strategy, have a positive and significant impact on liquidity and profitability of quoted industrial goods firms in nigeria, according to the findings of this study. the following is a policy recommendation based on the study's findings:  the customer's capacity to pay is influenced by the credit risk assessment strategy. setting a credit period, evaluating the degree of the durability of collateral presented as security before credit is granted, offering rebates to speed up receivables collections, and raising an invoice as a credit instrument for transaction proof are all requirements for organizations in this industry. the controller should review financial accounts of customers and determine their creditworthiness to assess consumer information and avoid risk.  the company's bad debt level is influenced by the debt recovery approach. to facilitate debt recovery, debt recovery plans should be established and implemented, particularly for overdue debts resulting from credit sales to customers. this would aid businesses in increasing receivable collections and reducing bad debt losses.  the way you collect receivables has a big impact on your cash flow. recommendations industrial goods sector in nigeria should pay particular attention to receivables and liquidity. when properly managed, this initiative is likely to have an impact on the company's financial performance. the study thus, suggest that companies in the industry should enhance their liquidity in order to achieve the targeted profit level by having effective credit terms and proper risk assessment strategy, designing and implementing debt recovery plans to aid collection of the overdue debt, adopting a stringent credit collection method, and employing and retained qualified accountants and credit administrators with excellent knowledge of credit control techniques references adegboye, o. d. 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(2015). credit management and bank performance of listed banks in nigeria. journal of economics and sustainable development, 6(2), 27-32. uzoh, c. a. (2012). the impact of credit management on the profitability of a manufacturing firm: a case study of unilever plc aba, nigeria. (unpublished m.sc. thesis, department of accounting, university of nigeria, enugu, nigeria. wireko, d., & forson, a. (2017). credit risk management and profitability of selected rural banks in upper east region. journal of excellence, leadership, & stewardship, 6(2), 43-55. zamira, v. (2016). the impact of credit risk management on the banking profitability: a survey of the theoretical and empirical literature. european journal of economics and management sciences, (2), 48-51. 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) indian journal of finance and banking 10(1) (2022), 45-53 45 finance and banking ijfb vol 10 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa customer trust in e-banking during covid-19 pandemic in bangladesh md. shahnur azad chowdhury (a) md. shahidul islam (b) md. shariful haque (c)1 mohammad shyfur rahman chowdhury (d ) mohammad emdad hossain (e) (a) associate professor, department of business administration, international islamic university chittagong, chittagong, bangladesh; e-mail: tipu_iiuc@yahoo.com (b) divisional officer, service engineering division, bangladesh forest research institute, chittagong, bangladesh; e-mail: engr.shahidul.islam@gmail.com (c) associate professor, department of economics and banking, international islamic university chittagong, chittagong, bangladesh; e-mail: sharif@iiuc.ac.bd (d) assistant professor, department of business administration, international islamic university chittagong, chittagong, bangladesh; e-mail: shohel_math22774@yahoo.com (e) associate professor, department of business administration, international islamic university chittagong, chittagong, bangladesh; e-mail: emdad@iiuc.ac.bd a r t i c l e i n f o article history: received: 22nd may 2022 accepted: 10th july 2022 online publication: 14th july 2022 keywords: e-banking, trust, customer satisfaction structure equation model, bangladesh jel classification codes: g21 a b s t r a c t the purpose of this study is to determine the trust that e-banking customers possess regarding the effect of customer satisfaction, which depends on the e-banking infrastructure facility and e-banking communication environment. using stratified random sampling in randomized block design, the response to a survey questionnaire has been obtained from 400 respondents via e-mail and hand-to-hand to know their opinion. structure equation model (sem) with kolmogorov smirnov test, shapiro wilk test, mannwhitney test, kruskal-wallis test, and least significant difference (lsd) tests are used to determine the factors that affect e-banking customer trust. it is observed, from this study, that an increased e-banking communication environment, leads to the enhancement of customer satisfaction, as there is a positive significant relationship. result also shows bachelor's degree and master's degree holder customers exhibit more trust in the e-banking process than the customers with a lower level of education. customers who started e-banking transactions during covid-19 own more trust value than the customers who started transactions before the pandemic. so, the growth of e-banking transactions may contribute positively to ensuring sound health in the future and especially in any pandemic situation. © 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) introduction the e-banking transaction process grows very rapidly for the covid-19 pandemic situation and becomes very popular in the last two years in bangladesh. customer trust is one of the aspects that scientists and business analysts look at while developing new products or services. this research is looking into the factors that influence customer loyalty and happiness, the backdrop of corporate social responsibility (csr), the role of business ethics as a determinant, and other factors. one of the factors that attract customers is their ability to build trust. in the banking sector, online banking is one of the most popular services offered by commercial banks, and it has a beneficial influence on the performance of financial institutions as a whole. in financial institutions, information technology has played an important role in enhancing services, providing new products, making inquiries easier, and saving time. in the present world, information technology has been chosen to bring answers to virtually every industry, including education, health, libraries, communication, and a slew of others. people in bangladesh are becoming more conscious of their entitlement to receive excellent and value-added services in exchange for their money. the banking business in bangladesh has recognized the needs of clients and their expectations from financial services. as a result, the new generation of private commercial banks is equipped with essential information technology infrastructure. e-banking refers to the supply of banking goods and services using electronic delivery channels, such as the internet. it allows for banking to be done, from any location, at any time. it provides handy, low-cost financial services that are simple, fast, and convenient around the clock. in addition to providing significant cost savings to customers, e-banking, whether conducted via the internet, telephone, or other electronic delivery methods, is becoming increasingly popular among businesses and consumers. bangladesh has been a leader in the use of electronic banking services. the bulk of bangladeshi clients has not yet been used to the electronic banking system (sadekin et al., 2019). the growth of e-banking in any country is largely dependent on the faith that clients have in the system. clients' confidence in any bank's e-banking system is 1corresponding author: orcid id: 0000-0002-2692-3634 © 2022 by the authors. hosting by cribfb. peer-review under responsibility of cribfb, u.s.a. https://doi.org/10.46281/ijfb.v10i1.1772 to cite this article: chowdhury, m. s. a., islam, m. s., haque, m. s., chowdhury, m. s. r., & hossain, m. e. (2022). customer trust in ebanking during covid-19 pandemic in bangladesh. indian journal of finance and banking, 10(1), 45-53. https://doi.org/10.46281/ijfb.v10i1.1772 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v10i1.1772 https://orcid.org/0000-0003-1547-157x https://orcid.org/0000-0001-5755-2365 https://orcid.org/0000-0002-2692-3634 https://orcid.org/0000-0002-7804-050x https://orcid.org/0000-0001-5792-0033 chowdhury et al., indian journal of finance and banking 10(1) (2022), 45-53 46 dependent on a number of factors, including service quality, security, network speed, and the educational qualifications of the customers. customers' confidence in the e-banking system will improve if the e-service quality of any bank is greater than the conventional banking system as a result of their contentment with the e-banking system. it is the quality of service provided by the e-banking system that determines whether or not customers are satisfied with the system. if bangladeshi banks do not succeed in increasing their consumers' confidence in banking transactions, they would face a very bleak future. the level of trust that bangladeshi clients have in the e-banking system is needed to be studied for policy making in the discipline of modern banking. e-banking refers to banking operations that are carried out electronically, such as through the use of a telecommunications network, web technologies, computers, cellular phones, and other electronic devices, rather than in person. nowadays, as a result of the growing importance of the global economy, e-commerce and ebusiness have become more important components of corporate strategy and a powerful stimulus for economic development. the progress of e-banking is dependent on the confidence that clients have in the system. the security status of e-banking and the level of confidence placed in it by clients are intimately tied to one another. it was during this period that the notion of electronic financial services, more generally known as e-banking, came into being. currently, commercial and public banks in bangladesh are taking a variety of efforts to implement e-banking. consumers are drawn to electronic banking technology for a variety of reasons, including convenience, increased ease of use, and, in certain cases, cost savings. e-banking customer satisfaction depends on e-banking infrastructure facility (measured by computer, laptop, mobile, communication network, web technology, communication software, antivirus security facility) and e-banking communication environment (measured by e-banking operation, adoption, growth, social acceptance, and perceived enjoyment). this research is expected to satisfy the objectives as follows:  to determine the e-banking customer trust from the effect of customer satisfaction.  to analyse the effect of demographic variables (type of bank used, gender, and education) on e-banking customer trust.  to investigate the e-banking customer trust in the covid-19 situation (started e-banking during covid-19 and before covid-19 situation) in bangladesh. literature review the overall increase in education, particularly computer literacy, as well as the developing large network of isps will provide an enabling environment that will allow the customer to feel secure when doing banking transactions over the internet (syed, 2011). goudarzi et al. (2013) conducted research in which they evaluated the following: according to the data, trust has a beneficial impact on the uptake of internet banking services by consumers. furthermore, the findings indicate that there are a variety of elements that influence confidence in electronic services. the vast bulk of the study has been carried out in the context of internet-based banking. with this research as a foundation, the review offered in this paper provides an overview of the key characteristics that may influence people's trust in online banking services in general. redwanuzzaman and islam (2013) found that the number of people who utilize electronic banking is growing considerably. it has, however, gained remarkable popularity among bank customers in recent years, and it is hoped that this popularity will continue to grow day by day as the product is nurtured by expert bankers. the perceived utility, social impact, and perceived enjoyment were the significant predictors of persons' propensity to use online banking services in bangladesh (islam & ahmed, 2020). the findings also revealed that perceived utility had the greatest significant impact on an individual's behavioral intention to use online banking in this nation, outweighing social influence by a factor of two to one. shahriar (2014) conducted a study and discovered in contrast to international banks, internet-based banking has only lately been offered by a number of big private and national banks, as well as certain regional banks. even though many banks have made significant investments in online banking, the adoption of internet banking has not been as rapid as anticipated. in bangladesh, clients do not have a sufficient understanding of e-banking, which is being provided by the banking industry in the country. customer acceptance and usage of e-banking technologies are connected to both individual consumer traits as well as a specific technology. in general, customer satisfaction with ebanking and banking issues are both high (hammoud et al., 2018). bank management is responsible for ensuring the security of e-banking transactions for not only customers but also for their bank employees (muhammad & munir, 2017). e-banking provides several benefits to the bangladeshi banking sector; nevertheless, the findings also revealed that bangladeshi clients lack sufficient awareness about the services provided by the banking industry in bangladesh through electronic banking (hasan et al., 2010). in bangladesh, the security and privacy components of the system must be enhanced for the proliferation of e-banking (mohiuddin, 2014). if the security and privacy concerns are addressed, the future of e-banking has the potential to be very lucrative. it is anticipated that the future of electronic banking will be a system in which customers will be able to communicate with their banks "worry-free," and in which institutions would operate under a single set of rules. mohiuddin (2015) discovered in his research that dealing officers of banks are not fully acquainted with their desk work, according to the findings. it has been noticed that the country would gain from the effective implementation of e-business and e-banking since this will aid in the increase of overall productivity in the country. additionally, the monetary benefit realized by both the manufacturer and the client may have a reasonable and favorable influence on the country's gross domestic product. e-business, particularly with the assistance of e-banking, has the potential to help bangladesh's economy grow more satisfyingly for its consumers. attitudes about internet banking are favorably influenced by ideas about trust and privacy (ashraf et al., 2010). however, attitudes toward internet banking are not shown to be significantly influenced by internet banking behavior. normalizing attitudes have a favorable impact on subjective norms, which in turn have an impact on internet banking behavior. similarly, views about one's own ability to control one's behavior with internet banking have a good effect on perceived behavioral control, which in turn has a positive chowdhury et al., indian journal of finance and banking 10(1) (2022), 45-53 47 effect on real online banking behavior. hoque (2012) discovered in his study that there is a widespread consensus amongst singaporeans that the internet is a handy medium for information search and buy transactions. the respondents with higher levels of education appear to be less concerned about security risks. they also believe that online buying offers better pricing and more cost savings than traditional purchasing. females express great dissatisfaction with the inability to enjoy a physically satisfying buying experience while purchasing online. skvarciany and jurevičienė (2018) in a study found that the respondents' poll, the factor that is essential for trust-building differs in each of the analyzed countries: in lithuania, information and the bank, in latvia, the website, and in estonia, the bank is the item that is important for trust-building. according to the experts, the e-banking system is the most effective factor in the trust-building process in lithuania and latvia, while the website is the most important component in estonia. the following constraints apply to this investigation: the online survey of individual customers (however, because internet banking is geared toward internet users, this limitation is not critical); the analysis of only the trust-building criteria that have a positive impact; and the assessment of only the subfactors by experts were the only limitations. bangladeshi banks are performing their e-banking services with the assistance of non-technical personnel (sadekin & shaikh, 2016). the majority of bangladeshi clients, both male, and female, are unaware of the importance of e-bank security. many of them do not have access to a computer at their place of abode. female users are more conscientious than their male counterparts. low-educated persons are hesitant to do e-banking transactions, according to the findings of sadekin et al. (2019). customers' confidence depends on a variety of factors, including security measures, customer awareness, educational qualification, verification of e-transactions, the quality of e-services provided by banks, and the behavior of bankers. it is also possible that consumers' trust may be diminished if they have difficulty in making an electronic transfer, which would result in decreased confidence. bangladeshi e-banking study reveals that the bare minimum of manpower is required for banking (sadekin & shaikh, 2015). compared to traditional banking, e-banks require the least amount of personnel. customers who withdraw and deposit money from atm booths are concerned about being robbed by a hijacker. it is not safe to use any of the atms operated by bangladeshi banks. privacy one of the most pressing issues of internet users is their privacy (cranor, 1999). the integration of financial services into the internet has heightened this level of anxiety (chen et al., 2016). privacy is defined as the right not to have one's inner life and affairs exposed to the public eye or otherwise infringed under tort law. as technology has progressed, how privacy has been preserved and compromised has evolved in parallel. in the case of some technologies, such as the internet, the greater ability to exchange information might result in the development of new methods for violating people's privacy. the first publication to advocate for the privacy of personal information was warren and brandeis (1989), who argued that an individual should have complete protection in both person and property. furthermore, this is the most crucial reason why bank customers do not wish to do online banking transactions via the internet. even though conceptions of privacy are fundamental to understanding individual behavior on the internet, the bulk of privacy concerns associated with internet banking appears to be governed by the property connection between privacy and confidentiality. in the case of the gvu internet surveys conducted in 1997, the results revealed that 53 percent of online clients are concerned about commercial websites collecting their personal information, and 66 percent do not register with the website out of concern that their personal information will be misused (gvu, 1997). the topic of privacy has been debated in various forms and circumstances for more than a century by a diverse range of stakeholders including attorneys, philosophers, sociologists, psychologists, economists, technologists, politicians, and others. developing privacy-preserving social network applications for a privacy-threat model that can be used to improve the security of stakeholders, including attorneys, philosophers, sociologists, psychologists, economists, technologists, politicians, and others by identifying the issues at stake related to the processing of personally identifiable information (weiss, 2009). weiss's (2009) in his paper describes the major requirements for developing privacy-preserving social network applications, as well as the privacy-threat model. trust trust refers to the willingness to be exposed to the actions of another party in the expectation that the other will perform a specific action important to the person who has placed their trust in them, regardless of the person's ability to monitor or control the actions of the other party (dwyer et al., 2007). a positive interpersonal connection can only be established by ongoing reciprocal interaction on both sides of this argument. acknowledgment of the role of trust as a major driver for electronic transactions is growing in both the academic and corporate realms (bhattacherjee, 2002; lim et al., 2012). two factors contribute to the success of online transactions: first, the ability of the customer to trust the merchant. first and foremost, online transactions frequently need the exchange of sensitive personal, business, and financial information between the parties involved in the transaction (lee & turban, 2001). second, with online transactions, clients often trade with people with whom they have had little or no prior encounter. this is especially true for small businesses (pavlou & gefen, 2004). hypothesis and conceptual framework development h1: there is a significant effect of communication infrastructure facility on e-banking customer satisfaction. h2: there is a significant effect of the e-banking communication environment on e-banking customer satisfaction. h3: there is a significant effect of e-banking customer satisfaction on e-banking customer trust. h4: there is a significant effect of e-banking customer trust on the demographic variable (type of bank used, gender, education). chowdhury et al., indian journal of finance and banking 10(1) (2022), 45-53 48 h5: there is a significant effect of e-banking customer trust in the covid-19 situation (started e-banking during covid-19 situation and before covid-19 situation). from the above discussion and review of literature, a research framework can be developed. the framework is as follows: methods a survey questionnaire was developed from the literature review to conduct the study. the developed survey questionnaire was pre-tested with 12 respondents. then necessary corrections and modifications were made according to the suggestion of the respondents. then the questionnaire was distributed among the 460 e-banking customers selected by stratified random sampling in randomized block design via hand-to-hand and e-mail. the collected response data are coded (fivepoint likert scale ranging from 1 = strongly disagree with the opinion to 5 = strongly agree with the opinion) in ibm spss statistics 20 and ibm spss amos 22 software. among the coded response data, 400 response data are selected for final analysis (as some respondents answered all the questions are the same rank and did not answer many questions). among the valid respondents, 108 are intermediate qualifications (now an undergraduate students), 168 are bachelor qualifications (now doing masters) and 124 are master's qualifications (now in service). 232 responders are male and 168 respondents are female, whereas 248 respondents are from private banks and 152 respondents are from a public bank in the data set. also, 152 respondents started e-banking during the covid-19 period (less than 2 years of e-banking experience) and 248 respondents started e-banking before the covid-19 period (more than 2 years of e-banking experience). the descriptive analysis value with the frequency of each response variable is calculated. factor analysis with cronbach's alpha value of each factor and kaiser-meyer-olkin measure for sampling adequacy are conducted with all the response variables to classify them into challenge factors. then structure equation model (sem) is developed to identify factors that influence the performance of online satisfaction. also, kolmogorov smirnov test, shapiowilk test, mannwhitney test, kruskal-wallis test, and least significant difference (lsd) test are conducted to determine the significant difference in the performance of online satisfaction with demographic variables. finally, the online opportunity creation is measured from the performance of the online satisfaction factor in the covid-19 situation. result and discussion the descriptive statistics (n, sum, max, min, mean and standard deviation) results are shown in table 1. table 1. descriptive analysis result of questionnaire variables sl. no questionnaire variable name n min max mean standard deviation a e-banking customer trust 1 the grade you trust on e-banking ebanktrust 400 2 5 3.40 1.064 b e-banking customer satisfaction e-banking customer trust e-banking customer satisfaction communication infrastructure facility e-banking communication environment types of bank gender education before covid-19 during covid-19 demographics e-banking started h1 h2 h3 h4 h5 dependent variable independent variables figure 1. research framework chowdhury et al., indian journal of finance and banking 10(1) (2022), 45-53 49 1 are you satisfied with the service quality of e-banking satisfy1 400 1 5 3.28 1.045 2 are you satisfied with the security of ebanking? satisfy2 400 1 5 3.09 1.147 3 are you satisfied with e-banking network facilities? satisfy3 400 1 5 3.22 1.115 c communication infrastructure facilities 1 the facility of tele communication network facility1 400 2 5 3.70 0.959 2 the facility of web technology facility2 400 1 5 3.18 1.067 3 the facility of communication software facility3 400 1 5 3.15 1.009 4 computer / laptop / tab / cellular phone facility4 400 1 5 3.25 1.123 5 the facility of antivirus security facility5 400 1 5 3.06 0.983 d e-banking communication environment 1 e-banking operation environment1 400 1 5 3.19 1.098 2 adoption of e-banking environment2 400 1 5 3.21 0.998 3 growth of e-banking environment3 400 2 5 3.72 0.922 4 social acceptance environment4 400 1 5 3.13 1.203 5 perceive e-banking enjoyment environment5 400 1 5 3.14 1.045 from the above descriptive table, the mean and standard deviation for e-banking customer trust is 3.40 and 1.064, for e-banking customer satisfaction mean and standard deviation variation is 3.09 to 3.28 and 1.045 to 1.147, for e-banking communication facilities mean and standard deviation variation are 3.06 to 3.70 and 0.959 to 1.123 and for e-banking communication environment mean and standard deviation variation are 3.13 to 3.72 and 0.922 to 1.203 respectively. the result shows that the mean and standard deviation values vary with overlapping each other, so factor analysis may be conducted to test the questionnaire and to classify the questionnaire into different factors, which is demonstrated in table 2. table 2. factor analysis and cronbach's alpha values of response variables rotated component matrixa factor variables component cronbach's 1 2 3 4 alpha e-banking environment4 0.859 0.882 communication environment1 0.830 environment environment2 0.826 environment5 0.817 environment3 0.734 communication facility3 0.868 0.785 infrastructure facility4 0.846 facilities facility5 0.784 facility2 0.613 facility1 0.503 e-banking satisfy3 0.863 0.783 customer satisfy2 0.835 satisfaction satisfy1 0.761 e-banking customer trust ebanktrust 0.885 not applicable extraction method: principal component analysis. rotation method: varimax with kaiser normalization. a. rotation converged in 5 iterations. in the factor analysis, the kaiser-meyer-olkin measure of sampling adequacy value is 0.738 (significance level 0.000). so, we can apply the factor analysis method to divide the response variable into different factors. in table 2, (factor analysis) the survey response values are classified into four factors such as e-banking communication environment (factor loading 0.859 to 0.734), communication infrastructure facilities (factor loading 0.868 to 0.503), e-banking customer satisfaction (factor loading 0.863 to 0.761) and e-banking customer trust (factor loading 0.885) respectively. the factor loading result shows all factor loadings are greater than 0.400, which indicates all measurements for each factor have good reliability. the cronbach's alpha value of each factor as e-banking communication environment is 0.882, communication infrastructure facilities is 0.785, and e-banking customer satisfaction respectively (all the cronbach's alpha values are > 0.7). for the e-banking customer trust factor, cronbach's alpha value is not calculated as there is only one questionnaire. it indicates that the survey response with factors is most reliable and consistent. based on the above factor analysis result, a structural equation model of e-banking customer satisfaction and e-banking customer trust with demographic variables is developed (figure 1). chowdhury et al., indian journal of finance and banking 10(1) (2022), 45-53 50 figure 2. structural equation model of e-banking satisfaction and e-banking customer trust with demographic variables from the above structure equation model, the factor loadings for communication infrastructure facilities is 1.37 – 2.49, for e-banking communication environment is 0.62 – 1.32, and for e-banking, customer satisfaction is 1.00 – 1.60 respectively. here all the factor loadings are very high and significant (p < 0.05). the error variance for communication infrastructure facilities, e-banking communication environment, e-banking customer satisfaction, and e-banking customer trust are 0.28 to 0.87, – 0.05 to 0.66, 0.14 to 0.75, and 0.75 respectively. the covariance values are 0.17 to 0.43, which are also significant (p < 0.05). in the model, χ2 /df is 1.058 (which is < 3), comparative fit index (cfi) value is 0.988 (which is > 0.9), incremental fit index (ifi) is 0.988 (which is > 0.9), tucker lewis index (tli) is 0.986 (which is > 0.9), root mean square error of approximation is 0.0324 (which is < 0.08). here, the model meets all the standards of the survey and hence the model is well-fitted. the path coefficient of communication infrastructure facilities to e-banking customer satisfaction is 0.27 (p < 0.192). as the p-value is greater than 0.05, there is not enough evidence to reject hypothesis (null) 1 for communication infrastructure facilities. so, the communication infrastructure facilities factor has no significant effect on the e-banking customer satisfaction. the path coefficient of e-banking communication environment to e-banking customer satisfaction is 0.17 (p = 0.024). as the p-value is less than 0.05, hypothesis (null) 2 is rejected for e-banking communication environment. so, the e-banking communication environment factor has a positive significant effect on e-banking customer satisfaction. the path coefficient of e-banking customer satisfaction to e-banking customer trust is 0.44 (p = 0.004). as the p-value is less than 0.05, hypothesis (null) 3 is rejected for e-banking customer satisfaction. so, the e-banking customer satisfaction factor has a positive significant effect on the e-banking customer trust. the mean value of the e-banking customer trust (400 observations) variable is 3.40 with a standard deviation is 1.064. the test statistic value of kolmogorov smirnov test is 0.227 (p = 0.000) and shapiowilk test is 0.862 (p = 0.000). as the p values are less than 0.05, the response values of the e-banking customer trust variable are not normally distributed. so, mann-whitney test and kruskal-wallis test are conducted to determine the significant difference in e-banking customer trust for demographic variables (type of bank used, gender, education) and covid-19 situation. table 3. e-banking customer trust with demographic variables and covid-19 situation measured variable measured value number of observations mean of ebanking customer trust the standard deviation of ebanking customer trust test teststatistic value sig. (2 tail) e-banking customer trust normality test 400 3.40 1.064 kolmogorov smirnov test 0.227 0.000 shapiowilk test 0.862 0.000 type of private bank 248 3.66 1.007 mann3.194 0.001 bank used public bank 152 2.97 1.026 whitney test (z) gender male 232 3.50 1.047 mann1.154 0.249 female 168 3.26 1.083 whitney test (z) educational intermediate 108 2.93 0.874 kruskal7.411 0.025 qualification bachelor’s degree 168 3.55 1.131 wallis test (chi master’s degree 124 3.61 1.022 square) covid-19 situation started e-banking during covid-19 situation 152 3.92 1.100 mannwhitney test (z) 3.704 0.000 chowdhury et al., indian journal of finance and banking 10(1) (2022), 45-53 51 measured variable measured value number of observations mean of ebanking customer trust the standard deviation of ebanking customer trust test teststatistic value sig. (2 tail) started e-banking before the covid19 situation 248 3.08 0.911 the path coefficient of the type of bank used for e-banking customer trust is 0.51 (p = 0.004). as the p-value is less than 0.05, hypothesis (null) 4 is rejected for the type of bank used. so, the type of bank used has a significant effect on the e-banking customer trust. the mean standard deviation value of e-banking customer trust for the private bank (62 observations) is 3.66 ± 1.007 and for the public bank (38 observations) is 2.97 ± 1.026. so, the result shows e-banking customer trust is higher in private banks than that public banks. the mann–whitney test (z) statistic is 3.194 (p = 0.001). as the p-value is less than 0.05, so the e-banking customer trust value of the private bank is significantly higher than that of a public bank. the path coefficient of gender to e-banking customer trust is 0.30 (p = 0.086). as the p-value is greater than 0.05, there is not enough evidence to reject hypothesis (null) 4 for gender. so, gender has no significant effect on ebanking customer trust. the mean standard deviation value of e-banking customer trust for males (59 observations) is 3.50±1.047 and for the public bank (42 observations) is 3.26± 1.083. so, the result shows e-banking customer trust is higher in males than females. the mann–whitney test (z) statistic is 1.154 (p = 0.249). as the p-value is greater than 0.05, so the e-banking customer trust of the male is the same as the female. the path coefficient of educational qualification to e-banking customer trust is 0.24 (p = 0.037). as the p-value is less than 0.05, hypothesis (null) 4 is rejected for educational qualification. so, educational qualification has a significant effect on e-banking customer trust. the mean standard deviation value of e-banking customer trust for intermediate respondents is 2.93 ± 0.874, for bachelor's degree respondents is 3.55 ± 1.131 and for master's degree respondents is 3.61 ± 1.002. so, the result shows e-banking customer trust is highest in master's degree respondents and lowest in intermediate-level respondents. the kruskal-wallis test (chi square) statistic is 7.411 (p = 0.025). as the p-value is lower than 0.05, so the e-banking customer trust is different for different education levels. to determine the significant difference between e-banking customer trust at different education levels least significant difference (lsd) is calculated. table 4. lsd of e-banking customer trust with educational qualification dependent variable: ebanktrust lsd education (i) education(j) mean difference (i-j) std. error sig. intermediate bachelor’s degree -.622* .255 .017 master’s degree -.687* .272 .013 bachelor’s degree intermediate .622* .255 .017 master’s degree -.065 .245 .790 master’s degree intermediate .687* .272 .013 bachelor’s degree .065 .245 .790 *. the mean difference is significant at the 0.05 level. from the above lsd table, the difference between the e-banking customer trust value for intermediate and bachelor's degrees is 0.622 (p = 0.017) and for intermediate and master's degrees is 0.687 (p = 0.013). as the p values are less than 0.05, there is a significant difference in the e-banking customer trust value of intermediate from both bachelor's and master's degree respondents. but the difference between the e-banking customer trust value of the bachelor's degree and master's degree is 0.065 (p = 0.790). as the p values are greater than 0.05, there is no significant difference in the ebanking customer trust value of bachelor's degree and master's degree respondents. the path coefficient of covid-19 situation (started e-banking during covid-19 situation and before covid-19 situation) to e-banking customer trust is 0.66 (p < 0.000). as the p-value is less than 0.05, hypothesis (null) 5 is rejected for the covid-19 situation. so, the covid-19 situation has a significant effect on the e-banking customer trust. the mean standard deviation value of e-banking customer trust for started e-banking during the covid-19 situation is 3.92± 1.100 and for started e-banking before the covid-19 situation is 3.08± 0.911. so, the result shows e-banking customer trust is higher in started e-banking during the covid-19 situation than that of started e-banking before the covid-19 situation. the mann–whitney test (z) statistic is 3.704 (p < 0.000). as the p-value is less than 0.05, the e-banking customer trust value of started e-banking during the covid-19 situation is significantly higher than that of started e-banking before the covid-19 situation. summary of findings and recommendations  the customers are satisfied with the communication infrastructure facilities so e-banking has the opportunity to grow rapidly in the next future days, especially in the pandemic situations.  the e-banking communication environment has a positive significant effect on e-banking customer satisfaction. so, there is a prospect that the proliferation of the e-banking communication environment will lead to the enhancement of customer satisfaction.  the e-banking customer satisfaction factor has a positive significant effect on the e-banking customer trust. so, with the increase in customer satisfaction, the e-banking customer trust will be enhanced. chowdhury et al., indian journal of finance and banking 10(1) (2022), 45-53 52  the e-banking customer trust value of the private bank is significantly higher than that of the public bank. so, the public bank authority may take necessary action to increase customer satisfaction, as a result, to increase the e-banking customer trust for the rapidly growing e-banking process to make a profit.  both male and female customers equally trust the rapidly growing e-banking transaction process. so, in the future, the e-banking transaction process will grow more in the safe covid-19 pandemic situation.  result shows, that bachelor's degree, and master's degree customers have more trust in the e-banking process than that of the intermediate level customers. so, the e-banking transaction process awareness program may be conducted in that segment of the customers.  customers who started e-banking transactions during covid-19 own more trust value than the customers who started transactions before the pandemic conclusion the study shows, that the communication infrastructure facilities factor has no significant effect on e-banking customer satisfaction. so, the communication infrastructure facilities are needed to be improved for e-banking for greater customer satisfaction. e-banking communication environment has a positive significant effect on e-banking customer satisfaction. it is revealed that the e-banking customer satisfaction factor has a positive significant effect on the e-banking customer trust. it is also observed that the e-banking customer trust value of the private bank is significantly higher than that of the public banks. both male and female customers equally trust the rapidly growing e-banking transaction process. the analysis indicates that better educated customers like bachelor and master degree holder customers hold more trusts on the e-banking process than the intermediate level customers. the started e-banking during the covid-19 situation has higher e-banking customer trust value than the started e-banking before the covid-19 situation. so, the e-banking transaction process should rapidly be growing more and more in the covid-19 pandemic situation in the future for ensuring sound health. author contributions: conceptualization, m.s.a.c., m.s.i., m.s.h., m.s.r.c. and m.e.h.; data curation, m.s.a.c.; methodology, m.s.a.c. and m.s.h; validation, m.s.a.c. and m.s.h; visualization, m.s.a.c; formal analysis, m.s.a.c.; investigation, m.s.a.c.; resources, m.s.a.c.; writing – original draft, m.s.a.c. and m.s.h; writing – review & editing, m.s.a.c. and m.s.h; supervision, m.s.a.c. and m.s.h; project administration, m.s.a.c. and m.s.h; funding acquisition, m.s.a.c., m.s.i., m.s.h., m.s.r.c., and m.e.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. 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 ashraf, m. a., alam, m. m. d., & noor, m. s. i. 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(2009). privacy threat model for data portability in social network applications. international journal of information management, 29(4), 249-254. https://doi.org/10.1016/j.ijinfomgt.2009.03.007 publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2022 by the authors. licensee cribfb, u.s.a. 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 12(1) (2022), 1-8 1 finance and banking ijfb vol 12 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa depict the role of factors affecting behavior of investors toward setting the investment avenues and choosing the best investment platform: an empirical analysis suraj sharma (a)1 ashish tripathi (b) (a) assistant professor and research scholar, ips academy, ibmr, sanwer, indore, vit universitybhopal, madhya pradesh, india; e-mail: surajsharmapgdm@gmail.com (b) professor and dean, vitbs, vit universitybhopal, madhya pradesh, india; e-mail: ashish.tripathi@vitbhopal.ac.in.ac.in a r t i c l e i n f o article history: received: 18th october 2022 accepted: 10th december 2022 online publication: 16th december 2022 keywords: factors influence, investors behavior, financial investment opportunities/ avenues, investment platform, financial behavior & attitude jel classification codes: g2, g4, g5, d1, m5, r3 a b s t r a c t the present study depicts the role of various factors affecting the behavior of investors towards set investment platforms and their priorities in choosing the best investment avenues. its first aim is to get fully acquainted with various factors: demographics and other influencing factors affecting investors' behavior towards choosing investment avenues. the second aim is to find the best investment platform in the indian financial system. the third one perceives investors' perceptions and behavior while choosing their best investment priority and selecting the best investment platform. and fourth measures the relationship between various factors and investment avenues. the study mainly concerns and focuses on generating new epistemology (knowledge) in financial investment decisions with the effect of influencing factors for choosing the best investments, simultaneously getting a conceptual framework with financial behavior & attitude glimpse. this study hypothesizes the demographic factors affecting behavior or not and measures relationships between other investment influencing factors & investment avenues. the study has conducted an empirical analysis based on observation, personal experience, and data collection through generated questionnaire links shared with the target audience. the target audience is housewives, daily wage earners, working professionals, government employees, and businessmen, with a sample size of 160. the data analysis and measurement are based on percentage analysis, t-test, and anova. © 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 investor behavior is dependent on the income level of individual investors. the income factor is one of the most important factors affecting investors' behavior toward selecting investment priority. investment decisions are based on the uncertainty of the future state (raaij, 2016). although, the study elaborates fully on an acquaintance of factors affecting the behavior of investors toward the selection of investment avenues. investors can be any individual, such as a housewife, daily wage earner, working professional/service class, business profession of self own business/ ventures, government employee, etc. before making an understanding of financial factors affecting the behavior of investors: firstly, we can know about a conceptual glimpse of behavioral finance and then go for getting knowledge about investment factors. this paper provides the framework of investment behavior and the theory of investment to maximization of profit (jorgenson, 1967). in the world of era representation, the latest and one of the essential tasks is to make decisions for an investment of funds in the right direction as per our desire for getting favorable returns with lesser risk. these things come from the individual human mind, those who want to take risks and return; this is called an investor. investor behavior is rational and irrational for making certain decisions for investing. rational investor psychology favors financial knowledge, while irrational investor logic has opposed rational investors' minds. behavioral finance is one of the most recent and emerging financial branches. to inculcate knowledge of the human 1corresponding author: orcid id: https://orcid.org/0000-0001-8342-7242 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v12i1.1864 to cite this article: sharma, s., & tripathi, a. (2022). depict the role of factors affecting behavior of investors toward setting the investment avenues and choosing the best investment platform: an empirical analysis. indian journal of finance and banking, 12(1), 1-8. https://doi.org/10.46281/ijfb.v12i1.1864 https://orcid.org/0000-0001-8342-7242 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v12i1.1864 https://orcid.org/0000-0001-9480-0057 sharma & tripathi, indian journal of finance and banking 12(1) (2022), 1-8 2 mind and physiological traits of investor behavior for opt desire investment opportunities. behavioral finance theories presented the study of the human mind, social science discipline as anthropology, human psychology & sociology and encouraged empirical research on investor’s behaviors (singh & yadav, 2016). behavioral finance: in the indian context, the traditional behavior of investors was rational. however, at present, investors' behavior is rational and irrational. financial education spreads various investment avenues. behavioral finance is a finance of the human mind or expresses the psychological decision to select the best investment platform to perform financial deeds. it has also covered physiological decisions, overconfidence, under and reaction, herd behavior, mental accounting, prospect, regret, anchoring, disjunction effect, magical thinking, culture, and social contagion. behavioral finance research is a new paradigm to check the mental ability of investor behavior. many influencing factors affect investors' behavior and perception (singh & yadav, 2016). behavior finance is trying to solve problems related to choosing optimum solutions for investing funds via mental ability, thinking, psychology, and individual behavior. it has traced the epistemology of investment decisions rather than understanding investment avenues. behavioral finance is based on human psychology and human knowledge for making concerning decisions for handling financial activities. financial behavior has given opportunities for financial literacy (marcolin & abraham, 2006). varieties of factors affect investors' behavior in opting for investment platforms. the investor's behavior is influenced by various factors towards investment decisions in banking, insurance companies, post offices, nbfcs, and the financial market (al-tamimi, 2009). some significant factors are influencing the behavior of investors as of now, risk and return, while other factors come from advice & recommendations as well as market growth and economic indication for choosing the best investment avenues for making profits and future financial growth. finally, financial factors help the behavior of investors to make a favorable decision toward the selection of the best investment avenues. investment decisions ignite the best investment platform, but investors' buying behavior is affected by factors, and investment aims to determine return and simultaneously face risk (dhar, 2017). this study part of behavior finances the psychological and sociological factors affecting investment decisions (uslu divanoglu & bagci, 2018). the objective of the study  to observe factors affecting the behavior of investors to set the investment avenues.  to find out the best investment platform chosen by investors.  to get investors' perception towards selecting the best investment priority and investment platform.  to measure the relationship between the demographic factor and investment avenues. literature review research is a scientific investigation based on past and present studies and also imparts knowledge from those studies that have already been conducted. a literature review is a basket of historical and modern studies to get new ideas for the present investigation. there are some essential reviews based on this research: hc (2020) observed the analysis and impact of financial literacy on the investment decisions of sharia bank customers in indonesia. the research methodology is based on validity & reliability test, cronbach alpha, correlation, and multiple regressions. the study has found the positive impact of financial investment decisions on financial knowledge, financial behavior, financial awareness, and financial attitude. the hypothesis tested significant differences between all, such as fk, fb, fa, and fat. the gap was recommended that the bank needs to emerge a wide variety of financial products & services. moreover, for making awareness about financial opportunities among all public outreach & implementing educational programs directly or indirectly via online websites, print media, etc. raut (2020) focused on the past behavior of investors towards investment decisions & financial literacy. data were analyzed based on amos 20.0 using two-step sem (structural equation modeling). the study found two external variables: first financial literacy and second, past behavior of investors. moreover, found a significant effect on all predictive variables and investors highly influenced by social pressures via financial literacy. in the past, behavior showed no significant impact on investors' behaviors of, investment decisions & intentions. the study found a gap between investment opportunities and investors' behavior toward making decisions for the best investment avenues. future studies need to elaborate on financial patterns to make people understand financial opportunities. alaaraj and bakri (2020) focused mainly on the effect of financial literacy in south lebanon. descriptive statistics were identified, and proposed hypotheses were tested using pearson correlation and multi-regression analysis. the result is highly recommended that future study is based on designing financial patterns for other regions and on numerous factors affecting investors' behavior towards making investment decisions and expanding the knowledge amongst all age groups. rodrigues et al. (2019) measured the financial education of individual investors toward used financial products. a quiz game was developed for the analysis of financial situations according to banking websites. this study compared bank clients' basic and advanced financial knowledge and skills. in essential financial literacy, skill is higher and satisfactory but less in the context of bank clients' advanced financial knowledge—moreover, investors' prediction towards less concern about investment and risk. the result was a suggested gap in this research is a contribution to building understanding about advanced financial skills and knowledge. also, future research should be highly classified on investment awareness and recommended for complex financial products and risk patterns on different factor levels. jana et al. (2019) identified social and demographic variables on financial literacy and its impact on the use of financial services. the research methodology used correlation, logit regression, kmo & bartlett's test, and hosmer & leme show test. the study found that financial literacy significantly impacted people of west bengal's use of financial services. moreover, measured occupation, income, educational qualification, and marital status significantly positively impacted the sharma & tripathi, indian journal of finance and banking 12(1) (2022), 1-8 3 financial literacy level of unorganized sectors. moreover, another aspect of the study, financial services, was likely influenced by domicile, income, and financial literacy factors. this study recommendation for upcoming and future research makes the initiative to advance financial knowledge, make financial policy to build concepts in the financial domain, and continue to focus on improving financial literacy and financial inclusion. jain (2018) investigated the role of financial literacy of working women in jaipur city and also measured their understanding of financial products and services offered by the financial institutions & sector. research methodology is based on simple charts and graphs and percentage analysis of factors. the study found that the financial literacy levels of working women were affected by a lack of financial knowledge, attitude, and behavior. as a result, that highly recommended financial literacy for all. arianti (2018) the study found that financial literacy, financial behavior, and investment decisions are based on the income level of investors. research methodology based on the quantitative analysis used in descriptive statistics analysis, data quality test, classical assumption test, multiple linear regression analysis, ftest, t-test, and correlation determination with the help of spss software. this study found no significant effect of financial literacy level on financial investment decisions. at the same time, financial literacy has a significant effect on investors' income behavior towards making investment decisions. the study also indicates that the student's financial knowledge and awareness about financial products were low. this study highly recommended financial literacy not only for students but also for every individual. hence, future studies should be based on spreading financial awareness and knowledge as well as the behavior of investors towards investment will be positive and make understanding accordingly. firli (2017) focused on the conceptual framework of financial literacy in the context of financial knowledge, skill, behavior, awareness, and attitude. the research methodology used the conceptual framework of financial literacy in the contents of tables and charts. the study found the knowledge of factors that influenced the behavior of investors toward investment decisions and also elaborated on the role of financial literacy in indonesia. this study is highly recommended in the future, financial education for all. hence, the future study needs to be a detailed structural overview of financial literacy and will identify factors affecting the behavior of investors as well as find investment avenues for investing. materials and methods hypothesis h1: there is no significant difference between the perception of males and females towards fd, insurance, post office, and real estate h2: there is no significant difference between the perception by age factor towards fd, insurance, post office, and real estate h3: there is no significant difference between the perception by education-based factors towards fd, insurance, post office, and real estate h4: there is no significant difference between the perception by occupational basis towards fd, insurance, post office, and real estate h5: there is no significant difference between the perception by income factor towards fd, insurance, post office, and real estate h6: there is no significant difference between the perception by marital status towards fd, insurance, post office, and real estate h7: there is a significant positive relationship between gender factor and fd influencing factor h8: there is a significant positive relationship between gender factor and insurance influencing factor h9: there is a significant positive relationship between gender factors and post office influencing factor h10: there is a significant positive relationship between gender factor and real estate influencing factor research methodology the research is based on empirical or experience methods. the data has been collected through the basis of a questionnaire with the perception of investors or target audience as housewives, business professionals, working professionals, daily wage earners, and government employees towards the factors influencing the behavior of investors towards the selection of investment avenues. the research design and findings are mentioned below: data sample: the research data has been collected randomly by assigning the target audience through email, whatsapp link share, and personal interviews. the data has been collected in descriptive and demographical objective based. sample size: 160 responses were made by the target population. sample unit: the data have been found in urban and rural areas with particular reference to indore city. data collection: in this research, valuable data has been made based on the primary data collection method; data collection is necessary to accomplish study objectives. results the central part of the research methodology is based on representing facts and figures to accomplish the research objectives. the study firstly represents the percentage analysis used as demographic factors such as gender, age, education qualification, sharma & tripathi, indian journal of finance and banking 12(1) (2022), 1-8 4 annual income, occupation, and marital status in table 1 and simultaneously in table 2 representing the factors affecting behaviors of investors and choosing the best investment priorities by investors to invest in, financial platforms. as per investors' perception, the first investment priority is fd, real estate, life insurance, post office, and all others presenting in t2. table 1. percentage analysis based on demographic factor factor variable percentage gender male 50% female 50% age between 23-35 55% between 36-50 33.75% between 51-60 10% above 60 1.25% education qualification primary and middle school 7.5% 10+2 secondary 11.25% graduation 36.25% post-graduation and doctorate 45% annual income below 1 lakh 30% 1 lack – 2.5 lakh 26.25% 2.5 lack – 5 lakh 26.25% above 5 lakh 17.5% occupation housewife 15% business professional/ self employed 21.25% working professional 52.5% daily wage earner 5% government job 6.25% marital status married 65% unmarried 35% other 0% table 2. factors affecting the behavior of investors towards investment decisions investment priority investment avenues influencing factors on the behavior of investors investment platform 1 fixed deposit (i) fixed-rate of return factor (ii) safety factor (iii) can be used to avail loan (iv) tax benefit factor (v) available of premature withdrawal factor (vi) the convenience of opening bank fd with a saving account (vii) flexible in tenures banking 2 life insurance (i) money back guarantee factor (ii) satisfactory returns factor (iii) coverage risk factor (iv) company goodwill factor (v) the credibility of the agent factor insurance companies 3 real estate (i) cash flows from rentals factor (ii) easy to avail loan facility factor (iii) lower risk factor (iv) best interest rate factor banking and nbfc 4. post-offices savings (i) avail loan facility (ii) premature closure factor (iii) satisfactory return factor (iv) tax benefits factor (v) easy to manageable factor (vi) local accessibility factor (vii) employee response factor post offices 5. gold (i) future gold demand in the family factor (ii) safety for future factor (iii) friend advise and recommendation factor (iv) current market economic indicator factor (v) goodwill. banking 6. mutual fund (i) high promotion by mutual fund services providers, (ii) high return, (iii) low risk in the securities market, (iv) market goodwill, (v) transparency, (vi) liquidity, (vii) volatility and also help for tax benefits. financial market 7. pdf (i) money back guarantee, (ii) satisfactory returns, (iii) high return. banking 8. share, forex, and commodity market (i) financial ratio basis, (ii) recent financial performance, (iii) divided earned by years, financial market sharma & tripathi, indian journal of finance and banking 12(1) (2022), 1-8 5 (iv) management of company policy, (v) structure of the board of directors, (vi) daily report stock exchange gainers and losers, (vii) competence of personalities that have a major share in the company, (viii) recommendation by expert and well-known stock brokers ownership structure of the company, (ix) friend advice (x) predominant family culture in the share market. 10. other savings priority etc. (i) maintain short-term cash flow, (ii) helpful for contingent liability, required for future requirements, (iii) fulfill basic requirements. (iv) investors also prefer other options as per their investment growth and earnings. financial market table 3. one-sample test one-sample test t df sig. (2-tailed) mean difference 95% confidence interval of the difference lower upper gender 37.829 159 .000 1.500 1.42 1.58 age 27.557 159 .000 1.575 1.46 1.69 education qualification 44.188 159 .000 3.188 3.05 3.33 annual income 27.018 159 .000 2.313 2.14 2.48 occupation 33.596 159 .000 2.663 2.51 2.82 marital status 35.690 159 .000 1.350 1.28 1.42 report gender age education qualification annual income occupation marital status mean 1.50 1.58 3.19 2.31 2.66 1.35 n 160 160 160 160 160 160 std. deviation .502 .723 .912 1.083 1.002 .478 table 3 represents the h1, h2, h3, h4, h5, and h6; there is a significant difference between the perception of gender, age group, education qualification, annual income, occupation, and marital status factors and investment avenues; therefore, the null hypothesis has rejected and accept the alternative hypothesis. moreover, there is a significant difference between the perceptions of demographic factors affecting the behavior of investors towards fixed deposits, real estate, life insurance, post office, etc. moreover, finally, gender, age, education qualification, income, occupation, and marital status are highly affected by selected investment avenues such as fixed deposits, real estate, life insurance, and post office deposits. one of the study's objectives has been accomplished towards investors' perceptions with the effect of demographic factors are positive and significant. all factors have highly influenced the behavior of investors toward selecting investment opportunities. table 4. gender and factors on fixed deposit anova: representing h7 sum of squares df mean square f sig. 1. fixed deposit [fixed rate of return] between groups 1.225 1 1.225 1.687 .196 within groups 114.750 158 .726 total 115.975 159 1. fixed deposit/ rd [safety] between groups .625 1 .625 .843 .360 within groups 117.150 158 .741 total 117.775 159 1. fixed deposit/ rd [can be used to avail loan ] between groups .625 1 .625 .946 .332 within groups 104.350 158 .660 total 104.975 159 1. fixed deposit/ rd [tax account ] between groups .625 1 .625 1.036 .310 within groups 95.350 158 .603 total 95.975 159 1. fixed deposit/ rd [availability of premature withdrawal] between groups .400 1 .400 .687 .408 within groups 92.000 158 .582 total 92.400 159 table 4 indicates that the h7 there is a significant positive relationship between gender factor and fd influencing factor are accepted. the highly influencing factors towards the selection of fixed deposits are the availability of premature withdrawal, safety, can be used to avail loan, and lesser influencing factors are tax account and rate of return. sharma & tripathi, indian journal of finance and banking 12(1) (2022), 1-8 6 table 5. gender and factors on real estate anova: representing h8 sum of squares df mean square f sig. 2. real estate(if bought second house) [cash flow from rentals] between groups .225 1 .225 .587 .445 within groups 60.550 158 .383 total 60.775 159 2. real estate(if bought second house) [easy loan ] between groups .025 1 .025 .051 .821 within groups 76.750 158 .486 total 76.775 159 2. real estate(if bought second house) [less risk ] between groups .025 1 .025 .042 .837 within groups 92.950 158 .588 total 92.975 159 2. real estate(if bought second house) [interest rate] between groups .625 1 .625 1.131 .289 within groups 87.350 158 .553 total 87.975 159 table 5 shows that the h8 is accepted that it is genuinely a significant positive relationship between gender factors and real estate influencing factors that affected the behavior of investors towards the selection of real estate investment avenue. the highly influencing factors are the avail easy loan and fewer risk factors simultaneously, cash flow from rental and interest rate affected the behavior of investors towards the selection of real estate investment avenue. table 6. gender and factors on life insurance anova: representing h9 sum of squares df mean square f sig. 3. life insurance [money back guarantee] between groups .100 1 .100 .249 .619 within groups 63.500 158 .402 total 63.600 159 3. life insurance [satisfactory returns] between groups .225 1 .225 .541 .463 within groups 65.750 158 .416 total 65.975 159 3. life insurance [risk coverage] between groups 2.500 1 2.500 3.926 .049 within groups 100.600 158 .637 total 103.100 159 3. life insurance [company goodwill] between groups 1.225 1 1.225 2.542 .113 within groups 76.150 158 .482 total 77.375 159 3. life insurance [credibility of agent ] between groups .900 1 .900 1.935 .166 within groups 73.500 158 .465 total 74.400 159 table 6 shows that the h9 is accepted that it is genuinely a significant positive relationship between gender factors and life insurance influencing factors that affected the behavior of investors towards the selection of life insurance investment avenue. the highly influencing factors are a money-back guarantee and a satisfactory return. however, the lesser influencing factors are the credibility of an agent, company goodwill, and risk coverage factors affecting the behavior of investors towards the selection of post office investment avenue. table 7. gender and factors on post office deposit anova: representing h10 sum of squares df mean square f sig. 4. other post office schemes [loan facility ] between groups .900 1 .900 1.762 .186 within groups 80.700 158 .511 total 81.600 159 4. other post office schemes [premature closure] between groups 1.225 1 1.225 2.231 .137 within groups 86.750 158 .549 total 87.975 159 4. other post office schemes [satisfactory returns] between groups .625 1 .625 1.238 .267 within groups 79.750 158 .505 total 80.375 159 4. other post office schemes [tax benefit] between groups .025 1 .025 .059 .808 within groups 66.950 158 .424 total 66.975 159 4. other post office schemes [easy manageability ] between groups .000 1 .000 .000 1.000 within groups 79.100 158 .501 total 79.100 159 table 7 shows that the h10 is accepted that it is genuinely a significant positive relationship between gender factors and post office influencing factors that affected the behavior of investors towards the selection of post office investment avenue. the high influencing factors are essay to manageability and tax benefits. however, lesser influencing factors are sharma & tripathi, indian journal of finance and banking 12(1) (2022), 1-8 7 satisfactory return, loan facility, and premature closer factors that affected the behavior of investors towards the selection of post office investment avenue. conclusions the study concludes that behavioral investment factors influence investment in fixed deposits, real estate, life insurance, and post office saving. the study first represents the conceptual framework of behavioral finance and investment decisions with influencing factors. secondly, showing the percentage analysis done based on occupational level regarding working professionals is more exciting towards investment. third, the study found the factors influencing the behavior of investors toward positive relations between investment avenues and demographic factors. the future study needs to focus on the other investment avenues, such as the share market, gold, and forex, and opt for new financial investment opportunities with technical and financial investment patterns and design models for investment factors for future investment decisions. the study will be working on financial investment opportunities and spreading awareness about financial products and services towards expanding financial literacy in the modern era. patents we now declare that all the above research is accurate to the best of our ability without plagiarism. author contributions: conceptualization, s.s. and a.t.; methodology, s.s. and a.t.; software, s.s.; validation, s.s. and a.t.; formal analysis, s.s. and a.t.; investigation, s.s. and a.t.; resources, s.s. and a.t.; data curation, s.s. and a.t.; writing – original draft preparation, a.k. and r.k.c.; writing – review & editing, s.s. and a.t.; visualization, s.s. and a.t.; supervision, a.t.; project administration, a.t.; funding acquisition, s.s. and a.t. 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. acknowledgments: not applicable. informed consent statement: not applicable. data availability statement: the data presented in this study are publicly available, and all the sources are mentioned in the manuscript. conflicts of interest: the authors declare no conflict of interest. references arianti, b. f. 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(2018). determining the factors affecting individual investors’ behaviours. international journal of organizational leadership, 7(3), 284-299. http://dx.doi.org/10.33844/ijol.2018.60407 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=0caqqw7ajahckewiom8sr-fv7ahuaaaaahqaaaaaqaw&url=https%3a%2f%2famity.edu%2fuserfiles%2fadmaa%2f195paper%25209.pdf&psig=aovvaw1cnmuig5pnxajrcasx7aee&ust=1671204844430683 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 9(1) (2022), 177-183 177 finance and banking ijfb vol 9 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa public, financial and managerial effects on authority styles in public and private sector: a case study in lic and reliance insurance thirupathi gadaboina (a)1 (a) professor, raja bhahadurvenkata rama reddy institute of technology, affiliated to osmania university hyderabad, india; e-mail: drgthirupathi@gmail.com a r t i c l e i n f o article history: received: 21 january 2022 accepted: 20 march 2022 online publication: 26 march 2022 keywords: authority, authority styles, public and private sectors, dimensions of employees jel classification codes: h81, i13, j24, i18 a b s t r a c t flourishing authority practices like values, virtues, dispositions, attributes, and competencies improve employee outcomes. few authority practices in the form of strategies were selected to achieve better performance. the authority styles were associated with public, financial, and managerial proportions of employees together in public and private sectors would assist the correlation among authority styles and proportions disturbing the authority styles which would be supportive to identify the main important policy variables for recovering the authority styles. the presentation was based on the primary source of data of the public sector, the lic, and the private sector; reliance insurance was chosen voluntarily for the research because of the researcher's awareness of different regions of telangana. the data was gathered using the five points likert scale. the study concluded that authority styles in both sectors managers distinguish the employees under supervision without any wisdom of accountability. © 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 the way flourishing leaders applied the authority quality practices would be influenced by several factors, including their opinions on the circumstances for both working and learning in an organization, their human resources' self-assurance and achievement, and the performance, expectations, and accomplishment stages. the authority practices and arrangement of employees in the firm have become a challenging task. booming authority practices could improve employee performance. employees' outputs can be better by their values, virtues, dispositions, attributes, and competencies. they adopt unique strategies to achieve better performance. the association of authority styles with select proportions of human resources in cooperation with public and private sectors allow the alliance among authority styles and harmonies that are distressing the authority styles, would be supportive of categorizing the essential variables for recovering the authority styles. review of literature the manager's character significantly controls their perception, feel, and transmit to other people. personality traits are liable to be appealing unwavering in middle age and help people proceed indefinitely favoured customs. during the working hours, the manager's character would rarely support subordinates to hold out work roles successfully. at other times same follows (tirmizi, 2002) factors like assurance, long-standing associations, real facts, and understanding, giving particulars to employees, reputation, pioneering approach, and personality had the superior authority on the authority styles. broome and hughes (2006) moral behavior, motivation, achievement-oriented approach, experience, knowledge, directive and participative approach, supportive and situational factors were showing collision on the authority styles (woodbine & liu, 2010); this study explained that companion ability behaviour traits, along with participation authority style, were completely 1corresponding author: orcid id: 0000-0001-6329-8279 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v9i1.1665 to cite this article: gadaboina, t. (2022). public, financial and managerial effects on authority styles in public and private sector: a case study in lic and reliance insurance. indian journal of finance and banking, 9(1), 177-183. https://doi.org/10.46281/ijfb.v9i1.1665 mailto:drgthirupathi@gmail.com http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v9i1.1665 https://orcid.org/0000-0001-6329-8279 gadaboina, indian journal of finance and banking 9(1) (2022), 177-183 178 associated with foremost change. both openness to skill and expressive readiness were significantly and optimistically interrelated with the authority style that the managers used. this research evaluated a significant constructive correlation stuck between the personality of managers, their authority styles, and their most important alteration capabilities (alkahtani, abujarad, sulaiman, & nikbin, 2011). the authority had a bang in achieving quality and quality control, individual grip, dedication, and involvement in running the excellence surrounded by principles and ideas instead of scheming by monster force. authority can be learned through practice and can be well-read with a stuffed result on merit. therefore leaders represented an encouraging environment to perquisite the presentation and competence of the supporters (lettieri, 1997). research objective  to evaluate the association of select proportions of human resources in public and private sectors. hypothesis framed  there is no significant association between select proportions of human resources in public and private sectors. methodology the primary data was gathered from the employees of the selected organizations in public and private sectors, this viz., lic and reliance insurance. journals, books, and thesis provided the secondary data. the reliance insurance was selected from the private sector, and the lic was selected from the public sector for the analysis. sampling reliance insurance was selected in the private sector, and in the public sector, the lic was chosen for the study. amongst the different regions of telangana, the districts of warangal, karimnagar, nizamabad, and khammamare were selected for the analysis. using stratified random sampling techniques, the workers of both reliance and lic insurance have been preferred. the study is evaluated with the sample size by adopting the below formula: n =[t2 x p (1-p)] / m2 in this research, employees are considered as respondents here 13.04% of the respondents of lic and 13.04% of the respondents of reliance insurance were chosen for the study. the data were evaluated from 300 respondents of the public insurance sector and 300 respondents of the private insurance sector. finally, the sample size considered for the study is 600. tools considered for the study the authority styles are calculated with the likert scale. the period considered for the analysis is 2020-2021. profile of lic with almost 80% of the market share, lic is considered the most victorious public sector organization in india. on 1 september 1956, the life insurance corporation of india was established when the parliament of india accepted the life insurance of india act that publicly owned the insurance industry in india. to generate india's state-owned life insurance corporation, 245 insurance companies and provident societies were amalgamated. profile of reliance insurance reliance life insurance is a branch of reliance group and is a reliance capital company. considering the net worth, it is integrated in india's most important private-sector financial services companies and positioned with the leading 3 private sector financial services and banking companies. reliance capital has benefited from asset administration and mutual funds, stockbroking, life, general insurance, proprietary investments, private equity, and additional financial services actions. reliance group has started with equity of rs. 2 billion into indian general insurance with its financial arm reliance capital ltd. without a foreign tie-up, it is considered the foremost insurance company in india. it is also the earliest private nonlife insurance product company to be certified to function. results and discussion table 1. analysis representing the socio-financial characteristics of respondents/ demographic factors demographic factors objects no. of respondents(lic) percentage no: of respondents(reliance insurance) percentage gender male 240 80 273 91 female 60 20 27 9 total 300 100 300 100 age 21-25 years 21 7 57 19 26-30 years 39 13 84 28 31-35 years 48 16 72 24 36-40 years 99 33 27 9 41-50 years 81 27 57 19 gadaboina, indian journal of finance and banking 9(1) (2022), 177-183 179 50+ years 12 4 3 1 total 300 100 300 100 monthly income rs.10001-15000 15 5 22 7 rs.15001-20000 24 8 27 9 rs.20001-25000 63 21 75 25 rs.25001-30000 75 25 92 31 rs.30001-35000 72 24 18 6 rs.35001 and above 51 17 66 22 total 300 100 300 100 marital status married 267 89 180 60 unmarried 33 11 120 40 total 300 100 300 100 education secondary 24 8 17 6 higher secondary 32 10 32 11 graduation 87 29 107 35 post-graduation 141 47 132 44 professional 16 5 9 3 diploma 5 1 3 1 total 300 100 300 100 employees hga 99 33 93 31 assistant 84 28 90 30 aao 69 23 57 19 ao 36 12 45 15 do 9 3 15 5 bm 3 1 0 0 total 300 100 300 100 source: calculated from primary data interpretation among 300 respondents of lic, almost 80% of respondents are males, and the leftover 20% of respondents are females. nearly 91% of the respondents from reliance insurance are males, and the remaining 9% are females. in lic, about 33% of respondents come under the age group of 36-40 years then by 41-50 years are 27%, 31-35 years 16.00 percent, 26-30 years 13%, 21-25 years 7% and above 50 years 4%. in reliance insurance, about 28% of respondents come under the age group of 26-30 years then by 31-35 years are 24%, 21-25 years and 41-50 years are 19%, 36-40 years are 9% and above 50 years are 1%. among 300 respondents of lic, about 25% of respondents come under the monthly income group of rs. 2500130000 later by rs. 30001-35000 are 24%, rs. 20001-25000 are 21%, above rs. 35000 are 17%, rs. 15001-20000 are 8% and rs. 10001-15000 are 5%. in reliance insurance, respondents belong to the monthly income group of rs. 20001-25000 are 25% observed by rs. 25001-30000 are 31%, above rs. 35000 are 22%, rs. 15001-20000 are 9%, rs. 10001-15000 are 7% and rs. 3000135000 are 6%. about 89% of the total respondents in lic are married, whereas the leftover is 11% are unmarried. concerned with reliance insurance, 60% of respondents are married, and the remaining 40% of the respondents are unmarried. in lic, almost 47% of respondents are post-graduates, 29% are graduates, and 10% have completed their higher secondary and 80% of the respondents have done their secondary, 5% of the answerers are professions, and 1% has completed their diploma. in reliance insurance, about 44% of respondents are post-graduates, 35% are graduates, 11% have finished their higher secondary, 6% have done their secondary education, 3% of the answerers are professionals, and 1% have done their diploma. among 300 respondents of lic, almost 33% of respondents are hga, and 28% are assistants, aao are 23%, ao is 12%, do are 3%, and bm is 1%. in reliance insurance, about 31% of respondents are hgaand then 30% are assistants, aao is 19, ao are 15%, do are 5%, and bm is zero. (cfa) for proportions disturbing authority styles in lic the (cfa) is accepted for everyproportiondistressingauthority style in lic furthermore the outcomes are obtained in table 2. table 2. (cfa) for proportions distressing authority styles in lic proportions chi-square value p-value gfi cfi rmr rmsea public 5.1 0.6 0.8 1.00 0.09 0.00 financial 4.9 0.3 0.8 1.00 0.08 0.00 managerial 5.2 0.3 0.8 1.00 0.08 0.07 source: calculated from primary data ten items give the public dimensions, and as per the cfa results, this indicates an excellent fit with the reliable value of 2which represents a perfect fit. gadaboina, indian journal of finance and banking 9(1) (2022), 177-183 180 concurrent and discriminate strength for proportions disturbing authority styles in lic besides, satisfactoriness of capacity model for proportions disturbing authority styles in lic is as well considered assuming the criterion of composite reliability (cr), average variance extracted (ave) along with discriminate validity (dv) of the variables, and the final outputs are given in table 3. table 3. build dependability in support of proportions distressing authority styles in lic source: calculated from primary data the collective constancy for proportions worrying authority styles in lic is higher than the normal value of 0.7. the general difference evaluated is higher than the least value of 0.50. the discriminate strength is more than 0.6, signifying that concurrent strength is established for proportions that are distressing authority styles in lic. (cfa) for proportions distressing authority styles in reliance insurance the (cfa) was achieved for every dimension distressing authority styles in reliance insurance, in addition to the findings are given in table 4. table 4. (cfa) for proportions distressing authority styles in reliance insurance source: calculated from primary data the result depicts an unconditional to the public dimensions of cfa proportions, which fit an exceptional 2. concurrent and discriminate strength for proportions disturbing authority styles in reliance insurance besides, the satisfactoriness of the capacity model for proportions distressing authority styles in reliance insurance in addition to calculating and assuming the standard of composite reliability (cr), average variance extracted (ave) in addition to discriminant validity (dv) of the calculation along with the outputs are accessible in table v. table 5. build dependability for proportions distressing authority styles in reliance insurance source: calculated from primary data the outcomes signify that combined reliability for proportions distressing authority styles in reliance insurance is bigger than the regular value of 0.70, the standard difference evaluated is larger than the slightest value of 0.50, and discriminate strength is privileged than 0.60 demonstrating that concurrent strength is established for proportions distressing authority styles in reliance insurance. public proportions the public proportions covering trust, teamwork, dignity, working conditions, feedback collected, security maintained, respect, discipline in lic and reliance insurances are evaluated by effective weighted mean, and table 6 indicates its results. table 6. public proportions distressing authority styles in lic and reliance insurance public proportions lic reliance insurance t-value sig weighted mean status weighted mean status respondents are working together. 3.08 neutral 3.01 neutral respondents are working as a team. 3.31 neutral 3.21 neutral the supervisor provides the required response regarding job performance. 3.44 neutral 3.68 agree proportions cr ave dv public 0.7 0.6 0.6 financial 0.7 0.7 0.6 managerial 0.8 0.6 0.6 proportions chi-square value p-value gfi cfi rmr rmsea public 6.4 0.6 0.9 0.9 0.02 0.06 financial 4.9 0.4 0.9 1.0 0.01 0.00 managerial 3.9 0.6 0.9 0.9 0.05 0.04 dimensions cr ave dv public 0.7 0.7 0.6 financial 0.7 0.6 0.6 managerial 0.8 0.6 0.6 gadaboina, indian journal of finance and banking 9(1) (2022), 177-183 181 overseen encourages employees to achieve the best. 3.23 neutral 3.79 agree secured job 4.16 agree 4.21 agree 13.562 0.01 the supervisor performs the job of informing their employees. 3.97 agree 4.00 agree the expectation among employees v/s senior management. 3.76 agree 3.81 agree top-level people treat workers with respect & dignity. 3.80 agree 3.87 agree the supervisor manages employee complaints. 2.85 neutral 3.08 neutral the supervisor manages employees' regulations. 3.65 agree 3.64 agree source: calculated from primary data in lic, the outcome explains that the job is protected, the supervisor performs the job of informing their employees, there is the belief among employees and superiors, top hierarchy treats workers with decorum and the supervisor manages to handle employee's regulations are decided by the employees as these public proportions are distressing the authority styles. the employees are neither approved nor disagreed with respondents working together, respondents working as a team, the supervisor provides required response regarding job performance, overseen encourages employees to achieve to the best, and the supervisor manages employee complaints. in reliance insurance, the supervisor provides the required response regarding job performance. the overseer encourages employees to achieve the best, most secured job, the supervisor performs the job of informing their employees, and there is an expectation among employees v/s senior management. top-level people treat workers with respect and dignity, and the supervisor manages the employees decide employees' regulations as these public proportions affect the authority styles. employees working together, employees working as a team, and the supervisor manage employee complaints that are neither agreed nor disagreed by the employees as these proportions distress the authority styles. the t-value of 13.562 is essential at the 1% level, signifying a considerable difference between public proportions distressing the authority styles in public and reliance insurance. therefore, the null hypothesis is rejected. the alternate hypothesis has accepted that there is a significant difference between public proportions distressing the authority styles in the public and private sectors. financial proportions the financial proportions that are distressing the authority styles in lic and reliance insurances are evaluated by the weighted mean, and lastly, the outcome is obtainable in table 7. table 7. financial proportions distressing authority styles in lic and reliance insurance financial proportions lic reliance insurance t-value sig weighted mean status weighted mean status respondents are pleased with the pay to enhance the procedure. 3.96 agree 4.04 agree respondents are happy with their salaries. 4.05 agree 4.16 agree respondents are fulfilled with general remuneration packages. 3.61 agree 3.81 agree respondents are happy with the scope for future expansion. 3.84 agree 4.05 agree 12.892 0.01 respondent’s promotions are managed moderately. 3.28 neutral 3.69 agree respondent’s remuneration package is competitive. 4.04 agree 4.17 agree the compensation is clear when differentiated from other jobs. 3.84 agree 4.07 agree respondents have sufficient contribution towards a decision that affects jobs. 3.83 agree 3.91 agree the organization has sufficient funds. 4.06 agree 4.20 agree the organization provides elevated awareness to employee's benefit 3.96 agree 4.01 agree source: calculated from primary data in lic, respondents are pleased with the pay to enhance procedure, employees are satisfied with the salary, respondents are fulfilled with general remuneration packages, respondents are happy with the scope for future expansion, respondent’s remuneration package is competitive, and the compensation is clear when differentiated with other jobs. respondents have sufficient contribution towards a decision which impacts jobs, the organization has ample funds, and the organization gives elevated awareness to staff benefit are decided by the employees as these financial proportions are disturbing the authority styles while they are neither approved nor disagreed with employee's promotions are handled fairly as it affects the authority styles. gadaboina, indian journal of finance and banking 9(1) (2022), 177-183 182 in reliance insurance, respondents are pleased with the pay to enhance procedure, employees are satisfied with the salary, respondents are fulfilled with general remuneration packages, respondents are happy with the scope for future expansion, respondents' promotions are managed moderately, and respondent's remuneration package is competitive. the compensation is clear when differentiated from other jobs, respondents have sufficient contribution towards a decision which impact jobs, the organization has ample funds and the organization trains elevated awareness to staff benefit are agreed by the employees as these financial dimensions are affecting the authority styles. the tvalue of 12.892 is important at 1 percent level representing that there is a significant difference between financial proportions distressing the authority styles in public and reliance insurance. consequently, the null hypothesis is rejected and the alternate hypothesis is accepted and this indicates that there is a significant difference between financial dimensions distressing the authority styles in the public and private sectors. managerial proportions the managerial proportions distressing the authority styles in lic and reliance insurances are explained by calculating the weighted mean, and the output is accessible in table 8. table 8. managerial proportions distressing authority styles in lic and reliance insurance managerial proportions lic reliance insurance t-value sig weighted mean status weighted mean status employees are treated with respect by the supervisor. 4.07 agree 4.27 agree without harassment, the work can be done. 3.65 agree 3.92 agree the conveniences are sufficient. 3.93 agree 4.13 agree good working conditions. 3.57 agree 3.95 agree respondents experience a liberated environment to talk about their issues with their supervisor. 3.97 agree 4.13 agree 13.186 0.01 respondents have adequate aid to control the work pressure. 3.69 agree 3.87 agree respondent’s complaints control moderately. 3.68 agree 3.92 agree respondents work dedicatedly towards the organization. 4.05 agree 4.27 agree managers assign responsibilities to assistants professionally. 3.63 agree 3.84 agree the organization has an efficient decision-making system 3.04 neutral 3.93 agree source: calculated from primary data in lic, employees are treated with respect by the supervisor; without harassment, the work can be done. the conveniences are sufficient, good working conditions, respondents experience liberated environment to talk about their issues with their supervisors, respondents have adequate aid to control the work pressure, and respondent's issues control moderately. respondents work dedicatedly towards the organization, and managers assign responsibilities to assistants professionally are decided by the employees as these managerial proportions are disturbing the authority styles. at the same time, they are neutral with the decision-making processes in the organization as it affects the authority styles. in reliance insurance, employees are treated with respect by the supervisor, without harassment, the work can be done, the conveniences are sufficient, good working conditions, respondents experience a liberated environment to talk about their issues with their supervisors, and respondents have adequate aid to control the work pressure, and respondent’s issues control moderately. respondents work dedicatedly towards the organization, managers assign responsibilities to assistants professionally and the organization has an efficient decisiveness policy that impacts the authority styles. the tvalue of 13.186 is significant at 1% level, signifying an important variation among managerial proportions affecting the authority styles in public and reliance insurance. hence, the null hypothesis is rejected, and the alternate hypothesis is accepted, and this is represented as there is significant differentiation between managerial proportions affecting the authority styles in the public and private sectors. relationship among authority styles and proportions distressing the authority styles the connection between authority styles and proportions distressing the authority styles was evaluated by analyzing the pearson correlation coefficients with the outcomes in table 9. table 9. relationship among authority styles and proportions distressing the authority styles particulars lic reliance insurance ls sd ed od ls se ed od ls 1.00 1.00 sd 0.45** 1.00 0.42** 1.00 ed 0.47** 0.45** 1.00 0.48** 0.44** 1.00 od 0.36** 0.43* 0.32* 1.00 0.46** 0.42** 0.47** 1.00 source: calculated from primary data gadaboina, indian journal of finance and banking 9(1) (2022), 177-183 183 in lic, the correlation coefficients signify that the authority styles are considerably and allied through financial proportions, public proportions, and managerial proportions at 1% level. secondly, authority styles are aligned with public proportions and financial proportions at a modest point but are connected through managerial dimensions at a low degree. the correlation coefficients demonstrate that public proportions are considered along with extremely allied with financial proportions at 1% level and managerial proportions at a 5% level. it explains that the public proportions are related in cooperation with financial and managerial proportions at a reasonable level. the outcome indicates that the financial proportions are considerably connected with managerial proportions at a 5% level with a low degree of involvement. in reliance insurance, the correlation analysis specifies that the authority styles are considerably allied with public, financial, and managerial proportions at a 1% level. it is pragmatic that the authority styles are allied with public, financial, and managerial at a modest stage. the correlation coefficients specify that public proportions are considerably and entirely correlated with financial proportions and managerial proportions at 1% level. the public proportions are related to financial and managerial proportions to a reasonable degree. the analysis says that financial proportions are drastically allied with managerial proportions at 1% level with the modest level of connection. hence, the null hypothesis is rejected and the alternate hypothesis is accepted and this explains that there is a considerable association between authority styles and proportions distressing the authority styles in the public and private sector. conclusion this study observes the authority styles of leaders and subordinates in public and private organizations. the managers distinguish that the employees can only work under supervision and don't have any wisdom of accountability in work. in contrast, the employees anticipate freedom at work and involvement in managerial actions. no single authority style in the business is successful. the authority style changes in different circumstances and would be affected by public, financial, and managerial proportions. the research can further expand on the impact of authority styles and authority practices on motivation, employees' welfare, and employees' work-life balance in both public and private sectors. successful adoption, diffusion, and implementation of quality authority practices can be critical determinants that could be further explored for managerial success and effectiveness. author contributions: conceptualization, t.g.; data curation, t.g.; methodology, t.g.; validation, t.g.; visualization, t.g.; formal analysis, t.g.; investigation, t.g.; resources, t.g.; writing – original draft, t.g.; writing – review & editing, t.g.; supervision, t.g.; software, t.g.; project administration, t.g.; funding acquisition, t.g. 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 the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. 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 alkahtani, a. h., abujarad, s. y., sulaiman, m. b., & nikbin, d. (2011, may). the impact of personality and leadership styles on leading change capability of malaysian managers. australian journal of business and management research, 1(2), 70-99. broome, t. a., & hughes, s. (2006). moral and behavioural motivation. journal of management development. lettieri, r. (1997). book review: the absolutes of leadership philip crosby jossey-bass, 1997, 144 pp. $15.00, paper. journal of leadership studies, 4(4), 155-157. tirmizi, s. a. (2001). a study of leadership prototypes in pakistani organizations. lead pakistan, islamabad. woodbine, g., & liu, j. (2010). leadership styles and the moral choice of internal auditors. electronic journal of business ethics and organization studies, 15(1). retrieved from http://urn.fi/urn:nbn:fi:jyu-201010052961 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 13(1) (2023), 12-27 12 finance and banking ijfb vol 13 no 1 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa indian mobile banking in post covid-19: an analytical study and gratification from the aspect of kano model bhadane jaywant (a) rajiv nayan (b) gaikar vilas bhau (c)1 kanwal jeet singh (d) joshi bharat (e) (a) head of department, economics/banking, kra college, deola, nasik, savitribai phule pune university, india; e-mail: jaywantrekha@gmail.com (b) assistant professor, department of commerce, ramanujan college, university of delhi, india; e-mail: rajivnayan32@gmail.com (c) professor, dept. of economics, smt. chm. college, ulhasnagar, university of mumbai, india; e-mail: gaikar_vilas@rediffmail.com (d) associate professor, department of commerce, ramanujan college, university of delhi, india; e-mail: kanwaljeet89@gmail.com (e) department of commerce, k. p. b. hinduja college of commerce, mumbai, india; e-mail: j28bharat54@gmail.com a r t i c l e i n f o article history: received: 4th november 2022 revised: 28th december 2022 accepted: 30th january 2023 published: 7th february 2023 keywords: virtual banking, gratification, kano model, marketing research theory. jel classification codes: a1, a30, c1, g17, y8 a b s t r a c t the purpose of the present research paper is to understand the research questions related to m-banking. it is the time call to take up virtual banking (vb) with zero contact banking (zcb) as a preventive measure to covid-19. the study also admits the comparative analysis on the gratification of m-banking users considering factors/attributes of the kano model. the researcher has undertaken integrative approach (ia) for both, related to literature reviewed and survey so far observed. both primary data through well-structured questionnaires from 900 m-banking users of sbi, hdfc, and citi bank (300 from each) and secondary data from published sources have been cantered and cited to understand the syntactic research gap. the researcher has followed stratified random sampling for sample banks considering the date of establishment, volume and value of m-banking transactions, number of employees, and convenient random sampling for m-banking users, to make the sample representative. the objectives were studied thoroughly and hypotheses were tested in spss. the researcher has used kolmogorov-smirnov (d-statistic) and shapiro-wilk test (w-statistic) to test data normality, cronbachs’ alpha to test data reliability, descriptive statistics i.e. frequency and per cent count to describe data and chi-square to measure significant associations and differences if any. the researcher has drawn an epilogue purely on the basis of data collection and analysis. the researcher has conducted pearson’s product movement correlation, to suggest a correlation on y-intercept model to show an association between volume and value of m-banking transactions of sbi, hdfc, and citi bank and suggested a model fit to regression equation. this paper gives a unique insight into kano model. © 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 technology has such a large influence on our lives that it is difficult to imagine a life without it. innovations taking place all over the world in various fields have made our lives much easier and more relaxed. mobile banking is characterized as “a channel whereby the customer interacts with a bank via a mobile device, such as a mobile phone or personal digital assistant. mobile banking has given users more flexibility in terms of time and space, which is also seen as a major drawback of traditional banking. it has also supported banks in lowering their operating costs and expanding their customer base. it has also aided banks in offering a variety of other related services to their existing customers at little or no cost. due to the sheer size of its population, the number of internet users, the government’s drive for financial inclusion, and public awareness of the ease and convenience of mobile banking, india’s prospects for mobile banking appear to be very bright. banking sector reforms in 1991 and 1998, technological advancement, changes in banking policy and further initiative taken by government of india i.e. the demonetization policy in november, 2016 and digital banking and its services have hit up the indian banking industry and make them more tech-savvy. further, the covid-19 has pushed an economy towards physical, social and mental distancing, results into technological advancement and dependency and implementation of e-banking products and services such as plastic money i.e. debit and credit card, rtgs, m-banking, 1corresponding author: orcid id: 0000-0001-5251-6656 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i1.1928 to cite this article: jaywant, b., nayan, r., bhau, g. v., singh, k., & bharat, j. (2023). indian mobile banking in post covid-19: an analytical study and gratification from the aspect of kano model. indian journal of finance and banking, 13(1), 12-27. https://doi.org/10.46281/ijfb.v13i1.1928 https://orcid.org/0000-0003-3964-608x http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i1.1928 https://orcid.org/0000-0003-0211-8259 https://orcid.org/0000-0001-5251-6656 https://orcid.org/0000-0002-9166-8510 https://orcid.org/0000-0003-3617-1541 jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 13 neft etc. (suoranta, 2003, tiwari & buse, 2007). mobile banking is characterized as “a channel whereby the customer interacts with a bank via a mobile device, such as a mobile phone or personal digital assistant” (barnes & corbitt, 2003). mobile banking is a service provided by a bank or other financial institutions that allows its customers to conduct financial transactions from anywhere anytime geographically, using a mobile device such as a smartphone or tablet. thus, mobile banking has removed the difficulty of physical access to bank during covid-19, provided flexibility to banking customers. unlike internet banking, it uses software, usually called a mobile banking app, usually designed and backed by the financial institutions. as on 30th october, 2020; 542 banks (includes public sector banks, private sector banks, foreign banks, co-operative banks and sahakari and gramin banks) were permitted by rbi to provide mobile banking services in india. users of mobile banking have more flexibility in terms of time and space, which is sometimes overlooked. assumed to be a major drawback of the traditional banking system. it has also aided banks in reducing costs. lowering their operating costs and broadening their customer base (cherian, gaikar, paul, & pech, 2021). despite the benefits of mobile banking, there are many risks associated with it that must be taken into account. the most serious of these risks is the protection of mobile banking transactions, as both the internet and mobile transactions are vulnerable to phishing, account theft, and the leakage of sensitive information, among other things. competition from mobile wallet companies such as paytm, phonepe, and others is another notable obstacle for mobile banking. for a variety of factors, two-thirds of online banking subscribers tend to use nonbanking companies' mobile wallets rather than their banks' mobile banking apps, according to one survey (durkin, o'donnell, mullholland, & crowe, 2007). according to academic model, “mobile banking is a proviso and expediency of banking products and financial services with the help of mobile telecommunication devices”. thus, m-banking is a digital form of banking linked with a bank account to carry out banking financial transactions such as account balance check, fund transfer, request to bank for availing various banking services, online shopping and payments, loans, investments and deposits, mudra loan etc. the rationale of the problem statement is available as follows: covid-19 has created panic and made society and people at mental, physical and social distance. the different banks are providing m-banking services on different platform offering disparate services to accountholders such as debit card add-on services, account check, investments and deposits, fund transfer, loan avail, m-passbook, mudra loan etc. private and foreign banks were the foremost to adopt and implement technology in banking business, which has created competitive environment for public sector banks not only to satisfy existing banking customers but also to retain them for long adopting technological up gradation. hence, there is a need to compare, explore and analyze the present research. following are the objectives of study:  to study the meaning and use of mobile banking.  to study about the demographic profile of mobile banking users sbi, hdfc and citi bank.  to study about the gratification of mobile banking users sbi, icici and citi bank.  to study the aftermath covid-19 on m-banking use of sbi, icici and citi bank. the significance of the study is as follows:  the present research study will be helpful to understand the concept and use of m-banking use of sbi, hdfc and citi bank.  it will be helpful to study the gratification of m-banking use of sbi, hdfc and citi bank only.  it will be helpful to study the concept of impact of covid-19 on m-banking use.  the present research study will be helpful to examine and analyze the comparative m-banking use in terms of volume and value of sbi, hdfc and citi bank.  the study will be useful to the bank to target m-banking users applying artificial intelligence (ai). literature review this literature review aims to investigate the most important contributions of the kano methodology and in which way researchers have used, interpreted and modified the methodology of kano at the same time how this model fits for the mobile banking. the discussions about use of wap services in gsm mobile phones, which enables the users to interact with the bank to carry out internet – based content and advance value-added banking and financial services provided by bank (cherian, jacob, qureshi, & gaikar, 2020). the application-based m-banking and its studies showed how the internet banking has given rise to mobile banking, which includes facilities to conduct bank transactions, to administer accounts and to access customized information via internet using mobile based application (durkin et al., 2007). most of the indian mbanking users are concerned about security issues like financial frauds and account misuse. to overcome these difficulties, the user uses different codes for banking transactions, installation and updating of application. hence, lacks standardization. the mobile banking is defined as “the provision of banking services to customers on their mobile devices”. it is the innovations in banking sector, which facilitates to carry out banking and other financial transactions with the help of mobile phones using internet (laforet, & li, 2005). the mobile phone is an electronic channel capable of giving customers more low-cost service options such as access to banking information, funds management and making online payments. m-banking transactions are economical compared to the traditional banking channels. to gain in long term benefits, bank has to encourage m-banking services by specific mobile application and individual platform which plays major role in building brand loyalty (matzler & hinterhuber, 1998). many empirical studies on electronic banking and mobile banking have applied tam. for identifying the important drivers having a bearing on the mobile banking adoption intention of users. a few other studies have also used demographic variables along with the behavioral factors as drivers of technology adoption intention (poddar, erande, chitkara, bhansal, & kejriwal, 2016). according to previous research, simplicity, access to the https://en.wikipedia.org/wiki/bank https://en.wikipedia.org/wiki/financial_institution https://en.wikipedia.org/wiki/mobile_device https://en.wikipedia.org/wiki/smartphone https://en.wikipedia.org/wiki/tablet_computer https://en.wikipedia.org/wiki/internet_banking https://en.wikipedia.org/wiki/mobile_app jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 14 service at any time and from any location, anonymity, and time and effort savings are all factors that contribute to mobile banking adoption (reserve bank of india, 2023, zhao & roy dholakia, 2009). materials and methods research framework: a kano model approach the model based on customer satisfaction, was developed by the japanese professor noriaki kano in 1984. this model seeks to explain how to assign the priorities to fulfill operational objectives, which results into long lasting improvements in customer service delivery (zhao & roy dholakia, 2009). the kano model classifies the products and services knowledge, wants to and the nature and ways it leads to customers’ satisfaction. the model divides product/service attributes into three categories; threshold or must be, performance and excitement or delighter. these attributes distinguish the product or services requirement, which has direct impact on their gratification (saeidipour, vatandost, & akbari, 2012). the kano model graphically shows the combination of two axis the x axis and the y axis, the x axis defines the customer needs were met and to what extent; which is referred as a product/service performance or function and the y axis is defines the customer response to the product/service; whether the customer is delighted or disappointed. on the basis of this the customer expectations and its achievement are categories into three; basic needs, is called as “must be requirements”, which are essential; if met customers are delighted and if not, they are disappointed and not preferred by them. performance needs, are define by customers and discussed by manufacturer, are called as “more is better”. this need makes product/services different from competitors. attractive needs, the unspoken or unexpected needs which the customer cannot define. if such needs provided, they feel excited and if not remains neutral. zhao & dholakia using kano model and multi-criteria decision models to evaluate the measurement of customer satisfaction (sharma & sharma, 2019). figure 1. the basic kano model thus, the kano model is viewed in the perspective of mobile banking service via customer product/service delivery. in present research study, the researcher has thought-out mobile banking as one of the ways to interact with bank customers during covid-19 in which physical and social distancing is must and hence measured and compared the gratification of sbi, hdfc and citi bank m-banking users with idiosyncrasy i.e. basic needs, performance requirements, excitements requirements, neutral attributes and reverse attributes (sulaiman, jaafar, & mohezar, 2007). following are the hypotheses of the study: the formulated affirmative statement in research study is called as hypothesis. it explains an association between two or more dependent and\or independent variable under study, which is tested using statistical tools and techniques and thereby study the objectives and to accept/reject the statements. the researcher has considered following hypotheses of the study. in the form of qualitative and quantitative hypotheses: qualitative hypotheses  h0: there is no significant difference in gratification related to basic needs of mobile banking users of sbi, hdfc and citi bank.  h0: there is no significant difference in gratification related to performance requirements of mobile banking users of sbi, hdfc and citi bank.  h0: there is no significant difference in gratification related excitement requirements of mobile banking users of sbi, hdfc and citi bank.  h0: there is no significant difference in gratification related to neutral attributes of mobile banking users of sbi, hdfc and citi bank. jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 15  h0: there is no significant difference in gratification related to reverse attributes of mobile banking users of sbi, hdfc and citi bank.  h0: there is no association between demographic profile (gender, age, marital status, educational qualification, occupation and income level) and gratification (bpenr) of mobile banking users of sbi, hdfc and citi bank.  h0: there is no significant difference in prior experience of m-banking use.  h0: there is no significant difference in frequency of using m-banking services. quantitative hypotheses  h0: there is no significant difference in volume (i.e. number) of m-banking transactions of sbi, hdfc and citi bank aftermath covid-19. (h0:µvolsbi = µvolhdfc = µvol’citi bank)  h0: there is no significant difference in value (i.e. amount) of m-banking use of sbi, hdfc and citi bank aftermath covid-19 (h0: µvalsbi = µvalicici = µval’citi bank)  h0: there is no association between volume and value of m-banking transactions of sbi, hdfc and citi bank. participant (subject) characteristics the present research study is qualitative and quantitative in nature. the approach to the present research study is particularistic. the research study is of exploratory and conclusive type. the universe and population for the present research study is public sector banks, private sector banks and foreign banks in india. the respondents were mobile banking users. the population for the present research study is verbal for mobile banking users and measurable for sample banks in terms of number of banks, its branches, volume and value of mobile banking and its use (cherian, jacob, qureshi, & gaikar, 2020). the data for the present research study has been collected from 900 m-banking users of the sbi, hdfc and citi bank. for the present study the researcher has used cochran’s formula to determine the size of the sample of m-banking users. cochran (1977) has developed a formula to determine the representative sample in both ways when population infinite and finite. hence, for the present study the researcher has decided to apply both formulas considering level of precision, confidence level desired and degree of variability to determine representative sample population for the present research study. sampling procedures – size, power and precision assuming large infinite population whose variability not known, assuming maximum variability i.e. 50% at p = 0.5 and taking 95% confidence level with ± 5 precision, the sample size for the present research study shall be 666. to study and probe into detail the researcher found such size of sample little less representative of population. further, it is said that larger the size of sample, more the surety of their responses to truly represent the population. thus, to buffer, the researcher has increased the total size of sample to 900 numbers of m-banking users in mumbai city i.e. 300 m-banking users of each sample bank i.e. sbi, hdfc and citi bank respectively. the sample banks were selected by stratified random sampling. three banks from each of the public sector, private sector and foreign banks have been selected considering their date of establishment, volume and value of mobile banking use, number of working branches\offices and number of employees. table 1. details of sample bank as on 31st march, 2020 in india particular head\bank name sbi hdfc citi bank date of establishment july, 1955 august, 1994 june, 1902 number\volume of mobile banking (actual) 322432111 120519634 1898161 value\amount of mobile banking (in rs’000) 1054325130.37 696795439.29 43713103.50 number of branches\offices 24000 4787 42 number of employees 249448 104154 204000 source: compiled and calculated from secondary source it was found that the sbi, hdfc and citi bank lead in above criteria. hence, public sector bank state bank of india, private sector bank the housing development finance corporation limited and foreign bank citi bank has constituted the sample bank for the present research study. the primary and secondary data has been organized and anlysed to study the objectives and to test the hypotheses of the present research study. the researcher has collected primary data from actual mobile banking users of sbi, hdfc and citi bank. 300 actual m-banking users from each of the sample banks has been collected and reported. measures and covariates the researcher has collected secondary data related to mobile banking use from the published source the reserve bank of india (2023). the researcher has collected secondary data related to mobile banking use of sbi, hdfc bank ltd. and citi bank for aftermath, pre covid-19 from november, 2019 to march, 2020 and post covid-19 from april, 2020 to august, 2020. primary data from the actual m-banking users and the secondary data from the published sources, by the reserve bank of india. just to balance the data the researcher has collected 5 months of pre (i.e. from november, 2019 to march, 2020) and 5 months of post (i.e. from april, 2020 to august, 2020) covid-19 of each sample bank data related to mobile baking use in terms of volume and value has been cited and analyzed. the result of normality of data using kolmogorov-smirnov jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 16 and shapiro-wilk is as follows: table 2. tests of normality by kolmogorov-smirnov = (d) and shapiro-wilk = (w) tests of normality kolmogorov-smirnova shapiro-wilk statistic df sig. statistic df sig. bn1 .228 900 .000 .889 900 .000 bn2 .253 900 .000 .877 900 .000 bn3 .216 900 .000 .890 900 .000 bn4 .248 900 .000 .871 900 .000 bn5 .252 900 .000 .861 900 .000 bn6 .247 900 .000 .861 900 .000 pr1 .201 900 .000 .901 900 .000 pr2 .260 900 .000 .874 900 .000 pr3 .223 900 .000 .892 900 .000 pr4 .261 900 .000 .869 900 .000 pr5 .259 900 .000 .851 900 .000 er1 .228 900 .000 .889 900 .000 er2 .253 900 .000 .877 900 .000 na1 .223 900 .000 .888 900 .000 na2 .256 900 .000 .872 900 .000 ra1 .261 900 .000 .862 900 .000 ra2 .248 900 .000 .871 900 .000 tob .223 900 .000 .793 900 .000 a. lilliefors significance correction source: compiled and calculated from primary data the researcher has considered variables to study, understand and compare gratification of m-banking use of sample bank. to verify whether all variable measure the same construct-scale, all variables are correlated and could form into some type of scaling, the cronbach’s alpha the test of reliability was conducted (table 4). table 3. reliability statistics of m-banking use variable head cronbach’s alpha no of items internal consistency basic needs .864 06 good internal consistency performance requirements .719 05 acceptable internal consistency excitement requirements .598 02 poor internal consistency neutral attributes .739 02 acceptable internal consistency reverse attributes .544 02 poor internal consistency overall reliability .729 17 acceptable internal consistency (for all attributes) source: compiled and calculated from primary data the researchers applied spss 21 to study the objectives and to test the hypotheses of the present research. the researcher has used kolmogorov-smirnov and shapiro -wilk test of normality, to test data normality. the researcher has used cronbachs’ alpha, to test data reliability. descriptive statistics-frequency and per cent count, kruskal wallis 1–way anova, mean rank, (to make gratification comparative), chi-square test, z-test (to calculate z-score to measure aftermath covid-19 of m-banking use of sample bank). results to understand the behavior toward m-banking use, the respondents were asked questions based on their demographic profile and m-banking services by sample banks. further, to measure their gratification, questions-based likert five point scale was asked and the same has been analyzed using descriptive statistics and inferential analysis as follow. descriptive analysis describes the collected data in logical order. the researcher has described data as follow: demographic profile table 4. demographic profile demographic head type of bank total (900) total per cent sbi hdfc citi bank gender male 98 97 105 300 33.33 % female 202 203 195 600 66.67 % female dominates the m-banking use among all three sample banks. age up to 25 year 84 95 97 276 30.67 % jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 17 26 to 35 year 90 84 82 256 28.44 % 36 to 45 year 77 75 69 221 24.56 % 46 year and above 49 46 52 147 16.33 % the age group up to 25 ears found to be highest number of m-banking users among all three sample banks. education graduation 59 60 65 184 20.44 % postgraduation 86 78 86 250 27.78 % diploma/technical 46 46 43 135 15.00 % professional 76 82 70 228 25.33 % other 33 34 36 103 11.45 % postgraduation m-banking users are more in all three sample banks. occupation business 74 84 77 235 26.11 % government employee 86 75 83 244 27.11 % private employee 87 78 89 254 28.22 % professional 53 62 51 167 18.56 % most of the m-banking users are private employees. monthly income up to rs. 24999 87 89 88 264 29.33 % rs. 25000 to rs. 49999 71 69 71 211 23.44 % rs. 50000 to rs. 74999 81 84 85 250 27.78 % rs. 75000 and above 61 58 56 175 19.45 % m-banking users having monthly income up to rs. 249999 found to be more. prior experience of using m-banking yes 175 183 180 538 59.78 % no 125 117 120 362 40.22 % most of the m-banking users are having prior experience of using m-banking services. frequency of using m-banking atleast once in a day 80 77 78 235 26.11 % once in 2 to 4 days 91 91 99 281 31. 22 % once in 5 to 7 days 96 93 87 276 30.67 % once in a fortnight 19 26 22 67 07.44 % once in a month 14 13 14 41 04.56 % it is found that there is insignificant difference of using m-banking services between once in 2 to 4 days and once in 5 to 7 days. source: compiled and calculated from primary data inference from analyses of mobile banking use to test and verify above hypothesis, the researcher has collected primary data from 900 respondents (300 from each) sample banks related to basic needs, performance requirements, excitement requirements, neutral attributes and reverse attributes. the researcher has also collected pre (from november, 2019 to march, 2020) post (april, 2020 to august, 2020) covid19 monthly data related to volume and value of m-banking transactions of sample banks. analyses and interpretations based on qualitative hypotheses h0: there is no significant difference in gratification related to basic needs of mobile banking users of sbi, hdfc and citi bank. table 5. kruskal-wallis 1-way annova mean rank related to basic needs (bn) ranks results/ ranks tob n mean rank bn1 sbi 300 470.25 1st hdfc 300 412.33 3rd citi bank 300 468.92 2nd total 900 sbi bank dominates. bn2 sbi 300 432.20 3rd hdfc 300 479.32 1st citi bank 300 439.98 2nd total 900 hdfc bank dominates. bn3 sbi 300 504.28 1st hdfc 300 416.00 3rd citi bank 300 431.22 2nd total 900 sbi bank dominates. bn4 sbi 300 462.82 1st hdfc 300 448.86 2nd citi bank 300 439.82 3rd total 900 sbi bank dominates. bn5 sbi 300 433.37 3rd hdfc 300 470.47 1st jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 18 citi bank 300 447.66 2nd total 900 hdfc bank dominates. bn6 sbi 300 444.64 3rd hdfc 300 445.06 2nd citi bank 300 461.81 1st total 900 citi bank bank dominates. source: compiled and calculated from primary data table 6. calculation of chi-square value to measure statistical significance difference in gratification related to basic needs (bn) test statistics a,b bn1 bn2 bn3 bn4 bn5 bn6 chi-square 10.485 6.220 21.091 1.294 3.372 .924 df 2 2 2 2 2 2 table value 5.99 5.99 5.99 5.99 5.99 5.99 asymp. sig. .005 .045 .000 .524 .185 .630 results p(χ2(10.485) > 5.99) = .005 < 0.05 p(χ2(6.220) > 5.99) = .045 < 0.05 p(χ2(21.091) > 5.99) = .000 < 0.05 p(χ2(1.294) < 5.99) = .524 > 0.05 p(χ2(3.372) < 5.99) = .185 > 0.05 p(χ2(0.924) < 5.99) = .630 > 0.05 sig.\insig. significant ha accepted significant ha accepted significant ha accepted not-significant fails to reject h0 not-significant fails to reject h0 not-significant fails to reject h0 a. kruskal wallis test b. grouping variable: tob source: compiled and calculated from primary data the table above shows that the calculated chi-square value is compared with its table value at a degree of freedom 2 and its significance value @ 5% level of significance. it shows either acceptance of ha or failure to reject h0 h0: there is no significant difference in gratification related to performance requirements of mobile banking users of sbi, hdfc and citi bank. table 7. kruskal-wallis 1-way annova mean rank related to performance requirements (pr) ranks results/ ranks tob n mean rank pr1 sbi 300 434.81 2nd hdfc 300 483.94 1st citi bank 300 432.75 3rd total 900 hdfc bank dominates. pr2 sbi 300 467.89 1st hdfc 300 428.79 3rd citi bank 300 454.81 2nd total 900 sbi bank dominates. pr3 sbi 300 438.22 3rd hdfc 300 470.35 1st citi bank 300 442.93 2nd total 900 hdfc bank dominates. pr4 sbi 300 435.50 3rd hdfc 300 468.46 1st citi bank 300 447.54 2nd total 900 hdfc bank dominates. pr5 sbi 300 443.81 3rd hdfc 300 450.36 2nd citi bank 300 457.34 1st total 900 citi bank bank dominates. source: compiled and calculated from primary data table 8. calculation of chi-square value to measure statistical significance difference in gratification related to performance requirements (pr) test statistics a,b pr1 pr2 pr3 pr4 pr5 chi-square 7.983 3.873 2.863 2.707 .443 df 2 2 2 2 2 table value 5.99 5.99 5.99 5.99 5.99 asymp. sig. .018 .144 .239 .258 .801 results p(χ2(7.983) > 5.99) = .018 < 0.05 p(χ2(3.873) < 5.99) = .144 > 0.05 p(χ2(2.963) < 5.99) = .239 > 0.05 p(χ2(2.707) < 5.99) = .258 > 0.05 p(χ2(.443) < 5.99) = .801 > 0.05 sig.\insig. significant ha accepted not-significant fails to reject h0 not-significant fails to reject h0 not-significant fails to reject h0 not-significant fails to reject h0 a. kruskal wallis test b. grouping variable: tob source: compiled and calculated from primary data jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 19 the table above shows that the calculated chi-square value is compared with its table value at a degree of freedom 2 and its significance value @ 5% level of significance. it shows either acceptance of ha or failure to reject h0. h0: there is no significant difference in gratification related to excitement requirements of mobile banking users of sbi, hdfc and citi bank. table 9. kruskal-wallis 1-way annova mean rank related to excitement requirements (er) ranks results/ ranks tob n mean rank er1 sbi 300 470.25 1st hdfc 300 412.33 3rd citi bank 300 468.92 2nd total 900 sbi bank dominates. er2 sbi 300 432.20 3rd hdfc 300 479.32 1st citi bank 300 439.98 2nd total 900 hdfc bank dominates. source: compiled and calculated from primary data table 10. calculation of chi-square value to measure statistical significance difference in gratification related to excitement requirements (er) test statistics a,b er1 er2 chi-square 10.485 6.220 df 2 2 table value 5.99 5.99 asymp. sig. .005 .045 results p(χ2(10.485) > 5.99) = .005 < 0.05 p(χ2(6.220) < 5.99) = .045 > 0.05 sig.\insig. significant ha accepted significant ha accepted a. kruskal wallis test b. grouping variable: tob source: compiled and calculated from primary data the table above shows that the calculated chi-square value is compared with its table value at a degree of freedom 2 and its significance value @ 5% level of significance. it shows the acceptance of ha. h0: there is no significant difference in gratification related to neutral attributes of mobile banking users of sbi, hdfc and citi bank. table 11. kruskal-wallis 1-way annova mean rank related to neutral attributes (na) ranks results/ ranks tob n mean rank na1 sbi 300 468.34 2nd hdfc 300 478.85 1st citi bank 300 404.31 3rd total 900 hdfc bank dominates. na2 sbi 300 473.36 1st hdfc 300 419.68 3rd citi bank 300 458.46 2nd total 900 sbi bank dominates. source: compiled and calculated from primary data table 12. calculation of chi-square value to measure statistical significance difference in gratification related to neutral attributes (na) test statistics a,b na1 na2 chi-square 15.486 7.470 df 2 2 table value 5.99 5.99 asymp. sig. .000 .024 results p(χ2(15.486) > 5.99) = .000 < 0.05 p(χ2(7.470) > 5.99) = .024 < 0.05 sig.\insig. significant ha accepted significant ha accepted a. kruskal wallis test b. grouping variable: tob source: compiled and calculated from primary data the table above shows that the calculated chi-square value is compared with its table value at a degree of freedom 2 and its significance value @ 5% level of significance. it shows the acceptance of ha. jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 20 h0: there is no significant difference in gratification related to reverse attributes of mobile banking users of sbi, hdfc and citi bank. table 13. kruskal-wallis 1-way annova mean rank related to reverse attributes (ra) ranks results/ ranks tob n mean rank ra1 sbi 300 458.65 1st hdfc 300 442.20 3rd citi bank 300 450.65 2nd total 900 sbi bank dominates. ra2 sbi 300 460.16 1st hdfc 300 451.30 2nd citi bank 300 440.05 3rd total 900 sbi bank dominates. source: compiled and calculated from primary data table 14. calculation of chi-square value to measure statistical significance difference in gratification related to reverse attributes (ra) test statistics a,b ra1 ra2 chi-square .500 .974 df 2 2 table value 5.99 5.99 asymp. sig. .779 .614 results p(χ2(0.500) > 5.99) = .779 < 0.05 p(χ2(0.974) > 5.99) = .614 < 0.05 sig.\insig. not-significant fails to reject h0 not-significant fails to reject h0 a. kruskal wallis test b. grouping variable: tob source: compiled and calculated from primary data the table above shows that the calculated chi-square value is compared with its table value at a degree of freedom 2 and its significance value @ 5% level of significance. it shows the failure to reject h0. h0: there is no significant difference between demographic profile (gender, age, marital status, educational qualification, occupation and income level) and gratification (bpenr) of mobile banking users of sbi, hdfc and citi bank. table 15. calculation of chi-square value to measure statistical significance difference between demographic profile and gratification related to bpenr test statistics gender age education occupation monthly income chi-square 100.000a 42.942b 84.300c 21.280d 21.520b df 1 3 4 3 3 table value 3.84 7.82 9.49 7.82 7.82 asymp. sig. .000 .000 .000 .000 .000 results p(χ2(100.00) > 3.84) = .000 < 0.05 p(χ2(42.942) > 7.82) = .000 < 0.05 p(χ2(84.300) > 9.49) = .000 < 0.05 p(χ2(21.280) > 7.82) = .000 < 0.05 p(χ2(21.520) > 7.82) = .000 < 0.05 sig.\insig. significant; ha accepted significant; ha accepted significant; ha accepted significant; ha accepted significant; ha accepted source: compiled and calculated from primary data the table above shows that the calculated chi-square value is compared with its table value at a different degree of freedom and its significance value @ 5% level of significance. it shows the acceptance of ha. h0: there is no significant difference in prior experience of m-banking use. table 16. calculation of chi-square value to measure statistical significance difference in prior experience of using mbanking services test statistics prior experience chi-square 34.418a df 1 table value 3.84 asymp. sig. .000 results p(χ2(34.418) > 3.84) = .000 < 0.05 sig.\insig. significant; ha accepted source: compiled and calculated from primary data jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 21 the table above shows that the calculated chi-square value is compared with its table value at a degree of freedom 1 and its significance value @ 5% level of significance. it shows the acceptance of ha. h0: there is no significant difference in frequency of using m-banking services. table 17. calculation of chi-square value to measure statistical significance difference in frequency of using m-banking services test statistics chi-square 302.956a df 4 table value 9.49 asymp. sig. .000 results p(χ2(302.956) > 9.49) = .000 < 0.05 sig.\insig. significant; ha accepted source: compiled and calculated from primary data the table above shows that the calculated chi-square value is compared with its table value at a degree of freedom 4 and its significance value @ 5% level of significance. it shows the acceptance of ha. based on quantitative hypotheses h0: there is no significant difference in volume (i.e. number) of m-banking transactions of sbi, hdfc and citi bank aftermath covid-19. (h0:µvolsbi = µvolhdfc = µvol’citi bank) table 18. descriptive statistics: related to volume of m-banking transactions descriptive statistics n minimum maximum mean std. deviation volpresbi 5 300516767 337113205 322469099 14716214.15 volpostsbi 5 287963313 424607423 370776973 55013702.67 volprehdfc 5 108376705 129307244 121382721 8062225.05 volposthdfc 5 86337417 150214245 119898353 24522352.72 volpre’citi bank 5 1835063 1973294.00 1903472 53708.78 volpost’citi bank 5 1460133 1681857.00 1558342 96246.13 zscore (volpresbi) 5 -1.49171 .99510 .0000000 1.00000000 zscore (volpostsbi) 5 -1.50533 .97849 .0000000 1.00000000 zscore(volprehdfc) 5 -1.61320 .98292 .0000000 1.00000000 zscore (volposthdfc) 5 -1.36859 1.23626 .0000000 1.00000000 zscore (volpre’citi bank) 5 -1.27371 1.30000 .0000000 1.00000000 zscore (volpost’citi bank) 5 -1.02040 1.28332 .0000000 1.00000000 valid n (listwise) 5 source: compiled and calculated from primary data from the calculated minimum, maximum, mean and standard deviation value (in table 19), the researcher has found z-score using z-table negative and positive value for sample sbi bank as follow: calculation z-score and pre-post per cent changes in volume of m-banking transactions sbi pre: minimum maximum z1 = 300516767 ─ 322469099 z2= 337113205 ─ 322469099 14716214.15 14716214.15 z1= -1.49 z2= 0.99 z1= -0.0681 z2= 0.8389 pre per cent (sbi) = (z2-z1) = (0.8389-0.0681) = 0.7708 = 77.08% minimum maximum post: z1 = 287963313 ─ 370776973 z2= 424607423 ─ 370776973 55013702.67 55013702.67 z1= -1.5 z2= 0.97 z1= -0.0648 z2= 0.834 post per cent (sbi) = (z2-z1) = (0.8340-0.0648) = 0.7692 = 76.92% calculation z-score and pre-post per cent changes in volume of m-banking transactions hdfc pre: minimum maximum z1 = 108376705 ─ 121382721 z2= 129307244 ─ 121382721 8062225.05 8062225.05 z1= -1.61 z2= 0.98 z1= -0.0537 z2= 0.8365 jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 22 pre per cent = (z2-z1) = (0.8365 0.0537) = 0.7828 = 78.28% maximum maximum post: z1 = 86337417 ─ 119898353 z2= 150214245 ─ 119898353 24522352.72 24522352.72 z1= -1.368 z2= 1.2362 z1= -0.08534 z2= 0.8925 post per cent (sbi) = (z2-z1) = (0.8925 1.368) = 0.80716 = 80.72% calculation z-score and pre-post per cent changes in volume 0f m-banking transactions citi bank pre: minimum maximum z1 = 1835063 ─ 1903472 z2= 1973294 ─ 1903472 53708.78 53708.78 z1= -1.273 z2= 1.3 z1= -0.10027 z2= 0.9302 pre per cent = (z2-z1) = (0.9302 1.273) = 0.82993 = 82.99% minimum maximum post: z1 = 1460133 ─ 1558342 z2= 1681857 ─ 1558342 96246.13 96246.13 z1= -1.02 z2= 1.2833 z1= -0.15386 z2= 0.8997 post per cent (sbi) = (z2-z1) = (0.8997 0.15386) = 0.74584 = 74.58% source: compiled and calculated from primary data table 19. z-score: aftermath covid-19 related to volume of m-banking name of the bank (volume of m-banking) pre -percent post percent difference (% increase\% decrease) sbi 77.08 % 76.92 % 00.16 % (decrease) hdfc 78.28 % 80.72 % 02.44 % (increase) citi bank 82.99 % 74.58 % 08.41 % (decrease) source: compiled and calculated from primary data hence, the alternate hypothesis, there is a significant difference in volume (i.e. number) of m-banking transactions of sbi, hdfc and citi bank aftermath covid-19. (h0:µvolsbi = µvolhdfc = µvol’citi bank), is accepted. h0: there is no significant difference in value (i.e. amount) of m-banking use of sbi, hdfc and citi bank aftermath covid-19 (h0: µvalsbi = µvalhdfc = µval’citi bank) table 20. descriptive statistics related to value of m-banking transactions descriptive statistics n minimum maximum mean std. deviation valpresbi 5 910042961 1054325130.37 981478286.54 59670139.53 valpostsbi 5 925024539.83 1373117981.00 1229123774.56 185372952.98 valprehdfc 5 660154034.10 726268897.70 699673177.02 25745493.54 valposthdfc 5 427146398.30 826220988.90 673413205.10 162568589.94 valpre’citi bank 5 37749396.82 43713103.50 41109833.76 2515407.30 valpost’citi bank 5 29215948.74 38735733.45 34128391.652 3886039.31 zscore (valpresbi) 5 -1.19717 1.22083 .0000000 1.00000000 zscore (valpostsbi) 5 -1.64047 .77678 .0000000 1.00000000 zscore (valprehdfc) 5 -1.53499 1.03302 .0000000 1.00000000 zscore (valposthdfc) 5 -1.51485 .93996 .0000000 1.00000000 zscore (valpre’citi bank) 5 -1.33594 1.03493 .0000000 1.00000000 zscore (valpost’citi bank) 5 -1.26413 1.18561 .0000000 1.00000000 valid n (listwise) 5 source: compiled and calculated from primary data jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 23 from the calculated minimum, maximum, mean and standard deviation value (in table 19), the researcher has found zscore using z-table negative and positive value for sample sbi bank as follow: the calculation of aftermath covid-19 of value of m-banking of sbi bank calculation z-score and pre-post per cent changes in value of m-banking transactions sbi: pre: minimum maximum z1 = 910042961 ─ 981478286.5 z2= 1054325130 ─ 981478286.5 59670139.53 59670139.53 z1= -1.2 z2= 1.22 z1= -0.11507 z2= 0.88877 pre per cent (sbi) = (z2-z1) = (0.88877-0.11507) = .7737 = 77.37 % minimum maximum post: z1 = 925024539.8 ─ 1229123775 z2= 1373117981 ─ 1229123775 185372953 185372953 z1= -1.64 z2= 0.78 z1= -0.0505 z2= 0.7823 post per cent (sbi) = (z2-z1) = (0.78230-0.05050) = 0.7318 = 73.18 % calculation z-score and pre-post per cent changes in value of m-banking transactions hdfc: pre: minimum maximum z1 = 660154034.1 ─ 699673177 z2= 726268897.7 ─ 699673177 25745493.54 25745493.54 z1= -1.53 z2= 1.03 z1= -0.06301 z2= 0.84849 pre per cent = (z2-z1) = (0.84849 0.06301) = 0.7883 = 78.83 % maximum maximum post: z1 = 427146398.3 ─ 673413205.1 z2= 826220988.9 ─ 673413205.1 162568589.9 162568589.9 z1= -1.51 z2= 0.94 z1= -0.06552 z2= 0.82639 post per cent (sbi) = (z2-z1) = (0.82639 0.06552) = 0.7609 = 76.09% calculation z-score and pre-post per cent changes in value of m-banking transactions citi bank: pre: minimum maximum z1 = 37749396.82 ─ 41109833.76 z2= 43713103.5 ─ 41109833.76 2515407.3 2515407.3 z1= -1.34 z2= 1.03 z1= -0.09012 z2= 0.84849 pre per cent = (z2-z1) = (0.84849 0.09012) = 0.7584 = 75.84 % minimum maximum post: z1 = 29215948.74 ─ 34128391.65 z2= 38735733.45 ─ 34128391.65 3886039.31 3886039.31 z1= -1.26 z2= 1.19 z1= -0.10383 z2= 0.88298 post per cent (sbi) = (z2-z1) = (0.88298 0.10383) = 0.7792 = 77.92 % source: compiled and calculated from primary data table 21. z-score: aftermath covid-19 related to value of m-banking name of the bank (volume of m-banking) pre-percent post percent difference (% increase\% decrease) sbi 77.37 % 73.18 % 04.19 % (decrease) hdfc 78.83 % 76.09% 02.74 % (decrease) citi bank 75.84 % 77.92 % 02.08 % (increase) source: compiled and calculated from primary data jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 24 hence, the alternate hypothesis, there is no significant difference in value (i.e. amount) of m-banking use of sbi, hdfc and citi bank aftermath covid-19 (h0: µval sbi = µval hdfc = µval’ citi bank), thus this hypothesis is accepted. h0: there is no association between volume and value of m-banking transactions of sbi, hdfc and citi bank. to test above hypothesis, the researcher has collected secondary data related to volume and value of m-banking transactions of sbi, hdfc and citi bank from november, 2019 to august, 2020. table 22. correlations statistics: volume and value of m-banking transactions correlations vol val vol pearson correlation 1 .951** sig. (2-tailed) .000 n 30 30 val pearson correlation .951** 1 sig. (2-tailed) .000 n 30 30 **. correlation is significant at the 0.01 level (2-tailed). source: compiled and calculated from primary data in the table above, a pearson’s data analysis shows a very high positive correlation, r (30) = 0.951, which clearly states that the increase in number of m-banking transactions results into increase in values of transactions of sbi, hdfc, citi bank m-banking transactions. table 23. model summary: volume and value of m-banking transactions model summary b model r r square adjusted r square std. error of the estimate change statistics durbin-watson r square change f change df 1 df 2 sig. f change 1 .951a .905 .902 145067623 .48663 .905 266.770 1 28 .000 .408 a. predictors: (constant), vol b. dependent variable: val source: compiled and calculated from primary data the above model states that 95.10 (0.951*100) per cent of the dependent variable i.e. value of m-banking transactions of sbi, hdfc and citi bank by the independent variable i.e. volume of m-banking transactions of sbi, hdfc and citi bank. calculated value of durbin-watson is 0.408 (it is between 0 and less than 2) indicates positive autocorrelation between value of and volume of m-banking transactions of sbi, hdfc and citi bank. table 24. one-way anova: volume and value of m-banking transactions anova a model sum of squares df mean square f sig. 1 regression 5614080707056142300.000 1 5614080707056142300.000 266.770 .000b residual 589249230753630590.000 28 21044615384058228.000 total 6203329937809772500.000 29 a. dependent variable: val b. predictors: (constant), vol source: compiled and calculated from primary data the calculated fisher value fcrit (1, 28) = 266.770 is greater than its critical value 4.20 (at df1 1 and df 2 28) and its significance value is 0.000 (i.e. p = 0.000), which is less than 0.05, and therefore there is an association between value and volume of m-banking transactions of sbi, hdfc and citi bank. table 25. number of credit cards and point-of-sale transactions coefficient sa model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 145109729.501 38871708.825 3.733 .001 vol 2.973 .182 .951 16.333 .000 a. dependent variable: val source: compiled and calculated from primary data jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 25 figure 2. graphical presentation of regression equation from the table above and a graph; following regression equation has been formed. yi = assumed to be volume of m-banking transactions of sbi, hdfc citi bank. b0 = constant value from table bi = dependent variable value of m-banking xi = assumed to be independent variable volume of m-banking yi = b0 + bi (xi) yi = 145109729.501 + 2.973 (xi)........ …………………………(1) the above regression coefficient shows that for every unit of increase in volume of m-banking use of each sample bank, it is expected that the value of m-banking of sample bank transactions increase by 2.973 in a month. further, to check the fitness of the above regression model, the researcher has found the unstandardized predicted volume and value of mbanking transactions, as follow; table 26. correlations statistics: unstandardized predicted value volume and value of m-banking transactions correlations val unstandardized predicted value val pearson correlation 1 .951** sig. (2-tailed) .000 n 30 30 unstandardized predicted value pearson correlation .951** 1 sig. (2-tailed) .000 n 30 30 **. correlation is significant at the 0.01 level (2-tailed). source: compiled and calculated from primary data the table above prove the fitness of above regression model, with respect to r2 linear = 1 = 1 (in graph). figure 3. graphical presentation of regression equation based on unstandardized predicted value therefore, the alternate hypothesis, “there is an association between volume and value of m-banking transactions of sbi, hdfc and citi bank.”, is accepted. (h0: µsbi ≠ µhdfc ≠ µ’citi bank). jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 26 discussions the findings of the study on the research ‘mobile banking: an analytical study on aftermath covid-19 and gratification from the aspect of kano model’ are as follows:  overall female m-banking users found to be more aware and benefited: female m-banking users were more (66.67%) as compared to male (33.33%) in sbi, hdfc and citi bank. however, there is negligible difference in number of female m-banking users in sbi (n=202) and hdfc (n=203) and male m-banking users in sbi (n=98) and hdfc (n=97).  most of the m-banking users belong to the age group of up to 25 years. this is because they found ease and prefer flexibility in carrying out banking transactions.  the data reveals that around 27.11% government employees are using m-banking from sbi, hdfc and citi bank. however, there is negligible difference between government employee and business doing m-banking users.  it is also found that, majority 29.33% m-banking users belong to the income group up to rs. 24999. this shows m-banking users with higher income (rs. 75000 and above) is comparatively less because of hacking and security concern.  most of the m-banking users have prior experience of m-banking services. it is found that there is a significant difference in prior experience of using m-banking services.  daily use of m-banking services enjoyed by 31.22% customers. the consistency in providing m-banking services shows that hdfc m-banking users were more satisfied than sbi and citi bank. the bank has good reputation and provides reliable method of m-banking shows that sbi m-banking users more satisfied than hdfc and citi bank.  the m-banking services are totally secured reveals that hdfc m-banking user are more satisfied than sbi and citi bank. the easy portability of m-banking services reflected that, citi bank m-banking users more satisfied than hdfc and sbi. the support to customers shows that, hdfc m-banking users more satisfied than sbi and citi bank.  the comprehensive services provided by banks i.e. m-banking services shows that sbi m-banking users more satisfied than hdfc and citi bank. m-banking provides flexibility in acceptance of different plastic cards\payments, shows that hdfc m-banking users are more satisfied than sbi and citi bank.  the interface of m-banks services were users friendly, shows that hdfc m-banking users are more satisfied than sbi and citi bank. m-banking services highly secured, shows that sbi m-banking user more satisfied than hdfc and citi bank. it is found that there is decrease in volume of m-banking transactions of sbi (00.16% decrease) and citi bank (05.54% decrease). however, there is 01.94% increase in m-banking transactions of hdfc bank. it is found that there is decrease in value of m-banking transactions of sbi (04.29% decrease) and hdfc (02.72% decrease). however, there is 02.21% increase in m-banking transactions of citi bank. conclusions from the present research study, it has been observed that the m-banking is a financial service providing online and over internet mobile based platform, found to be immediate substitute to plastic money, which helps to reduce the risk of carrying cash and boost up money in digital form for bank customers’ convenience and safety.  telecommunication and cellular service provider should extend their network coverage to remote rural area (time call in covid-19). this promotes the banks to provide services to areas were physical branch access not possible. hence, bank can expand their banking services in rural area with m-banking coverage, it should be made users friendly and with regional language option.  for every wrong data input for online transactions, reversal procedure should be made immediate. bank should expand their merchant tie-up for payments and associations. bank should make synchronization ease with different m-wallets platforms. this helps to push an economy towards digital banking.  there should be professionals and technicians at bank branch to educate users about its usage. bank should allow use of m-banking for non-core banking purpose also.  mobile platform should be well networked with bank server, to avail easy and error free access to account.  the bank should monitor transactions to implement artificial intelligence (ai). security concern and antihacking measures must be undertaken by banks to promote on-line transactions using m-banking.  the bank should direct their branches in rural and urban areas to have some definite number of mobile banking accounts. mobile banking has transmogrified the banking from brick-mortar to virtual banking-online, using smartphones called as m-banking. m-banking provides flexibility, convenience, safety and security to bank customers and further offer them account related utility services. m-banking provides bank based mobile application to carry out financial transactions. there is a threat of hacking, cloning and safety-security concern also. hence, m-banking users should be made aware on time about its secured use and passcode change and re-change. technological advancement and banking policy amendments has made it financial inclusive. this is the time to understand and resolve with m-banking problems to make it more dependable and efficient. jaywant et al., indian journal of finance and banking 13(1) (2023), 12-27 27 author contributions: conceptualization, v.g. and b.j.; methodology, b.j. and v.g.; software, b.j. and k.j.s.; validation, v.g. and r.n.; formal analysis, v.g.; investigation, r.n., k.j.s. and v.g.; resources, v.g. and b.j.; data curation, k.j.s. and j.b.; writing – original draft preparation, v.g., b.j. and k.j.s.; writing – review & editing, v.g., b.j. and k.j.s.; visualization, j.b. and b.j.; supervision, r.n.; project administration, v.g.; funding acquisition, k.j.s. and r.b.n. 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. 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 barnes, s. j., & corbitt, b. (2003). mobile banking: concept and potential. international journal of mobile communications, 1(3), 273-288. http://dx.doi.org/10.1504/ijmc.2003.003494 cherian, j., gaikar, v., paul, r., & pech, r. (2021). corporate culture and its impact on employees’ attitude, performance, productivity, and behavior: an investigative analysis from selected organizations of the united arab emirates (uae). journal of open innovation: technology, market, and complexity, 7(1), 45, 1-27 https://doi.org/10.3390/joitmc7010045 cherian, j., jacob, j., qureshi, r., & gaikar, v. (2020). relationship between entry grades and attrition trends in the context of higher education: implication for open innovation of education policy. journal of open innovation: technology, market, and complexity, 6(4), 199. 1-17. https://doi.org/10.3390/joitmc6040199 cherian, j., gaikar, v., & raj p, p. (2020). do leadership styles impact organizational performance in the uae context? a study. international journal of mechanical engineering and technology, 11(9), 23-32. durkin, m., o'donnell, a., mullholland, g., & crowe, j. (2007). on e‐banking adoption: from banker perception to customer reality. journal of strategic marketing, 15(2-3), 237-252. https://doi.org/10.1080/09652540701318815 laforet, s., & li, x. (2005). consumers’ attitudes towards online and mobile banking in china. international journal of bank marketing, 23(5), 362-380. https://doi.org/10.1108/02652320510629250 matzler, k., & hinterhuber, h. h. (1998). how to make product development projects more successful by integrating kano's model of customer satisfaction into quality function deployment. technovation, 18(1), 25-38. https://doi.org/10.4236/jssm.2015.85079 poddar, b., erande, y., chitkara, n., bhansal, a., & kejriwal, v. (2016). digital and beyond new horizons in indian banking. the boston consulting group, ficci, indian bank’s association: mumbai, india, 1-43. https://doi.org/10.55529/jcfmbs.31.23.34 reserve bank of india press releases. (2023). retrieved february 5, 2023, from https://www.rbi.org.in/scripts/bs_pressreleasedisplay.aspx?prid=3058 saeidipour, b., vatandost, t., & akbari, p. (2012). study the effects of development of electronic banking on customer satisfaction levels by using kano model (case study: refah bank of kermanshah, iran). international research journal of applied and basic sciences, 3(5), 950-960. https://ssrn.com/abstract=2145494 sharma, s. k., & sharma, m. (2019). examining the role of trust and quality dimensions in the actual usage of mobile banking services: an empirical investigation. international journal of information management, 44, 65-75. https://doi.org/10.1016/j.ijinfomgt.2018.09.013 sulaiman, a., jaafar, n. i., & mohezar, s. (2007). an overview of mobile banking adoption among the urban community. international journal of mobile communications, 5(2), 157-168. http://dx.doi.org/10.1504/ijmc.2007.011814 suoranta, m. (2003). adoption of mobile banking in finland. studies in business and management 28 (doctoral dissertation, doctoral thesis, jyva skyla). tiwari, r., & buse, s. (2007). the mobile commerce prospects: a strategic analysis of opportunities in the banking sector (p. 233). hamburg university press. http://library.oapen.org/handle/20.500.12657/27668 zhao, m., & roy dholakia, r. (2009). a multi‐attribute model of web site interactivity and customer satisfaction: an application of the kano model. managing service quality: an international journal, 19(3), 286-307. http://dx.doi.org/10.1108/09604520910955311 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. http://dx.doi.org/10.1504/ijmc.2003.003494 https://doi.org/10.3390/joitmc6040199 https://doi.org/10.1080/09652540701318815 https://doi.org/10.1108/02652320510629250 http://dx.doi.org/10.4236/jssm.2015.85079 https://doi.org/10.55529/jcfmbs.31.23.34 https://www.rbi.org.in/scripts/bs_pressreleasedisplay.aspx?prid=3058 https://ssrn.com/abstract=2145494 https://doi.org/10.1016/j.ijinfomgt.2018.09.013 http://dx.doi.org/10.1504/ijmc.2007.011814 http://library.oapen.org/handle/20.500.12657/27668 http://dx.doi.org/10.1108/09604520910955311 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 10(1) (2022), 41-44 41 finance and banking ijfb vol 10 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa impact of value-added tax on gross domestic product of bangladesh jafrul shahriar jewel (a)1 (a) mphil student, department of finance, university of dhaka, dhaka-1000, bangladesh; e-mail: jewelmpf@gmail.com a r t i c l e i n f o article history: received: 20th march 2022 accepted: 20th may 2022 online publication: 18th june 2022 keywords: v.a.t., g.d.p., sales tax, bangladesh j.e.l. classification codes: k34 a b s t r a c t international monetary fund advocates the bangladesh government introduce value added tax that was incepted in 1991. before that, it was known as sales tax. now bangladesh scales up its country income status from a low-income country to a middle-income country, while value-added tax is the key player contributing a great part to gross domestic product. the study inspects the effect of value-added tax on bangladesh's gross domestic product using a long dataset from 1991-1992 to 2020-2021. the study uses a co-integration technique invented by johansen with a restricted v.a.r. named vector error correction model. this article finds that value-added tax has a specific positive impact on a gross domestic product that ensures good and continuous economic growth over the decades in bangladesh. © 2022 by the authors. licensee cribfb, u.s.a. 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 german economist f. von siemens 1918 proposed that value-added tax (v.a.t.) is a substitute for german turnover tax. french economist maurice laure innovates the value-added tax in the year 1954. it is an indirect tax. another name for v.a.t. is goods and service tax (g.s.t.). v.a.t. is levied on each stage of value addition. the french republic first introduced the v.a.t. on 10th april of 1954. european economic committee (e.e.c.) imposes v.a.t. to ensure a uniform trading system. v.a.t. was introduced in most of the french-speaking african countries in 1964. brazil was the first developed country that implemented v.a.t. in 1967. india and china both introduced v.a.t. in the year1990. bangladesh introduced v.a.t. in 1991 to replace sales tax. now, the v.a.t. is the most common practice of internal revenue for all countries of the world. the international monetary fund (i.m.f.) advocates and plays a vital role in this case. nowadays, the v.a.t. is an important tool of fiscal management. william petty gives the basic concept of gross domestic product (g.d.p.) in sixteen half-centuries. charles davenant developed the method in 1675. in 1934, at the bretton woods conference, g.d.p. became the most important parameter for understanding a country's economic health, and simon kuznets sketched that idea. when china started practicing g.d.p. as a financial health measuring scale of a country office in 1993, it gained global affiliation. g.d.p. is the monetary value of final goods and services produced by a country for a given period. g.d.p. is determined in real and nominal value; otherwise, g.d.p. is valued at the constant price or current price, alternately known as inflation-adjusted or not. g.d.p. is defined in three ways: production, income, and expenditure. the most common and widely used approach is the expenditure approach. according to the expenditure approach, g.d.p. = c+i+g+(x-m). where, c= household final consumption, i= investment, g= government expenditure on final goods and services, x= gross export, and m= gross import. the national budget of bangladesh has been growing positively over the years. in order to back up the rapid growth of g.d.p., the government of bangladesh needs to increase its expenditure (faridy & sarker, 2011). in order to increase government expenditure, bangladesh needs to increase indirect taxes like v.a.t. it is important to know the extent of the relationship between v.a.t. & g.d.p. this study will investigate the extent of the relationship between 1corresponding author: orcid id: 0000-0002-7571-6623 © 2022 by the authors. hosting by cribfb. peer-review under responsibility of cribfb, u.s.a. https://doi.org/10.46281/ijfb.v10i1.1753 to cite this article: jewel, j. s. (2022). impact of value added tax on gross domestic product of bangladesh. indian journal of finance and banking, 10(1), 41-44. https://doi.org/10.46281/ijfb.v10i1.1753 https://orcid.org/0000-0002-7571-6623 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v10i1.1753 jewel, indian journal of finance and banking 10(1) (2022), 41-44 42 v.a.t. and g.d.p. by covering a period from its inception to the recent past. the study's main purpose is to find a causal relation between v.a.t. & g.d.p. literature review if you buy more, you have to pay more tax; this is the underlying philosophy of v.a.t. it is levied to the person when s/he purchases v.a.t. applicable goods and services. the seller is the custodian of the government to collect v.a.t. under the v.a.t. law, 2012, which shows that v.a.t. has a significant positive impact on g.d.p. of bangladesh. they also find the significant positive effect of v.a.t. on total tax revenue and revenue for the period of 1991-1992 to 2018-2019. lalarukh and chowdhury (2013) opine that v.a.t. has significantly positive contributions to g.d.p. of bangladesh from 19911992 to 2011-2012. many researchers find positive effects of v.a.t. on g.d.p. in various countries and time frames using different methodologies, for example, adegbie, olajumoke, and danjuma (2016), anojan (2015) in srilanka, ayoub, and mukharjee (2019) in china, rahman, and sarkar (2016) in nigeria, emmanuel (2013), gatawa et al. (2017) in pakistan, jalata (2014) in ethiopia, nasiru, haruna, and abdullahi (2016). okoye and gbegi (2013), onwuchekwa and aruwa (2014), shala (2017) in kosovo, and simionescu and albu (2016) in bulgaria, czech republic, hungary, poland, and romania. however, gashi, asllani, and boqolli (2018), stoilova, and patonov (2013) find a significant negative impact of v.a.t. on g.d.p. in nigeria. kalas and milenkovic (2017) find no impact of vat on gdp. mursgrave (1969) opines that tax impacts are classified as (i) ability to give up, (ii) efficient resource use, (iii) ability to collect (iv) comparison with average performance. emran and stiglitz (2005) analyze reforms of trade tax and v.a.t. in the countries with informal economies and conclude that most developing countries replacing trade taxes with v.a.t. can reduce welfare under plausible assumptions. michael et al. (2013) opine that in a tradable only economy with no informal sector, a reduction in the import tariff on the commodity bearing the highest taxation and the highest total indirect tax burden increases welfare under suitable assumptions of substitutability. the lost revenue is compensated by an increase in the consumption tax on the commodity bearing the lowest indirect tax burden (michael et al., 2013). contemporary literature concludes that v.a.t. is a significant revenue-raising essential for developing countries in the eye of efficacy (fjeldstad, 2014). the improper tax system is the major gridlock of industrial growth in the case of bangladesh (nashashibi (2002) v.a.t. raises production costs which creates the product non-competitive (nashashibi, 2002) v.a.t. is not a hinder industrial growth as well as an economic growth of bangladesh. nashashibi (2002) focuses more on v.a.t. governance rather than its impact on economic growth. research methodology both v.a.t. and g.d.p. have common trends of consistent growth from year to year. if this study considers this dataset, the relationship between two variables gives misleading results. finding the solution to this problem, engle and granger (1987) cite that non-stationary data sets must be converted into stationary by differencing. this type of conversion is known as co-integration or co-integrating equation (c.e.). johansen's co-integration technique is suitable for this study because it solves the problem of non-stationary level data. so, the equation of this study is: gdpt = β0+ β1vatt + et (1) where, β0= intercept, β1 = coefficient and e= error term. first-order differentiation converts non-stationary data into stationary data and tests the relation between v.a.t. and g.d.p. the augmented dickey-fuller test is conducted to test the stationarity of the data set in this study. the vector error correction model is a model which gives a remedy for linear regression having non-stationary data set, which are co-integrated. so v.e.c. model is the best technique to assess the relation between v.a.t. and g.d.p. data secondary time series data are collected from bangladesh economic review, b.b.s., bangladesh bank, ministry of finance, etc., from 1991-1992 to 2020-2021. empirical analysis the null and alternative hypotheses of the augmented dickey-fuller test are: null hypothesis (h0): there is a unit root in the data set. alternative hypothesis (h1): there is no unit root in the data set. table 1. augmented dickey-fuller test output variables unit root in z-statistic and (p-value) of test with constant but without trend z-statistic and (p-value) of test with constant and trend comments log(g.d.p.) level 1.4500 (0.9973) -1.7380 (0.7339) non stationary 1st difference -4.1320** (0.0000) -3.9320* (0.0109) stationary log(vat) level -0.2430 (0.9332) -2.2100 (0.4840) non stationary 1st difference -6.9660** (0.0000) -7.0190** (0.0000) stationary *(**) denotes statistical significance level at 5% (1%) level. jewel, indian journal of finance and banking 10(1) (2022), 41-44 43 table 1 shows the augmented dickey-fuller test results. both variables, g.d.p. and v.a.t., have unit root levels, and both are non-stationary. from the above table, the study finds that we cannot reject the null hypothesis at one level, which implies the data set is not stationary. for this type of non-stationary dataset johansen co-integration test technique is the best tool to establish a co-integration relation between two variables. table 2. results of johansen co-integration test hypothesized no. of co-integration equation(s) trace statistic 5 percent critical value 1 percent critical value none** 21.4351 15.41 20.04 at most 1 1.5300 3.76 6.65 *(**) denotes statistical significance level at 5% (1%) level. table 2 reports the results of the johansen co-integration test. table 2 reports the trace statistic value at none and number one and concludes that there is one co-integration equation between g.d.p. and v.a.t. which is statistically significant at 5% and 1% significance levels. table 3. the output of co-integration coefficients log(g.d.p.) log(v.a.t.) constant coefficient 1.0000 -0.8113 -5.7817 standard error 0.0188 0.1632 log-likelihood 92.5304 table 3 suggests that there exists the following co-integration equation: log (gdp)t = 5.7817+ 0.8113 log(vat)t + et (2) equation 2 states that v.a.t. has a significant positive impact on g.d.p. the reason behind that positive impact is that v.a.t. increases government revenue and this increased government revenue meet the various government expenditure, which is a part of gross domestic product. conclusion this study establishes a relation that v.a.t. has a statistically significant positive influence on g.d.p., which plays a vital role in the income status improvement of bangladesh. bangladesh's economic growth has consistently achieved a standard growth rate since the inception of v.a.t. today. the positive impact of v.a.t. on g.d.p. may find positive outputs in the essentials of g.d.p. this finding of the positive effect of v.a.t. on g.d.p. will help policymakers improve or change consumption patterns and investment in goods and services which may help reduce unemployment, control inflation, increase purchasing power, etc., in many more ways. author contributions: conceptualization, j.s.j.; data curation, j.s.j.; methodology, j.s.j.; validation, j.s.j.; visualization, j.s.j.; formal analysis, j.s.j.; investigation, j.s.j.; resources, j.s.j.; writing – original draft, j.s.j.; writing – review & editing, j.s.j.; supervision, j.s.j.; project administration, j.s.j.; funding acquisition, j.s.j. 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. 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 adegbie, f. f., olajumoke, j., & danjuma, k.j. (2016). assessment of value-added tax on the growth and development of nigeria economy: imperative for reform. accounting and finance research, 5(4), 163-178. https://doi.org/10.5430/afr.v5n4p163 anojan, v. (2015). value-added tax (v.a.t.), gross domestic production (g.d.p.), and budget deficit (b.d.): a case study in srilanka. proceeding of international conference on contemporary management, (iccm-2015), 1-11. ayoub, z., & mukherjee, s. (2019). value added tax and economic growth: an empirical study of china perspective. signifikan: jurnal ilmu ekonomi, 8(2), 235-242. emran, m. s., & stiglitz, j. e. (2005). on selective indirect tax reform in developing countries, journal of public economics, 89, 599– 623. https://doi.org/10.1016/j.jpubeco.2004.04.007 emmanuel, u. c. (2013). accumulation of external reserves and effects on exchange rates and inflation in nigeria. international business and management, 6(2), 105-114. faridy, n., & sarker, t. (2011). incidence of value added tax (vat) in the developing countries: a case in bangladesh. international journal of trade, economics and finance, 2(5), 437-442. https://doi.org/10.1016/10.7763/ijtef.2011.v2.145 https://doi.org/10.1016/j.jpubeco.2004.04.007 jewel, indian journal of finance and banking 10(1) (2022), 41-44 44 fjeldstad, o. h. (2014). tax and development: donor support to strengthen tax systems in developing countries. public administration and development, 34(3), 182-193. https://doi.org/10.1002/pad.1676 gatawa, n. m., abdulgafar, a., & olarinde, m. o. (2017). impact of money supply and inflation on economic growth in nigeria (1973-2013). iosr journal of economics and finance (iosr-jef), 8(3), 26-37. gashi, b., asllani, g., & boqolli, l. (2018). the effect of tax structure in economic growth. international journal of economics & business administration (i.b.a.), 6(2), 56-67. jalata, d. m. 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(2016). evaluating the impact of value added tax on the economic growth of nigeria. journal of accounting and taxation, 8(6), 59-65. okoye, e. i., & gbegi, d. o. (2013). effective value-added tax: an imperative for wealth creation in nigeria. available at ssrn 2238854. onwuchekwa, j. c., & aruwa, s. a. (2014). value-added tax and economic growth in nigeria. european journal of accounting auditing and finance research, 2(8), 62-69. rahman, z. u., & sarkar, s. h. (2021). role of value added tax (v.a.t.) on the economic growth of bangladesh, iosr journal of business and management (iosr-jbm), 23(02), 12-27 shala, t. (2021). collection of value added tax in kosovo and its effect on economic growth. european journal of economics and business studies, 3(2), 225-233. stoilova, d., & patonov, n. (2013). an empirical evidence for the impact of taxation on economic growth in the european union. tourism & management studies, tourism & management studies, 3, 1031-1039. simionescu, m., & albu, l. l. (2016). the impact of standard value-added tax on economic growth in cee-5 countries: econometric analysis and simulations. technological and economic development of economy, 22(6), 850-866. publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2022 by the authors. licensee cribfb, u.s.a. 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.1002/pad.1676 https://revistia.com/index.php/ejes/index https://revistia.com/index.php/ejes/index http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 9(1) (2022), 164-176 164 finance and banking ijfb vol 9 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa the altered volatility spillover sequence under covid-19: indian sectoral indices impact deibold yilmaz index kunwar sanjay tomar (a)1 (a) professor, school of management, fostiima, new delhi, india; e-mail: sanjay.tomar@fostiima.org a r t i c l e i n f o article history: received: 01 january 2022 accepted: 28 february 2022 online publication: 19 march 2022 keywords: diebold and yilmaz index volatility spillover, bombay stock exchange sector indices, covid19 jel classification codes: g01, g11, d81, d85 a b s t r a c t the industrial sectors have their unique place in the economic interlinkage. the sectoral valuation reflected by each sector indices shows how each sector responds to different events. the exogenous event covid-19 impact has been differential due to the impact of lockdown and other covid-19 appropriate restrictive measures. the present paper examines the change in the volatility spillover induced by covid19. the study uses daily sectoral indices data from india's oldest exchange, the bombay stock exchange. data from january 2010 to november 2020 has been split into four subgroups to find how covid-19 has affected the volatility spillover using the diebold and yilmaz index. ranks have been assigned to find the change in the four periods' volatility to the volatility spillover's magnitude and direction. the impact of the covid-19 is strong enough to change the volatility spillover, which followed a system. capital goods volatility increased three times. at the same time, the auto sector becomes a volatility receiver instead of the net volatility dispenser, from 2.5% before covid-19 to -3.39% after covid-19 lockdown. bankex remains unaffected by covid-19. © 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 the covid-19 seems to have impacted sectors like hospitality, manufacturing, and services industry almost immediately, followed by other sectors. hence volatility transmission also should have followed the same sequence. a case in point is the information technology sector. the shifting of “work from home” would have made no significant difference to this sector's volatility. however, our findings show a complete upsurge of the volatility sequencing. covid-19: the contextual background covid-19 is a rare event. it needs intense scrutiny, rightly termed a genuine exogenous shock (ramelli & wagner, 2020). mainly so as the covid-19 with 2.5 million deaths (march 1 2021) is next only to spanish flu in terms of fatality. the other pandemics and epidemics like 1957-58 h2n2, h3n2 1968, 2009-10 swine flu,2012 mers, 2014-16 ebola did not disrupt the globe as covid-19 has. one common strand most researchers affirm today is how gargantuan covid-19 is. compared to covid, the spanish flu killed nearly 50 million (zimmer & burke, 2009) worldwide, while around 20 million in india(chandra & kassens-noor, 2014). the research on spanish flu is not new, neither for the finance field nor for medical sciences. medical research has been active in the last decade, calling the spanish flu virus the “mother of all pandemics”(taubenberger & morens, 2006). much of such research extensively studied the covid-19 type pandemic through the study of the spanish flu (boëlle et al., 2011; martini et al., 2019). baker et al. (2020) compared the financial markets under the present pandemic and other such epidemic effects. they confirm through their study that covid-19 pandemic is most severe in its impact in the entire time frame from 1900 onwards. the impact of covid-19 is almost double that of the spanish flu, as per baker. more work hence is required to 1corresponding author: orcid id: 0000-0003-0166-3749 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v9i1.1660 to cite this article: tomar, k. s. (2022). the altered volatility spillover sequence under covid-19: indian sectoral indices impact deibold yilmaz index. indian journal of finance and banking, 9(1), 164-176. https://doi.org/10.46281/ijfb.v9i1.1660 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v9i1.1660 https://orcid.org/0000-0003-0166-3749 tomar, indian journal of finance and banking 9(1) (2022), 164-176 165 understand many aspects of such events. the essential objectives are interlinkage of volatility, global penetration, and the ripple effect to study the financial meltdowns. as we move through the covid-19 much research is being conducted to understand the financial markets' response to such black swan (loginov & heywood, 2020) events. what seems to be even more challenging is the economic recovery mechanism. research studies on the impact of a pandemic, business cycles, financial crisis focus on the genesis and influence of channelization. however, the system for research to study volatility inflicted by covid-19 creates its peculiar mechanism. on the one hand, we grapple with the battle to nurture back the economy to normal, while on the other hand, the covid-19 does not seem to end. the present pandemic of covid-19 is most intense in its impact. the spread of pandemic upsurge covering all the countries is another fact that the global community is coming to terms. the question now is whether this phase of uncertainty will end or whether coivd 19 has become a more regular part of our lives. for the researchers, financial market and economic regulators, business managers, and fund managers, this phase of covid19, the battle of various vaccines and mutating viruses, is the test of time. researches need to find insights into this covid19 pandemic. why sector level study of volatility? the present study adds to the literature by opening the dimension of sector behaviour peculiar to covid-19. the equity sector indices reflect the expected future earnings and valuation. the valuation differs across the sectors. the importance of the sectors as economic focal point has been changing dynamically as india moves from underdeveloped to developed economy. over the years, the indian economic structure has changed. labour-intensive manufacturing has changed to a more service-based economy, changing the real wage to the rental price of capital ratio. the labour intensity has changed from 1.45 in the 1980s to 0.33 in the 2000s. (economics & series, 2014). the changing structure of the indian economy itself needs regular assessment to assess the sector level data. with the covid-19, a new window has opened to find how the sectors have behaved—especially the labour-intensive economic activities. covid-19 has led to significant disruption for the factory workers. nearly 600 million workers migrated internally in india due to covid-19 (covid-19 fallout: how the pandemic displaced millions of migrants news makers news issue date: january 11, 2021, n.d.) although the scenario before covid-19 was not too good either. as per the moc (ministry of commerce), 2019-20 had already seen a flat growth in the eight core industries (coal, crude oil, natural gas, refinery products, fertilizers, steel, cement, and electricity)2. sector level study need to be studied, with regards to how the lockdown has impacted certain sectors more than the others. how the sectors have transmitted the risk can be assessed. interest in sector-level associations and functionality has been a popular topic for research (bahmani-oskooee & saha, 2019) . narrowing to a more specific study of volatility spillover and connectedness, gabauer et al. (2020) research is worth mentioning. gabauer et al. (2020) has undertaken a more recent study to find the volatility spillover connectedness for indian sectors. the unique relation supply demand relation sectors have many not necessarily transmit volatility in the order expected. gabauer et al. (2020) consider the leading/lagging connectedness the driver of many critical growth-oriented decisions. their study shows that this connectedness varied in india's previous crisis, mainly 2008, inflation of 2011, national elections, and demonetization of 2016. they tried to answer how this change occurred. the policy changes in particular between 2014-19 with the focus on “making in india” and several initiatives to increase employment, regulate banking (the recent past has seen many mergers of public sector banks) reflected in their study. like the ghatziantonion study, this paper tries to understand the system's volatility spillover connectedness the covid-19. we use the diebold and yilmaz (2012) index (dyi) with a volatility measure of parkinson (parkinson, 1980). the dyi can see the volatility spillover over different asset class portfolios and between the sectors. their index bypasses the controversial issues associated definition and existence of episodes of “contagion” or “herd behaviour” as per diebold and yilmaz. the connectedness, by definition, is a linkage or relatedness of the components under study. the (xiao & huang, 2018) dyi is used by many authors. dyi has also led to more augmented methods like by gabauer (2020); antonakakis et al. (2018). xiao and huang compare and contrast the different methods used in measuring connectedness. their study classifies the dyi based on different methods based on the volatility spillover and the system's contribution. they find the dyi 2012 appropriate when the whole system is the understudy for the volatility of the variable spillover connectedness and not merely the correlation. the direction of volatility spillover with pair-wise calculation makes the dyi intuitively superior to other methods. we can understand “which sector gives and receives the volatility spillover?”. more important feature of dyi 2012 methodology is to find the primary variable dispensing the highest volatility spillover and hence the variable which takes the central role in the system-wide volatility spillover connectedness. literature review researchers agree that the present pandemic is comparable to the worst financial market meltdowns. the financial market downturn inflicted by covid-19 is unparalleled in its magnitude, penetration, and severity. the spanish flu, which killed 50 million (the spanish flu (1918-20): the global impact of the largest influenza pandemic in history our world in data, n.d.) people as compared to 2.5 million by covid-19, had a much lesser impact on financial markets and economy. baker and others find no other epidemic and pandemic having such intense effect on the economy and financial markets as covid19. they write in their white paper that the spanish flu impact was modest compared to covid-19. (baker et al., 2020a). perhaps that brings under scrutiny the governmental policies to check the covid-19. questions being asked such as “could the cost of battling covid-19 have been much lesser?”.(flatten the coronavirus curve at a lower cost wsj, 2 https://pib.gov.in/pressreleasepage.aspx?prid=1601314 ministry of commerce and industry india https://pib.gov.in/pressreleasepage.aspx?prid=1601314 tomar, indian journal of finance and banking 9(1) (2022), 164-176 166 n.d.)(coibion et al., 2020). the lockdown, as a policy decision to check covid-19, itself affected some sectors more than the others. notably, the labour-intensive sectors were hit most by covid-19 pandemic (chaudhary et al., 2020). these measures containing the spread of corona required immediate shut down of manufacturing and other such labour-intensive sectors. in india, the labour working in different manufacturing zones is spread across the country; labour to such sectors is predominantly served by the two most populous states of up and bihar. most of these day workers had no other option but to migrate to their native place. the triggering ripple effects led to massive internal migration in india (more details given earlier in this article). these ripple effects should reflect in the financial market’s valuation mechanism. hence, volatility would follow a sequence linked to the supply chain system. banks, the power sector, logistics are some sectors that continued functioning. thereby immune to the lockdown but certainly affected by the social distancing and even spread of infection. such differential sector level operations should reflect in the financial market information processing. there is a need to find the impact of financial markets and their sequence. such asymmetric connections in sectors become vital for fund managers, regulators, and business managers. the use of dyi is apt for such event as covid-19, as discussed above. the method has been used by researchers in similar financial and economic crisis previously. sehgal et al. (2015) using dyi find a change in the directional flow from the u.s. to europe, varying as the stages of the 2008 crisis deepened. accentuating the importance of connectedness measure even more, show how equity markets connectedness shows a robust geographical component, not found in the case for bond markets. their study reaffirms stronger international interlinkage in the “great financial crisis.” such volatility spillover connectedness has led to a series of studies that try to find the linkage among global institutions and markets. khan and others' complex network method finds structural change through "node changes, clustering, and homogeneity" in the world market (aslam et al., 2020). it is not surprising that in coivd 19, the major banks' connectivity increased, and so did the spillover density. the author puts it more effectively using the word "unprecedented interconnectivity" in covid19 using dyi (baumöhl et al., 2020). researchers define covid-19 as a pure “exogenous factor.” unlike other crises such as political, economic, and financial, covid-19 is an exact exogenous event to study the firm and industry interaction in such rare event. the infectious diseases earlier have been grossly underrated and slowly has crept into a more obscure event, as ramelli and wagner pointed out. their paper quote “world economic forum’s global risk report (2020)” (hall, 2020) listed the infectious disease as the tenth item in order of impact strength. in their paper, ramelli and wagner cite how the “disaster literature” can explain the complexity of such events and how they relate to their future use (ramelli & wagner, 2020). the researchers have been quick to provide useful benchmarks for the steps taken by different governments to check covid-19. an example of such a study is by carletti et al. (2020). they find a three-month lockdown to reduce the profit by 10% of yearly gdp. the most vulnerable are the small and mid-size organisations (carletti et al., 2020). the literature on covid-19 can also be viewed as published initially at the beginning of the covid-19. as who declared the pandemic, markets and governments acted. to this announcement by who, the researchers acted almost immediately. the researchers started publishing as early as march april 2020. like liu et al. (2020) published their work in april 2020. they effectively laid the composition for classifying the research of earlier similar studies on catastrophic events. their study shows how more digitalised firms stood the test of the time to face coivd 19 (ding et al., 2020). many such studies captured the data up to march 2020, publishing in july to september 2020. some set of these studies compared the pandemic to other such crisis times. however, covid-19 pandemic differed from other such events in many ways. firstly, the unique aspect of the covid-19 is its almost simultaneous global onset. the studies measuring the impact of coivd on markets use many methods to find the specific features relating to the covid-19 pandemic. the epidemics like ebola, sars mers, have been concentrated more in certain geographical regions but not coivd 19. the panic and fear impact of the pandemics have been studied relatively well (long et al., 2021). their study shows that the pandemic's impact is more on the emerging economies than on the developed markets. the studies also related to the regions and economic classification based on development. albuquerque, koskinen, yang, and zhang study and find that the companies high on the e.s. (environment and social) policies perform better than those with lower e.s. scores. they consider the covid-19 pandemic to test the esg (environment, social, and governance) theories (mcwilliams & siegel, 2001; friedman, 1970) as opposed to the esg) (albuquerque et al., 2020). liu and others study the covid-19 impact on the 21 leading stock markets to show how significant this pandemic is. they use the event study with the cumulative abnormal return. the event study using especially car (cumulative abnormal return) remains the most preferred method used by the researchers to study coivd 19. liu and others published in june 2020 the short-term impact of the covid-19. they also study the sectoral indices to find the impact of the covid19. their study shows that pharmaceuticals, i.t. ware favored by the investors, while transport, lodging, and catering were negatively affected (liu et al., 2020). the impact of covid-19 is hence asymmetric. in the economy, the sectoral distribution of the covid-19 pandemic also attracted studies. ten sectors are studied by liew and puah (2020). liew and puah (2020) find the ocivd 19 effect on the shanghai stock exchange and sectoral indices. they find that i.t. and telecom were more immune to the covid-19 effect. studies focusing on indian markets and coivd 19: the studies using the indian nse/bse or primary markets found a substantial drop in the markets on january 20, 2020. h. liu et al., (2020) based on abnormal and cumulative results returns. the volatility spillover based on market size shows considerable volatility from mid-cap to small-cap and primary index of bombay stock exchange. trabelsi and others use indian financial markets and gold for portfolio optimisation during the covid-19 times. bora and basistha study the covid-19 effect on the indian stock market using the gjh garch model. they find a significant effect of volatility on bse. nse was not affected with the same magnitude. this tomar, indian journal of finance and banking 9(1) (2022), 164-176 167 study, which takes the data from september 3 to july 10, 20020, finds that the upward trend started in their sample period (bora, debakshi, & basistha, 2020). salisu et al. (2020) find that the emerging markets are affected more than the developed markets. they used 24 emerging markets and 21 (india as one of them) developed markets. using out of sample and full sample data, they conclude that government policies have no effect on uncertainty from covid-19. they used the equity market volatility infectious disease tracker (evm). yousaf and ali trace the high-frequency information transmission among the cryptocurrencies using var-dccgarch (yousaf & ali, 2020). their finding shows the unidirectional spillover from ethereum to bitcoin and bitcoin to litecoin. the literature above has summarised the covid-19 research, which sought to bring out different aspects of the covid-19 on financial markets. the data used, methodology, statistical tools, graphs, and software. put together, these studies point out the validity of finding more insights into such catastrophic events. medical science and researchers have been pointing out the possibility of outbreak of events such as covid-19. had these forewarnings have been taken more seriously the covid-19 could have been better tackled. on the ground level, the large internal migration of the labour in india and the loss of livelihood for the day worker is a massive hit to the “unfortunate bottom of the pyramid.” the digitalised india quickly responded by giving relief packages (may 15 2020)of usd 260 billion (indiameasures in response to covid-19 kpmg global, n.d.), saving the worker. the unemployment rate of 23.52% in (• india: unemployment rate due to covid-19 | statista, n.d.) april 2020 (which now as of march 2021 is 6.53%) had been severe, making them walk hundreds of kilometers. the present work finds this gap in understanding the volatility spillover under covid-19 at the sector level. data and methodology model used the use of the volatility spillover and connectedness approach by diebold and yilmaz can give an insight into the mechanism of volatility spillover. the past data of the financial market would show a system of connectedness based on historical data. the upheaval brought by covid-19 in the economy and markets should follow the same system of connectedness. the out-of-sample data would affirm such a system. the data set before the covid-19 can be seen as a benchmark to compare the corona period as out of sample data for comparison. although many researchers have used connectedness and volatility spillover, no such study uses this methodology to compare the sub-periods post and previous to the covid-19. the primary motivation for using the diebold and yilmaz index and other derivations of their method by researchers is presented under. in their paper "better to give than receive: predictive directional measurement of volatility spillover," (diebold & yilmaz, 2012) extends their index further. d.y. spillover index is an output of variance decomposition with n-variable vector autoregression. familiar terrain for researchers. the primary focus of the d.y. is on the total spillover in a somewhat simplified var model. the cholesky factor orthogonal drives the potential order-dependent results. as directional spillover is measured in a generalised var framework, it eliminates the dependency on ordering results. an n-variable var (p) (covariance stationery) 𝑥𝑡 = ∑ ∅𝑖 𝑝 𝑖=1 𝑥𝑡−𝑖 + 𝜀𝑖. the identically distributed disturbance vector is represented by 𝜀𝑖(0, ∑). the nxn coefficient matrices ai obeys the recursion 𝐴𝑖 = ∅1𝐴𝑖−1 + ∅2𝐴𝑖−2 + ⋯ ∅𝑝𝐴𝑖−𝑝, with a0 an nxn identity matrix and 𝐴𝑖 = 0 for i<0. the dynamics of the system build on the moving average coefficients. an important part is the "system shocks." these system shocks segregate in various components based on variance decomposition. such as variance decomposition impulse response. the variance decompositions make the fractions of h-step ahead error variance in forecasting xj, ɐj≠i, for each i. while the var innovations are contemporaneously correlated, calculating variance decompositions requires orthogonal innovations. cholesky factorisation achieves orthogonality as the identification method. variance decomposition depends on the variable orders act. diy solves this by using var generalised framework. here, the generalised approach allows correlated shocks and explains the past observed error distribution. this is done instead of orthogonalising the shocks. this way, the total contribution to the variance of forecast error (row sum of the variance decomposition table) may not be equal to unity. such exploratory power allows correlated shocks. the fraction of the h-step ahead error variance in forecasting is forecasting, is "own variance shares" for xi due to shocks to xi, for i=1,2,…, and cross variance shares, or spillovers, to be the fractions of the h-step ahead error variances in forecasting xi, due to shocks to xj, for i,j=1,2…, n, such that i≠j. the expression denoting kpps h-step ahead forecast error variance decomposition 𝜃𝑖𝑗 𝑔(𝐻), for h = 1,2…, we have 𝜃𝑖𝑗 𝑔(𝐻) = 𝜎𝑖𝑖 −1 ∑ (�́�𝑖𝐴ℎ∑𝑒𝑗)^2𝐻−1 ℎ=0 ∑ (�́�𝑖𝐴ℎ∑𝑒𝑖)𝐻−1 ℎ=0 (1) here the variance matrix for error vector ε, is ∑. the standard deviation of the error term for the ith equation is σij. whereas ej is the selection vector with one as the ith element and zero otherwise. as expressed earlier ∑ 𝜃𝑖𝑗 𝑔𝑁 𝑗=1 (𝐻) ≠ 1, variance decomposition table each element in a row is not equal to one. for calculating the spillover index, and utilising the information through variance decomposition matrix, normalising each entry of the variance decomposition matrix by the sum, can be expressed as tomar, indian journal of finance and banking 9(1) (2022), 164-176 168 �̃�𝑖𝑗 𝑔 (𝐻) = 𝜃𝑖𝑗 𝑔 (𝐻) ∑ 𝜃 𝑖𝑗 𝑔𝑁 𝑗=1 (𝐻) (2) by construct ∑ �̃�𝑖𝑗 𝑔𝑁 𝑗=1 (𝐻) = 1 and ∑ �̃�𝑖𝑗 𝑔𝑁 𝑗=1 (𝐻) = 𝑁. the total spillover volatility index is constructed by variance decomposition volatility contribution from the kpps. �̃�𝑖𝑗 𝑔 = ∑ �̃�𝑖𝑗 𝑔 (𝐻)𝑁 𝑖,𝑗=1,𝑖≠1 ∑ �̃� 𝑖𝑗 𝑔 (𝐻)𝑁 𝑖,𝑗=1 x 100 = ∑ �̃�𝑖𝑗 𝑔 (𝐻)𝑁 𝑖,𝑗=1,𝑖≠1 ∑ �̃� 𝑖𝑗 𝑔 (𝐻)𝑁 𝑖,𝑗=1 x 100 (3) the spillover of volatility shocks across variables contributes to the total forecast error variance estimated by the total spillover index. spillover of volatility contributed by variables in analysis to the total forecast error variance is measured by the total spillover index. more meaningful information is provided by the direction of the spillovers across variables. the generalised var approach enables us to provide this informative part. much information can be extracted from the total volatility spillover index, and directional spillovers complete the total picture of volatility movement. the directional volatility spillovers through normalised elements of the general variance decomposition matrix hey can be expressed as 𝑆𝑖 𝑔(𝐻) = ∑ �̃�𝑖𝑗 𝑔 (𝐻)𝑁 𝑗=1,𝑗≠1 ∑ �̃� 𝑖𝑗 𝑔 (𝐻)𝑁 𝑗=1 x 100 (4) measures b.i. directional volatility spillovers by variable i from all other variables j. this is generalised impulse responses, and variance decompositions are invariant to the ordering of variables 𝑆𝑖 𝑔(𝐻) = ∑ �̃�𝑖𝑗 𝑔 (𝐻)𝑁 𝑗=1,𝑗≠1 ∑ �̃� 𝑖𝑗 𝑔 (𝐻)𝑁 𝑗=1 (5) net spillovers from variable i to all other variables j are expressed as 𝑆𝑖 𝑔(𝐻) = 𝑆𝑖 𝑔(𝐻) − 𝑆𝑗 𝑔(𝐻) (6) to find the net volatility spillover, we can calculate the difference between gross volatility shocks received and gross volatility shock transmitted from all other variables. the pair-wise variable i to j for volatility spillover is the difference between gross volatility shocks transmitted from variable i to j and that transmitted from j to i. net pair-wise spillover, in addition to the net volatility spillover, make the interpretation much more effortless. expressed as: 𝑆𝑖𝑗 𝑔(𝐻) = �̃�𝑖𝑗 𝑔 (𝐻) ∑ �̃� 𝑖𝑘 𝑔 (𝐻)𝑁 𝑘=1 − �̃�𝑗𝑖 𝑔 (𝐻) ∑ �̃� 𝑗𝑘 𝑔 (𝐻)𝑁 𝑘=1 x 100 (7) data the data used is daily for the ten sectors and primary index "sensex." all the indices are from india's oldest and most popular index, the "bombay stock exchange." the time taken is from january 4 2010, up to november 2020. (the limitation of the time period has been the data availability, which for some of the index starts from the date given). like diebold and yilmaz for volatility parkinson method has been used. parkinson, (1980) volatility measure requires low and high index values during the day for each index. for some of the indexes, this data was not available (daily “high” and “low”) for the period earlier to january 2010. hence, such indexes were left out of the calculation. analysis methodology the analysis seeks to find and explain the volatility spillover peculiar to covid-19. for this reason, diebold and yilmaz index (referred hereafter as dyi) is used. the following sectors from bse (bombay stock exchange) are included; automobile (auto), banks (bankex), bse (sensex, the primary index of bse), capital good (cap), consumer goods (cd), metal (metal), oil and gas, power, reality, technology (tech). the (dyi) diebold yilmaz index output provides total volatility spillover within the model and each sector associated with other sectors. the advantage of dyi is that it shows which sector is more or less volatile than other sectors with a directional flow of volatility. this is shown in each dyi by the row named as cto and column as from. the column and row “from” “cto” (contribution to others) give the volatility spillover received by each sector from the other sectors and disseminated to other sectors, respectively. the net volatility spillover row shows if the sector is the net receiver or provider of volatility spillover. diagonal in each dyi model gives each sector’s volatility spillover. tomar, indian journal of finance and banking 9(1) (2022), 164-176 169 the data from january 4 2010, to november 14 2020, is split into four parts. (i) daily volatility from january 4, 2010, to november 14 2020, referred as s1 (ii) daily volatility from january 4, 2010, to january 31 2019, referred as s2 (iii) daily volatility from february 4 2019, to december 31 2019 (221 days) as pre covid-19 (iv) daily volatility from january 1, 2020, to november 14 2020 (221 days) as during covid-19 the above period group s1 constitutes the entire sample. the other three samples become the “in sample” subsets. the three-period groups, s2, pre and during covid-19, becomes the separate “out of sample” sets. the time set s2, pre covid-19, and covid-19 should have approximately the same volatility profile. the dyi are assigned ranks. the reasons are as follows: dyi is calculated for each of the four periods. as these volatilities are in percentage, each sector role in volatility is known, making a comparison across four periods easy. for example, the auto sector column “from” shows the volatility from other sectors. for the total period under study (which includes the covid-19 period), volatility received by the auto sector is 68.32%. this increases to 82.29% during the covid-19. however, this shows the quantum jump in volatility due to covid-19. it does not show if the auto sector has become more or less volatile in the crisis than other sectors. the 13.97% increase in the auto sector can be similar for all the sectors if all sectors receive the same exogenous impact. if we rank each sector for the volatility being received and transmitted, we can also know if a particular sector has become more or less volatile relative to other sectors. for this reason, the assigned ranks are summarised in table 10. the rank of the auto sector remains the fifth largest volatility receiver in all the three periods baring 221 days period before covid-19, whereas it was the seventh-largest volatile receiver. it thereby becomes clear that auto volatility reduced before the covid-19 sub-sample of the period. hence the percentage change in the volatility needs to be seen in comparison to the entire batch of sectors in comparison. another dimension added by ranking is the relative increase or decrease of volatility as “receiver” or “transmitter”. the auto sector volatility ranks as the receiver is maintained at 5th rank even in covid-19 time, but the volatility transmission becomes seventh from sixth rank pre covid-19. the transmission of volatility is reduced. this position is also seen in the column “net”, which shows auto sector transmit -3.39% volatility but reduces the overall rank to the seventh-highest transmitter. plan of analysis the descriptive statistics for the entire sample data of s1 is based on returns. daily variance is used using the high and low prices of each sector used by diebold and yilmaz. the parkinson (parkinson, 1980) method is used for the dyi. for sector i on the day t we have 𝜎𝑖𝑡 2̃ = 0.361[𝑙𝑛(𝑃𝑖𝑡 𝑚𝑎𝑥) − 𝑙𝑛(𝑃𝑖𝑡 𝑚𝑖𝑛)]2 where 𝑃𝑖𝑡 𝑚𝑎𝑥 is the high and 𝑃𝑖𝑡 𝑚𝑖𝑛 is the low in the market i on day t table 1. discriptive statistics for all the ten sectors and primary index table 1 auto bank cap cd metal og power psu reality bse tech mean 0.04% 0.06% 0.02% 0.08% -0.01% 0.02% -0.01% -0.02% -0.01% 0.04% 0.05% standard error 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% median 0.10% 0.10% 0.00% 0.10% 0.00% 0.00% 0.00% 0.00% 0.10% 0.10% 0.10% standard deviation 1.40% 1.60% 1.50% 1.40% 1.70% 1.40% 1.30% 1.30% 2.00% 1.10% 1.20% sample variance 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% kurtosis 821.30% 894.30% 656.30% 546.20% 289.60% 857.50% 439.10% 654.00% 204.10% 1395.60% 761.70% skewness -16.10% -34.20% -25.00% -29.50% -12.60% -56.00% -35.70% -34.60% -29.70% -75.90% -44.30% range 23.60% 27.50% 23.70% 20.30% 20.70% 21.70% 18.60% 19.90% 19.70% 22.10% 17.90% date for min return 23-mar-20 23-mar-20 23-mar-20 23-mar-20 23-mar-20 23-mar-20 23-mar-20 23-mar-20 23-mar-20 23-mar-20 23-mar-20 minimum -13.40% -16.80% -14.90% -11.70% -11.90% -12.70% -8.40% -10.90% -10.90% -13.20% -9.60% maximum 10.30% 10.70% 8.80% 8.60% 8.80% 9.10% 10.20% 9.00% 8.80% 9.00% 8.40% sum 1.1629 1.5093 0.4137 2.1737 -0.2144 0.4866 -0.3138 -0.4061 -0.1426 1.0731 1.3097 count 2698 2698 2698 2698 2698 2698 2698 2698 2698 2698 2698 the descriptive statistics sectors are based on returns for the total period s1 (table 1). this shows that the worst day of indian financial markets occurred on march 23 2020. the highest fall is recorded for the bank & capital goods sector with -16.8% and -14.9%. the least single-day fall was in the power sector. the highest mean returns for the whole sample period are given by consumer durable on a daily basis. the highest and the lowest standard deviance is shown by reality and metal with 2% and 1.7%. the skewness, a measure of asymmetry threshold, is negative for all the sectors. hence, the sectors' return is longer to the left side of the distribution than to the right. as the universal indices for markets in general, the high kurtosis is heavy-tailed.(“coefficient of skewness,” 2008) analysis total volatility spillover figure 1 compares the total sample size with the other three sets of the sample for the "total volatility spillover." the sample consisting of the entire sample which also includes (blue colour) the covid-19 volatility spillover. the volatility spillover reaches 82.5% during the covid-19. earlier to the covid-19 period, the sample period of 2010-18 (figure 1) with the highest touching 78% compared to covid-19 at 82.5%. most of the earlier periods in the two graphs show how the total tomar, indian journal of finance and banking 9(1) (2022), 164-176 170 system volatility spillover ranges between 67% to 77%. the upsurge of the volatility spillover hence becomes very clear. for the sample period of 221 days pre covid-19, figure 4, the volatility spillover’s highest point is 68.9% (approx.), while after covid figure 5 shows 81.8% volatility 55 60 65 70 75 80 85 10 12 14 16 18 20 full sample non coivd total volatility spillover 2010-2020 figure 1. total volatility spillover 2010-2020 figure 2. dynamic total connectedness full sample s1 figure 3. 2010-18 dynamic total connectedness s2 figure 4. pre covid-19 dynamic total connectedness figure 5. covid-19 dynamic total connectedness the total connectedness the total volatility spillover, the composite index of various directional volatility spillovers, appears in the lowermost right corner of each index table. if one looks at pre and during covid-19 and the full sample (s1) index table, we can note that total volatility spillover is 67.7%, 81.24%and 72.6%.this shows that the covid-19 pandemic turbulence adds a 27% increase in volatility. table 2. data s1 table 2 auto bankex cap cd metal oilgas power psu reality bse tech mean -9.476 -9.355 -9.296 -9.087 -8.902 -9.373 -9.48 -9.599 -8.565 -10.073 -9.742 variance 0.936 1.105 0.934 0.84 0.808 0.818 0.9 0.949 0.893 0.991 0.823 skewness 0.365*** 0.392*** 0.380*** 0.447*** 0.253*** 0.471*** 0.332*** 0.372*** 0.271*** 0.487*** 0.450*** 0 0 0 0 0 0 0 0 0 0 0 kurtosis 0.443*** 0.347*** 0.333*** 0.425*** 0.233** 1.081*** 0.543*** 0.439*** 0.202** 0.771*** 0.777*** 0 -0.001 -0.002 0 -0.022 0 0 0 -0.042 0 0 jb 82.128*** 82.816*** 77.315*** 110.128** 34.935*** 231.362** *82.824*** 84.061*** 37.557*** 173.719** 158.944*** 0 0 0 0 0 0 0 0 0 0 0 ers -8.022*** -2.952*** -2.335** -5.475*** -8.616*** -5.953*** -2.473** -4.842*** -3.212*** -7.030*** -3.492*** 0 -0.003 -0.02 0 0 0 -0.013 0 -0.001 0 0 q(20) 2807.845* 4104.888* *2086.891* *1787.858* 1885.059* *1826.328* *2103.494* 2104.510* 1133.040* *3768.076* 1707.907** tomar, indian journal of finance and banking 9(1) (2022), 164-176 171 0 0 0 0 0 0 0 0 0 0 0 q2(20) 2190.766* 3312.629* *1721.525* *1589.049* 1354.105* *1274.887* *1770.456* 1518.099* 888.473** *3023.454* 1274.023** 0 0 0 0 0 0 0 0 0 0 0 lm(20) 306.420** 425.344** *230.745** *238.739** 254.348** *236.133** *270.231** 273.705** 146.375** *431.797** 202.161*** 0 0 0 0 0 0 0 0 0 0 0 auto 1 0.651 0.588 0.476 0.584 0.55 0.578 0.599 0.533 0.725 0.478 bankex 0.651 1 0.638 0.484 0.549 0.54 0.59 0.659 0.546 0.816 0.486 cap 0.588 0.638 1 0.477 0.533 0.536 0.662 0.63 0.561 0.649 0.416 cd 0.476 0.484 0.477 1 0.425 0.434 0.453 0.464 0.488 0.508 0.369 metal 0.584 0.549 0.533 0.425 1 0.555 0.612 0.674 0.526 0.591 0.443 oilgas 0.55 0.54 0.536 0.434 0.555 1 0.583 0.719 0.507 0.639 0.469 power 0.578 0.59 0.662 0.453 0.612 0.583 1 0.746 0.57 0.604 0.435 psu 0.599 0.659 0.63 0.464 0.674 0.719 0.746 1 0.579 0.643 0.445 reality 0.533 0.546 0.561 0.488 0.526 0.507 0.57 0.579 1 0.552 0.393 bse 0.725 0.816 0.649 0.508 0.591 0.639 0.604 0.643 0.552 1 0.607 tech 0.478 0.486 0.416 0.369 0.443 0.469 0.435 0.445 0.393 0.607 1 table 3. data s2 table 3 auto bankex cap cd metal oilgas power psu reality bse tech mean -9.571 -9.429 -9.31 -9.065 -8.983 -9.423 -9.542 -9.689 -8.568 -10.127 -9.801 variance 0.836 0.978 0.901 0.789 0.757 0.756 0.871 0.875 0.877 0.898 0.748 skewness 0.169*** 0.211*** 0.237*** 0.374*** 0.184*** 0.294*** 0.266*** 0.282*** 0.203*** 0.227*** 0.220*** kurtosis -0.132 -0.205** -0.058 0.165 0.005 0.677*** 0.268** 0.09 0.112 -0.149 -0.047 -0.192 -0.031 -0.617 -0.118 -0.901 0 -0.017 -0.361 -0.267 -0.136 -0.694 jb 12.418*** 20.774*** 21.498*** 55.265*** 12.807*** 75.627*** 33.353*** 30.648*** 16.658*** 21.525*** 18.438*** ers -7.896*** -2.853*** -2.100** -5.160*** -8.338*** -5.333*** -2.352** -4.947*** -2.966*** -6.579*** -3.240*** q(20) 1398.319* 2235.424* 1493.624** 1058.597** 1029.662* 1011.197** 1366.441** 1140.460* 726.933*** 2347.848** 780.619*** q2(20) 1283.337* 2077.128* *1298.618* *1005.396* 780.192** *794.434** *1214.136* 882.724** *610.523** *2173.183* 728.878*** lm(20) 191.234** 311.336** *185.397** *166.934** 160.068** *162.585** *193.686** 184.902** *98.927*** 335.616** 117.595*** auto 1 0.627 0.577 0.463 0.541 0.5 0.563 0.558 0.534 0.711 0.439 bankex 0.627 1 0.639 0.463 0.52 0.496 0.584 0.639 0.533 0.794 0.419 cap 0.577 0.639 1 0.435 0.516 0.497 0.67 0.614 0.548 0.624 0.381 cd 0.463 0.463 0.435 1 0.419 0.396 0.445 0.463 0.466 0.47 0.331 metal 0.541 0.52 0.516 0.419 1 0.518 0.599 0.648 0.532 0.558 0.406 oilgas 0.5 0.496 0.497 0.396 0.518 1 0.555 0.684 0.481 0.593 0.426 power 0.563 0.584 0.67 0.445 0.599 0.555 1 0.735 0.577 0.588 0.404 psu 0.558 0.639 0.614 0.463 0.648 0.684 0.735 1 0.581 0.604 0.397 reality 0.534 0.533 0.548 0.466 0.532 0.481 0.577 0.581 1 0.528 0.366 bse 0.711 0.794 0.624 0.47 0.558 0.593 0.588 0.604 0.528 1 0.567 tech 0.439 0.419 0.381 0.331 0.406 0.426 0.404 0.397 0.366 0.567 1 table 4. data pre covid-19 table 4 auto bankex cap cd metal oilgas power psu reality bse tech mean -9.261 -9.575 -9.426 -9.514 -8.673 -9.358 -9.49 -9.391 -8.843 -10.214 -9.801 variance 0.858 0.941 0.782 0.727 0.671 0.697 0.657 0.771 0.669 0.735 0.584 skewness 0.434*** 0.259 0.514*** 0.414** -0.102 0.350** 0.082 0.232 0.197 0.383** 0.423** kurtosis 0.457 0.736** 0.829** 1.250*** -0.154 0.483 -0.168 0.298 0.446 1.044** 0.677* jb 8.861** 7.464** 16.055*** 20.692*** 0.605 6.651** 0.506 2.802 3.259 15.424*** 10.800*** ers -1.991** -2.219** -3.085*** -2.052** -1.298 -1.664* -0.697 -2.713*** -2.304** -2.367** -2.565** q(20) 150.01 192.65 76.788* 61.664* 70.390* 49.371* 76.333* 71.481* 51.421* 63.596* 18.901* q2(20) 129.28 179.59 73.303* 67.099* 58.150* 46.590* 77.409* 70.058* 42.314* 56.189* 16.606* lm(20) 35.265*** 31.601*** 22.115*** 17.969** 25.254*** 15.465 27.585** 17.466** 11.102 16.367* 15.924* auto 1 0.545 0.498 0.416 0.542 0.555 0.413 0.555 0.402 0.594 0.241 bankex 0.545 1 0.519 0.397 0.5 0.5 0.378 0.607 0.499 0.805 0.339 cap 0.498 0.519 1 0.517 0.464 0.561 0.557 0.62 0.475 0.621 0.257 cd 0.416 0.397 0.517 1 0.316 0.397 0.38 0.383 0.391 0.449 0.246 metal 0.542 0.5 0.464 0.316 1 0.464 0.45 0.556 0.406 0.509 0.217 oilgas 0.555 0.5 0.561 0.397 0.464 1 0.578 0.774 0.475 0.605 0.214 power 0.413 0.378 0.557 0.38 0.45 0.578 1 0.688 0.434 0.494 0.213 psu 0.555 0.607 0.62 0.383 0.556 0.774 0.688 1 0.539 0.653 0.245 reality 0.402 0.499 0.475 0.391 0.406 0.475 0.434 0.539 1 0.491 0.227 bse 0.594 0.805 0.621 0.449 0.509 0.605 0.494 0.653 0.491 1 0.386 tech 0.241 0.339 0.257 0.246 0.217 0.214 0.213 0.245 0.227 0.386 1 table 5. data post – covid-19 table 5 auto bankex cap cd metal oilgas power psu reality bse tech mean -9.261 -9.575 -9.426 -9.514 -8.673 -9.358 -9.49 -9.391 -8.843 -10.214 -9.801 variance 0.858 0.941 0.782 0.727 0.671 0.697 0.657 0.771 0.669 0.735 0.584 skewness 0.434*** 0.259 0.514*** 0.414** -0.102 0.350** 0.082 0.232 0.197 0.383** 0.423** kurtosis 0.457 0.736** 0.829** 1.250*** -0.154 0.483 -0.168 0.298 0.446 1.044** 0.677* jb 8.861** 7.464** 16.055*** 20.692*** 0.605 6.651** 0.506 2.802 3.259 15.424*** 10.800*** ers -1.991** -2.219** -3.085*** -2.052** -1.298 -1.664* -0.697 -2.713*** -2.304** -2.367** -2.565** q(20) 150.01 192.65 76.788* 61.664* 70.390* 49.371* 76.333* 71.481* 51.421* 63.596* 18.901* q2(20) 129.28 179.59 73.303* 67.099* 58.150* 46.590* 77.409* 70.058* 42.314* 56.189* 16.606* lm(20) 35.265*** 31.601*** 22.115*** 17.969** 25.254*** 15.465 27.585*** 17.466** 11.102 16.367* 15.924* auto 1 0.545 0.498 0.416 0.542 0.555 0.413 0.555 0.402 0.594 0.241 bankex 0.545 1 0.519 0.397 0.5 0.5 0.378 0.607 0.499 0.805 0.339 cap 0.498 0.519 1 0.517 0.464 0.561 0.557 0.62 0.475 0.621 0.257 cd 0.416 0.397 0.517 1 0.316 0.397 0.38 0.383 0.391 0.449 0.246 metal 0.542 0.5 0.464 0.316 1 0.464 0.45 0.556 0.406 0.509 0.217 oilgas 0.555 0.5 0.561 0.397 0.464 1 0.578 0.774 0.475 0.605 0.214 power 0.413 0.378 0.557 0.38 0.45 0.578 1 0.688 0.434 0.494 0.213 psu 0.555 0.607 0.62 0.383 0.556 0.774 0.688 1 0.539 0.653 0.245 reality 0.402 0.499 0.475 0.391 0.406 0.475 0.434 0.539 1 0.491 0.227 bse 0.594 0.805 0.621 0.449 0.509 0.605 0.494 0.653 0.491 1 0.386 tech 0.241 0.339 0.257 0.246 0.217 0.214 0.213 0.245 0.227 0.386 1 tomar, indian journal of finance and banking 9(1) (2022), 164-176 172 net spillover the column and row (off-diagonal) summation presents "cto" and "from" directional spillovers. the net spillover gives the direction of volatility spillover. the row total, which is the direction from others to the sectors volatility spillover, is a collection of volatility spillover from each sector contribution. when each sector row sum is subtracted from the column total, we get the net flow of volatility spillover. a positive sign means that the sector is the net provider of the volatility spillover. while negative net volatility spillover would mean that sector is the receiver of volatility spillover. diebold and yilmaz index of volatility spillover the model's volatility spillover within the model (table 6 & 7) increases from71.29% to 72.59% when we compare the entire sample, and partial sample denoted as s1 and s2 (out of sample and in the sample, respectively). this 1.3% increase in the volatility spillover is substantial, especially if we see that the comparative smaller data set of 221 days has caused this increased volatility spillover. what is noteworthy is that pre covid-19 is much calmer comparatively. the volatility spillover is 67.72% for the s2 data set. the graph of dtc (figure 2) also shows the lowermost volatility spillover drops to touch 60%. this does not happen with any other time frame under the study. table 6. s1 volatility spillover connectedness diebold and yilmaz index table 6 auto bankex cap cd metal oilgas power psu reality bse tech from auto 25.319 9.565 7.364 4.91 7.092 6.477 7.871 8.611 5.786 12.953 4.051 74.681 bankex 8.469 24.719 8.309 4.666 5.602 5.769 7.752 9.805 5.641 15.359 3.908 75.281 cap 7.598 9.228 26.073 4.867 5.754 6.43 10.747 9.548 6.865 10.023 2.867 73.927 cd 6.277 7.397 6.755 36.521 4.83 6.376 6.604 6.981 6.984 8.152 3.123 63.479 metal 8.025 7.315 6.603 4.317 26.488 7.346 9.139 11.706 6.182 9.036 3.844 73.512 oilgas 6.658 6.587 6.427 4.415 6.702 27.514 8.181 13.264 5.446 10.223 4.581 72.486 power 7.074 7.431 9.556 4.467 7.578 7.55 25.281 12.91 6.771 8.29 3.093 74.719 psu 6.962 9.101 7.717 4.365 8.425 10.789 11.686 22.767 6.201 8.801 3.184 77.233 reality 6.806 7.571 7.752 6.329 6.65 6.883 8.664 9.109 28.714 8.325 3.196 71.286 bse 9.921 13.45 7.965 4.866 6.149 7.762 7.503 8.567 5.024 22.502 6.29 77.498 tech 6.471 7.439 4.795 4.006 5.834 6.656 6.037 6.355 4.107 12.479 35.821 64.179 cto 74.261 85.086 73.243 47.208 64.617 72.039 84.185 96.856 59.006 103.642 38.137 798.28 cti 99.58 109.805 99.316 83.73 91.105 99.553 109.465 119.624 87.72 126.144 73.958 tci net spo -0.42 9.81 -0.68 -16.27 -8.9 -0.45 9.47 19.62 -12.28 26.14 -26.04 72.571 table 7. s2 volatility spillover connectedness diebold and yilmaz index table 7 auto bankex cap cd metal oilgas power psu reality bse tech from auto 25.579 9.323 7.95 5.297 6.536 5.784 8.048 8.031 6.595 13.085 3.771 74.421 bankex 8.226 25.052 9.193 4.88 5.599 5.182 7.931 9.814 5.927 15.1 3.096 74.948 cap 7.598 9.893 26.56 4.168 5.603 5.9 11.231 9.521 7.077 9.747 2.704 73.44 cd 6.31 7.639 6.125 38.343 5.025 5.465 6.63 7.396 7.019 7.47 2.579 61.657 metal 7.273 7.235 6.901 4.703 26.936 7.016 9.276 11.184 6.801 8.996 3.679 73.064 oilgas 6.052 6.53 6.228 4.299 6.416 29.699 7.982 13.095 5.523 9.896 4.279 70.301 power 6.947 7.716 10.089 4.556 7.311 7.252 24.931 12.586 7.119 8.391 3.103 75.069 psu 6.364 9.313 7.92 4.754 7.995 10.515 11.777 23.236 6.606 8.618 2.902 76.764 reality 6.948 7.423 7.913 6.167 6.876 6.494 8.988 9.324 28.964 7.926 2.977 71.036 bse 9.988 13.351 8.259 4.766 6.218 7.161 7.713 8.301 5.176 23.15 5.916 76.85 tech 6.156 6.325 4.886 4.031 5.795 6.185 5.902 5.765 4.253 12.175 38.529 61.471 cto 71.861 84.748 75.464 47.622 63.374 66.954 85.478 95.016 62.095 101.404 35.006 789.022 cti 97.44 109.8 102.024 85.964 90.31 96.653 110.408 118.253 91.059 124.554 73.535 tci net spo -2.56 9.8 2.02 -14.04 -9.69 -3.35 10.41 18.25 -8.94 24.55 -26.47 71.729 table 8. pre-covid-19 volatility spillover connectedness diebold and yilmaz index table 8 auto bankex cap cd metal oilgas power psu reality bse tech from auto 31.678 9.748 6.941 5.204 9.368 8.943 4.75 8.251 3.901 10.113 1.105 68.322 bankex 7.78 28.692 6.784 3.451 6.758 7.394 4.156 10.419 5.778 16.931 1.857 71.308 cap 7.497 7.264 27.545 7.165 6.365 8.114 8.992 10.196 6.204 9.796 0.861 72.455 cd 6.889 6.57 9.684 40.039 3.95 6.705 5.924 6.107 5.048 7.602 1.481 59.961 metal 9.274 8.817 7.273 3.579 33.78 6.592 6.492 9.877 5.171 8.481 0.663 66.22 oilgas 8.412 6.477 7.762 4.311 5.577 26.091 9.245 15.747 6.694 9.166 0.519 73.909 power 5.97 4.159 9.469 4.069 6.211 10.732 30.675 14.704 6.081 7.145 0.784 69.325 psu 7.265 8.894 8.5 3.43 7.244 13.648 10.997 23.46 6.339 9.358 0.863 76.54 reality 5.102 9.606 6.915 5.085 5.582 7.167 7.089 10.467 34.518 7.687 0.783 65.482 bse 8.357 15.876 8.317 4.322 6.543 8.957 6.181 10.309 5.103 23.45 2.585 76.55 tech 4.295 7.059 4.763 4.637 4.714 2.111 2.993 3.629 3.205 7.401 55.191 44.809 cto 70.841 84.469 76.408 45.254 62.314 80.363 66.819 99.705 53.525 93.682 11.501 744.881 cio 102.518 113.161 103.952 85.293 96.093 106.454 97.494 123.165 88.043 117.132 66.693 tci net spo 2.518 13.161 3.952 -14.707 -3.907 6.454 -2.506 23.165 -11.957 17.132 -33.307 67.716 tomar, indian journal of finance and banking 9(1) (2022), 164-176 173 table 9. post-covid-19 volatility spillover connectedness diebold and yilmaz index table 9 auto bankex cap cd metal oilgas power psu reality bse tech from auto 17.731 9.225 9.687 8.004 7.042 8.752 6.055 8.09 4.815 12.176 8.422 82.269 bankex 7.368 19.278 9.722 6.946 5.228 8.163 5.198 8.207 4.67 15.057 10.162 80.722 cap 8.6 8.796 18.661 7.725 6.928 8.5 6.292 9.657 5.461 11.806 7.575 81.339 cd 8.882 8.593 9.318 17.659 6.673 8.599 5.63 8.196 5.752 11.249 9.449 82.341 metal 8.382 6.479 9.219 6.624 17.781 9.281 7.292 10.7 4.697 10.98 8.566 82.219 oilgas 7.857 7.388 9.351 6.422 7.313 16.613 6.596 11.666 5.312 12.056 9.427 83.387 power 7.763 6.133 9.677 5.989 7.212 8.712 21.133 12.978 5.378 9.086 5.94 78.867 psu 7.147 7.197 10.307 6.162 8.401 11.404 9.103 16.925 5.351 10.794 7.211 83.075 reality 7.642 8.311 10.007 6.889 5.301 8.285 6.235 7.826 20.972 10.657 7.874 79.028 bse 8.833 11.879 9.668 7.311 6.491 9.626 5.722 8.969 4.789 16.452 10.26 83.548 tech 6.397 10.252 8.59 6.407 4.787 9.568 5.186 7.941 4.327 13.444 23.1 76.9 cto 78.871 84.252 95.545 68.479 65.375 90.889 63.309 94.23 50.552 117.304 84.886 893.694 cti 96.602 103.531 114.207 86.139 83.155 107.502 84.443 111.155 71.524 133.756 107.986 tci net spo -3.398 3.531 14.207 -13.861 -16.845 7.502 -15.557 11.155 -28.476 33.756 7.986 81.245 the major jolt of covid-19 sets rolling a very volatile period, but the lockdown announcement beginning with significant uncertainty shows how volatility spillover touches an all-time high of 81.25% within the model (table 9). the s1, s2, and pre covid data set should adhere to the volatility spillover sequence built on historical data. an out-of-sample data should confirm the concurrence of the robustness, which is the post-covid-19 data set. hence, it can show if the volatility spillover remains the same or changes. the s2 pre covid-19 are identical, showing the similarity in the volatility spillover profile within these two data sets. the sectors receiving the volatility spillover are ranked for better comparison. the rankings can show the sequencing of the volatility spillover changes or not. does the covid-19 upsurge the volatility spillover or not is hence answered. the section named "cto," the first part of table 10 (summarized from table 6 to 9), shows the sector-wise volatility spillover transmission to other sectors. the number in each column shows how much volatility spillover has been induced by that sector. in this part of table 10, we can compare the s2 and pre-covid-19 periods. out of eleven sectors, five (45% of total), the ranking as volatility spillover dispenser remains the same. these sectors are capital goods, auto, metal, consumer and technology, ranking 5, 6, 8, 10 and 11. table 10 shows the “from.” this column shows the volatility spillover received by each sector from others. out of eleven sectors, four maintain their ranking as the volatility spillover receivers. these sectors are bse, pus, consumer, and technology, with ranks of 1,2,10, and 11. (36% of all the sectors). the out of sample confirms the validity of the significant volatility spillover movement within the model. the net spillover adds the directional explanation to the volatility spillover. the positive sign shows the variable as the transmitter of the volatility spillover, while the negative sign shows that the variable is the receiver of the volatility spillover. this section shows that 36% of the sectors maintain their ranking as either receivers or dispensers of the volatility spillover. capital goods remain the volatility transmitter with value of 2, increasing marginally to 3.9%. the consumer sector maintains its position with a negative sign volatility spillover of -14.0% to -14.7%. technology increases from -26.46 to -33.30 while it maintains its overall ranking of the eleventh position. a noteworthy change is only in the auto sector, which changes from negative to positive but maintains its sixth position. has the covid-19 altered the volatility spillover sequence? the fourth data set of post should have the exact nature as the s2, pre covid-19 data set to answer the question. change in the ranking of one position up or down can be seen in the data sets s2 and pre. those sectors changing with position one rank down or up can be ignored, as the dyi table of (table 10) in the s2 and pre covid-19. when we compare the post or covid-19 period with the pre, we see a significant upsurge in the ranking sequence change. in the "cto" section, we can see that seven sectors change their ranking by two to as many as six positions. the pattern is also seen in the "from" section, where six sectors show similar rank movement patterns. the "net" volatility spillover section shows the change in eight sectors. table 10. the ranking based on the volatility spillover tables table 10 volatility spillover values % ranks of volatility spillover to s1 s2 precovid postcovid s1 s2 precovid postcovid auto 74.261 71.861 70.841 78.871 5 6 6 7 bankex 85.086 84.748 84.469 84.252 3 4 3 6 bse 103.642 101.404 93.682 117.304 1 1 2 1 cap 73.243 75.464 76.408 95.545 6 5 5 2 cd 47.208 47.622 45.254 68.479 10 10 10 8 metal 64.617 63.374 62.314 65.375 8 8 8 9 oilgas 72.039 66.954 80.363 90.889 7 7 4 4 power 84.185 85.478 66.819 63.309 4 3 7 10 psu 96.856 95.016 99.705 94.23 2 2 1 3 reality 59.006 62.095 53.525 50.552 9 9 9 11 tech 38.137 35.006 11.501 84.886 11 11 11 5 tomar, indian journal of finance and banking 9(1) (2022), 164-176 174 from s1 s2 precovid postcovid s1 s2 precovid postcovid auto 74.681 74.421 68.322 82.269 5 5 7 5 bankex 75.281 74.948 71.308 80.722 3 4 5 8 bse 77.498 76.85 76.55 83.548 1 1 1 1 cap 73.927 73.44 72.455 81.339 6 6 4 7 cd 63.479 61.657 59.961 82.341 11 10 10 4 metal 73.512 73.064 66.22 82.219 7 7 8 6 oilgas 72.486 70.301 73.909 83.387 8 9 3 2 power 74.719 75.069 69.325 78.867 4 3 6 10 psu 77.233 76.764 76.54 83.075 2 2 2 3 reality 71.286 71.036 65.482 79.028 9 8 9 9 tech 64.179 61.471 44.809 76.9 10 11 11 11 net s1 s2 precovid postcovid s1 s2 precovid postcovid auto -0.42 -2.56 2.518 -3.398 5 6 6 7 bankex 9.81 9.8 13.161 3.531 3 4 3 6 bse 26.14 24.554 17.132 33.756 1 1 2 1 cap -0.68 2.024 3.952 14.207 7 5 5 2 cd -16.27 -14.036 -14.707 -13.861 10 10 10 8 metal -8.9 -9.69 -3.907 -16.845 8 9 8 10 oilgas -0.45 -3.347 6.454 7.502 6 7 4 5 power 9.47 10.408 -2.506 -15.557 4 3 7 9 psu 19.62 18.253 23.165 11.155 2 2 1 3 reality -12.28 -8.941 -11.957 -28.476 9 8 9 11 tech -26.04 -26.465 -33.307 7.986 11 11 11 4 model 72.571 71.729 67.716 81.245 na na na na the significant changes take place in the ranking of technology. the i.t. sector is more immune to the market portfolio (primary index) and the right candidate for portfolio optimisation. here the covid-19 alters the position. technology becomes the transmitter of the volatility spillover—sign changes to positive. however, the change is not significant enough when we look within sample s1 and compare it with s2. the past performance of the sector volatility spillover reduces the volatility spillover from -26.46 to -26.04. bse as the primary market index doubles its volatility spillover transmission. 17.13 to 33.75. nevertheless, the ranking changes from two to one. other observations: bankex shows a significant volatility spillover reduction. capital goods increased volatility spillover 3.6 times from 3.9 to 14.20. metal increases the volatility spillover by almost four times. power volatility spillover increases by 6.2 times from -2.5 to -15.5. psu reduces the volatility spillover from 23.11 to 11.15. consumer goods show resilience by maintaining the status of net volatility spillover receiver. what is essential is to witness the peculiarity of the covid-19 volatility spillover mechanism. the lockdown announcement leads to the closure of manufacturing sectors sending a rippling effect on the ancillaries and the supply chain. the bankex shows very robust resistance to the covid-19. this can be because of the digitalisation motivated by demonetization. the event of demonetization had prepared india by a significant shift of retail banking to a digital platform. the episode of covid-19 has shown bankex as the most robust investment vehicle. conclusion the analysis shed some critical implications of the nature of the covid-19 pandemic. the data set of 221 days stands out in its covid-19 effect implications. for some time, it seemed that in india, the situation had rolled back to pre covid-19. the financial markets rebounded. the gross change in the sector volatility spillover shows the uniqueness of the shock which hit the financial markets in 2020. factories are operational for the entire four shifts. however, as seen above, the volatility moved in a more differentiated manner. as the second wave of covid-19 sets in, this volatility behaviour can help the fund managers, regulators, and business managers to forecast and understand how the volatility will unfold. the lessons must be learned how digitisation in india had been a significant mark of help in helping the displaced labour force through online relief transfer into their account by the indian government. the “demonetisation,” which was grossly criticised earlier by many, forced the digital payment to an extent. as seen through the bank index “bankex”, digitalisation has been the least to dispense the volatility. technology has changed its profile from a volatility receiver to a volatility spiller. the sector based on foreign clientele needs to relook at the risk factors. the work change from the office to home should have made the sector's response resilient, yet it performed the opposite. the takeaway for the psu and the power sector is that they need to reassess the risk mitigation strategies under such covid-19 type shocks. author contributions: conceptualization, k.s.t.; data curation: k.s.t.; methodology: k.s.t.; validation: k.s.t.; visualization: k.s.t.; formal analysis: k.s.t.; investigation: k.s.t.; resources: k.s.t.; writing – original draft: k.s.t.; writing – review & editing: k.s.t.; supervision: k.s.t.; software: k.s.t.; project administration: k.s.t.; funding acquisition: k.s.t. 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. 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. tomar, indian journal of finance and banking 9(1) (2022), 164-176 175 references albuquerque, r., koskinen, y., yang, s., & zhang, c. 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(2009). historical perspective — emergence of influenza a (h1n1) viruses. new england journal of medicine, 361(3), 279–285. https://doi.org/10.1056/nejmra0904322 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 11(1) (2022), 45-59 45 finance and banking ijfb vol 11 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa the growth trajectory of upi-based mobile payments in india: enablers and inhibitors abhishek kumar (a)1 rajesh kumar choudhary (b) saroj kumar mishra (c) sanjay kumar kar (d) rohit bansal (e) (a) research scholar, department of management studies, rajiv gandhi institute of petroleum technology, amethi, uttar pradesh, india; e-mail: pm1901@rgipt.ac.in (b) research scholar, department of management studies, rajiv gandhi institute of petroleum technology, amethi, uttar pradesh, india; e-mail: pm1908@rgipt.ac.in (c) assistant professor, department of management studies, rajiv gandhi institute of petroleum technology, amethi, uttar pradesh, india; e-mail: skrmishra@rgipt.ac.in (d) professor, department of management studies, rajiv gandhi institute of petroleum technology, amethi, uttar pradesh, india; e-mail: skar@rgipt.ac.in (e) associate professor, department of management studies, rajiv gandhi institute of petroleum technology, amethi, uttar pradesh, india; e-mail: rbansal@rgipt.ac.in a r t i c l e i n f o article history: received: 8th october 2022 accepted: 4th december 2022 online publication: 9th december 2022 keywords: digital payments, mobile payments, m-wallets, unified payments interface, upi jel classification codes: c00, c10, c80, g28 a b s t r a c t "unified payments interface" (upi), an innovative mobile-based payment system, was introduced by the government of india to support its digitization initiatives. not just in india, upi has expanded globally by being implemented in bhutan and is on the verge of being launched in ten more countries in north and southeast asia and, the uae & africa. thus the study examines upi's growth and significance to the transformation of india's mobile payment systems, its global reach and further expansion. the study consists of two parts, with an initial focus on scholarly literature published in the last five years since the upi's inception in april 2016. out of 177 papers, the method yielded 14 notable peer-reviewed publications. other sources include government policy papers, news materials, and research undertaken by national or international organizations such as kantar, statista, assocham, deloitte, nielson, ericsson, etc. despite its early launch, upi swiftly outperformed all other digital payment methods in india, including mobile wallets. google pay, phonepe and paytm were early drivers of upi payments. however, the government-backed bharat interface for money application failed to achieve its potential. moreover, the covid-19 pandemic has little impacted the growth of upi. another major finding is that transaction failure, and cyber frauds must be addressed for improved upi uptake, and a greater focus will be on credit and cash withdrawals via upi. the study concluded that near field communicationbased upi payments will revolutionize peer-to-merchant payments. © 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 technological advances have led to a gradual transformation of digital payments in india in the last few years. the advent of smartphones and the internet plays a major role in making india a less-cash society. indians have been hesitant about adopting the rapidly changing technology due to a lack of trust in themselves (omidyar network, 2017). however, the nation has welcomed reforms recently and made massive improvements to simplify payments. a cashless india may still be a distant dream, but once it becomes a reality, one agency will lead the task: the national payments corporation of india (npci). this organization handles the majority of all digital payment requests in india. globally, the volume of non-cash transactions has risen, leading to a change in banking and payment industry dynamics that is witnessing a shift towards digital. the global market for digital payments is expected to reach usd 10.7 trillion by 2026 (globe newswire, 2019). the global payment revenue is diverse, but the increasing share is of transactions, i.e. a positive development for financial institutions and payment service providers. revenue generated through transactions constitutes about 40 per cent of the total revenue of global payments, which was 37 per cent in 2012. this share is expected 1corresponding author: orcid id: 0000-0001-7034-0121 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v11i1.1855 to cite this article: kumar, a., choudhary, r. k., mishra, s. k., kar, s. k., & bansal, r. (2022). the growth trajectory of upi-based mobile payments in india: enablers and inhibitors. indian journal of finance and banking, 11(1), 45-59. https://doi.org/10.46281/ijfb.v11i1.1855 https://orcid.org/0000-0001-7034-0121 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v11i1.1855 https://orcid.org/0000-0003-2941-1252 https://orcid.org/0000-0002-4081-8144 https://orcid.org/0000-0002-8862-9430 https://orcid.org/0000-0002-9914-9109 kumar et al., indian journal of finance and banking 11(1) (2022), 45-59 46 to reach 46 per cent by 2022. the asia-pacific region accounts for over 60 per cent of the world's population. despite recording more than double growth since 2012, it is still behind other regions with only 21 per cent of total electronification (bansal et al., 2018). india has emerged as a global pioneer in innovative population-scale payment systems with its unique rich payment ecosystem. the reserve bank of india (rbi) and the government have outlined a vision of a "less money society”. the banks have primarily led to the growth of financial services in india, and e-banking services have increased in recent years (jivan biradar, 2021). the regulator and banks are working on the initial thrust, growth, and support of digital payment systems. the digital payment ecosystem has made significant progress on the supply or issuance side, providing a wide range of payment services. this includes real time gross settlement (rtgs), national electronic funds transfer (neft), immediate payment service (imps), bharat interface for money (bhim) upi, card networks, point of sale (pos), bharat qr (bqr), national automated clearing house (nach), m-wallets, aadhaar payments bridge system (apbs) and aadhaar enabled payment system (aeps), via bank accounts, bank branches, business correspondents, wallets, mobile phones, and related tools. there are certain problem areas on the adoption side, such as high-cost structures (i.e., interchange fees) and limited financial services offerings that hinder merchants' acceptance of digital payments. cash plays a significant role in payments in india because of its universal availability and acceptance, low product prices, and no kyc criteria. the number of digital transactions per capita is useful for measuring the country's growth in digital transactions. to understand india's performance regarding the number of digital transactions per capita relative to that of the world, annual per capita digital transactions were calculated (table 1) of selected developing countries that are cpmi members (committee on payments and market infrastructures). table 1. no. of cashless transactions per capita (global) cashless transaction/capita growth country 2018 2019 2020 (in %) singapore 831.22 848.42 662.14 -20.34 republic of korea 546.71 607.02 620.74 13.54 brazil 165.17 195.97 210.87 27.66 china 142.16 225.17 241.66 69.99 south africa 85.49 93.39 90.94 6.37 turkey 76.21 87 92.74 21.69 argentina 53.37 60.87 70.17 31.47 indonesia 41.26 44.18 46.37 12.38 mexico 40.16 46.32 49.82 24.05 saudi arabia 38.16 58.69 94.19 146.82 india 18.06 23.92 29.44 63.01 per capita digital transaction volume (annual) = total volume of digital payments for the year/population. source: created by the author using data from the world bank and bank of international settlements india has seen a tremendous increase in digital payment measures in the previous three years, rising from 18.06 digital transactions per capita in 2018 to 29.44 transactions per capita in 2020 (table 1), a 63% increase. surprisingly, in 2014, there were just 2.4 digital transactions per capita (rbi, 2019c). however, it is still far behind from world ratio; developing nations, such as china, argentina, mexico, and saudi arabia, have much higher per capita digital transactions. people are increasingly migrating to other digital payment methods due to the resurgence of covid-19 in the nation; however, there is a steep fall in per capita digital transactions in singapore. this might be due to covid restrictions and market shutdown. the rbi and goi intended to reach an annualized volume of approximately 40 billion (b) digital transactions by fy 2020 and 220 digital transactions per capita by march 2021 (rbi, 2019c). the country surpassed the first target by recording 46b transactions by 2020 (mishra, 2020), but it missed the second target by a big margin. the rbi’s vision is to enhance customer experience, develop the required ecosystem and infrastructure, and empower the service providers by supportive regulations and timely risk-centred supervision to achieve the country’s target and make india a less-cash society (rbi, 2019b). a recent report on digital payment is also in line with that of the rbi, which states that the country's digital payments transaction value will show rapid growth and is projected to reach usd 135.2b by 2023 from 64.8b in 2019, with the compound annual growth of 20.2 per cent (assocham-pwc, 2019). literature review the rapid incorporation of mobile phones in society and their role in development has been one of the most significant technological developments of the last decades (madan & yadav, 2016), and it has created enormous growth prospects for payment systems (jocevski et al., 2020). technology and its rapidly changing existence influence how businesses work and how countries function and prepare for the future. governments worldwide are investing heavily in their digital economy to foster value creation and growth. the landscape of digital payments is mainly shaped by unique value propositions, a favourable climate, regulatory support, and high-end technologies. mobile payment (m-payment), which is a new-age digital payment system, refers to an economic exchange or a transfer of funds for any goods or services from one individual to another through internet-enabled mobile phones or tablets (mallat & tuunainen, 2008) or it can be understood as “any payment where a mobile device is used in order to initiate, activate, and confirm the payment, can be considered a mobile payment” (karnouskos & fokus, 2004). m-payment allows users to complete their payments anytime and anywhere in a simple, safer, quicker, and more convenient way (liébana-cabanillas et al., 2014; zhou, 2013). m-payment advantages kumar et al., indian journal of finance and banking 11(1) (2022), 45-59 47 include ease (sarmah et al., 2020), location independence (mallat et al., 2009), and its adoption gets affected by several factors, i.e., visibility (johnson et al., 2018), perceived transaction speed (teo et al., 2015), privacy concerns (thakur & srivastava, 2013) and effort expectancy (tak & panwar, 2017). millennials are known for their high use of information and communications technologies (xiang et al., 2015), and they are the centre of tomorrow's consumer spending (kim et al., 2015). self-efficacy (boonsiritomachai & pitchayadejanant, 2017) and network effects play a significant role in mobile payment adoption for young consumers. there is also a trade-off between perceived security and convenience in the valuation of services (rehncrona, 2018). besides these factors, consumer innovativeness (handarkho & harjoseputro, 2019) and lifestyle compatibility (chawla & joshi, 2019) directly affect mobile payment adoption. standardization, the nonexistence of interoperability, security, privacy, and incorporating a new payment system into the overall business environment are the key challenges of mobile payment systems (au & kauffman, 2008; mallat & tuunainen, 2008). some recent studies have found that gender, relative advantage, compatibility, complexity, and observability affect consumer intention to use and recommend mobile wallets (kaur et al., 2020). mobile wallets (m-wallets) are the digital counterparts to traditional wallets, preloading a certain amount of money via credit card, debit card, or internet banking, enabling users to make online and offline payments (chawla & joshi, 2019). understanding the need and changing consumer behaviour of consumers in india, the government of india (goi) developed and supported a specific mobile phone app called the unified payment interface (upi) to improve people's ability to use digital money and banking services (seranmadevi et al., 2019). the upi was introduced in 2016 by npci to streamline digital transactions to a text message level. this allows users to transfer money through an app without needing bank account information. not surprisingly, upi has left far behind other online payment systems. thereby, india has taken a step closer to becoming a cashless economy with the introduction of upi. with this new payment system, smartphones have become electronic debit cards, and people can send and receive money immediately. upi is a considerable improvement compared to the current payment system in terms of cost, user-friendliness, settlement times, and strong user acceptance (gochhwal, 2017). it is comparatively more secure than m-wallets (lakshmi et al., 2019). transaction costs in upi are much less than in m-wallets, and the added advantage is that users need not transfer money in wallets for any transaction (bhardwaj & kaushik, 2018a). it is widely accepted for small payments and can make india a digitized economy (kapur et al., 2020). mobile payments are divided into three categories: mobile proximity payments, peer-to-peer transactions, and remote mobile payments (forrester, 2014). the upi incorporates two categories, i.e., peer-to-peer and remote payments. from the discussed literature, it was found that researchers have explored the intention and adoption behaviour towards digital/mobile payments, more particularly the m-wallets. it was also evident that more work needs to be done so far to understand the evolution and progression of the new-age payment system of india, i.e., 'upi.' so, the authors in this study have shed light on the overall digitization of payments in india to that of the world, focusing on upi through available secondary data. materials and methods this research is separated into two parts. first, we conducted a conceptual study of the idea of upi, concentrating primarily on scholarly material published in the previous five years since its establishment in april 2016. several peer-reviewed publications were included, indicating a growing scientific work on mobile payments. scopus, a popular database, was utilized to do internet searches for the phrases "unified payments interface" and "upi." initially, the search yielded 177 items in business management and social sciences categories. we started by reviewing all the articles' titles and abstracts to find the relevant ones. the preliminary screening revealed that most results are irrelevant to the research. after removing duplicate and unrelated items, the process produced about 14 noteworthy peer-reviewed publications (table 2). table 2. screening results (previous studies on upi) authors & year focus areas rastogi et al. (2021) financial literacy/inclusion through upi kumar et al. (2020). lakshmi et al. (2019); malladi (2021) security aspects of upi anjali & suresh (2019) consumer satisfaction with bhim gupta et al. (2020). gupta et al. (2019); kapur et al. (2020); mallik & gupta (2021) consumer intention/adoption of upi khanra et al. (2020) barriers towards the adoption of upi bhardwaj & kaushik (2018b); dhamija & dhamijia (2017); gochhwal (2017) basic model/feasibility of upi the screening of the papers made it clear that most of the studies have focused on security, financial inclusion, and the basic model of upi, and some on consumer adoption of upi. however, we found very minimal literature focusing on the growth and advancement of upi and the reasons that contributed to this. as a result, it became clearer that the review needed to be widened; therefore, we looked at non-academic literature. the authors reviewed official policy documents, public reports, press releases, and research conducted by national and international organizations. the study's data was gathered from various publicly accessible government-owned websites/platforms such as rbi, npci, etc., and nongovernment national and international research firms such as kantar, statista, assocham deloitte, nielson, ericsson, and others. results growth of upi in the past few years, a strong base has been created for mobile payments, and the next few years are expected to see high growth and contribute to digital india. the ease of payment and round-the-clock accessibility are the factors that have kumar et al., indian journal of finance and banking 11(1) (2022), 45-59 48 resulted in increased upi adoption, and its popularity has grown exponentially. based on current growth estimates, transactions via upi could surpass other cashless payments within a few years. upi has amassed more than 32b transactions in 2021 (figure 1). the number of banks offering upi services has increased from 21 banks in 2016 to over 282 in 2021 (npci, 2021c). transaction values have risen from rs. 31 million (m) to more than rs. 5 trillion by march 2021 (npci, 2021c). compared to march 2020, the transaction volume increase is over 120 per cent, and transaction value growth is approximately 144 per cent, far above any other form of digital payment. upi's 'growth spurt' is driven by ease of use, a combination of consumer-facing fintech activities, and an aggressive push by goi. the key catalysts for the growth of p2p upi payments were google pay, phone pe, paytm, amazon pay, and whatsapp in its introductory stage. the npci, rbi and the indian banks association (iba) research predicts that the annual number of upi transactions may reach 60b by 2023. figure 1. growth of upi (created by author); transactions up to november 2021 source: npci effect of upi on m-wallets the goi announced the momentous ‘demonetization’ of all rs. 500 and rs. 1,000 currency notes on 8th november 2016 (the hindu, 2020a). the government's reasons back then included curbing black money, eliminating fake currency, and reducing the economy's cash circulation. data shows that electronic transactions, especially from mobile wallets, four years later, had increased significantly from before demonetization (figure 2). however, the introduction of upi, stringent rules of physical kyc verification, and imposition of a maximum amount limit by the rbi have narrowed its year-on-year growth. this decline in m-wallet transaction volume may be attributable to the increasing popularity of upi. very recent data for fy 2020-21 shows that upi has continued its momentum, whereas, despite an improved performance, m-wallet is way lesser than upi (figure 2). figure 2. comparative analysis of upi & m-wallet (created by author) source: rbi, npci there has been speculation that the growth of upi will end the m-wallet era. nonetheless, this could be a relatively intuitive and uninformed claim, as india's mobile wallet companies have more users than any of the current bank-supported 2.533 426.704 3708.223 9479.14 18880.89 32108.25 0 5000 10000 15000 20000 25000 30000 35000 2016 2017 2018 2019 2020 2021 v o lu m e (i n m ill io n ) year 2016-17 2017-18 2018-19 2019-20 2020-21 upi 2.533 426.704 3708.223 9479.14 18880.89 m-wallet 1629.98 3025.98 4139.28 4141.1 3998.7 0 5000 10000 15000 20000 25000 v o lu m e (i n m ill io n ) year m-wallet upi kumar et al., indian journal of finance and banking 11(1) (2022), 45-59 49 applications. upi would be an additional source for wallet companies to further integrate with the banking system and incorporate more merchants. contribution of upi to retail payments upi used mainly for p2p payments is now gaining broader acceptance in merchant transactions, a significant change as companies drift away from providing incentives for p2p payments and make it more viable. the retail volume data of upi transactions have significantly increased in the last few years, but it still holds a minimal portion of total retail payments in terms of value (figure 3 & figure 4). the significant variation between the volume and value of transactions shows that people still prefer cheques over digital payments for large-value transactions in india. however, it is also observed that there is a downfall in the value of transactions from cheques compared to other digital modes of payment in fy 2020-21, as it may be the effect of the pandemic and the closure of markets. most small indian retail outlets and independent shop owners operate in a cash-driven informal economy. they generally do not generate the financial records required to apply for bank loans, thereby restricting their growth potential. electronic transactions produce financial records that testify to buyers' and sellers' creditworthiness, making the business less costly. it can foster transparency and accountability, lower transaction costs, and lower the size of the grey/informal economy. it can also enhance the effectiveness of a business and be used as a tool to meet competition. a recent study indicated that digital retail is expected to increase its share from 5 per cent to 15 per cent by 2025 (mckinsey, 2019). a study by paypal claims that 88 per cent of consumers in india use mobile devices to make payments or pay online (etbr & equity, 2019). these changes have paved the way for increased digital transactions and shaped the payment behaviours of a consumer. the upi is generally preferred for low-ticket transactions, but the growth pattern indicates that the system can expand and evolve as a popular and preferred merchant payment method. upi members have jointly developed an approach to get small merchants or vendors with a low-ticket size into the digital system to accomplish this dream. in addition to the other two existing categories, p2p and p2m, upi has introduced a new 'p2pm' category catering to the needs of small merchants and the unorganized retail sector (npci, 2019a). the price and other fees related to purchases made in this class are the same as p2p. offline opportunities are enormous, so major online payment service providers like paytm, phonepe, and google pay vigorously expand their networks and focus on acquiring offline merchants for payments through upi. small merchants with estimated inward upi transactions of less than or equal to rs. fifty thousand per month shall be graded as p2pm, and no merchant discount rate (mdr) will be charged under this category (npci, 2019a). the goi has also taken various steps to encourage homegrown upi and rupay cards by exempting them from mdr fees from january 1, 2020. the department of revenue, goi, has also mandated all companies with a turnover of rs. 500m or more to provide customers with a payment facility through a rupay debit card and upi qr code (the economic times, 2019). these changes have increased merchant transaction volume and boosted india's digital footprint. figure 3. retail payments (transactions volume) source: npci 0 5 10 15 20 25 30 35 40 45 imps rupay card(pos+ecom) upi cts(cheque clearing) volume in billion imps rupay card(pos+ecom) upi cts(cheque clearing) 2018-19 1.75291 1.12708 5.3534 1.11207 2019-20 2.57917 1.48072 12.51862 1.03589 2020-21 3.27 1.38 22.33 0.66 2018-19 2019-20 2020-21 kumar et al., indian journal of finance and banking 11(1) (2022), 45-59 50 figure 4. retail payments (transactions value) source: npci upi as a business: public and private players in 2016, npci introduced upi in india by introducing bhim. bhim is a payment application developed by the npci which allows users to use the upi to make simple, easy, and quick transactions. after some initial growth, it could have achieved its full potential. merchants' cashback offers provided by other upi-based payment apps led to a continuous reduction in the market share of bhim. private firms-backed upi apps introduced their innovations, but npci's limited scope did not allow the govt. owned bhim to match the other players. the npci changed this when it introduced the bhim 2.0 platform in october 2019 (pti, 2019), which allowed donations and automatic bill clearing, increased transaction limits, and provided exciting offers from the merchants' side in the same way as other apps. in bhim 1.0, consumers faced a per-transaction cap of rs. 20 thousand. this hampered both online and offline big purchases of customers. now, bhim 2.0 has increased the cap to rs. 100 thousand for verified merchants as well as for some other retail stores. however, the payment cap for transfer to an individual remains the same at rs. 40 thousand. bhim has also launched an option for equity investors who subscribe to initial public offerings (ipos) on the national stock exchange (nse) and bombay stock exchange (bse). this unique feature is not available on other upi-based platforms. it facilitates upi's instant fund transfer experience while users subscribe to ipo, creating an instant mandate that ensures applications are submitted in real-time and customer support for issues related to transactions. despite these changes, bhim lags way behind its private counterparts. npci statistics show that bhim has recorded 251.68m transactions in fy 2020-21, accounting for only 0.96 per cent of the total market share. in contrast, flipkart-owned phonepe has shown tremendous growth by recording the highest number of transactions, followed by google pay, paytm, and amazon pay (figure 5). the competition is expected to intensify as whatsapp has recently integrated the upi platform in its message/voice chat app, facilitating users to transact through their whatsapp messenger application. with more than 400m subscribers, india is whatsapp's primary market (statista, 2021b). whatsapp would only allow some users to use the newly launched payment feature immediately. npci has asked whatsapp to start its service in a phased manner beginning with a limit of 20m users (npci, 2020). figure 5. upi’s transactions volume through different platforms for fy 2020-21 source: npci 0 50000 100000 150000 200000 250000 imps rupay card(pos+ecom) upi cts(cheque clearing) value in billion imps rupay card(pos+ecom) upi cts(cheque clearing) 2018-19 15902.57 1175.13 8769.7 81535.92 2019-20 23375.41 1757.21 21317.3 79174.61 2020-21 29414.96 2096.1 41036.54 56026.11 2018-19 2019-20 2020-21 8916.87 8981.33 2606.5 654.84 251.68 3.24 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000 phonepe google pay paytm amazon pay bhim whatsapp v o lu m e o f tr an sa ct io n s (i n m ill io n ) kumar et al., indian journal of finance and banking 11(1) (2022), 45-59 51 impact of covid-19 on digital payments digital payments have seen a significant drop during the public lockdown to control the covid-19 spread, carrying the economy to a stop and requiring non-essential organizations all through the nation to halt. the data from npci shows that upi transaction volume had declined by about 19 per cent in april 2020 to less than a billion transactions for the first time in several months. although overall payment volumes have fallen, the supermarket segment, payments at medical stores, has experienced growth, says praveena roy, coo, npci (bose, n.d.). during the 100 days of the lockdown between 24th march 2020 and 2nd july 2020, razorpay (a payment gateway channel) saw spending on online education rise by 23 per cent, medical transactions by 20 per cent, and social commitments like counselling, dating, and marriage websites increase by 32 per cent (the economic times, 2020b). the rbi and goi also emphasized encouraging digital payments to decrease social contacts. with the shutdown, critical goods and services were the only supply chain moving. as noted, there was a significant increase in digital payments in many areas as people stayed away from cash and atm use because of the risk involved. during this lockdown, bharat pe, which provides one qr code for all upi-based payment apps, recorded twofold growth in offline digital payments through qr codes (etbfsi, 2020). india transact was surveyed to understand the lockdown effect on millennial payment behaviour in india. the study found that approximately 57 per cent of respondents used digital payments five to six times a week, while 21 per cent used them three times a week (the economic times, 2020b). the data from npci shows that even a pandemic like covid19 has minimal effect on upi payments. from october-march 2020, on average, 1250m exchanges were being done through the upi platform. in april 2020, when markets were shut because of the lockdown, it tumbled to around 999m exchanges. however, when the market opened, and individuals were acclimated to the new normal, upi exchanges recorded substantial growth, even higher than before the pandemic. in august 2020, it recorded over 1600m transactions, about 25 per cent higher than in january 2020. the second covid wave in india has had little impact on upi, with transaction volume falling by 7 per cent between march and may 2021 (npci, 2021c). discussions upi has seen rapid growth in the last few years, and it can be attributed to its increased ubiquity, ease of use, and security features. upi has become the preferred payment method for many users and businesses in india. a renewed version of upi was launched in 2018 by npci with some new features that supposedly aimed to make it more attractive and secure for users. the new additions were intended to increase the user base and satisfy merchant needs. some of the key features of upi 2.0 include upi mandate with block facility in which consumers can pre-authorize a payment and block the funds in their account for a later debit with this option. this can be used when the money is paid later after the service has been obtained; however, the money in the account is withheld immediately. users have the option to create the payment mandate to be done later. this new advancement benefits both the customer and the merchant. so, upi shall be useful for several market players, which was not this way possible before. hotels, e-commerce companies, subscription-based services, healthcare, cab-booking, food delivery services, etc., shall be able to block advance amounts on their customers' cards as protection. earlier, linking only savings and current accounts was possible in upi 1.0. in the newer version, the client can connect an overdraft account (od) if their bank considers the user eligible to take advantage of an od. p2p and p2m transactions are permitted from a secure od account. however, for unsecured od accounts, only p2m transactions are allowed. merchants could borrow money even though their accounts had a cash deficit. thus, the business will not have to stop because of a short-term insolvency issue. in the updated upi, the focus has been on reducing fraudulent activities. signed intent was introduced through which the user can gain additional protection in the form of signed qr/intent while making payment using the intent or scanning qr. with the qr signed, issues relating to qr manipulation and non-verified entities are reduced. it facilitates the client about whether or not the merchant is a certified upi. this gives added security, as customers will be notified if the qr is not secured. in the case of signed intent, no app passcode is required, making fast transactions possible. in the last few years, the government has focused on the universal applicability of the upi payment system to provide ease and convenience to the citizens. it also focuses on its internationalization. there have also been several other developments with regard to upi, like changes in government laws and specific enablers and inhibitors that affect the growth and development of the upi payment system. internationalization another recent development is the internationalization of upi. the bhim upi app has gone global; it was first launched in bhutan (pib, 2021), and a pilot demo was introduced in singapore (etbfsi, 2019). things are also underway to link singapore’s pay now with upi by july 2022 (mas, 2021). to further promote upi in the global market, npci established a wholly-owned subsidiary, npci international payments limited (nipl), in april 2020 to promote the rupay card and upi globally. nipl formed multiple alliances with discover financial services (dfs) in the united states, japan credit bureau (jcb) in japan, union pay international (upi) in china, royal monetary authority (rma) in bhutan, and network for electronic transfers (nets) in singapore (npci, 2021a). nipl has also collaborated with singapore-based liquid group’, a leading cross-border digital payments provider, to facilitate qr-based upi payments services in 10 countries spanning north and southeast asia, including south korea, malaysia, thailand, cambodia, philippines, vietnam, singapore, hong kong, taiwan and japan (the times of india, 2021). the cooperation will expand upi's reach to over 2 million merchants in these nations. to increase its reach in the middle east and africa, nipl has partnered with a multinational digital commerce facilitator, ‘network international’(the economic times, 2021). kumar et al., indian journal of finance and banking 11(1) (2022), 45-59 52 government reforms the government is playing a significant role in upi by removing fees from upi transactions and capping the market share of upi players. removing psp fees and upi charges for customers the government has eliminated transaction fees, mdr, and psp fees. in august 2020, the central board of direct taxes (cbdt) issued a notification instructing all banks to stop charging for upi transactions and reimburse any costs collected on or after january 2020 (the economic times, 2020a). previously, banks charged rs. 2.5 for transactions worth less than rs. 1,000 and rs. 5 for transactions worth more than rs. 1,000 (razorpay, 2020). from january 1, 2020, the npci removed psp commissions for p2m upi transactions, terminating one of the psps' primary revenue streams. though the above reforms are increasing consumer acceptance of upi, they have resulted in the loss of a significant revenue source for banks and psps. the elimination of the psp charge would make it impossible for businesses such as google pay, phonepe, and paytm to generate any money on upi transactions. on average, they earn rs. 0.30-0.35 for every p2m transaction through psp fees (entrackr, 2020). third-party apps (tpas), which have been investing millions each year to gain a significant market share in the upi ecosystem, will not be able to profit from it. tpas refer to any private application that provides upi. there is no future revenue model for tpas in the merchant-based upi ecosystem. although the number of upi transactions has increased, a free-market model in which market forces decide pricing and charges is better suited for market stability and continued exponential growth. regulators must encourage rivalry among players while also protecting the interests of customers. furthermore, a market-driven cost structure enables banks and tpas to update and maintain their infrastructure to sustain the growing volume of upi transactions. capping the market share of upi players the npci has set a market cap of 30 per cent for upi transactions from tpas from january 2021 (the hindu, 2020b). upi services provided directly by banks are free from this restriction. the change is intended to prevent the upi digital payments system from being overburdened and prevent a few players from monopolizing the digital payments environment. it will also allow new fintech companies to enter the industry and accelerate creativity by introducing new use cases. this move also prevents emerging players with a substantial market share from the possible challenge of new entrants taking a considerable portion of the upi transaction market share. however, this change may create some other challenges for probable new users. according to news estimates, there are about 120m unique upi users (money control, 2021) and 696m smartphone users in india as of june 2021 (statista, 2021a), which means only 17 per cent of smartphone users have been using upi. suppose a total number of upi users be mapped according to roger's product adopters' model 1962. in that case, upi has now crossed the early adopters' stage and entered into the early majority stage. for any products/services to succeed, the early adopters and the early majority stages are essential. this rule may affect upi product satisfaction if users are forced to use any other app against their choice due to the market cap. however, by the deadline of december 2023 for compliance with this rule, top players like phonepe and google pay (figure 6) are expected to increase their market share by acquiring more and more users to sustain in the market. figure 6. third-party app market share in upi transactions (march 2021) source: npci enabling factors smartphone penetration with ever-lower data tariffs and increasing smartphone penetration in the country, upi shall benefit as people use smartphones as their prime device (assocham, 2019). as per the joint study (assocham-pwc, 2019), the number of smartphone users in the country is projected to double to 859m by 2022 from 468m users, rising at a compound annual growth rate (cagr) of 12.9 per cent in 2017. the study also points out that non-smartphone ownership in india will decline from 701m in 2017 to 504m in 2022 at a rate of -6.4 per cent as more and more people will prefer smartphones. 18.10% 0.90% 2% 35% 44% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00% 45.00% 50.00% others (tpas+non tpas) bhim amazon pay google pay phonepe kumar et al., indian journal of finance and banking 11(1) (2022), 45-59 53 internet penetration in its icube 2019 report (figure 7), kantar, which monitors digital adoption and use patterns, noted that india's number of internet users has reported annual growth of 24 per cent in 2019 and is estimated at 573m as of 2019. the report predicts a steady increase in the coming years, and internet users in india are expected to reach 900m by 2025. the fascinating part of this report is that internet users in urban india have increased by 11 per cent, reaching 264m users in 2019. however, rural india is now driving digital growth, reporting a rise of 45 per cent in internet users over the past year. another assessment from the government-owned telecom regulatory authority of india (trai) indicates that the country's internet users increased from 795.18m in december 2020 to 825.30m in march 2021 (business standard, 2021). in recent years, increased bandwidth availability and cheap data plans have narrowed the digital gap between urban and rural india. it indicates that the digital revolution is now reaching small towns and remote areas of the country. the internet and, more specifically, mobile internet penetration can be understood by recent data from the department of telecommunications (dot), goi, which stated that in june 2021, india had one of the highest average internet usages on smartphones in the world, hitting 14 gigabytes (gb) a month (financial express, 2021). figure 7. internet users in india – rural and urban source: kantar digital literacy goi has initiated several schemes and programs to increase digital awareness and literacy among the people of india, including the pradhan mantri gramin digital saksharta abhiyaan (pmgdisha). the scheme seeks to address the digital divide, targeting the rural population, including the disadvantaged sections of society. the target was to make 60m people digitally literate in rural areas across the country, reaching approximately 40 per cent of rural households by selecting one member from each qualified household by 31 march 2020 (pmgdisha, 2020). however, as of march 2021, about 40m people have completed their digital training. a new educational channel called "digi shala” and a dedicated website named www.cashlessindia.gov.in was also launched to raise awareness about various electronic payments. change in consumer demographics and usage patterns india, after china, has the world's second-largest population. due to the significant population growth of the last years, the age distribution remains skewed toward the younger age group. the young indian consumer, with a median age of 28.4 in 2020 (figure 8), are tech-savvy and have high digital demand, reflecting the recent growth in digital payments. the 400m millennials born after 1982 constitute india's one-third population and 46 per cent of its workforce (morgan stanley, 2020). the millennials are generally known for their tech-savvy nature (parment, 2013) and have a significant role in spurring growth. they are young and are the prime earners in many households. millennials are leading india's smartphone revolution, with 84 per cent of them reliant on mobile broadband and spending an average of 17 hours/per week online (deloitte, 2017). figure 8. average age of population (india) source: statista 134 182 264 496.17250 280 309 403.83 0 200 400 600 800 1000 2017 2018 2019 2025 (est.) rural urban 21.3 20.7 20.2 19.6 19.3 19.7 20.2 20.6 21.1 21.8 22.7 23.8 25.1 26.8 28.4 30 31.7 33.3 35 36.6 38.1 0 10 20 30 40 50 m ed ia n a ge in y ea rs http://www.cashlessindia.gov.in/ kumar et al., indian journal of finance and banking 11(1) (2022), 45-59 54 there is also a strong correlation between how long people use their handsets and their usage evolution. the study on the habits of indian smartphone users indicates that an average user spends more than 90 minutes on online activities, while the advanced segment usage is up to 130 minutes a day (nielsen, 2018). the changed behaviour has affected the digital payments landscape in the country in recent years. challenges digital literacy the need for digital literacy is crucial in a country as populated and diverse as india (sane & biradar, 2021). using technology, the difference between limited resource availability and vast requirements could be resolved to a large extent. the standing committee on information technology (scit) was formed in 2018-19 to review the national digital literacy mission. the report stated that the government's three digital literacy schemes, named 'national digital literacy mission (ndlm), 'digital saksharta abhiyan’ (disha), and pmgdisha, aimed at reaching a total of about 65m individuals. as a proportion of india's population of about 1.2b, all three digital literacy schemes cover a minuscule 1.67 per cent (scit, 2019). the scheme states that the requirement to include only one person per household is too restrictive. the major hurdles in implementing digital literacy schemes were a need for more awareness of digital literacy benefits and the required training infrastructure and resources available at several locations in the country. internet connectivity and language barriers are also major challenges. the committee also discovered that the government's digital literacy programs emphasize numbers rather than training quality or qualitative parameters. (scit, 2019). transaction failure upi's flagship digital payments platform is struggling on one front; data published by the npci reveals a significant rise in transaction failures. in september 2020, the state bank of india (sbi), which processes the most significant number of upi transactions, saw failures leap to more than 5 per cent. this figure was 3.8 per cent in august 2020. for private sector banks like axis bank, the failure rate is about 1.5 per cent of total transactions in september 2020, compared with 0.6 per cent in august. the number of failed transactions for hdfc bank has increased to 0.8 per cent from 0.2 per cent during the same time (money control, 2020). however, sbi has improved its position; the transaction decline volume now stands at 0.90 per cent of total transactions in march 2021, whereas other public sector banks such as punjab national bank, union bank, central bank of india, and andhra bank have transaction failure rates ranging from 1 to 5 per cent (npci, 2021b). the main reasons for failure are an increased volume of transactions, connectivity problems, and no response from banks' servers. addressing this, rbi released a circular on 20 september 2020 on the harmonization of turnaround time (tat) and customer reimbursement in the event of failure of transactions. in case of transaction failure, payment service providers are liable to pay rs. 100/ per day if the delay is beyond t+1 days in case of funds transfer, whereas the t+5 days rule is applicable in merchant payments (rbi, 2019a). however, the challenge remains almost the same: users need to know where to reach out to get their money. npci needs a proper reporting mechanism as such. merchant’s infrastructure merchant acceptability is critical, and the supplier side must be everywhere. a partial tale will not reduce cash transactions. there are around 20m upi qr codes in india (bhalla, 2020); what happens is that the user notices it in one place but not in another. as a result, a consumer still requires the funds, and when cash is available, the consumer prefers no other mode of payment. cyber frauds a spike in cyber fraud is greater than other forms of bank fraud. the alert notification by rbi to all the banks indicates that fraudsters are now targeting upi platforms by installing an application to gain unauthorized access to mobile phone users (business standard, 2019). covid has been a significant driver of digital payment use and growth in india, but transaction growth has been followed by the proliferation of payment-focused scams, with an increased number of users being targeted by scammers. there has been a rise in digital fraud during the covid pandemic as people increasingly used digital payment during the nationwide lockdown in india. cyber fraud increased by about 190 per cent in delhi during the march 2020 national shutdown; 62 per cent of these complaints were about digital financial fraud (the print, 2021). cyber fraud on ewallet transactions and digital payments has also increased in mumbai. there was a 70 per cent rise in cybercrime-related complaints from january to may 2020 compared to the same five-month period of the previous year (etgovernment, 2020). recent research by yougov and aci worldwide found that consumers in india are more concerned about digital payments fraud and are progressively becoming more cautious when making digital payments than a year ago. 49 per cent of customers are most worried about bogus upi payment links that request money transfers through text or email. according to the findings, consumers consider net banking the safest form of payment, followed by upi (business wire, 2021). conclusions upi enables the day-to-day transactions of an individual by providing the ability to manage personal finances safely and efficiently, transfer funds and purchases and make other transactions electronically. it allows businesses to increase their competitiveness by offering their customers a convenient and safe digital payment mode and thus makes it a coherent and natural choice. major upi players are now focused on increasing their merchant tie-ups to capture the market share. considering different reports and growth patterns, upi will continue its rapid growth while playing an essential role in digital payment space transformation. the digital payment space has seen tremendous growth, innovation, and regulatory kumar et al., indian journal of finance and banking 11(1) (2022), 45-59 55 support over the last few years. the developments have made india one of the fastest-growing nations in digital payments. however, the new regulations, like a 30 per cent market cap on tpa and restricting psp fees, may impact the balanced growth. the increased transaction failure and cyber fraud must be looked upon. the emphasis should be on keeping the momentum going with more government support with clear policy measures. the focus should be on increasing digital literacy among the masses, especially in rural india, creating digital infrastructure and new use cases for upi. digital payments in india are likely to see robust growth over the next 5 years at a compound annual growth rate (cagr) of 52 per cent (mint, 2019). another research from crisil shows that digital payments in india can reach rs. 4055 trillion in fy 2024 with a cagr of 20 per cent in five years (sabpaisa, 2020). the study also found that upi payments, with 59 per cent of transactions, would dominate the payment space. the upi has been one of the most significant fintech innovations that transformed the indian digital payment market. if this momentum continues, upi will permanently overtake cards and internet banking to become the most popular payment app. unlike before, indian consumers have become more comfortable using upi, and increased consumer trust would increase high-value transactions through upi. the adoption may also rise in tier 3 and tier 4 cities. npci, the parent organization for upi, is also considering the following advancements to push upi in the digital space: near-field communication (nfc) npci focuses on increasing the upi footprint in the retail segment by incorporating an nfc facility in the upi payment system. although mobile-based nfc payments are available worldwide, it was just recently launched in india. several private players, including samsung pay, google pay, icici, and paytm have started providing mobile-based nfc payment services in india (firstpost, 2020; mint, 2022). npci is reportedly planning to launch this feature on a larger scale, enabling consumers to make contactless payments from their preferred upi app to the point of sale (pos) device. the corporation is talking with payment aggregators to incorporate this technology into the pos devices. it would result in a multi-fold increase in merchant payments through upi, further developing the overall payment market. credit on upi credit facility on upi can be the next big thing. as of now, there is no way to get credit through upi. the credit availing system based on a upi will help increase p2p and p2pm transactions regardless of the amount of money in the account. a credit cap can be set up to the credit limit of upi for verified users and merchants. it will help businesses and vendors who engage in large payments as it helps in using upi credit for making payments without having a load on their working capital. cash withdrawal apart from merchant payments and direct transfers, customers will have the option to utilize upi for cash withdrawals. in collaboration with mumbai-based payment firm ags transact technology, the public sector bank 'bank of india' has already launched this service for its clients. the npci is now exploring the feasibility of this new development and may quickly open up interoperability, enabling a new upi usage case. as of now, this service can only be accessed by the bank's clients, but if interoperability is opened up, this will also help other bank customers. interoperability allows clients to borrow money from any bank atm. author contributions: conceptualization, a.k. and r.k.c.; methodology, a.k., s.k.m. and r.b.; software, r.b.; validation, s.k.m. and s.k.k.; formal analysis, a.k. and r.k.c.; investigation, a.k. and r.k.c.; resources, r.b.; data curation, a.k.; writing – original draft preparation, a.k. and r.k.c.; writing – review & editing, s.k.m. and s.k.k.; visualization, a.k. and s.k.m.; supervision, s.k.m.; project administration, s.k.m., s.k.k. and r.b.; funding acquisition, a.k. and r.k.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 because the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgements: not applicable. informed consent statement: not applicable. data availability statement: the data presented in this study are publicly available, and all the sources are mentioned in the manuscript. conflicts of interest: the authors declare no conflict of interest. references anjali, r., & suresh, a. 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(2013). an empirical examination of continuance intention of mobile payment services. decision support systems, 54(2), 1085–1091. https://doi.org/10.1016/j.dss.2012.10.034 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 13(1) (2023), 104-109 104 finance and banking ijfb vol 13 no 1 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa demystifying the misery behind loan apps in india mora saritha (a)1 (a) assistant professor. department of finance and accounting, icfai business school, ifhe hyderabad, india; e-mail: msaritha@ibsindia.org a r t i c l e i n f o article history: received: 22nd december 2022 revised: 31st january 2023 accepted: 25th february 2023 published: 28th february 2023 keywords: digital lending, digital lending apps, lending service provider (lsp), know your customer (kyc) jel classification codes: g2, g21, k000, k240 a b s t r a c t digital lending contributed to meeting the financial needs of people who had otherwise faced many difficulties in getting the required money in a very short period of time. all that comes with ease cannot be presumed to have a happy ending. loan apps increased and created havoc. in the wake of many undesirable situations leading to the suicidal deaths of people who have fallen prey to unscrupulous lending through loan apps, this paper tries to bring into light the digital loan apps and their features, the factors responsible for unscrupulous digital lending, the mechanism adopted by loan apps operators to cheat and harass the borrowers, and finally studies the intervention by the regulatory bodies. the loan app operators leveraged the gaps in the regulatory system to override their business coupled with the dire need of people to raise easy finance via loan apps. this paper aims to explore the rbi (reserve bank of india), the regulatory body for the supervision and control of the banking system of india, guidelines on digital lending, and provide precautions to whosoever wants to avail finance through digital loans. the data is collected from the report published by the rbi and various articles from the electronic media. the study highlights that the financial user must be vigilant at every step in the loan availing process and ensure that the process happens transparently and within the regulatory ambit laid by the rbi. © 2023 by the authors. licensee cribfb, usa. this open-access article is distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0). introduction in recent years, india has witnessed a surge in the popularity of loan apps, promising quick and hassle-free access to credit. these digital platforms have become a convenient solution for individuals seeking financial assistance, especially in emergencies or when traditional banking services are out of reach. however, beneath the veneer of convenience lies a dark underbelly, as numerous reports of exploitation, harassment, and unethical practices have plagued the loan app industry in india. this article aims to demystify the misery behind loan apps in india, shedding light on some operators' deceptive tactics and their detrimental impact on borrowers, particularly vulnerable sections of society. by exploring the root causes of this issue and raising awareness about the potential pitfalls, we hope to empower individuals to make informed choices and advocate for stronger regulations in the lending industry (asheq et al., 2022). technology has been a significant driver in reshaping the financial services industry. this paper assumes significance because it will highlight how digital lending backed up by technology development is creating strides in the lending business. it is easy to borrow money online, but digital lenders use a crooked way of recovering from digital borrowers. the present study assumes importance as it attempts to bring awareness to the public by providing information relating to loan apps. the paper aims to present the murkier side of digital lending facilitated by loan apps. it throws light on the predatory lending practice adopted by loan app operators. small traders, students, and daily wage laborers were the victims of these operators, and when the harassment reached a peak stage, the victims committed suicide. the takeaway from this paper proves to be socially relevant as it provides precautions for the general public before availing of digital finance. this paper is conceptual in nature as the topic is contemporary, and there are only a few research articles on this topic. it speaks about digital lending, features of loan apps, and factors responsible for unscrupulous digital lending; no particular statistical analysis is taken, and the conclusions are not based on any empirical evidence. 1corresponding author: orcid id: 0000-0002-9317-213x © 2023 by the authors. hosting by cribfb. peer review under the responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i1.2047 to cite this article: saritha, m. (2023). demystifying the misery behind loan apps in india. indian journal of finance and banking, 13(1), 104-109. https://doi.org/10.46281/ijfb.v13i1.2047 https://orcid.org/0000-0002-9317-213x http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i1.2047 khan, indian journal of finance and banking 13(1) (2023), 91-103 105 the structure of this paper is as follows: the subsequent section presents a thorough literature review, followed by a description of the materials and methods used for data collection. subsequently, the paper delves into a discussion of the results and findings obtained from the analysis. finally, the concluding remarks summarize the key insights and implications derived from the study. literature review a bank's erstwhile services, which would happen only through desk contact, are moving towards digital connect. the traditional face-to-face banking transaction has been replaced with fintech-enabled financial services. the financial services industry has undergone tremendous change with the adoption of technology. banks whose primary business of accepting deposits and lending loans can happen without customers' physical appearance at a bank branch. digital lending has become a buzzword, and as per the reserve bank of india (rbi), 2021, it involves a technology-oriented lending process with an online human interface, driven by unified digital technologies in acquiring customers, their credit appraisal, loan sanction, disbursement, recovery, and related customer service. digital lending is facilitated by digital lending apps run by regulated entities such as banks and nbfcs (non-banking finance companies) solely or in partnership with lending service providers (lsps). lsps (reserve bank of india, 2021) are primarily technology-oriented entities that perform both main and auxiliary lending services. the services rendered by lsps include establishing a marketplace and creating a link between the lenders and borrowers, sourcing a loan, underwriting, repayment collection services, data collection and analysis, rating services, etc. digital lending apps (reserve bank of india, 2021) are applications that can be run on mobile, and others are web-based with a user interface that can help lending and borrowing from a digital lender to any consumer in need of finance. the market for digital lending in india has shown signs of progress, and it disbursed $2.2 billion in digital loans in 2021-22. startup lenders who advanced digital loans were supported by foreign investors, prompting conventional banks a run for their money in their lending businesses (reuters, 2022). due to the pandemic, challenges, such as the loss of jobs and subsequent financial constraints, prompted many people to utilize loan apps to meet their financial needs. loan app operators disbursed small amounts of money to people in need. however, the loan contract was opaque and adopted cyberbullying, harassment imposed through electronic or communication devices such as computers, laptops, mobile phones, etc., to recover money from borrowers. this cruel practice has led to the suicidal deaths of borrowers. this topic assumes importance as it attempts to bring awareness to the public by providing information relating to loan apps. the present article is based on a novel work. many articles in the print and electronic media have attempted to create awareness among the general public regarding predatory loan apps so that they will not fall victim to this menace. as the topic is contemporary, the newspaper articles on the web and the rbi report of the working group on digital lending, including lending through online platforms and mobile apps, are primarily utilized for constructing this paper. (gupta et al., 2020) explored the cryptic challenges faced by users of different age groups towards complete acceptance of digital payments and modes (tandon et al., 2019) speaks about the design and challenges of a financial management application for a specific audience. hulikal et al. (2018) highlight the changes in the monetary ecology surrounding loan payments after introducing a mobile app. materials and methods as this paper is conceptual and relies on existing literature sources, the materials and methods employed revolve around data collection and analysis from secondary sources. the research methodology does not involve hypothesis formulation or testing. instead, it aims to provide an overview and analysis of the predatory lending practices adopted by loan operators through lending apps in india.  data collection: the primary data source for this study is published print media literature sources, including research articles, reports, and studies related to loan app lending practices in india. these sources were obtained from reputable academic journals, government publications, and industry reports. additionally, research results and findings from regulatory bodies such as the reserve bank of india (2022) were used to gather relevant information on the subject.  literature review: a comprehensive literature review was conducted to identify and analyze studies, reports, and publications that discussed the predatory lending practices employed by loan app operators in india. key themes and findings from the literature were extracted, summarized, and synthesized to form the basis of the conceptual understanding presented in the paper.  data analysis: the data collected from the literature sources underwent a qualitative analysis. the predatory lending practices, patterns, and implications discussed in the literature were examined to identify common themes, trends, and examples of exploitation. data analysis involved categorizing and organizing the information to present a coherent narrative of the misery behind loan apps in india.  limitations: it is important to acknowledge the limitations of this study. as a conceptual paper relying on secondary data sources, the findings are subject to the quality and availability of the literature reviewed. there may be limitations in the scope and representativeness of the literature sources. additionally, the dynamic nature of the khan, indian journal of finance and banking 13(1) (2023), 91-103 106 loan app industry implies that the findings may need to capture the latest developments and emerging practices. hence, further empirical research is encouraged to explore and validate the concepts discussed in this paper. overall, the materials and methods employed in this study involve gathering and analyzing secondary data from published print media literature sources, including research articles, reports, studies, and survey results conducted by regulatory bodies. the focus is on providing an in-depth understanding of predatory lending practices in the loan app industry in india based on existing knowledge and insights from relevant sources. results and discussions features of loan apps tenor: 7 days to one month (mallikarjunan, 2020) amount of loan: the amount lent via digital loan apps ranges from rs. 2,000 to 10,000 (chadha, 2022). processing procedure and disbursement time: the digital loan apps are installed on a prospective borrower's phone. the loan disbursal happens within 2 hours of filling out an application to the borrower's bank account or wallet. it is understood that most of the apps are found to route disbursement through deemed brokers (rbi, 2021). the application process is done by submitting a photo i.d., such as an aadhaar number, and uploading a selfie photograph to validate the identity from the registered mobile number. the interest rates vary from 25-72% p.a., while the processing fee ranges from 15% to 20% of the loan amount. besides, gst at 18% is charged on the processing fee (mallikarjunan, 2020). target group: the target group is low-income, financially constrained individuals, especially in the range of 21-40 age belonging to diverse groups such as daily wage laborers, college-goers, and business owners of small and micro ranges. numerous customers downloaded at a time 4-5 such apps and took loans from all at the same time period (mallikarjunan, 2020) rates of interest: minimum of 1 percent to a maximum of 12.99 percent per month (the new indian express, 2023) operated by (rbi, 2021): regulated entities (r.e.s) of rbi such as all commercial banks, nbfcs (including housing finance companies, and co-operative banks at the urban, state, and district levels. due to technological advancements, banks are partnering with lsps to operate in the digital era. there are two types of lsps: regulated entities:  credit information-sourcing companies controlled by financial sector regulators,  nbfcs are controlled by rbi and are in the category of: a) account aggregator (nbfc-aa), b) peer to peer lending platform (nbfc-p2p)  the securities and exchange board of india controls credit rating agencies. unregulated entities: those that any financial sector regulator does not specifically regulate. it is understood that lsps are not undertaking the business of a financial service provider as per the rbi act, 1934. the loans which are sourced, evaluated, or disbursed by them are not their assets. they are entering an outsourcing arrangement with a bank or an nbfc, and their activities are regulated by the guidelines on outsourcing of financial services issued for banks and nbfcs by rbi. there are no similar guidelines on outsourced activities other than banks and nbfcs. therefore, lsps are bound to fall outside the regulatory ambit. factors responsible for unscrupulous digital lending lack of regulation: as mentioned in the features of loan apps, digital lending is growing by exploiting the lapses in the regulatory regime. ease of borrowing: low formalities, a small loan amount available, short-tenure period, no collateral, and quick disbursal. these are some of the features luring prospective borrowers to avail of a digital loan. smart phone revolution and internet penetration: the smartphone revolution and internet penetration have thrown open new opportunities in the digital sphere. the number of smartphones in india has skyrocketed from 100 million in 2014 to over 700 million in 2021 (rbi, 2021), and this trend will be increasing soon. internet penetration is also one of the primary factors which spurt the growth of digital banking. pandemic thrown challenges (poonam, 2020): due to challenges thrown by the pandemic, such as loss of employment and resultant financial distress, constrained mobility, and social distancing, people had no choice but to search for quick online loans. khan, indian journal of finance and banking 13(1) (2023), 91-103 107 murkier side of loan apps: digital lending apps collect a substantial amount of data, including customers' sensitive personal information, spending habits, and social media connections. this data will be utilized to assess the credit score, and risk profiling of the potential customer will be done. the information is collected without the customer being unaware that he is supplying the information, which may land him in future pathetic troubles. one of the primary unethical practices implemented by the lending apps is that they charge very high-interest rates, and they collect the user's entire phone contacts, media, and gallery as part of the installation process and for the proper functioning of the app. potential borrower is compelled to share the information, and later, lending apps misuse this highly sensitive information and indulge in a brutal recovery process. borrower's relatives are telephoned, and using the media and gallery data of the user, pictures of the borrowers are morphed and showcased in social media in an acute indecent manner crossing all borders of modesty. in many cases (mengle, 2022), borrowers repay their loan within the prescribed deadline, and as per the emis (equated monthly installments) stated in the agreement, still app's executives continuously pester the borrowers by calling them and stating that the repayment is not reflecting in their records and systems and harass the borrowers to pay the same amount again and again. the recovery agents send to the borrower's phone and address fake documents which seems to be genuine firs (first information reports issued by the police against filing a complaint), legal notices, court orders, and, in some cases, signed and stamped warning issued by rbi (poonam, 2020). this fatal indecent recovery process has led to the suicidal deaths of many borrowers. rbi guidelines on digital lending small ticket loans, short tenure periods, quick disbursal, minimum documentation, and easy processing loans requiring no collaterals have proved to be the most dangerous credit facility. the interest rate charged was exorbitant, but the financial consumer availed of these loans over the advantages mentioned above, not knowing the disaster it would bring in postborrowing. in the wake of the undesirable consequences of digital lending, rbi established a working group to conduct a study on digital lending, including lending through online platforms and mobile apps. based on the recommendations made by the working group, rbi has issued the following guidelines on digital lending (reserve bank of india, 2022).  all the proceeds of a sanctioned loan and later repayments by the borrowers are mandatory to be made only between the bank accounts of the borrower and the regulated entity without any intermediation of the lending service provider (lsps) or any third party through pass-through or pool account of the lsps. this measure would eliminate the routing of disbursements through deemed brokers.  any fees, charges, etc., payable to lending service providers shall be directly paid by the regulated entity and not by the borrower. this measure will reduce the burden of high-interest rates, which include fees, charges, etc., payable to (lsps).  the borrower should be provided a standardized key fact statement (kfs) before onboarding the loan contract.  kfs should include all cost components of digital loans, which are reflected in the form of the annual percentage rate (apr).  the explicit consent of the borrower is required to increase the credit limit. no automatic increase in credit limit is permitted.  the loan contract should include a cooling-off or look-up period during which the borrowers have the option to exit digital loans. they can exercise this option by remitting the principal amount and the equivalent apr without any penalty payment.  regulated entities and the lsps engaged by r.e.s must put suitable nodal grievance redressal officers in place to handle complaints related to fintech or digital lending. such grievance redressal officers must also deal with complaints against their respective digital lending apps (dlas). grievance redressal officer details shall be displayed at the appropriate places, such as on the websites of the re, its lsps, and on dlas.  according to the existing rbi guidelines, if the re does not resolve any complaint raised by the borrower within the specified period, presently 30 days, then the borrower will have a right to complain to the reserve bank – integrated ombudsman scheme (rb-ios). precautions to be taken by the prospective borrower before availing digital loans (et online, 2022): nothing is so rosy behind every easy. the following are the precautions a financial consumer or a prospective borrower should follow before using digital loans. rbi registration mandatory: rbi website displays the list of registered nbfcs. https://rbi.org.in/scripts/bs_nbfclist.aspx. the prospective borrower is required to ensure that the loan facility is given by a registered or regulated entity of rbi. website maintenance: an app that maintains a website and directs the user to the registered or regulated entity upon navigating the loan app is trustworthy. avoid messages with connected links: fraudsters often entice the victim by sending messages with links connected to them. it is advised that prospective borrowers avoid such messages and do not click on the links. https://rbi.org.in/scripts/bs_nbfclist.aspx khan, indian journal of finance and banking 13(1) (2023), 91-103 108 not adhering to kyc (know your customer) norms: lenders must follow kyc norms before advancing a loan. if a lender does not do it, borrowers are advised not to enter into a loan contract with that particular lender. maintain silence when asked for card verification value (cvv) and card numbers: fraudsters are interested in knowing victims' personal details and would lure the victim to reveal the card numbers and cvv, etc. prospective borrowers are required to please maintain silence when asked for such details. missing loan agreement verification: if loan apps avoid providing the loan agreement details, prospective borrowers are required not to onboard those loans. hiding the details is the characteristic feature of a fraud loan app. conclusions digital loans are easy to avail but often keep the much-needed details hidden and drag much confidential information about the user. this happens due to the prospective borrower's need for adequate knowledge regarding the app's functionality and, in many cases, the dire necessity for the borrower to want funds. technological innovation without the regulatory lens has led to a lot of undesirable consequences. a digitally savvy financial consumer can enjoy the benefits of digital lending and fintech, provided he/she is aware of the regulatory guidelines and precautionary measures to protect himself/herself from unethical practices of solely profit-oriented entities. this paper is limited to the general overview of loan app lending happening in india. this paper is theoretical and empirical analysis needs to be included in this paper. this paves the way for further research to be carried out in this area. this topic is relevant in this digital era and provides ample opportunities for further research. this paper could be the base paper for further research in the area of financial crime, digital finance, financial literacy, and the relevant regulatory regimes.  various factors compel the prospective borrower to avail of the digital loan. each factor and its interlinkages can be empirically tested.  the research findings can provide inputs to the policymakers as to where the regulatory noose can be tightened and where it can be made slightly liberal in order to enhance the reach and coverage of the digital india mission.  the interlinkage between financial literacy and digital finance can be empirically tested. author contributions: conceptualization, m.s.; methodology, m.s.; software, m.s.; validation, m.s.; formal analysis, m.s.; investigation, m.s.; resources, m.s.; data curation, m.s.; writing – original draft preparation, m.s.; writing – review & editing, m.s.; visualization, m.s.; supervision, m.s.; project administration, m.s.; funding acquisition, m.s. 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 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 asheq, a. a., tanchi, k. r., akhter, s., kamruzzaman, m., & islam, k. m. a. 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(2023). 10 best instant personal loan apps in india (july 2023). retrieved from https://www.newindianexpress.com/expressdeals/other-categories/10-best-instant-personal-loan-apps-in-indiaaugust-2021/202.html 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 14(1) (2024), 1-13 1 finance and banking ijfb vol 14 no 1 (2024) p-issn 2574-6081 e-issn 2574-609x journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by american finance & banking society, usa microfinance and women microentrepreneurs: key variables influencing socio-economic and financial success gourav roy (a)1 popy rani sarkar (b) (a) lecturer, bangladesh institute of capital market (bicm), dhaka, bangladesh; e-mail: gouravroy.du@gmail.com (b)assistant director, bangladesh export processing zones authority (bepza), prime minister’s office, dhaka, bangladesh; e-mail: popysarkar.du.mgt@gmail.com a r t i c l e i n f o article history: received: 14th may 2024 reviewed & revised: 14th may to 25th july 2024 accepted: 30th july 2024 published: 15th august 2024 keywords: bangladesh, entrepreneurship, financial performance, microenterprise, microfinance, socio-economic development, women empowerment, women microentrepreneurs jel classification codes: g21, o16, j16, l26 peer-review model: external peer review was done through double-blind method. a b s t r a c t given that bangladesh has a male to female ratio of almost 49.5:50.5, the contribution of women's workforce to gdp is significant, and microfinance has been instrumental in enabling women to initiate microenterprises since 1974. proper investigation of how microfinance can contribute to women's socioeconomic and entrepreneurial financial success is required. this study examines whether microfinance impacts the socio-economic development of women microentrepreneurs and whether microfinance impacts the financial performance of women-led microenterprises. this primary and secondary database-driven mixed-methods study surveyed 273 women-led microentrepreneurs and their enterprises across bangladesh using a homogenous survey questionnaire. to meet the first research objective, the study employs primary responses from women microentrepreneurs and uses ordinary least squares (ols) and ordered logit (ologit) regression to analyze the mutual relationship between women microentrepreneurs' socio-economic development and the six explanatory variables, including four relevant control variables. the study has also used a paired t-test methodology to meet the second research objective, comparing the microenterprises’ three years' average net income before and after taking microfinance. the results indicate a significant impact of microfinance on the socio-economic development of women microentrepreneurs, with all independent variables except q4iv and the control variable q8cv demonstrating a significant relationship with the dependent variable. additionally, the study confirms a statistically significant relationship between microfinance and the financial performance of those microenterprises. the study contributes to the field of research with a mixedmethods statistical facility to analyze microfinance's impact on both socio-economic and financial performance dimensions of women microentrepreneurs using both primary and secondary data. © 2024 by the authors. licensee american 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 in 1974, a project named rural social services (rss) launched the first interest-free and collateral-free microcredit. in the late 1970s and early 1980s, certain non-governmental organizations (ngos) and grameen bank initiated microfinance services as a demand-driven operation, with the backing of the government. these services were provided in conjunction with their social development initiatives. microfinance allows opportunities for women to take micro loans for enabling access to finance in a socially inclusive way for raising contribution to national income and gross domestic product (gdp). in 2023, a total of bdt 2857.57 billion of microcredit has been disbursed which is 5.67% of the gdp (in current amount). as 90% of the clients of microfinance institutions (mfis), registered under microcredit regulatory authority (mra), are women, thus the disbursement of microfinance to women is nearly 5.09% of the total gdp. a study on the perspective of pakistan was conducted with a data set from 2006 to 2018 where the study found that women borrowers’ percentage in microfinance significantly contribute to the financial sustainability of women (maeenuddin et al., 2024). a study at uganda suggests that enhancing and broadening micro-finance assistance to economically disadvantaged and susceptible women in different regions of the country by means of entrepreneurial education and training, facilitating access to credit and financial services, and creating market opportunities (robert, 2024). the implementation of microfinance in bangladesh has resulted in an increase in individuals' incomes, enhanced housing and food security, and provided economic empowerment to women, thus promoting entrepreneurship and decision-making. additionally, it has bolstered social solidarity and the growth of communities by promoting economic involvement. 1corresponding author: orcid id: 0000-0001-9782-9103 © 2024 by the authors. hosting by american finance & banking society. peer review under responsibility of american finance & banking society, usa. https://doi.org/10.46281/ijfb.v14i1.2241 to cite this article: roy, g., & sarkar, p. r. (2024). microfinance and women microentrepreneurs: key variables influencing socio-economic and financial success. indian journal of finance and banking, 14(1), 1-13. https://doi.org/10.46281/ijfb.v14i1.2241 https://orcid.org/0000-0001-9782-9103 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v14i1.2241 https://orcid.org/0009-0008-0977-5650 roy & sarkar, indian journal of finance and banking 14(1) (2024), 1-13 2 although facing difficulties, microfinance continues to be essential for alleviating poverty in bangladesh (shah, 2024). in afghanistan, the effect of microfinance on women’s empowerment is less than projected; yet, there is evidence of a favorable benefit for some women (hemat & rahman, 2023). a study in the context of bihar, india also established that microfinance significantly contributes to achieve financial inclusion (fatima, 2024). the scope of the study is centered on primary data collected from a sample of women microentrepreneurs around bangladesh. as the bigger part of microfinance (90%) is drawn by the women, the study only focuses on the women clients of microfinance. it includes those women clients who have utilized the microfinance in establishing an enterprise. microfinance has two dimensions; one is socio-economic development and the other is financial performance of enterprises. thus, the study scopes both of the dimensions by blending primary and secondary data from the same respondents. the study aims to find out whether microfinance is significantly impacting the socio-economic development of the women microentrepreneurs. additionally, using the net income information of their enterprises, the study aims to find out whether microfinance significantly impacts the financial performance of those enterprises. the novelty of the study consists in utilizing a mixed method analytical research blending primary and secondary data where both the socio-economic performance and financial performance of microfinance are evaluated focusing only on the women microentrepreneurs. this study contributes the existing field of research by understanding the gender dynamics of microfinance, providing policy implications for optimizing microfinance programs for women, offering a robust mixed-methodological framework, and implementing a localized, contextual, and evidence-based study. the study approaches by reviewing exiting literatures in the given field. review of literature involves studying the theories relevant to microfinance, findings of other studies, determining research gaps, and development of hypothesis. after that, the methodology of the study provides roadmaps to conduct the study. after that, results and discussion provide the statistical outputs and discussions based on the outputs. a brief finding is provided for summarizing the outputs and implications for microfinance society based on research aims. finally, the study concludes by summarizing the outputs and providing shades of possible avenues of further studies. literature review microfinance, a powerful tool for fighting against some major problems, including poverty (kalla, 2021) and vulnerability (bassem, 2012), in developing countries like bangladesh, boosts socio-economic development (al-amin & mamun, 2022), which is a multidimensional process through which an individual can take control over the matters concerning them for the socio-economic betterment of women (sethy & jana, 2020). thus, it amplifies the capability of poor and marginalized people to improve their standards of living (banerjee & jackson, 2017). in the early 1970s, the concept of microfinance was introduced by the economist muhammad yunus in bangladesh to encourage women involved in start-ups and entrepreneurship. the famous economist dr. mohammad yunus also developed grameen bank, which is most probably the largest microcredit organization in the world (islam et al., 2012), to execute his microfinance concept, especially focusing on the poor rural women who are interested in improving their living standards and engaging in and expanding their entrepreneurial activities. the study conducted by akter and jilu (2020) has assessed the success of the microfinance concept through grameen bank in bangladesh. the strategy of self-empowerment through micro-finance is successfully being operated in more than 60 countries in the world and it is being observed that women's participation in entrepreneurial activities has increased to a greater extent all over the world. to make bangladesh smart, fostering women's entrepreneurship is needed to contribute to national economic development. by 2041, bangladesh is going to transition from a developing country to a middle-income country with the joint efforts of men and women who have worked together to implement vision 2021 and are still working to attain the sdgs by 2030. it’s a good point for bangladesh that women entrepreneurs hold large portions and are actively exploring new opportunities in economic participation. not only in bangladesh but also in the whole world, microfinance contributes to the economy of the country by reducing poverty, creating self-employment, and fostering women's entrepreneurship. in both developed and developing countries around the world, microfinance is treated as a viable and best alternative to conventional financial and non-financial services. during the global financial crisis of 2008, microfinance gained trust and reliability with profound shock-resistant roots (alimukhamedova, 2014). the concept of microfinance, also called microcredit, provides women, especially those from rural areas, with affordable financial and non-financial services and opportunities to utilize their own skills, knowledge, and abilities to startup businesses, which causes women's empowerment (nimmi & ramachandran, 2021). moreover, it is considered a world where all the people, especially marginalized and poor individuals and households, get wide access to affordable quality financial services and products, which do not only act as credit but also act as savings, payment services for the clients, leasing and micro-insurance (khavul et al., 2013), and transfer of funds. it performs the function of banking for unbanked consumers and entrepreneurs who have little access to regular banks and are not able to provide proper collateral to take advantage of financial services (bassem, 2012). in addition to that, microfinance provides women entrepreneurs with proper support and funding to financially contribute to their families (tandon, 2016), especially in developing countries like bangladesh. nimmi and ramachandran (2021) explained that women empowerment through small businesses is particularly a specific economic concept that helps women go forward and contribute to their families as well as the economy of bangladesh. microfinance plays a crucial role in women's empowerment through entrepreneurship. through this, women entrepreneurs get financial, social, health, and educational development that ultimately develops their family empowerment. a study by gupta and meher (2016) explained that microfinance is an effective way to boost women's entrepreneurship by providing financial and non-financial services such as small and emergency loan facilities, scholarships, educational and roy & sarkar, indian journal of finance and banking 14(1) (2024), 1-13 3 training programs, medical facilities, etc. to women who are interested in entrepreneurship and small businesses. with financial independence through microfinance, women can grow their entrepreneurship and thus gain self-confidence and utilize their skills. thus, the economic empowerment of women through microfinance makes a positive impact on their selfesteem (sethy & jana, 2020) and gains respect for them. on the other hand, microfinance evolved as a procedure of financial inclusion for women entrepreneurs (okesina, 2021) who are not able to get access to conventional financial services (chowdhury et al., 2021) such as credit facilities, insurance, and some other non-financial services due to perceived gaps in ownership of land and religiosity (olohunlana et al., 2024), gender discrimination, lack of proper collateral, and level of informality (banerjee et al., 2015) for fostering more involvement of women in entrepreneurship (okesina, 2021). women's participation in entrepreneurship boosts their financial independence, earnings, family income, savings, and also some other household resources (rehman et al., 2015), and microfinance paves the way for a for a smooth and affordable future. according to a study by bassem (2012), a large portion of beneficiaries of microfinance are women who are interested in involving themselves in entrepreneurship and other self-employed activities. this gives women self-confidence, social status, and active participation in family decisionmaking, the ability to contribute to family and the economy (degago & aschale, 2018), and gender equality. studies show that microfinance exerts a deep influence on the socio-economic status, knowledge, skill and ability (ksa) improvement, decision-making power, and self-dignity of women involved in self-employment. addai (2017) shows the notable positive relationship between microfinance and the socio-economic development of the self-employed women group (dame & adisa, 2020), though marital status may affect the mentioned relationship, whereas age and educational level of women have no controlling effect. in bangladesh, microfinance is provided by grameen bank, which is the largest microfinance bank in bangladesh and is acting as a revolutionary method to eradicate poverty and foster women's entrepreneurship (islam et al., 2012). the microfinance concept and grameen bank have contributed so much to rural development, especially women's entrepreneurship and empowerment, that in 2006, the nobel prize committee jointly awarded dr. muhammad yunus and grameen bank for their earnest efforts to reduce poverty in bangladesh (islam et al., 2012). despite all the positive outcomes of microfinance, there are some negative outcomes of microfinance on women entrepreneurs’ ability to run their entrepreneurial activities. this is supported by (dumbuya & munu, 2024; okesina, 2021). such as the findings of the study conducted by okesina (2021), it is a small statement that women's engagement with microfinance also has some negative outcomes, including increased debt, loan diversion, financial burden, less financial literacy, unjustified deductions, short repayment periods, etc. (dumbuya & munu, 2024) for women entrepreneurs. islam et al. (2012) indicate that the high interest rate of microcredit sometimes becomes a huge burden for women entrepreneurs and suggest grameen bank rethink the interest rate and make a smooth way for women entrepreneurs to contribute to their families, society, and the economy of bangladesh. up to the authors’ latest knowledge, in bangladesh, no research has been done on finding the impact of microfinance on women micro-entrepreneurs by conceptualizing a survey questionnaire and knowing directly from them about the effectiveness of microfinance in socio-economic development and financial performance of their microenterprises simultaneously. in addition to that, up to the authors’ latest knowledge, no research has been done using a mixed method set up in this field with updated information till june 2023. these issues have lured the researchers to conduct a study in this domain. conceptual framework the book, “banker to the poor” specifically enlightening microfinance in bangladesh context (yunus & porter, 2008), a study by jayasinghe and herath (2013) formulated few variables based on what the proxies for variables can be shaped. again, a women empowerment index (wei) developed in the context of india by roy et al. (2018) influenced the inclusion of variables. also, studies by asadullah et al. (2021) and hashemi et al. (1996) provided different angles of judgments regarding microcredit program’s relation to women empowerment. all these have been adjusted and conceptualized in bangladesh by the authors of this study. referring to figure 1, where a theoretical framework has been generated from theories and relevant studies. women’s microcredit utilization success is reflected in the entrepreneurial success of women taking microcredit. entrepreneurial success is a factor of different types of capital, including financial capital (elsafty et al., 2020). access to credit encourages entrepreneurial success (abebe & kegne, 2023). it’s seen in the study that when financial capital is ample, there is a chance of entrepreneurial success. entrepreneurial success is remarkable when such a microbusiness initiative employs other women (badal, 2010). a study published in springer focusing on the european union showed that there existed a significant correlation between employment rate and entrepreneurship (anastasiou et al., 2021). employment leads to higher income and business expansion, which finally provides a better network with stakeholders and mfis. the mfis consider these successful women micro-entrepreneurs as role models, and finally, the social status of the women microentrepreneurs develops. it is notably true that there should be a positive relationship between good corporate financial performance and entrepreneurship that is efficient and successful (chitimiea et al., 2021). thus, a better social status is blessed to these women micro-entrepreneurs, which consequentially leads to the empowerment of women. as microcredit allows opportunities for easy access to capital and all these direct and indirect opportunities that finally link women's microcredit entrepreneurship to success, the framework hints at a positive correlation between these variables and women's micro-entrepreneurial success. roy & sarkar, indian journal of finance and banking 14(1) (2024), 1-13 4 figure 1. conceptual framework on how microfinance impacts socio-economic development and financial performance of women microentrepreneurs hypotheses of the research the study, as of its research objectives, wants to examine various segments of microfinance’s impacts and wants to test two hypotheses. referring to table 1, the alternative hypotheses are denoted in the list with respective test strategies. table 1. hypotheses of the research alternative hypotheses description of hypotheses test strategies h1 there exists a significant relationship between microfinance and the socio-economic development of women microentrepreneurs. ordinary least squares (ols), and ordered logit regression model. h2 there exists a significant relationship between microfinance and women-led microenterprises' financial performance. paired t-test materials and methods data and sample distribution the data is the women clients’ information found from the grameen bank, society for social service (sss), and other few microfinance institutions (mfis), and microcredit regulatory authority (mra). using sample size estimation formula from (1), the sample size has been estimated 273. cochran (1977) advised the sample size formula. sample size n = n * [z2 * p * (1-p)/e2] / [n – 1 + (z2 * p * (1-p)/e2] (1) where, n = population size, e = margin of error (percentage in decimal form), z = critical value of the normal distribution at the required confidence level, and p = sample proportion. here, 1,33,64,000 is the number of women clients of microfinance in bangladesh till the fiscal year 2022-23. using z value for 90% confidence interval with 5% margin of error, the number of samples is found. socio-economic and financial success of women microentrepreneurs microbusiness's financial success easy access to capital job creation to the unemployed higher income and purchase ability relative freedom from domination in family better economic, legal, and political network better psychological wellbeing roy & sarkar, indian journal of finance and banking 14(1) (2024), 1-13 5 figure 2. samples distribution across bangladesh (as of divisions of bangladesh) referring to figure 2, where the sample distribution across the locations has been provided. figure 2represents stratified sampling procedure across the country considering eight divisions of bangladesh. basing on mfi’s presence and the quantity of women clients, the density of survey has been shaped. data collection data has been collected using survey questionnaire with the women microentrepreneurs. the data questionnaire is enclosed in the appendix-a, where the data has been ordinal data in nature, in a likert scale of 0 to 4. also, information on net income before taking microfinance loans and net income after taking microfinance loans has been collected for meeting the second aim of the research. variables identification, labels and justification table 2. variables identification, labels and justification variables’ labels and types name of the variables justification q1dv: dependent variable economic security and improvement of capital from a study of hashemi et al. (1996), this has been considered proxy for socio-economic development of women microentrepreneurs. this variable represents that woman have security against economic vulnerability and capital enhancement history from microfinance. q1iv: independent variable 1 easy access to capital a study of roy et al. (2018) considered access to resources as a key indicator of women’s socio-economic empowerment. q2iv: independent variable 2 job creation women from their microenterprises can impact the job creations for others which impact the socio-economic development (sohail, 2014). q3iv: independent variable 3 economic, legal, and political network a study showed that women’s socio-economic empowerment is impacted positively by networking (mayoux, 1970). microfinance enables this option highly to the women microentrepreneurs. q4iv: independent variable 4 higher income and purchase ability the ability of women in income and purchase comparing to the past represents benefits which impacts socio-economic development (hashemi et al., 1996). q5iv: independent variable 5 better psychological wellbeing asadullah et al. (2021) found that better psychological wellbeing is a fundamental effect of microfinance that is a social outcome of microfinance. q6iv: independent variable 6 relative freedom from domination in family the access to microfinance has a significant relationship with relative freedom from domination in family (hashemi et al., 1996). q7cv: control variable 7 asset size the size of the asset can have an impact on the business's growth (kendo & tchakounte, 2021). the model controls this accordingly. q8cv: control variable 8 location the location of the women-led enterprises may have an impact on what is controlled in the model (kakooza et al., 2023). q9cv: control variable 9 age of the business the age of the business represents its experience, which might have an impact on its growth. that’s why it’s controlled in the model (gupta et al., 2013). q10cv: control variable 10 amount of loan taken the amount of loan taken from the mfis or any other government organization or bank may have an impact on business growth for what’s controlled in the model (al-azzam & parmeter, 2019). referring to table 2, the definition of the variables is provided with proper background or insights with citations. as no specific theories are tested in this study, thus, variables are chosen with sincere blend of relevant literatures. dhaka 16% chittagong 6% mymensingh 17% sylhet 6%barisal 5% khulna 9% rajshahi 11% rangpur 30% percentage of 273 microentrepreneurs surveyed across divisions dhaka chittagong mymensingh sylhet barisal khulna rajshahi rangpur roy & sarkar, indian journal of finance and banking 14(1) (2024), 1-13 6 regression model q1dv= α + β1q1iv+ β2q2iv+ β3q3iv+ β4q4iv+ β5q5iv+ β6q6iv+ β7q7cv+ β8q8cv+ β9q9cv+ β10q10cv + ε (2) where, α the constant βi slope for all the independent variables ε error terms data analysis framework the study has used stata (version 18) to analyze the ordinal data series, where the data analysis has been formed in the figure 3. figure 3. data analysis framework the research has undergone data analysis using this methodology. the steps are described briefly below: step 1: the ordinal level data collected from the respondents is coded in a likert scale of 0 to 4 (appendix-a for more details). step 2: using stata, a statistical analysis tool, cronbach’s alpha is calculated, which represents the level of reliability and validity of the data set. in this stage, all the independent variables and dependent variable are tested by numerous questions (appendix-b) for checking individual cronbach’s alpha and basing on omission process, the reliability and validity of individual variables is determined, and finally overall cronbach’s alpha is found out. step 3: descriptive statistics is calculated to find out the minimum, maximum, mean, and standard deviation of the data set for understanding the basic depth and variability of the data dimension. step 4: ordinary least squares (ols) with robust standard errors is used to regress the q1dv against all six independent variables and four control variables. step 5: the ordered logistic regression model (ologit) with robust standard errors is used to regress the q1dv against all the independent and control variables. data anlysis reliability and validity test cronbach's alpha impact analysis ordinary least squares (robust s.e.) ordered logistic regression model (robust s.e.) test of financial performance t-test correlation analysis correlation matrix with p values test of multicollinearity vif test summarization descriptive statistics roy & sarkar, indian journal of finance and banking 14(1) (2024), 1-13 7 step 6: the correlation matrix with p values is calculated to understand the variables’ interrelationship to find out the chances of multicollinearity. step 7: the average net incomes of the women microentrepreneurs’ particular enterprises are calculated in two series. one is “average net income before getting microfinance,” and the other is “average net income after getting microfinance." the average of net income includes three consecutive years’ average. after that, the average before and after series are used to generate the ln (before) and ln (after) series using the lognormal function in stata. after that, a paired two-tailed t-test is conducted on the ln (before) and ln (after) series to find whether there are any significant differences between the means of the data sets. step 8: the variable inflation factor (vif) test is done to check multicollinearity. results reliability and validity test (cronbach’s alpha) in order to find out individual cronbach’s alpha, several consistent questions have been designed in the survey questionnaire for each variable. in the test, omission methodology has been used to maximize the scale reliability. appendix-b shows the final list of questions used for reaching determining every variable’s reliability and validity. table 3. cronbach’s alpha summary for individual variables variables overall individual cronbach’s alpha q1dv 0.881 q1iv 0.896 q2iv 0.903 q3iv 0.891 q4iv 0.930 q5iv 0.892 q6iv 0.888 q7cv 0.889 q8cv 0.886 q9cv 0.887 q10cv 0.887 overall cronbach’s alpha of data set 0.903 in table 3, the cronbach’s alpha is shown. typically, a good cronbach's alpha value falls within the range of 0.70 to 0.99, although this can vary depending on the research context and the specific measurement instrument used. the scale reliability coefficient value 0.903 presented in table 3 indicates the high reliability and validity of the data set used in this study for further analysis. descriptive statistics table 4. summary statistics variable observation mean std. dev. min max q1dv 273 2.655 1.392 0 4 q1iv 273 2.267 1.501 0 4 q2iv 273 2.666 1.402 0 4 q3iv 272 2.172 1.249 0 4 q4iv 273 1.908 1.517 0 4 q5iv 273 2.373 1.358 0 4 q6iv 273 2.435 1.386 0 4 q7cv 273 2.421 1.386 0 4 q8cv 273 2.487 1.393 0 4 q9cv 273 2.490 1.364 0 4 q10cv 273 2.501 1.409 0 4 in table 4, the descriptive statistics for the observation set for first research aim is shown. the table summarizes that there are 273 observations and the means and standard deviations are homoscedastic having no heterogenous outliers. the minimum and maximum in all cases are 0 and 4 respectively. correlation matrix with p values table 5. correlation matrix with p values q1dv q1iv q2iv q3iv q4iv q5iv q6iv q7cv q8cv q9cv q10cv q1dv 1.0 q1iv 0.6* 1.0 0.0 q2iv 0.5* 0.3* 1.0 0.0 0.0 q3iv 0.7* 0.5* 0.3* 1.0 roy & sarkar, indian journal of finance and banking 14(1) (2024), 1-13 8 0.0 0.0 0.0 q4iv 0.0 0.0 0.1 0.0 1.0 0.9 0.8 0.2 0.7 q5iv 0.6* 0.5* 0.3* 0.5* 0.1 1.0 0.0 0.0 0.0 0.0 0.2 q6iv 0.7* 0.4* 0.4* 0.5 0.0 0.6* 1.0 0.0 0.0 0.0 0.0 0.8 0.0 q7cv 0.7* 0.5* 0.3* 0.6* 0.0 0.5* 0.6* 1.0 0.0 0.0 0.0 0.0 0.5 0.0 0.0 q8cv 0.7* 0.5* 0.4* 0.5* 0.0 0.5* 0.6* 0.7* 1.0 0.0 0.0 0.0 0.0 0.6 0.0 0.0 0.0 q9cv 0.7* 0.4* 0.3* 0.6* -0.1 0.5* 0.5* 0.6* 0.7* 1.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 q10cv 0.7* 0.4* 0.4* 0.5* 0.0 0.5* 0.6* 0.6* 0.6* 0.7* 1.0 0.0 0.0 0.0 0.0 0.5 0.0 0.0 0.0 0.0 0.0 here,* denotes significance at 95% confidence interval. in table 5, the correlation matrix with p values states that there exists a good and positive correlation between the independent variables and the dependent variable. almost every independent variable provides strong explanatory evidence of a representing the changes in the dependent variable. linear probability model (with robust standard errors) table 6. summary of ols (with robust standard errors) number of observations p value r-squared 273 0.000*** 0.819 here, *** stands for 99% confidence interval in table 6, using ols with robust standard errors, the p value is significant at a 99% confidence interval. the ols model rejects the null hypothesis by establishing a significant relationship between microfinance and the socioeconomic development of women microentrepreneurs. the r-squared of 81.93% indicates that the explanatory variables can accurately predict changes in the dependent variables by 81.93%, providing strong evidence of the model's fitness. table 7. summary of multivariate ols outcomes (with robust standard errors) variables coefficients robust standard errors t values p values q1iv 0.085 0.034 2.43 0.016** q2iv 0.079 0.032 2.41 0.017** q3iv 0.202 0.049 4.08 0.000*** q4iv 0.023 0.022 1.02 0.311 q5iv 0.070 0.042 1.66 0.098* q6iv 0.193 0.048 3.99 0.000*** q7cv 0.197 0.047 4.16 0.000*** q8cv 0.012 0.049 0.25 0.804 q9cv 0.103 0.053 1.95 0.052* q10cv 0.221 0.048 4.52 0.000*** constant -0.191 0.113 -1.68 0.093 here,*** stands for 99% confidence interval ** stands for 95% confidence interval * stands for 90% confidence interval in table 7, the detailed outputs as per variables are listed. the results show that except for q4iv and q8cv, all the variables are significantly impacting the dependent variable. the coefficients represent a positive slope in predicting the dependent variable. ordered logistic regression model (with robust standard errors) table 8. summary of ologit (with robust standard errors) number of observations p value pseudo r-squared 273 0.000*** 0.465 here, *** stands for 99% confidence interval in table 8, the ologit model, featuring robust standard errors, demonstrates a significant p value within a 99% confidence interval. this rejects the null hypothesis using the ologit model by stating that there exists a significant relationship between microfinance and the socioeconomic development of women microentrepreneurs. the pseudo-rsquared shows that the explanatory variables have strong confidence in predicting the dependent variable. table 9. summary of multivariate ologit outcomes (with robust standard errors) variables coefficients robust standard errors z values p values q1iv 0.252 0.114 2.2 0.028** roy & sarkar, indian journal of finance and banking 14(1) (2024), 1-13 9 q2iv 0.186 0.106 1.75 0.081* q3iv 0.573 0.158 3.62 0.000*** q4iv 0.108 0.082 1.32 0.187 q5iv 0.254 0.151 1.68 0.094* q6iv 0.608 0.170 3.56 0.000*** q7cv 0.641 0.179 3.58 0.000*** q8cv 0.022 0.175 0.13 0.896 q9cv 0.367 0.182 2.02 0.044** q10cv 0.643 0.177 3.64 0.000*** here,*** stands for 99% confidence interval ** stands for 95% confidence interval * stands for 90% confidence interval in table 9, the results completely affirm with the outcomes of ols in table 7. except for the q4iv and q8cv, all the independent and control variables are significantly impacting the dependent variable. test of multicollinearity (vif test) table 10. vif results variable vif 1/vif q8cv 2.87 0.35 q9cv 2.87 0.35 q10cv 2.86 0.35 q6iv 2.53 0.40 q7cv 2.52 0.40 q5iv 2.13 0.47 q3iv 2.1 0.48 q1iv 1.75 0.57 q2iv 1.37 0.73 q4iv 1.05 0.95 mean vif 2.2 referring to table 10, where the test of multicollinearity using variable inflation factor (vif) is tested. the results show that mean vif is 2.2 which explains that the models don’t have substantial amount of multicollinearity. the paired t-test on microenterprises’ financial performance (net income) table 11. paired t-test summary result paired t-test {ln (after) – ln (before)} p values 0.0021*** t values 3.2307 here, *** stands for 99% confidence interval with reference to table 11, using the 3-year average net income before taking the microfinance and the 3-year average net income after taking the microfinance, the sets are converted into lognormal values. at a 95% confidence interval, the paired t-test values reject the null hypothesis, indicating a significant difference between the means of the data sets before and after the microfinance loans received by the women microentrepreneurs. the t values for the difference between the ln (after) and ln (before) datasets are 3.2307, indicating that microfinance had a positive impact on microenterprises' financial performance. discussions the study's results align with the findings of relevant studies conducted in various geospatial contexts around the world. shah's (2024) study revealed that microfinance significantly reduces poverty in bangladesh, a finding further validated by the study's focus on women microentrepreneurs. robert (2024) discovered in uganda that microfinance enables access to credit and financial services and creates market opportunities, which aligns with this study's findings. however, a study by hemat and rahman (2023) in afghanistan revealed that while microfinance positively benefited women, the impact was not significant. our study ensures that, from a bangladeshi perspective, the positive impact of microfinance on women microentrepreneurs is significant. gupta and meher (2016) concluded in their study that microfinance plays a critical role in empowering women entrepreneurs. the study validates the findings of previous studies conducted in diverse global contexts. the study's analysis confirms acceptance of the first alternative hypothesis, which asserts a significant relationship between microfinance and the socioeconomic development of women microentrepreneurs. the study also accepts the second alternative hypothesis, which asserts a significant relationship between microfinance and the financial performance of women-led microenterprises. the study identifies five independent variables that significantly impact the dependent variable: easy access to capital, job creation, economic, legal, and political networks, better psychological wellbeing, and relative freedom from family dominance. meanwhile, the control variables, asset size, age of business, and amount of loan taken, also significantly impact the dependent variable. the r-squared from ols with robust standard errors is 81.9%, and the pseudo-r-squared from the ologit regression model with robust standard errors is 46.5%. the r-squared represents strong explanatory confidence among the independent variables to predict the dependent variable. once again, a paired troy & sarkar, indian journal of finance and banking 14(1) (2024), 1-13 10 test comparing the three-year average net income of women-led microenterprises before and after microfinance reveals that microfinance has a significant impact on their financial performance. based on the alignment of findings from prior studies and this study, the study concludes that microfinance significantly impacts the socio-economic development of women microentrepreneurs in bangladesh while also significantly enhancing their financial performance. with assurance to reject the null hypotheses, the study affirms that microfinance significantly and positively impacts the socio-economic development of women microentrepreneurs and financial performance of women-led microenterprises in bangladesh. conclusions previous research on a similar segment of microfinance also revealed the importance of microfinance in a country's gdp and economic development. the study's uniqueness relied on direct responses from women microentrepreneurs and their enterprises' financial information to meet the research objectives. the study concentrated on root-level responses and secondary data-driven outcomes to explain whether microfinance in bangladesh significantly improves the socio-economic development of women microentrepreneurs and the financial performance of their enterprises. the findings show a significant relationship between microfinance and the socioeconomic development of female microentrepreneurs. the study also discovered that microfinance significantly enhances the financial performance of women-led microenterprises. this study contributes significantly to developing ideas about the current contribution of microfinance to women’s empowerment in an emerging economy like bangladesh. the study suggests significant policy implications for expanding the reach of microfinance throughout the country and providing technical education to clients on how to effectively use microfinance to establish and operate businesses. the study provides an avenue for much deeper studies involving more respondents countrywide and comparing microfinance’s contributions with those of other emerging economies using similar mixedmethod pathways. author contributions: conceptualization, g.r. and p.r.s.; methodology, g.r.; software, g.r and p.r.s.; validation, g.r. and p.r.s.; formal analysis, g.r.; investigation, g.r. and p.r.s..; resources, p.r.s.; data curation, g.r.; writing – original draft preparation, p.r.s. and g.r.; writing – review & editing, g.r and p.r.s.; visualization, g.r.; supervision, g.r.; project administration, g.r. and p.r.s.; funding acquisition, g.r. and p.r.s. 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: the views and opinions expressed in this article are mine and do not necessarily reflect the views of their institution. informed 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(2008). banker to the poor: micro-lending and the battle against world poverty. playaway digital audio: manufactured and distributed by findaway world, llc. appendices appendix-a: survey questionnaire name age of the enterprise size of the total assets number of employees working amount of loan taken location age of the owner/s types of business net income for three years before and after microfinance received survey questionnaire (part a) numbers questions strongly agree***** agree**** neutral*** disagree** strongly disagree* 1 have you gained more economic security and become able to appreciate your capital after taking microfinance? 2 do you have easy access to capital now after taking microfinance, comparing to when you didn’t have microfinance? 3 could your microenterprise create job for your community? 4 could you get better access to economic, legal, and political network after taking microfinance? 5 utilizing the loan, could generate higher income and get ability to more purchase? 6 are you now at a better psychological wellbeing after taking microfinance? 7 do you think that you can manage a relative better freedom from domination your family now after taking microfinance? here, ***** represents 4, **** represents 3, *** represents 2, ** represents 1, * represents 0 survey questionnaire (part-b) numbers control variables codes 4 3 2 1 0 8 size of total assets 7 lacs to 10 lacs 5 lacs to below 7 lacs 3 lacs to below 5 lacs 1 lac to below 3 lacs less than 1 lacs 9 location of the enterprise metropolitan city upazilla thana village 10 age of the enterprise above 10 years 5 years to below 10 years 3 years to below 5 years 6 months to 3 years 1 month to below 6 months 11 amount of loan taken 5 lacs to 10 lacs 3 lacs to below 5 lacs 1 lac to below 3 lacs 50 thousand 1 lac below 50 thousand appendix-b (likert scale 0 to 4) supporting questions after omission methodology main questions sl. no. supporting questions/statements have you gained more economic security and become able to appreciate your capital after taking microfinance? 1 has your income achieved greater stability since you obtained microfinance? 2 have you experienced any growth in your savings or assets since engaging in microfinance? 3 your enterprise experienced an increase in size, revenue, or customer base as a result of obtaining microfinance. 4 you obtained additional assets (such as equipment, inventory, or property) for your business or personal use subsequent to receiving microfinance. 5 your ability to handle your finances and make financial choices improved as a result of obtaining microfinance. roy & sarkar, indian journal of finance and banking 14(1) (2024), 1-13 13 do you have easy access to capital now after taking microfinance, comparing to when you didn’t have microfinance? 1 you can obtain further financing or loans, in comparison to the period prior to your acquisition of microfinance. 2 you received offers or successfully acquired fresh credit or loans from other financial institutions subsequent to obtaining microfinance. 3 has the capital for your business activities increased since obtaining microfinance, in comparison to when you did not have microfinance? could your microenterprise create job for your community? 1 you strongly advocate for the necessity of recruiting extra personnel for your microenterprise following the acquisition of microfinance. 2 you are convinced that your microenterprise has made a significant contribution to the creation of job possibilities within your local community. 3 as your microenterprise expands, you intend to recruit additional employees or workers. 4 you had difficulties in recruiting personnel or expanding your labor force. could you get better access to economic, legal, and political network after taking microfinance? 1 since obtaining microfinance, your access to economic networks and commercial options has significantly improved. 2 since obtaining microfinance, you now have enhanced access to legal support and information. 3 since receiving microfinance, you have gained enhanced access to political networks and community power. utilizing the loan, could generate higher income and get ability to more purchase? 1 by utilizing the loan, you have been able to create a greater revenue than previously. 2 since obtaining the loan, i have been able to acquire a greater quantity of goods or services to meet the demands of my business or personal requirements. 3 the financing has facilitated your investment in my firm, resulting in expansion and increased profitability. are you now at a better psychological wellbeing after taking microfinance? 1 acquiring microfinance has alleviated your financial distress and concerns. 2 accessing microfinance has bolstered your confidence and elevated your self-esteem. 3 the microfinance you received has significantly enhanced your overall quality of life. 4 microfinance has enhanced your sense of financial security and stability. do you think that you can manage a relative better freedom from domination your family now after taking microfinance? 1 acquiring microfinance has enhanced your autonomy in managing your finances, reducing your reliance on my family. 2 you now possess greater autonomy to make independent decisions without any interference from your family. 3 microfinance has resulted in a reduction of familial control or intervention in your financial and economic affairs. 4 since undertaking microfinance, your capacity to negotiate and assert my preferences within my family has significantly enhanced. publisher’s note: american finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2024 by the authors. licensee american 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by american 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/ indian journal of finance and banking 9(1) (2022), 192-202 192 finance and banking ijfb vol 9 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa measuring efficiency in assets and liabilities management practices in deposit taking non banking financial companies in india: a camel approach karthik reddy (a)1 ravichandra reddy b (b) (a) research scholar, department of commerce, university of mysore, india; e-mail: mbaskreddy@gmail.com, skreddy0485@gmail.com (b) professor, department of commerce, isbr research centre, university of mysore, india; e-mail: reddy050671@gmail.com a r t i c l e i n f o article history: received: 23 january 2022 accepted: 24 march 2022 online publication: 27 march 2022 keywords: nbfcs, camel alm management & tamilnadu jel classification codes: a10, b21, g23 a b s t r a c t alm technique is a strategic financial tool particularly focused on management of financial risks such as liquidity and interest rate risks only. in general, mismatch between assets and liabilities poses high risk (financial or non-financial risk) to the company’s capital. therefore, company’s can protect their capital from various risks through proper management of assets and liabilities. present study applied camel technique to measure the efficiency of alm practices of selected nbfcs-d in tamilnadu for the period of 2011-2020. the study revealed that, srtfl reported strongest level of financial soundness in the aspects of capital adequacy, management efficiency and earning efficiency whereas satisfactory level in liquidity and moderate/fair level in assets quality. similarly, srcufl reported strong level in capital adequacy and earning efficiency, satisfactory level in assets quality and liquidity and fair level in management efficiency. similarly, sfl has shown strongest level of performance in asset quality and earning efficiency, satisfactory in management efficiency, fair level in capital adequacy and marginal/poor level in liquidity. similarly, skfl reported satisfactory level in assets quality, fair level in capital adequacy and earning efficiency, marginal level in management efficiency and unsatisfactory/worst level in liquidity. finally, nlof has reported unsatisfactory/worst level of performance in all parameters except capital adequacy. this indicates high risk level/default level of the nlofl during the study period. © 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 alm technique is a strategic financial tool particularly focused on management of financial risks such as liquidity and interest rate risks only. in general, mismatch between assets and liabilities poses high risk (financial or non-financial risk) to the company’s capital. therefore, companies can protect their capital from various risks through proper management of assets and liabilities. at the beginning alm technique (traditionally) aimed at stabilization of short-term profits, mitigation of liquidity and interest rates risk of home currency particularly in static portfolio analysis, but focus extended to long term earnings, economic value, exchange rate risk, capital management and risks associated with all financial instruments in dynamic portfolio scenario. as result, alm technique gains dynamism in risk management practices. earlier to alm, treasury department monitored only cash clearance and short-term funding and ignored long term aspects which affected the firm solvency position. in alm practices both type, cost and maturity of assets and liabilities is included. review of literature al-najjar and assous (2021) have focused on rating of 11 commercial banking operating in saudi for the period of 20142018 through using camel rating system. the study also applied regression tool between ratings and deposits of selected 1corresponding author: orcid id: 0000-0002-1810-6570 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v9i1.1668 to cite this article: reddy, k., & reddy b, r. (2022). measuring efficiency in assets and liabilities management practices in deposit taking nonbanking financial companies in india: a camel approach. indian journal of finance and banking , 9(1), 192-202. https://doi.org/10.46281/ijfb.v9i1.1668 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v9i1.1668 https://orcid.org/0000-0002-1810-6570 https://orcid.org/0000-0003-4318-9336 reddy & reddy b, indian journal of finance and banking 9(1) (2022), 192-202 193 banks. the study found that, best regression model has an adjusted r2 of 73.4% and a standard error of around 0.58. (nguyen, nguyen, & pham, 2020) investigated the effect of camel components on the financial performance of 31 commercial banks in vietnam for the period of 2013-18. the study deployed three econometric models are built using four camel’s crucial indicators as independent variables (capital adequacy, asset quality, management effectiveness and liquidity) and (roa), (roe), and (nim) as proxies for commercial banks’ financial performance – dependent variables. the statistical results of the study have shown that a better fit of the fixed effects model (fem) in terms of the research methodology compared to the ordinary least squares (ols) and random effects model (rem). the study found that capital adequacy, asset quality, liquidity and management efficiency significantly affected the performance of commercial banks in vietnam. (badrul munir & ahmad bustamam, 2017) have evaluated the profitability of 19 banks of malaysia and indonesia during 201-2015 by using the technique of camel. this study is comparative study between traditional and islamic banking systems in selected countries. the study revealed that camel analysis is significant tool in measuring performance of financial institutions. the study found significant variations in management, earnings and liquidity between conventional banks of both countries and significant variations in only management and liquidity between islamic banks of both countries. for the purpose of study, he used regression analysis technique and t-test. (umarani & jayanthi, 2015) has analyzed the asset liability management effectiveness in selected commercial banks during 2003-12 through using camel technique. the study found that alm practices by banking sector are significantly different one another. some indian banks risk management capacity is very lower than foreign banks during the study period. however, the study found that banking sector is moving towards effective implementation of alm through sophistical innovative techniques such as duration gap, simulation and value at risk. (kaur, 2016) has evaluated performance of two leading gold loan non-banking financial services namely manappuram and muthoot finance during 2009-2014 through using camel. in the study he evaluated the performance in terms of capital adequacy (capital adequacy, debt-equity ratio, total advances to total assets ratio), asset quality (gross npa to net advances, net npa to net advances and asset utilization ratio), management efficiency( profit per branch and per employee, business per employee and ronw), earnings quality (roa, interest income to total assets, non-interest income to total assets)and liquidity(quick assets) the study found in line with the performance of both nbfcs in all selected parameters, except, in two cases i.e. manappuram has shown superior performance in case of capital adequacy whereas muthoot finance ltd has shown leadership in management efficiency during the study period. camel-conceptual framework camels mechanism is a risk measurement rating system of financial institutions prepared by regulatory authorizes based on monitoring of financial statements timely. camels rating system monitor the operational and financial functions of financial institutions and assess the risk exposure of them. camels rating system works as early warning system of disclosing financial distress and helps to take corrective steps. a camel rating is a composite rating of different components of the framework. camels rating is measured in the range between 1-5 where 1 indicates best and 5 indicates worst risk management efficiency and high probability of failure of financial institution. table 1. camel rating methodology for the present study (nbfcs-d) source: standards from rbi and other institutions and general standards composite camels’ ratings and interpretation rating scale rating analysis interpretation 1 strong sound in all respects, no supervisory responses required 2 satisfactory fundamentally sound with modest correctable weakness with limited supervisory response 3 fair(watch category) combination of weaknesses if not redirected will become severe. watch category. requires more than special supervision 4 marginal (some risk of failure) immoderate weakness unless properly addressed could impair future viability of the bank. needs close supervision 5 unsatisfactory (high degree of failure) high risk of failure in the near term. under constant supervision/cease and desist order sources: camels framework 2020, bank for international settlements, basel committee on banking supervision. criteria (rating) strong (1) satisfactory (2) fair (3) marginal (4) unsatisfactory (5) capital adequacy (crar %) >20 >15 but <18 =15 >10& <15 <10 assets quality (nnpa ratio %) ≤1 >1 but < 2 >2 but < 3 >3but <5 >5 management efficiency(aum) highest high moderate low lowest earnings efficiency (roe) ≥15 >10& <15 ≥10 & < 05 > 5& <10 < 5 liquidity (acid ratio) >0.50 & <0.40 >0.40 & <0.3 >0.30 &< 0.20 >0.20&<0.10 <0.10 reddy & reddy b, indian journal of finance and banking 9(1) (2022), 192-202 194 research gap it is revealed from the above literature that many research studies on alm practices is observed in commercial banks, cooperative banks, gold loans nbfcs. however, no study is observed on alm practices in deposit taking nbfcs particularly in tamilnadu state where role of deposit taking nbfcs is highly significant. therefore, present study fulfills this research gap. research problems the mismatch between assets and liabilities causes the financial risks to financial institutions. however, academic and industrial research literature in the aspects is plenty in case of banking sector but very scarcity in non-banking financial sector. there is much demand for research activities in this thrust area particularly deposit taking nbfcs. present study full fills this gap. objectives of the present study  to study the capital adequacy position of the selected nbfcs-d in tamilnadu  to measure the assets quality of the selected nbfcs-d in tamilnadu  to examine the management efficiency of the selected nbfcs-d in tamilnadu  to analyze the earning efficiency of the selected nbfcs-d in tamilnadu  to study the liquidity position of the selected nbfcs-d in tamilnadu. hypothesis formulated  ho1: there is no significant difference in capital adequacy within and between selected nbfcs-d in tamilnadu during the study period.  h1: there is significant difference in capital adequacy within and between selected nbfcs-d in tamilnadu during the study period  ho2: there is no significant difference in asset quality (net non-performing assets) within and between selected nbfcs-d in tamilnadu during the study period.  h2: there is significant difference in assets quality (net non-performing assets) within and between selected nbfcs-d in tamilnadu during the study period. research methodlogy present study is purely based on secondary data collected from the annual reports of selected nbfcs-d operating in tamilnadu state. the present study covers the ten years study period 2011-2020. the selected nbfcs are to five deposits taking nbfcs in tamilnadu namely, sri ram transport finance ltd, sri ram city union ltd, shakti finance ltd, sundaram finance ltd and new link overseas finance ltd. the study employed camel technique & ratios to measure the effective of assets and liabilities management practices of selected nbfcs-d during the study period. data analysis and interpretation table 2. capital to risk (weighted) assets ratio (crar) of selected nbfcs-d in tamilnadu during 2011-2020 (%) source: company annual reports (2011-2020) c-capital adequacy: capital refers to owner’s contribution to the business which is a base for carrying business transaction at initial stage. therefore, adequate capital is a tool for protection of deposits/creditors funds and an indication of financial soundness of organization to absorb the unexpected losses. adequate capital ensures firms ability to absorb unexpected shocks in business and market. therefore, increase in capital levels is an indication of increasing protection of deposits funds and loss absorption capacity of financial institutions. capital adequacy of financial institutions is examined through ratios of capital risk adequacy ratio and debt to equity ratio. capital to risk weighted assets ratio: capital to risk weighted assets ratio is a tool that indicates the loss absorption capacity of the nbfcs-d with available capital. capital adequacy ratio measures the proportion of capital availability against its current financial obligations and risk associated with these assets. it is also a sign for absorption capacity of business losses without insolvency. in nbfcs-d assets are in the form of advances, loans and investments which are subject to risks of default/credit risk and market risk. in this case, company allocate certain portion of profits to meet these losses, years srtfl srcufl sfl skfl nlofl 2019-20 21.99 27.69 18.37 21.92 6.89 2018-19 20.27 22.84 19.43 22.35 17.30 2017-18 17.38 21.37 18.03 17.22 18.85 2016-17 16.63 23.88 18.45 19.73 20.52 2015-16 17.56 26.14 18.43 19.42 20.61 2014-15 20.52 29.03 21.41 18.04 21.41 2013-14 23.39 25.77 18.18 21.55 22.48 2012-13 20.74 18.95 17.85 14.5 22.57 2011-12 22.26 17.40 16.33 16.2 22.20 2010-11 24.85 20.52 16.24 15.60 21.15 avg 20.55 23.35 18.27 18.65 19.39 reddy & reddy b, indian journal of finance and banking 9(1) (2022), 192-202 195 however, in some cases bank operating profits may inadequate to meet this losses that rise the situation to compensate these losses out of its capital which is an indication of severe financial threat to the owner’s equity (equity plus reserves). risk assets excluded cash in hand, cash at bank and investment in approved securities. crar use by nbfcs-d with aim of protect the depositors and to promote stability and efficiency in nbfcs-d. increase in crar indicates increased loss absorption capacity and good financial health, in contrast, decrease in crar is an indication of decrease in loss absorption capacity and financial ill of the nbfcs-d. therefore, higher crar ratio is preferable than lower. in the present study broad indicator of capital adequacy (crar) is calculated and presented and rest of two is not disclosed due to data constraint or data inadequacy. the capital to risk weighted assets ratio of selected deposit taking nbfcs-d is presented in below table hypothesis testing ho: there is no significant difference in capital adequacy within and between selected nbfcs-d in tamilnadu during the study period. h1: there is significant difference in capital adequacy within and between selected nbfcs-d in tamilnadu during the study period statistical results: anova single factor analysis. anova results (f-test) source of variation ss df ms f p-value f critic between nbfcs-d 167.4654 4 41.86636 3.882113 0.008589 2.578739 within nbfcs-d 485.2991 45 10.78442 total 652.7645 49 source: spss the statistical analysis reveals that, calculated f test value is 3.882113 which is higher than the table value of 2.578739. similarly, p-value is 0.008589 which is lower than the significant confidence level of 0.05. this indicates that, the statistical analysis recommends to rejects null hypothesis and accepts alternative hypothesis “there is significant difference in capital adequacy of selected nbfcs-d in tamilnadu during the study period table 2 exhibits the capital to risk weighted assets ratio of selected nbfc-d in tamilnadu during 2011-2020 the study observed that, capital to risk weighted assets ratio (crar) of sri ram transport finance ltd (srtfl) was 24.85 percent in 2010-11 which was double to rbi norms of 12 percent indicates strong loss absorption capacity. thereafter, crar slightly decreased to 22.26 percent in 2011-12 and 20.74 percent in 2012-13, but maintained higher than rbi norms of 15 percent. in contrast, it increased to 23.39 percent in 2013-14. thereafter, in next three years crar gradually decreased to 20.52 percent in 2014-15, 17.56 percent in 2015-16 and 16.63 percent in 2016-17 which is also higher to norms. in contrast, srcuf reported uptrend in crar in next three years such as 17.38 percent in 2017-18, 20.27 percent in 2018-19 and 21.99 percent in 2019-20. the srtfl reported average crar of 20.55 percent which is good sign of sufficiency capital adequacy. this indicates that, srtfl met capital adequacy norms during the entire study period, moreover, its ratio is significantly higher than regulatory norms which indicates high loss absorption capacity of the company. similarly, crar of sri ram city union finance ltd (srcufl) was 20.52 percent in 2010-11 which is 8.52 percent higher than rbi norms (12 percent). thereafter, crar fell to 17.40 percent in 2011-12 but higher than rbi norms of 15 percent. thereafter, in next three years crar gradually raised to 18.95 percent in 2012-13, 25.77 percent in 2013-14 and grew to the very strongest level of 29.03 percent in 2014-15 which was highest crar during entire period and among all selected nbfcs-d in the study. this is mainly attributable to 42 percent increase in owner’s equity backed by company reserves and surplus. in contrast, srcufl reported down trend in crar in next three years such as 26.14 percent in 2015-16, 23.88 percent in 2016-17 and 21.37 percent in 2017-18. thereafter, crar again rose to 27.69 percent in the 2019-20. the average crar of the srcufl is 23.35 percent during the study period. this indicates that, srcufl met capital adequacy norms during the entire study period, moreover, its ratio is substantially higher than regulatory norms which indicate high loss absorption capacity of the company. the sundaram finance ltd (sfl) company reported crar 16.24 percent and 16.33 percent in fir two years which was higher than rbi norms. thereafter, in 2012-13 sfl reported crar of 17.85 percent in 2012-13 and 18.18 percent in 2013-14 and 21.41 percent in 2014-15 which were higher rbi norms. similarly, during the period of 2015-18 company’s crar stood in the range of 18-18.50 percent which was higher than rbi norms. in last two years also sfl reported crar of 19.43 percent and 18.37 percent respectively which was higher than rbi norms. in overall, the average crar of sfl was 18.27 percent which indicates good capital adequacy level during the study period. similarly, crar of sri shakti finance ltd (srtfl) was 15.60 percent in 2010-11 and 16.20 percent in 2011-12 which were higher to rbi norms (12 & 15 percent) which indicates good loss absorption capacity. thereafter, crar reported 14.5 percent crar in 2012-13 which was marginally lower to rbi norms (15 percent). this is mainly attributable to the huge increase risk weighted assets of non-current investments (nearly half rate increase). this indicates weak loss absorption capacity in this year. thereafter, company improved its crar to substantial level and reported 21.55 percent in 2013-14, 18.04 percent in 2014-15 and 19.42 percent in 2015-16 and 19.73 percent in 2016-17. thereafter, srcuf reported decreased crar of 17.22 percent in 2017-18 and again rose to 22.35 percent in 2018-19 and 21.92 percent in 2019-20. the skfl reported average crar of 18.65 percent which is good sign of adequate capital availability. the study reveals that, skfl met capital adequacy norms during the entire study period, moreover, its ratio is higher than regulatory norms which reddy & reddy b, indian journal of finance and banking 9(1) (2022), 192-202 196 indicates adequate loss absorption capacity of the company.the study also observed that, new link overseas finance ltd (nlofl) reported continuous uptrend in crar in first three year such as 21.15 percent in 2010-11, 22.20 percent in 201112 and 22.57 percent in 2012-13. in contrast, company’s crar continuously fallen from 22.48 percent in 2013-14 to 17.30 percent in 2018-19. however, it could maintain crar higher to rbi prescribed norms. but, in the last, nlofl reported substantial fall in crar i.e. 6.89 percent which is less than half of rbi norm (15 percent) due to significant fall in company’s net worth from rs 12.23 cr in 2019 to rs 4.43 cr in 2020 (three fold fall), deterioration in quality of assets, small scale operations high influence of covid 19 on profitability. however, this indicates worst capital adequacy position of nlofl and calls for immediate financial action towards the provision of security to the lenders and deposits. rbi also directed the company not to raise fresh deposits until capital adequacy improved. in overall, four out of five companies capital adequacy position met rbi regulations which indicate good loss absorption capacity and financial health. only new link financial ltd reported deterioration in capital adequacy position in the last year due to continuous losses which results in fall of in net worth. a-asset quality: in camel technique second parameter to assess the efficiency of alm practices is asset quality. the quality analysis of the assets of non-banking financial companies is an indication of operational and financial efficiency. the quality of assets of non-banking financial companies is influenced by the credit appraisal policy, lending norms, customer risk profile, loan concentration and diversification, debt recovery system of the firm and economy of the state. the quality of nbfcs-d assets has significant impact on the revenue, cost, profit and fund-raising capacity of the firm. the deterioration of assets quality will show negative impact on the company’s revenue, profits and net worth, in contrast, high quality of assets will show positive impact. net non-performing assets to net worth ratio: net non-performing assets refer an actual loss of gross non-performing assets after provision. net non-performing assets should be 100 percent write off out of profits every year which shows adverse impact on the profitability of the company and reduce net worth of the company. higher losses erode the company’s profits and net worth. in contrast, low ratio indicates good assets quality and financial health of the business. consequently, net npa to net worth ratio is analyzed in the present study as part of asset quality measurement. this ratio is calculated as net non-performing assets by net worth multiplication with 100. table 3. net npa to net worth ratio of selected nbfcs-d in tamilnadu during 2011-2020 (%) source: company annual reports (2011-2020) the study analyzed that, sri ram transport finance limited reported net npa to net worth ratio of 1.52 percent in 2010-11. thereafter, it creased to 1.63 percent in 2011-12, 3.36 percent in 2012-13, 3.66 percent in 2013-14 and 4.10 percent in 2014-15. thereafter, it was suddenly surged nearly by three folds increase of 11.26 in 2015-16 which trend was continued thereafter also such as 14.53 percent and 15.70 percent in 2016-17 and 2017-18 respectively. thereafter, net npa to net worth reached weakest level of 35.66 percent in 2018-19, but, in next year it was slightly improved to 33.37 percent in 2019-2020. the average net npa to net worth ratio of the company stood at 12.48 percent. the study found continuous uptrend in this during the entire study period (except 2019-20). this indicates continuous negative impact of non-performing on the net worth of the firms due to the continuous increase in net and gross non-performing assets in gross and net loans and advances since beginning of the study period. similarly, sri ram city union finance limited company reported raising trend in net npa to net worth ratio in first three years such as 2.46 percent in 2010-11, 2.47 percent in 2011-12 and 4.87 percent in 2012-13. in contrast, in two year this ratio was improved to 2.64 percent and 2.60 percent in 2013-14 and 2014-15 respectively. on the contrast, this was again climbed to 6.58 percent in 2015-16, 8.25 percent in 201617, and 16.89 percent in 2017-18 and reached to weakest level of 22.73 percent in 2018-19 and thereafter improved to 16.18 percent. the study observed mixed trend in net npa to net worth ratio of srcufl with an average of 8.57 percent in during the study period. on other hand, sundaram finance limited reported net npa to net worth ratio of 1.22 percent in 2010-11 which was improved to 0.58 percent in 2011-12. thereafter, this ratio was increased to 2.55 percent in 2012-13 and marginally years srtfl srcufl sfl skfl nlofl 2019-20 33.37 16.18 9.76 16.21 450.62 2018-19 35.66 22.73 4.53 17.06 19.78 2017-18 15.70 16.89 2.31 19.0 7.29 2016-17 14.53 8.25 2.34 16.7 16.57 2015-16 11.26 6.58 3.85 5.27 20.51 2014-15 4.10 2.60 2.39 3.77 5.34 2013-14 3.66 2.64 2.34 2.73 4.99 2012-13 3.36 4.87 2.55 1.54 5.71 2011-12 1.63 2.47 0.58 1.16 5.91 2010-11 1.52 2.46 1.22 2.14 5.54 avg 12.48 8.57 3.19 8.56 54.23 reddy & reddy b, indian journal of finance and banking 9(1) (2022), 192-202 197 decreased to 2.34 percent in 2013-14. in contrast, this ratio moved up to the levels of 2.39 and 3.85 percent in 2012-13 and 2013-14 respectively. this ratio was improved in two subsequent years such as 2.34 percent and 2.31 percent in 2017-18. thereafter, this ratio was climbed to 4.53 percent in 2018-19 and reached to weakest level of 9.76 percent in 2019-20. the study observed ups and down in net npa to net worth ratio of sundaram finance limited during the entire study period with an average of 3.19 percent which is lowest among all the selected nbfcs-d in tamilnadu. similarly, shakti finance limited reported 2.14 percent in 2010-11 which was improved to 1.16 percent in 2011-12. thereafter, this ratio was weakened in next six subsequent years to the levels such as 1.54 percent in 2012-13, 2.73 percent in 2013-14, 3.77 percent in 2014-15, 5.27 percent in 2015-16, and 16.7 percent in 2016-17 and reached weakest level of 19 percent in 2017-18. thereafter, this ratio was improved to 17.06 and 16.21 percent in 2018-19 and 2019-20. the study witnessed weak levels in net npa to net worth ratio of shakti finance limited during the study period with an average of 8.56 percent. similarly, new link overseas finance limited reported net npa ratio was 5.54 percent in 2010-11 which as raised to 5.91 percent in 2011-12. thereafter, it improved to 5.71 percent and 4.99 percent in 2012-13 and 2013-14 respectively. this ratio was again climbed to 5.34 percent in 2014-15 and reached to weak level of 20.51 percent in 2015-16. this ratio of was improved in next two subsequent levels such as 16.57 percent in 2016-17 and 7.29 percent in 2017-18. however, again this ratio deteriorated to 19.78 percent in 2018-19. in the last year this ratio reached to abnormal level of 450.62 percent which shows net –performing assets four times higher than net worth which indicates worst position of assets quality and huge impact on net worth. the reserves and surplus of the companies fallen by 80 percent profit turned to losses as 0.35 cr to 6.3 cr. this also indicates default risk level of the company to meet its bad assets even with capital. the study observed high fluctuations in net npa to net worth ratio with an average of 54.23 percent during the study period. hypothesis testing ho: there is no significant difference in asset quality (net non-performing assets) within and between selected nbfcsd in tamilnadu during the study period. h1: there is significant difference in assets quality (net non-performing assets) within and between selected nbfcs-d in tamilnadu during the study period. statistical results: anova single factor analysis anova results (f-test) source of variation ss df ms f p-value f critic between nbfcs-d 19455082.5 4 6485028 4.843824 0.006219 2.866266 within nbfcs-d 48197665.8 45 1338824 total 67652748 49 source: spss the statistical analysis reveals that, calculated f test value is 4.843824 which is higher than the table value of 2.866266. similarly, p-value is 0.006219 which is lower than the significant confidence level of 0.05. this indicates that, the statistical analysis recommends to rejects null hypothesis and accept alternative hypothesis “h1: there is significant difference in assets quality (net non-performing assets) of selected nbfcs-d in tamilnadu during the study period m-management efficiency management efficiency is third element of camels framework. measurement of managerial efficiency through only quantitative figures is not enough due to involvement of qualitative aspects such planning, decision making, evaluation and controlling etc. the overall, results of qualitative aspects reflect in quantitative business figures. however, overall efficiency of management decisions should reflect in bottom to top line figures of the business such as income, cost and profit etc. therefore, in present study managerial efficiency is measured through ratios of assets under management (aum). aum refers to the total market value of the financial assets such as securities, loans, advances, investment and cash and cash equivalents etc. under the management of the nbfcs-d. the size of assets under management is an indication for size of the firm and also signs for success of the management in wealth creation. it is also a tool for measuring relative competency in the industry. assets under management is also a growth driving parameter of a company while uptrend refers to pushing factor of growth and down trend refers to pulling factor of growth. growth in aum on year-on-year basis indicates that management is high efficient, in contrast, fall indicates inefficiency of management and subject to increase in business risk. therefore, in the present study, year on year growth in assets under management is analyzed in the below table. reddy & reddy b, indian journal of finance and banking 9(1) (2022), 192-202 198 table 4. assets under management of selected nbfcs-d in tamilnadu during 2011-2020 (rs) source: company annual reports (2011-2020) note: value within parenthesis indicates year on year growth in percentage table 4 shows the growth in assets under management of selected nbfcs-d in tamilnadu during 2011-20. the study found 23.55 percent yoy growth rate in assets under management (aum) of sri ram transport limited in 201112 over previous year value of rs 40218cr. in next year (2012-13) company reported only 6.90 percent growth in aum by reaching to rs 53116 cr. similarly, in 2013-14 company reported 11.28 percent of growth over previous value by reporting aum of rs 59108. in the year 2014-15 company’s aum increased to rs 72760 cr with yoy growth of 23.10 percent. in 2015-16 srtfl reported aum of rs 78761 cr with yoy growth rate of 8.25 percent. thereafter, the study observed substantial growth in aum in the year 2016-17 rs 95306 cr with 21.01 percent of growth over previous year. in the year 2017-18 aum has grown to rs 96253 cr with growth rate of 0.99 percent. in the last two years aum of the company have grown with yoy growth rates of 8.55 percent (rs 104482 cr) and 5.04 (rs 109750 cr) percent respectively. in overall, srtfl company’s assets under management has grown with cagr of 10.56 percent during the study period. srtfl aum value crossed one lakh core which is highest among all the nbfcs-d this is mainly attributable to substantial rise in cash and cash equivalents, derivative instruments and loans. the study also found substantial growth of 67.93 percent yoy growth rate in assets under management (aum) of sri ram city union finance limited in 2011-12 over previous year aum of rs 7998 cr. in next year (2012-13) company reported 17.85 percent growth in aum by reaching to rs 15828 cr. similarly, in 2013-14 company reported negative growth of -7.34 percent of over previous value by reporting aum of rs 14667 cr. in the year 2014-15 company’s aum increased to rs 16700 cr with yoy growth of 13.86 percent. in 201516 srcul reported aum of rs 19576 cr with yoy growth rate of 17.22 percent. thereafter, the study observed substantial growth in aum in the year 2016-17 rs 24906 cr with 27.23 percent of growth over previous year. in the year 2017-18 aum has grown to rs 27461 cr with growth rate of 10.26 percent. in the last two years aum of the company have grown with yoy growth rates of 5.29 percent (rs 28915 cr) and 0.59 (rs 29085cr) percent respectively. in overall, srcufl company’s assets under management has grown with cagr of 13.78 percent during the study period. this is the highest cagr among all the selected nbfcs-d during the study period. this is also attributable to substantial growth in cash (two fold) and bank balances in 2020. similarly, sundaram finance limited assets under management was rs 110808 cr in 2010-11 which has grown by 5.42 percent in 2011-12 i.e. rs 12447. similarly, in 2012-13 company reported growth of 12.81 percent of over previous value by reporting aum of rs 14042 cr. similarly, in 2013-14 company reported growth of 5.11 percent of over previous value by reporting aum of rs 14760 cr. in the year 2014-15 company’s aum increased to rs 16150 cr with yoy growth of 9.42 percent. in 2015-16 srcul reported aum of rs 16806 cr with yoy growth rate of 4.06 percent. thereafter, the study observed substantial growth in aum in the year 2016-17 rs 18580 cr with 10.56 percent of growth over previous year. in the year 2017-18 aum has grown to rs 22857 cr with growth rate of 23.02 percent. in the last two years aum of the company has grown with yoy growth rates of 31.15 percent (rs 29976cr) 8.79 (rs 32612 cr) percent respectively. in overall, sfl company’s assets under management has grown with cagr of 10.69 percent during the study period. this is mainly attributable to substantial rise in investment and loans during the study period. similarly, shakti finance limited assets under management was rs 606.38 cr in 2010-11 which has grown by 13.48 percent in 2011-12 i.e. rs 68813. similarly, in 2012-13 company reported growth of 11.65 percent of over previous value by reporting aum of rs 768.29 cr. similarly, in 2013-14 company reported growth of 8.97 percent of over previous value by reporting aum of rs 837.21 cr. in the year 2014-15 company’s aum increased to rs 1097.86 cr with yoy growth of 31.13 percent. in 201516 skfl reported aum of rs 1006.42 cr with yoy negative growth rate of 18.33 percent. thereafter, the study observed marginal growth in aum in the year 2016-17 rs 1010.62 cr which is 0.42 percent of growth over previous year. in the year 2017-18 aum has grown to rs 1025.77 cr with growth rate of 1.52 percent. in the last two years aum of the company has grown with yoy growth rates of 2.91 percent (rs 1055.58 cr) and 5.43 (rs1112.87 cr) percent respectively. in overall, years srtfl srcufl sfl skfl nlofl 2019-20 109750 (5.04) 29085 (0.59) 32612 (8.79) 1112.87 (5.43) 68.51 (-5.66) 2018-19 104482 (8.55) 28915 (5.29) 29976 (31.15) 1055.58 (2.91) 72.62 (2.53) 2017-18 96253 (0.99) 27461 (10.26) 22857 (23.02) 1025.77 (1.50) 70.83 (10.05) 2016-17 95306 (21.01) 24906 (27.23) 18580 (10.56) 1010.62 (0.42) 64.36 (4.91) 2015-16 78761 (8.25) 19576 (17.22) 16806 (4.06) 1006.42 (-8.33) 61.35 (7.31) 2014-15 72760 (23.10) 16700 (13.86) 16150 (9.42) 1097.86 (31.13) 57.17 (7.52) 2013-14 59108 (11.28) 14667 (-7.34) 14760 (5.11) 837.21 (8.97) 53.17 (1.92) 2012-13 53116 (6.90) 15828 (17.85) 14042 (12.81) 768.29 (11.65) 52.17 (15.11) 2011-12 49689 (23.55) 13431 (67.93) 12447 (5.42) 688.13 (13.48) 45.32 (2.81) 2010-11 40218 7998 11808 606.38 44.08 cagr 10.56 13.78 10.69 6.26 4.51 reddy & reddy b, indian journal of finance and banking 9(1) (2022), 192-202 199 skfl company’s assets under management has grown with cagr of 6.26 percent during the study period. this is attributable to substantial growth in loans and investment. similarly, ne link overseas finance limited aum was rs 44.08 cr in 2010-11 which has grown by 2.81 percent in 2011-12. similarly, in 2012-13 company reported growth of 15.11 percent of over previous value with aum of rs 52.17 cr. similarly, in 2013-14 company reported growth of 1.92 percent of over previous value with aum of rs 53.17cr. in the year 2014-15 company’s aum increased to rs 57.17 cr with yoy growth of 7.52 percent. in 2015-16 nlofl reported aum of rs 61.35 cr with yoy growth rate of 7.31 percent. thereafter, the study observed growth in aum in the year 2016-17 rs 64.36 cr which is 4.91 percent of growth over previous year. in the year 2017-18 aum has grown to rs 70.83 cr with growth rate of 10.05 percent. in the last two years aum of the company has grown with yoy growth rates of 2.53 percent and 5.43 (rs1112.87 cr) percent. in overall, skfl company’s assets under management has grown with cagr of 4.51 percent during the study period. e-earnings and profitability earning and profitability is a fourth parameter of camels technique. earnings are bottom line indicator of operational efficiency, risk, profitability, financial health and early indicator of financial weakness. in the present study camels framework earnings and profitability capacity of the nbfcs-d measured through growth in total income, total cost to total income ratio, operating profit ratio, and net interest margin, net profit margin return on total assets (rota, return on equity (roe) or net worth. return on equity is investment related profitability ratio. return on equity refers to the rate of return generated on the owner’s equity. owner’s equity comprises of equity capital plus reserves and surplus and minus accumulated losses. return on equity may be positive or negative. return on equity is positive when net profit is positive, in contrast, roe is negative when company reports net losses. positive roe indicates good profitability on equity investments and high management efficiency and negative roe indicates worst performance of the management and unprofitability on investments. therefore, positive roe is preferred than negative roe. return on equity is calculated by net profit divided by owner’s equity multiplication by 100. table 5. exhibits the return on equity of the selected nbfcs-d in tamilnadu during 2011-2020 source: company annual reports (2011-2020) the study found that, srtfl company’s roe was 25.08 percent in 2010-11. thereafter, roe has shown gradual fall in next subsequent years such as18.91 percent in 2012-13, 13.40 percent in 2014-15 and even dropped to lowest of 11.02 percent in 2016-17. this is attributable to fall net profit. thereafter, roe has improved substantially to 18.89 percent in 2017-18 owing to double in net profit. in contrast, roe has fallen to 16.19 percent in 2018-19 and 13.90 percent in 201920 respectively. in overall, srtfl’s roe stood at 16.52 percent during the study period. similarly, srcufl has reported roe of 19.85 percent in 2010-11 which has rose to 20.75 percent in 2011-12. in contrast, roe has gradually decreased to 20.35 percent 2012-13, 17.98 percent in 2013-14 and reached to lowest of 11.19 percent in 2016-17 due to substantial growth in net worth than net profit. thereafter, roe has improved to 12.80 percent, 15.47 percent in 2017-18 and 2018-19 respectively. in 2019-20 again roe dropped to 13.88 percent. in overall, the srcufl has reported average roe of 15.76 percent during the study period. similarly, sfl has reported roe of 19.30 percent in 2010-11 which has rose to 19.80 percent in 2011-12. in contrast, roe has gradually decreased to 18.40 percent 2012-13, 15.25 percent in 2013-14 and reached to lowest of 13.57 percent in 2016-17. thereafter, roe has improved to 13.63 percent and reached to highest of 22.33 percent in 2017-18 and 2018-19 respectively on account of substantial profit from sale of proportion of business in 2018-19. in 2019-20 again roe dropped to 13.05 percent due to substantial fall in net profit by 30 percent. in overall, the sfl has reported average roe of 16.95 percent during the study period. this is highest among all selected nbfcs-d during the study period. similarly, skfl has reported roe of 11.29 percent in 2010-11. thereafter, company reported roe of 11-12 percent in next four subsequent years. thereafter, roe of skfl witnessed ups and down such 8.04 percent in 2015-16 due to fall in net profit on accounts of rise in financial cost, employees expenses and other provisions, 10.25 percent in 2016-17, 7.59 percent in 2017-18, 7.12 percent in 2018-19 this is lowest and finally 7.24 percent in 2019-20 due to substantial fall in net profit and increase in net worth. in overall, the average roe of skfl stood at 9.83 percent during the study period. on the other hand, nlofl has reported roe in first seven years of study period (2011-2017), in between 5-9.50 percent. thereafter, it has turned into negative percentage of -5.40 percent, -13.74 percent and even reached to worst ratio of -86.42 percent due to net loss reported for the last three years due to huge fall in total income. in overall, the average roe of nlofl was -5.59 percent during the study period. years srtfl srcufl sfl skfl nlofl 2019-20 13.90 13.88 13.05 7.24 -86.42 2018-19 16.19 15.47 22.33 7.12 -13.74 2017-18 18.89 12.80 13.63 7.59 -5.40 2016-17 11.02 11.19 13.57 10.25 5.89 2015-16 11.60 11.74 14.41 8.04 6.52 2014-15 13.40 13.61 15.25 12.04 6.18 2013-14 15.28 17.98 18.40 11.57 6.59 2012-13 18.91 20.35 19.65 12.15 6.41 2011-12 20.98 20.75 19.88 11.05 8.52 2010-11 25.08 19.85 19.30 11.29 9.50 avg 16.52 15.76 16.95 9.83 -5.59 reddy & reddy b, indian journal of finance and banking 9(1) (2022), 192-202 200 liquidity refers to ability of the nbfcs-d to meet short term obligations on due date. liquidity management is major component in asset and liabilities management practices of financial institutions. liquidity assets are those assets which can be convertible into cash without loss to meet short term obligations. in general liquid assets comprises of cash in hand, cash at bank and marketable instruments. liquidity analysis is vital for deposit taking nbfcs-d due to dealing with public funds. therefore, one of the main objectives of alm is maintenance of adequate liquidity through matching of assets and liabilities maturity periods. in camels technique liquidity analysis is done through two ratios of such as current ratio and absolute liquidity ratio. absolute ratio or quick ratio is another liquidity ratio measure the liquidity position of a firm to meet its current liabilities on demand. in the liquid assets are those assets which can be convertible into cash without loss. in the present study, absolute liquid ratio is calculated by dividing absolute liquid assets by current liabilities. table 6. absolute liquid ratio of selected nbfcs-d in tamilnadu during 2011-2020 (times) source: company annual reports (2011-2020) table 6 exhibits the absolute liquidity ratio of selected nbfcs-d in tamilnadu during the study period of 201120. the study found that, srtfl has reported absolute liquid ratio of 0.63 times which has increased to 0.73 times in 201112. thereafter, absolute liquid ratio has fallen in subsequent years such as 0.59 times in 2012-13, 0.57 times in 2013-14 and 0.43 times in 2014-15. thereafter, absolute liquid ratio has dipped to 10.49 times in 2015-16 due to drastic fall in current investment. in contrast, in has slightly improved to 0.19 times in 2016-17 which has again fallen to 0.13 times and 0.09 times in 2018-19. however, in last it has substantial increased to 0.26 times (2019-20). the overall, absolute quick ratio of srtfl was 0.37 times which is highest among selected nbfcs –d in tamilnadu during the study period. similarly, srcuf has reported absolute quick ratio of 0.58 times in 2010-11 which has fallen to 0.28 times in 2011-12 owing to fall in cash and cash equivalents and rise in loans and advances. thereafter, this ratio has improved to 0.42 times and reached to highest of 0.71 times in 2013-14 due to three folds increase in cash and cash equivalents and current investments. thereafter, suddenly it has decreased to 0.26 times in 2014-15 further it has further dipped to 0.08 times in 2017-18 on account four folds fall in cash and cash equivalents. thereafter, it has improved to 0.14 times in 2018-19 and 0.29 times in 2019-20. in overall, the average of quick ratio of srcufl stood at 0.30 times during the study period. similarly, sfl absolute quick ratio was 0.30 times in 2010-11 which has fallen to 0.08 times in 2011-12. thereafter, it has improved to 0.15 times in 201213, 0.16 times in 2013-14 and 0.16 times in 2014-15. thereafter, this ratio has fallen to 0.10 times in 2015-16 and 0.11 times in 2018-19 which indicates lowest liquidity position of the firm. thereafter, it has improved to 0.13 times in 2019-20. in overall, the sfl reported absolute liquidity position of 0.14 times during the study period. the study also revealed that, skfl absolute liquidity ratio has improved from 0.05 times in 2010-11 to 0.04 times in 2012-13 and reached to highest of 0.22times in 2015-16 to substantial fall in current liabilities short term borrowings and other liabilities. thereafter, in last four years skfl has reported absolute liquid ratio of between 0.4 to 0.5 times due to three folds fall in cash and cash equivalents in last three years. in overall, the average absolute liquid ratio was 0.08 times during the study period. on the other hand, nlofl reported absolute liquid ratio in the range of 0.01to 0.03times during the entire study period with an average of 0.02 times during study period. this indicates very poor liquidity position of the company. findings of the study-rating of companies as per the camel performance table 7. camel rating for selected nbfcs-d in tamilnadu source: standards from rbi and other institutions and general standards camel model ratings are from 1 to 5 which indicate strongest financial soundness to worst financial position. rating of 1 indicates a strongest financial soundness and lowest or zero risk level, 2 indicates, strong level of financial years srtfl srcufl sfl skfl nlofl 2019-20 0.26 0.29 0.13 0.04 0.02 2018-19 0.09 0.14 0.06 0.09 0.02 2017-18 0.13 0.08 0.12 0.13 0.02 2016-17 0.19 0.11 0.11 0.11 0.02 2015-16 0.10 0.15 0.10 0.08 0.02 2014-15 0.43 0.26 0.16 0.22 0.02 2013-14 0.57 0.71 0.16 0.05 0.01 2012-13 0.59 0.42 0.15 0.04 0.02 2011-12 0.73 0.28 0.08 0.04 0.02 2010-11 0.63 0.58 0.30 0.05 0.03 avg 0.37 0.30 0.14 0.08 0.02 companies /rating capital adequacy (crar) assets quality (nnpa) management efficiency (aum) earnings efficienc y (roe) liquidity (acid ratio) srtfl 1 3 1 1 2 srcufl 1 2 3 1 2 sfl 3 1 2 1 4 skfl 3 2 4 3 5 nlofl 2 5 5 5 5 reddy & reddy b, indian journal of finance and banking 9(1) (2022), 192-202 201 soundness and lowest risk level, 3 indicates fair level of financial soundness and moderate risk level, four indicates poor financial soundness and high risk level and indicates worst level of financial soundness and highest risk level and default situation level also. the selected nbfc-d companies are rated based on the average values (entire study period) compared to standards. description of camel rating performance c-capital adequacy: the capital adequacy of selected nbfcs-d is measured through crar ratio. in capital adequacy srtfl (23.35%) and srcufl (20.55) companies are assigned 1st rank due to strong level of above 20 percent average during the study period. this indicates its high-risk tolerance capability compared others. thereafter, nlofl is assigned 2rd rank due to average capital adequacy level of 19.39 percent. this indicates satisfactory level of capital adequacy of nlofl during the study period. thereafter, skfl and sfl are assigned 3rd rank with averages of 18.65 percent and 18.27 percent. this indicates fail capital adequacy level of these two companies and moderate risk level. a-asset quality: the assets quality of selected nbfcs-d is measured through nnpa ratio. in asset quality parameter sfl is assigned 1st rank due to strong level of less than one percent (0.76) average during the study period. this indicates its high quality of assets of sfl. thereafter, skfl and srcufl are assigned 2rd rank due to average nnpa level of 1.50 and 1.89 percent. this indicates satisfactory level in quality of assets held of skfl and srcufl during the study period. thereafter, srtfl assigned 3rd rank with averages of nnpa of 2.17 percent. this indicates moderate level of asset quality of srtfl. finally, nlofl is assigned 5th rank with average nnpa of 5.07 percent which indicates worst level of quality of assets and high risk level of assets. m-management efficiency: the management efficiency of the selected nbfcs-d is measured through assets under management (aum) parameter. in the parameter srtfl is assigned first rank due having highest aum of rs 109750 cr, followed by sfl 2nd rank with aum of rs 32612 cr, srucfl 3rd rank with aum of rs 29085 cr, skfl with rs 1112 cr and nlofl is assigned 5th rank with lowest aum of rs 68.51 cr. this indicates that first three nbfcs-d have good management efficiency in creation of assets to the firms where last first have poor efficiency. eearning efficiency: the earning efficiency of selected nbfcs-d is measured through return on equity ratio. the study revealed that, srtfl, srcufl and sfl companies are assigned 1st rank in the earning efficiency due to reported strongest level of above 15 percent. thereafter, skfl is assigned 3rd rank due reporting of average roe of 9.83 percent which indicates fail level and nlofl is assigned 5th rank due to reporting of negative roe of -5.59 percent which indicates loss level and high-risk level of company’s profitability. lliquidity: liquidity: liquidity level of nbfcs-d is measured through nnpa ratio. in liquidity position no firm is assigned strongest level due to not reporting of above 0.40 percent. however, srtfl and srcufl are assigned 2nd level which indicates satisfactory level of liquidity. in contrast, nlofl and skfl companies assigned 5th ranks which indicated worst level of liquidity position. conclusion in overall, the study found that, srtfl reported strongest level of financial soundness in the aspects of capital adequacy, management efficiency and earning efficiency whereas satisfactory level in liquidity and moderate/fair level in assets quality. similarly, srcufl reported strong level in capital adequacy and earning efficiency, satisfactory level in assets quality and liquidity and fail level in management efficiency. similarly, sfl has shown strongest level of performance in asset quality and earning efficiency, satisfactory in management efficiency, fair level in capital adequacy and marginal/poor level in liquidity. similarly, skfl reported satisfactory level in assets quality, fair level in capital adequacy and earning efficiency, marginal level in management efficiency and unsatisfactory/worst level in liquidity. finally, nlof has reported unsatisfactory/worst level of performance in all parameters except capital adequacy. this indicates high risk level/default level of the nlofl during the study period. author contributions: conceptualization, k.r. and r.r.b.; data curation, k.r. and r.r.b.; methodology, k.r. and r.r.b.; validation, k.r. and r.r.b.; visualization, k.r. and r.r.b.; formal analysis, k.r. and r.r.b.; investigation, k.r. and r.r.b.; resources, k.r.; writing – original draft, k.r. and r.r.b.; writing – review & editing, k.r. and r.r.b.; supervision, r.r.b.; software, k.r.; project administration, k.r.; funding acquisition, k.r. 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. 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 al-najjar, d., & assous, h. f. (2021). key determinants of deposits volume using camel rating system: the case of saudi banks. plos one, 16(12), 1-15. https://doi.org/10.1371/journal.pone.0261184 reddy & reddy b, indian journal of finance and banking 9(1) (2022), 192-202 202 badrul manir, m. b., & ahmad bustamam, u. s. (2017). camel ratio on profitability banking performance (malaysia versus indonesia). international journal of management, innovation & entrepreneurial research, 3(1), 30-39. https://doi.org/10.18510/ijmier.2017.314 kaur, j. (2016). performance evaluation of gold loan nbfcs using camel model. pacific business review international, 1(1), 189-191. nguyen, a. h., nguyen, h. t., & pham, h. t. (2020). applying the camel model to assess performance of commercial banks: empirical evidence from vietnam. bank and bank systems, 15(2), 177-186. http://dx.doi.org/10.21511/bbs.15(2).2020.16 umarani, d., & jayanthi, m. (2015). an analysis of asset-liability management in indian banks. international journal of business and administration research review, 1(11), 179-183 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 13(2) (2023), 36-44 36 finance and banking ijfb vol 13 no 2 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa to investigate the trend and expansion of private equity investment in india rithvik lakhotia (a)1 (a) student, department of economics, christ (deemed-to-be university) bangalore bgr, karnataka, india; e-mail: lakhotiarithvik@gmail.com a r t i c l e i n f o article history: received: 21st october 2023 revised: 20th december 2023 accepted: 25th december 2023 published: 30th december 2023 keywords: private equity, india, investment, risk, growth, log-lin regression, predictions, exit, construction, information technology, real estate. jel classification codes: e22, l16 a b s t r a c t this paper delves into india's burgeoning realm of private equity investment, examining its growth trends, sectoral preferences, and risk profile. utilizing log-lin regression analysis of detailed data from 2012 to 2022, we unveil insights into deal value and volume for investments and exits. our findings paint a nuanced picture. while india presents compelling opportunities, it also harbours inherent risks for private equity players. notably, 2020 witnessed the highest influx and divestment of capital, highlighting the dynamic nature of the market. construction, information technology, and real estate are the hottest sectors, attracting significant investor attention. the quantitative analysis reveals a steady annual growth of 5.4% in private equity investment value, further bolstered by a notable 3.4% weekly increase. these robust figures solidify india's position as a burgeoning private equity hub. furthermore, we venture beyond historical patterns, offering valuable predictions for the next ten years. this vital forecast equips investors and stakeholders with critical insights to navigate the evolving landscape of indian private equity. in conclusion, this study comprehensively analyses private equity's rise and inherent risks within the indian context. through data-driven insights and future projections, it empowers informed decision-making and strategic planning for navigating the promising yet dynamic realm of private equity in india. © 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 the 21st century has witnessed a profound shift in the global financial landscape, driven by the unstoppable force of globalization. investors in developed nations, seeking to diversify their portfolios and maximize returns in an ever-changing environment, have increasingly turned to alternative asset classes. among these, private equity (pe) has emerged as a powerful force, attracting capital and impacting businesses across the globe. globalization has fostered unprecedented interconnectedness and rapid change. technological advancements, socioeconomic transformations, and business models have altered how we live, work, communicate, travel, and trade. in this dynamic environment, traditional public equity markets, with their limitations, have faced increasing challenges. enter private equity, a creative and flexible investment approach focused on injecting mediumto long-term capital into unlisted companies. unlike publicly traded stocks, pe investments provide financial backing to private businesses, often to actively influence their growth and development. this patient capital model, typically spanning a decade or more, allows pe firms to work closely with portfolio companies, providing strategic guidance, operational expertise, and network access. the global pe industry has experienced explosive growth in recent decades. since 2004, private equity fundraising has reached unprecedented heights, reflecting the increasing appeal of this alternative asset class. the allure of private equity lies in its potent cocktail of higher potential returns compared to public markets, diversification across sectors and geographies, and the active involvement of pe firms in shaping investee companies, potentially unlocking more excellent value and amplifying returns, all while acknowledging the inherent increased risk. the rise of pe has also brought renewed focus on the importance of sound corporate governance, particularly in early-stage and growth-oriented companies. with their vested interest in the success of their investments, pe firms often implement robust governance practices to safeguard investor interests and ensure long-term sustainability. 1corresponding author: orcid id: 0009-0003-0672-5504 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i2.2174 to cite this article: lakhotia, r. (2023). to investigate the trend and expansion of private equity investment in india. indian journal of finance and banking, 13(2), 36-44. https://doi.org/10.46281/ijfb.v13i2.2174 https://orcid.org/0009-0003-0672-5504 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i2.2174 lakhotia, indian journal of finance and banking 13(2) (2023), 36-44 37 seeking to address the limited knowledge of indian private equity (pe), this research delves into its multifaceted landscape. we examine its general trends, growth, and emergence over the past two decades, exploring the drivers of pe investment at country, firm, and sector levels. additionally, we analyze the performance of pe funds in india and assess the preand postinvestment performance of investee companies. compared to public markets, the potential for higher returns attracts investors to pe, but it also comes with increased risk. this risk is mitigated by pe's diversification opportunities across sectors and geographies. furthermore, pe firms' active involvement in shaping investee companies can lead to enhanced value creation and increased returns. our research highlights the importance of pe as a potential source of capital for india's infrastructure development, making it a more reliable option than fiis and ipos. pe has been instrumental in growing vital industries and small and medium-sized companies, fostering job creation and developing strategic capabilities. between 2001 and 2014, over 3,100 companies received pe funding, with 50% having annual revenues below us$2 million and 30% between us$2 million and us$125 million. pe played a crucial role in the growth of the mobile communications industry, with private equity investors funding four of the top 10 indian telecom businesses and seven of the top nine tower operators during that period (hunt et al., 2015). additionally, businesses backed by pe experienced a 6% higher direct employment growth rate than their unfunded counterparts (kpmg, 2010). the indian government's validation of alternative investment funds (aifs) as the preferred vehicle for private capital pooling contributed to the us$23 billion pe/vc investment in 2018 (thornton, 2018). pe has boosted india's economy through increased sales, profits, r&d spending, and wage payments (ernst & young, 2018). its transformative impact on target businesses extends beyond financial support. the past two decades have witnessed a significant expansion of pe investments in india, both in size and scope. pe in india focuses on partnering with mid-sized businesses, providing capital and guidance to help them grow three times in size within five years. over the years, pe has become an integral part of the indian corporate financing landscape. with expected investments in infrastructure, consumption-driven economic growth, and supportive government policies, india has the potential to become the world's second-largest economy by 2050 (deloitte, 2012). increased pe is believed to be crucial in fueling this growth (live mint, 2015). pe investors see india's long-term potential for robust returns (cumming, 2010). 2018 marked a banner year for indian pe, with a 35% increase in investment value and a 28% increase in volume compared to 2017 (ernst & young, 2018). as the industry matures, the value and volume of more significant pe/vc deals steadily increase. 2018 also saw the highest pe/vc exits, reaching us$26 billion, driven by the largest deal in the indian pe market – walmart's acquisition of a controlling stake in flipkart for us$16 billion (ernst & young, 2018). additionally, the industry raised us$8.1 billion through 51 funds, a 40% increase from 2017, highlighting india's growing attractiveness to global pe/vc investors (ernst & young, 2018). pe sponsors' preferences have shifted towards minority to majority stakes and large strategic deals, embracing all stages of investment, including pre-ipo stages. they are also increasingly involved in multiple-fund chasing of targets, primary and secondary infusions, and assuming the role of strategic advisors beyond just financial investors. this evolution reflects the recognition of pe's potential to create value for itself and the economy through improved corporate governance and job creation (thornton, 2018). this study faces several limitations. pre-2012 data on aggregate and sectoral pe investments and exits is scarce and unreliable. crucial variables like business confidence, disclosure levels, and labour market/debt/credit market parameters must be completed or consistent, hindering macroeconomic analysis. more financial data on unlisted companies is needed to ensure firm-specific analysis. additionally, excluding pe deals outside 2012-2022 (due to low volume) and focusing solely on initial pe deals per company restrict the sample size. continuously changing sectoral classifications further limit sector-level analysis. lastly, the need for dedicated india-focused pe data and relevant prior research hamper variable selection and statistical tools. despite these limitations, this study lays the groundwork for future pe research in india. it aims to analyze pe's trend, growth, and emergence in both emerging (brics) and developed markets (u.s., u.k., etc.), focusing on critically assessing india's attractiveness to pe investors compared to others. additionally, it will explore the macroeconomic determinants of pe investment in different markets through cross-country comparisons. the ongoing industry/corporate interest in indian pe contrasts with the academic knowledge gap. extensive literature exists on pe in north america and europe, but its findings often need to be more relevant to developing markets like india. this limited knowledge hinders researchers' understanding, pe practitioners' investment decisions, and regulatory policy formulation. the lack of organized data on indian pe forces researchers to rely on studies from developed markets, limiting their ability to conduct comprehensive and conclusive research. this study aims to bridge this gap by expanding the scope of knowledge on indian pe and facilitating further empirical analyses. literature review the rapid ascent of emerging economies like india, fueled by their dynamic growth and maturing capital markets, has ignited a surge in private equity (pe) interest. however, navigating this exciting landscape demands a nuanced understanding of factors shaping investor decisions and return expectations. this study delves into the intricate world of indian pe, exploring its historical trajectory, growth patterns, and industry-level impact. while existing research by sabarinathan et al. (2017) and mohammad et al. (2016) laid the groundwork for understanding india's pe landscape, much has unfolded since. recent reports like bain & company's india private equity report 2023 highlight the industry's continued ascent, with 2022 witnessing a record $62 billion in pe-vc investments lakhotia, indian journal of finance and banking 13(2) (2023), 36-44 38 despite global headwinds. patil et al. (2016) predictions have held, with pe remaining a critical lifeline for india's burgeoning startup ecosystem. komala's (2016) insights remain relevant, but the industry has evolved, with sectors like renewable energy and fintech attracting increasing attention. shukla (2015) aptly captured pe's transformative power, and stories like flipkart's $16 billion walmart acquisition in 2018 (ernst & young, 2018) further solidify this impact. however, challenges persist. as nelivigi (2015) pointed out, regulatory hurdles remain a concern, with complexities in capital structuring and exit options. while the revised companies act 2013 aimed to improve governance and transparency, it also introduced restrictions that continue to be debated. as highlighted, macroeconomic uncertainties and geopolitical factors further add complexity to the landscape. despite these challenges, the potential of indian pe remains immense. the burgeoning microfinance sector, as observed, continues to attract pe interest, focusing on impact investing alongside financial returns. mwirigi's (2014) observations about kenya's nascent pe scene resonate with india's journey, showcasing the potential for pe to act as a conduit for foreign investment and economic growth. dyck and pomorski's (2014) call for more profound research into diverse pe opportunities and risks remains relevant, and this study aims to contribute by analyzing the impact of pe on indian businesses through new data sources and methodologies. in conclusion, while the indian pe landscape is undeniably vibrant, it is also evolving rapidly. this study sheds light on this dynamic ecosystem, its growth drivers, challenges, and potential to propel india's economic engine forward. by delving deeper into the intricate world of indian pe, we can unlock valuable insights for investors, policymakers, and entrepreneurs alike, paving the way for a future where pe continues to be a catalyst for growth and innovation in this dynamic market. ghai et al. (2014) expressed their belief that the performance of private equity firms has been misrepresented in some the allure of private equity lies in its compelling trio of higher risk-adjusted returns, diversification, and active portfolio shaping, potentially amplifying value creation and returns compared to the public market, albeit with inherent risk. this potent mix has fueled a steady rise in private equity's market share, from 1.5% in 2000 to 3.9% by 2012, despite mirroring public market fluctuations. this growth, coupled with its increasingly mainstream practices, as desai (2013) notes, positions private equity as a critical driver of global economic expansion, nurturing new ideas and gestating them into economic realities. in india, highlight its critical role from ideation to buyouts, providing capital and transformative inputs that empower growth and diversify investment across sectors. with its unique structure of limited partnerships, where pe firms act as general partners guiding major institutional and high-net-worth investors (limited partners), private equity seems poised to continue its dynamic journey, shaping both individual companies and the global economic landscape. while traditional private equity (pe) models offered attractive returns and diversification, emerging markets presented a unique opportunity in the early 2000s. leeds and sunderland (2003) characterized these markets as a "middle ground," enticing investors with capital scarcity, promising macroeconomic fundamentals, and government openness. however, initial attempts at applying us-style venture capital (vc) models in these markets yielded disappointing results (gaughan, 2007). this, coupled with the growing prominence of pe and hedge funds in mergers and acquisitions (m&a) (gaughan, 2007), necessitated a shift towards risk-sharing and localizing foreign funds. this evolution coincided with the significant growth of pe research and practice. investors increasingly sought pe funds to capitalize on opportunities beyond traditional channels (fuchs et al., 2021, 2022). although pe is often costlier than public equity (brav, 2009), leading to a preference for debt financing, the deregulation of capital markets has made pe funds more accessible to large investors (ewens & farre-mensa, 2020). this has potentially contributed to declining initial public offerings (ipos) as companies find alternative funding sources. notably, the assets managed by pe firms have nearly doubled in the past five years (dai, 2022). today, venture capitalists and private equity players are involved in diverse activities, including socially responsible and impact investing (barber et al., 2021). vc, in particular, remains a prominent method of financing new ventures and serves as a quality signal for external investors (revest & sapio, 2012). the abundance of research on vc and pe reflects their growing importance in the capital market. venture capital and private equity firms have been drawn to india's large and growing market and its plentiful supply of highly qualified it workers. another factor that has made the country an appealing investment location is its improving demographic situation. private equity (pe) has emerged as a crucial driver of india's economic growth, transforming businesses and fueling entrepreneurship. this study delves into the evolution of pe in india over the past two decades, analyzing its trends, growth, and impact across various sectors ernst & young (2013). private equity roundup. india. the research highlights the shift in investor appetite towards more significant deals, diverse stages, and strategic partnerships, emphasizing pe's role in value creation beyond mere financial investment. while data limitations exist, this study paves the way for further exploration of pe's potential in india, comparing its attractiveness across emerging and developed markets and understanding the macroeconomic factors driving its growth. by bridging the knowledge gap and fostering a deeper understanding of pe's intricate relationship with the indian economy, this research contributes to informed policy formulation. it propels india's journey towards becoming a global economic powerhouse. materials and methods data sources  pwc india: quarterly reports on pe investment and exit in india (2012-2022) and stage-wise annual data on pe investment (2017-2022).  grant thornton india: annual reports on industry pe investment (2012-2022). lakhotia, indian journal of finance and banking 13(2) (2023), 36-44 39 data analysis  period: 2012-2022 (10 years) for aggregate pe investment and exit, stage-wise investment (6 years), and sectoral trends (10 years).  aggregate pe: quarterly data on investment and exit analyzed using log-linear regression.  stage-wise pe: annual data on investment analyzed using descriptive statistics (mean, median, standard deviation, average transaction size).  sectoral trends: annual data on pe investment in nine sectors analyzed using descriptive statistics.  target company performance: two-sample t-tests and binary logistic regression were employed to examine statistical differences after pe investment. quantitative analysis  log-linear regression: used to model the relationship between pe investment and other variables (e.g., time, sector).  descriptive statistics: used to summarize key features of the data (e.g., central tendency, dispersion).  time series analysis: forecast future pe investment values and calculate upper and lower control limits (ucl/lcl). following this rigorous data analysis and statistical examination, the study unveils its critical findings on pe's trend, growth, and emergence in india. these findings will be presented and discussed in detail in the following sections. results increasing average deal size: between 2004 and 2022, the average deal size in pe investments in india significantly increased from us$18 million to us$30 million (table 1). this indicates a shift towards more significant investments even though the number of deals remained relatively constant. table 1. private equity investment and exit trend in india (million us$) year pe investment pe exit volume (no. of deals ) value average deal size volume (no. of deals ) value average deal size 2012 551 10200 18.51179673 115 7000 60.8695652 2013 696 11800 16.95402299 164 7000 42.6829268 2014 810 15100 18.64197531 193 6000 31.0880829 2015 1433 22900 15.98046057 213 9400 44.1314554 2016 976 16800 17.21311475 197 10000 50.7614213 2017 682 26400 38.70967742 211 15700 74.4075829 2018 793 26300 33.16519546 265 330004 1245.29811 2019 1053 45100 42.8300095 200 12800 64 2020 1106 62200 56.23869801 232 9000 38.7931034 2021 2067 69800 33.76874698 269 36000 133.828996 2022 2046 61600 30.10752688 212 24000 113.207547 volatile investment activity: the average annual pe deal volume was 1,110 with a standard deviation of 526, while the average annual total deal value was us$21,550 million with a standard deviation of us$6,717 million (table 2). this suggests significant fluctuations in pe investment activity over the years. table 2. descriptive analysis pe investment average median st. dev volume (no. of deals) 1110.273 976 526.7869 values (us $ m) 21550 21550 6717.514 pe exits volume (no. of deals) 206.4545 211 43.0868 values (4 m) 59857.71 9000 119658.6 sectoral preferences: the infrastructure sector had the highest average deal size at us$101 million, followed by real estate (us$75 million), pharma, health & biotech (us$57 million), and bfsi (us$37 million) (table 3). however, it&ites, despite having the lowest average deal size (us$20 million), attracted the most pe investment in terms of total value and volume, although with higher volatility compared to other sectors. real estate emerged as pe investors' second most preferred sector due to its relatively lower volatility. lakhotia, indian journal of finance and banking 13(2) (2023), 36-44 40 table 3. sector-wise private equity investment trend in india (million us$) it&ites bfsi real estate retail & consumer pharma, health & biotech infrastructure av. deal size 20.1475 37.99989 75.3643 28.81682 57.70976 101.5731 av volume 123 123.5455 59.45455 40.81818 18.63636 31.09091 av value (us $ m) 2478.143 4694.714 4480.75 1176.25 1075.5 3158 median (no. of deals) 122 109 53 34 16 24 median (us $ m) 1830 2992 4264 1091 748 3200 st. dev (no. of deals) 40.88 75.39 20.29 15.17 8.8 18.71 st. dev(us $ m) 1843.228 4227.823 2276.387 592.4111 990.9405 2203.627 investment stages: private investment in public equity (pipe) and growth-stage companies received the most pe investments, followed by buyouts (table 4). this indicates a preference for late-stage and high-growth potential companies among pe investors. table 4. stage-wise private equity investment (us $ m) trend in india year pipe ($ m) growth ($ m) buyout ($ m) 2017 3772 13376 .0 3008 2018 3749 14076 10439 .0 2019 5042 .0 14823 16450 .0 2020 3066 25376 11821 .0 2021 928 1831$m 1384$m 2022 2109 1585 762 mean 2724.8 13965 1885 growth trends: both linear and log-linear trend models can be used for forecasting future pe investment trends. however, the log-linear model is deemed more appropriate considering the non-linear nature of financial time series data (table 5). table 5. log-lin regression model of pe investment (value and volume) s(value) s(volume f(1,9) 21.823 11.852 r squared 0.708 0.568 adjusted r squared 0.676 0.52 root mse 0.64 0.62 prob. >f 0.001 0.003 regression analysis showed that time was a significant factor in explaining the variations in pe investment value and volume, with growth rates of 5.4% and 3.4% per quarter, respectively (tables 6 and 7). this suggests a positive and rising trend in pe investment activity in india. table 6. log-lin regression model of pe investment (value) coefficients (value) model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b b std. error beta lower bound upper bound 1 (constant) 487.154 167.320 1.599 .002 51.48 850.764 value 0.046 0.007 .841 5.432 .001 0.044 0.072 table 7. log-lin regression model of pe investment (volume) coefficientsa (volume) model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b b std. error beta lower bound upper bound 1 (constant) 302.432 25.764 2.031 0.003 262.414 657.55 volume 0.002 0.001 0.754 3.443 0.005 0.143 0.759 sectoral growth rates: pe investments in real estate and it & ites sectors grew at annual rates of 73% and 16%, respectively, while other sectors like retail, infrastructure, and pharma also experienced significant growth (table 8). this further reinforces the upward and rising trend observed in pe investments across different sectors. lakhotia, indian journal of finance and banking 13(2) (2023), 36-44 41 table 8. log-lin regression model of pe investment across sectors model unstandardized coefficients standardized coefficients t sig. 95.0% confidence interval for b b std. error beta lower bound upper bound it 0 0 0.164 0.578 0.004 0 0.001 bfsi 2.64e-05 0 0.032 0.071 0.003 -0.001 0.001 real estate 0.001 0.001 0.733 1.99 0.002 0 0.003 retail 7.80e-05 0 0.04 0.232 0.001 -0.001 0.001 pharma 0.001 0.001 0.205 0.684 0.002 -0.002 0.004 infrastructure -4.60e-05 0 0.056 -0.404 0.004 0 0 forecasting: figures 1 and 2 present forecasted values for pe investment volume and value, along with upper and lower control limits, for the years 2012 to 2032. figure 1. volume ((no. of deals) for private equity investment(million us$) figure 2. investment value of private equity ( million us$) figure 3.volume ((no. of deals) of private equity exit (million us$) figure 4. prediction for exist value of private equity figure 5. pe investment across the different sectors according to both models, pe investment and exit volume and value are set for a sustained rise over the next ten years. figures 3 and 4 further illustrate this trend for pe exits, while figure 5 explores pe investment across different sectors. lakhotia, indian journal of finance and banking 13(2) (2023), 36-44 42 overall: this study provides evidence of a significant rise in pe investment activity in india over the past decade, with increasing average deal size, a preference for specific sectors and investment stages, and a promising growth trajectory for the future. discussions growth and diversification of the indian pe market the indian private equity (pe) market has grown substantially in recent years, with increasing deal sizes and a shift towards larger, established companies. however, volatility remains a key feature, with deal volume and value fluctuations across different sectors and years. sector preferences and performance it & ites dominates the pe landscape based on deal volume and value. while its high returns attract investors, its volatility poses a significant risk. real estate, on the other hand, presents a more stable alternative, attracting consistent investment while exhibiting less volatility. infrastructure has emerged as a growing focus for pe funds, offering a compelling alternative investment strategy. maturing market and opportunities overall, the indian pe market is maturing and diversifying, catering to investors with varying risk appetites. this diversification presents many opportunities, but careful analysis of sector trends and company performance remains crucial for successful investment decisions. implications for investors and policymakers: these results highlight india's potential as a dynamic and attractive market for pe investments. the observed upward trends across most sectors indicate promising opportunities for investors. however, the varying growth rates emphasize the importance of sector-specific analysis for informed investment decisions. from a policy perspective, the consistent growth in pe investment underscores the need for a supportive regulatory environment and infrastructure. fostering such an environment can attract further investments and stimulate economic growth. model predictions and considerations both models employed in this study consistently predict an upward trend in the volume and value of pe investments from 2012 to 2032. this suggests a growing interest and potential for pe investments in the coming years. the control limits derived from these models provide valuable insights into the expected range of pe investment activity. any significant deviations from these limits indicate potential changes in market conditions or unforeseen disruptions. it is important to note that these forecasts are based on specific models and assumptions. real-world factors and unforeseen events can influence the actual outcomes. therefore, while these forecasts provide valuable guidance for decision-making, it is crucial to remain informed about broader market trends and potential risks. in conclusion, the indian pe market is on a dynamic growth trajectory with sector-specific trends and opportunities. careful analysis, informed by model predictions and broader market considerations, is critical to successful investment decisions in this evolving market. conclusions india's private equity (pe) market is flourishing, marked by robust deal sizes, diversifying sector preferences, and a growing appetite for established companies. this surge, however, has its challenges. volatility, a constant companion, demands a keen understanding of sector dynamics and company performance. it & ites reigns supreme, offering high volume and value, but its inherent volatility necessitates cautious entry. real estate, in contrast, provides stability and consistent returns, while the burgeoning infrastructure sector beckons investors seeking higher growth potential. this diverse landscape caters to varied risk appetites, but thorough sector analysis and due diligence remain paramount for success. india's upward trajectory makes it a compelling pe destination, but its nuances require sector-specific scrutiny. recognizing the market's consistent expansion, policymakers should prioritize supportive policies to fuel investment and economic growth further. forecasting models predict sustained pe growth, highlighting the market's potential. however, control limits and unforeseen events can disrupt this trajectory. while forecasts provide valuable guidance, staying vigilant about market trends and potential risks is crucial for navigating this dynamic and promising landscape. our research confirms the hypotheses: pe investment and exits have significantly increased between 2012 and 2022, with consistent growth in both value and volume. the lin-log regression analysis further corroborates this, indicating annual growth of 5.4% in value and 3.4% weekly. the next ten years promise continued pe expansion, reinforcing the market's immense potential. however, careful analysis, strategic decision-making, and a keen eye for risk remain essential for investors seeking to capitalize on this exciting opportunity. lakhotia, indian journal of finance and banking 13(2) (2023), 36-44 43 implications and recommendations for practice  diversify portfolios across sectors with varying risk-return profiles.  conduct thorough due diligence on target companies and sectors before investing.  stay updated on market trends and potential disruptions.  collaborate with experienced pe players for insights and guidance.  advocate for supportive policies to strengthen the pe ecosystem. limitations and future research  this analysis focuses on aggregate data; deeper insights could be gained from firm-level data.  the study period may not capture the full impact of recent economic events.  further research could explore the impact of pe on target companies and the broader economy. by recognizing the nuances and opportunities within india's pe landscape, investors can navigate this exciting market with confidence, contributing to its continued growth and fostering economic prosperity. author contributions: conceptualization, r.l.; methodology, r.l.; software, r.l.; validation, r.l.; formal analysis, r.l.; investigation, r.l.; resources, r.l.; data curation, r.l.; writing – original draft preparation, r.l.; writing – review & editing, r.l.; visualization, r.l.; supervision, r.l.; project administration, r.l.; funding acquisition, r.l. 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. 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 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(2018). an instinct for growth. ifrs news, special edition, a revised conceptual framework financial reporting. search in. 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. https://www.globalprivatecapital.org/app/uploads/2017/03/indias-new-corporate-law.pdf https://www.globalprivatecapital.org/app/uploads/2017/03/indias-new-corporate-law.pdf https://dx.doi.org/10.2139/ssrn.3474809 https://repository.iimb.ac.in/handle/123456789/7735 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 9(1) (2022), 184-191 184 finance and banking ijfb vol 9 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa a comparative study on the impact of covid pandemic paranoid on investment behaviour of banking and non banking professionals in india kannadas sendilvelu (a)1 srikanth parthasarathy (b) (a) assistant professor, sdm institute for management development, mysore-570011, india; e-mail: kannadas100@gmail.com (b) associate professor, rajalakshmi school of business, chennai – 600124, india; e-mail: psrikanth2011@gmail.com a r t i c l e i n f o article history: received: 21 january 2022 accepted: 21 march 2022 online publication: 26 march 2022 keywords: covid pandemic, investment behaviour, professionals jel classification codes: g4, g11, g40, g41 a b s t r a c t the study focuses on comparing the investment behaviour of banking and non-banking professionals in india and also, how the covid pandemic has impacted their behaviour towards investments as such. the aim of the project is to understand if there are any differences in the investment choices of both sets of people. for the purpose of the study, data has been collected from banking and non-banking employees through the issue of google forms, and the same data has been used to analyse the behaviours among the targeted groups. a sample of 122 data points is considered for the study, with banking and nonbanking professional samples. the questions try to bring out the actual behaviour of the respondents with regards to their investments, before and after the covid pandemic. with that, comparison of banking and non-banking, in particular, will be well understood by the reader of the study. apart from that, statistical models like chi-square test, regression analysis and correlation analysis have been done for the collected set of data points. by the end of the study, the gain is all about the idea and understanding about the investment behaviour of the banking and non-banking employees that the covid pandemic has made any impact on the investment behaviour of people. © 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 covid-19 is a highly transmissible and deadly virus that has transformed the globe drastically, and a tragically enormous number of human lives lost. people were more concerned about their lives and livelihood than money and leisure in the case of a terrible outbreak. investors' psychological reactions to the stock market, whether positive or negative, have the potential to change the economy's trajectory. patients and health workers have developed psychological resistance and have been subjected to severe psychological strain as a result of the pandemic. the current pandemic has had a major psychological impact, resulting in a recognisable mental state of "anxiety." the term "worry" refers to the public's reaction to the pandemic in all forms of media, regardless of whether or not the information is accurate. there is widespread anxiety about the long-term viability of global stock markets and financial markets, which has far-reaching repercussions. non-banking and traditional banking businesses will face pre-crisis challenges such as revenue pressure and low profitability (low interest rates and higher capital), increased competition from shadow banks and new digital entrants (to name a few), and tighter regulation (following the previous financial crisis). as new entrants combat banks, digitalization will gain a lot more traction." this dynamic has many benefits, but it also creates new risks that will necessitate regulatory solutions and, most critically, a level playing field for incumbents and newcomers. accessibility concerns, as well as the scaling down of sme/corporate clients and an increase in retail consumer defaults, are likely as a result of a short-term banking outage. a longer-term crisis is expected to boost consumer demand for digital channels and goods like insurance, in addition to smes/corporate defaults. health and life insurance are getting increasingly popular. excess money is accumulating due to limited deployment alternatives. as a result of decreasing income and profitability, loan defaults have grown. 1corresponding author: orcid id: 0000-0002-9806-1711 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v9i1.1666 to cite this article: sendilvelu, k., & parthasarathy, s. (2022). a comparative study on the impact of covid pandemic paranoid on investment behaviour of banking and non banking professionals in india. indian journal of finance and banking, 9(1), 184-191. https://doi.org/10.46281/ijfb.v9i1.1666 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v9i1.1666 https://orcid.org/0000-0002-9806-1711 https://orcid.org/0000-0002-8617-812x sendilvelu & parthasarathy, indian journal of finance and banking 9(1) (2022), 184-191 185 the behaviour of individual investors is heavily impacted by a variety of biases that have been emphasized in the burgeoning science of behaviour finance. as a result, this research is part of a larger attempt to analyse the influence of behavioural biases on paranoia associated with the covid pandemic among banking and non-banking professionals. a questionnaire is created, and answers from 100 professionals are gathered through the survey (deloitte, 2020). literature review daniel et al. (1998) found that investors' most prevalent tendency while making investing decisions was discovered. investors aren't always interested in all types of securities and assets. individual investors are fearful of losing money. investors consider past performance as a sign of future performance when making stock buying decisions. investors are trading far too aggressively. investors do not always build efficient portfolios, they do not always perform in a similar manner, and they are influenced by history. mane and bhandari (2014) discovered that the majority of respondents prefer traditional investment methods such as banking for their savings. patil and nandanwar (2015) revealed that investors' investment preferences and priorities are reflected in bank deposits, which are ranked first, indicating that investors value safety and security in their investments. according to hong and stein (1999), slow spread of news produces momentum, while feedback traders who purchase based on prior returns induce overreaction because they link past momentum traders’ behaviour to news and so end up buying too much stock, which causes momentum when positions are reverse. sasirekha and jerinabi (2015) conducted a study on the degree of investment knowledge among professionals in the information technology field, finding that 38 percent of investors have just an average level of investment awareness. it has been shown that there is a link between the degree of awareness and age, level of education, family structure, social standing, yearly income, organisational structure, residential area, and savings capacity; however, gender and the number of earning members are not important. as a result, it can be stated that all parameters, with the exception of gender and the number of earning members, have supported the association between level of awareness and income. ramanathan and meenakshi (2015) in his research paper titled 'a study on investment behaviour and level of satisfaction of bank employees,' ramanathan and meenakshi (2015) believes that understanding the investors' opinions, desires, and worries about the market is critical for policymakers and regulatory bodies. research might be undertaken just for different types of workers with the goal of assisting and promoting investors. bhushan (2014) did research in india to look at the link between financial literacy and investing behaviour among salaried people. the study's findings revealed that an individual's financial literacy degree influences their knowledge of financial products as well as their investing preferences. in addition, respondents in the high financial literacy category have a greater degree of knowledge for all financial products except post office savings, according to the study's findings. bank fixed deposits, savings accounts, public provident funds, mutual funds, stock market investments, and bonds all had statistically significant differences in knowledge levels. baldwin (2020) discusses the influence of covid-19 on the economy's income flows. first, because they are not reimbursed, households reduce their consumption and save. savings fall, which leads to less investment and, as a result, a decreased capital stock. second, households' appetite for imports declines, leading in lower revenue for the rest of the world and lower exports for the country. third, demand/supply shocks interrupt supply chains both domestically and internationally. fourth, all of the previous shocks and interruptions create a decrease in output, resulting in poorer factor utilisation. khanooja (2020) covid-19 has affected millions of individuals over the world, claiming lakhs of lives, destroying families, and causing global harm. aside from the physical effects on people's health, it has also had an economic impact, which is where it hurts the most. it has impacted people from all walks of life, leaving thousands of people jobless and without a steady source of income. as india adopted dramatic measures to halt the spread of covid 19, the country's economy came to a halt, bringing it to its knees. businesses across many industries have had to cut back operations, lay off personnel, or lower compensation due to restricted mobility and disturbed supply chain management. the slowing economy and the closure of a number of enterprises have prompted us all to reconsider the importance of saving and investing in our daily lives. many families and individuals have had to dip into their little reserves to get through the covid 19 storm, highlighting the need for prudent saving and investing once again. individual investment patterns in the post-covid scenario are expected to indicate a shift in investment outlets. people will be hesitant to accept any short-term risks and will prefer to invest in less volatile and harmful assets. the change in the portfolio is mostly due to income variations during the epidemic. job losses, wage cuts, and low/no business are just a few of the factors that have had an influence on investors' portfolios. during the epidemic, many people may invest in mutual funds, nscs, and equities markets, regardless of their income level. this demonstrates that these investors took advantage of market volatility, as investing is typically more profitable when the market is down. due to the considerable market volatility, investors may choose to invest only in avenues that provide a guaranteed return (kumthakar & nerlekar, 2020). behavioural finance is also a reflection of the mindset that is ingrained in the investing system. various theories argue that investors can act irrationally, leading to the creation of inefficient markets and mispriced securities, while ignoring the potential for profit (asamoah, 2021). the importance of investment behaviour in influencing the success of financial markets cannot be overstated. three factors were studied when determining investing behaviour: risk perception, satisfaction, and profitability rate (ainia & lutfi, 2019). sendilvelu & parthasarathy, indian journal of finance and banking 9(1) (2022), 184-191 186 ramelli and wagner (2020) believes that investors should avoid circumstances that are intrinsically risky, even if they present opportunity. fear is the reaction of investors to a drop in the value of their assets. then there's the worry about not having enough money to fund covid-19 therapy. covid-19 has elevated people's stress levels, according to taylor et al. (2020). the findings also explain the current anxiety levels (taylor et al., 2020). in the article "covid-19 created the perfect case study in behavioural finance: here's what we mean," enrich financial partners, a registered investment advisor, outlines how covid-19 created the perfect case study in behavioural finance. the covid-19 epidemic has had an impact on people's lifestyles and financial decisions. the advisor has linked behavioural finance to the investor's irrationality as a result of unemployment and losses. the article has offered an overview of behavioural finance as well as a method for an investor to make reasonable judgments during covid paranoia, such as recognising risk tolerance, restricting investment discussion, and analysing market patterns, among other things (partners, 2021). the study, titled "the investor psychology and stock market behavior during the initial era of covid-19: a study of china, japan, and the united states," looked at investor psychology and stock market behaviour in china, japan, and the united states. sobia naseem, muhammad mohsin, wang hui, geng liyan, and kun penglai of the university of castilla la mancha in spain discuss how investment decisions in china, japan, and the united states have changed in the aftermath of the covid outbreak. the purpose of covid-19 was to look into investor psychology and stock market behaviour. investors' psychological reactions to the stock market, whether positive or negative, have the potential to influence the economy's outlook. using principal component analysis, this study examines the shanghai, nikkei 225, and dow jones stock markets from january 20, 2020, through april 27, 2020. investor psychology was discovered to be inversely associated with three stock markets under psychological resilience and pandemic strain, according to the data. as a result of negative emotions and pessimism, investors stop making financial investments in the stock market, resulting in lower stock market returns. in the event of a deadly pandemic, people were more concerned about their lives and livelihood (naseem et al., 2021). fanyi wang of the school of finance and jilin, china, ruobing zhang of the b school of finance, changchun guanghua university, changchun, jilin, china, and syed mir muhammed of the d school of business, sukkur iba university, sukkur, sindh, pakistan have explained the changes in uk investor behaviour due to the covid outbreak in their study "impact of investment behaviour on financial markets during covid-19. the goal of this research is to see how investment behaviour affects financial markets in the united kingdom during covid-19. data is acquired from primary sources, such as a survey questionnaire, in this form of quantitative analysis. the researcher used a non-probability convenience sampling method to get 337 replies. the research will look into the relationship between investing behaviour and the stock market. according to the findings, qualities including general risk tolerance and financial risk tolerance, as well as satisfaction, risk perception, and rate of profitability, influence the study's variables. covid-19 acts as a moderator in the interaction between them. financial risk tolerance is regarded an attitudinal component while making financial decisions, according to the data (wang et al., 2021). objectives of the study the purpose of this research is to see how the banking and non-banking professionals are reacting in this unprecedented situation of covid. we took a look into their sources of income, where they spend their money, how they save or what savings they have? where they take investment suggestions and what are their future investment plans groups. this study also aims to identify and prioritize the elements that impact investor behaviour throughout the investment decision-making process, as well as to understand how physiological considerations and other sorts of biases influence a person's buying and spending choices. methodology this research is exploratory research and the information regarding the impact of covid pandemic paranoid on investment behaviour of banking and non-banking professionals was collected through online questionnaire survey. exploratory research is done to look into a subject that isn't well-defined, hasn't been well studied, or is otherwise misunderstood. the technique, also known as grounded theory research or interpretative research, is not intended to provide definitive conclusions, but rather to gain ideas that may be used to build the framework for future, more specialized study. you may build research hypotheses and questions for further examination using the information gleaned through exploratory research, and you can narrow down the data you need. exploratory research is conducted to get a deeper knowledge of a problem or issue, to clarify or define the topic's boundaries, or to refine a broad concept into a more particular research challenge. the basic data is gathered through sending questionnaires to experts in the banking and non-banking sectors in india's numerous cities. secondary data is gathered from a variety of sources, including articles, journals, research papers, magazines, and newspapers. we employed 'judgement' or 'purposive' sampling with a targeted sample size of 100 respondents to determine the influence of covid pandemic paranoia on investment behaviour of banking and non-banking professionals. the sample size reached 122 people from different cities in india. the poll received responses from 60 banking and 62 non-banking professionals. analysis and innterpretation test objective 1: to find the impact of age group and invested or interest to invest beyond savings. h0: there is no impact of age group on the investment or interest to invest beyond savings. h1: there is a significant impact of age group on the investment or interest to invest beyond savings. sendilvelu & parthasarathy, indian journal of finance and banking 9(1) (2022), 184-191 187 table 1. invested or interested to invest beyond savings invested or interested to invest beyond savings column labels row labels no yes grand total 25-35 33 43 76 35-45 1 6 7 45-60 1 2 3 above 60 4 4 below 25 14 18 32 grand total 49 73 122 test statistic row labels no yes below 25 0.10245902 0.06877386 25-35 0.20074484 0.13474653 35above 60 2.33432108 1.56687306 4.40791838 df 2 left p-value 0.88963467 right p-value 0.11036533 0.22073067 >alpha result interpretation: from the analysis conducted through chi-square test, since the p-value is more than alpha, the alternative hypothesis (h1) is thereby rejected. therefore, we can conclude that there is no impact of the investors’ age group on the investment or interest to invest beyond savings. test objective 2: to find the impact of the profession (banking or non-banking) on the portion of income that is set aside for savings. h0: there is no impact of profession (banking or non-banking) on the portion of income that is set aside for savings. h1: there is a significant impact profession (banking or non-banking) on the portion of income that is set aside for savings. table 2. proportion of income goes for savings proportion of income goes for savings column labels row labels banking non-banking grand total 0% 10% 20 21 41 10% 20% 14 22 36 20% 30% 10 17 27 30% and above 11 7 18 grand total 55 67 122 test statistic row labels banking non-banking grand total 0% 10% 0.12440478 0.10212333 10% 20% 0.30627587 0.25142049 20% 30% 0.38761936 0.318195 30% and above 1.02586521 0.84212816 3.35803221 df 3 left p-value 0.66035303 right p-value 0.33964697 0.67929394 >alpha result interpretation: from the analysis conducted through chi-square test, since the p-value is more than alpha, the alternative hypothesis (h1) is thereby rejected. therefore, we can conclude that there is no impact of profession (banking or non-banking) on the portion of income that is set aside for savings. test objective 3: to find whether investors’ gender and impact of the pandemic on their regular income are significantly associated. h0: investor’s gender and impact of the pandemic on their regular income are not significantly associated. h1: investor’s gender and impact of the pandemic on their regular income are significantly associated. sendilvelu & parthasarathy, indian journal of finance and banking 9(1) (2022), 184-191 188 table 3. pandemic impacted the regular income pandemic impacted the regular income column labels row labels decreased increased no change grand total female 6 6 25 37 male 25 10 49 84 prefer not to say 1 1 grand total 31 17 74 122 test statistic row labels decreased increased no change female 1.230758786 0.13824963 0.29141769 male and prefer not to say 0.53574206 0.06017925 0.12685241 2.383199823 df 2 left p-value 0.69626507 right p-value 0.30373493 0.60746985 >alpha result interpretation: from the analysis conducted through chi-square test, since the p-value is more than alpha, the alternative hypothesis (h1) is thereby rejected. therefore, we can conclude that investors gender and impact of the pandemic on their regular income are not significantly associated. test objective 4: to find whether investor’s gender and their reaction when the financial markets start to perform badly after making an investment are significantly associated. h0: investor’s gender and their reaction when the financial markets start to perform badly after making an investment are not significantly associated. h1: investor’s gender and their reaction when the financial markets start to perform badly after making an investment are significantly associated. table 4. reaction on the poor performance of market reaction on the poor performance of market column labels row labels invest more funds to take advantage of the lower price, expecting future growth. monitor the investment and wait to see if it improves. transfer money to a more secure investment product to reduce the risk of further losses. grand total female 5 22 10 37 male 18 45 21 84 prefer not to say 1 1 grand total 23 67 32 122 test statistic row labels invest more funds to take advantage of the lower price, expecting future growth. monitor the investment and wait to see if it improves. transfer money to a more secure investment product to reduce the risk of further losses. female 0.559428637 0.1389541 male 0.243515995 0.060485902 1.002384635 df 1 left p-value 0.683265817 right p-value 0.316734183 0.633468367 >alpha result interpretation: from the analysis conducted through chi-square test, since alpha is way lesser than the p-value, the alternative hypothesis (h1) is thereby rejected. therefore, we can conclude that investors’ gender and their reaction when the financial markets start to perform badly after making an investment are not significantly associated. test objective 5: to find whether investor’s age and the person whose advice they take before investing are significantly associated. h0: investor’s age and the person whose advice they take before investing are not significantly associated. sendilvelu & parthasarathy, indian journal of finance and banking 9(1) (2022), 184-191 189 h1: investor’s age and the person whose advice they take before investing are significantly associated. table 5. source of advice before investing source of advice before investing column labels row labels family members friends or colleagues investment advisors myself grand total 25-35 13 25 15 23 76 35-45 2 1 2 2 7 45-60 1 2 3 above 60 3 1 4 below 25 9 7 11 5 32 grand total 28 33 28 33 122 test statistic row labels healthcare retirement life tax savings wealth creation grand total below 25 to above 60 0.37328015 0.316722553 1.819708724 1.544 grand total 0.13272183 0.112612463 0.647007546 0.54898 5.495024651 df 3 left p-value 0.861063499 right p-value 0.138936501 0.277873003 >alpha result interpretation: from the analysis conducted through chi-square test, since alpha is lesser than that of the p-value, the alternative hypothesis (h1) is thereby rejected. therefore, we can conclude that investor’s age and the person whose advice they take before investing are not significantly associated. test objective 6: to estimate the relationship between investor’s professions, having a household budget, and preference towards having higher returns on investment even if the risk is high. h0: the variable investor’s profession, having a household budget, and preference towards having higher returns on investment even if the risk is high, does not have a significant relationship. h1: the variable investor’s profession, having a household budget, and preference towards having higher returns on investment even if the risk is high, have a significant relationship. table 6. relationship between investor’s profession, having a household budget, and preference towards having higher returns on investment even if the risk is high regression analysis overall fit multiple r 0.064657 aic 173.4307 r square 0.004181 aicc 173.7726 adjusted r square -0.01256 sbc 181.8428 standard error 2.011017 observations 122 anova alpha 0.05 df ss ms f p-value sig regression 2 2.020362 1.01018 0.249786 0.779375 no residual 119 481.2583 4.044188 total 121 483.2787 coeff std err t stat p-value lower upper vif intercept 3.037368 0.431394 7.040814 1.32e-10 2.183164 3.891573 does your household have a budget? 0.070377 0.099582 0.706721 0.481122 -0.12681 0.267559 1.010572 i would prefer a higher return on investment even though it is riskier -0.01016 0.122282 -0.08307 0.933932 -0.255229 0.231973 1.010572 result interpretation: from the regression analysis conducted we can conclude that: the variablesinvestor’s profession, having a household budget, and preference towards having higher returns on investment even if the risk is high, do not have a significant relationship, as a result of p-value being much greater than what alpha is (5%). test objective 7: to test whether investors’ profession and the avenue of investment they feel is safer after the covid pandemic are correlated. sendilvelu & parthasarathy, indian journal of finance and banking 9(1) (2022), 184-191 190 h0: the investor’s profession and the avenue of investment they feel are safer after the covid pandemic is not correlated. h1: profession and the avenue of investment they feel are safer after the covid pandemic is correlated. table 7. correlation between investor’s profession and the avenue of investment they feel are safer after the covid pandemic correlation coefficients pearson 0.132652 spearman 0.110255 kendall 0.10127 pearson's coeff (t test) pearson's coeff (fisher) alpha 0.05 rho 0 tails 2 alpha 0.05 tails 2 corr 0.132652 std err 0.09048 corr 0.132652 t 1.466085 std err 0.090909 p-value 0.145241 z 1.45564 lower -0.04649 p-value 0.145492 upper 0.311797 lower -0.0462 upper 0.0303262 result interpretation: from the correlation analysis, investors’ profession and the avenue of investment they feel are safer after the covid pandemic; we can conclude that the two variables are positively correlated (corr is 0.13). suggestions unforeseen circumstances can happen similar to how the situation arose during the pandemic, and it does not matter whether the investors are from the banking or non-banking sectors. at times like this, the way investors look at their money has changed as more importance is given to health and wealth. so, we suggest that investors both banking and non-banking create an emergency fund in the ongoing environment across all genders and make it their apex financial goal. since we had seen both men’s and women’s behaviour in savings and investing has changed during the pandemic, the investors must prioritise their financial health and wellbeing. conclusion the covid-19 outbreak has had a significant financial impact. lockdown and social isolation have become unpleasant due to the vast population and the economy's challenges, notably in the financial sector. government tactics to limit the spread of covid-19, such as lockdown and the stock market crash, have greatly harmed individual investors' willingness to invest in mutual funds and the stock market. the major goal of covid-19 is to look into the impact of investing behaviour on the financial market. the relationship between investment behaviour and a financial market will be investigated in this study. financial risk tolerance is regarded an attitude component while making financial decisions, according to the study. the result is that financial risk assessment and how variations in the rate of profitability affect financial risk tolerance drive the rate of profitability. when making investment decisions in stocks or any other financial commodity, the ability to risk-taking tolerance is defined by the growth of high return over financial investment. covid-19's effects on risk perception and general risk tolerance can be examined, according to the findings. business sectors have been badly impacted as a result of global implications, resulting in investor uneasiness. as a result, financial planning and forecasting may be done quickly and effectively, benefiting both financial planning and the market. the efforts taken to avoid covid 19 had a direct impact on the investor's savings and investment behaviour, according to the research. while both genders experienced a drop in investment, the difference in percentage decline was not substantial. it is also found that furthermore investment behaviour didn't vary with investor age. this study has faced a couple of limitations in that the views of respondents are subjected to their bias and prejudice. the number of employees in the banking and non-banking sector is very huge and therefore the views cannot be generalized on the basis of only 122 respondents. the years of experience also play a very vital role in understanding behavioural finance which is not considered in this scenario. author contributions: conceptualization, k.s.; data curation, s.p. and k. s.; methodology, k.s.; validation, s.p. and k. s.; visualization, k.s.; formal analysis, k.s.; investigation, s.p. and k. s.; resources, k.s.; writing – original draft, k.s.; writing – review & editing, s.p. and k. s.; supervision, k.s.; software, k.s.; project administration, s.p. and k. s.; funding acquisition, s.p. and k. s. 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. 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 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(2021). impact of investment behaviour on financial markets during covid-19: a case of uk. economic research-ekonomska istraživanja, 1-19. 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking vol. 9, no. 1; 2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 129 a study on npas of selected private & public sector banks in india jayraj javheri assistant professor department of mba sanjivani college of engineering kopargaon-423 603, india e-mail: jayrajjavheri@gmail.com https://orcid.org/0000-0001-7868-6442 dr. ravindra gawali associate professor department of mba amrutvahini institute of management and business administration sangamner-422 605, india e-mail: ravindra_gawali@rediffmail.com https://orcid.org/0000-0001-5409-3319 received: december 08, 2021 accepted: january 31, 2022 online published: february 13, 2022 doi: 10.46281/ijfb.v9i1.1610 url: https://doi.org/10.46281/ijfb.v9i1.1610 abstract banks play a very important role in any financial system. it is the backbone of the indian financial system. the rising npa’s of the banks in india for the last 5 years has really posed a threat to the indian financial system. recently standard & poor global rating agency has expected the npa’s of indian banks to remain elevated at 11.5 %. npa helps to measure the performance of any bank. it is quite evident that the recent covid pandemic has badly hit not only india but the entire world to a greater extent. the public and private sector banks in india both have been adversely affected by the rising npa. through this research, it has been observed that public sector banks are more adversely affected than private sector banks. my study focus on the trend & differences in the non-performing assets of the selected indian public and private sector banks. keywords: npa, finance, banks, rating, financial system. jel classification codes: e, g. introduction the indian banking sector plays a very important role in the indian financial system. it acts as a link between lender and borrower. banking in india has played a very important role to develop the saving habits among the masses. it helped to channelize the savings of the people into investment. in the past three decades indian banking has outperformed and helped to develop the financial system in the country. nevertheless indian banking system has witnessed many revolutionary changes, for e.g. nationalization of 14 major private banks in the year 1969. the banking sector in india currently consist https://orcid.org/0000-0001-7868-6442 https://orcid.org/0000-0001-5409-3319 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 130 of public sector banks, private sector banks & foreign banks. in any economy banks plays a very major role in developing the financial system. failure of banks reflects the failure of economy & it has many adverse impact across the sectors. strong and healthy financial system increase the confidence in the economy and thus help to further increase investment and gdp of the country. in the last 5 years indian banks are witnessing the increase in number of npas. a high level of npas impact the liquidity & profitability of bank (das & uppal, 2021). credit creation by banks also get hampered due to the rising npas. continuity in increased npas adversely impacts the economy, whereby the confidence in economy is lost and investment starts decreasing which in turn affects gdp of the economy. it has been found that npa of public sector bank is higher than private sector bank (joseph & prakash, 2014; miyan, 2017). rise in npa levels of banks have also impacted their profitability (wadhwa, 2020). despite of different mechanism introduced by government of india for the quick debt recovery such as debt recovery tribunals throughout the country but this debt recovery tribunal performance has been unsatisfactory from the evidence that the level of npa has increased despite of debt recovery tribunals (alamelumangai & sudha, 2019). a revolutionary change was bought in banking sector by bringing the sarfaesi act, 2002 as a tool to expedite the loan recovery process for the indian banks. the performance of sarfaesi act, 2002 has been far more satisfactory than drts in loan recovery process. to overcome the shortcomings of the drts and sarfaesi act, 2002, insolvency bankruptcy code was passed in the year 2016 to overcome the npa problem of the indian banking sector and give the time bound solution for the npa recovery process. ibc saves the banking system from the clutches of willful defaulters and make the promoters understood that they can no longer swindle the banks. the performance of ibc during the last four years has been excellent in institutionalizing a mechanism for faster implementation of insolvency laws in india, much more can be done in the coming years (kumara, 2018). non-performing assets (as per the rbi announcement) a non-performing asset (npa) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. classification of npas (as per the rbi guidelines)  substandard assets: an asset which remains as npa for less than or equal to 12 months.  doubtful assets: an asset which remain as npas for more than 12 months.  loss of asset: an asset where loss is identified by the bank or rbi. asset whose value is uncollectible, but there may be little value remaining in it. major causes of npas. external factors  ineffective recovery tribunal  natural calamities  poor industrial growth  willful defaults  changes made in the government policies. internal factors  poor lending process  insufficient technology  poor credit appraisal system  inefficient management. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 131 literature review joseph and prakash (2014) this paper deals with the comparative analysis of advances & non performing assets of public & private sector banks. 5 years data from the year 2008-2013 has been used for analyzing. it was observed that public sector banks are having more npas than private sector banks. secondary data was used for the research purpose. chaudhary and sharma (2011) the paper focus on comparing npa data of public & private sector banks. the trend of npa also have been studied and it was observed that, public sector banks are unable to compete with private sector banks and needs to improve its performance in management information system and also there is a larger need of imparting training to employees of public sector banks to make them competitive in comparison with private sector bank employees. das and dutta (2014) the study is done on comparing the npas of public sector banks only. 26 public sector bank data on npa was used. the comparison was done between sbi associates and other public sector banks. using the anova test it was found that there is no significant difference in npas of sbi associates and other public sector banks. kaur and saddy (2011) the paper mainly focused on understanding the concept of npa & factors contributing towards npa. it also studies how npa affect banking operations. mittal and suneja (2017) the paper mainly examine the level of npas in the indian banking sector and then analyzing the causes for increasing npas. the study also concludes that the magnitude of npa in public sector banks is more than private sector banks. miyan (2017) comparative analysis of selected private and public sector bank has been done on various performance parameters such as gnpa, roa, and nnpa. 5 years data was use for analysis from 2011-2016. it was found that performance of psu banks is way behind the private sector banks. ttest was used to find the significant difference. kumar et al. (2021) the study examines the impact of npa on profitability of banks. only 2 banks hdfc & sbi were used for comparison. it was found that increase in the provisions for npa declines the profitability of banks. it was also found that if npas are reduced then the public sector banks could have a higher profitability. singh (2013) the magnitude of npa is comparatively higher in public sectors banks than private sector banks. to improve the efficiency and profitability of banks the npa need to be reduced and controlled. das and dutta (2014) the study is done on comparing the npas of public sector banks only. 26 public sector bank data on npa was used. the comparison was done between sbi associates and other public sector banks. using the anova test it was found that there is no significant difference in npas of sbi associates and other public sector banks. kaur and saddy (2011) the paper mainly focused on understanding the concept of npa & factors contributing towards npa. it also studies how npa affect banking operations. mittal and suneja (2017) the the paper mainly examine the level of npas in the indian banking sector and then analyzing the causes for increasing npas. the study also concludes that the magnitude of npa in public sector banks is more than private sector banks. miyan (2017) comparative analysis of selected private and public sector bank has been done on various performance parameters such as gnpa, roa, and nnpa. 5 years data was use for analysis from 2011-2016. it was found that performance of psu banks is way behind the private sector banks. ttest was used to find the significant difference. boddu (2019) this study compares the loans and advances, npas of both public and private sector banks in india to explore the preventive measures to control the rising npas. suitable preventive measures help banks to decrease the level of npas in india. a lower level of npas helps the banks in consolidating their position, increasing confidence to depositors and increasing market share of the banks. kumar et al. (2021) the study examines the impact of npa on profitability of banks. only 2 banks hdfc & sbi were used for comparison. it was found that increase in the provisions for npa https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 132 declines the profitability of banks. it was also found that if npas are reduced then the public sector banks could have a higher profitability. sahoo and majhi (2020) the paper analyze the recovery mechanism of npas with its three important wings i.e. recovery through lok adalat, debt recovery tribunals (drts) and securitization and reconstruction of financial assets and enforcement of securities interest act (sarfasei act) and its impact on npa. objectives of the study  to ascertain the trends in the level of npas  to know the position of private and public sector banks in respect of npas of last 10 years.  to compare the level of npas of selected private & public sector banks in india.  to suggest few measures to improve the level of npas of banks. research methodology as per the literature review it has been observed that the present study mainly focus on npas comparison of public sector banks and private sector banks. my study also focus on comparison of npa level of private and public sector banks. only selected prominent banks from each private & public sector is taken for the study. last 10 years data has been used for the meaningful study on npas. the secondary data has been used for analysis which is mainly taken from authentic sources such as rbi publications etc. the data has been analyzed in tabular form, trend analysis and anova test has been used to find out significant difference. data analysis table 1. gross non-performing assets percentage to gross advances of the private sector banks for the year 2011-12 to 2020-21 hdfc icici axis year gross npa1 gross advances2 gross npa to gross advances percentage gross npa gross advances gross npa to gross advances percentage gross npa gross advances gross npa to gross advances percentage 2020 12559.38 1002726.8 1.25 40829.09 676290.3 6.04 26604.1 588797.7 4.52 2019 11135.91 827334.92 1.35 45676.04 618985.2 7.38 27146.45 511096.4 5.31 2018 8506.87 664254.34 1.28 53240.18 537945.1 9.9 30876.32 454550.9 6.79 2017 5825.88 558566.64 1.04 42159.38 482460.4 8.74 20045.65 384723.4 5.21 2016 4297.6 467579.38 0.92 26221.25 450182.6 5.82 5848.48 342312 1.71 2015 3265.81 367887.84 0.89 15094.69 398962 3.78 3866.88 284008.7 1.36 2014 2775.37 304963.21 0.91 10505.84 347211.5 3.03 3001.42 232498.8 1.29 2013 2048.06 241306.07 0.85 9607.75 298416.4 3.22 2371.41 198900.7 1.19 2012 1814.9 190968.9 0.95 9292.6 192333.8 4.83 1720.2 145904.9 1.18 2011 1660.32 156705.26 1.06 9815.96 169181.8 5.8 1586.99 124119.8 1.28 source: rbi reports observations  gross advances of hdfc bank is comparatively more than icici & axis bank, whereas gross advances of icici bank are comparatively more than that of axis bank. 1 all outstanding loans and advances including advances for which refinance has been received but excluding rediscounted bills, and advances written off at head office level. 2 sum of all loans given by the bank defaulted by the borrowers. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 133  gross npas of hdfc bank are comparatively low than that of than icici & axis bank, whereas icici npa are highest in comparison of other two banks.  all these bank have the higher npas for the year 2019 & 2020 mainly due to corona pandemic.  all the banks have seen decrease in npas in the year 2020 in comparison to the year 2019.  the financial position of hdfc in terms of gross advances and npas is far better than other two banks. table 2. gross non-performing assets percentage to gross advances of the public sector banks for the year 2011-12 to 2020-21 sbi bob pnb year gross npa gross advances gross npa to gross advances percentage gross npa gross advances gross npa to gross advances percentage gross npa gross advances gross npa to gross advances percentage 2020 149091.85 2422844.77 6.15 69381.43 738096.45 9.40 73478.76 516928.83 14.21 2019 172750.36 2293454.12 7.53 48232.77 501706.39 9.61 78472.70 506194.30 15.50 2018 223427.46 2048387.31 10.91 56480.39 460744.36 12.26 86620.05 471296.60 18.38 2017 112342.99 1627273.00 6.90 42718.71 408510.92 10.46 55370.44 441751.36 12.53 2016 98172.80 1509499.82 6.50 40521.04 405517.24 9.99 55818.33 432775.04 12.90 2015 56725.33 1335423.71 4.25 16261.45 437280.38 3.72 25694.86 392422.15 6.55 2014 61605.35 1245122.44 4.95 11875.90 403699.43 2.94 18880.06 359645.78 5.25 2013 51189.39 1078557.11 4.75 7982.58 332811.32 2.40 13465.79 315244.03 4.27 2012 37156.00 757888.60 4.90 3881.80 205453.60 1.89 8689.90 276107.70 3.15 2011 23073.52 662444.06 3.48 2786.23 171801.48 1.62 4379.39 243998.78 1.79 source: rbi reports  gross advances of sbi bank is comparatively more than bank of baroda & punjab national bank.  gross npas of sbi bank are comparatively low than that of than punjab national bank & bank of baroda, whereas punjab national banks npa are highest in comparison of other two banks.  since 2016 there is a considerable rise in the gross npas of all the above banks.  the financial position of sbi bank in terms of gross advances and npas is comparatively better than other two banks. figure 1. gross npas of public sector banks source: rbi reports 0 5 10 15 20 g ro ss n p a % year gross npas of public sector banks sbi bank of baroda pnb https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 134  there is considerable rise in the level of npas of all the above banks since 2016.  gross npas of punjab national bank has reached the highest to level of around 18 % in the year 2018.  since 2018 slight decline in the gross npas percentage could be seen in all the above banks. figure 2. gross npas of private banks source: rbi reports  there is considerable rise in the level of npas of all the above banks since 2016.  gross npas of icici bank has reached the highest to level of around 10 % in the year 2018.  since 2018 slight decline in the gross npas percentage could be seen in all the above banks.  gross npas of hdfc banks is more or less stable since 2011 to 2020. figure 3. gross npa % of public sector banks trend up to 2025 source: rbi reports  up to the year 2025 an upward trend could be seen of the npas of pnb and bob, whereas sbi bank could be seen a flat level of npas till the year 2025 0 2 4 6 8 10 12 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 g ro s n p a % year gross npas of private banks hdfc icici axis 0 5 10 15 20 25 30 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 g ro ss n p a % year gross npa % of public sector banks trend upto 2025 sbi bank of baroda pnb linear (sbi) linear (bank of baroda) linear (pnb) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 135 figure 4. gross npa % of private banks & trend analysis up to 2025 source: rbi reports  up to the year 2025 an upward trend could be seen in the level of npas of icici and axis bank, whereas level of npas of hdfc bank are likely to remain stable until upcoming year 2025. figure 5. gross npas of public & private banks source: rbi reports observations  in private banks above, hdfc npas are stable throughout the years. npas of icici bank are quite high than hdfc & axis bank.  in public sector banks above, npas of punjab national bank is higher than other two banks sbi & bob. 0 2 4 6 8 10 12 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 g ro ss n p a % year gross npa % of private banks & trend analysis upto 2025 hdfc icici axis linear (hdfc) linear (icici) linear (axis) 0 2 4 6 8 10 12 14 16 18 20 hdfc icici axis sbi bob pnb private banks public banks g ro ss n p a s banks gross npas of public & private banks 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 136  all the banks whether private or public sector banks could see increasing trend in the level of npas since the year 2016 except hdfc bank whose level of npas is stable throughout the periods. table 3. performance of public sector and private sector banks. private banks public banks year hdfc bank icici bank axis bank sbi bank of baroda punjab national bank 2011 1.06 5.8 1.28 3.48 1.62 1.79 2012 0.95 4.83 1.18 4.9 1.89 3.15 2013 0.85 3.22 1.19 4.75 2.4 4.27 2014 0.91 3.03 1.29 4.95 2.94 5.25 2015 0.89 3.78 1.36 4.25 3.72 6.55 2016 0.92 5.82 1.71 6.5 9.99 12.9 2017 1.04 8.74 5.21 6.9 10.46 12.53 2018 1.28 9.9 6.79 10.91 12.26 18.38 2019 1.35 7.38 5.31 7.53 9.61 15.5 2020 1.25 6.04 4.52 6.15 9.4 14.21 observation  the performance of public sector banks is very poor in comparison of private sector bank.  hdfc is a top performer in private sector banks whereas sbi is the top performer in public sector banks.  npa level of punjab national bank are very serious in comparison of all other banks. t-test analysis a t-test is a type of inferential statistic used to determine if there is a significant difference between the means of two groups, which may be related in certain features. a t-test is used as a hypothesis testing tool, which allows testing of an assumption applicable to a population. hypothesis ho: there is no significant difference in the average values of the selected private and public sector banks. h1: there is significant difference in the average values of the selected private and public sector banks. table 4. findings of t-test analysis t-test: two-sample assuming unequal variances variable 1 variable 2 mean 3.296 7.304666667 variance 2.271337778 15.95755605 observations 10 10 hypothesized mean difference 0 df 12 t stat -2.969065558 p(t<=t) one-tail 0.005860761 https://www.investopedia.com/terms/s/statistics.asp https://www.investopedia.com/ask/answers/073115/what-assumptions-are-made-when-conducting-ttest.asp https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 137 t critical one-tail 1.782287556 p(t<=t) two-tail 0.011721522 t critical two-tail 2.17881283 as p value is less than 0.05 it can be interpreted that ho will be rejected and h1 would be accepted as there is a significant difference between the average values of npas of selected public & private sector banks. measures to reduce npas of the banks  conducting credible credit appraisal of the company before giving loan.  continuously assessing the financial position of the company after giving loan to avoid further bankruptcy and take timely action  selling off npas  use of sarfaesi act, 2002  use of insolvency bankruptcy code, 2016 importance of insolvency & bankruptcy code, 2016 in recovery of npas of the financial institutions insolvency & bankruptcy code, 2016 was introduced to resolve the claims which involved insolvent companies. although many other law were present in india to deal with the insolvency problem such as sarfaesi act, 2002, debt recovery tribunals and lok adalats. the average recovery rate after enactment of ibc.2016 has increased to around 45%. the average recovery time has also been decreased dramatically from 4 years earlier to this act. insolvency & bankruptcy code has remarkably help in speedy recovery of loans on the basis of which indian ranking in “ease of doing business” 2020 report of the world bank has improved to 63rd position from 142nd position prior to the introduction of this act. findings  the study makes it clear that all the above banks both private and public sector banks are facing serious problem of npas.  rising level of npas are impacting the profitability and liquidity of these banks.  condition of public sector banks is very poor due to rising npas.  performance of private banks is better than public sector banks in case of npas.  hdfc bank is best performer when it comes to npas. the level of npas is stable throughout the years. suggestions  evaluate cibil score of the borrower before giving any loan.  circulating information of defaulters in the society.  continuously assessing the financial position by the lender of the borrower for timely recovery or avoiding huge losses.  using the speedy dispute settlement mechanism such as insolvency & bankruptcy code, 2016 for the recovery of bad loans.  lending more to the growing sectors in the economy. conclusion the study makes it clear that all the above private& public sector banks are facing the problem of npas. npas are affecting the liquidity and profitability of these banks. icici bank has a very high rate of gross npas in private sector banks compared to other 2 private sector banks hdfc & axis bank. punjab national bank has the higher rate of npas in public sector banks and private banks. the performance of hdfc bank is far better than icici & axis bank as npa percentage of hdfc is more https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 138 or less stable since last 10 years. rising npas since last 5 years is a matter of concern for indian banking system and also indian financial system. it is equally important to take necessary steps by the banks and at government level to bring the npas down to restore the confidence in the banks. these banks should more focused on providing quality loan as “prevention is always better than cure” yes recent steps taken by government in respect of insolvency code has got some relief to the banking sector to get fast recovery of loans but this mechanism of recovery of loans is post mortem and cannot enhance the economy, ultimately giving quality loans is essential for the development of the economy and meeting its need. future scope of the study  the research can be extended to other private and public sector banks.  foreign banks can also be included in comparison of level of npas.  many variables other than npas can be used for meaningful comparison between banks such as capital adequacy ratio, liquidity ratio, profitability ratio, etc.  other statistical test could also be used to analyse the data. author contributions conceptualization: cma jayraj javheri data curation: cma jayraj javheri formal analysis: cma jayraj javheri funding acquisition: cma jayraj javheri investigation: cma jayraj javheri methodology: cma jayraj javheri project administration: cma jayraj javheri resources: cma jayraj javheri software: cma jayraj javheri supervision: ravindra gawali validation: cma jayraj javheri visualization: cma jayraj javheri writing – original draft: cma jayraj javheri writing – review & editing: cma jayraj javheri, ravindra gawali 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 alamelumangai, r., & sudha, b. 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(2020). impact of npa on profitability of banks. international journal of engineering technology and management sciences, 4(3), 1-8. 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). about:blank indian journal of finance and banking 13(1) (2023), 28-38 28 finance and banking ijfb vol 13 no 1 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa corporate governance and firms’ performance: evidence from dhaka stock exchange shaikh masrick hasan (a)1 sk. alamgir hossain (b) roushanara islam (c) md. mahedi hasan (d) (a)associate professor, department of finance, faculty of business studies, jagannath university, dhaka, bangladesh; e-mail: masrick.hasan@gmail.com (b)assistant professor, department of finance, faculty of business studies, jagannath university, dhaka, bangladesh; e-mail: alamgir2783@yahoo.com (c)associate professor, department of finance, faculty of business studies, jagannath university, dhaka, bangladesh; e-mail: roushanaraislam@yahoo.com (d)department of finance, faculty of business studies, jagannath university, dhaka, bangladesh; e-mail: mahedihasan.jnu.fin11@gmail.com a r t i c l e i n f o article history: received: 15th may 2022 revised: 27th july 2022 7th november 2022 accepted: 3rd february 2023 published: 17th february 2023 keywords: corporate governance (cg), roa, roe, eps, firm performance, board effectiveness, board of directors, audit committee. jel classification codes: a1, a30, c1, g17, y8 a b s t r a c t well-managed corporate governance mechanisms play an important role in improving corporate performance. good corporate governance is fundamental for a firm in different ways; it improves company image, increases shareholders' confidence, and reduces the risk of fraudulent activities. this research aims to investigate the relationship between corporate governance and firm performance in a sample of 58 companies listed on the dhaka stock exchange (dse) using the data of 2016-2021. for this objective, this study used a number of corporate governance indices, including board size, board independence, members of the audit committee, and board effectiveness. the impact of those indices has been analyzed on the performance indicators of a firm like eps, roa and roe. in this research, firm size and leverage ratio serve as control variables. in addition, the influence of independent factors on dependent variables has been analyzed using multiple linear regression. from the regression, the study found that board independence is a solo factor that is significant on the firm performance and has a positive impact. this research also observed no statistically significant correlation between board size, board effectiveness, and audit committee on the firms’ performance. © 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 the association between the performance of firms and corporate governance is crucial. good corporate governance, one of the most often debated topics in international finance, is crucial for the success of both economical and institutional changes (akbar, 2015). companies with strong corporate governance, according to black, jang, and kim (2006), outperform than with weak governance. however, the results are not definite. many authors (leng, 2004; xu & wang, 1999; brown & caylor, 2004; cheema & din, 1970) found a positive relationship between firm performance and corporate governance in their literature but other researchers (larcker, richardson, & tuna, 2007; kosnik, 1987) reveals that there is no significant relationship between these facts. based on research an effective board of directors can greatly minimize agency expenses which also supports another claim that there is a positive relationship between corporate governance and firm performance. a large sample of us corporations (brown & caylor, 2004) found a significant association between corporate governance and the firm’s performance, dividend payout, and valuation. similarly, lee, rosenstein, rangan, and davidson (1992) noted that the existence of external directors boosts stockholder wealth in management buyouts (lee et al., 1992). weisbach (1988) also discovers that when presented with outside directors, chief executive officers are more inclined to step down due to poor firm performance (weisbach, 1988). beasley (1996) demonstrates that the existence of outside directors and an audit 1corresponding author: orcid id: 0000-0002-5321-119x © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i1.1947 to cite this article: hasan, s. m., hossain, s. a., islam, r., & hasan, m. m. (2023). corporate governance and firms’ performance: evidence from dhaka stock exchange. indian journal of finance and banking, 13(1), 28-38. https://doi.org/10.46281/ijfb.v13i1.1947 https://orcid.org/0000-0002-5321-119x http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i1.1947 https://orcid.org/0000-0002-2756-0329 https://orcid.org/0000-0003-4055-7885 https://orcid.org/0000-0003-3163-2601 hasan et al., indian journal of finance and banking 13(1) (2023), 28-38 29 committee in a firm lowers the risk of financial statement falsification (beasley, 1996). according to denis and sarin (1998) if companies significantly increased the share of independent directors, the stock price returns would be above average (denis & sarin, 1998). others, in contrast to this research, have not been successful in demonstrating a powerful association between the aspect of corporate governance and firm performance. in particular, larcker et al. (2007) found no consistent relations between corporate governance and firm performance, even if they acknowledge that it may be challenging to develop accurate and trustworthy measures of corporate governance (larcker et al., 2007). in addition, bhagat and black (1998) discover no association between the proportion of outside directors and return on assets (roa) or turnover ratio (bhagat & black, 1998). according to yermack (1996), who focuses on another facet of the board of directors, there is a negative link between firm performance and board size (yermack, 1996). although the relation of firm performance with corporate governance remains uncertain, it is a standard exercise for businesses to create a board of directors to oversee operations and protect shareholders (kosnik, 1990). additionally, corporate economies in developing countries vary regularly from those in more established ones, like the usa and the uk, in terms of dynamics and development. examples of the organizational arrangements that differ between developed and developing countries include the existence of fundamental legal systems, lower market sizes, corporate ownership, political stability, and the structure of individual economic systems (gul & tsui, 2004). the research conducted on underdeveloped nations has shown contradictory findings. for instance, (leng, 2004) shows that board independence, ownership concentration, and leverage have a detrimental impact on the performance of malaysian enterprises. however, they find that board size and the presence of institutional investors positively affect the performance of firms. using data from chinese enterprises, xu and wang (1999) established a favourable association between corporate governance and firm performance (xu & wang, 1999). bangladesh, another emerging nation, is considered in this research to figure out the correlation between board features and business success. another fact why bangladesh, as it varies significantly in terms of institutional structure of the two emerging nations, malaysia and china. additionally, bangladesh, situated in south-east asia, has distinct natural qualities along with political instability and economical vulnerability. in contrast to others, especially educational attainment, or political allegiance influence board selection, which emphasis is distinct? now, bangladesh offers an ideal setting for investigating the correlation of corporate governance with business performance. four categories comprise the remaining sections of the article. section two (2) examines corporate governance in bangladesh, analyzes pertinent literature, and proposes a number of testing hypotheses. the study plan is described in section three (3). section 4 presents the empirical results. finally, section 5 concludes with a summary of the results and a description of conclusions. literature review bangladesh is one of the most developing countries in this era. so the history of corporate governance is not very old in bangladesh. about 60 years ago, there were few companies incorporated under the companies act. during the bangladesh liberation war, many industries and business organizations were abandoned, and the government of bangladesh took possession of some of these assets by establishing the bangladesh chemical industries corporation (bcic) and the bangladesh steel and engineering corporation (bsec). after the war, during the 1980s, the government of bangladesh took the privatization policy and after that, the private sector played a significant role in the economic growth (bhuiyan, ullah, & biswas, 2007). without any corporate scandals, the stock market of bangladesh was crushed in 1996 which is remembered worth. the bangladesh bank order of 1972, the bank companies act of 1991, the companies act of 1994, the securities and exchange commission act of 1993, the financial institutions act of 1993, the securities and exchange ordinance of 1969, and the bankruptcy act of 1997 are the corporate legal entities acts currently in bangladesh (siddiqui, 2009). the international standards on auditing (isa) and international accounting standards (isa) were adopted by the institute of chartered accountants of bangladesh (icmab), which are known as the bangladesh standards on auditing (bsa) and bangladesh accounting standards (bas). the institute of chartered accountants of bangladesh also published a report in 2003 name corporate governance in bangladesh, considering the corporate governance scenario of bangladesh that provide recommendations for practising corporate governance in bangladesh (bhuiyan et al., 2007). governance is derived from the latin word "gubernare," which means "to steer," and a quote pertinent to this context is "he who governs sits quietly at the stern and is seldom seen to air" (cadbury, 1993). according to cadbury (1993), corporate governance is primarily concerned with maintaining a balance between social and economic objectives, as well as communal and individual objectives. the rules of corporate governance will improve the economy by discouraging fraud and mismanagement. in 1992, sir adrian cadbury produced a report which is the first report on corporate governance, titled "the financial aspects of corporate governance" and published by "the committee on the financial aspects of corporate governance". corporate governance is defined by the authors as the system by which organizations are directed and managed. also, explain that the shareholders pick the board of directors and that the auditors will determine if proper corporate governance is in place based on their own evaluations (cadbury, 1993). the oecd (organization for economic cooperation and development) has explained corporate governance as a non-governmental organization whose goal is to achieve the shareholder's ideals, rights, and duties. the study of kosnik (1987) has diverse perspectives on corporate governance where the researcher concentrates on corporate governance's structure, methods, and procedures. this study hasan et al., indian journal of finance and banking 13(1) (2023), 28-38 30 concluded that the performance of firms in developing or underdeveloped countries is not totally influenced by corporate governance variables (kosnik, 1987). cheema and din (1970) made research on the impact of corporate governance and firm performance. in that study, they used three variables and measured the firm performance using return on assets, return on equity, earnings per share, and the ratio of current ratio and book-to-equity ratio. this research showed that there is a positive relationship between firm performance and corporate governance (cheema & din, 1970). the study made by dalton, daily, ellstrand, and johnson (1998) found a significant and positive correlation between board independence and firm performance (dalton et al., 1998). larcker et al. (2007) found no consistent relations between corporate governance and firm performance, even though they acknowledge that it may be challenging to develop accurate and trustworthy measures of corporate governance. a large sample of us corporations (brown & caylor, 2004) found a significant association between corporate governance and the firm’s performance, dividend payout, and valuation. using data from chinese enterprises, xu & wang (1999) established a favourable association between corporate governance and firm performance. increasing the firm's value is directly related to good corporate governance, said klapper and love (2004). this fact is true in both emerging and established nations (klapper & love, 2004). the corporate governance guideline, 2012 was focused on a comparative analysis of the corporate governance of bangladesh done by rahman and khatun (2017). the guideline includes some qualifications, criteria, and statements for independent directors as well as for director reports. this research also discloses some mandatory aspects like the separation of ceo duality and chairman. this study also suggests some rules and regulations such as performance evaluation of independent directors and board, risk identification methods, reporting systems, etc., that should be added to the corporate governance practice of bangladesh (rahman & khatun, 2017). another study made by habib (2016) found that the ceo duality, compensation of board members, and female board members have a positive relation with the firm performance. the author also found that board size has a negative impact on firm performance (habib, 2016). along with that, another study by rouf, (2011), found a significant positive relationship between independent directors and ceo duality with firm performance, measured by return on assets and return on equity, although a negative relation is found between the board size and audit committee with firm performance (rouf, 2011). calculating the ideal number of board members is challenging. based on the agency hypothesis, larger boards may make it harder to reach a consensus on important issues, which can have a negative impact on the organization's performance and efficiency. as a result, smaller boards are preferable (fama & jensen, 1983). it is more difficult for the firm to schedule board meetings and for the board to establish an agreement, according to cheng (2008), therefore boards with fewer members are more efficient and have the ability to make decisions more quickly. the author claims that a larger board will make it simpler for the ceo to exercise dominance inside the board, giving the ceo more say in board decisions (cheng, 2008). the resource dependency hypothesis argues that having diverse and experienced professionals on the board leads to better business outcomes. smaller boards have a positive correlation with business success because of the increased efficiency of communication between members (guest, 2009). the study deb, sarker, and siddique (2021) found that there has no statistically significant relationship between the board size and the performance of the firm. eisenberg, sundgren, and wells (1998) came to a similar conclusion for a sample of 879 finnish small private enterprises when they examined the correlation between board size and performance as assessed by return on assets (roa) while rouf (2011) found a significant negative relation between them. the effectiveness of the board's monitoring role is therefore dependent on the board's autonomy, size, and makeup. most of the research on the topic is empirical and takes the present board’s governance structure as a given phenomenon before examining its effect on the performance of businesses (john & senbet, 1998). the study made by beasley (1996) determined that the audit committee has a major influence on the firm's performance since it minimizes the business's financial misstatement, and so improves firm performance. deb et al. (2021) found a negative correlation between the audit committees and return on assets and return on equity. the audit committee has been shown to have a good effect on a firm's performance, according to klein (1998). another study made by rouf (2011) found that there is no significant relationship between the audit committee and the firm performance. many efforts to improve corporate governance mainly focus on increasing board independence. this is because boards in publicly traded companies are better equipped to execute their oversight duties, the likelihood of reduction of management collusion so that business resources are protected from being misused (black et al., 2006). independent directors, in accordance with agency theory, boost firm performance by providing objective oversight and channeling specialized knowledge toward serving the business's and its shareholders' best interests (fama & jensen, 1983). according to research by duchin, matsusaka, and ozbas (2010), a firm's performance improves when the board of directors is not tied to the management of the firm in any way. independent directors, they said, are better able to safeguard shareholder interests, reduce the impact of agency conflicts, and ensure the most efficient use of the firm's resources since they are not financially tied to management and are thus unbiased. the study was made by dalton et al. (1998) who found a significant and positive correlation between board independence and firm performance. however, an investigation by yermack (1996) and klein (1998), which contradicts dalton et al. (1998) claims that a high level of board independence has a negative effect on how well a firm performs. according to denis and sarin (1998), if firms significantly increased the share of independent directors, their stock price returns would be above average (denis & sarin, 1998). it has also been suggested that increasing the number of independent directors does not lead to better overall business results (hermalin & weisbach, 1991). however, rouf (2011) found significant positive relation of independent directors with firm performance. hasan et al., indian journal of finance and banking 13(1) (2023), 28-38 31 the duality of the ceo weakens the board's ability to effective supervision of management and increases the possibility of the ceo’s undue influence (jensen, 1993). the stewardship idea posits that having two ceos allows more rapid and effective decision-making regarding the dynamism of a firm's external environment (boyd, 1995). past research observed a connection between having a ceo who serves in multiple roles and increased firm success. separating the roles of ceo and chairman does not have an impact on corporate performance, as shown by omran, bolbolc, and fatheldin (2008) although rouf (2011) found a significantly positive relationship between the ceo duality and firm performance. according to the research by haniffa and hudaib (2006), having two ceos may have a detrimental effect on a firm's performance, while having two independent boards can improve performance significantly. they concluded that the dual nature of the situation is due to loopholes in the law that allowed for lax oversight of businesses' internal control units. the study of rostami, rostami, and kohansal (2016) on the tehran stock exchange, is to identify the effect of corporate governance on stock return and return on assets. for that, they used 469 firms and collect samples as yearly observations for 7 years. they used the least square method to find out the effect. the authors found that there is a significant positive relationship of return on assets with the variable of board independence, ownership concentration, ceo tenure, and ceo duality (rostami et al., 2016). on the other hand, kumalasari and pratikto (2018) made a study to identify the direct effect of good corporate governance on corporate value, good corporate governance on return on assets and return on equity, and the indirect effect of good corporate governance by using return on assets and return on equity. in that study, they found that good corporate governance has a significant positive effect on return on assets, and return on assets has a significant positive effect on corporate value (kumalasari & pratikto, 2018). the study by brown and caylor (2008) investigate the dataset from iss (institutional shareholder service) and found 51 provisions of corporate governance. in this study, authors select 6 provisions of corporate governance and use a regression model to identify the effect. they found a significantly positive relationship between return on assets and corporate governance provisions (brown & caylor, 2008). on the other side, a study by bhagat and black (1998) found that there is no significant relationship between the return on assets and outside directors. another research by sheikh, wang, & khan (2013) investigates the impact of corporate governance on pakistani firms’ performance. the authors used board size, outside directors, chief executive director duality, ownership concentration, and managerial ownership as influential factors. this study concluded that board size is significantly positive with return on assets, whereas outside directors are negatively related. moreover, the study also found that leverage is negatively related to the return on assets (sheikh, wang, & khan, 2013). another study by deb et al. (2021) found a positive relationship between corporate governance and return on assets. a study of board characteristics and earnings per share to identify the effects of corporate governance was done by shittu, ahmad, and ishak (2016). for that analysis, they used 6-year period data and used ordinary least square regression. this study found that eps is significant at 1% level of significance and has a relationship between board size, and sharia board meetings, but found a negative relationship between eps and sharia board size (shittu et al., 2016). however, deb et al. (2021) study found no statistically significant relationship between board size and the performance of the firm, a negative correlation between the audit committee and return on assets and return on equity, and lastly a positive relation between corporate governance and return on assets. only a few researchers like shittu et al. (2016); sheikh et al. (2013) show the relationship between corporate governance and earnings per share. there is no research in bangladesh showing the relationship between corporate governance and earnings per share. this study fills the research gap by showing the relationship between corporate governance and earnings per share. materials and methods variable description many authors use different types of variables to identify the impact of corporate governance on firm performance. here are a few dependent and independent variables. the dependent variables are: return on assets, return on equity, and earnings per share. the independent variables are board size, board independence, audit committee, and board effectiveness. the following variables used in this study are discussed concisely: dependent variables return on asset: (roa) is a ratio used to determine how much net profit may be generated from all assets held and invested by a business (kumalasari & pratikto, 2018). it is the ratio comparable with net income to total assets (ahmed, sultana, chowdhury, akhter, & alam, 2017; makhlouf, laili, basah, & ramli, 2017). in a study, andreou, louca, and panayides (2014) calculated the return on assets by dividing the total assets by operating profit before depreciation and used the annual data for that calculation (andreou et al., 2014). the formula is – return on assets (roa) = net income / total assets return on equity: (roe) is the ratio of a firm's net income to its total equity (kumalasari & pratikto, 2018). return on equity is the ratio that is comparable to net income to total equity (buallay, hamdan, & zureigat, 2017; ahmed et al., 2017). the formula is – return on equity (roe) = net income / total equity hasan et al., indian journal of finance and banking 13(1) (2023), 28-38 32 earnings per share: (eps) is the proportion of a firm's net income allocated to every outstanding share of ordinary stock (jorgensen, lee, & rock, 2013). earnings per share is the ratio that is found to be net income divided by the number of total outstanding shares (ahmed et al., 2017). the formula is – earnings per share (eps) = net income/ weighted average of shares outstanding independent variables board size (bs): it is the total member, represents in number, of executive and non-executive directors on the board (deb et al., 2017; samaduzzaman et al., 2015). board independence (bi): the proportion of independent non-executive directors on the board indicates the number of independent directors (fama & jensen, 1983). audit committee (ac): the committee which oversees the firm’s financial statements and reporting and the measurement is how many members are in the audit committee (samaduzzaman, zaman, & quazi, 2015). board effectiveness (be): it is the frequency of meetings held by the board of directors that is measured by the number of board meetings held in a year (makhlouf et al., 2017; arora & sharma, 2016). control variables firm size (fs): it is the total assets of the firm, which is measured by the natural logarithm of the total assets (mwambuli, 2019; ahmed & hamdan, 2015). firm leverage (lev): it is the portion of debt in a capital structure which is measured by the total debt/total assets (mwambuli, 2019; ahmed & hamdan, 2015). hypotheses development deb et al. (2021) found that there has no statistically significant relationship between board size and performance of the firm. on the other hand, rouf (2011) found negative relation of board size and firm performance. another study made on saudia arabia by buallay et al. (2017) that used data from 2012 to 2014 for 171 listed companies. in that study, they found that the largest shareholder and independent directors have no significant impact on firm performance. kosnik (1987) showed that the performance of firms is not totally influenced by corporate governance variables. this finding also support the study made by rouf (2011). in that study rouf (2011) found that there is no significant relationship between audit committee and firm performance. in all empirical studies, discussed in review, researchers try to find a relation between a ceo who serves in multiple roles with firm success. they also focus on the separation roles of ceo and chairman that have no impact on corporate performance (omran et al., 2008). based on the above discussion, the hypothesis is made: h0 = the corporate governance variables have no impact on the firm’s performance fama and jensen (1983) note that controlling agency expenditures is one of the essential responsibilities of the board of directors (fama & jensen, 1983). dalton (1998) consider that larger board of director has a valuable impact on the firm performance and decision-making. in contrast, lipton and lorsch (1992), beasley (1996), jensen (1983), believe that small board of director has the greatest impact on decision-making and make meeting efficient and everyone can give their opinion properly which also affect the firm performance. depending on the above discussion, the hypothesis is made: h1a = there is a significant relationship between the board size and the firm performance. fama and jensen (1983) contend that the independence of the board is the most effective internal control tool for observing top-level management. effective board autonomy has the biggest influence on the success of the firm (fama & jensen, 1983). on the contrary, conyon and peck (1998) demonstrated that independent directors are outside directors who have less impact on performance. because they have less inducement to observe the management and to defend the shareholder rights. based on the following discussion, the hypothesis is made: h1b = there is a significant correlation exists between the percentage of independent directors and firm performance the audit committee has a critical role in the performance of a firm’s because it reviews the internal operations, recommends the appointment of external auditors, improves the financial statements’ integrity, and observes the auditor’s independence, and effectiveness helps to achieve the firm goals successfully and proficiently (subramaniam, stewrt, ng, & shulman, 2013). therefore, based on the following discussion the hypothesis is made: h1c = there is a significant relationship between the audit committee members and firm performance. hasan et al., indian journal of finance and banking 13(1) (2023), 28-38 33 the effectiveness of the board is determined by the number and frequency of board meetings conducted by the board of directors, as well as their diverse decisions on a variety of issues. according to lipton and lorsch (1992), when board members meet regularly, they are better able to address the firm's most pressing concerns and oversee management. moreover, frequent board meetings generate the costs like travel expenses and director fees and waste managerial time (arora & sharma, 2016). based on the following discussion, the hypothesis is made: h1d = there is a significant relationship between the board meeting frequency and firm performance. methodology up to 2022, the dse (dhaka stock exchange) will list 348 companies. the study's population consists of the entire number of listed companies. the sample for this research consists of companies listed on the dse. for 2016-2021, data is gathered from a sample of 58 businesses across 13 sectors2. financial institutions (banks and non-bank) are excluded because this regulated sector is expected to have essentially distinct accrual and cash flow procedures. additionally, this study remove companies that have inadequate data to estimate dependent and independent variables. the annual reports of companies are the finest source of information. therefore, the majority of the study is based on secondary data acquired from the companies' annual reports and websites. data analysis methods four qualities of the board of directors are regarded as fundamental independent variables in corporate governance (fama & jensen, 1983). they are (i) directors in the board (bs); (ii) independent directors, which represent board independence (bi); (iii) audit committee (ac); and (iv) board meetings conducted, which represent board effectiveness (be). the control variables are leverage and firm size. several studies (e.g., ramaswamy, 2001; frank & goyal, 2003) have shown that the size of a firm might affect its success. fama and french (1995), for instance, indicate that, on average, smaller companies have a lower roe than bigger ones. as a result, the business size is one of the widely used variables to measure the performance of firms; the natural logarithm of total assets is used to measure fir size. because leverage affects business performance via debt holders' monitoring actions, it is measured as total liabilities divided by total assets. roa, eps, and roe are seen as dependent variables (ahmed et al., 2017). multiple regression analysis determines the relationship between explanatory factors and firm performance. in addition, the correlation analysis is performed to determine the relationship between variables. three sets of regression equations are developed for hypothesis testing which are shown below epsi = a+ b1 bs + b2bi + b3ac + b4be+ b5fs, + b6lev + ε -------------(i) roai = a+ b1 bs + b2bi + b3ac + b4be+ b5fs, + b6lev + ε -------------(ii) roei = a+ b1 bs + b2bi + b3ac + b4be+ b5fs, + b6lev + ε --------------(iii) where, eps, roa and roe stand for earning per share, return on asset and return on equity, respectively. bs stands for board size, bi stands for board independence, ac stands for audit committee, be stands for board effectiveness, fs stands for firm size and lev stands for firm leverage. in above all three regression models, firm size and frim leverage variables are used as control variables. results and discussions descriptive statistics table 1 shows descriptive statistics of all the variables. the data for 2016-2021 and select 58 companies from 13 sectors excluding the financial sector. the mean of directors on the board is 8.21; among them about 2.16 are independent members which is more than the minimum level. the average size of the firms is 22.89, their eps is 8.34 taka, their roa or return on assets is 4.01 percent, and their roe or return on equity is 6.50 percent. with an average debt-to-equity ratio of 49 percent, firms in bangladesh have a substantially elevated risk of default. except for leverage ratio (lev) and members of audit committee (ac), the medians of all other variables are below their respective means. this suggests the sample of the variables are skewed. the standard deviations of all variables are acceptable and quite minimal. table 1. descriptive statistics of all variables for the period 2016-2021 no. of obs mean sd median min max dependent variables: earnings per share (eps) 696 8.34 16.63 2.20 -8.45 98.69 return on assets (roa) 696 0.04 0.14 0.03 -0.80 0.54 return on equity (roa) 696 0.06 0.54 0.05 -3.42 1.90 independent variables: board size (bs) 696 8.21 2.21 8.00 5.00 16.00 2 cement, ceremic, engineereing, food & allied, fuel & power, it, jute, paper & printing, pharmaceuticals & chemicals, services & real estate, tannery industries, telecommunication and textile hasan et al., indian journal of finance and banking 13(1) (2023), 28-38 34 independent directors (bi) 696 2.16 0.87 2.00 1.00 5.00 members of audit committee (ac) 696 3.84 0.93 4.00 3.00 7.00 board effectiveness (be) 696 8.91 5.52 7.00 4.00 37.00 control variables: firm size (fs) 696 22.89 1.69 22.81 18.57 26.06 leverage (%) (le) 696 0.49 0.22 0.49 0.04 0.86 notes: the above table shows the descriptie statistics of the mentioned variables using data from 2016 to 2021. row shows the name of the variables and the column shows the name of different statistics measures. correlation matrix table 2 shows the correlation among all the variables used in the study. three dependent variables, eps, roa, and roe, are found to be highly connected. a positive and strong correlation exists between independent directors and earnings per share, which indicates that firms are benefited from having independent directors. mashayekhi and bazaz (2008) found the same results. board effectiveness has a significant and positive correlation with size of business, but its relation with firm performance is insignificant. there is a positive and strong correlation between business size and performance. mashayekhi and bazaz (2008) also found the same results. the purpose of correlation analysis is to determine whether or not multicollinearity exists among independent variables. such an issue does not present in this correlation matrix. because each correlation between independent variables is below 0.70. according to fidell et al. (1996), independent variables with correlations over 0.70 should not be included in multiple regression analyses due to multicollinearity. table 2. correlation matrix bs bi ac be fs lev eps roa roe bs 1 bi 0.6263*** 1 ac 0.3300* 0.1805 1 be 0.0647 0.0065 0.0451 1 fs 0.2709* -0.1130 0.2390 0.2913* 1 lev 0.0058 -0.1110 0.0605 0.2102 0.1857 1 eps 0.1761 0.2793* 0.1647 0.0239 0.3013* 0.0379 1 roa 0.0970 0.1352 0.2334 -0.0039 0.3943*** -.1858 0.5968*** 1 roe 0.0734 0.0832 0.2054 0.0126 0.3722* -.0919 0.5354*** 0.9726*** 1 notes: table 2 is the pearson correlation matrix which describes the correlation among the variables. here one star (*) indicates that the correlation is significant at 0.05 level. two stars (**) indicate that the correlation is significant at 0.01 level. and three stars (***) indicate that the correlation is significant at 0.001 level. on the other hand, roa, roe, and eps represent the dependent variables return on assets, return on equity, and earnings per share. also, bs represents board size, bi represents board independence, be represents board effectiveness, ac represents audit committee, fs represents firm size and lev represents leverage. so these stars ***, **, and * indicate significance level at .001, .01, and .05 level based on a two-tailed test. regression results in this study, ordinary least square (ols) regression analysis is used to assess the impact of independent factors on dependent variables. the data range form 2016-2021 of 58 companies from 13 sectors excluding the financial sector is considered. there are three regression results as the number of dependent variables is three. table 3 points out the regression result of each three-regression model. the r2 value indicates that about 23%, 32% and 23% of the variation in eps, roa and roe are explained by the independent variables, respectively, which corresponds to the result of mashayekhi and bazaz (2008). all three models on eps, roa and roe are accepted at 5% significance level. the coefficients of board independence has statistically significantly positive relationship with eps after controlling the effects of firm size and frim leverage. this means that board independence impact on firm performance. however, there is no statistically significant result for board size, audit committee, and board effectiveness. that means no impact of audit committee, board effectiveness and leverage on the firm performance. table 3. regression result for firm performance (eps, roa, roe) eps (t-stat) roa (t-stat) roe (t-stat) intercept -96.1445** -0.9595*** -3.4052** (-3.1406) (-3.9501) (-3.4514) bs -1.9384 -0.0195 -0.0643 (-1.4387) (-1.8204) (-1.4805) bi 9.1832** 0.0537* 0.1624 (2.8143) (2.0754) (1.5440) ac 1.0965 0.0243 0.0803 (0.4650) (1.2964) (1.0564) be -0.2954 -0.0026 -0.0090 (-0.7484) (-0.8448) (-0.7048) fs 4.2798** 0.0458*** 0.1567** (2.9619) (3.9908) (3.3655) lev 2.2045 -0.1507 -0.3446 (0.2286) (-1.9703) (-1.1089) hasan et al., indian journal of finance and banking 13(1) (2023), 28-38 35 r2 0.2292 0.3152 0.2271 adjusted r2 0.1385 0.2346 0.1361 f 2.5269* 3.9120** 2.4969* no. of obs 696 696 696 notes: the above table shows the regression results derived from epsi = a+ b1 bs + b2bi + b3ac + b4be+ b5fs, + b6lev + ε ------------- (i), roai = a+ b1 bs + b2bi + b3ac + b4be+ b5fs, + b6lev + ε -------------(ii) and roei = a+ b1 bs + b2bi + b3ac + b4be+ b5fs, + b6lev + ε --------------(iii). here, three star (***), two (**) and one (*) indicate significance level at .001, .01 and .05 level based on a two tailed test. columns denote the dependent variables where eps stands for earning per share, roa represents return on assets; roe represents return on equity. and rows denote the independent and control variables, where, independent variables are bs is the board size; bi is the board independence; ac is the audit committee; and be is the board effectiveness;. control variables are fs is the firm size; lev is the leverage. the coefficients of board independence has a statistically significant relationship with roa after controlling the effects of firm size and leverage. that means higher board independence has a positive impact on firm performance. on the other hand, the board size, audit committee, board effectiveness and leverage have no significant relationship on firm performance. lastly for roe, only the coefficient of firm size has a statistically significant relationship that means the higher the firm size, the higher the impact of corporate governance on firm performance. and the other variables have statistically no significant relationship with firm performance. the above results are consistent with the findings of (mashayekhi & bazaz, 2008: rashid, 2010; garcía martín & herrero, 2018; shungu et al., 2014; brickley & zimmerman, 2010; hunjra et al., 2018). conclusions this research examines the impact of corporate governance indicators on the performance of firms in the emerging bangladeshi economy. in addition to eps, roa, and roe as measures of firm success, the study consider board effectiveness, board independence, audit committee membership, and board size as corporate governance indices. additionally this study consider firm size and leverage ratios as control variables. the research finally indicated that only the independence of the board has a meaningful correlation with the success of the firm. this indicates that there is a correlation between the board's independence and the firm's performance. regarding board size, board effectiveness, and the audit committee, there is no meaningful influence on the firm's performance, indicating a negative association. future research opportunities over the time, business sector in bangladesh is going to develop. so the corporate governance of the business sector will be improved. this study consider the data of 2016-2021 years only. so, if anyone wish to research, they can consider the previous long term data to identify the impact of corporate governance. author contributions: conceptualization, s.m.h., s.a.h., r.i. and m.m.h.; methodology, s.m.h.; software, s.m.h.; validation, s.m.h.; formal analysis, s.m.h., s.a.h., r.i. and m.m.h.; investigation, s.m.h., s.a.h., r.i. and m.m.h.; resources, s.m.h., s.a.h., r.i. and m.m.h.; data curation, s.m.h.; writing – original draft preparation, s.m.h.; writing – review & editing, s.m.h., s.a.h., r.i. and m.m.h.; visualization, s.m.h., s.a.h., r.i. and m.m.h.; supervision, s.m.h.; project administration, s.m.h.; funding acquisition, s.m.h., s.a.h., r.i. and m.m.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 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, b., sultana, m., chowdhury, m., akhter, s., & alam, m. 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(1996). higher market valuation of companies with a small board of directors. journal of financial economics, 40(2), 185-211. https://doi.org/10.1016/0304-405x(95)00844-5 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking vol. 9, no. 1; 2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 115 double dip pandemic impact on portfolio of investors reference to salaried employees p. madhu kumar reddy research scholar department of business management kl business school koneru lakshmaiah education foundation (deemed to be university) vaddeswaram, guntur district, india e-mail: madhukumarreddy@gmail.com https://orcid.org/0000-0002-2750-2604 dr. v s prasad kandi assistant professor department of business management kl business school koneru lakshmaiah education foundation (deemed to be university) vaddeswaram, guntur district, india e-mail: kandi.vsp@gamil.com https://orcid.org/0000-0002-9346-8192 dr. a. rama kumar former professor department of business management kl business school koneru lakshmaiah education foundation (deemed to be university) vaddeswaram, guntur district, india e-mail: ark6466@gmail.com https://orcid.org/0000-0002-9829-3176 received: november 17, 2021 accepted: january 04, 2022 online published: february 05, 2022 doi: 10.46281/ijfb.v9i1.1589 url: https://doi.org/10.46281/ijfb.v9i1.1589 abstract the ongoing health crisis around covid-19 has affected all communities. the government has taken action since the coronavirus attack created an unprecedented situation. drop-down covid-19 positive cases in december and january made people to normal life. an immediate double-dip from the covid19, plow back them into hazardous life with more effective and more quickly spreading of virus leads to the second lockdown. the present study analyzed different investments avenues and the factors that affect the investment. the main objective of the study is to know the relationship between the re-entry of covid-19 and the change in investment decisions of the salaried employees in telangana. the study also identifies the investor’s attitude towards mutual funds and understands how the second wave mailto:madhukumarreddy@gmail.com https://orcid.org/0000-0002-2750-2604 mailto:kandi.vsp@gamil.com mailto:ark6466@gmail.com https://orcid.org/0000-0002-9829-3176 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 116 covid-19 has impacted on investments and financial decisions of individuals in developing nations such as india. keywords: savings, investment avenues, pandemic, weighted aspects, portfolio construction. jel classification codes: g01, g11, g40, g41, g51. introduction covid -19, novel corona virus disease, highly infectious significantly disrupted human life. government suggested several measures to fight against this pandemic situation like social distancing, self-distancing, and self-isolation, cease of educational institutions, transportation restrictions, and nationwide lockdown. on 30th january 2020 the first covid-19 positive case was registered in india. gradually cases have increase regularly, with this effect from 25th march 2020, the government of india declared a 3 week country wide lockdown. on an average every day, india recorded 35,000 new cases by the end of october and up to the month of january 2021 slowly number of positive cases decrease. but on 10th february, india confirmed 11,000 positive cases prior as second wave, and within two months it reaches to 89,800 cases that lead to lockdown from 12th may to 31st may 2021. distribution of vaccination like covisheld and covaxin creates hopes and fill the will power to fight against this devil virus. due to this protracted lockdown and restricted economy activity, the economy witnessed as an extended period of slow down and financial crisis, many of the people lost jobs, collapse of the business. the economy had paid the major effects on gold price, market indices, crude oil and crypto currencies with the impact of second wave covid -19. the present survey based study attempts to analyze the investor preference, factors influencing for investment. review of literature gurbaxani and gupte (2021) highlighted the results on impact of covid-19 on individual investor behavior with a decline of 43% in the sip investment was common to the genders but vary with age and covid19 outbreak at micro-level and may enhance the financial institution and individuals for handling in situation better in future. an economy incident a supply and demand of output and employment with the pandemic impact in terms of magnitude and intensity in short run, (afrina et al., 2021) , the pandemic and market volatility caused a sharp down in resources, business sector, financial institutions that threaten more than the virus throughout the global community. investor’s perception in volatility and return in between india’s implied volatility index (ivix) and nifty 50 during covid-19 pandemic, (chittineni, 2020), garbing the opportunity at market decline to invest and to sell as market raise based on the fundamental market movements that effects for the ivix futures in india. along with global capital market, indian mutual fund industry crisis during pandemic, like franklin templeton debt funds forced wind up. with a certain new compliances and regulation by sebi, to ally the pain of investors strengthen and focused on the investment goals ( polisetty, 2020) indian mutual funds during covid pandemic times). nav’s of various schemes of mutual fund schemes like hsbc large cap equity fund, lic mutual fund, canara robeco blue chip equity fund and bnp paribas large cap fund performance are satisfied with the majority of the investors at pre covid-19 ( manoj & avinash, 2020), the index funds of all the scheme are gradually decrease with the outbreak of covid-19. investors risk bearing capacity with neuroticism, agreeableness, extraversion and conscientiousness are influenced by the various demographical factor and personal traits (athira & kakkakunnan, 2020), result accompany with the summary of dhiman and raheja (2018) and (thomas & rajendran, n.d.), present risk bearing capacity, proper investment decision and beneficiary situation for the financial institutions to offer best financial product and provide correct guidance about investment avenues. bounded knowledge, nature, self-control and limitations of the investors differ in investment pattern (sendilvelu & shah, 2021), fund managers and financial advisors involved in market analysis and sensitivity to assist start –up entrepreneur and self employed in investment pattern to occupy perspective gain in future. covid-19 has footprint the financial crisis, health crisis were influenced on the investors perception in https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 117 various investment avenues in pre and during of pandemic (mushir & suryavanshi, 2021), results shows the change in the preference of the investment pattern like risk free stock, insurance, gold, bank deposits and ppf with enhancing effective strategies in portfolio allocation in present crisis. a dread in global market, blow in mutual fund and descend in international oil prices begins in 2020 (polisetty & manda, 2020 ) indian mutual funds in the times of covid-19 introduction). ( srivastava & kulshrestha, 2020), stick to the (graham & dodd, 1996), “stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price”, investing technique results in indian stock market (nifty), and international stock market (dow jones). household incomes and investment avenues due to the covid 19, an indian household income was terrifically impact during lockdown on april 12, 2020. an outstanding decline in the level of income with household reporting to a fall about 9 percent in tardy february to 45.7 percent massive in mid-april (statista, 2021). the outbreak of covid19, gives a significant impact on the income towards real estates and equity (khan et al., 2020). agrawal and ashraf (2020) band together with dvara research explore on the daily life of low income households highlighted that effective access for the eligible beneficiaries, raising transactions failures immediately, developing a transparent system. the entry of covid-19, created an industrial recession that change the perception of the indian citizens about income, savings and spending (jain, n.d.). an extraordinary assist requires for the economy from monetary policy (schembri, 2021), estimated that pandemic “forced and precautionary” saving added about $ 180 billion because canadians are unable to spend on going out, entertainment, travelling, but more cautious about health and finance. weighted aspects based on the psychological theories (thomas & rajendran, n.d.), (personality and investor behavior influence the investment pattern of the various investment avenue and its benefit aspect. investment motives and investors personal characteristics gives an significant impact on the investment preferences (riyazahmed, 2021), analyzed a wide range of investment factors that knowledge about mutual fund and market more influence the investment preferences than the investment motives. an effective financial decision for start-up-entrepreneur and self employed are differ (sendilvelu & shah, 2021) observed their investment pattern aid fund manager, financial institution and other investors for market analysis. income level and savings an activity was engaged by the people who have savings i.e. investment that are made. a true and famous quote by buffett (n.d.), “don’t save what is left after spending; spend what is left after saving”. it has become famous in today’s high competitive and risky market. according to srd (neill, 2021), dec 2020, around 1500.07 (000’s) were fresh graduates and pg, join their dream job get salary and feel that moment got success. gradually when time passed raised a question about their hard earn money and savings. the two strongest pillar of economy savings and investment had yacht in this pandemic highlighted once again the tradition and importance of saving to all categories investors in india. a significant drop in the household income and savings during this crisis and average one year at least to recovery (martin et al., 2020). hypothesis of the study  hypothesis 1 (h1a): second wave of covid-19 has an impact on the preference of the investors in investment.  hypothesis 2 (h1b): covid-19 second wave has an impact on the weighted aspects of the investors in investment.  hypothesis 3 (h1c): the savings of the investors differs in constructing portfolio in first and second wave of covid-19. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 118 research methodology based on the systematic method of data collection and analysis the validity of any research is justifiable. in this research paper, an attempt has made by authors to evaluate the impact of reentry of covid-19 on the portfolio of the investors special emphasis on salaried employees with a sample of 115 from march 18th 2021 to 17th may 2021. research design over 156 questionnaires were circulated, 115 (74%) were considered for the final research work. it is well known fact that the demographic data are the sources and the principle means for gathering the basic and social statistics of the individuals and also influence the standard of living, economy growth, consumption, savings, and investment etc. of the individuals. the present study questionnaire has two major parts. the first part had five dimensions with respect to the demographical profile of the respondents; second part had 17 dimensions, includes three variables such as investment avenues, weighted aspects, and income level and savings. six dimensions were used to assess the of the preference of investment in pre and second wave of covid-19 with respect to the portfolio construction, added to these lines seven dimensions to the weighted aspects to measure the benefits from the various investment avenues, and followed to this four dimensions of the savings of the respondents to quantify the factors influence in investment alternative. each variable consist of different dimensions that help to analyze the preference of the indian investors respondents in constructing the portfolio (see table 1). table 1. variable construct and source s.no variables items 1 investment avenues 6 2 weighted aspects 7 3 saving 4 note: vvariables to construct the preference, benefits and income of the investors. sample size according to the steps taken by the government to fight against the pandemic, primary data was collected through structured questionnaire to determine the impact of second wave of covid-19 on investors, communicated with respondents in the form of telephone survey method administered to a purposive and convenience sample of 115 indian respondents to evaluate the hypothesized relationship. by using yamane’s formula (1967), researchers draw a sample size of 115 indian respondents with 5% level of significance. formula: n= n/ 1+n (e)/2 n= sample size n= total number circulated/ observation in area e= precision value/ level of significance statistical tools research data was analyzed with  descriptive analysis  standard deviation  standard error  pearson correlation  test of homogeneity  analysis of variance (anova) with the help of spss https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 119 df= (k-1), (n-k),(n-1) msc= ssc/k-1 mse=sse/n-k f-ratio=msc/mse dfdegree of freedom mscmean of sum of square msemean of square within a sample f ratiof calculated value/ f significant value results  if f calculated value is < f tabulation value accept null hypothesis f cal < f tab = accept h0  if f calculated value is >f tabulation value accept alternative hypothesis f cal > f tab = accept h1 result and discussion table 2. tabular representation of profile of the sample investors respondents sl. no respondents particulars no of respondents valid percent 1. gender male 78 67.82 female 37 32.17 2. age upto 30 years 5 4.34 31-40 years 71 61.73 41-50 years 32 27.82 above 50 years 7 6.05 3. education qualification intermediate graduate 19 16.52 post graduate 62 53.91 professionals 34 29.56 4. occupation private employee 79 68.69 public employee 28 24.34 self employed 2 1.73 others 5. monthly income below 20,000 12 10.43 20,001-30,000 68 59.13 30,001-40,000 29 25.21 40,001-50,000 6 5.21 above 50,000 source: primary data as per the total population, the sample (n=115, 74%) was 67.82% (n=78) male and 32.17% (n=37) female, with 61.73% (n= 71) majority of respondents were under the age of 31-40 years, similarly 27.82 %(n=32) were aged between 41-50 years, 6.05% (n=7) of them were above 50 years and 4.34% (n=5) were up to the age of 30 years. likewise 16.52% (n=19) has a degree, 53.91% (n=62) ere postgraduates and 29.56% (n=34) are professionals; 68.69% (n=79) the majority were private employees, https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 120 24.34% (n=28) were public employees and 1.73% (n=2) were self-employed. along with majority of the respondents reported with monthly income 59.13% (n=68) earned 20,001-30,000, 25.31% (n=29) yields 30,001-40,000, 10.43% (n=12) earned below 20,000 and 5.21% (n=6) earned 40,001-50,000. among the total sample (n=115), 16.52% (n=19) were aggressive investors, 31.30% (n=36) were conservative investors, 45.21% (n=52) were balanced investors and 6.95% (n=8) were speculative investors. table 3. tabular representation of had income level still remains same in first and second wave of covid-19? investors response no of respondents valid percent yes 36 31.30 no 79 68.69 total 115 source: primary data the above table no 3 explains the frequency distribution of the sample investors respondents on the basis of the income level of the investors in between 1st and 2nd wave effect of covid-19. this shows the analysis of the present study where during pandemic situation; there is a lot of variation in the income of the respondents forming a mean of (68.69) percent with a sample of 79 respondents among 115 respondents. table 4. tabular representation of is there any change in portfolio re-entry of covid-19? investors response no of respondents valid percent yes 86 74.78 no 29 25.21 total 115 source: primary data the above table exhibits the change in constructing the portfolio of the sample investors’ respondents with the re-emerged of covid-19. with the help of frequency distribution it is clearly shows the result that among 115 sample respondents, majority of the sample that is 76 respondents where forming a mean of (74.58) percent are agreed that there is a change in their portfolio with the second wave of covid-19. this pandemic not only creates a huge financial and health crisis, but also a severe impact on the income of the individuals that influence their savings in constructing the portfolio. table 5. tabular representation of percentage of income saves during second wave of covid-19. percentage no of respondent valid percent 11%-15% 79 68.69 16%-20% 22 19.13 21%-25% 14 12.17 26%-30% total 115 source: primary data in the above table, it is observed about the percentage of the income of the investors saving for various investment avenues. the percentage of the savings is divided into four levels that are from 11% to 15%, 16% to 20%, 21% to 25%, and 26% to 30%. the above table no 5 conclude that nearly 79 sample investors respondents are saving in between 10% to 15% forming a mean of( 68.69) percent, 22 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 121 respondents are saving 16% to 20% with a valid percent of (19.13) and the remaining are saving 21% to 25% of their savings and forming a mean of (12.17) percent in constructing their portfolio. table 6. tabular representation of investment avenues weighted aspect during second wave of pandemic-ii. source: primary data the main aim of any investors is to constructing their investment portfolio with maximum profit with a minimum risk. the above table shows the analysis of the investors in investing various investment avenues based on the various weighted aspects from their portfolio. it is observed that among 115 sample investors respondents, 34 respondents are looking for the regular returns with a valid mean of (29.56) percent, 26 respondents are investing for future security purpose forming a mean of (22.60) percent, 22 respondents are concentrated on the market liquidity of (19.13) valid percent, and the remaining sample respondents are for other aspects like children carrier, retirement planning, insurance and tax benefits. table 7. tabular representation of preference of investment avenues pre covid 19 investment avenues no of respondents valid percent bank deposits 19 16.52 post office 17 14.78 mutual funds 36 31.30 equity 31 26.95 gold 8 6.95 insurance 4 3.47 total 115 source: primary data table 8. tabular representation of preference of investment avenues second wave of covid 19 investment avenues no of respondents valid percent bank deposits 8 6.95 post office 7 6.08 mutual funds 38 33.04 equity 34 29.56 gold 12 10.43 insurance 16 13.91 total 115 source: primary data the table no 7 & 8 shows the frequency distribution of the sample investor respondents about the preference of the investment avenues in pre and second wave of covid-19. with the above analysis it is an evident that there is a variation in the preference of the investors with a 9.57 (16.52-6.95) in case of a bank deposits, 8.7 (14.78-6.08) variation for the post office savings. and it is also observed that a weighted aspects no of respondents valid percent regular returns 34 29.56 future security 26 22.60 liquidity 22 19.13 children carrier 17 14.78 retirement 2 1.73 insurance 12 10.43 tax benefits 3 2.60 total 115 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 122 positive variation in some investment avenues like for mutual fund 1.74, equity market 2.61, 3.48 for gold and 10.44 for insurance. the outbreak of covid-19 for the income factor is not influencing the preference in gold and equity (khan et al., 2020). this drastic change in investment avenues for the present study sample respondents are due to a huge financial and health crisis during covid-19. on the basis of this pandemic, most of the investors showed interest in investing in pharmaceutical sector through equity market and health crisis shift the portfolio of the present study investors in insurance. table 9. descriptive statistics investment avenues n std. deviation std. error 95% confidence interval for mean minimum maximum lower bound upper bound bank deposits 8 1.00 .000 .000 1.00 1.00 1 1 post office 11 1.00 .000 .000 1.00 1.00 1 1 mutual funds 46 1.00 .000 .000 1.00 1.00 1 1 equity 31 1.55 .506 .091 1.36 1.73 1 2 gold 5 2.00 .000 .000 2.00 2.00 2 2 insurance 14 3.00 .000 .000 3.00 3.00 3 3 total 115 1.43 .703 .066 1.31 1.56 1 3 weighted aspects regular returns 34 1.00 .000 .000 1.00 1.00 1 1 future security 26 1.00 .000 .000 1.00 1.00 1 1 liquidity 22 1.14 .351 .075 .98 1.29 1 2 children carrier 17 2.00 .000 .000 2.00 2.00 2 2 retirement 2 2.00 .000 .000 2.00 2.00 2 2 insurance 11 3.00 .000 .000 3.00 3.00 3 3 tax benefits 3 3.00 .000 .000 3.00 3.00 3 3 total 115 1.43 .703 .066 1.31 1.56 1 3 savings in pre and second wave of covid-19 11%-15% 79 1.392 .175 .000 -1.82 -.97 1 1 16%-20% 22 1.392 .175 .000 .97 1.82 1 2 21%-25% 14 3.165 .210 .000 2.65 3.62 1 1 total 115 5.949 .56 .000 1.8 4.47 1 1 change in portfolio yes 36 1.00 .000 .000 1.00 1.00 1 1 no 79 1.63 .771 .087 1.46 1.81 1 3 total 115 1.43 .703 .066 1.31 1.56 1 3 note:α**: p < 0.05(2 tailed); s: significant; ns: not significant level of significance at 5% source: primary data the present study made an attempt with a sample of 115 investors. the variable investment avenues scores ranges from (1.00 to 1.00) with a mean of 1.00 (bank deposits, post office and mutual fund) with a standard deviation of (0.000), equity scores range from (1.00 to 3.00) with a mean of (1.55) standard deviation of (0.506), and others gold and insurance scores ranges from (2.00 to 3.00) with a mean of (2.00, 3.00) and a standard (0.000). the analysis clearly explains the impact of double dip of https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 123 covid-19 in the preferences of investors to invest based on the savings of the sample investors respondents. the table explains about the descriptive analysis of the investors’ savings during second wave of covid-19, where the various weighted aspects of the investment avenues score range from (1.00 to 3.00). the weighted aspect of regular return, future security score a mean range of (1.00) with a standard deviation of (0.000), liquidity aspect ranges from (1.00 to 2.00) with a mean (1.14) and a standard deviation of (0.351), children carrier, retirement score range from (2.00 to 3.00) with a mean of (2.00) and standard deviation of (0.000), and the other aspects ranges to (3.00) with a mean of (3.00) and standard deviation of (0.000). following to this it depicted the analysis of savings of the investors in pre and second wave of covid-19 were, for 11%-15% and 16%20% mean score range of (1.00 to 1.00) and (1.00 to 2.00) with a mean of (1.392) and a standard deviation of (.175) and 21%-25% mean score ranges from (1.00 to 1.000) with a mean of (3.165) and a standard deviation of (.210), the descriptive analysis of the investors’ savings habits with the impact second wave covid-19, where mean score ranges from (1.00 to 3.00), with a standard deviation of (0.000) and (0.771). table 10. results of the homogeneity of variance test hypothesis statement levene statistic df1 df2 sig. h1a second wave of covid-19 has an impact on the preference of the investors in investment 9.924 2 112 .000 h2a covid-19 second wave has an impact on the weighted aspects of the investors in investment 12.964 6 108 .000 h3a the savings of the investors differs in constructing portfolio in first and second wave of covid-19 149.858 1 113 .000 note: h1astatement of hypothesis 1, h2a-statement of hypothesis 2, h3astatement of hypothesis 3, lslevene statistics for homogeneity test, dfdegree of freedom1, , sigresult of the test with the significant values. to know the assumption that the variance was homogenous, a high priority level of the homogeneity test was conducted with the help of levene’ statistic. hypothesis 1: analyzing to h1a stated that second wave of covid-19 has an impact on the preference of the investors in investment. the f-values and significant value for the levene’ test were (f (2,112) = 9.924), (p= 0.000) (h1a). with this analysis it is clearly mentioned that the significance values are less than 0.05, thus the finding reject the null hypothesis. hypothesis 2: followed with this hypothesis, h2a associated that covid-19 second wave has an impact on the weighted aspects of the investors in investment and the result revealed that f-value and significance value for the levene’s test were (f (6,108) =12.964), (p= 0.000). hence the results illustrated that the significance values are less than 0.05, thus the results suggests that reject the null hypothesis. hypothesis 3: concerning the hypothesis, h3a reveals that the savings of the investors differs in constructing portfolio in between first and second wave of covid-19 and the result stated that the fvalues and significance values for the levene’ test were (f (1,113) = 149.858), (p=0.000). therefore, it is an evident that the significance values are less than 0.005, will reject the null hypothesis. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 124 table 11. pearson correlation constructs (n=115) preference during second wave of covid 19 weighted aspects in investment avenues savings in first and second wave of covid 19 preference during second wave of covid 19 1.000 .918 .832 weighted aspects in investment avenues 1.000 .908 savings in first and second wave of covid 19 1.000 note: **: p < 0.05(2 tailed); s: significant; ns: not significant. to determine the consistency of the interrelationship between selected variable such as investment avenue preference during second wave of covid-19, weighted aspects in investment avenue and savings in between first and second wave of covid-19 pearson’s correlation analysis was used. the present study was accurate, with a coefficient varying from (0.832 to 0.918) for variables. it represents the degree of relationship between the preferences of various investment avenues, savings in constructing the portfolio. with the help of the correlation coefficient statistic shows that preference on various investments avenue had a positive correlation with weighted aspects of investments (r=0.918, ,p<0.05) and a positive relation with savings (r=0.832,p<0.05) and the finding were confirmed ( k., 2021), benefits and savings are the main factor and had a moderate positive influence on preference of various investment avenue (r=0.908, p<0.05) at 5% significance level. table 12. result of analysis of variance (anova) sum of squares df mean square f sig. preference during second wave of covid 19 between groups 134.006 2 67.003 127.789 .000 unweighted 119.096 1 119.096 227.142 .000 linear term weighted 133.460 1 133.460 254.538 .000 deviation .546 1 .546 1.041 .000 within groups 58.724 112 .524 total 192.730 114 weighted aspects between groups 9.906 1 9.906 24.149 .000 unweighted 9.906 1 9.906 24.149 .000 linear term weighted 9.906 1 9.906 24.149 .000 deviation 6.732 1 6.732 12.647 .000 within groups 46.354 113 .410 total 56.261 114 savings in first and second wave of covid 19 between groups 53.670 6 8.945 372.865 .000 unweighted 27.271 1 27.271 1136.765 .000 linear term weighted 46.371 1 46.371 1932.942 .000 deviation 7.299 5 1.460 60.850 .000 within groups 2.591 108 .024 total 56.261 114 note: *.the mean difference is significant at the 0.05 level, dfdegree of freedom, ms-mean of sum of square, f-statistical test. this section shows the f-test (analysis of variance) for 115 sample investors respondents based on the preferred of the investment avenues which influence sample investors to invest. three variables https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 125 were designed the interrelationship among the study variable like preference in various investment avenues, weighted aspects in investments, and saving. results of hypothesis 1: in the present study h1a, stated that second wave of covid-19 has an impact on the preference of the investors in investment. the f-value and significance value for the analysis of variance test were (f (2,113) = 127.789), (p=0.000), (h1a). with this analysis it is clearly mentioned that the significance values are less than 0.05, thus the findings reject the null hypothesis. results of hypothesis 2: with respect to the re entry covid -19 impact on the preference of the investors to investment. concerning to the hypothesis h2a, associated that covid-19 second wave has an impact on the weighted aspects of the investors in investment. the result clearly stated that various aspects of the investor were (n=35, µ= 29.56) are expecting regular return, (n=26, µ= 22.60) are securing for future requirements, (n=12, µ=10.43) were looking for the insurance benefits. due to increase in the number of cases in this prolonged crisis, the (ians, 2020), mandated all general and health insurers to start offering corona kavachan indemnity health based plan, corona rakshaka fixed health insurance benefit to their customers which covers hospital and medical expenses of covid19 patients. a vast variation observed in the investors’ preference, with the digitalization support from the many insurance companies to their clients with better choices and smooth delivery system. therefore it is an evident with the analysis that f-values and significance values of analysis of variance test were (f (1,113) = 24.149), (p=.000) (h2a) thus findings reject the null hypothesis, that there is a significant difference in the weighted aspects of the various investments avenues in second hit of covid-19. results of hypothesis 3: the two variables consider under this paper is income level and the savings of the investors in constructing their portfolio during reappear pandemic situation. with this same line h3a, stated that the savings of the investors differs in constructing portfolio in between first and second wave of covid-19. the f-value and significance value for the analysis of variance test were (f (6,108) =372.865), (p=0.000), (h3a). the results shows that significance value are less than 0.05, thus the finding reject the null hypothesis, with respect to income level and the savings of the investors in constructing their portfolio separating first and second wave of covid-19. findings of the study  the present study has been undertaken with the main objective to find the preference of the investors in various investment avenues in double hit of covid-19 and its impact on their savings and income level with respect to the salaried employees.  in the pair of pandemic, many of the salaried employees have realized the importance of the money, savings and its abundance and begin their financial plans.  analysis of the present study was done with the help of survey method with 115 sample investors’ respondents of telangana and reveals that 67.82 percent are male respondents and 32.17 percent are female respondents.  the study revealed about the different kind of investors as aggressive, conservative, balanced and speculative, where majority of the respondents are balanced investors with a valid percent of 45.21 percent and second majority are from conservative of 31.30 valid percent.  novel corona virus not only caused a huge health damage crisis, economy but also savings habits and income levels of the individuals with a valid percent of 68.69 percent and impact in constructing their portfolio with a valid percent of 74.78.  investing is a chord and passionate activity with the investors’ necessities and dreams, but is hold up with the raise of uncertainty puts their financial plans hard with a huge valid variation.  it is analyzed that there is a significant difference in the preference of the investors in various investment avenues during second wave of covid-19. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 126  the paper also revealed about the there is a significant difference in the weighted aspects of the investments in pre and second wave of covid-19, and found many of the investors are willing for the insurance policies with the various plans from irdai, like corona kavach and corona rakshak.  finally, lockdown has unlocked the savings and fd’s. conclusion the present study has made a genuine attempt to analyze the preference of the investors in mutual fund and constructing their portfolio with respect to the salaried employees. most probably investors consider their savings as a path to meet any obligations, and prefer investing with minimum risk that warrant constant and steady returns. the study concludes that many of the investors prefer for secured and regular returns. after the statistical analysis, the investors still prefer to invest in mutual fund, equity and insurance also. on the other hand the authors revealed about the facts of the covid-19 impacts on various investment avenues, savings and income of the investors that due to cut off in pays and jobless, people spending only on the necessity foods, health, education, insurance etc. due to this health and financial crisis in pandemic situation, investors prefer the safety and health insurances as an important factor while investing. it is very essential and completely needed to save from earn, plan for future benefits and to endure the spending funds. from covid-19, the entire world taught a good lesson about income and savings that when and where to spend as it is a quite difficult but started habituated. vaccines building hope in the minds of the people to fight against this covid-19. finally, with the help of ayurvedic medicine by anandaih from krishnapatnam ap gives people a deep positive breath for the positive covid-19 patients. author contributions conceptualization: p. madhu kumar reddy data curation: p. madhu kumar reddy formal analysis: v s prasad funding acquisition: p. madhu kumar reddy investigation: p. madhu kumar reddy methodology: p. madhu kumar reddy project administration: a.rama kumar resources: p. madhu kumar reddy software: p. madhu kumar reddy supervision: a.rama kumar validation: v s prasad visualization: a.rama kumar writing – original draft: v s prasad writing – review & editing: a.rama kumar 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 agrawal, n., & ashraf, h. 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(n.d.). bb&k five-way model and investment behavior. international journal of economics and management, 6(1), 115-127. retrieved from http://www.ijem.upm.edu.my/vol6no1/bab07.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 (https://creativecommons.org/licenses/by/4.0). https://doi.org/10.46281/ijfb.v5i2.1025 about:blank indian journal of finance and banking vol. 9, no. 1; 2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 140 does corporate social responsibility add value to the indian banking sector? nitika gaba research scholar doms, iit madras, india e-mail: nitikagaba1@gmail.com https://orcid.org/0000-0003-2110-5226 r. madhumathi professor doms, iit madras, india e-mail: rmm@iitm.ac.in https://orcid.org/0000-0002-3601-9964 received: december 09, 2021 accepted: january 31, 2022 online published: february 13, 2022 doi: 10.46281/ijfb.v9i1.1612 url: https://doi.org/10.46281/ijfb.v9i1.1612 abstract corporate social responsibility (csr) is assumed to have an indirect impact on the performance of the banking sector due to the sector's core non-manufacturing and complex functionalities. this paper examines the value creation for a bank through csr initiatives considering their earnings persistence and risk exposure in india. the authors measure csr disclosure through content analysis. csr scores for 14 items are identified from the annual reports, national csr portal, ministry of corporate affairs (mca, 2021) and websites of 20 indian banks. applying ols and panel regression models, the role of csr in creating value for the banking sector is established. the study found that csr commitment has a positive impact on the market value of the banks, along with an adequate liquidity position and business risk. csr commitment and earnings persistence contribute to the bank's expected operating performance, highlighting its sustainability through csr investments. participation of banks for education, healthcare, skill development, and environmental sustainability is associated with higher returns from their lending activities to customers creating social value addition. specific csr activities encourage bank customers to repay banks with the implication of business risk reduction for banks. keywords: business risk, corporate social responsibility, market value, social value, sustainable value. jel classification code: m14, g21. introduction in the past few decades in india, banks are focusing more on meeting environmental, social, governance, and economic goals. financial scandals of 2008 indicate the lack of responsibility by them that could only be restored by strengthening the trust with all stakeholders (thome, 2020). the banking system in every economy plays a vital role that impact society and also contribute to economic development (levine, 2005; scholtens, 2008). unlike other firms, banks do not produce physical products that https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 141 directly affect society. however, they are obliged to csr, both directly and indirectly (thompson & cowton, 2004). investment in csr activities keeps the banks safe from indulging in unethical events due to their complex nature. they have been playing a crucial role in an economy as an agent of the financial inclusion process (carbo-valverde et al., 2015). the trust with the public after their collapse in the 2008 crisis can be restored by focussing on csr commitment. after the montreal carbon pledge signed by various banks worldwide in 2014 to measure and disclose the harmful gas emissions data of their financial assets on an annual basis; they have become more aware of the implications for csr activities (caby et al., 2020). banks, in contrast to other sectors, are subject to stricter scrutiny in their reporting practices to stakeholders such as the government, media and lenders. this demands more attention in creating benefits for the society as they receive government bailouts or guarantees during tough times (iannotta et al., 2013). literature on csr and performance relationship has gained momentum after being mandated by section 135 of the companies act of 2013 in india. although, it is not mandatory for banks, but they have realized that achieving social goals is as crucial as providing shareholder value. the prior literature has used both market-based measures and accounting-based measures to evaluate the impact of csr on financial performance (van beurden & goessling, 2008). the impact of csr on market and accounting performance convey to various stakeholders their worth and the internal utilization of resources of the banks. for enhancing social value, firms usually advertise csr activities along with their products and services that raise awareness among existing and potential customers. most often, customers besides transacting in new products and services, have better corporate relationships through csr that leads to positive marketing performance and higher market share (servaes & tamayo, 2013). however, mittal et al. (2008) reported that indian firms with a code of ethics generated little more value than those without codes on csr. csr commitment also impacts the operating performance of a bank by evaluating the cost and benefits of csr activities in the context of productivity and cost efficiency, which are dependent on firm’s characteristics such as location, laws, etc. (paul & siegel, 2006). these research arguments on the convergence of csr activities with the market, accounting and operating performance highlight the need for stakeholder engagement that adds to value creation. delivering value involves making the right decisions by profitability planning which includes csr allocation. these are enabled by good marketing, accounting and operating performance management that provides necessary resources and processes, revenues and costs and risks and value objectives. csr and market value market value impact in banking sector can be added through several mechanisms like costs, operational efficiency, sales, litigation and financial risk by providing disclosure in annual reports to meet the information demand of various stakeholders. cheng et al. (2013) highlighted the role of capital markets in creating long-term value creation and increased market performance by adopting csr strategies. csr not only affects market value directly but also has some indirect effects through value relevance of earnings and book value of equity. csr disclosure provides information that allow investors to make a better assessment of risks, which is reflected in higher market valuation of shares of the firms. csr and sustainable value we live in a world where there are limited resources and growing pressure by humans on these constrained resources. earlier, firms have only concentrated on economic value but now they are becoming fully aware of the potential value outcomes. the changing business environment and resource limitations have raised the need for sustainable value creation. csr positively impacts the operating performance of a bank by decreasing the operating costs to its net interest income by channel optimization, process costs, benchmarking, attracting good talent and staff productivity, vendor relationships, technology, automated workflow process, thereby increasing the bank's sustainability. value is created by saving resources from the costly operations and redirecting them to the areas where https://link.springer.com/article/10.1007/s11628-016-0318-1#ref-cr8 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 142 there are new opportunities for the bank. when we reduce any uncaptured value, sustainable value is created for example, overcapacity of labour, under-utilized resources, etc. high persistent earnings imply a sustainable earnings generation process that investors highly value. earnings persistence is determined by good strategic positioning and operating decisions with the help of right commitment of money towards csr activities. the firms have to continue to generate sustainable value despite disruptive forces, turbulent regulatory conditions and other pressures. top management strategically position their firms by connecting performance with a purpose for long-term sustainable value creation. firms with more accruals can have the ability to manipulate their earnings in the future, and such strategic positions imply higher chances of non-sustainable returns. csr and social value socially responsible actions are associated with capital adequacy, high liquidity and low non-performing assets which increases the bank's operating performance by lowering moral hazard between bank shareholders and debtholders (lotto, 2019). banks create social acceptance by investing in diversified csr activities like education, training, skill development, healthcare, technology, etc. the social impact of banks prompts bank customers to return the borrowed assets, which lowers the non-performing loans and enhances the reputation in the long run. social value creates a positive change by social intervention in the subjective well-being of disadvantaged individuals and communities (kroeger & weber, 2014). csr activities of banks will encourage the industry to participate more towards the environmental, social and governance (esg) goals of india. however, there is a need to justify that such csr investments will be sustainable by the industry in the long term. the recognition of csr activities by bank customers is crucial since banks hold a large part of their assets in lending activities. hence, there is a need to identify the role of csr investment by banks towards market value, its ability to sustain the csr investment in the long term and the impact on bank customers to identify the social value created by the industry. this paper focuses on addressing the impact of csr commitment on a bank's market value, sustainable value and social value. literature review and hypotheses development existing literature on csr elaborates the impact on firm performance, but very few studies discuss csr and value creation (ding et al., 2016, alotaibi & hussainey, 2016). firm performance is elaborated as csr impact on market value, sustaining operating performance and asset value generation through csr activities. further, literature discussion on bank specific factors such as business risk, governance and reporting practices and bank liquidity lead to the research design and development of a testable hypothesis. csr and market value researchers in accounting and finance apply surrogates like tobin's q, share price, cost of capital and market value addition to measure market value as a theoretical construct of firm performance. market valuation represents the investor’s expectation of the firm to generate returns which are diverted as investment in csr. additionally, csr strategies emphasize firm's own idiosyncratic resources and capabilities rather than just replicating competitor's choices which lowers business risk and improves earning quality. stakeholder theory also reflects the importance of the firm’s interests of various people (stakeholders) who are affected by it directly or indirectly. to succeed in the long term, it has to meet their expectations, which is met by investing in csr activities that increase market value (nekhili et al., 2017). dhaliwal et al. (2011) state that disclosure of csr is useful for shareholders through several mechanisms like revenue, costs, operating efficiency, litigation risk and financing. further, deniz and suarez (2005) applied cost-benefit analysis and found that there is an increase in market value of the firm with an increase in csr expenditure. there is an inverse relationship between higher levels of csr and lower cost of equity capital (sherfman & fernando, 2008; orlitzky & benjamin; 2001). csr performance impacts firm value by lowering market risk expectation. alsaid (2016) and ferrell et al. (2016) also supported their argument that consistent csr activities help in increasing earnings and firm https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 143 value. other factors like adherence to tax obligations enhance csr evaluations, thereby adding market value. zeng (2016) using their sample of canadian firms found that paying more taxes contributes to higher overall csr ranking and thus enhances firm's market value. in contrast, palazzo et al. (2020) inferred that bank show less prominence to strategic csr and value creation than other firms. very few studies concentrated on the relationship between csr and market value in the banking sector. market performance (value) is measured as an efficiency indicator since the value of the financial assets is the primary component of their total asset structure (jiao, 2010, fatemi et al., 2015). belasri et al. (2020) measure bank efficiency as a microeconomic variable of productivity that evaluates the production process considering the volume of both inputs and outputs. fund utilization efficiency is reflected by the ability of the bank to generate market value based on its assets. for our study, the following hypothesis is framed: h1: csr commitment, increases the market value of banks. the hypothesis tests the market value potential of csr investment by banks. csr and operating performance (value sustenance) csr commitment today impacts the future operating performance of a bank. csr contribute to the operating performance by improving resource utilization process. the implementation of csr practices helps in increasing productivity and minimize wastage (he et al., 2020). activities like board governance get stakeholder's support, improve management abilities which help in effective resource deployment. investors also believe that socially and environmentally responsible firms use their resources efficiently. second hypothesis framed as: h2: csr commitment has a positive impact on bank's future operating performance. the testing of this hypothesis addresses the sustainability of csr activities of banks for future performance. csr and social value csr activities are usually divided into internal and external categories. internal csr are the internal policies and practices of the firm which are related to employees like human rights, employee-wellbeing, work-life balance, diversity, etc. external csr activities can be defined as volunteerism, philanthropy, etc. (environmental and social practices) mainly cater to external stakeholders (brammer et al., 2007). investors pay attention to the social performance of the firm as pointed out by various scholars in the past. they reported that it has relationship with return on assets (roa). for instance, mcguire et al. (1988), luo and bhattacharya (2019) and lin et al. (2009) demonstrated that firms which have low social responsibility also experience lower return on assets (roa) than firms which have high social responsibility. all csr activities didn't increase the value of the bank, only core activities which were a part of bank's operating mission increased their value (bolton, 2013). roa of a bank indicates the efficiency of a bank management through its ability to convert bank assets (customer loans) into net earnings. as banks are dominated by customer centric loans, roa captures the positive impact of social value. roa reflects systematic market trends that is not influenced by the differential degree of leverage present in a firm (mishra & suar, 2010). researchers reported positive relationship between csr and roa (bodhanwala & bodhanwala, 2018; garcia-castro et al., 2010, giuli & kostovetsky, 2014). in contrast, hafez (2015) reported negative and no relationship between csr and roa. the third hypothesis is framed as: h3: bank's csr scores increases its return on assets. https://www.sciencedirect.com/science/article/pii/s0160791x08000687?casa_token=4t99owyyzrsaaaaa:euyxxdx6xlfchxkavovmrzi_ryf2kvwu8l3ck6vxvfep3veauhatgkn5wj-dxbzrplfszohdgg#! https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 144 this hypothesis tests how social activities of banks enables bank customers to have a positive impact, thus increasing the return on assets for the banks earnings quality and persistence over the years, earnings manipulation has been observed in banks particularly during financial crisis in 2008. during the crisis, shareholder's perception of manipulated earnings of a bank had led to immediate stock market losses. this type of financial meltdown has erode confidence in the integrity of the top management; that may have serious consequences for the society as a whole. this problem can be mitigated by having a certain set of structures, rules and systems internally and externally to align the interests of the managers of a bank with various stakeholders. this system can be embedded in a bank through good csr performance which will improve market confidence in the long run. in addition, transparency in csr reporting reduces the chances of earnings manipulation that leads to bank stability. earnings persistence suggests the stability of our earnings and how well the present earnings can help banks to predict future earnings. if earnings are persistent, then there are less chances of earning manipulation i.e., management. beneish (2001) states that earnings management (em) occurs when managers seek to either deceive stakeholder perception or provide private information on the firm's future performance. kim et al. (2012) showed that csr firms are less likely to engage in aggressive em through discretionary accruals or real activities manipulation. grougiou et al. (2014) examined us's banks and established that low accounting earnings and high investment in intangibles are associated with intensive investment in csr activities. earnings persistence reflects the quality of the profit of a firm and shows that the firm can retain earnings over time instead of an event of a particular activity. it imply sustainable profit stream and thereby are good evidence for earnings quality (garcía-sánchez & garcía-meca, 2017). accruals play a matching role by reflecting transitionary special items adjustments that reduce earnings persistence (dechow & ge, 2003). accrual adjustments in firms that have positive accruals improves earnings persistence. on the other hand, firms which have negative accruals in their balance sheets, made efforts to write down assets to their fair value. however, earnings persistence may represent earnings smoothness through loan loss provisions implying lower reporting quality. research also reported that csr has more effect in countries where there is more investor protection and regulation in banks (garcía-sánchez & garcía-meca, 2017; chih et al., 2008, kim et al., 2012, prior et al., 2008, hong & anderson, 2011). kanagretnam et al. (2014) used a sample of banks from 35 countries indicating stronger legal and political institutions are associated with higher levels of earnings persistence cash flow predictability and greater ability of current periods loan loss provisions to predict next period's loan charge offs. literature reveals that managers enhance a firm's financial position by building a profitable business with all the stakeholders (greening & turban, 2000; mishra & suar, 2010). being committed to csr implies good governance practices and earnings quality thereby leading to enhanced operating performance of the firm and thereby creating sustainable value. these studies motivated us to frame the following hypothesis: h4: csr commitment and earnings quality have a positive impact on performance. bank specific characteristics bank liquidity and market value there are many theoretical reasons which support the fact that market liquidity enhances market value positively. liquidity stimulates the entry of informed investors who makes prices more informative to other investors. khanna and sonti (2004) and nguyen (2016) reported that higher prices signal good prospects to managers which affects their investment decisions and firm value. they further stated that ‘the effect of liquidity is proportional to the sensitivity of firm's operations and the information content of stock prices. the effect of trades on managerial behaviour is factored in the trading strategies by informed traders which helps in making the price more informative. liquidity improves the operating performance and market value. therefore, we formed the next hypothesis as: https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 145 h5: bank liquidity has a positive impact on its market value. banks and risk management reputation theory assumes a restrictive lending process as banks with low risk are characterized by rigorous credit assessment and with less risky assets than their competitors (nandy & lodh, 2013). while risk mitigation theory states that csr creates a moral capital which increases value if it aids stakeholders in attributing the negative event to managerial unskilfulness rather than enmity and temper their reactions accordingly (godfrey et al., 2005). the stakeholders will impose less strict rules on those banks which has high csr due to higher moral capital. the merton (1987) model is also consistent with this argument that risk management and socially responsible activities are valued. management knows the value of a bank's reputation as banks with good reputation attracts more value that allows them to charge a premium. since, the market believes that such banks will deliver sustained earnings and future growth due to having high price to earnings ratio and lower cost of capital. kayode et al. (2015) reported that increased credit risk disrepute and lowers bank profit margins. wood and mc-conney (2018) examined the effect of risk factors on the financial performance of the selected banks and reported that credit risk has a negative effect on their financial performance. most of the existing literatures reported a negative relationship between csr and risk. firms who want to stay in the market must change dynamically their exposure to risk. banks with low risk usually focus on saving costs as investment in banking requires fixed costs and compliance costs. banks are also interlinked with the capital markets as they have to manage their exposure in off-balance sheet products like forex, forward and swaps contracts. high exposure can be a worry as there can be huge market fluctuations that's why banks should continuously measure their exposures to evaluate the impact of market changes on counterparty positions. therefore, the last hypothesis is framed as: h6: business risk has a negative impact on market value. conceptual framework the conceptual framework links dependent variables: market value, social value and sustenance value with the independent variables (figure 1). csr commitment, csr scores, earnings persistence, liquidity, operating performance and business risk. literature on csr disclosure has applied various classes of information categories and measurement units. to assess the extent of csr disclosures in annual reports, a checklist containing 14 items is constructed (appendix a). krippendorff (1980) defines content analysis as 'a research technique for making replicable and valid inferences from data according to their context'. researchers apply a dichotomous coding procedure where a bank is scored as '1' if an activity included in the checklist is reported and ‘0’ if it is not reported (rashid & lodh, 2008).the csr scores are derived by computing the ratio of number of items disclosed to the maximum expected items of disclosure by each bank (mohd ghazali, 2007). the maximum score is 14 implying that the banks in the sample have deployed their funds in 14 socially beneficial csr activities (appendix b). the approach to scoring is additive and equally weighted (haniffa & cooke, 2002). a larger score suggests diversified csr deployment by a bank. 𝐶𝑆𝑅 𝑆𝑐𝑜𝑟𝑒𝑗 = (∑ 𝑋𝑖𝑗 𝑛 𝑡=1 )/𝑁𝑗 csr score = corporate social disclosure scores for the jth bank nj = number of activities expected for the jth bank, where 𝑁 ≤14 xij =1, if ith csr activity is disclosed for firm j year i, otherwise 0; 0≤ csr score ≤1. empirical models multivariate regression analysis is used to test the formulated hypotheses. (model 1): ptb = csr ta + ebit ta + npa + cdr + eq + e https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 146 (𝑀𝑜𝑑𝑒𝑙 2): ebit ta (t + 1) = csr ta + eq + e (𝑀𝑜𝑑𝑒𝑙 3): roa = csr scores + eq + 𝑒 where: ptb: log-…… e the hypotheses are modelled to capture the value creation for a bank through its csr. model 1 examines the market value creation process of csr commitment along with operating performance, business risk, earnings persistence and bank liquidity. model 2 examines the bank's ability to sustain its future operating profits with csr investment and earnings persistence. model 3 captures the social value to a bank from csr activities. research methodology source of data, study period and sample the study used secondary data for empirical analysis. of the total 40 banks including public banks (18) and private banks (22) as reported by rbi's statistical tables of liabilities and assets of banks (https://dbie.rbi.org.in/dbie/dbie.rbi?site=publications#!4), we have selected the sample of 20 banks (10 public and 10 private) who published csr data from 2014-15 to 2018-19 (appendix b). data of the selected banks was collected from various sources i.e., annual reports, csr reports, and national csr portal. we collected information from various sources to eliminate any deficiency from only one source (oxibar, 2005). all these 20 banks listed in bse together represent 52.63 % market share of the indian banking sector and exhibit high visibility to stakeholders. in our empirical research analysis, ols and random effect regression models are used to test the hypotheses. a bank's csr score, csr commitment, earnings persistence, financial performance, business risk and bank liquidity are (table 1) considered for model testing with stata software tool. measurement of variables table1. measurement of variables dependent variables variables measurement market performance (market value) log of price to book value it tells us about the expectation of the investors of how much shareholder value the bank's management will be able to create from a given stock of assets and liabilities (bis, 2021) https://dbie.rbi.org.in/dbie/dbie.rbi?site=publications#!4 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 147 source: the author’s empirical results and discussion ols and panel regression models after checking for heteroskedasticity and hausman test are applied to test the hypothesis. banks have an average of six csr activities (0.45 csr score) among the 14 activities in the checklist during 2014 to 2019 (appendix a). maximum csr score is 0.93 in year 2017 indicating participation in almost all 14 activities. the average csr expenditure spent by the banks scaled by total assets is 7.46 %per million crore asset value (table 2). table 2. descriptive statistics variable observations mean sd min max csr obligation (%) 100 1.29 2.38 0.09 20.89 csr score 100 0.45 0.16 3.00 0.93 csr commitment (% per million asset value) 100 7.64 8.04 0.00 0.03 market value (times) 100 1.63 1.56 0.32 7.17 social value (%) (roa) 100 -0.64 1.13 -4.68 2.46 sustenance value (%) (expected operating performance) 100 5.17 2.90 -3.84 14.83 earnings persistence (coefficient) 100 -0.24 3.55 -14.87 12.51 business risk (%) 100 3.94 3.36 0.12 16.69 liquidity (%) (credit deposit ratio) 100 78.34 9.89 54.45 105.08 the csr obligation is way below the 2 % regulatory requirement for a few private banks. average csr obligation is 1.29 % and the maximum of 20.89 % for a public bank in 2018. the average ptb value is 1.63 times, with the maximum of 7.17 in 2015. the average roa (social value) is negative (0.64 %). however, it varies between the minimum value of -4.68 % (2019) and the maximum of 2.46 expected operating performance (sustainable value) ebit/ta(t+1) financial performance (social value) return on assets the dominant asset category of a bank in india is the customer centric loan portfolio. this ratio thus indicates the ability of banks to generate returns from its (customers) implying social value independent variables csr commitment csr expenses total assets diversified csr scores csr scores control variables bank liquidity credit deposit ratio operating performance ebit scaled by total assets earnings persistence coefficient in a regression of future earnings on current earnings kanagaretnam et al. (2014). business risk npa to net advances (%) (caiazza et al., 2018). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 148 % (public bank in 2018). expected operating performance (sustenance value) on an average is 5.17 % and varied between a minimum values of -3.84 % in 2019 and a maximum value of 14.83 % in 2019 indicating moderate core profit for the banks. business risk measured through the npa to net advances ranged from a minimum of 0.12 % recorded in 2015 and a maximum of 16.69 % recorded in 2018. earnings persistence of banks in our sample has a negative coefficient of -0.24. negative coefficients imply the low reporting quality for banks. this is a coefficient between prior earnings and current earnings. a negative coefficient implies that if prior earnings increases, then current earnings decreases. the earning persistence was fluctuating for all the selected banks during the period under study. the average credit deposit ratio for the selected banks is 78.34 %. this level peaked at 105.08 % in 2016 indicating a tight liquidity position for a bank and reached 54.45 % for another bank in 2019 implying relaxed liquidity. the liquidity was more for private banks i.e., 81.1% in comparison to public banks (72.53 %). table 3 show that the correlation between market value with csr commitment and liquidity is significant and positive. there is a negative and significant relationship between business risk and csr commitment, market value and liquidity. there is also a negative relationship between expected operating performance and business risk. these correlations are below the 0.80 multicollinearity threat threshold. table 3. correlation matrix notes: **p<0.05; *p<0.1 table 4 indicates that private sector banks in the sample have high csr scores and csr commitment than public sector banks and the difference is strongly significant at 5% level. variables correlation among variables (1) (2) (3) (4) (5) (6) (7) (8) (1) csr score 1.00 (2) csr commitment 0.30** 1.00 (3) market value 0.14 0.55** 1.00 (4) social value 0.29** 0.15 0.12 1.00 0.13 (5) expected operating performance (5) earnings persistence -0.01 0.14 0.17* 0.22** 1.00 0.27** (6) expected operating performance 0.14 0.29** 0.21** 0.12 0.24** 1.00 -0.58** 0.31** (7) business risk 0.23** 0.51** 0.52** -0.12 -0.14 1.00 (8) liquidity 0.15 0.56** 0.59** 1.00 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 149 table 4. comparison across private and public banks t-test variable mean p -value private banks public banks csr commitment 55.36 19.03 0.006 csr score 0.52 0.38 0.000 table 5. regression models variables (model 1) (model 2) (model 3) market value (log price to book ratio) sustainable value (expected operating performance) social value (return on assets) ols ols ols fixed random csr commitment 2265.668*** (820.4412) 92.52** (34.65) csr score 0.204** (0.0639) 0.400 (0.123)*** .24188 (.06583)*** earnings persistence 0.083277 (0.016038) 0.00168* (0.000785) 0.00693* (0.00292) 0.00169 (.003) .004065 (.0032) ebit scaled by total assets -17.3483*** (4.865) business risk -0.1239*** (0.0285) liquidity 0.02590*** (0.00727) constant -0.7051 (0.7358) 0.0450*** (0.00384) 0.0971** (0.0307) -.1495 (.0537) -.0872 (.0346) observations 100 100 100 100 100 r sq 0.6101 0.123 0.139 year effect no no r sq within 19.43 17.83 between 22.59 25.01 overall 17.32 18.68 rho 21.65 2.41 notes: standard errors in parentheses; ***p<0.001, **p<0.01, *p<0.05 source: the author's the regression analysis results of the three models (table 5), are indicated by the beta coefficient and the standard errors in parentheses of each variable under investigation. market value creation by csr breusch-pagan test (bp test) for model 1 was non-significant implying that ols regression results are consistent (chi square= 0.02). the model is significant with an explanatory power of 61.01%. the https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 150 positive effect of csr on the bank's market value is confirmed by the beta coefficient (2265.66); an increase of one unit of the csr commitment leads to an increase in the log of price to book ratio thus improving the market value of the bank many folds (belasri et al., 2020). the high coefficient indicates a strong relationship between the csr commitment and market multiplier in relation to its book value. for uco bank, which is having very high csr commitment, if we increase commitment towards csr by 1 %, then market price will increase from inr 19.2 to inr 42.75 in 2019 while for a bank which has low commitment towards csr if we increase csr commitment by 1%, then csr commitment increases from inr 1839.45 to inr 1839.59 in 2019 (hdfc bank). besides csr, the value creation for banks is also significantly supported by the liquidity position of the banks. value creation is also supported from reduced business risk and operating profit. the results are in line with dhaliwal et al. (2011) and alsaid (2016). the negative coefficient of the operating profit indicates the negative value additive component of core financial functions such as the interest rate spreads for a bank to its market value. in india, the spread from operations does not significantly differentiate competitive operating performance. rather fund and fee-based services are considered by the shareholders as value creation activities of a bank. the negative coefficient of business risk implies the value addition to the bank through reduced business risk exposure. banks which commit more to csr are rewarded better than banks which have low commitment towards csr which leads to the acceptance of hypothesis 1. if the operating profit is increased by 1 % for a bank, then the market value is negatively affected (accept hypothesis 4). for an increase in liquidity position of a bank by 1%, the market value will increase by 2.623 % accepting hypothesis 5 and if there is an increase in business risk by 1%, then market value of the banks decrease by 11.65 % accepting hypothesis 6. sustenance of value creation by csr in model 2, the breusch–pagan test (bp test) for expected operating performance is not significant as the chi-squared was 2.86 with p-value 9 %. the result implies that panel data is rejected. as a result, ols regression is good for the model with expected operating performance. model 2 results indicates that each unit increase of csr commitment lead to a rise in expected operating performance by 92.52, as confirmed by the positive and significant coefficient (p<0.01). earnings persistence is also significant and positively related to expected performance in line with greening and turban (2000) and mishra and suar (2010). if a bank has larger commitment to csr, it has a positive impact on its operating performance and earnings persistence of the firm. the activities in which a firm commits for csr are value adding activities. thus, these value adding activities through their business models transform various inputs to produce output like loans, deposits, etc. they act as an operating profit sustenance strategy for the firm. sustainable value creation is a long-term process which requires management orientation for persistent and stable earnings with continuous commitment to csr and improves firm's stability and resilience. firms which give attention to csr, balance their interests with multiple stakeholders. balancing such interests and allocation of resources to all the stakeholders reduces excessive risk taking and excessive risk avoidance which increases their sustainability in the long term. the behaviours of the firm which balance financial and non-financial dimensions to manage risks and opportunities with economic, environmental and social development leads to sustainable value creation. the biggest challenge faced by the banking sector is to take more long-term and integrated approach which is resolved by sustainable value creation. sustainability requires balancing long-term and shortterm objectives for the firm. therefore, we accept hypothesis 2 that the sustainability of csr activities is evident for banks. social value creation by csr model 3 is significant with an explanatory power of 13.9 % using the ols regression. the explanatory variables csr score and earnings quality are (1 % and 5 %) significant (table 5). for a unit increase in csr score, holding all other factors constant, return on assets (roa) will increase by 20.4 % at 1% significance level. the model also establishes a positive significant impact of earnings persistence in line with stakeholder theory (freeman, 1984 & waddock & graves, 1997). bp test for the 3rd model https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 151 with the chi-squared value (443.66) is highly significant at 5% level. it means the ols regression is not consistent for this model and possible model which can be applied are fixed or random effects model. the hausman test was applied to determine a good model. the chi square value (2.81) is not significant implying that random effects (rem) regression is consistent for the 3rd model. the results of the specification tests attested that the random effects model is best for understanding the csr and roa relationship. the relationship between csr and financial performance measured through roa is strong (p=0.000). the r square for the rem regression of model is 18.68 %. as anticipated, the csr score is highly significant, which confirms that csr diversified activities create social value in line with the results of mitra et al. (2018) and bodhanwala and bodhanwala (2018). disclosure of csr investment in different diversified areas helps to create a long-term social value for banks. consumers, government and other stakeholders view banks as a catalyst for value creation. by disclosing csr efforts in education, healthcare, etc., a bank increases its financial performance. the positive relationship between csr and financial performance is in line with the stakeholder theory representing shared values leading to collective social intention. we accept our hypothesis 3 that banks csr scores increases its return of assets. robustness checks the structural validity of model 1 is well established as the explanatory variable significantly influences all the dependant variables formulated in the study. moreover, the tested hypotheses have literature support and are backed by stakeholder theory. we dropped variables other than csr from all the models l, the results for the dependent variables were unchanged and were significant. we also computed variance inflation factor (vif) when estimating our regression models to test signs for multi-collinearity between the explanatory variables. as no vif exceeded ten, we concluded that multi-collinearity is not a major concern in the study. discussion banking sector is a very important part of an economy. its activities affect people since its services are linked to other organisations. this study is a modest attempt to identify the impact of csr disclosure to create value for the indian listed banks during the period 2014-15 to 2019-20. the prior studies do not extensively study the banking sector as an individual sector especially in india. the research attempts to reconcile the conflicting understanding of the nexus between csr, business risk, earnings quality, financial performance and value. the present study provides evidence that csr investments have impact on their market value, social value and sustenance value. for banking sector, csr is a great opportunity to utilize their strengths to benefit the local community. banks can enhance their long-term value by carefully scrutinizing the project proposals for financing those projects that do not harm the environment. the results indicate importance of csr activities and governance factors like earnings persistence in enhancing the value of banks. the relationship between csr commitment and value of banks has huge policy implications. investment in diversified csr activities gives competitive advantage. commitment to csr activities in diversified areas along with improved earnings persistence helps in both sustainable and social value creation respectively. the investment in csr activities is related to the moral and ethical behaviour of banks which improves the satisfaction of the stakeholders. there has been a huge debate on efficiency of banks regarding their investment towards csr activities to be more responsible towards the need of the stakeholders. the present study establishes the fact that investment in diversified csr activities and continuous csr commitment create tangible values for the banks. it enhances the long-term value for them as the mutual relationship between banks and the society. demonstrating social value also means differentiating from the competition. various stakeholder's expectations are met by investing in diversified activities. by spending on different areas of csr, local communities are also benefitted which enhances the social value of the bank. during recent years, the social value has garnered attention as all the stakeholders like government, media, etc. are interested in knowing whether the investments are reflecting genuine value to the society. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 152 the study establishes three value creation functions of csr for banks in india. first positive csr commitment, liquidity and earnings quality leads to market value creation, while business risk has a negative impact. if the markets are efficient, a positive csr engagement will be embedded in the stock prices. investors perceive how csr is articulated and its quality, consistency, effectiveness and take these factors into account for decision making which increases the market value. second, there is a positive relationship between csr, earnings quality and expected operating performance confirming the sustenance of csr value creation for banks. third, diversified csr activities enhances the social value of the banks through its asset returns. conclusion the present study results are subject to several limitations, which could lead to further research both empirical and theoretical. first, the current study is limited to examining banking sector in india, while this study can be extended further with an international sample of banks. second, the generalizability of the results in this paper is subject to data collected from public disclosure of banks. it can be pointed out that several banks contribute to csr that may not be reported and thus hidden value creation by such csr activities needs to be brought out in the future. different results may be obtained when different firms in other sectors are used. the question of csr contribution by specific industries also needs to be dealt with in the future. we can compare the firms that are legally required to carry out csr with those firms that willingly commit to csr. further research may evaluate if csr hedge interest rate risk, market risk (beta) and tax risk (effective tax rate). in the present study, we have only used a few proxies for measuring value of the firm. the future studies can explore more indicators along with panel dataset among various countries. to conclude: our results will be useful to policy makers, academicians, top management while making sustainable strategies. author contributions conceptualization: nitika gaba, r.madhumathi data curation: nitika gaba, r.madhumathi formal analysis: nitika gaba, r.madhumathi funding acquisition: nitika gaba, r.madhumathi investigation: nitika gaba, r.madhumathi methodology: nitika gaba, r.madhumathi project administration: nitika gaba resources: nitika gaba, r.madhumathi software: nitika gaba, r.madhumathi supervision: nitika gaba, r.madhumathi validation: nitika gaba, r.madhumathi visualization: nitika gaba, r.madhumathi writing – original draft: nitika gaba writing – review & editing: nitika gaba, r.madhumathi 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. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 153 appendices appendix a: checklist of items for csr score checklist of 14 items for csr scores average score (max: 5) s.no items 1 education / livelihood enhancement 4.85 2 skill development 3.25 3 rural development 3.35 4 healthcare/sanitation/safe drinking water 4.5 5 environmental sustainability 3.6 6 swachh bharat abhiyan 1.8 7 prime minister relief fund/ chief minister relief fund 0.9 8 arm forces veterans 0.5 9 women empowerment 2.3 10 poverty, malnutrition and hunger 2.2 11 sports 1.9 12 art and culture 1.75 13 senior citizens welfare 0.35 14 technology incubators funding 0.2 appendix b: ranking based on average csr scores (14 items) for five years 2014-2015 to 201819 note: pr (private); pu (public) banks average csr scores for five years 2014-2019 ranking federal bank (pr) 0.8143 1 south indian bank(pr) 0.6143 2 karnataka bank ltd (pr) 0.5714 3 sbi (pu) 0.5143 4 icici bank(pr) 0.5143 4 indusind bank (pr) 0.5000 5 kotak mahindra bank (pr) 0.4857 6 bank of india (pu) 0.4857 6 pnb (pu) 0.4572 7 canara bank (pu) 0.4572 7 idbi(pu) 0.4571 8 yes bank (pr) 0.4571 8 hdfc bank(pr) 0.4428 9 karur vysya bank (pr) 0.4428 9 union bank of india(pu) 0.4000 10 syndicate bank(pu) 0.3714 11 rbl bank ltd(pr) 0.3428 12 bank of baroda(pu) 0.2571 13 uco bank(pu) 0.2429 14 andhra bank(pu) 0.2143 15 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 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2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 33 does the financial performance of islamic banks are higher than the traditional banks in bangladesh? panel data analysis dr. md. abu issa gazi associate professor school of e-commerce jiujiang university, jiujiang, jiangxi, china e-mail: maigazi@yahoo.com, dr.issa@jju.edu.cn https://orcid.org/0000-0002-1397-8855 md. aminuzzaman talukder associate professor department of business administration khwaja yunus ali university, enayetpur, sirajgonj, bangladesh e-mail: talukder.dba@kyau.edu.bd https://orcid.org/0000-0002-5173-7243 md. sazib molla assistant professor department of business administration the international university of scholars, bangladesh e-mail: sazib.ais.iu@gmail.com https://orcid.org/0000-0001-7156-6472 dr. mobarak hossain assistant professor department of business administration bangladesh islami university, bangladesh e-mail: mobarakru1987@gmail.com https://orcid.org/0000-0003-4514-1547 abu ishaque hossain master of business administration (mba-hrm) department of business administration the international university of scholars, bangladesh e-mail: abuishaquehossain96@gmail.com https://orcid.org/0000-0002-0688-2329 received: october 20, 2021 accepted: december 19, 2021 online published: january 17, 2022 doi: 10.46281/ijfb.v9i1.1549 url: https://doi.org/10.46281/ijfb.v9i1.1549 abstract this study aims to examine the comparative financial performance between traditional and islamic banks in bangladesh. the study used secondary data as panel data of banks for 2016-2020. since the data is secondary, the quantitative approach to research is considered to use financial ratio analysis (fra). for analyzing the panel data, decision analyst stats 2.0 software was used. this study randomly selected 10 scheduled commercial banks where 5 traditional and 5 islamic banks. the mailto:maigazi@yahoo.com https://orcid.org/0000-0002-1397-8855 mailto:email:%20talukder.dba@kyau.edu.bd https://orcid.org/0000-0002-5173-7243 mailto:sazib.ais.iu@gmail.com https://orcid.org/0000-0002-5173-7243 mailto:mobarakru1987@gmail.com https://orcid.org/0000-0003-4514-1547 mailto:abuishaquehossain96@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 34 results found that the financial performance of islamic banks and traditional banks is satisfactory but more satisfactory in the case of islamic banks in bangladesh. the study also found that profitability has increased significantly in the banking sector in the last five years. based on empirical findings, financial performance indicators significantly affect the financial performance of the baking sector; that’s why policymakers should care about financial performance determining factors and focus on rapid economic growth with risk recovery techniques. the present study is a small attempt to understand the current financial performance of islamic banks and traditional banks. the findings help the researchers and all parties involved in the banking system understand profitability and its role. keywords: islamic banks, traditional banks, financial performance, panel data, ratio. jel classification codes: f62, g21, g200, g210, g240. introduction the banking system of bangladesh has a strong economic foundation. the banking system, which contributes to the economy of bangladesh, has been providing various benefits to customers for over 50 years. we know a bank is a financial institution playing a vital role in the economic growth and development of any country (belkhaoui et al., 2020; mustafa, 2019; baeshen and shaheen, 2021). the economy's strength is closely linked to the soundness of a country's banking system (ledhem & mekidiche, 2020). without an effective banking system, the current business and economics cannot be run smoothly as it is considered one of the most important modern service industries in the world. in this competitive environment in today's world, banks increase their facilities in favor of their customers to retain them and capture more market share to be a leader. competition is increasing day by day. the banking sector needs to be dynamic with continuous development in a highly competitive environment (rahaman et al., 2020). sixty-one scheduled banks in bangladesh are functioning very efficaciously. their current performance and financial situation are quite satisfactory. right now in bangladesh, banks’ have four divisions, namely, state-owned commercial banks (6) and private commercial banks (43=conventional bank 33+islami shariah-based bank 10), foreign commercial banks (9), and 9 specialized banks (bangladesh bank, 2021). along with the traditional banking system of bangladesh, the islamic banking system has reached a strong position. islamic banking system opened new horizons in the banking system of this country in the eighties. islamic banking has strengthened the economy of bangladesh side by side with traditional banks. at present, the development of the islamic banking industry cannot be repudiated, which is growing at least 5% annually (s&p global rating, 2020). the islamic banking system has gained the trust of millions of customers (majeed & zainab, 2021). in this muslim-majority country bangladesh, where traditional and islamic banking systems go hand in hand, a different kind of trust and confidence has been created in the islamic banking system (berger et al., 2019). there is fierce competition between islamic and traditional banking systems. in the competition race, islamic banks are moving against the traditional banks visible in their profit margins. in 1983, islami bank bangladesh (ibbl) set a milestone in the islamic banking system by launching shariah-based banking activities (islam et al., 2019). subsequently, ten islamic shariah base banks have been established one after another due to the success of islami bank bangladesh limited (ibbl). the banking sector contributes more to the economic development of bangladesh. bangladesh's banks are now stable and significantly influence the national economy. we attempt to examine both banks' present progress and financial situation in bangladesh. for this purpose, we analyzed financial performance to find which one is better in position. therefore, this research will be helpful to depositors and investors to make well-timed decisions concerning investment and fundraising. it directs bank managers to increase the eminence of both financial and deposit services. ultimately, the results of this study also help financial policymakers and the regulatory author of the banking sector to make accurate decisions. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 35 literature review the bank is a financial institution that is working as the most important organ of the economic growth and development of any country. banks provide financial security by accepting customer savings, creating high employment opportunities through investment and playing a role in alleviating poverty. similarly, the economic development of a country also depends on the performance of the banking industry. researchers have taken the issue of the financial banking industry’s financial performance very seriously. many previous studies have evaluated comparative financial performance between traditional and islamic banks. the literature reveals that numerous studies have scrutinized the financial performance of islamic banks and traditional banks and found mixed results (mustafa, 2019; safiullah & shamsuddin, 2019; hassan et al., 2019; komijani & hesary, 2018; zahid et al., 2016). for instance, majeed and zainab (2021) analyzed traditional and islamic banks' financial performance using financial ratio analysis (fra). the finding shows that islamic banks are better capitalized, have higher liquidity and are less risky than conventional banks. still, the profit earnings ratio of islamic banks is lower than conventional banks. uddin, ahsan, and haque (2017) studied on comparison of financial performance of islamic banks and conventional banks in bangladesh during 2010-2014 by analyzing camel tests. they didn't find any difference between islamic banks and conventional banks in financial performance. they also noticed that traditional banks' assets quality and management quality are better than islamic banks. saeed et al. (2013) conducted a study on comparative financial performance between islamic banks and traditional banks in pakistan during 2007-2011 by using data envelopment analysis (dea) and financial ratio analysis (fra) methods to analyze data. they found from their study that conventional banks are more competent than islamic banks. kakakhelet et al. (2013) found that islamic banks have a better financial position, especially better in cash and assets turnover than conventional banks but less profitable than traditional banks. on the other hand, majeed and zanib (2016) revealed that islamic banks are highly profitable and proficient. kias and ramlan (2016) studied the profitability of islamic banks and conventional banks in malaysia, studied period used data from 2006 to 2011. he used a linear regression test to find results. he found that conventional banks are less profitable than islamic banks, whereas the total loan to total assets is higher than conventional banks. najjar (2012) studied the financial performance of traditional and islamic banks in bahrain by using financial ratio analysis (fra) and found that islamic banks’ financial strength is better than traditional banks. milhem and istaiteyeh (2015) also analyzed financial performance through ratio analysis and concluded that effective asset management, effective liquidity rates and high profitability of islamic banks than traditional banks. ibrahim (2015) studied the financial performance of two uae-based islamic and conventional banks during 2000-2006. the findings showed that islamic banks are more profitable than conventional banks, but there are significant differences between the two banks. jubilee et al. (2021) assessed the differences between islamic and conventional banks’ productivity in the context of asian countries by applying deabased mpi panel data methodologies. they found that islamic banks are more productive than conventional banks but not statistically significant. rodoni et al. (2017) analyzed a comparison of the productivity and efficiency of the 30 islamic banks during 2009-2013 in pakistan, indonesia and malaysia using mpi and dea data analyzing methods. they found islamic islamic banks of malaysia more productive than others countries. kamarudin et al. (2017) studied 21 islamic banks belonging to malaysia and indonesia using the mpi panel data method during 2006-2014. they found statistical significant of profitability better than banks of malaysia and indonesia. habib (2018) found a significant difference between islamic banks and conventional banks and noted that the profitability of islamic banks is better than conventional banks in developing countries and developed countries using panel data dea and mpi techniques during 2013–2015 for g20 countries. qureshi and abbasb (2019) studied 15 traditional banks and two pure islamic banks in malaysia using camel ratio analysis during 2010-2017. they found that the financial performance of islamic banks is more satisfied than traditional banks. aljahdali and faleel (2021) argued that islamic banks are less profitable but more liquid, less risky and more efficient than traditional banks. they concluded this by analyzing 3 islamic banks and 3 traditional banks using t-test to determine the significance between the two groups. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 36 thus, we propose the following hypothesis; h1. there is no difference between islamic banks and traditional banks relating to financial performance. based on previous studies, we can be said that many studies have been conducted on traditional banks relating to the financial performance in the world and bangladesh. although there is some research on the financial performance of islamic banks separately, the number of comparative studies is less. most of the studies have documented different and mixed results. there is little evidence to suggest that both islamic banks and traditional banks have had productive levels in bangladesh. so based on the previous studies gap, the purpose of the present study is to provide comparative empirical evidence of two different banking sectors (islamic and traditional) method sample selection except for bangladesh bank itself, there are 60 scheduled banks among these 43 private commercial banks and 6 state-owned commercial banks providing banking services in bangladesh (bangladesh bank, 2021). this study considered 10 banks as a sample among the private banks by selecting 5 islamic banks and 5 traditional banks randomly. the following islamic and traditional banks islamic banks traditional banks islami bank of bangladesh limited(ibbl) prime bank limited (pbl) social islami bank limited(sibl) mercantile bank limited(mbl) shahjalal islami bank limited (sjibl) dutch bangla bank limited (dbbl) al-arafah islami bank (aaib) bank asia limited(bal) first security islami bank limited(fsibl) national bank limited (nbl the sample banks cover only private banks, which occupy 90% of the banking sector of bangladesh. variables covered financial ratios are used to measure capital adequacy (ca), asset quality (aq), management efficiency (me), profitability (p), liquidity efficiency (le), which are the independent variables of this study. on the other hand, financial performance is considered a dependent variable of the current study. data analysis, instruments and measurements various financial and accounting ratios have been used for performance analysis, such as capital adequacy ratio car), asset quality ratio (aqr), management efficiency ratio (mer), liquidity ratio (lr) and profit ratio (pr). profit ratio includes ror, roe and eps-earning per share. the present study used a very well-known bank’s financial ratio calculation method. cole (1972) first introduced these ratios to calculate the bank’s financial performance. many researchers have used this method for similar objectives, i.e., narayan and phan (2019); mukhibad and kafid (2018); shawtari et al. (2018); and bitar et al. (2019). in addition to measuring the performance of concerned banks, different descriptive statistical tools have been used in this study. the fra model of panel data has been used to determine a bank’s financial performance. the study used panel data analysis software and decision analyst stats 2.0 for analyzing the data. http://en.wikipedia.org/w/index.php?title=islami_bank_of_bangladesh_limited&action=edit&redlink=1 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 37 theoretical framework of the research figure 1. theoretical framework analysis and results profitability return on assets (roa) table 1. return on assets (roa) table 1 shows the calculation of roa. among the islamic banks and conventional banks, islamic banks' position is strong; islamic banks' average growth in roa is better than conventional banks. the average growth of roa for islamic bank and the traditional bank is 16.79% and 10.27%, respectively. individually, fisbl is in a better position among the banks; it is also observed that all islamic banks' performance is good and gained optimum growth rate. the table reveals a significant difference between islamic banks and traditional banks based on roa. capital adequacy asset quality profitability liquidity ratio management efficiency name of the banks 2016 2017 2018 2019 2020 average growth (%) mean z value p ibbl 0.88 1.28 1.44 1.37 1.45 16.79% 1.054 0.000 growth (%) 52.19 6.51 6.29 -9.16 12.17 sibl 0.77 1.56 1.31 1.45 1.22 growth (%) 32.28 23.58 14.28 31.77 9.45 aaibl 1.18 1.60 1.79 3.65 3.06 growth (%) 56.52 -1.66 44.63 -22.26 15.45 sjibl 2.60 2.26 2.08 3.01 1.26 growth (%) -13.07 -7.96 44.71 -58.13 -6.89 fsibl 0.55 0.66 1.78 1.97 2.78 growth (%) 30.50 144.85 22.17 -8.02 28.85 pbl 2.02 1.70 3.07 1.88 2.82 10.27% growth (%) 1.25 1.78 2.06 1.05 1.58 dbbl 1.32 2.06 2.74 1.87 2.02 growth (%) 28.45 7.02 4.14 14.87 13.54 mbl 1.52 1.87 0.99 2.04 1.89 growth (%) 1.58 11.04 35.87 0.03 4.58 bal 3.01 1.99 3.24 1.44 1.45 growth (%) -12.02 17.54 2.05 -18.97 2.99 nbl 1.40 2.98 1.54 7.48 5.02 growth (%) 0.04 5.88 29.54 25.87 21.84 ratio analysis performance islamic banks traditional banks https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 38 return on equity (roe) table 2. return on equity (roe) name of the banks 2016 2017 2018 2019 2020 average growth (%) mean z value p ibbl 14 19.02 16.93 19.00 17.42 2.99% 0.158 ns growth (%) 46.30 -10.99 12.22 -8.31 8.85 sibl 19 22.15 19.32 18.87 15.69 growth (%) 48.21 21.75 12.35 1354 7.78 aaibl 16.05 24.70 24.10 20.01 18.34 growth (%) 44.87 -2.43 -16.97 -8.34 4.46 sjibl 24.21 25.58 25.10 30.71 13.18 growth (%) 10.21 -1.88 22.35 -57.08 -5.50 fsibl 1.47 0.61 1.56 1.89 1.75 growth (%) 29.78 155.73 21.15 -7.40 38.48 pbl 32.68 20.58 30.19 32.12 19.61 2.14% growth (%) 1.08 38.45 7.87 -8.49 1.25 dbbl 24.59 30.87 29.47 33.54 32.84 growth (%) 1.54 3.64 7.81 -7.57 -4.99 mbl 18.54 16.78 19.85 18.96 18.02 growth (%) 0.05 6.02 4.98 0.81 1.02 bal 34.25 22.88 31.89 34.65 20.74 growth (%) -28.02 40.25 1.25 -25.74 -4.85 nbl 31.85 29.67 28.12 50.12 30.84 growth (%) 1.52 5.45 66.45 37.88 23.83 table 2 shows that the average growth rate of roe is higher for the islamic banks; most of the islamic banks’ financial position based on roe is good enough than conventional banks. the mean value of islamic banks is 2.99, whereas the mean value of traditional banks is 2.14. the results reveal that the financial performance of islamic banks is better than traditional banks but not significant. earnings per share table 3 indicates that the average growth rate of earning per share of islamic banks is 7.80%. in contrast, traditional banks have 5.69%, which means that the financial performance of islamic banks calculated good in position, particularly the financial performance of islamic banks are calculated higher in position rather than a traditional one, earning per share of ibbl, sibl, aaibl sjibl and fsibl of all islamic banks looks great based on growth rate. finally, the table-3 reveals that the financial performance based on earnings per share of islamic banks is higher than traditional banks but not statistically significant. table 3. earnings per share name of the banks 2016 2017 2018 2019 2020 average growth (%) mean z value p ibbl 3.87 3.99 5.48 5.02 3.89 7.80% growth (%) 45.58 5.85 -2.80 9.25 19.54 sibl 17.82 16.48 17.85 3.28 2.05 growth (%) 0.08 7.64 0.99 2.18 16.33 aaibl 3.54 4.85 1.89 3.87 4.68 growth (%) 47.98 2.88 10.87 8.94 22.56 sjibl 4.23 4.55 3.99 4.75 3.84 growth (%) 38.45 8.21 2.75 6.14 10.58 fsibl 3.50 7.35 1.42 1.61 1.71 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 39 growth (%) 129.68 -80.68 13.38 6.21 12.45 1.28 ns pbl 5.87 3.88 8.45 4.87 5.90 5.69% growth (%) -29.70 80.83 -27.33 -17.39 2.85 dbbl 23.58 6.02 6.12 9.87 11.25 growth (%) -55.54 4.58 71.89 7.45 2.99 mbl 30.86 27.87 31.57 42.85 33.99 growth (%) 0.52 8.21 33.87 0.05 4.33 bal 49.54 38.45 58.67 62.82 35.88 growth (%) 0.06 55.63 3.78 4.58 2.74 nbl 6.21 8.54 6.24 8.54 6.85 growth (%) 32.85 0.64 52.47 11.7 12.78 capital adequacy ratio table 4. capital adequacy ratio banks 2016 2017 2018 2019 2020 mean sample industry average z value p ibbl 11.61% 12.72% 12.65% 13.06% 14.09% 13.43% 11.63% 0.89 ns sibl 9.71% 11.87% 15.97% 9.88% 14.27% 10.82% aaibl 12.92% 11.21% 11.25% 14.49% 13.47% 12.27% sjibl 15.42% 13.81% 13.98% 10.08% 11.14% 13.09% fsibl 10.15% 9.15% 10.91% 9.09% 9% 9.46% pbl 12.50% 10.88% 14.71% 11.69% 12.49% 11.25% 11.45% dbbl 10.8% 10.9% 11.6% 9.6% 11.2% 9.02% mbl 12.67% 10.17% 10.48% 9.13% 10.60% 10.41% bal 13.88% 8.11% 12.27% 11.25% 11.28% 10.56% nbl 14.11% 13.42% 8.61% 12.29% 12.65% 12.02% from table 4, it is clear that the capital adequacy ratio of islamic bank bangladesh (ibbl) is higher among the two categories bank of 13.43% and the average capital adequacy ratio of sibl, aaibl, sjibl and fsibl is 10.82%, 12027%, 13.09% and 9.46% respectively. on the other hand, the average capital adequacy ratio is highest for nbl from traditional banks group. it is observed from table 4 that the capital adequacy ratio of the islamic banking sector is quite better than the traditional banking sector but not significant. asset quality table 5. assets quality banks 16 2017 2018 2019 2020 mean sample industry average z value p ibbl 2.83% 2.79% 2.36% 1.67% 2.21% 2.83% 3.78% 1.258 ns sibl 5.93% 4.68% 3.29% 4.26% 2.93% 3.18% aaibl 4.72% 2.25% 1.60% 1.24% 0.85% 2.05% sjibl 0.72% 1.44% 0.84% 1.44% 1.62% 1.61% fsibl 2.52% 1.25% 2.14% 1.87% 2.47% 3.2% pbl 2.11% 1.82% 0.99% 1.25% 1.52% 1.42% 2.68% dbbl 5.02% 2.98% 1.98% 3.01% 2.65% 3.21% mbl 1.95% 2.02% 2.82% 1.87% 3.40% 2.06% bal 2.05% 2.38% 2.27% 3.07% 1.86% 2.82% nbl 4.85% 6.20% 6.08% 4.52% 1.78% 3.56% https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 40 table 5 shows that islamic and traditional banks' asset quality is different. but calculated shows that islamic banks’ asset quality is better than traditional banks based on the mean value of asset quality. the average growth rate of islamic banks is 3.78% and for traditional banks is 2.68% but statistically not significant. if we see all banks individually, most of the islamic banks' asset quality position is better than traditional banks. alternatively, the asset quality of traditional banks is also good in bangladesh. liquidity ratio loan to deposits table 6. loan to deposits it is observed from table-6 that the loan to deposit ratio for islamic banks and traditional banks is different based on sample industry average values that are 11.82% and 10.77%, respectively. the calculation value of islamic banks is higher than that of traditional banks. individually, ibbl, sibl, dbbl and mbl are first, second, third and fourth, respectively, based on mean values (0.78, 0.63, 0.56 and 0.44). table-6 reveals that loan to deposit as a determinant of financial performance is better for islamic banks than traditional banks but not a significant difference. net loans to total assets table 7. net loans to total assets bank name 2016 2017 2018 2019 2020 mean sample industry average z value p ibbl 0.82 0.88 0.93 0.47 0.82 0.81 83.12% 1.921 ns sibl 0.72 0.65 0.72 0.67 0.76 0.73 aaibl 0.77 0.66 0.52 0.46 0.64 0.68 sjibl 0.71 0.68 0.72 0.73 0.64 0.59 fsibl 0.55 0.54 0.51 0.46 0.51 0.52 pbl 0.58 0.82 0.14 0.48 0.64 0.71 72.78% dbbl 0.73 0.72 0.73 0.71 0.72 0.72 mbl 0.72 0.74 0.74 0.76 0.74 0.74 bal 0.71 0.67 0.70 0.74 0.69 0.70 nbl 0.69 0.75 0.71 0.75 0.67 0.71 table 7 shows the islamic and traditional banks’ net loan to total assets ratios. nlar is good for islamic banks than others. the mean value of islamic banks is 83.12%, and the mean value of traditional banks is 72.78%. it is observed that among the islamic banks. the net loan to total assets ratio is highest for ibbl and lowest for fsibl. results reveal a difference between traditional and bank name 2016 2017 2018 2019 2020 mean sample industry average z value p ibbl 0.29 0.78 0.42 0.52 0.44 0.78 11.82% 1.058 ns sibl 0.15 0.14 0.08 0.06 0.09 0.63 aaibl 0.08 0.85 0.64 0.65 0.08 0.09 sjibl 0.71 0.45 0.09 0.06 0.06 0.08 fsibl 0.21 0.19 0.22 0.11 0.12 0.18 pbl 0.19 0.21 0.09 0.08 0.07 0.15 10.77% dbbl 0.44 0.54 0.57 0.45 0.08 0.56 mbl 0.32 0.25 0.34 0.63 0.43 0.44 bal 0.45 0.34 0.06 0.04 0.64 0.39 nbl 0.32 0.57 0.04 0.06 0.91 0.19 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 41 islamic banks but are statistically insignificant. management efficiency tax management efficiency table 8. tax management efficiency bank name 2016 2017 2018 2019 2020 mean sample industry average z value p ibbl 0.47 0.52 0.42 0.65 0.57 0.562 55.62% 0.081 ns sibl 0.25 0.81 1.21 0.87 0.12 0.331 aaibl 0.08 0.53 0.54 0.68 0.56 0.478 sjibl 0.53 0.52 0.60 0.70 0.50 0.566 fsibl 0.52 0.55 0.50 0.55 0.47 0.518 pbl 0.59 0.50 0.60 0.55 0.53 0.554 53.82% dbbl 0.46 0.46 0.53 0.54 0.47 0.492 mbl 0.45 0.39 0.48 0.58 0.57 0.494 bal 0.56 0.54 0.58 0.48 0.53 0.538 nbl 0.41 0.21 0.45 0.49 0.71 0.74 table 8 found that islamic banks' average tax management efficiency is improved than conventional banks; values are 55.62% and 53.82 %, respectively. both categories of banks’ have good tax management efficiency. among the islamic banks, sjibl and ibbl have the better position and gained 1st and 2nd position. pbl and bal gained the first and second positions among the traditional banks, respectively. islamic banks’ tax management efficiency is better than traditional banks; statistical value shows no significant difference between these two groups of banks. expense control efficiency table 9. expense control efficiency bank name 2016 2017 2018 2019 2020 average of sample bank mean z value p ibbl 1.88 0.89 0.99 0.88 0.98 1.88 96.9% 1.054 000 sibl 0.72 0.64 0.87 0.91 0.91 1.81 aaibl 0.86 0.81 0.87 0.85 0.86 1.85 sjibl 1.23 1.08 1.43 1.16 1.32 1.24 fsibl 0.25 0.72 0.75 0.25 0.43 1.54 pbl 0.45 0.65 0.45 0.63 0.62 0.55 88.6% dbbl 0.82 0.45 0.14 0.24 0.62 0.85 mbl 0.75 0.48 1.25 1.28 0.64 1.68 bal 0.58 0.64 0.74 0.52 0.65 1.02 nbl 0.41 0.44 0.87 0.52 0.45 0.82 from table 9, we see that islamic banks' average expense control efficiency is better than traditional banks. the mean value of the islamic bank group is 96.9%, and traditional banks are 88.6%, respectively. it is also observed that ibbl, aaibl and sibl gained 1st and 2nd and 3rd position among the islamic banks, respectively. also observed among the traditional banks mbl, bal and dbbl gained 1st and 2nd and 3rd position respectively. result reveals from table-9 that there is a significant difference between islamic banks and traditional banks in the case of average expense control efficiency. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 42 fund management efficiency table 10. fund management efficiency bank name 2016 2017 2018 2019 2020 mean sample industry average z value p ibbl 17.85 16.24 13.47 15.87 14.14 18.24 18.54 1.054 ns sibl 12.74 17.96 12.22 13.13 9.96 13.45 aaibl 15.83 13.78 12.65 6.89 7.98 12.85 sjibl 11.14 14.28 12.65 11.12 14.02 13.14 fsibl 23.75 12.30 16.74 16.22 20.00 15.88 pbl 15.09 16.49 10.62 9.12 10.44 12.38 16.87 dbbl 21.14 19.16 18.79 14.45 13.79 17.55 mbl 15.34 16.11 15.40 12.12 12.06 15.58 bal 44.62 31.56 13.85 7.56 3.08 21.54 nbl 12.37 11.78 10.30 7.05 7.85 9.87 table 10 shows that islamic banks’ fund management efficiency is better than traditional banks; the mean value of islamic banks and traditional banks is 18.54% and 16.87%, respectively. it is observed from table-10 that according to the fund management efficiency ratio ibbl is best from the islamic bank's group, and bal is the best from traditional banks group. there is a difference between islamic banks and traditional banks’ financial performance based on fund management efficiency but not significant. discussion the study results prove that islamic banks’ financial performance undoubtedly is higher and progressive than conventional banks. the growth of the return on assets (roa) position and the growth of islamic banks' return on equity (roe) position are better than traditional banks. there is a significant difference between the islamic banking sector and the traditional banking system in the case of roa (table 1) but not significant in the case of roe (table 2). the results demonstrate (table 3) earning per share ratio of islamic banks is more than the traditional banks. islami bank bangladesh limited (ibbl) has a strong position among the studied banks. on the other hand, the position of traditional banks is also well in the case of earning per share ratio. several studies, e. g. mustafa (2019), habib (2018), and jubilee et al. (2021) confirmed the same outcomes of the present study. the null hypothesis (h1) is not accepted. furthermore, in terms of the highest position of capital adequacy and asset quality, the islamic banks' sector is diminutive healthier than the customary banking sector; the study observed that there is a difference but not significant (table 4 and 5). few studies have proved the similar result like islam et al. (2019); komijani and hesary (2018); majeed and zainab (2021), liquidity ratio of net loans to total assets and the loan to deposits of both banking sector good in position but statistically not significant (table 6 and 7). several researchers found the same findings (ledhem & mekidiche, 2020; daoud and kammoun, 2017). some studies found a significant difference between the islamic banking system and traditional banking system in the case of management efficiency of banks, i.e., akram and rahman (2018); alsartawi (2019). it is observed that tax management efficiency, expense control efficiency and fund management efficiency of the islamic banking sector are higher than the traditional banking sector. there is also a significant difference between both banking sectors in the case of expense control efficiency (table 9). still, there is no significant difference in tax management efficiency (table 8) and fund management efficiency (table 10). arising from the findings, we can reject the null hypothesis (h2) of there is no difference between islamic banks and traditional banks relating to financial performance in bangladesh. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 43 conclusion the banking sector of bangladesh is playing a key role in economic prosperity. traditional and islamic banks have already been able to earn the trust of their clients by providing timely services together. it has become a partner in the economic development of bangladesh, not as a rival but as a helper. as a muslim-majority country, islamic banks are not enjoying additional benefits, but in some cases, progress is being hampered by shariah-compliant formalities. since bangladesh is a muslimmajority country, the entire financial system is not run according to islamic shariah. similarly, the banking sector is not based on islamic shariah as an integral part of the economy. for all these reasons, the islamic banking sector has not achieved the desired success, and the number of islamic banks is insufficient. in addition, the success of islamic banks is enviable despite the unfavorable environment of the islamic banking system. research has shown that islamic banks are ahead in the indicators of financial performance appraisal like profitability, management efficiency, asset quality, liquidity position, and capital adequacy look good in the islamic banking sector that is slightly absent in the traditional banking sector. it is necessary to take all indispensable steps to make the islamic banking system uninterrupted; above all, it is time to formulate more research base policies to modernize the banking system of bangladesh. it is hoped that the results and findings of the present study will benefit all parties involved in the banking sector. every study has some limitations, and the present study is not out of it. future researchers have the opportunity to research financial performance analysis of both banking sectors comparatively by taking more sample size and financial performance indicators related variables. author contributions conceptualization: md. abu issa gazi, md. aminuzzaman talukder data curation: abu ishaque hossain, md. sazib molla formal analysis: md. aminuzzaman talukder, mobarak hossain funding acquisition: md. aminuzzaman talukder, mobarak hossain investigation: md. aminuzzaman talukder, mobarak hossain methodology: md. aminuzzaman talukder, mobarak hossain project administration: md. abu issa gazi resources: md. aminuzzaman talukder, mobarak hossain software: md. abu issa gazi, md. sazib molla supervision: md. abu issa gazi validation: md. aminuzzaman talukder, md. abu issa gazi visualization: md. abu issa gazi writing – original draft: md. abu issa gazi writing – review & editing: mobarak hossain, abu ishaque hossain, md. sazib molla conflict of interest statement the authors declare that they have no competing interests. acknowledgments all authors contributed equally to the conception and design of the study. references aljahdali, a. a., & faleel, j. 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(2016). performance comparison of islamic and commercial banks in malaysia, aip conference proceedings 1782. https://doi.org/10.1063/1.4966070 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). http://creativecommons.org/licenses/by/4.0/) indian journal of finance and banking 13(1) (2023), 54-62 54 finance and banking ijfb vol 13 no 1 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa an empirical study of customer satisfaction towards e-banking services in delhi sana parveen (a)1 vardah saghir (b) sana beg (c) (a) research scholar, school of management and business studies, jamia hamdard, new delhi, india; e-mail: psana99@gmail.com (b) assistant professor, school of management and business studies, jamia hamdard, new delhi, india; e-mail: drvardah@jamiahamdard.ac.in (c)associate professor & hod, school of management and business studies, jamia hamdard, new delhi, india; e-mail: sbeg@jamiahamdard.ac.in a r t i c l e i n f o article history: received: 1st january 2023 revised: 19th february 2023 accepted: 20th february 2023 published: 28th february 2023 keywords: e-banking, technology, digital financial services, customer satisfaction jel classification codes: g21, g28 a b s t r a c t digital solutions are a must for gen next banking. there has been a surge in tech-enabled digital payments marking a shift in the operations of banks vis-a-vis technology and customer behavioural patterns. the last two years have witnessed a significant rise in digital transactions from 40 billion in 2020 to 87 billion in 2021 in india. given the increasing preference for contactless banking, banks need to understand their customers better. the purpose of the study is to gauge customer perception towards e-banking services. the study uses the following variables, namely, user interface, content, communication, responsiveness, customer support services, data protection and recommendation of banks to others to find out the relationship with the age of the customers. the questionnaire method is used for conducting the study with a sample size of 200 customers. the cross-tabulation statistical test is applied using spss software for data analysis. the study covers the post-pandemic period and chalks out the strategies to increase digitalization in the banking industry which is required for the sector to flourish. key findings indicate that the banking industry's current framework needs to find secure solutions to reduce online crimes and e-banking fraud. based on the findings, better instruments and mechanisms for e-banking services must be put in place. it is recommended to develop a customized user interface for e-banking applications, enforce cyber laws and regulations to curb e-banking frauds and assist customers by setting up in-house cyber redressal cells. based on time constraints, the study is limited only to 200 customers and the findings rest on the opinion and perception of our chosen sample size. © 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 the demand for digital financial services has increased manifold because of covid-19 surpassing the limitations on physical interaction. digital financial services are defined as financial services such as remittances, payments, and credit accessed through digital channels. according to moody’s, it makes imperative for banks to accelerate digitalization (guterres, 2021). in the last three years, more than 300 million adults have gained access to banks accounts and saving accounts have increased by 13.3% in 2022. there is an increase in the usage of unified payment interface in india from processing 17.9 million digital transactions per month in 2016 to 1.3 billion per month in 2020 (sazonova, 2021). financial regulators forecast that the number of digital transactions would rise from an estimated 40 billion in 2020 to 87 billion in 2021 (eriksson, 2021). there has been a rapid development in providing digital financial services by developing digital identification systems using aadhar, increasing high-speed internet and smartphones. digital payments, remittance, and lending have grown tremendously in the last few years. in 2017, more than 925 banks facilitated 106.75 million government-to-private payments with a total value of more than rs. 44.14 billion through e-transactions (chaimaa, 2021). the rbi digital payments index for march 2019 and 2020 stood at 153.47 and 207.84 respectively indicating the growth of digital financial services in india (guterres, 2021). limited research studies have been conducted to analyze the existing policies and regulations of e-banking services. this study covers the period post pandemic where considerably less number of studies have been undertaken on customer perception towards e-banking services. this study is innovative in itself. it chalks out the strategies to increase digitalization 1corresponding author: orcid id: 0000-0002-2894-7170 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i1.1974 to cite this article: parveen, s., saghir, v., & beg, s. (2023). an empirical study of customer satisfaction towards e-banking services in delhi. indian journal of finance and banking, 13(1), 54-62. https://doi.org/10.46281/ijfb.v13i1.1974 https://orcid.org/0000-0002-2894-7170 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i1.1974 https://orcid.org/0000-0002-6318-5052 https://orcid.org/0000-0003-2971-8449 parveen et al., indian journal of finance and banking 13(1) (2023), 54-62 55 in banking industry which is required for the sector to flourish. the fundamental objective of the study is to analyze customer satisfaction towards e-banking services in delhi, india. further, it aims to find the relationship between age and customer perception variablesuser interface, content, communication, responsiveness, customer support services, updates, high security and data protection, technical problems, and recommendation of banks to others. the present paper also explores the existing policies and regulations of e-banking services among merged private banks during 2000-2019. the study is analytical in nature and a survey method was employed to collect data. combinations of primary and secondary data were used in obtaining information. structured questionnaire was drawn and administered which formed the basis of the analysis. the paper is organized into six sections with review of literature following the introduction. the methodology of study is presented in section three while section four provides data analysis and discussion of findings. section 5 is for conclusion and recommendations. literature review according to nitsure (2003), the e-banking term encompasses and signifies the entire sphere of technology initiatives that takes place in the banking industry. it refers to the delivery of banking services through electronic channels such as mobile phones, computers, and laptops using the internet. evolution of e-banking in india according to singh (2020), technology plays a significant role in the transformation of the banking industry across the globe. roy (2017) mentioned that there are various initiatives taken by the government of india to support digitalization in the banking industry, such as the aadhar-enabled payment system. shankar (2020) asserted that the only awareness among the customers would not influence their decision to shift towards e-banking services from the traditional banking system. various factors influence the customer's decision to adopt a digital banking system, such as trust, technical issues, etc. sardana (2018) concluded that there is a need for developing customized digital banking services to enhance customer experience. the digital medium increases the level of financial inclusion globally from 51% in 2011 to 69% in 2017 (singh et al., 2020). some 91% of people are using digital payment system in high-income economies. in contrast, just 44% are using in developing economies which indicates lack of digital penetration (khandelwal et al., 2013). few challenges for digital penetration would include lack of infrastructure, lack of awareness, connectivity, among others. e-banking policies in india chakraborty (2015) asserted that the changing financial landscape that is more of digitalization brings new challenges for bank management, supervisory and regulatory authorities. some of the risks encountered are as follows:  regulatory risks: according to narware (2016), there is an absence of a license that is appropriate where the supervision is weak, and cooperation between the home supervisor and a virtual bank is not adequate. there is also an absence of guidelines to clarify the grey areas among the consumers to use the e-banking system appropriately.  legal risk: the e-banking system carries legal risks as the banks are expanding to increase the geographical scope of the services. shankar (2020) states there are a lack of contact with the host country supervisor. it results in difficulty staying abreast of regulatory changes. however, virtual banks are unknowingly violating customer protection laws, including regulations on soliciting, data collection, and others. it exposes a loss through lawsuits or crimes which are not prosecuted due to jurisdictional disputes.  reputational risk: nitsure (2003) asserted security breaches and disruptions lead to the damage of banks' regulations. the risks increase when there is an increase in e-delivery channels. if one customer faces any confidentiality issue, then it impacts on customer's confidence in the e-banking system. it requires an implementation of internal guidelines for bank supervisors for effective risk management.  operational risk: narware (2016) explained that the availability of new technology had created an operational risk to the e-banking system. it raises security threats from outside and inside the system. it ensures that banks have appropriate practices to guarantee data confidentiality and system integrity. the management of heightened operational risks requires overall risk management and supervisors need to include operational risk in their soundness and safety evaluation. theoretical framework the technology acceptance model the technology adoption model is the foundation of various technology adoption and diffusion research, which is rooted in the theory of reasoned action. according to the author, there are two significant independent variables, including perceived usefulness and perceived ease of use (granić al., 2019). these are the two factors that impact consumer’s attitudes towards using it, and it impacts behavioral intention. it reflects the use of technology in changing consumer’s behavior. parveen et al., indian journal of finance and banking 13(1) (2023), 54-62 56 institutional intervention theory dubey (2019) explains two dimensions that reflect the influence, including demand-pull and supply push forces in the context for actions to take place. the innovation adoption requires both supply push and demand pull, which comes from the supplier and demand generated from the users to develop innovation. these theories are used in various technology adoption studies, such as edi adoption and ecommerce adoption. institutional theory the theory asserted that in societies, the organizational work is guided by the rational activities and rules which are originated as a system. scott (2005) claims that there are three types of institutions, including normative, pressures-coercive and mimetic, which determine the technology adoption by the organization and individual.  coercive pressure exerted by the organizations on social actors to adopt the behavior, attitude, and practice as the later have resource dependency on the former.  normative pressure is exerted when the organization voluntarily imitates the behavior, attitude, and practices of other organization.  mimetic pressure is related to the conscious and voluntary copying of the behavior and practices of competitors and high-status actors. materials and methods the present study uses mixed research methodology for analyzing customer satisfaction towards e-banking services. the combination of qualitative and quantitative data enables to provide insight into the customer perception and existing business policies. the combination of both types of data offset the weaknesses of each research method. it enables to determine the answers to unexpected findings of the research study (baker, 2000). sampling procedure the study uses primary data to assess the perception of e-banking services. the sample size is 200 who are existing bank account holders (appendix a). questionnaire method is used to collect data which is created on google forms. random sampling method is used for data collection as it provides each sample an equal opportunity of being chosen. the study also draws data from secondary resources such as annual reports, research papers, and articles among others to explore policies and regulations of e-banking services. measurement approaches data has been analyzed using spss (schrepp, 2003). the cross-tabulation statistical test is applied to analyze the categorical data, including age, occupation, and sex. anova statistical test is applied because it allows comparing the means of more than two groups using correlated group designs and one independent variable. the study uses the following variables, namely, user interface, content, communication, responsiveness, customer support services, updates, high security and data protection, technical problems, and bank recommendation to analyze customer perception the relationship between the defined variables and age of the customers.  user interface: it refers to the point of human-computer interaction which allows to access e-banking services to the customers.  content: it is defined as the information available on the e-banking application.  communication: it explains the exchange of information among the customers and banks through emails, messages, and phone calls.  responsiveness: it defines the banks behavior to fulfil consumer needs through regular updates, maintain privacy of consumer data, and others.  customer support services: it describes the operational support provided by the banks to the consumers to resolve consumer queries such as last three transactions, bank account balance, and other queries.  data protection: it is defined as the process of safeguarding consumer’s data against phishing, frauds, misusing consumer information, and others.  bank recommendation: it refers to the customer suggestion for using the same e-banking services based on their ebanking experience. research hypothesis ho: there is no significant relationship between user interface, content, responsiveness, customer service, bank communication, updates, data protection, technical problems, bank recommendations towards e-banking service and age. h1: there is a significant relationship between user interface, content, responsiveness, customer service, bank communication, updates, data protection, technical problems, bank recommendations towards e-banking service and age. results the current section analyzes the data and corroborates the findings. the customer perception towards e-banking services is analyzed based on factors, including user interface, content, communication, responsiveness, customer support services, updates, high security and data protection, technical problems, and recommendations to others. parveen et al., indian journal of finance and banking 13(1) (2023), 54-62 57 customer perception towards e-banking services user interface table 1. cross tabulation-user interface the respondents between the age-group of 46-55 considered the e-banking services to have complex user interfaces as they are not much technology savvy while on the other hand consumers below 45 years find it less complex. bank communication and data protection table 2. cross tabulation-bank communication age excellent good fair poor total 18-25 18 15 6 1 40 26-35 10 31 3 1 45 36-45 13 26 7 1 47 46-55 0 2 11 5 18 above 55 2 0 16 32 50 total 43 74 43 40 200 table 3. cross tabulation-data protection age strongly disagree disagree neutral agree strongly agree total 18-25 2 0 1 24 14 41 26-35 0 2 4 26 12 44 36-45 0 3 4 21 19 47 46-55 0 6 8 4 0 18 above 55 5 35 9 0 1 50 total 7 46 26 75 46 200 the respondents above 55 years of age perceived bank communication to be poor as they are not much familiar with e-banking services which includes paperless statements, digital transactions prone to scams and phishing attacks. on the other hand, the younger generation feels that bank communication is good. the government of india has declared the right of privacy as a fundamental right under the framework of the right to life as per the indian constitution. the online frauds increased to rs. 155 crore in 2022 as compared to the frauds worth rs. 119 crore in 2021 (rao et al., 2022). the increase in online frauds discourages consumers to use e-banking services. the banks are legally obliged to protect consumer information to maintain confidentiality, integrity and security. it requires the banks to develop reliable security mechanisms for customer acquisition and retention. the above set of respondents more or less agreed that their banks are providing sufficient safety and protection to curb e-banking frauds. content table 4. cross tabulation-content age missing information missing some information average information availability of information availability of all information total 18-25 2 0 4 19 16 41 26-35 0 2 6 19 17 44 36-45 1 5 6 23 12 47 46-55 1 7 6 4 0 18 above 55 5 38 5 1 1 50 total 9 52 27 66 46 200 the above cross-tabulation table shows that 33% respondents perceived that e-banking has the required information. 9.5% respondents below 35 years perceived that e-banking services have all the required information. further, 19% respondents above 55 years perceived that some information is missing in e-banking services. age very high complex user interface highly complex user interface complex user interface less complex user interface simple user interface total 18-25 0 0 2 23 16 41 26-35 0 3 6 16 19 44 36-45 0 5 6 23 13 47 46-55 1 7 9 1 0 18 above 55 1 44 4 0 1 50 total 2 59 27 63 49 200 parveen et al., indian journal of finance and banking 13(1) (2023), 54-62 58 responsiveness and customer service support table 5. cross tabulation-responsiveness age highly responsive behavior responsive behavior irresponsible behavior highly irresponsible behavior total 18-25 14 25 2 0 41 26-35 10 32 2 0 44 36-45 11 29 6 1 47 46-55 0 7 11 0 18 above 55 1 2 34 13 50 total 36 95 55 14 200 table 6. cross tabulation-customer service support age excellent good fair poor total 18-25 23 17 1 0 41 26-35 14 24 5 1 44 36-45 18 23 5 1 47 46-55 0 2 11 5 18 above 55 1 3 10 36 50 total 56 69 32 43 200 12.5% respondents of 18-25 years feel that their banks are responsive towards their e-banking need. further, 34 respondents above 55 years perceived that e-banking services provided by their banks are not responsive enough and just 10 respondents below 45 years perceive the same. table 6 show that 23 respondents out of 41 respondents between the age group of 18-25 years rate excellent customer support service. overall 28% respondents feel that the customer service support provided by their banks is excellent. banks must improve on this aspect since this is a key attribute for customer acquisition and loyalty. bank recommendation table 7. cross tabulation-bank recommendation age yes no maybe total 18-25 33 1 7 41 26-35 32 3 9 44 36-45 36 1 10 47 46-55 2 3 13 18 above 55 2 31 17 50 total 105 39 56 200 the consumer acquisition is significant to remain competitive in the banking industry. there is a direct relationship between consumer acquisition and business profitability. so, the banks should focuses on customer acquisition and retention for long run sustainability. the above table shows that more than 50% respondents are satisfied with banking services and they are more likely to recommend others. table 8. anova table sum of squares df mean square f sig user interface between groups 168.341 4 42.085 74.852 .000 within groups 109.639 195 .562 total 277.980 199 content between groups 150.203 4 37.551 49.118 .000 within groups 149.077 195 .764 total 299.280 199 responsiveness between groups 70.455 4 17.614 52.439 .000 within groups 65.500 195 .336 total 135.955 199 customer service support between groups 151.993 4 83.454 .000 parveen et al., indian journal of finance and banking 13(1) (2023), 54-62 59  user interface: the above chart has shown that the user interface significance value is .000, which is less than 0.05. thus, the null hypothesis is rejected. it can be stated that the user interface experience among the customers is different.  content: the significant value is .000, which is less than 0.05. thus, there is a relationship between customer age and content information experience.  responsiveness: the significant value is .000, which is less than 0.05. thus, there is a relationship between customer age and customer perception towards responsiveness.  bank communication: the significant value is .000, which is less than 0.05. thus, there is a relationship between customer age and customer perception towards updates.  updates: the significant value is .000, which is less than 0.05. thus, there is a relationship between customer age and customer perception towards updates.  data protection: the significant value is .000, which is less than 0.05. thus, there is a relationship between customer age and customer perception towards data protection.  technical problems: the significant value is .000, which is less than 0.05. thus, there is a relationship between customer age and customer perception towards technical problems.  bank recommendation: the significant value is .000, which is less than 0.05. thus, there is a relationship between customer age and customer perception towards bank recommendations.  customer service support: the significant value is .000, which is less than 0.05. thus, there is a relationship between customer age and customer perception towards customer service support. thus, there is a significant relationship between the customer perception towards e-banking services and age. regulations of digital finance services the legal framework of the indian banking system is governed by the set of statutes as mentioned below:  indian contract act, 1872  indian evidence act, 1872  foreign exchange management act, 1999  the reserve bank of india (rbi) act, 1934  the banking regulation act, 1949  information and technology (it) act, 2000  negotiable instruments act, 1881  securitization and reconstruction of financial assets and enforcement of security interest act (sarfaesi) act, 2002 (ketterer, 2017). within groups 88.787 195 total 240.780 199 bank communication between groups 112.799 4 51.916 .000 within groups 105.921 195 total 218.720 199 data protection between groups 154.145 4 62.792 .000 within groups 119.675 195 total 273.820 199 bank recommendation between groups 42.111 4 19.207 .000 within groups 106.884 195 total 148.995 199 parveen et al., indian journal of finance and banking 13(1) (2023), 54-62 60 a content analysis has been done to diagnose the issues in the existing e-banking framework. following are the issues, the respective acts and the results thereof. theme codes results security and privacy risks provision of indian penal code, 1860:  section 383: punishment of extortion  section 379: punishment of theft  section 406: punishment of criminal breach of trust  section 471: using as genuine a forged document  section 417: punishment of cheating o section 506: punishment of criminal intimidation (rajput, 2020)  lack of statutory recognition of the legal statutes and imposing a penalty on the bank's authorities for its violation.  absence of internal audit compulsion for maintaining transparency in e-banking system.  absence of in-house cyber redressal cell for dealing with bank frauds legal issues  section 3(2) of the information and technology act  section 4 of the information and technology act  section 72 and section 79 of the information and technology act  lack of cyber laws and regulations for curbing the ebanking frauds and cyber frauds in india.  lack of biometric authentication compulsion authentication issues  cyber cells and ancillary authorities  information and technology act, 2000  ineffective enforcement structure.  lack of trained staff results in an increment in the cybercrimes in india.  lack of separate provision for dealing with the authentication issues and securing the customer interest (chaimaa et al., 2021). according to gupta (2006), the existing regulatory framework over banks needs to be extended to the e-banking system. the banks should design network and database administrator which defines the specific roles. there is an absence of security policy duty approved by the board of directors. mhlanga (2020) further added that the banks should have separate information technology division and information system security. the existing laws and regulations ensure security and confidentiality of customer information, protection against anticipated threats to the security and protection against authorized access to such information. chaimaa (2021) states the reserve bank of india has created rules for e-money issued by non-banks to address the regulatory vacuum. the information technology bill, 1999 and electronic commerce bill, 1999 in india are created for addressing general issues such as secure electronic records and signatures, duties of certification authority, computer crime and data protection, the liability of network service provider, and duties of certification authority. these bills are promoted by the government of india, which facilitate the introduction of electronic data interchange in the commercial sector. the examination of bank secrecy and data privacy regulations in developing countries shows a patchwork of rules. these are issued by the agencies with overlapping oversight and jurisdiction. however, bank secrecy rules are not statutorily recognized, which is required for imposing a penalty on the bank regulations. rajput (2020) mentioned that there is an absence of internal audit compulsion. also, there is an absence of the compulsion for some concentrate measures which the banks should take to protect the e-banking services. further, there is also a lack of in-house cyber grievance redressal cells for dealing with bank frauds individually. discussions the study finds that there is a significant relationship between customer perception towards e-banking services and age. people of age groups 18-25, 26-35, and 36-45 have a relatively positive perception towards e-banking services. they believe that the e-banking services have a simple user interface, effective communication, required content, responsive behavior, timely updates, no technical problem, and excellent customer service support. on the other hand, people of age groups 4655 and above 55 years have relatively negative perception of e-banking service as they consider that the e-banking services are not safe and secure. the data shows that interface experience among customers of different age groups is different. the significance value of content experience is 0.000, which shows that there is a relationship between customer age and content information experience. similarly, there is a relationship between other attributes of e-banking services and age. the existing legal framework of the banking industry is ineffective in minimizing cybercrimes and e-banking frauds. there is a lack of statutory recognition of the legal, statutes and imposing penalty on the bank authorities for its violations. also, there is an absence of internal audit compulsion and in-house cyber redressal cells for dealing with bank frauds. the legal issues include lack of cyber laws and regulations for curbing e-banking frauds and lack of biometric authentication compulsion. the authentication issues include ineffective enforcement structure, untrained staff, and lack of separate parveen et al., indian journal of finance and banking 13(1) (2023), 54-62 61 provisions to deal with the authentication issues and secure the customer interest. thus, the banks must be more responsive towards the needs of the customers. conclusions it can be concluded that the people of different age groups have different perceptions towards e-banking services. it is important to consider that there is a knowledge gap as certain sections of people are not much familiar with e-banking services. thus, banks should focus on making this group of people aware of e-banking services. also, there should be an implementation of a customized user-interface option to enhance customer experience. the communication, privacy and safety of data are also their key concerns. the customers above 45 years are more reluctant to use e-banking services as they believe that their data may not be secured. there is an absence of a structured legal framework for handling cyber-crimes in india. it is recommended to implement statutory recognition of legal statutes and impose a penalty on bank authorities for its violation. there should be a compulsion of internal audits to maintain transparency in the banking system. further, an in-house cyber redressal cell should be created to handle bank frauds. the government of india should enforce cyber laws and regulations for curbing e-banking frauds and cyber frauds with the implementation of biometric authentication compulsion. knowledge and education can change their perception of e-banking services. apart from this, banks should also consider taking feedback from different group of people so that their needs can be identified. when the need is identified, e-banking services can be designed accordingly to meet their needs and change their perception towards ebanking services. further, banks must consider an artificial intelligence techniques that combine technology and robust datasets which will ensure seamless services to the customers. the present study is limited to only 200 respondents to determine consumers' perception of e-banking services in delhi/ncr. secondly, due to time constraints, it is limited to only delhi only. future study can be done at pan india level for analyzing the customer perception towards e-banking services among different states. in addition, comparative studies can also be done for analyzing the customer perception towards e-banking services among developed and developing nations. author contribution: conceptualization, s.p., v.s. and s.b.; methodology, s.p.; software, s.p; validation, s.p, v.s. and s.b.; formal analysis, s.p. and v.s.; investigation, s.p., v.s. and s.b.; resources, s.p.; data curation, s.p.; writing – original draft preparation, s.p. and v.s.; writing – review & editing, s.p. and v.s.; visualization, s.p. and v.s.; supervision, s.b. and v.s.; project administration, v.s.; funding acquisition, s.p. 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: jawaharlal nehru memorial fund, new delhi 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. conflict of interest: the authors declare no conflict of interest. references 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(2020). understanding the intention to use mobile banking by existing online banking customers: an empirical study. journal of financial services marketing, 25(3), 86-96. https://doi.org/10.1057/s41264-020-00074-w. willmott, h. (2015). why institutional theory cannot be critical. journal of management inquiry, 24(1), 105-111. https://doi.org/10.1177/1056492614545306. appendices appendix a. list of private merged banks 2019 bandhan bank ltd. gruh finance ltd. [merged] 2006 federal bank ltd. ganesh bank of kurundwad ltd. [merged] 2008 h d f c bank ltd. centurion bank of punjab ltd. [merged] 2010 i c i c i bank ltd. bank of rajasthan ltd. [merged] 2018 i d f c first bank ltd. capital first home finance ltd. [merged] 2017 indusind bank ltd. bharat financial inclusion ltd. [merged] 2001 kotak mahindra bank ltd. pannier trading co. pvt. ltd. [merged] 2019 lakshmi vilas bank ltd. [merged] indiabulls commercial credit ltd. 2000 royal bank of scotland n v r b s equities (india) pvt. ltd. standard chartered bank –india standard chartered grindlays bank ltd. 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. http://www.jstor.org/stable/4414436 https://doi.org/10.1504/ijicbm.2011.038913 https://doi.org/10.1016/j.bir.2017.12.003 https://doi.org/10.1080/00131857.2022.2041413 https://doi.org/10.1007/978-3-030-44655-0_7 https://doi.org/10.54660/anfo.2022.3.2.12 https://doi.org/10.1080/0965254x.2016.1148771 https://doi.org/10.1504/ajaaf.2021.119206 https://doi.org/10.1016/j.ausmj.2020.06.008 https://doi.org/10.1057/s41264-020-00074-w https://doi.org/10.1177/1056492614545306 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 10(1) (2022), 54-60 54 finance and banking ijfb vol 10 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa determinants of dividend policy: an empirical investigation of indian companies using panel data estimation technique razique anwar (a) sandeep kumar (b)1 (a) research scholar at indian institute of management, kashipur 244713, india; e-mail: razique.phd1902@iimkashipur.ac.in (b) assistant professor at jamshedpur workers’ college, jamshedpur – 831001, india; e-mail: sandijaiswal@gmail.com a r t i c l e i n f o article history: received: 19th may 2022 accepted: 29th june 2022 online publication: 31st july 2022 keywords: dividend yield, dividend policy indian companies, leverage panel data jel classification codes: g1, g3, m2 a b s t r a c t the decision to pay dividends by companies is among the most researched and contentious topics in corporate finance as, according to some scholars, it has a bearing on companies' valuation. the purpose of this research is to find out important factors that act as determinants of the dividend policy of indian companies. the study employs secondary time series data gathered from the latest data available from the cmie (centre for monitoring india) prowess database. the study has been divided into three time periods i.e. 1) 2000-01 to 2009-10, 2) 2010-11 to 2020-21, 3) 2000-01 to 2020-21, by merging the two time periods and the panel data regression technique has been applied. the results of the analysis suggest that return on assets, debt to equity ratio, cash and cash equivalents & debt to total capital ratio significantly affect dividend yield from 2000-01 to 2009-10 and from 2000-01 to 2020-21, whereas the results of the analysis from period 2010-11 to 2020-21 found sales/size, return on the asset, and debt to total equity ratio as determinants of dividend policy. these results corroborate the earlier findings that profitability, liquidity, and leverage are important factors in the decision-making of companies regarding the payment of dividends. © 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 the decision to pay dividends or not is one of the most contentious decisions for companies. “the harder we look at the dividend picture the more it seems like a puzzle, with pieces that just do not fit together” (black, 1998). the puzzle is among the top ten unsolved problems of finance. so it is very hard to dissect the dividend policy of the companies. the decision of firms to declare dividends or to retain earnings for future growth has always been dynamic. a vast amount of literature available on this study suggests theoretical and empirical support for variables such as corporate size, age, ownership structure, market risk, cash holdings, leverage, growth opportunities, net working capital, and profitability of the firms as important factors as determinants of dividend policy for companies. in light of the brief above argument presented, the present study intends to find out the factors that act as determinants of dividend policy for 356 indian companies under study using the panel data regression analysis technique. the analysis of this study has been divided into three time periods i.e 1) from the financial year 2000-01 to 2009-10, 2) from the financial year 2010-11 to 2020-21, 3) from the financial year 2000-01 to 2020-21 by merging the above two time periods to find out the significant factors that act as determinants of dividend payment by companies. in this study banking and financial services providing companies have been excluded as we assume that they differ in business practices and have different financial parameters than industries in other sectors. trends in dividend yield figure 1 below shows the average dividend yield of all 356 companies understudy from the financial year 2000-01 to 200910. it shows that the average dividend yield showed an increasing trend though it started falling from 2005-06 till 2008-09 1corresponding author: orcid id: 0000-0002-8292-0972 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v10i1.1777 to cite this article: anwar, r., & kumar, s. (2022). determinants of dividend policy: an empirical investigation of indian companies using panel data estimation technique. indian journal of finance and banking, 10(1), 54-60. https://doi.org/10.46281/ijfb.v10i1.1777 https://orcid.org/0000-0002-8292-0972 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://orcid.org/0000-0002-8292-0972 https://doi.org/10.46281/ijfb.v10i1.1777 https://orcid.org/0000-0002-1573-0415 anwar & kumar., indian journal of finance and banking 10(1) (2022), 54-60 55 which could be attributed to the global financial crisis and india too was not fully immune to it and thus companies refrained from paying dividends. but again it picked up its increasing trajectory from there onwards. figure 1. above shows the average dividend yield of companies from 2000-01 to 2009-10. figure 2 below shows the average dividend yield of all the companies understudy from the financial years 201011 to 2020-21. it also shows an increasing trend though it was on the decline from the financial year 2015-16 till 2017-18 which could be attributed to major structural changes within india’s economy like the implementation of goods and services tax ( gst ) move toward the digital economy, tax amendments laws, etc. so the companies once again refrained from paying dividends as they had to adjust to these changes. figure 2. above shows the average dividend yield of companies from 2010-11 to 2020-21. figure 3 below shows the average dividend yield of all 356 companies from the financial year 2000-01 to 20202021 by merging the above two time periods. it shows a slight increasing trend in average dividend yield with a few ups and downs. figure 3. above the shows average dividend yield of companies from 2000-01 to 2020-21. 0 2 4 6 8 10 12 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 d iv id en d yi el d( % ) data source : cmie prowess iq average dividend yield(%) 0 2 4 6 8 10 12 14 16 18 2011-12 2012-13 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 d iv id en d yi el d( % ) data source : cmie prowess iq average dividend yield(%) 0 2 4 6 8 10 12 14 16 18 199 900 200 001 200 102 200 203 200 304 200 405 200 506 200 607 200 708 200 809 200 910 201 011 201 112 201 213 201 415 201 516 201 617 201 718 201 819 201 920 202 021 202 122 d iv id en d y ie ld (% ) data source : cmie prowess iq average dividend yield(%) anwar & kumar., indian journal of finance and banking 10(1) (2022), 54-60 56 review of literature according to some scholars, the decision to pay dividend has an important bearing on the valuation of the firms while others believe that dividend decisions are irrelevant and does not have any effect on variables affecting firms. a dividend decision is irrelevant in the absence of taxes, transaction costs, or other market imperfections, and the investment decisions of a firm are not affected by its dividend policy (miller & modigliani, 1961). also, it has been found in many studies that dividend has no significant relation with size and industry classification, while it has an inverse relation with the growth of the companies. in the united states, canada, united kingdom, germany, france, and japan, the propensity to pay dividends is higher among larger and more profitable firms (denis & osobov, 2008). also, profitable firms with more stable net earnings, ownership concentration, and market liquidity have a positive impact on dividend payout policy. the study done in pakistan to find out determinants of dividend policy using the dynamic panel data analysis technique found stable net earnings, liquidity, and ownership concentration have positive effects whereas investment opportunity and leverage have negative effects on dividend payment decisions by companies (yusof & ismail, 2009). also, the study done in srilanka for 191 firms and 1337 firms year observation using binary logistic regression and fixed effect panel data technique found that past dividend decisions, earnings, investment opportunities, profitability, free cash flow (fcf), corporate governance, state ownership, firm size and industry influence as the key determinants of propensity to pay dividends. in addition to this past dividends, investment opportunities, profitability, and dividend premium are identified as the determinants of dividend payout. as per a study done for the u.a.e. (united arab emirates) firms, profitability and size are the most important considerations of dividend payout decisions. in another study done for 799 companies in 15 countries over 14 years, the key significant determinants of dividend payout decisions were found to be free cash flow, growth, liquidity, profitability, and size (madra-sawicka & ulrichs, 2020). also, a few other pieces of the literature suggest liquidity, size, and profitability have a positive relationship with dividend payment decisions by the companies. the study done in the indian context using the panel data regression technique concludes that in the automobiles sector liquidity/cash flow, dividend distribution tax, investment opportunities, and retained earnings are the significant factors that influence the dividend payout ratio whereas in the pharmaceuticals sector profitability, debt to equity ratio, sales growth and retained earnings are the significant factor for deciding dividend payout ratio (nathani & gangil, 2019). profitability, liquidity, leverage, risk, size of the firm, and inflation were also found to be the major determinants of dividend policy of selected nse( national stock exchange) listed firms in india (brahmaiah et al., 2018). investment opportunity, financial leverage, size of the company, business risk, firm life cycle, profitability, tax, and liquidity were found to be the major determinants of the dividend policy for indian companies (labhane & mahakud, 2016). the study done using pooled ordinary least square and fixed effect panel data technique found that size, profitability, and interest coverage ratios have a significant positive relation to dividend policy, and business risk and debt level have a significantly negative relationship with payment of dividends (pinto & rastogi, 2019). data & methodology list of variables the following is the list of variables with their definitions used in this study –  dividend percent / dividend yield it is a financial ratio that shows the percentage of dividends a company pays out relative to its share price in the financial year ( dividend / share price). it is used as a dependent variable.  salesit is defined as the activity of selling products or services. it is also taken as a proxy for the size of the company in this study.  return on assetsit is obtained as “net profit after tax divided by its total assets” of a company which shows the profitability of a company.  current ratioit is the liquidity ratio and obtained as all “current assets divided by its current liabilities of a company”.  quick ratioalso known as acid test ratio, it short-term or term liquidity position of a company. it is calculated as “current assets minus inventory divided by current liabilities”.  debt to equity ratioit is a ratio used to evaluate a company's financial leverage and is calculated as the “company’s total liabilities divided by its shareholder’s equity”.  net cash flow from operating activities to total asset ratioit is obtained as “net cash flow generated from operating activities of a business divided by its total assets”.  cash & cash equivalentscash and cash equivalents are a line item on the balance sheet stating the amount of all cash or other assets that are readily convertible into cash.  retained earnings to total equity ratioit measures how much retained earnings the company is keeping within when compared to its total equity.  debt to total capital ratioit is calculated as “interest-bearing total term liabilities ( short and long term) divided by total capital ( total debt + shareholder’s equity)”. it shows the financial leverage of the company. in this study, analysis is done for 356 companies across three time periods – 1) from the financial year 2000-01 to 2009-2010, 2) from the financial year 2010-2011 to 2020-2021, 3) from the financial year 2000-01 to 2020-2021 by combining the above two time periods. banking and financial services providing companies have been excluded from the study as we assume that they differ in business practices (lending and borrowing) and have different financial parameters than industries in other sectors. anwar & kumar., indian journal of finance and banking 10(1) (2022), 54-60 57 the panel data regression technique has been employed to find out the variables affecting dividend payment decisions by the firms. the results are reported based on the most robust model of panel data regression technique i.e model used is robust to standard errors disturbances being heteroscedastic or autocorrelated or both if the test indicates the presence of such disturbances. the equation used the for panel data regression technique in the study is as follows 𝐷𝑖𝑣 𝑦𝑖𝑒𝑙𝑑𝑖,𝑡 = 𝛼 + 𝛽1𝑠𝑎𝑙𝑒𝑠𝑖,𝑡 + 𝛽2𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑡𝑖,𝑡 + 𝛽3𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜𝑖,𝑡 + 𝛽4𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜𝑖,𝑡 + 𝛽5𝐷𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜𝑖,𝑡 + 𝛽6𝑁𝑒𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑡𝑜 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡 𝑟𝑎𝑡𝑖𝑜𝑖,𝑡 + 𝛽7𝐶𝑎𝑠ℎ & 𝑐𝑎𝑠ℎ 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡𝑠𝑖,𝑡 + 𝛽8 𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑡𝑜 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜𝑖,𝑡 + 𝛽9𝐷𝑒𝑏𝑡 𝑡𝑜 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑡𝑖𝑜𝑖,𝑡 + 𝜂𝑖 + 𝜀𝑖,𝑡 where, 𝜂𝑖 shows unobservable firm effects, 𝜀𝑖,𝑡 shows the effect of unobservable cross-section variables changing over time. 𝛼 is a constant term, and 𝛽1 𝑡𝑜 9 are coefficients that show the magnitude of change in the dependent variable due to change in each of the individual independent variables respectively. the data source used in the study is cmie (centre for monitoring india) prowess. empirical results & findings return on assets, debt to equity ratio, cash and cash equivalents & debt to total capital ratio were found to be significantly affecting dividend yield from the financial year 2000-01 to 2009-10 (result shown below in table 1). table 1. below shows the results of panel data regression results for the period 2000-01 to 2009-10. robust divpercent coef. std. err. t p>|t| [95% conf. interval] sales -1.58e-06 1.24e-06 -1.27 0.205 -4.02e-06 8.68e-07 roa 15.11666 4.000729 3.78 0.000 7.243503 22.98981 currentratio .2063839 .4004855 0.52 0.607 -.5817434 .9945112 quickratio -.4230762 .4866113 -0.87 0.385 -1.380693 .5345406 debttoequit~o -.0014024 .0004352 -3.22 0.001 -.0022589 -.0005459 nocftota 1.640437 2.588111 0.63 0.527 -3.452783 6.733656 cashandcash~s .0000466 .0000134 3.48 0.001 .0000202 .0000729 retototaleq~y -.0000535 .0000495 -1.08 0.280 -.0001508 .0000439 debttototal~o -.0557873 .0155427 -3.59 0.000 -.0863743 -.0252003 _cons 9.28502 .5192132 17.88 0.000 8.263245 10.30679 source: results obtained from stata 16. the results above in table 1 have been reported using the “fixed effect cluster” variant of the panel data regression technique in stata 16 as the hausman test suggests the use of the fixed-effect model (appendix a.1) and is the most appropriate variant to be used when the estimates of the standard errors are robust to disturbances being heteroscedastic and autocorrelated (appendix a.2 and a.3 respectively). (https://www.princeton.edu/~otorres/panel101.pdf) sales/size, return on the asset, and debt to total equity ratio was found to be significantly affecting dividend yield from the financial year 2010-2011 to 2020-2021 (result shown below in table 2 ). table 2. below shows the results of panel data regression result for the period 2010-11 to 2020-21. robust divpercent coef. std. err. t p>|t| [95% conf. interval] sales 8.47e-06 2.75e-06 3.08 0.002 3.06e-06 .0000139 roa 43.52311 8.825933 4.93 0.000 26.15453 60.89169 currentratio 1.246671 1.246429 1.00 0.318 -1.206181 3.699522 quickratio -1.688633 1.592382 -1.06 0.290 -4.822287 1.445021 debttoequit~o .0963707 .0469315 2.05 0.041 .0040142 .1887273 nocftota 4.653729 3.83322 1.21 0.226 -2.889675 12.19713 cashandcash~s -3.33e-08 .00001 -0.00 0.997 -.0000197 .0000197 retototaleq~o -.0043646 .0022172 -1.97 0.050 -.0087279 -1.23e-06 debttototal~o -.0115922 .0214151 -0.54 0.589 -.0537352 .0305507 _cons 7.251368 .8931895 8.12 0.000 5.493658 9.009078 source: results obtained from stata 16. the results above in table 2 have been reported using the same variant of panel data regression technique as the hausman test suggests the use fixed-effect model (appendix b.1 ) and standard error estimates are robust to disturbances being heteroscedastic (appendix b.2). https://www.princeton.edu/~otorres/panel101.pdf anwar & kumar., indian journal of finance and banking 10(1) (2022), 54-60 58 return on assets, debt to equity ratio, cash and cash equivalents & debt to total capital ratio were again found to be significantly affecting dividend yield of two time periods merged from the financial year 2000-01 to 2020-2021 (result shown below in table 3) as consistent with the findings of the first study. table 3. below shows the results of panel data regression results for the period 2000-01 to 2020-21. robust divpercent coef. std. err. t p>|t| [95% conf. interval] sales -1.58e-06 1.24e-06 -1.27 0.205 -4.02e-06 8.68e-07 roa 15.11666 4.000729 3.78 0.000 7.243503 22.98981 currentratio .2063839 .4004855 0.52 0.607 -.5817434 .9945112 quickratio -.4230762 .4866113 -0.87 0.385 -1.380693 .5345406 debttoequit~o -.0014024 .0004352 -3.22 0.001 -.0022589 -.0005459 nocftota 1.640437 2.588111 0.63 0.527 -3.452783 6.733656 cashandcash~s .0000466 .0000134 3.48 0.001 .0000202 .0000729 retototaleq~y -.0000535 .0000495 -1.08 0.280 -.0001508 .0000439 debttototal~o -.0557873 .0155427 -3.59 0.000 -.0863743 -.0252003 _cons 9.28502 .5192132 17.88 0.000 8.263245 10.30679 source: results obtained from stata 16. the results above in table 3 have been reported once again using the “fixed effect cluster” variant of the panel data regression technique same as in the first study as the hausman test suggests the use of the fixed-effect model (appendix c.1) and it is a robust method to be used where the standard errors disturbances are heteroscedastic and autocorrelated (appendix c.2 and c.3 respectively). concluding remarks the following three conclusions can be made based on the above results of this study  the dividend yield is directly related to the profitability of the firms as per findings in earlier studies. as more profitable the firm, the more its ability to pay dividends to shareholders.  leverage has a negative impact on the payment of dividends by firms once again consistent with the findings of the previous studies.  the liquidity of firms has a positive relationship with dividend yield as the more liquid the firms, they have more ability to pay cash dividends. figure 4. shows j.c. van horne's classification of factors affecting dividend policy. the above findings can be put into an above-shown figure of j.c. van horne's classification of factors affecting dividend policy (shown with blue arrows). author contributions: conceptualization, r.a. and s.k.; data curation, r.a. and s.k.; methodology, r.a.; validation, r.a. and s.k.; visualization, r.a. and s.k.; formal analysis, r.a.; investigation, r.a.; resources, r.a., software, r.a.; writing – original draft, r.a.; writing – review & editing, s.k.; supervision, s.k.; project administration, s.k.; funding acquisition, r.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. 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 black, f. (1998). the dividend puzzle'. streetwise: the best of the j portfolio manag, 10. brahmaiah, b., srinivasan, p., & sangeetha, r. (2018). determinants of corporate dividend policy in india: a dynamic panel data analysis. academy of accounting and financial studies journal, 22(2), 1-13. retrieved from anwar & kumar., indian journal of finance and banking 10(1) (2022), 54-60 59 https://www.abacademies.org/articles/determinants-of-corporate-dividend-policy-in-india-a-dynamic-paneldata-analysis-7138.html denis, d. j., & osobov, i. (2008). why do firms pay dividends? international evidence on the determinants of dividend policy. journal of financial economics, 89(1), 62-82. https://doi.org/10.1016/j.jfineco.2007.06.006 labhane, n. b., & mahakud, j. (2016). determinants of dividend policy of indian companies: a panel data analysis. paradigm, 20(1), 36-55. https://doi.org/10.1177%2f0971890716637698 madra-sawicka, m., & ulrichs, m. (2020). dividend payment policy across food industry companies–the case of european economies. prace naukowe uniwersytetu ekonomicznego we wrocławiu, 64(4), 146-159. https://doi.org/10.15611/pn.2020.4.11 miller, m. h., & modigliani, f. (1961). dividend policy, growth, and the valuation of shares. the journal of business, 34(4), 411-433. retrieved from https://www.jstor.org/stable/2351143 nathani, n., & gangil, r. (2019). determinants of dividend policy in indian companies: a panel data analysis. in proceedings of 10th international conference on digital strategies for organizational success. http://dx.doi.org/10.2139/ssrn.3308721 pinto, g., & rastogi, s. (2019). sectoral analysis of factors influencing dividend policy: case of an emerging financial market. journal of risk and financial management, 12(3), 110. https://doi.org/10.3390/jrfm12030110 yusof, y., & ismail, s. (2016). determinants of dividend policy of public listed companies in malaysia. review of international business and strategy, 26(1), 88-99. https://doi.org/10.1108/ribs-02-2014-0030 appendices appendix a 1) hausman fixed random coefficients (b) (b) (b-b) sqrt(diag(v_b-v_b)) fixed random difference s.e. sales -1.58e-06 -5.68e-07 -1.01e-06 1.38e-06 roa 15.11666 19.97453 -4.857872 .6234698 currentratio .2063839 .2309103 -.0245264 .2066785 quickratio -.4230762 -.4337633 .0106871 .2268247 debttoequi~o -.0014024 -.0019628 .0005604 . nocftota 1.640437 4.789302 -3.148865 .4447369 cashandcas~s .0000466 .0000365 .0000101 7.02e-06 retototale~y -.0000535 -.0000806 .0000271 .0000205 debttotota~o -.0557873 -.0647497 .0089623 .0058542 b = consistent under ho and ha; obtained from xtreg b = inconsistent under ha, efficient under ho; obtained from xtreg test: ho: difference in coefficients not systematic chi2(6) = (b-b)'[(v_b-v_b)^(-1)](b-b) = 81.36 prob>chi2 = 0.0000 (v_b-v_b is not positive definite 2) xttest3 modified wald test for groupwise heteroskedasticity in fixed effect regression model h0: sigma(i)^2 = sigma^2 for all i chi2 (300) = 1.2e+06 prob>chi2 = 0.0000 3) xtserial divpercent sales roa currentratio quickratio debttoequityratio nocft > ota cashandcashequivalents retototalequity debttototalcapitalratio wooldridge test for autocorrelation in panel data h0: no first-order autocorrelation f( 1, 296) = 11.166 prob > f = 0.0009 appendix b 1) hausman random fixed similar scale. coefficients (b) (b) (b-b) sqrt(diag(v_b-v_b)) random fixed difference s.e. sales 1.55e-06 8.47e-06 -6.93e-06 . roa 59.12369 43.52311 15.60058 . currentratio -1.104143 1.246671 -2.350813 . quickratio 1.071532 -1.688633 2.760166 . debttoequi~o -.0063944 .0963707 -.1027652 . nocftota 7.88746 4.653729 3.233731 . cashandcas~s 4.48e-06 -3.33e-08 4.51e-06 . retototale~o -.0051832 -.0043646 -.0008186 . debttotota~o -.0351521 -.0115922 -.0235599 . https://doi.org/10.1108/ribs-02-2014-0030 anwar & kumar., indian journal of finance and banking 10(1) (2022), 54-60 60 b = consistent under ho and ha; obtained from xtreg b = inconsistent under ha, efficient under ho; obtained from xtreg test: ho: difference in coefficients not systematic chi2(7) = (b-b)'[(v_b-v_b)^(-1)](b-b) = 482.64 prob>chi2 = 0.0000 (v_b-v_b is not positive definite) 2) xttest3 modified wald test for groupwise heteroskedasticity in fixed effect regression model h0: sigma(i)^2 = sigma^2 for all i chi2 (301) = 5.5e+05 prob>chi2 = 0.0000 3) xtserial divpercent sales roa currentratio quickratio debttoequityratio nocft > ota cashandcashequivalents retototalequity debttototalcapitalratio wooldridge test for autocorrelation in panel data h0: no first-order autocorrelation f( 1, 298) = 0.791 prob > f = 0.3746 appendix c 1) hausman fixed random note: the rank of the differenced variance matrix (6) does not equal the number of coefficients being tested (9); be sure this is what you expect, or there may be problems computing the test. examine the output of your estimators for anything unexpected and possibly consider scaling your variables so that the coefficients are on a similar scale. coefficients (b) (b) (b-b) sqrt(diag(v_b-v_b)) fixed random difference s.e. sales -1.58e-06 -5.68e-07 -1.01e-06 1.38e-06 roa 15.11666 19.97453 -4.857872 .6234698 currentratio .2063839 .2309103 -.0245264 .2066785 quickratio -.4230762 -.4337633 .0106871 .2268247 debttoequi~o -.0014024 -.0019628 .0005604 . nocftota 1.640437 4.789302 -3.148865 .4447369 cashandcas~s .0000466 .0000365 .0000101 7.02e-06 retototale~y -.0000535 -.0000806 .0000271 .0000205 debttotota~o -.0557873 -.0647497 .0089623 .0058542 b = consistent under ho and ha; obtained from xtreg b = inconsistent under ha, efficient under ho; obtained from xtreg test: ho: difference in coefficients not systematic chi2(6) = (b-b)'[(v_b-v_b)^(-1)](b-b) = 81.36 prob>chi2 = 0.0000 (v_b-v_b is not positive definite) 2) xttest3 modified wald test for groupwise heteroskedasticity in fixed effect regression model h0: sigma(i)^2 = sigma^2 for all i chi2 (300) = 1.2e+06 prob>chi2 = 0.0000 xtserial divpercent sales roa currentratio quickratio debttoequityratio nocft cashandcashequivalents retototalequity debttototalcapitalratio > ota cashandcashequivalents retototalequity debttototalcapitalratio 3) wooldridge test for autocorrelation in panel data h0: no first-order autocorrelation f( 1, 296) = 11.166 prob > f = 0.000 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 11(1) (2022), 15-28 15 finance and banking ijfb vol 11 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa dividend policy: a bibliometric analysis divya saini (a)1 priti sharma (b) (a) research scholar, department of commerce, mdu rohtak, india; e-mail: divyasaini759@gmail.com (b) assistant professor, department of commerce, mdu rohtak, india; e-mail: pritisrm04@gmail.com a r t i c l e i n f o article history: received: 22nd june 2022 accepted: 23rd october 2022 online publication: 5th november 2022 keywords: bibliometric analysis, dividend payouts, dividend policy, lintner model jel classification codes: g3, g35 a b s t r a c t the dividend is one of the controversial topics in financial management which mean earnings of management how much amount is distributed to the shareholders and what percentage is retained in the business. the main objective of the study is to provide a comprehensive overview of previous studies related to the topic of dividend policy in the context of statistical analysis of published articles/documents around the world. for this purpose, bibliometric analysis was conducted through the bibliometrix library and the biblio-shiny platform of rstudio. the web of science database was used for the collection of data on the topic of dividend policy. the search was made in the web of science database with the keywords “the dividend policy”, “dividend payouts”, “determinants” and “lintner model” covering the period of 20 years from 2002 to 2022. the publications/documents/articles included in the study were written by 839 authors from all over the world. the bibliometric analysis of the collected data indicates that the dividend policy has a significant contribution to scientific production. in 2011, there was a great increment in the number of publications and since 2018 the publications are continuously increasing. usa, uk and china are the pre-eminent countries having significant contributions to research on dividend policy. © 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 with the advancement of economic scenario, investment in different sectors of economy is rapidly increasing. due to increase in investment, there is increase in return also. these returns are the earnings for the companies. these earnings can be utilized in different ways like retained in business for growth purpose or it may be distributed to the investors (dong et al., 2005). the amount which is dispersed to the shareholders for their investment is known as dividend. joshua warner (2019) “a dividend is money that is regularly paid by a business to its shareholders using profits, cash reserves or even debt”. dividend policy refers to the financial policies regarding payment of dividend. it refers to firm’s decision about its earnings, which mean how much of its earnings is distributed among equity shareholders & how much is retained in business. dividend payouts decision is considered as an integral part of firm’s financial ecosystem (mensa et al., 2014). dividend decision is like a puzzle which remain unsolved as different researchers have different viewpoints regarding dividend policy. in words of black (1976) “the harder we look at the dividend picture, the more it seems like a puzzle, with the pieces that just do not fit together”. dividend is one of the controversial topics of study as different researchers have different point of view like: dividend policy is affected by executive stock option holdings & stock options (de cesari & ozkan, 2015), growth opportunities (flavin & o’connor, 2017), creditor rights & culture (byrne & o’connor, 2017), bank risk taking (onali, 2014), new ceo compensation (chen et al., 2019), restricted monetary policies (pandey & bhat, 2007), corporate social responsibilities (cheung et al., 2018), leverage (cooper & lambertides, 2018), family control, tangibility& firm size (yousaf et al., 2019), institutional ownership & board composition (abdelsalam et al., 2008), profitability (renneboog & trojanowski, 2007) and many more variables. lintner (1956) proposed that dividend depends upon current earnings and lagged dividend of firms. renneboog and trojanowski (2011) reveals that dividend payout decisions of firms are affected by liquidity needs of directors. michaely and roberts (2011) in their study disclose that ownership structure and incentives are the main factors that play an important role in determining dividend policy. some of the firms those paying dividend, now they stop paying (michaely & moin, 2022). there are no appropriate sets of factors 1corresponding author: orcid id: 0000-0002-9798-1436 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v11i1.1820 to cite this article: saini, d., & sharma, p. (2022). dividend policy: a bibliometric analysis. indian journal of finance and banking, 11(1), 15-28. https://doi.org/10.46281/ijfb.v11i1.1820 mailto:pritisrm04@gmail.com http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v11i1.1820 https://orcid.org/0000-0002-9798-1436 https://orcid.org/0000-0002-0773-6673 saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 16 influencing dividend policy of all the firms because dividend policy is highly volatile to various factors like firm & market characteristics and alternative forms of dividend (baker & weigand, 2015). the main purpose of this study is to focus on following questions related with dividend policy over the year 20022022. these are as under:  rq 1 – what is the statistical result of the study in context of document type, document content, authors and author’s collaboration?  rq 2 – what are the important keywords (author keywords and keywords plus) related with the study? and also to find out the co-occurrence between keywords.  rq 3 –which source is most significant in terms of publishing articles related with the study?  rq 4 – who are the main contributing authors related with the study?  rq 5 – which country or institution have highest contribution in the study? and also, to find out the co-citation network of papers and sources related with dividend policy. materials and methods bibliometric analysis of study the word bibliometric was first propounded by otlet (1934) which means “the measurement of all aspects related to the publication and reading of books and documents”. it is a statistical method which is used for analysis of books, articles, documents and other publications on basis of scientific data. it is a quantitative method for describing, monitoring and evaluating the published research articles/documents. various software available for bibliometric analysis but the present study is based on r software. it was carried out through bibliometric library and biblio-shiny platform of rstudio. biblioshiny is shiny application which gives a web-interface for the purpose of bibliometric analysis. it depicts comprehensive outlook of dividend policy like authors, author’s collaborations, citation, co-citation, journal, affiliated institutions, top countries, keywords and co-occurrence of keywords etc. data collection the data for the study had been collected through web of science database as on january 28, 2022 covering a period of 20 years from 2002 to 2022. in web of science database, the search was made through following words “dividend policy” or “dividend payouts” and “determinants” and “lintner model”. this search gave a core collection of 2435 results, then after certain refinement on basis of publication years, web of science categories, document types, language etc., it was reduced to 1004 results. on basis of important keywords, a total of 415 articles which were written by 839 authors, was selected for bibliometric analysis performed through bibliometric library and biblio-shiny platform of rstudio. figure 1 describe the workflow of study as firstly the main keywords were identified for search in web of science database and 415 articles were selected after certain refinements. after that collected data were analyze through bibliometrix library and biblio-shiny platform of r studio. figure 1. workflow of study results and discussions statistical results table 1 elucidate the main information about the study that was analyze through r studio. this table is based on data extracted from web of science database, which is the most widely used, oldest and authoritative database for publications & citations. this study comprised a total of 415 documents, which consists of published articles, articles from book chapters, early access and proceeding papers. it covers a total timespan of 20 years from 2002 to 2022. the 415 documents in the study were published by 839 authors from different institutions and countries around the world with average citations 29.13 per document and the authors collaboration index is 2.22. the documents used in this study includes a sum total of 8614 references, 654 keywords plus and 888 author’s keywords. table 1. information about study description about data results time duration 2002-2022 sources 66 documents 415 average years from publication 7.82 search criteria keywords: dividend policy, dividend payout, determinants, lintner model data collection database: web of science. a total of 415 documents selected after certain refinements. data analysis and presentation of results software: r studio (bibliometrix library and biblio-shiny platform) descriptive analysis & presentation of results. saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 17 average citations per documents 29.13 average citations per year & documents 2.57 references 8614 document-types article 395 articles from book chapter 1 article; early access 9 article; proceedings paper 10 document-contents keywords plus 654 author's keywords 888 authors authors 839 author appearances 1023 authors of single-authored documents 65 authors of multi-authored documents 774 authors collaboration single-authored documents 67 documents per author 0.495 authors per document 2.02 co-authors per documents 2.47 collaboration index 2.22 source: authors source keywords evolution keywords are the important words/main idea which gives vital information about the study. a keyword is word that gives information about the content present in a particular document. two types of keywords are used the first one is author keywords: it comprises of words selected by author which in their opinion best represent the content of document, the other is keyword plus: it comprises of frequently occurring words in title of the cited articles. figure: 2 represent the word cloud of author keywords. it is clearly visible from this figure that the word “dividends”, “payout policy”, “corporate governance”, “dividend payout” are the most highlighted. the author ferris et al. (2009) in “catering effects in corporate dividend policy: the international evidence” used dividend and catering as keywords. andres et al. (2009) in their paper titled as “dividend policy of german firms a panel data analysis of partial adjustment models” used dividend policy, payout policy, dividend smoothing, corporate governance as keywords. figure 2. word cloud of author’s keywords figure 3 shows the occurrence of most relevant keywords. it portrays the frequency of keywords like the word “policy” occurs 124 times, “earnings” occurs 100 times and the word “payout policy” occurs only 52 times. the article “the evolving relation between dividend and flexible payouts: a different evolution” written by armitage, s. and gallagher, r. (2021) used policy, disappearing dividend, earnings, cash, market, determinants as keywords. saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 18 figure 3. occurrence of most relevant keywords figure 4 represent the co-occurrence between the keywords. co-occurrence of keywords means the together occurring of keywords. figure: 4 shows the clusters of different colors and the interconnection between them. in blue cluster payout policy, information investment, disappearing dividends, share repurchase etc. are the highlighted words and these are interrelated to each other. figure 4. co-occurrence network between keywords plus figure 5. word growth of keywords 0 20 40 60 80 100 120 140 policy ownership disappearing dividends performance taxes frequency k ey w o rd s p lu s occurrences of most relevant keywords saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 19 figure 5 depicts the word growth of keywords. it is the graphical representation of keywords associated with dividend policy. these are agency cost, corporate governance, determinants, disappearing dividend, earnings, information, investment, ownership, payout and policy. it shows growing tendency of these keywords over the time period from 2002 to 2022. figure 6. dendrogram of keywords plus figure 6 shows the dendrogram of keywords plus. dendrogram is like a tree plot consisting of hierarchical relation between different keywords. the analysis of dendrogram is based on the height at which the keywords are connected. the blue lines show the keywords related with dividend policy and the red lines shows the factors determining the dividend policy. the words at same height have similar significance. source’s significance in field of research, sources are the online platform where one can get access of articles, documents, books, journal etc. there are various journals available but the quality journals are those whose impact factor is higher. the impact factor of journal is measured with the help of h index which is based upon publications and citations of particular journal. figure: 7 portrays the source significance on basis of number of publications and value of h index. it shows that the journal of corporate finance has 58 highest number of publication and also the value of h index of this journal is highest. the most significant source for the study of dividend policy is “journal of corporate finance” followed by “managerial finance”, “journal of business finance & accounting” and “journal of financial economics” etc. figure 7. main source/journal (top 20) 0 10 20 30 40 50 60 70 journal of corporate finance journal of business finance \& accounting journal of banking \& finance pacific-basin finance journal international review of financial analysis international review of economics \& finance review of financial studies european financial management journal of finance mathematical finance no. of articles and h index so u rc es h index articles saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 20 figure 8 represent most local cited top 20 journals. the larger value of citations indicates the quality and impact of particular source. the journal of financial economics has highest numbers of citations 2956 which is followed by journal of finance has 2622 numbers of citations. as shown in figure: 7 “journal of corporate finance” has highest value of h index and articles but its local citation is 613 only. figure 8. most local cited sources (top 20 sources) top authors top authors or the main authors who have highest contribution in study can be identified through number of publications, citation score, value of h index etc. the study includes a total of 415 documents written by 839 authors. figure: 9 depicts the total citations of top 20 authors. it depicts that michaely r from cornell university, johnson school of management, usa has highest total citations 2023, brav a of duke university, fuqua school of business, usa, graham jr of duke university, durham, usa & harvey cr have same number of citations 831. michaely, r. also have highest number of publications and greater value of h index. figure 9. most cited authors (top 20) figure 10 portrays relevance of top 20 authors by number of citations of their particular article. the citation score of any article represents its significance. brave, a. et al. (2005) from duke university of usa has highest number of 29562622931849613519503390370311280254244224210178164153148114 0 500 1000 1500 2000 2500 3000 3500 j financ econ rev financ stud j financ quant anal financ manage working paper econometrica j account res number of local citations so u rc es most local cited sources 2023 831 831 831 723 723 657 657 548 524 470 429 348 327 327 327 327 235 235 227 0 500 1000 1500 2000 2500 michaely r brav a graham jr harvey cr deangelo h deangelo l baker m wurgler j stulz rm grullon g skinner dj denis dj osobov i ahmed as billings bk morton rm stanford-harris m grinstein y brockman p renneboog l no. of citations a u th o rs total citations saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 21 citations 821 on their article titles as “payout policy in the 21st century”. the second highest citation 548 is of deangelo et al. (2006) from university of southern california, usa in their document titled as “dividend policy and the earned/contributed capital mix: a test of the life cycle theory”. there are many other authors who have splendid citation score like baker and wurgler (2004) in their article titled as “a catering theory of dividends”, grullon and michaely (2002) etc. figure 10. relevance of authors by number of citations and particular article (top 20) figure 11. time evolution of authors (top 20) figure 11 clearly shows the production of top 20 authors over the time period of 20 years from 2002 to 2022. the author michaely, r. of cornell university, johnson school of management, usa has greatest contribution in field of 0 100 200 300 400 500 600 700 800 900 brav a, 2005, j financ econ deangelo h, 2006, j financ econ baker m, 2004, j financ grullon g, 2002, j financ denis dj, 2008, j financ econ skinner dj, 2008, j financ econ grinstein y, 2005, j financ von eije h, 2008, j financ econ leary mt, 2011, rev financ stud chay jb, 2009, j financ econ baker m, 2004, j financ econ deangelo h, 2006, j financ econ-a floyd e, 2015, j financ econ li w, 2006, j financ econ michaely r, 2012, rev financ stud short h, 2002, j corp financ brockman p, 2009, j financ econ gugler k, 2003, j bank financ hu ad, 2004, j financ quant anal brown jr, 2007, j financ no. of citations d o cu m en ts global citations local citations saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 22 research related with the topic dividend policy over the years from 2002 to 2022. he published an article on titled “dividend, share repurchase and substitution hypothesis” in 2002 having citation score 524, in 2004 titled as “the information content of share repurchase program” having citation score 298, in 2022 titled as “disappearing and reappearing dividends” and many more. another author renneboog, l. of tilburg university, netherland worked for 15 years from 2005 to 2020, he wrote an article titled as “when do german firms change their dividend?” in 2005, “how relevant is dividend policy under low shareholders protection?” in 2020 etc. there are many other authors who have significant contribution in the field of research related with dividend policy like baker and weigand (2015) etc. figure 12. collaboration network of authors figure 12 represent the collaboration network between different authors. it shows the collaborative work of authors with the help of different colors clusters. grey color cluster shows the collaborative work of deangelo et al. (2008) of university of southern california, usa. they jointly worked on an article in 2006 titled as “the irrelevance of the mm dividend irrelevance theorem” and in 2008 titled as “reply to dividend policy: reconciling dd with mm”. the green color cluster indicate the collaborative work of brockman and unlu (2009). they jointly work on the document in 2009 named as “dividend policy, creditor rights and the agency cost of debt” and brockman and unlu (2011) on “earned/contributed capital, dividend policy and disclosure quality: an international study”. figure 13. three-fields plot: references-authors-keywords saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 23 figure 13 depict the interconnection between references, authors and keywords with the three-fields plot. under this, there are three sections the left section represents the references, middle one indicates the authors and the right section represent the keywords used in the studies. the grey lines between these sections shows the inter-relation between references, authors and the keywords. the main keywords used by different authors are dividend, dividend policy, payout policy, agency cost, dividend smoothing etc. top institutions various authors have significant contribution in field of research on dividend policy. they have affiliations with different universities and institutions. figure: 14 clearly portrays the top 20 affiliated institutes, university of missouri, columbia, missouri has highest number of published articles. the other universities like harvard university (cambridge, united states), cornell university (ithaca, united states) and tilburg university (netherlands) also have great number of published articles. figure 14. top 20 affiliation of institutes figure 15 represent the collaboration network of institutes. it is shown through different color clusters. the green color cluster shows the collaborative work of cornell university (ithaca, united states and duke university (durham, usa). figure 15. collaboration network of institutes top countries usa has highest numbers of publications on the topic dividend policy both in terms of single country publications and multiple country publications as shown in figure 16. the contribution of other countries like united kingdom, china, australia and canada is also appreciable. 18 14 13 13 11 11 10 10 10 9 9 9 9 8 8 8 8 8 8 8 0 2 4 6 8 10 12 14 16 18 20 univ missouri cornell univ univ georgia bi norwegian business sch stern sch business univ chicago univ sydney la trobe univ rmit univ univ antwerp number of articles a ff ili at io n saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 24 figure 16. corresponding author’s country (top 20) the country usa has topped the list of country scientific production on the topic of dividend policy as shown in figure 17. usa has published a total of 434 articles followed by china 144, uk 128, and australia 93 etc. region frequency usa 434 china 144 uk 128 australia 93 canada 64 south korea 47 germany 42 netherlands 25 france 23 ireland 22 norway 20 belgium 19 new zealand 18 spain 18 pakistan 17 israel 14 japan 13 singapore 13 india 12 turkey 11 figure 17. country scientific production saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 25 different countries also work in collaborative way which makes the research more authentic. figure: 18 have different color clusters which indicate the collaboration network between various countries. the red color cluster shows the collaboration of usa, singapore, china, canada etc. figure 18. collaboration network between countries figure 19. co-citation network of papers saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 26 when two articles are cited together by another article it is known as cocitation. figure: 19 represent the cocitation network of papers published by different authors. it is shown with the help of various clusters of different colors and the lines between then shows the interrelation. figure 19 shows the co-citation network of sources. it is clearly visible from this figure that how different sources are connected to each other. figure 20. co-citation network of sources conclusions the publications/documents related with dividend policy were analyzed through bibliometric analysis. it was discovered that the research on the topic dividend policy has been increasing with some fluctuations. in 2011, there was great increment in number of publications and from 2018 the publications are continuously increasing. usa, uk and china are the preeminent countries having significant contribution in research on dividend policy, in both overall production and in single & multiple countries publications. the major affiliated institutes associated with the study are university of missouri, harvard university and cornell university. the most significant source related with dividend policy is journal of corporate finance, as it has highest number of published articles and greater value of h index. journal of financial economics is also considered as important because of highest number of local citations. the author michaely, r. of cornell university, johnson school of management, usa has greatest contribution in scientific production over the period from 2002 to 2022. the keyword analysis shows that the keywords used by the authors are dividends, payout policy, share repurchases, dividend smoothing, corporate governance, agency theory, agency cost etc. and the main frequently occurring words (keywords plus) are policy, earnings, information, corporate governance, ownership, investment, agency costs, payout policy etc. the growth chart of key words depicts that the keywords namely agency cost, corporate governance, determinants, earnings, information, investment, ownership, policy and payout shows increasing trend over the years. the theoretical implications of the study provide a detailed description on the research topic dividend policy through bibliometric analysis. it shows scientific production over the years, important keywords including both author keywords and frequently occurring words, most significant journal, top authors, top institutions, top countries and their scientific collaboration on the research topic dividend policy. the main practical implication of the study is that it will be beneficial for the researcher as it provides a base for historical and theoretical foundation for dividend policy research. the main limitation of the study is that the data used for bibliometric analysis was extracted from only one database, web of science. there are many other database with many scientific publications and with different authors, keywords, etc. it may saini & sharma, indian journal of finance and banking 11(1) (2022), 15-28 27 be possible that when bibliometric analysis is performed with different database the results may vary. the further study on this topic can be made by using other databases which will give more reliable and genuine results. author contributions: conceptualization, p.s. and d.s.; methodology, p.s. and d.s.; software, p.s.; validation, p.s. and d.s.; formal analysis, p.s. and d.s.; investigation, p.s. and d.s.; resources, p.s. and d.s.; data curation, p.s. and d.s.; writing – original draft, p.s. and d.s.; writing – review & editing, p.s. and d.s.; visualization, p.s. and d.s.; supervision, p.s. and d.s.; project administration, p.s. and d.s.; funding acquisition, p.s. and d.s. 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: n/a. 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 abdelsalam, o., el-masry, a., & elsegini, s. 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(2019). effect of family control on corporate dividend policy of firms in pakistan. financial innovation, 5(1), 1-13. https://doi.org/10.1186/s40854-019-0158-9 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 9(1) (2022), 213-229 213 finance and banking ijfb vol 9 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa analysis of the factors affecting the financial performance of insurance companies listed on the palestine stock exchange firas s. q. barakat (a) jawad hussein (b) oroubah a. r. mahmoud (c)1 mohammed bayyoud (d) (a) ph.d., assistant professor, department of accounting, faculty of economics and business, al-quds university, palestine; e-mail: fbarakat@staff.alquds.edu (b) external auditor, insurance sector in securities exchange commission, palestine, e-mail: jawadhussein38@gmail.com (c) ph.d., assistant professor, department of banking & finance, faculty of economics and business, al-quds university, palestine, e-mail: omahmoud@staff.alquds.edu (d) lecturer, department of banking & finance, faculty of economics and business, al-quds university, palestine, e-mail: mbayyoud@staff.alquds.edu a r t i c l e i n f o article history: received: 24 january 2022 accepted: 26 march 2022 online publication: 31 march 2022 keywords: financial performance, insurance, solvency margin, reinsurance, institutional factors governance jel classification codes: g32, g22, g34, h54 a b s t r a c t the objective of this study was to investigate the factors affecting the financial performance of insurance companies in palestine. the entire study population was targeted at 7 insurance companies listed on the palestine exchange for the period between 2010 and 2019. the researchers used multiple linear regression analysis to create two models that represent the financial performance; the study adopted two models for measuring financial performance, the first model measuring financial performance by return on assets, and the other measuring financial performance by return on equity. the results showed a positive and statistically significant impact on the solvency margin, the state's legal system, the size of the board of directors, and the size of the company on the return on assets. there is a negative, statistically significant impact on each of the claims loss ratios, the dependence on the four major auditing firms, and the ownership of board members on the return on assets. the reliability of reinsurance and the audit committee did not show a statistically significant effect on the return on assets. the results showed a positive, statistically significant impact of the solvency margin and company size on the return on equity. the results indicate a negative, statistically significant impact of both the claims loss ratio and the audit committee on the return on equity. reinsurance dependent, dependence on the four major auditing companies, the state's legal system, the size of the board of directors, and the ownership of board members have no significant effect on the return on equity. the study recommends that insurance companies in palestine should comply with the required margin of money, which was set by the palestinian capital market authority at 150%. © 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 insurance companies play an important role in economic growth, as insurance companies facilitate various economic transactions in the country by transferring risks and providing compensation. these companies provide financial security in the country (cudiamat & siy, 2017), as they enhance local and foreign investment opportunities, which positively affects the economic growth of the country. the insurance services provided by insurance companies for the benefit of other businesses, whether companies or individuals, help them to continue working and achieve profits by transferring some of the risks to insurance companies. in this sense, the developed insurance industry is an important factor for economic development because it works to reduce the material risks faced by the various economic sectors; this is because it helps companies to continue their operations without worrying about the occurrence of unusual events that limit their production capacity (mogro & barrezueta, 2019). 1corresponding author: orcid id: 0000-0003-0654-3690 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v9i1.1679 to cite this article: barakat, f. s. q., hussein, j., mahmoud, o. a. r., & bayyoud, m. (2022). analysis of the factors affecting the financial performance of insurance companies listed on the palestine stock exchange. indian journal of finance and banking, 9(1), 213-229. https://doi.org/10.46281/ijfb.v9i1.1679 mailto:jawadhussein38@gmail.com http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v9i1.1679 https://orcid.org/0000-0003-3065-4681 https://orcid.org/0000-0001-8604-2997 https://orcid.org/0000-0003-0654-3690 https://orcid.org/0000-0002-1336-0545 barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 214 insurance refers to procedures, systems, or businesses whereby financial protection (or financial compensation) for life, property, health, etc. is compensated for unforeseen events that can occur such as death, loss, damage or illness, involving regular premium payments during a certain period against policies that guarantee this protection (johny, purwoko, & merawaty, 2021). on the other hand, the term insurance can be defined by two schools of thought: transfer school and pooling school: according to transfer school “insurance is a device for reducing uncertainty of one party, called the insured, by transferring certain risks to another party; called the insured, which offers a repair, at least in part, of the economic losses incurred by the insured. pooling school: according to the pooling school “the essence of insurance is to eliminate the uncertainty or risk of loss for an individual by bringing together a large number of similarly exposed individuals”, insurance works on the principle of risk pooling where people contribute to a mutual fund in the form of premiums and where the lucky ones who do not incur a loss help the unlucky who suffer a loss during a specified insurance period (deyganto & alemu, 2019). importance of the study the utmost importance of this study stems from the fact that it helps in analysis factors that affecting the performance of palestinian insurance companies, which helps in identifying the strengths and weaknesses within these companies in terms of: insurance factors, institutional factors, and governance factors, by providing information sufficient performance of the company from which internal bodies (company management) benefit from, in addition to external bodies benefiting from financial analysis data such as: auditors, in the analytical tests, and any other party of rational economic decision-makers. problem of the study many studies have focused on the factors affecting the financial performance of insurance companies, many areas have been studied by many researchers, but there are still many unresolved issues in the previous literature. the reason for this literary gap is that each country has a different economic, financial and political structure. similarly, from one time period to another, very few studies were found that examined factors affecting the financial performance of insurance companies by addressing more than one axis, for example, the extent to which insurance industry factors and governance factors affect the financial performance of insurance companies were not studied. insurance in palestine. also, previous literature did not address institutional factors and their impact on the performance of financial insurance companies. this study attempts to answer the following questions: first main question: what is the extent of the impact of insurance industry factors on the financial performance of insurance companies listed on the palestine stock exchange? sub-questions  what is the extent of the impact of the solvency margin of the insurance company on its financial performance?  what is the extent of the impact of the insurance company's claims loss ratio on its financial performance?  what is the extent of the impact of the reinsurance reliability of the insurance company on its financial performance? second main question: what is the extent of the impact of institutional factors on the financial performance of insurance companies listed on the palestine stock exchange? sub-questions  what is the extent of the impact of relying on the big four to audit the accounts of the insurance company on its financial performance?  what is the extent of the impact of the state's legal system on the financial performance of insurance companies? third main question: what is the extent of the impact of governance factors on the financial performance of insurance companies listed on the palestine exchange? sub-questions  what is the extent of the impact of the size of the insurance company's board of directors on its financial performance?  what is the extent of the impact of the ownership of the board of directors of the insurance company on its financial performance?  what is the extent of the impact of the existence of the audit committee emanating from the board of directors of the insurance company on its financial performance? limitations of the study it is related to the theoretical and practical frameworks of the study: the study was limited to the financial ratios and dummy independent variables distributed over three groups, the insurance industry factors, institutional factors, and governance factors (which were mentioned only within the theoretical and practical frameworks). it included a total of eleven percentage points among all independent, dependent, and control factors, for which the researcher had sufficient financial data to calculate. barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 215 theoretical framework the theories institutional theory institutional theory revived in 1977, (meyer & rowan, 1977) identified the foundations of institutional theory when discussing the environment of formal institutional structures, and (dimaggio & pawell, 1983) explained the existence of an impact of the common legal environment in the form of the behavior and structure of institutions in addition to the impact of the institution on the social environment and political decisions. scott (2008) reported that institutional theory looks at the environment influencing the institution such as the political, legal and social environment, and defines institutional theory as "a widely accepted theoretical position that emphasizes rationality, similarity, and legitimacy myths." institutional theory this study is based on the institutional theory, because it studies the impact of the state's legal environment on the financial performance of insurance companies. legitimacy theory suchman (1995) defines legitimacy as a generalized perception or assumption that the actions of an entity are desirable, appropriate, or appropriate within a socially constructed system of rules, values, beliefs, and definitions. in other words, legitimacy is the process by which an organization justifies its right to exist for a peer or superior system (mousa & hassan, 2015). legitimacy relies heavily on subjective and collective assessments of powerful stakeholders resulting in a better understanding of legitimacy as socially constructed (dube & maroun, 2017). organizational legitimacy is defined as “a condition, which exists when the value system of an entity is identical with the value system of the larger social system of which the entity is a part. when there is a discrepancy, actual or potential between the two value systems, there is a threat to the entity’s legitimacy,” “legitimacy theory indicates that when there is a discrepancy between company actions and societal expectations, management uses disclosure methods such as annual reports in order to help alleviate societal concerns or, more precisely, what they consider to be societal concerns (lanis & richardson, 2012). agency theory the beginnings of agency theory go back to smith (1776) when he posed the problem of separating ownership and management at work. agency in cases where one individual called the agent is engaged by another individual called the owner (principle) to act on his behalf on a fixed remuneration, both persons are assumed to be the beneficiary, and motivated by financial and non-financial factors, incentive problems may arise , especially in light of information uncertainty and inconsistency (birjandi, hakemi, & sadeghi, 2015). osho and ayorinde (2018) clarified the principal-agent relationship as a contract under which one or more (principal) principles engage another agent (the agent) to perform some service on their behalf, which includes giving some decision-making power to the agent. while the intent of both parties in an agency relationship is to act in the interest of the owner (principle), information asymmetry and greed tempt management to pursue personal goals rather than those of the owner (principle), this conflict of interest or mismatch of goals between management and shareholders is described as agency problem. this theory helps in implementing various governance mechanisms to control the work of agents in companies (panda & leepsa, 2017). panda and leepsa (2017) classified the agency problem into three types, the first type is between the owners (principles) and agents (agents), which arises due to the asymmetry of information and the variance in risk-sharing situations, the second type of conflict occurs between the major and small shareholders, and it arises because the major owners make decisions in their favor at the expense of the minor shareholders. the third type of agency problem occurs between owners and creditors. this conflict occurs when owners make more risky investment decisions against the will of the creditors. stakeholder theory stakeholder theory has been found to be a particularly useful viewpoint for addressing some of the important issues in business from an international perspective. it provides an opportunity to reinterpret a variety of concepts, models, and phenomena across different disciplines. stakeholders are typically defined as individuals, groups, and organizations that have an interest in a company's operations and results and on which a company depends to achieve its goals, and include employees, managers, shareholders, financiers, customers, and suppliers (harrison, freeman, & sá de abreu, 2015). in other words, stakeholders are defined as any group or individual that can influence or be affected by a company's achievement of its objectives or performance (miles, 2017). the variables definitions solvency margin the concept solvency margin appeared in the 1970s in europe. until then, the only condition that a life insurance company had to fulfill was that after distribution of the surplus, if any, the value of its assets should not be less than the value of its liabilities. instead, it was stipulated that the value of assets should exceed the value of liabilities by a certain margin. this margin was known as the solvency margin (gour & gupta, 2012). in general, solvency is a measure of a company's longterm financial ability. it refers to the company's ability to meet its long-term financial obligations. while solvency is of interest to various stakeholders in the organization, it is of paramount importance to both investors and creditors (morara & sibindi, 2021). a creditworthy and concessional company is one that is in a position to pay current and subsequent claims as they become due (going case), the higher the solvency margin, and the greater the level of confidence of creditors, investors, existing customers and potential customers (morara & sibindi, 2021). solvency margin has been under study and development since the early 2000s and has come to be called solvency ii which is currently one of the most complex barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 216 insurance systems in the world. it is built on the principles of market consistency and integrating strong risk management and governance within insurance companies. for businesses with long-term guarantees. the previous solvency margin system, in force since the 1970s and which has come to be known as first solvency, was not risk sensitive and a number of key risks, including market, credit and operational risks, were not explicitly considered in the capital requirements (rae, barrett, brooks, chotai, & pelkiewicz, 2018). claims loss ratio claims are amounts payable. also known as claims loss ratio, the claims ratio is measured by the number of claims in a period divided by the total premiums earned for the same period. as part of insurance operations is liquidity risk management and it is necessary to have a thorough understanding of the proportion of claims incurred, if the value is higher than expected or established standards, then further investigation is required to find out the reason for this and it is important to check whether there is a threat of insurance fraud, if the ratio was lower than expected and may indicate unrelated products or difficulties in claiming, which may affect customer satisfaction, and obviously requires further investigation (olalekan, 2018). in other words, claims are the ratio of total losses incurred “paid and reserved” in claims plus adjustment expenses divided by total premiums earned. for insurance companies (berhe & kaur, 2017). reinsurance in this modern era, risk conscious individuals and organizations with a high level of risk seek adequate protection against the negative consequences that may arise due to the presence of risks. the insurance company also seeks, in order to reduce its heavy liabilities, to transfer part of the burden of risk to other institutions, namely, reinsurance companies (adekunle & stephen, 2017). in other words, reinsurance is one of the ways in which insurance companies effectively transfer parts of their risks arising from insurance claims. it is clear that reinsurance brings benefits not only to the reinsurance company, but also to the insurance company (huang, ouyang, tang, & zhou, 2018). reinsurance has many benefits. first, low volatility in underwriting results will protect insurance companies from unexpected large losses and reduce the capital required to support the business, since capital has a cost, the use of reinsurance may reduce the average cost of capital and increase the value of the company. second, with reinsurance insurers can insure more risk with the same amount of capital, thus spreading their overheads over a broader base of business. third, improved solvency may help reduce the traditional underinvestment problem and improve the financial quality of insurance companies. as a result, policyholders will not demand these high-risk compensation, which may lead to lower insurance rates. fourth, because reinsurance premiums are tax-deductible, using reinsurance may improve the profitability of insurance companies. finally, by accessing the expertise of reinsurers, insurers may achieve a better understanding of assumed risks and ensure more accurate risk assessments (lei, 2019). big4 audit firms provide reasonable assurance of the correctness of financial statements to investors. it is a formal external oversight mechanism that can provide institutional legitimacy. the auditor's report will be more important in countries where legal systems are weak, the company's external auditor can have an impact on the quantity and quality of financial and non-financial statements. large and international audit firms require more compliance with international accounting and auditing standards, as audit firms follow in their procedures and implement the control aspects required by international auditing standards, providing better quality auditing and auditing than local firms. they can usually advise on disclosing more information, these companies are usually larger than local companies. rahman, meah, and chaudhory (2019) indicated that the size of the audit firm is an influencing factor on the financial performance of companies. legal system the political and legal environment and economic growth have a relationship with each other. a stable political environment is important for the insurance industry to develop and thrive. likewise, a country experiencing political instability hampers economic growth and creates an uncertain environment for investment (pant & bahadur kc, 2019). the institutional framework and political stability of the state are important in a number of economic areas, including the insurance industry. it is clear that legal rules are important to this sector, based on the contractual obligations assumed by both parties and the insurance industry is expected to develop further if the insured persons feel protected by the legal system and law enforcement. moreover, the integrity of this legal environment depends on the political context, for example, controlling corruption can significantly affect confidence in the insurance system in general, due to short or long-term private engagements. using the average of six indicators to measure voice and accountability, political stability, government effectiveness, organizational quality, rule of law, and control of corruption (mare, dragos, dragota, & muresan, 2016). board size the size of the board of directors refers to the total number of board members of any company, and determining the ideal size of the board of directors for companies is very important because the number and quality of directors in the company determine and affect the performance of the board of directors and thus the performance of the company (azutoru, obinne, & chinelo, 2017). the size of the board of directors is quantitative in relation to the number of components (board size) and has resulted in conflicting evidence about the effectiveness of governance: for some large councils allow for a more effective integration of opinions, experiences, skills and contacts and therefore have a positive relationship, and for others barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 217 the mark is negative because as the size of members increases, coordination becomes more difficult and this increases the strength of the ceo (anderloni, moro, & tanda, 2020). ownership of board members the board of directors is responsible for maintaining assets in order to facilitate the completion of administrative work and contribute to high efficiency (dakhlallh, rashid, abdullah, & dakhlallh, 2019), has proposed several internal and external governance mechanisms that, such as board formation, internal ownership or council ownership and external ownership as a means of controlling agency disputes and reducing agency costs. many accounting theories, including agency theory and consolidation theory highlight the critical role of internal ownership or ownership of board members, suggest that such types of board ownership can serve as a double-edged sword in terms of their impact on agency costs and company performance. the ownership of board members can reduce agency conflicts as a result of aligning interests between board members and owners. however, higher levels of board ownership can create a state of agency conflict by encouraging controlling shareholders to act opportunistically to confiscate wealth from other shareholders (habtoor, 2021). audit committee the audit committee can be defined as "a select number of board members whose duties include helping auditors remain independent of management," the majority of audit committees are board members who are not members of the company's executive management (dakhlallh, rashid, abdullah, & al shehab, 2020). the audit committee makes a significant contribution to the company as part of the application of corporate governance principles in the form of high-quality internal supervision of the company to preserve the rights of shareholders and corporate stakeholders. the audit committee's duties are closely linked to the review of the risks faced by the company, as well as compliance with regulations, the audit committee must participate in the appointment of external auditors, taking into account risks, including the potential for inadequate scrutiny and non-independent external auditors and/or the performance of external auditors who do not meet standards (sofia & avianti, 2019). the chairman of the audit committee must be independent and must have appropriate financial experience (sankhla, 2021). company size company size can be measured in different ways such as total assets, stock market value, average sales level and sales amount (djunid & amelia, 2018). as well (qoyum, setyono, & qizam, 2017) says the size of the company is displayed through total assets, total sales, average total sales and average total assets. return on assets return on assets is the percentage of profitability that provides the amount of profit a company can make from its assets. in other words, roa measures the efficiency of the company's management in making profits from its economic resources or assets on its balance sheet. the company's net income reflects the amount of profit the company makes. to increase return on assets, companies must be able to improve the position and growth of dividend-generating assets (puspitasari, sudiyatno, hartoto, & widati, 2021). return on equity roe is part of the profitability ratios that must be known to management in its capital management. roe is the ratio for measuring net income after tax with private capital. this ratio demonstrates the efficiency of private capital use, the higher the position of the company's owners, and vice versa, roe is the ratio used to assess the extent to which the company uses its resources to be able to provide a return on equity (junaeni, 2017). literature review insurance industry factors koc (2016) aimed to identify factors affecting the performance of ise-listed insurance companies represented by the return on net assets (roa), and used panel data analysis to study the eight-year period between 2008 and 2015. it concluded that there was a positive correlation between the performance of insurance companies and the number of their agents, the profitto-premium ratio earned and the financial assets of the investment profit, while a negative correlation between the performance of insurance companies and the loss ratio was identified. while (ishtiaq & siddiqui, 2019) focus on factors affecting the financial performance of pakistan's life insurance sector, potential internal and external factors including liquidity, net premiums, premium growth, underwriting risk and debt to equity, insurance leverage, concrete, equity capital, capital surplus, gdp, inflation and market share were used to assess their impact, while the sector's return on assets (roa) was used as a performance appraisal indicator for years from 2008-2017 from nine insurance companies on life. the results were analyzed using panel data to form a normal micro-square slope model and use the generalized moment method to estimate the results. its results showed that tangible, market share, net premiums, insurance leverage and gdp had no d or negative impact on the financial performance of psc, while other independent variables such as liquidity, underwriting risk, and debt to equity, equity capital, surplus capital and inflation had a positive and significant statistical impact. abebe and abera (2019) examined the financial performance determinants of insurance companies in ethiopia from 2010 to 2015. profitability ratios were used as a means of measuring financial performance; return on assets (roa) and return on equity (roe). the panel data study was used by 9 insurance companies for 6 years. to determine financial performance determinants, the researcher used the normal ols method. the result of the estimate showed that capital barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 218 adequacy, liquidity, size, age, loss and leverage were the main determinants of financial performance. mazviona, dube, and sakahuhwa (2017) focused his study on factors affecting the performance of insurance companies in zimbabwe. the researcher used secondary data from 20 short-term insurance companies. the data for the period 2010-2014. analysis of multiple factors and linear regression models was used to identify and determine the impact of performance factors. one of its results is that the ratio of expenses, the proportion of claims and the size of the company adversely affect the performance of insurance companies. leverage and liquidity positively affect performance. it recommended that insurance companies introduce mechanisms that reduce operational costs such as automated systems. deyganto and alemu (2019), aimed to identify factors affecting the financial performance of insurance companies operating in ethiopia. the researchers used a causal research design with a mixed research approach that targeted the study's target community of 17 insurance companies operating in ethiopia, and the researchers selected 6 public insurance companies with audited financial data for 10 years from 2008 to 2018. collected through a review of financial statements and published and unpublished materials, the results of the study show that premium growth, solvency ratio, gdp growth rate and inflation rate have a statistically significant impact on the financial performance of insurance companies, while reliance on reinsurance, company size and interest rate have no significant impact on the financial performance of the insurance company. johny, purwoko, and merawaty (2021) to analyze the simultaneous and partial impact of total insurance premiums, claim reserve, premium reserve and payment of claims on return on assets, the sample included 10 insurance companies listed on the indonesian stock exchange, the data was processed using version 9 of eviews, the results of which were that total premiums had a positive and significant impact on return on assets, reserve claims having a negative impact and indicative of return on assets, for allocations a positive but insignificant effect on return on assets and claims payments it has a negative impact on return on assets. daare (2016) investigate the factors that determine the profitability of insurance companies in india for eight insurance companies for the period 2006-2016 dealing with eight variables, and concluded that the company's size, liquidity and inflation are statistically significant factors that determine the profitability of insurance companies in india. the study recommended that insurance managers pay close attention to current asset management and current responsibility to maintain optimal liquidity status while inflation is also important from external variables. kaya (2015) investigate the financial performance analysis of insurance companies traded on the istanbul stock exchange (bist) from the end of 2014 through the grey relationship analysis method (gra), for the period 2010-2014 in terms of capital adequacy ratios, liquidity ratios, operating ratios, and profitability ratios. tarsono, ardheta, and amriyani (2019) analyzed the impact of net premium growth, claim ratio and risk-based capital on the financial performance of insurance companies, and the study community was an insurance company listed on the indonesian stock exchange from 2014-2018, with a sample size of 17 life insurance companies. the study concluded that there was no impact on net premium growth and claim ratio on financial performance, risk-based capital having a negative impact on the financial performance of life insurance, namely the return on assets, the three ratios of net premium growth, claims ratio and risk-based capital affect the financial performance of life insurance companies represented by the return on assets. institutional factors rahman, meah, and chaudhory (2019) focused on detecting the impact of audit characteristics on the company's performance, using the quality of external audit (big4), the frequency of audit committee meetings and the size of the audit committee as models of audit characteristics and the company's performance is measured by return on assets, profit margin and earnings per share. during 2013-2017 to see the impact of audit characteristics on the company's performance. the researcher used multiple regression analysis, and one of its findings is that the quality of external audit (big4) and the size of the audit committee are positively related to the company's performance, as well as a negative relationship between the audit committee meeting and the company's performance. recommended that the regulatory authority and the audit committee review the frequency of audit committee meetings to make them more effective to ensure better company performance. farouk and hassan (2014) was concerned with the impact of quality audit on the financial performance of nigeria-listed companies. the study used the descriptive approach. the data was obtained from published annual reports and accounts and notes on the financial statements of the four companies representing the study sample. results have shown that the size of the auditor and the independence of the auditor have significant impacts on the financial performance of cement companies listed in nigeria. however, the auditor's independence has a greater impact than the auditor's size on financial performance. on the other hand, (dragos, mare, dragota, dragos, & muresan, 2017) investigated the impact of institutional factors on life insurance demand in 32 european countries found that the demand for life insurance is differently influenced by institutional indicators from the global governance indicators database, in emerging and transitional markets compared to developed markets. he noted that the sound legal environment in developed countries, so that the level of the rule of law was very homogeneous and high, made it irrelevance to the demand for life insurance. for developing countries, the enforceability of contracts, the independence of justice and the efficiency of time in the judicial process positively affect citizens' decision to purchase life insurance contracts. governance factors ebere, ibannichuka, and ogbonna (2016) investigated the corporate governance system with the aim of identifying the relationship between board size, board composition, earnings per share (eps) and return on assets (roa) of nigeria-listed insurance companies for the period 2008-2015, data was collected from 14 insurance companies and analyzed and the researcher used pearson link and multiple regression analysis, and the results of which are that the size and composition of the board of directors contribute significantly to the financial performance of insurance companies in nigeria. barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 219 the relationship between corporate governance mechanisms and the performance of insurance companies in pakistan was studied, data were collected from 12-year annual reports for the period 2007-2018, and the results indicated that the composition of the board of directors, the concentration of ownership, and executive compensation are the most influential internal corporate governance on the performance of insurance companies, the composition of the board of directors and executive wages is linked to a negative relationship with all performance measures, but the concentration of ownership has a significantly positive impact on the performance of insurance companies in pakistan, as well as the size and age of variables positive control over all performance measures while adversely affecting all performance metrics (junaid, xue, syed, ziaullah, & riffat, 2020). previous studies have not taken into account the specificity of the palestinian economy in general and the insurance sector in palestine in particular, in addition to the lack of literature dealing with the impact of institutional factors on the financial performance of companies, especially insurance companies. in this article, an analysis of factors that are likely to have an impact on the financial performance of insurance companies in palestine will be addressed taking into account the specificity of palestine’s economic and legal situation. methodology the study follows the descriptive analytical approach to identifying the impact of insurance industry factors, institutional and corporate governance factors on the financial performance of insurance companies. the sample included 7 insurance companies listed in the palestine inch as shown in table (4.1), based on companies still operating according to the last year of the analysis period (2010-2019). with regard to data collection, the study relies on published data on the palestine stock exchange as a primary source of information collection on variables, while the world bank's global governance indicators (wgi) website is used to collect indicators of legal system variables, as well as the palestinian capital market authority to obtain a solvency margin variable. variables dependent & independent variables table 1. independent and dependent variables variables measurement expected effect references independent variables insurance industry factors solvency margin available capital/required capital ratio sm + (deyganto & alemu, 2019) claims loss ratio claims incurred / premiums earned cir (abebe & abera, 2019) reinsurance dependent total reinsurance premiums/total written premiums rein (deyganto & alemu, 2019) institutional factors big 4 big 4 is 1, not big 4 is 0 big4 /+ (nwoye, anichebe, & osegbue, 2021) legal system it is an average of the following set of six: voice and accountability, political stability and absence of violence/terrorism, government effectiveness, regulatory quality, rules of law and control of corruption. according to the global governance indicators website legal /+ (mare, dragos, dragota, & muresan, 2016) corporate governance factors board size decimal logarithm of the number of board members bsize /+ (ebere, ibanichuka, & ogbonna, 2016) ownership of board members non-shareholder board members/total number of board members bownership /+ audit committee exist audit committee 1, no audit committee 0 auditcomm /+ control variables company size decimal logotherm of total assets size + (djunid & amelia, 2018) independent variables: financial performance return on assets net profit before tax/total assets roa (mazviona, dube, & sakahuhwa, 2017) return on equity net profit before tax/total equity roe (batool & sahi, 2019) models two equations used in this research represented the financial performance of companies, as follow: financial performance measured by roa model: roa=bα+b1sm+b2cir+b3rein+b4big4+b5legal+b6bsize+b7bownership+ b8auditcomm+b9size + e barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 220 financial performance measured by roe model: roe=bα+b1sm+b2cir+b3rein+b4big4+b5legal+b6bsize+b7bownership+ b8auditcomm+b9size + e hypotheses model 1 hypotheses h01: there is no statistically significant effect of insurance industry factors on financial performance as measured by return on assets in insurance companies listed in inch palestine, subhypotheses were: h01.1: there is no statistically significant effect of the solvency margin on roa. h01.2: there is no statistically significant effect of the claim loss ratio on roa. h01.3: there is no statistically significant impact of reinsurance dependence on roa. h02: there is no statistically significant effect of institutional factors on financial performance as measured by return on assets in insurance companies listed in inch palestine, subhypotheses were: h02.1: there is no statistically significant effect of big 4 on roa. h02.2: there is no statistically significant effect of legal system on roa. h03: there is no statistically significant effect of corporate governance factors on financial performance as measured by return on assets in insurance companies listed in inch palestine, subhypotheses were: h03.1: there is no statistically significant effect of board size on roa. h03.2: there is no statistically significant effect of ownership of board members on roa. h03.3: there is no statistically significant impact of audit committee on roa. model 2 hypotheses h01: there is no statistically significant effect of insurance industry factors on financial performance as measured by return on equity in insurance companies listed in inch palestine, subhypotheses were: h01.1: there is no statistically significant effect of the solvency margin on roe. h01.2: there is no statistically significant effect of the claim loss ratio on roe. h01.3: there is no statistically significant impact of reinsurance dependence on roe. h02: there is no statistically significant effect of institutional factors on financial performance as measured by return on equity in insurance companies listed in inch palestine, subhypotheses were: h02.1: there is no statistically significant effect of big 4 on roe. h02.2: there is no statistically significant effect of legal system on roe. h03: there is no statistically significant effect of corporate governance factors on financial performance as measured by return on equity in insurance companies listed in inch palestine, subhypotheses were: h03.1: there is no statistically significant effect of board size on roe. h03.2: there is no statistically significant effect of ownership of board members on roe. h03.3: there is no statistically significant impact of audit committee on roe. data analysis descriptive statistics table 2. descriptive statistics of ratio variables roa roe sm cir rein legal bsize size mean 0.0373 0.051 1.6136 0.6351 0.1255 0.3345 0.9091 7.6815 median 0.0348 0.1259 1.595 0.65 0.1048 0.3336 0.9031 7.6864 maximum 0.1414 0.4901 3.33 0.88 0.3008 0.3589 1.0414 8.2695 minimum -0.1091 -2.452 0.33 0.26 0.0396 0.3101 0.699 7.0386 std. deviation 0.0416 0.4399 0.6209 0.108 0.0621 0.0166 0.0992 0.273 no. of observation 70 70 70 70 70 70 70 70 barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 221 the table 2 shows that the average return on assets was 0.0373, with values ranging from (-0.109-0.141), average return on equity (0.051) and values ranged from (-2.452-0.490), and average solvency margin (1.6144) its values ranged from (0.33-3.33), averaged claims loss (0.635) and values ranged from (0.26-0.88), average reliance on reinsurance (0.126) and values ranged from (0.0396-0.3008), the average legal system of the state (0.335) ranged in value from (0.31010.3589), the average size of the board of directors (0.909) and its values ranged from (0.699-1.0) 41), also averaged the ownership of board members (0.3324) and its value ranged from (0-1), the average size of the company (7.6815) and its value ranged from (7.0386-8.2695). table 3 shows the independent-quality variables that take the values of 0 and 1: the big four audit companies and the audit committee of the insurance companies in question, which have been calculated from their financial lists, showing the numbers and percentages of each of these independent variables. table 3. descriptive statistics of dummy variables variables category no. % big4 0 (not big 4) 18 25.70% 1(big 4) 52 74.30% sum 70 100.00% auditcomm (the absence of an audit committee) 0 13 18.60% (audit committee exist) 1 57 81.40% %100.00 70 المجموع unit root test in order to test the stillness of the ct time series data used in the search, four types of unit root tests were used: levin-linchu, lim-bassaran-shin im, pesaran and shin w-stat, fisher-chi square-adf test, fisher-chi square-adf test, fisher-chi square-pp test, all of which are parameter tests that assume that all-time series are cross-sectionally independent except for the last test as it is non-teacher (hsiao, 2014), all of these tests are based on a zero hypothesis examination that provides for the presence of the unit root of the single series in all sections (cross-sections) and that the data of the ct series are not static, and these tests will be used at the original level of series (level) and at the first difference (first difference), and table 4 shows the results of these tests: table 4. unit root test variable test level first difference statistic prob. statistic prob. roa levin-lin-chu -3.6494 0.0001 -6.6102 0.0000 im, pesaran and shin w-stat -1.6855 0.0460 -2.5781 0.0050 fisher-chi square-adf 24.8247 0.0363 35.1103 0.0014 fisher-chi square-pp 54.4640 0.0000 76.5581 0.0000 roe levin-lin-chu -3.3969 0.0003 -6.9411 0.0000 im, pesaran and shin w-stat -1.2815 0.1000 -2.9805 0.0014 fisher-chi square-adf 21.6950 0.0851 37.4430 0.0006 fisher-chi square-pp 47.0663 0.0000 84.6838 0.0000 sm levin-lin-chu -3.4643 0.0003 -5.5937 0.0000 im, pesaran and shin w-stat -0.8764 0.1904 -0.5930 0.2766 fisher-chi square-adf 19.5547 0.1448 22.0967 0.0766 fisher-chi square-pp 32.9299 0.0029 46.1509 0.0000 cir levin-lin-chu -4.2969 0.0000 -8.0996 0.0000 im, pesaran and shin w-stat -2.5097 0.0060 -4.5092 0.0000 fisher-chi square-adf 32.8306 0.0030 47.2937 0.0000 fisher-chi square-pp 64.1746 0.0000 76.4233 0.0000 rein levin-lin-chu -3.6074 0.0002 -8.1162 0.0000 im, pesaran and shin w-stat -1.2426 0.1070 -3.4893 0.0002 fisher-chi square-adf 22.3675 0.0714 42.1663 0.0001 fisher-chi square-pp 42.3035 0.0001 86.6944 0.0000 big4 levin-lin-chu -1.6103 0.0537 -4.1886 0.0000 im, pesaran and shin w-stat -0.6956 0.2433 -0.7830 0.2168 fisher-chi square-adf 3.4047 0.1823 5.9615 0.0508 fisher-chi square-pp 10.0270 0.0066 5.4618 0.0652 legal levin-lin-chu -5.3542 0.0000 -7.3997 0.0000 im, pesaran and shin w-stat -3.1347 0.0009 -3.5487 0.0002 fisher-chi square-adf 38.0266 0.0005 43.0633 0.0001 fisher-chi square-pp 37.4467 0.0006 75.6868 0.0000 bsize levin-lin-chu -2.5591 0.0052 -2.2907 0.0110 im, pesaran and shin w-stat -0.5289 0.2984 -1.3738 0.0848 fisher-chi square-adf 14.1205 0.1676 21.2023 0.0475 fisher-chi square-pp 9.8711 0.4519 35.2133 0.0004 barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 222 bownership levin-lin-chu -1.4091 0.0794 -2.8678 0.0021 im, pesaran and shin w-stat -0.6456 0.2593 -2.2513 0.0122 fisher-chi square-adf 15.1496 0.2334 27.8856 0.0057 fisher-chi square-pp 24.7325 0.0161 54.4649 0.0000 auditcomm levin-lin-chu -2.1061 0.0176 -1.8041 0.0356 im, pesaran and shin w-stat -0.4811 0.3152 0.2297 0.5908 fisher-chi square-adf 7.8033 0.2529 3.8192 0.7011 fisher-chi square-pp 7.1369 0.3084 18.9549 0.0042 size levin-lin-chu -3.6494 0.0001 -6.6102 0.0000 im, pesaran and shin w-stat -1.6855 0.0460 -2.5781 0.0050 fisher-chi square-adf 24.8247 0.0363 35.1103 0.0014 fisher-chi square-pp 54.4640 0.0000 76.5581 0.0000 it is noted from the results of the unit root tests in the previous table that most of the studied ct time series are stable at the original level level where the statistical significance level values are below the 0.05 level for most of the tests used, indicating the rejection of the zero hypothesis that the unit root exists, it is also clear that all studied ct time series are stable at first difference, where statistical significance level values are below 0.05 for most tests used in all variables, it also refers to the rejection of the zero hypothesis that the root of the unit exists, and therefore concludes that the ct time series used in this research can be self-related and first-class integrated (integrated of order 1) i(1)." panel cointegration test in order to examine the possibility of an complementary relationship between the study variables used in the research, the combined simultaneous integration test of ct time series called kao residual cointegration test (hsiao, 2014), where the zero hypothesis of this test states that the trumpet chain does not remain silent and that there is no common integration relationship between variables, and the rejection of the zero hypothesis in this test indicates that the study variables grow at the same pace in the long term, indicating the existence of a common integration relationship between variables. a longterm balance relationship that binds variables together, and table 5 shows the results of the joint simultaneous integration test of ct time series by the two equations of the study: table 5. panel cointegration test variables in equation t-statistic prob. model 1: -4.896 0 roa, sm, cir, rein, big4, legal, bsize, bowner, auditcomm, size model 2: -3.6351 0.0001 roe, sm, cir, rein, big4, legal, bsize, bowner, auditcomm, size the results of the ct integration test note that the level of indication for the simultaneous joint integration of ct time series is less than 0.05 for the first and second study models, and therefore the zero hypothesis that the trumpet sequence does not remain silent and that there is no common integration relationship between the variables, and therefore concludes that the boki sequence is static and stable for the two equations of the study, indicating a long-term common integration relationship between the model variables of the study proposed by the researcher. multicollinearity test table 6. multicollinearity test probability correlation roa roe sm cir rein big4 legal bsize bowner auditcomm probability roa 1 ---- roe 0.7498 1 0 ---- sm 0.505 0.3909 1 0 0.0008 ---- cir -0.205 -0.1485 -0.087 1 0.0887 0.2199 0.474 ---- rein 0.1475 0.0083 0.4094 0.0359 1 0.223 0.9459 0.0004 0.768 ---- big4 0.0746 -0.0826 0.1742 0.1471 0.1891 1 0.5392 0.4967 0.1493 0.2243 0.1168 ---- legal 0.0918 -0.0118 0.0241 -0.1415 0.0418 0.0185 1 0.4497 0.9228 0.8431 0.2427 0.7309 0.8792 ---- bsize 0.1296 -0.133 0.1086 0.1321 0.0937 0.6875 0.0241 1 0.2851 0.2723 0.3706 0.2756 0.4403 0 0.8429 ---- bowner 0.0288 0.0125 0.0239 -0.0334 -0.1941 0.1274 -0.0547 -0.0639 1 0.8128 0.9184 0.8442 0.7839 0.1074 0.2931 0.6531 0.599 ---- barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 223 auditcomm 0.2696 0.034 0.0588 0.0503 -0.0667 0.2233 -0.1372 0.2599 0.1008 1 0.024 0.7797 0.6288 0.6792 0.583 0.0631 0.2575 0.0298 0.4063 ---- size 0.3137 0.388 0.3489 0.2822 0.4616 0.0567 -0.2007 -0.0662 -0.2336 0.1566 0.0082 0.0009 0.0031 0.0179 0.0001 0.6411 0.0958 0.586 0.0517 0.1955 the table 6 shows that there are no statistically function links between most independent variables, the highest correlation between independent variables (0.69) between board size (bsize) and big four audit companies (big4) was statistically lower at 0.05 (statistical indication level less than 0.05), followed by the association between total assets (size) and rein dependency factor of 0.46, a statistical function at 0.05, followed by the ratio between solvency margin (sm) and rein dependency at 0.41, which is statistically lower at 0.05, the correlation between total assets (size), solvency margin (sm) and claims loss ratio (cir) was 0.35 and 0.28 respectively, a statistical function at 0.05, and the auditcomm link factor and board size (bsize) were statistically at 0.05. variance inflation factors (vif) test to ensure that there is no linear bonding problem, vif transactions have been calculated for all independent variables that appear in the table 7, as it is clear that all contrast inflation coefficients are less than 10, indicating that the estimated study models are free of linear bonding problem (gujarati & porter, 2009). table 7. variance inflation factors (vif) test variables variance inflation factors sm 1.3670 cir 1.2071 rein 1.5424 big4 2.1637 legal 1.0962 bsize 2.2201 bowner 1.2456 auditcomm 1.2037 size 1.8549 the durban-watson autocorrelation test table 8. the durban-watson autocorrelation test model d-statistic du null hypothesis decision for null hypothesis panel model 1 1.7741 1.91 no autocorrelation rejection if d < du panel model 2 1.6474 number of explanatory variables excluding the constant (k= 9) number of included observations (n=70) through the results of the derben-watson test, it is clear that the value of the derben-watson test statistic (d=1.7741) for the first equation and (d=1.6474) for the second equation, both smaller than the great scheduling value (du=) 1.910) at the indication level of 0.05, the zero hypothesis that there is no self-association between the boundaries of the trumpet sequence is rejected, thus concluding that there is a problem of the self-bonding of the trumpet matrix in the two equations of the study. to ensure that there is no heteroskedasticity problem for the residuals matrix, the white's general heteroscedasticity test will be used to test the zero hypothesis that the contrast of the error boundaries is all equal or homogeneous (gujarati & porter, 2009), table 9 shows the results of this test on the two study models based on the results of the estimate using the micro-box method: table 9. heterogeneity test model white’s test statistic(n* r2) degrees of freedom tabulated chi-square panel model 1 70*0.4295=30.065 9 16.919 panel model 2 70*0.3785=26.495 number of the regressors excluding the constant (k= 9) number of included observations (n=70) through the results of the contrast homogeneity test, it is clear that the test value (30.065) of the first equation and (26.495) of the second equation, both greater than the table value (chi-square=16.919) at the indication level 0.05, is therefore rejected the zero hypothesis that the difference in the boundaries of the error is all equal, thus concluding that the problem of inequality in the two equations of the study is rejected. in order to solve the problems of self-association and heterogeneity of variability, the two equations of the study will be re-estimated by a special method of estimated generalized least squares (egls) or feasible generalized least barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 224 squares (fgls), as suggested by hsiao (2014), which adjusts the standard error matrix of capacities in the manner of the usual micro-squares (gujarati & porter, 2009) and (greene, 2018). hausman random effects test table 10. hausman random effects test model test type chi-sq. statistic d.f. prob. panel model 1 period random 3.7371 8 0.88 panel model 2 period random 11.1332 8 0.1943 it is clear from the results of the haussmann random impact model test that the level of test indication for the first equation (0.88) and the second equation (0.1943), both of which are greater than the 0.05 indication level, and accordingly the zero hypothesis that the random impact model is the best and most appropriate for data analysis is accepted, the random impact model will therefore be used to estimate the two equations of the study as the random impact of the period random and the impact for ct units is cross-section. fixed) because the number of ct units studied (insurance companies) is small and is lower than the number of independent variables to be studied their impact on the dependent variable (gujarati & porter, 2009). normality of residuals test table 11. normality of residuals test sample jarque-bera statistic p-value panel model 1 5.0927 0.0783 panel model 2 209.319 0 from the results of table 11, it is noted that the level of indication of the natural distribution of the residuals chain to offset the first regression model is equal to 0.0783, which is greater than 0.05, which indicates the acceptance of the zero hypothesis that assumes that the trumpets are naturally distributed to the first study model, the value of the level of indication of the natural distribution of the trumpet chain to offset the second study model was 0.000, which is less than 0.05, which indicates the rejection of the zero hypothesis that the trumpets are naturally distributed for the second study model, based on the central end theory and considering that the size of the study sample is large (at least 5 views per independent variable by bentler and chou (1987), the emergence of the problem of the natural distribution of the trumpet sequence here does not affect the results of the study, especially since the level of test indication (jarque-bera) becomes 0.236 after the deletion of three abnormal values from the trumpet chain (gujarati & porter, 2009). regression analysis model 1 regression analysis regression analysis of model 1 shows the results of the estimate of the first regression equivalency model using roa as a dependent variable and as a measure of financial performance, and notes from the table results that there is a positive and s tatistically significant impact on financial performance as measured by return on assets for each solvency margin, legal system, board size and company size, and notes that there is a negative and statistically significant impact on financial performance as measured by return on assets for each claim loss ratio, the big four audit companies and the ownership of the board members, and the results did not show a statistically significant impact on both the audit committee and the reinsurance of financial performance as measured by the return on assets. the calculated f value (4.791) and the prob.=0.000 level, which is below the level of 0.05, this indicates the appropriateness of the regression model used and proposed in measuring the impact on financial performance as measured by return on assets (roa) , and dependent variable: roa method: panel egls (period random effects) sample: 2010 2019 , periods included: 10 , cross-sections included: 7 total panel (balanced) observations: 70 white period standard errors & covariance (d.f. corrected) variable dependent variable: roa coefficient std. error t-statistic prob. c -1.069409 0.495872 -2.156625 0.0355 sm 0.026795 0.011504 2.329245 0.0236 cir -0.103195 0.048344 -2.134576 0.0374 rein 0.106544 0.141647 0.752180 0.4552 big4 -0.036687 0.013045 -2.812300 0.0068 legal 0.464623 0.214546 2.165607 0.0348 bsize 0.149580 0.052973 2.823698 0.0066 bowner -0.038594 0.013337 -2.893798 0.0055 auditcomm 0.011378 0.012943 0.879047 0.3833 size 0.111315 0.052129 2.135373 0.0373 statistic=4.791 prob.= 0.000-= 0.452 f2=0.571 adj.r2r barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 225 the value of the selection factor (0.571r2=) indicating the interpretive capacity of the estimated study model, i.e. the independent variables studied and used in the assessment of the study model are all responsible for interpreting 57.1% of the change in financial p erformance as measured by the return on assets. model 2 regression analysis dependent variable: roe method: panel egls (period random effects) sample: 2010 2019 , periods included: 10 , cross-sections included: 7 total panel (balanced) observations: 70 white cross-section standard errors & covariance (d.f. corrected) variable dependent variable: roe coefficient std. error t-statistic prob. c -10.162260 2.172096 -4.678553 0.000000 sm 0.253006 0.092418 2.737636 0.008400 cir -0.926265 0.261648 -3.540123 0.000800 rein -0.924052 1.247308 -0.740837 0.462000 big4 -0.238229 0.302386 -0.787831 0.434200 legal 2.309334 2.528019 0.913495 0.365000 bsize 0.602263 0.521700 1.154425 0.253400 bowner -0.303591 0.348703 -0.870629 0.387800 auditcom m -0.103913 0.040502 -2.565649 0.013100 size 1.243480 0.236898 5.249011 0.000000 statistic=3.461 prob.= 0.000-= 0.348 f2=0.490 adj.r2r regression analysis of model 2 shows the results of the estimate of the second regression equivalency model using the return on equity as a dependent variable and as a measure of financial performance. the table results show that there is a statistically positive and significant impact on financial performance as measured by return on equity for both the solvency margin (sm) and the size of the company, and notes that there is a negative and statistically significant impact on financial performance as measured by the return on the property rights of both the loss of claims, and the audit committee, there is a statistically significant impact on both reinsurance, reliability on large audit companies, the legal system, the size of the board of directors, and the ownership of board members on financial performance as measured by the return on property rights. the calculated f value (3.461) and the level of statistical significance (prob.=0.000), which is below the level of 0.05, this indicates the appropriateness of the regression model used and proposed in measuring the impact on financial performance as measured by roe, and the value of the selection factor (0.490r2=) indicating the interpretive capacity of the estimated study model, i.e. the independent variables studied and used in the assessment of the study model are all responsible for interpreting 49% of the change in financial performance measured return on property rights. table 12. factors affecting performance measured by roa variables effect studies agree with result studies do not agree with result insurance industry factors solvency margin positive (deyganto & alemu, 2019) claims loss ratio negative (shawar & siddiqui, 2019) reinsurance dependent no effect (masc, mmskb, & sk, 2021) (kočović, paunović, & jovović, 2014) institutional factors big 4 negative (gallery, cooper , & sweeting, 2008) (alzharani, ahmad, & aljaaidi, 2011) legal system positive (dragos, mare, dragota, dragos, & muresan, 2017) governance factors board size positive (ibrahim, ouma, & koshal, 2019) (azutoru, obinne, & chinelo, 2017) ownership of board members negative ( hsu & petchsakulwong, 2010) (alqirem, abu afifa, saleh, & haniah, 2020) audit committee no effect (ademola, moses, & ucheagwu, 2016) (ebun, 2019) control variable company size positive (berteji & hammami, 2016) barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 226 table 13. factors affecting performance measured by roe variables effect studies agree with result studies do not agree with result insurance industry factors solvency margin positive (deyganto & alemu, 2019) claims loss ratio negative (shawar & siddiqui, 2019) reinsurance dependent no effect (masc, mmskb, & sk, 2021) (kočović, paunović, & jovović, 2014) institutional factors big 4 no effect (alzharani, ahmad, & aljaaidi, 2011) (gallery, cooper , & sweeting, 2008) legal system no effect (dragos, mare, dragota, dragos, & muresan, 2017) governance factors board size no effect (azutoru, obinne, & chinelo, 2017) (ibrahim, ouma, & koshal, 2019) ownership of board members no effect (alqirem, abu afifa, saleh, & haniah, 2020) ( hsu & petchsakulwong, 2010) audit committee negative (ebun, 2019) (ademola, moses, & ucheagwu, 2016) control variable company size positive (berteji & hammami, 2016) conclusions according to the final results achieved through the application of panel data analysis techniques, the factors affecting financial performance in the palestinian insurance market, as illustrated by the two models of the study, are: solvency margin and claim loss ratio. in terms of solvency margin, there is a statistically significant positive impact on financial performance, as the financial stability of the insurance company is an important criterion for potential customers. a good margin of solvency also gives greater confidence to both current and potential clients, creditors, investors and supervisors. the loss of claims reflects the potential impact of claims incurred on the return on net assets, in the event of claims that have a negative impact on the financial performance of insurance companies. it is an important risk that affects the financial performance of insurance companies. with regard to reinsurance, there is no significant impact of reinsurance on the financial performance of insurance companies, despite their role in distributing risks, possibly because of the low participation rate of the reinsurance providers, possibly resulting from the small percentage of premiums waived by palestinian insurance companies for the benefit of the reinsurance providers. for the institutional factors group, according to the first study model, the results show that each of the four largest audit companies and the state's legal system are factors affecting financial performance as measured by return on assets. for the big four audit companies, they have a statistically significant negative impact on the financial performance of palestinian insurance companies. perhaps the negative impact of the big four audit firms on return on assets, due to the many risks facing the insurance industry that require hedging to be taken into account, may be that the big four audit firms have a greater commitment than local audit firms to international flour and accounting standards, which require hedging and adequate allocation. furthermore, there is a statistically significant positive impact of the legal system on financial performance, given the insurance industry's association with both judicial claims and political and security stability. the second study model shows that there is no statistically significant impact on the financial performance of each of the big four audit companies and the legal system as measured by the return on equity. for the range of governance factors, the results of the first model analysis of the study revealed a statistically significant impact on both the size of the board of directors and the ownership of board members. in terms of board size, it means that the company's financial performance improves when the board size increases. there is a statistically significant negative impact on financial performance by the proportion of non-shareholder board members, consistent with the agency's theory. the problem of conflicts of interest between the fundamentals and agents, there is no impact of the audit committee on the return on assets. the results of the analysis of the second model of the study show a significant negative impact on the return on property rights used as a measure of financial performance. the negative impact may be due to the poor experience of members of the audit committee of palestinian insurance companies. furthermore, the results did not show a statistically significant impact on the size of the board and the ownership of council members on the return on property rights. as for the controlling factors, the results according to the two study models show a statistically significant positive impact on the size of the company with both the return on assets and the return on equity. recommendations based on the results above, the researchers recommend the following:  the need for palestinian insurance companies to pay attention to the required solvency margin set by the palestinian capital market authority of 150%, because of their positive and significant impact on the financial performance of insurance companies.  palestinian insurance companies should take into account the careful management of claims, which are the largest payments in insurance companies, and a careful study of the risks when underwriting insurance policies. barakat et al., indian journal of finance and banking 9(1) (2022), 213-229 227  the need to take into account the continuous development and modernization of legislation related to the insurance sector for its positive role in the financial performance of insurance companies by the relevant authorities.  it is essential that insurance companies take into account the interest in corporate governance, such as increasing the number of board members, because of the impact on the diversity of experiences and ideas and the strengthening of oversight in the company. moreover, interest in raising the efficiency of insurance audit committees. author contributions: conceptualization, f.s.q.b., o.a.r.m., j.h. and m.b.; data curation, f.s.q.b., o.a.r.m., j.h. and m.b.; methodology, f.s.q.b.; validation, f.s.q.b., o.a.r.m., j.h. and m.b.; visualization, f.s.q.b., o.a.r.m., j.h. and m.b.; formal analysis, f.s.q.b., o.a.r.m., j.h. and m.b.; investigation, f.s.q.b.; resources, f.s.q.b.; writing – original draft, f.s.q.b., o.a.r.m., j.h. and m.b.; writing – review & editing, f.s.q.b., o.a.r.m., j.h. and m.b.; supervision, f.s.q.b.; software, f.s.q.b.; project administration, f.s.q.b.; funding acquisition, f.s.q.b., o.a.r.m., j.h. and m.b.. 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. 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 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(2019). the influence of net premium growth, claim ratio and riskbased capital on the financial performance of life insurance companies. advances in economics, business and management research, 127, 65-68. 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking vol. 9, no. 1; 2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 71 audit quality and real earnings management: evidence from tunisian banks dr. amina zgarni teacher researcher the international finance group faculty of economics and management of tunis university of tunis el manar, tunisia e-mail: amina2302@yahoo.fr https://orcid.org/0000-0002-7071-4442 monia chikhaoui laboratory of risk management and research in accounting and finance rim-raf manouba university, tunisia e-mail: monia70chikhaoui@gmail.com https://orcid.org/0000-0002-9374-8725 received: october 25, 2021 accepted: december 29, 2021 online published: january 22, 2022 doi: 10.46281/ijfb.v9i1.1562 url: https://doi.org/10.46281/ijfb.v9i1.1562 abstract the beginning of the 21st century was marked by a multitude of financial scandals, notably the enron affair in 2001 and the fall of the auditing firm arthur andersen (2002). such scandals have called into question of the financial reporting quality. the main cause of these scandals was the failure of the external audit quality which is considered crucial to ensure the reliability and relevance of accounting information. moreover, following the promulgation of the sox law (2002), managers tend rather towards the real activities manipulation to avoid the detection of the accounting earnings management. in fact, managers can resort to certain adjustments whose opportunistic or optimal nature is difficult to discern by auditors, in particular the reduction in selling prices, the granting of more lenient credit terms, overproduction and the reduction or postponement of research and development (r&d) and advertising expenditure. this study therefore aims to show the role that external audit quality can play in limiting real activities manipulation and therefore in the quality of accounting information. for this, we conducted an empirical study with a sample of the main. tunisian commercial banks observed over a period from 2006 to 2019, using the panel data method. the results indicate that the presence of a reputable auditor limits real earnings management. however, the results show that the tenure of auditors increases these discretionary practices. keywords: real earnings management, audit reputation, audit tenure, product on equity securities, tunisian commercial banks. jel classification codes: m41, m42, g21. introduction the several financial scandals, in particular the 2001 enron affair and the fall of the audit firm arthur andersen (2002) showcased the beginning of the twenty-first century. such scandals called into question the quality of financial reporting. the main cause of these scandals was the failure of external audit mailto:amina2302@yahoo.fr https://orcid.org/0000-0002-7071-4442 mailto:monia70chikhaoui@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 72 which is considered to be the most important mechanism for ensuring accounting information reliability and relevance. according to de angelo (1981), there are two fundamental conditions for a high-quality external audit, namely independence and competence. the author defined external audit quality as the joint probability that the auditor will both discover fraud or irregularities in the client's financial statements (depends on the auditor's overall competence: their technological capabilities, their expertise level...), in tunisia, according to the code of tunisian commercial companies, external audit is an obligation for companies. this code sets the operational conditions for external audit as well as its missions then, auditors intervene in companies and in particular banks in order to limit the opportunistic strategies of managers, and to avoid conflicts of interest between the different stakeholders while ensuring the relevance, reliability and credibility of financial statements. the establishment of an audit system in banks is therefore essential to mend for information asymmetry problems, which are more pronounced in banks than in other firms, reduce agency costs and limit the opportunistic strategies of bank managers and subsequently their discretionary practices. in fact, because of the succession of accounting scandals and following the enactment of the sox law, managers tend rather towards real earnings management practices to avoid detection of accounting earnings management (graham et al., 2005, cohen et al., 2007; cohen & zarowin, 2010). indeed, real earnings management denotes “… management actions which deviate from normal business practices, undertaken with the main objective of reaching certain income thresholds” (roychowdhury, 2006). thus, managers can make use of certain adjustments whose opportunistic or optimal nature is difficult to distinguish by auditors, in particular the reduction of selling prices, and the adoption of more lenient credit conditions. it is for all these reasons that this study focuses on the ability of a quality external auditor to limit real earnings management in banks. our aim is therefore to specifically understand the effect of external audit quality on real earnings management in tunisian banks. literature review and hypothesis development bédard et al. (2008) define auditing as “a service purchased by companies in order to improve the credibility of their financial statements”. referring to agency theory, fan and wong (2005) assert that external audit has long been considered a full-fledged governance mechanism with information and control missions in order to regulate relationships between the different stakeholders of a company. in the same vein, charreaux (1997) considers external audit as one of the governance mechanisms whose mission is to resolve agency problems between the different stakeholders of a company. o'sullivan and diacon (1999) and yeoh and jubb (2001) define external audit as an important governance mechanism that participates and helps in ensuring the reliability and relevance of accounting data. it is a mechanism which serves to monitor the relationships between company partners. similarly, jensen and meckling (1976) consider that external audit serves to bring the interests of managers closer to those of shareholders. indeed, external audit can be used as a means of justification or obligation (bonding). thus, to supervise and control managers (monitoring), shareholders and creditors oversee financial statements through an independent external auditor. according to ormrod and cleaver (1993), this helps to decrease managers’ opportunistic behaviour. however, some authors like chemingui and pigé (2004) and hay et al. (2008), have criticized the effectiveness of this mechanism, grounding their argument on the many financial crises that have taken place over the past two decades and the fall of the largest audit firms (such as the arthur andersen network, etc.). indeed, since the study of de angelo (1981), external audit quality has been found to depend on the quality of the external auditor. however, a review of the literature on this topic allowed us to identify two lines of research. the first considers that audit quality depends on the quality of the auditor (their independence and competence). the second, a more recent trend, tends to question this relationship between the auditor and auditing, by proposing a more direct approach to the assessment of audit quality. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 73 in fact, the first so-called indirect approach is defended by several authors, including (de angelo, 1981; citron & taffler, 1992, dit hauret, 2003; tong, 2006; clickeman, 1998; dit hauret, 2003, knapp, 1991; flint, 1988; moizer, 1997; krishnan, 2002; citron & taffler, 1992) according to de angelo (1981), audit quality is defined as the joint probability that the auditor will both discover fraud or irregularities in the client's financial statements (depends on the auditor's overall competence: their technological capabilities, expertise level, etc.), and disclose to the market any fraud or irregularities that it has discovered (depends on the level of professional ethics and its independence vis-à-vis its client). flint (1988) states that an audit is good when the auditor is honest, on the one hand, and technically and professionally competent on the other. two essential criteria are thus identified for the evaluation of external auditor quality, namely: independence and competence. however, the latest financial and accounting scandals (enron, worldcom, & parmalat, etc.) which took place both in the united states and in europe and the bankruptcy of one of the auditing giants, arthur andersen, have shown the inadequacy of these two conditions alone to understand audit quality. these scandals disrupted our understanding of the conception of audit quality, which hitherto relied on indicators exogenous to the audit process. therefore, drawing attention to adverse selection risks and dependence of managers, which can undermine auditor independence and competence, a new line of research on audit quality has just emerged. several researchers (hopkins, 1996; behn., 1997; mock & wright, 1999, carcello, 1992; pigé, 2003; brown 2005; chemingui & manita, 2005) consider that external auditor quality does not necessarily imply audit quality. on the other hand, the first approach has been criticized empirically because of the variability of the trends identified and their inability to predict audit quality (fuerman, 2004). as for the second direct approach, it attempts to assess audit quality by examining the different stages of the audit process (knapp, 1991; & pigé, 2003). this second trend highlights the complexity of audit work (carcello, 1992; pigé, 2003; brown 2005; chemingui & manita, 2005). then, this new approach takes into account other elements that may affect external audit quality, besides the quality of the auditor. accordingly, because competence and independence of the external auditor face information asymmetry problems, then adverse selection and external auditor work may depend on managers. therefore, external audit quality depends on each audited company. as a result, it is difficult to assess the competence and independence of the external auditor. then, conflicts of interest encourage the external auditor (agent) to cheat the company (principal) on certain information in order to maximize its usefulness and improve its competitive level and / or its fees. in fact, the external auditor reveals problems of adverse selection when signing the contract (watts & zimmerman, 1985). this problem generates additional agency costs, thereby requiring better differentiated audit quality (francis & wilson, 1988; copley et al., 1995; abbott & parker, 2000; piot, 2001, collis et al., 2004; hay & davis, 2004). however, because of the difficulty of assessing the audit process opacity and the strong information asymmetry between the auditor and the market, this study has limited itself to explore audit quality pursuing the indirect approach. indeed, competence and independence always remain fundamental prerequisites for the quality of the audit result. several indicators have been used in the literature to assess these two criteria. of these, there are audit firm size, reputation, fees, its sectoral specialization, competition in the audit market, etc. this study retains two measures of external audit quality, namely reputation of external auditor, and term of office. reputation of audit firm the review of the literature shows that the reputation of the audit firm is related to membership in an international group (defond, 1992). henceforth, large companies, in particular banks, have recourse to audit firms with a good reputation, i.e. having the technical and material resources which allow them to minimize agency conflicts (watts & zimmerman, 1981, francis & wilson; 1988; johnson & lys, 1990; firth & smith, 1992). https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 74 according to pittman and fortin (2004), being a “big 4” auditor improves accounting disclosure quality, reduces information asymmetry and uncertainty of business partners as well as managers' opportunistic behavior. in fact, research on the impact of using a big 4 firm on earnings accounting management is wide (pittman & fortin, 2004; almarayeh et al, 2020). however, studies examining the effect of using a big 4 firm on real earnings management are few (kim & park., 2014; khanh & khuong, 2018; chowdhury & eliwa 2021). indeed, auditors do not have a dissuasive power over the use of real earnings management (chi et al. 2011). they cannot easily distinguish between optimal management decisions (such as overproduction, lower research and development and advertising costs, lower selling prices) from opportunistic operational adjustments. in fact, auditors have neither the skills nor the power to detect possible real earnings management (choi et al., 2016, 2018). sometimes when companies opt for both accounting and real earnings management, auditors need more resources to detect real earnings management which complicates the reported accounting figures. auditors are sometimes unable to distinguish between accounting manipulation and real manipulation. several audits are thus necessary for auditors to detect real earnings management and reduce the complexity of the reported earnings, facilitating thus their detection of accounting earnings manipulation (choi et al., 2018). on the other hand, it is important to note that auditors tend to reduce real earnings management to deal with litigation risk because the simultaneous use of real earnings management and accounting earnings management by managers to increase share price may not have a positive lasting effect on the price of these shares. this may lead shareholders to assign the responsibility of accruals to companies and / or auditors. consequently, it is therefore indisputable that real earnings management can give rise to litigation (ibrahim et al., 2011; choi et al., 2018), which prompts auditors to pay attention to real earnings management in order to minimize litigation risk. in fact, and depending on this risk associated with the detection of real earnings management, auditors can opt either to preserve their clients or to resign (kim & park, 2014). however, resignation of auditors can be costly for the company since they are well adapted with its activities and its management, which limits the excessive use of real earnings management by companies. this therefore translates into the importance of the role that a quality auditor can play in mitigating real earnings management (choi et al., 2018). nevertheless, empirical studies on the impact of auditor membership to a big 4 group on real earnings management found mixed results. indeed, choi et al. (2018), in a transnational study covering 22 countries, found that belonging to big 4 makes it possible to attenuate real earnings management. however, cohen and zarowin (2010) found that big 4 firms push companies to engage in real earnings management with the aim of escaping the scrutiny of auditors of accounting earnings management. likewise, chi et al. (2011) show that auditor membership to big 4 can limit accounting earnings management, which encourages managers to opt for real earnings management, although it is more expensive. in a more recent study, sitanggang et al. (2019) even found that audit quality measured by membership to big 4 group is statistically insignificant and has no impact on real earnings management in a sample of british manufacturing companies. khanh and khuong (2018) in turn prove empirically that belonging to a big 4 group has no effect on real earnings management. this study tests the effect of the reputation of the audit firm on earnings management of banks. hence, our first hypothesis runs as follows: hypothesis i: the reputation of the audit firm has a negative effect on real earnings management of banks term of office or rotation rules in tunisia, article 13 bis of law n ° 2005-96 of october 18, 2005, relative to the strengthening of the security of financial relationships, presumes that the auditor is appointed for a renewable period of three years. however, the number of successive mandates, taking into account the renewal, is regulated as follows: https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 75  for business companies subject to the obligation to appoint an auditor registered on the counsel of chartered accountants of tunisia may not exceed three mandates,  when the statutory auditor is a natural person, three mandates  when the auditor is a chartered accounting firm with at least three chartered accountants registered on the counsel of chartered accountants of tunisia, five mandates. this is true on the condition of changing the auditor in charge of drafting the audit report and changing the team involved in the audit operation once, at least once, after three terms of office. application of these terms is fixed by decree. the provisions of the second paragraph of this article apply to the renewal of mandates from january 1, 2009. mandate duration or rotation rules are among the factors that can influence independence of the external auditor (carey & simnett, 2006; iyer & rama, 2004). according to these authors, after a certain period, the auditor is no longer independent. however, they found no evidence showing that a long term of office diminishes auditor independence. under this perspective, knapp (1991) found that at the start of their career, auditors can detect anomalies more than at the end of their career. as for studies on the relationship between term of office and real earnings management, they turn out to be limited in number. in fact, it was only after the imposition of the sox law that managers turned to real earnings management in order to prevent a fall in accounting flexibility. in particular, roychowdhury (2006) found that in order to respect the reference criteria of financial information and to avoid disclosure of annual losses, managers tend more towards real earnings management (discount on prices, overproduction, etc.). in this regard, cohen and zarowin (2010) found that the duration of an auditor's mandate positively correlates with real earnings management. this study tests the effect of the auditor's mandate duration on real earnings management of banks. hence, our second hypothesis is formulated as follows: hypothesis ii: a long term as an auditor is associated with higher levels of real earnings management. research methodology sample and study period the aim of this study is to determine whether audit quality has an effect on real earnings management of banks. therefore, we examine a sample of 10 tunisian commercial (or deposit) banks which are listed on the tunis stock exchange (bvmt). the other categories of banks (development, business and offshore) were not retained because of their specificities, their small size and the clearer impact of external factors on them. the study period is 14 years stretching from 2006 to 2019.this gives us a panel of 140 observations. financial data and governance data, in particular external audit, are collected from the banks' annual reports, and the aptbef annual reports. the model to estimate a review of the literature has shown us that it is necessary to distinguish between selling equity securities and trading or investing securities. in addition, selling equity securities is often carried out by banks. in fact, it was at the beginning of the nineties with bartov (1993) that studies on the estimation of the normal thresholds of products on sale of securities and subsequently on the estimation of abnormal excess levels started (herrmann et al., 2003; gunny, 2005; zang, 2007. in fact, schipper (1989) was among the first to define real earnings management and incorporated it into the notion of earnings management in general. in this study, like herrmann et al. (2003) and zang (2007), we estimate the product on equity securities following a two-step approach. our first model assumes that the level of discretionary product on equity securities depends on the level of sales of the asset (the value of products increases if banks increasingly sell their securities). thus, the normal component of product on equity securities (ndprodit) can be presented by the following equation: 𝑁𝐷𝑃𝑅𝑂𝐷𝑖𝑡 =∝0+∝1 𝑆𝐴𝐿𝐸𝑆𝑖𝑡 𝑇𝐴 𝑖 𝑡−1 + 𝜀𝑖 (1) https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 76 ( : are the estimators of the coefficients of equation (1) on panel data during the estimation period 2006-2019). 𝑁𝐷𝑃𝑅𝑂𝐷𝑖𝑡 =∝̂0+∝̂1 𝑆𝐴𝐿𝐸𝑆𝑖𝑡 𝑇𝐴 𝑖 𝑡−1 (2) discretionary products on equity securities (dprodit) denote the residual of the estimate of equation (1). they are calculated as follows: 𝐷𝑃𝑅𝑂𝐷𝑖𝑡 𝑇𝐴 𝑖 𝑡−1 = = 𝑃𝑅𝑂𝐷𝑖𝑡 𝑇𝐴 𝑖 𝑡−1 − [∝̂0+∝̂1 𝑆𝐴𝐿𝐸𝑆𝑖𝑡 𝑇𝐴 𝑖 𝑡−1 ] (3) : the residual of the equation which represents the discretionary component of products on the sale of securities of bank i in year t. salesit: the sale value of equity securities of bank i in year t tait: total assets of bank i in year t the aim of this study is to state the effect of external audit quality on real earnings management of banks. the study therefore tests the effect of the different measures of audit quality on discretionary products calculated by the first model. we therefore develop the following model: 𝐷𝑃𝑅𝑂𝐷𝑖𝑡 𝑇𝐴 𝑖 𝑡−1 = 𝛽0 + 𝛽1𝑅𝐸𝑃𝑈𝑇𝑖𝑡 + 𝛽2𝑇𝐸𝑁𝑈𝑅𝐸𝑖𝑡 + 𝛽3𝐿𝐴𝑆𝑆𝐸𝑇𝑖𝑡 + 𝛽4𝑅𝑂𝐴𝑖𝑡 + 𝛽5𝐶𝐴𝑅𝑖𝑡 + 𝜀𝑖 (4) the study variables the different variables and their measures are presented in table 1 below: table 1. variables measurement nature of variables variables measurement dependent variables dprod discretionary product on equity securities. ndprod non-discretionary product on equity securities; income from the sale (capital gain loss) of equity securities. independent variables external audit variable tenure number of consecutive years that the auditor has audited the bank. reput binary variable that takes '1' if the auditor is a member of the big 4, and '0' otherwise. control variables lasset bank size, measured by the natural logarithm of the book value of the bank's total assets. roa return on assets = net profit / total assets. car capital ratio = own funds / total assets. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 77 results and discussions descriptive statistics the descriptive statistics of the variables are presented in table 2 below. table 2. descriptive statistics of the study variables variable medium min max standard deviation. observation prod / ta .019036 .000013 .0966906 .0173715 140 dprod / ta .1340704 .000062 .4892164 .1210084 140 tenure 3.75 0 10 2.42328334 140 reput 0.61428571 0 1 0.48851138 140 in the table above, income on the sale of securities is 1.90%, with a standard deviation of 1.73% indicating the low volatility of this variable. discretionary income on the sale of securities is 13.4% on average with a minimum of 0.0062% and a maximum of 48.92%. the standard deviation is 12.10% indicating the low volatility of this variable. for external audit quality, the descriptive statistics show that the average tenure is 3.75 with a minimum of 0 and a maximum of 10. the standard deviation is 242% indicating the high volatility of the tenure variable. while reputation is 0.61 on average with a minimum value of 0 and a maximum value of 1, a standard deviation of 0.48% indicating an average volatility obtained within our sample. results and discussion table 3. regression results of the estimate of the effect of audit quality on discretionary products on disposal of securities coefficient std. err. z p> | z | [95% conf. interval] tenure .0072784 .0037742 1.93 0.056 * -.0001912 .0147481 reput -.0069421 .0030714 -2.26 0.026 ** -.0130207 -.0008635 roa -.2759353 .1224877 -2.25 0.026 ** -.5183537 -.0335168 car .0157547 .0083736 1.88 0.062 * -.0008176 .032327 lasset -.0352785 .0039132 -9.02 0.000 *** -.0430232 -.0275337 const .4861721 .0484431 10.04 0.000 *** .3902971 .582047 ***: significance at the 1% threshold, ** significance at the 5% threshold and * significance at the 10% threshold examining the results presented in the table above, the reputation of the auditor shows a significant and negative relationship between this variable and real earnings management measured by discretionary products on the sale of securities. this allows us to confirm hypothesis h1. this result, being consistent with the postulates of agency theory, is consistent with that of choi et al. (2018), who found that belonging to the big 4 limits real earnings management. our result is in line with the findings of umar et al (2021). they proved that the risk of real earnings management decreases when firms are audited by big 4 auditors. however, this finding turns out to contrast that of cohen and zarowin (2010) and chi et al. (2011) who found that big 4 firms limit accounting flexibility of banks and push managers to opt for real earnings management, which is more difficult to distinguish from optimal business decisions. this result also contradicts those of sitanggang et al. (2019) and khanh and khuong (2018) who empirically found no relationship between auditor membership to the big 4 group and the practical of real earnings management. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 78 as for the tenure, we found that it has a significant positive effect on discretionary product on equity securities. our hypothesis h2 is therefore confirmed. this finding, which contrasts the postulates of agency theory that governance mechanisms, in particular audit, allow for a better control of financial information, is consistent with that of cohen and zarowin (2010 ) who found that the longer the auditor's term of office increases, the more likely it is that earnings will really be managed. this finding can be explained by the tendency of bank managers in our sample towards real earnings management, since accounting management is easier to detect by auditors (roychowdhury, 2006, graham et al., 2005, cohen et al., 2007). conclusion research on the relationship between governance mechanisms and earnings management has mainly focused on accounting earnings management. this study has the merit of focusing on a dimension that is much less studied in the literature, namely real earnings management of banks. indeed, following the succession of accounting scandals, in recent years managers have increasingly made recourse to real earnings management as a substitute for accounting earnings management which is easier to detect. studying the relationship between external audit quality and real earnings management in a sample of tunisian banks observed during the 2006-2019 period, we reached several conclusions. first, tunisian banks opt for real earnings management, in particular discretionary products on sale of securities. second, reputation of audit firms, which represents an important factor of external audit quality, is found to have a disciplinary role in real earnings management of tunisian banks. however, auditor tenure seems to accentuate the latter. third, this study enriches the debate on the role of external audit quality in mitigating earnings management, and this by examining the real dimension of earnings management, which recently has started to attract the attention of researchers, following the accounting scandals that have taken place in recent decades. accordingly, this study thus draws some implications. first, auditor tenure should be reduced in order to increase auditor independence allowing them consequently to limit real earnings management. in addition, the banks included in our sample should continue to appoint auditors belonging to the big 4 group who prove to be more apt to limit real earnings management practices, although these latter are more difficult to detect than accounting earnings management. finally, like any study, ours has some limitations. indeed, this study is limited to audit quality as measured by only two indicators. however, other indicators to measure audit quality, such as auditors' sector expertise, co-commissioning, etc. can shed more light on its disciplinary role in real earnings management. a second limitation relates to the measures of real earnings management. indeed, our study was limited to discretionary products on sale of securities while other measures could be used to better reinforce the robustness of our empirical conclusions, in particular securitization. author contributions conceptualization: amina zgarni data curation: amina zgarni formal analysis: amina zgarni funding acquisition: amina zgarni investigation: amina zgarni methodology: amina zgarni project administration: amina zgarni, monia chikhaoui resources: amina zgarni software: amina zgarni supervision: amina zgarni, monia chikhaoui validation: amina zgarni visualization: amina zgarni, monia chikhaoui writing – original draft: amina zgarni writing – review & editing: amina zgarni, monia chikhaoui https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 79 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 abbott, l. j. & parker, s. 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(2007). evidence of the tradeoff between real manipulation and accrual manipulation. working papers, university of rochester. 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). https://doi.org/10.1080/00014788.1993.9729910 https://doi.org/10.1080/713764630 https://doi.org/10.1016/j.jacceco.2003.06.005 https://doi.org/10.1108/ijmf-03-2018-0095 http://hdl.handle.net/1802/4864 http://creativecommons.org/licenses/by/4.0/) indian journal of finance and banking 14(2) (2024), 8-14 1 finance and banking ijfb vol 14 no 2 (2024) p-issn 2574-6081 e-issn 2574-609x journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by american finance & banking society, usa a case study on risk management system of a rural cooperative bank in india aditya nikam (a)1 (a) manager, national bank for agriculture and rural development (nabard), hyderabad, india; e-mail: aditya.nikam@nabard.org a r t i c l e i n f o article history: received: 14th september 2024 reviewed & revised: 14th september to 10th december 2024 accepted: 18th december 2024 published: 20th december 2024 keywords: risk management systems, risk governance, rural cooperative banks, district cooperative central bank jel classification codes: g21, g28 peer-review model: external peer review was done through double-blind method. a b s t r a c t rural cooperative banks (rcbs) are supervised by national bank for agriculture and rural development (nabard) under camelsc rating framework. the camelsc model is principally performance-oriented while risk factors are not effectively incorporated. nabard’s enhanced camelsc model, which will be fully implemented by the end of fy26, includes additional risk and control indicators. the purpose of this study is to examine liquidity risk, interest rate risk and credit risk of a district cooperative central bank (dccb) having good financial position as per the c, a, e and l components of camelsc model. name and data of the bank have been partially modified to maintain confidentiality of the data not available in public domain. the study is based on policies, committee proceedings and quantitative data obtained from a dccb, discussion with bank officials, and periodic returns submitted to nabard. the study employed various guidelines by rbi and nabard. the stock and flow approaches suggested that the bank had moderate liquidity risk. application of interest rate sensitivity statements, macaulay duration of investment portfolio, and mclr methodology for interest rate benchmarking showed low interest rate risk. altman’s z-score model illustrated credit risk in institutional clients viz. pacs and logistic regression model for retail customer scoring indicated limitation in capturing credit risk of its retail customers. the capital adequacy assessment also indicated the bank had insufficient roa to give dividend as per its mandate. bank did not have governance mechanism in place such as credit risk management committee or having effective alco to carry out executive functions of monitoring and controlling risk controls/ limits as per the policy. © 2024 by the authors. licensee american 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 indian agricultural financial system comprises of banking and non-banking financial institutions, development financial institutions and central bank. rural cooperative banks (rcbs), in the financial ecosystem, are a part of three-tier short term cooperative credit structure (stccs), which include state cooperative bank (stcb) and district cooperative central bank (dccb) as reserve bank of india (rbi) licensed banks, to cater to the agricultural and other short term credit requirements of the cooperative members primarily. the structure also includes a cooperative credit society at the grassroot level, called a primary agriculture credit society (pacs). in some states, stccs caters to both short-term and longterm lending. nabard has been rating the rcbs under camelsc model since 1998-99. the model consists of components viz. capital adequacy, asset quality, management, earning, liquidity, systems and controls and compliance. as per the report of the working group on risk based supervision (rbs) (2020), while the camelsc model, derived from camel model is an important supervisory tool utilized by nabard for rating the banks based on on-site inspection, the rating system is largely focused on assessment of the past performance of the se while the risk elements not being adequately incorporated. the rating assigned is therefore, neither forward looking nor dynamic in nature. hence, based on the recommendations of the report, nabard has adopted enhanced camelsc rating framework, as a step towards capacity building for rbs. the model includes additional risk and control indicators. like any other commercial bank, rcbs also are posed with various risks like liquidity, credit, market, operational risks. nanda (2024) highlights risk scenarios in 21st century and importance of risk management systems in banks. rao (2024) emphasizes risk management as a single expression that epitomizes banking business. risk management is important due to multiple factors including bank’s fiduciary role towards depositors, their critical interaction with real economy and their role in ensuring financial stability. the primary objective of this study is to evaluate the inherent risks in a dccb which is rated as per camelsc model as 1corresponding author: orcid id: 0009-0000-1829-7613 © 2024 by the authors. hosting by american finance & banking society. peer review under responsibility of american finance & banking society, usa. https://doi.org/10.46281/ijfb.v14i2.2276 to cite this article: nikam, a. (2024). a case study on risk management system of a rural cooperative bank in india. indian journal of finance and banking, 14(2), 8-14. https://doi.org/10.46281/ijfb.v14i2.2276 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/ijfb.v14i2.2276 https://orcid.org/0009-0000-1829-7613 nikam, indian journal of finance and banking 14(2) (2024), 8-14 2 a ‘fundamentally sound bank with sound banking operations’. by application of various risk management tools and indicators prescribed by rbi/ nabard through guidelines on liquidity, interest rate and credit risk, the study will provide insight into the limitations of traditional camelsc model, especially c, a, e and l components. this study will contribute to the literature on understanding the risk management systems of rural cooperative banks and will be helpful for supervisors and rcbs to understand importance of enhanced camelsc rating model to be fully implemented by nabard by 2026. this section is followed by review of relevant literature. the methodology and source of data is followed in the third section. the results and discussion of the analysis are presented in the fourth section, and section five concludes with suggestions for future research. literature review the financial performance of different banks across various countries have been studied using the camel framework. barker and holdsworth (1993) noted the importance of camel ratings system as an effective tool for predicting banks' failure and measuring these institutions' performance. barr et al. (2002) concluded that camel rating system is useful for measuring the financial performance of banks by regulators and examiners. the camel rating model was introduced by rbi based on report of the working group to review the system of on-site supervision over banks (1995). based on camel model in indian banks, various studies were published. bodla and verma (2006), found that state bank of india (sbi) fared better than icici in terms of capital adequacy between 2000 and 2004. however, icici outperformed sbi in terms of asset quality, earning quality, and management quality, while there was no significant difference in the liquidity positions of the two banks. in their study, mishra and aspal (2012) assessed the overall performance and economic soundness of the state bank group using the camel approach and concluded that different banks ranked differently. however, the difference was not statistically significant based on the anova test. considering private banks, kumar and malhotra (2017) in their study found that the axis bank performed best, and the indusind bank performed worst. liquidity, revenue capacity, and capital sufficiency were the key reasons for the subpar performance of the latter. a study on comparison between private and public sector bank was also conducted by purohit and bothra (2018), which revealed that the difference in the parameters reflected sbi's efforts to improve its efficiency, revenue, and liquidity, as well as the attempts by the icici bank to strengthen its capital adequacy and asset quality. amongst the studies in cooperative banking sector, chander and chandel (2010) studied four dccbs in haryana, india and found that the dccbs were not performing well on all parameters viz. profitability, liquidity, solvency, efficiency, and risk. das (2012) studied stcbs in northeast region of india and found that the banks were not in par with all-india in respect of financial parameters. there were challenges of dual control, poor financial base, high cd ratio, poor infrastructure, lack of professionalism, low technology upgradation and poor recovery. a study by sushmitha and nagaraja (2019) found that the ucbs and stcbs have shown a significant improvement in the management of npas in comparison to the dccbs. however, there are limitations in analyzing performance of banks only on camel ratios. raja et al. (2023) reviewed that there are studies which have complemented the camel framework with analytical tools such as regression analysis, while others assessed the performance using camel ratios and alternative techniques. they evaluated performance of commercial banks in guyana by applying camel rating system and linear discriminant analysis on prudential ratios, and concluded that only four out of five ratios contributed to differentiating banks in good-performing and bad-performing. nair et al. (2018) compared the performance of private banks with the psbs using the camel framework and discriminant analysis. the study showed that the debt-to-equity ratio, tier i capital ratio, net npa ratio, and sensitive sector loans to total loans ratio explained the variation in the performance between these two categories of banks in india. there have been studies on risk management practices of banks. a high level steering committee (hlsc) constituted under the chairmanship of dr. k. c. chakrabarty, deputy governor for review of supervisory processes for commercial banks in their report (2012) recommended that under the risk-based approach to supervision, the supervisory rating would be a reflection on the risk elements (inherent risk and control) and not an exercise in performance evaluation as is the case under the camels rating framework. based on the study of us banks, handorf (2016) found that small and community banks were more affected by interest rates, mortgage prepayment and loan demand. by contrast, large banks hedge much of their interest rate risk but are adversely affected by basis risk. interest rate risk deservedly requires attention from both bank regulators and management. however, interest rate risk is not as important as asset quality, the provision for loan losses and the allowance for loan losses. indian economy moves gradually to full capital account convertibility, the banking sector is likely to come under increased stress in view of the exchange rate volatility with adverse repercussions on interest rates and bank default rates. through their study, srivastava et al. (2020) suggested ways of capital management of ucbs such as need for uniform guidelines on redemption of borrowing-linked capital, use of hybrid instruments, requirement for capital charge for market and operational risk. the issues in implementation of asset liability management in select cooperative banks in uttar pradesh, india by keshava (2020) were observed as low awareness at the top level, lack of skill among staff and poor-quality mis report from cbs. thus, from the extant literature, there is a scope for study in risk management practices and applicability of risk measurement tools in rcbs. materials and methods a governance mechanism, where the risk appetite of the organization is clearly defined, limits are set, and control measures to review and monitor these risks are in place, is necessary for risk management. according to the institute of internal auditors (2020) the three lines of defense model is a way of explaining the inter-relationship between three crucial functions nikam, indian journal of finance and banking 14(2) (2024), 8-14 3 of business, risk management and audit. the three lines have different responsibilities in the risk governance framework, of risk ownership, risk control and risk assurance, as indicated in table 1. table 1. responsibilities of the three lines of defence 1st line of defence 2nd line of defence 3rd line of defence • manages business risks in the organization’s processes. • the first line owns the risk and is accountable for the design and execution of the organization’s internal controls. • supports management and provides additional expertise and monitoring to help ensure that the risks and controls are effectively managed. • activities are separate from the first line of defence, but they still report functionally to senior management. • internal audit provides assurance to senior management and board over the effectiveness of first and second lines. • the third line is not allowed to perform management functions to protect its objectivity and independence. • it has a direct reporting to the board through audit committee. risk ownership risk control risk assurance source: author’s compilation the risk management system, or the second line of defence is responsible for controlling risk. a typical structure has been prescribed by nabard (2020) for cooperative banks, which would be as follows:  risk management sub-committee of the board  executive committees • asset liability management committee • credit risk management committee • operational risk management committee  compliance officer  risk management department rbi (2020) prescribes responsibilities of the risk management function. nabard (2020) delineates the roles and responsibilities of the board of directors, risk management committee, and other executive functionaries. the entire structure should have responsibilities such as to identify, measure, monitor and control overall risks; to assist the board in approving policies and strategies, for implementing integrated risk management system, in measuring and reporting risks, risk mitigation and stop-loss parameters; set and approve the risk appetite, within overall parameters; evaluate internal controls and functions through the committees covering credit, operational and market risks; internal capital adequacy assessment process (icaap). risk measurement and control practices have been in place in financial systems covering important business risks. the liquidity risk of a bank can be analysed using two approaches: flow approach and stock approach. nabard (2009) highlight the use of alm statements such as structural liquidity statements (sls) and interest rate sensitivity statements (irss) and using flow approach to examine liquidity and interest rate risk. guidance notes by rbi (2012) and nabard (2024) also provide for stock approach in risk management approach. macaulay duration can be an important method of identifying interest rate risk on investment portfolio with the changes in interest rate scenario. banks usually follow duration strategy depending on the prevailing interest rate scenario. a long-duration strategy is used when interest rates are falling (such as during recessions) where a bond investor focuses on bonds with a high duration value. in this situation, an investor is likely to buy bonds with a long time before maturity and greater exposure to interest rate risks. a short-duration strategy is one where a fixed-income or bond investor is focused on buying bonds with a small duration. this usually means that the investor is focused on bonds with a small amount of time to maturity. this strategy is employed when interest rates will rise or when there is uncertainty about interest rates, to reduce their risk. rbi has not prescribed any methodology for fixing interest rates for rcbs, unlike commercial banks. hence, rcbs are free to adopt any methodology. however, adopting benchmark methodology such as marginal cost of funds based lending rate (mclr) can be beneficial is maintaining desired net interest margin (nim), which is issued by rbi (2023). apart from conventional credit risk parameters focused on npas under the loan portfolio, credit risk can be mitigated at the account level. one such method is by assessing the solvency of financed unit using a linear model introduced by altman (2013), also known as the z-score model, which separates defaulting firms from non-defaulting ones based on certain financial ratios. the model was also modified for private-manufacturing and non-manufacturing industries. for retails loans, loan acceptance based on credit scoring can be helpful to reduce the probability of default. logistic regression model for credit scoring can be developed by banks (rauhmeier & engelmann, 2011). there have been guidelines on capital management by nabard (2024). nabard has also issued guidance notes on enhanced camelsc rating framework, 2023. basic concepts of risk management and practices in india have been reviewed (pathak, 2020). basu and tasneem (2024) offers an overview of risk management in banks and financial institutions, with special reference to india. important techniques and tools for risk measurement are also discussed. though all the guidelines indicated in the literature review have not been issued for the rcbs, the purpose of this paper is to examine applicability of these guidelines and risk measurement techniques on a dccb through case study of a particular bank, abc dccb ltd. the comparative financial position of the bank is provided in the appendix a. the name of the bank is changed to abc district cooperative central bank ltd. and data is partially modified, while retaining its proportionality, to maintain confidentiality of the information not available in public domain. results and discussions governance the abc dccb ltd. has been incorporated under state cooperative societies act and is functioning in its area of operation nikam, indian journal of finance and banking 14(2) (2024), 8-14 4 of abc district as per its byelaws. the bank is governed by the board of directors, representing affiliated pacs in its area and two professional co-opted directors. the board is headed by the president, who is elected by the board members from amongst themselves. the functions of formulating business strategies, setting policies as per the strategy & nabard/ rbi regulations, and execution is governed by the board directly, through the sub-committees of the board or through chief executive officer (ceo) and other executive committees. as per nabard guidelines, risk management committee as a sub-committee of the board has been setup, with the president, two professional directors, ceo and two general managers (gms) as members. under the risk management committee, an executive committee asset liability management committee (alco) is put in place. however, there are no credit risk management committee and operational risk management committee. bank has a compliance officer to ensure compliance to various statutory/ regulatory guidelines, instructions, and compliance testing of its processes/ products. bank has an audit committee as a sub-committee of the board. for ensuring separation of audit function and transparency in its audit and compliance mechanism, president and ceo are not members of the committee. audit committee of the board carries out the important function of risk assurance to the board and gives necessary feedback for strengthening risk control measures.there is a risk management policy which identifies various risks that can impact the functioning of the bank such as credit risk, operational risk, interest rate risk/ market risk, liquidity risk, capital risk, compliance risk. to manage the risks, document puts in place action plan for setting up robust management information system (mis) to capture data such as large credit exposure, system generated asset classification and overdue reports, exception reports, structural liquidity and interest rate sensitivity statements, fund flow statements, setting up risk appetite for various categories and exposure limits. however, the policy was formulated in the fiscal year 2019 and has not been reviewed since then. the limits set by the policy were not reviewed in the agenda of the committee. mis was not full-fledged and did not generate all the reports. bank may put in place a credit risk management committee and operational risk management committee to carry out executive functions of monitoring and controlling risk controls/ limits as per the policy. limits set in the policy can be reviewed periodically and monitored through risk management committee. bank can identify key risk indicators and adopt a mechanism of risk control and selfassessment (rcsa) at its business units such as branches and head office departments to analyze operation risk. liquidity risk as per nabard guidelines on camelsc rating (2016), liquidity position of the bank was assessed. during 2022-23, the bank did not default in maintenance of crr/ slr or in repayment to higher financing agency and paid insurance premium to dicgc accurately and timely. bank had an alco in place but was not meeting regularly. funding liquidity position of the bank was sound with 18.9% growth of deposits from previous years and individual deposits being above 200% of the institutional deposits. flow approach: as per camelsc rating, bank was preparing sls manually consolidating limited reports generated from their cbs. the assumptions in compilation of statements are given below. for the flow approach, rbi and nabard have prescribed the banks to prepare sls to analyse mismatches in various time maturity buckets. bank had put limits for short-term mismatches viz., 1-14 days and 15-28 days. however, limits for all buckets were fixed. the sls of the bank as on 31 march 2023 is as indicated in the table 2. table 2. structural liquidity statement of ab dccb ltd. as on 31 march 2023 (₹ million) sr. no. 1 to 14 days 15 to 28 days 29 days and up to 3 months over 3 months and up to 6 months over 6 months and up to 1 year over 1 year and up to 3 years over 3 years and up to 5 years over 5 years total a 5101.87 1071.45 1617.16 4279.75 10440.16 28876.55 15126.28 7366.05 73879.27 b 3758.41 490.33 4260.28 3707.75 11953.49 19693.43 21803.74 8211.83 73879.27 c -1343.46 -581.12 2643.13 -572.01 1513.33 -9183.12 6677.47 845.78 0.00 d -1343.46 -1924.58 718.55 146.55 1659.88 -7523.24 -845.77 0.00 0.00 e -26.33 -54.24 163.44 -13.37 14.50 -31.80 44.14 11.48 where a = total outflows b = total inflows c = mismatch (b-a) d = cumulative mismatch e = mismatch as a % of total outflows (assumptions in the statements are as follows: i. rbi guidelines issued to the rcbs are followed while bucketing the items. ii. deposits: current accounts and savings deposits accounts core portion is taken as 85%, whereas volatile portion is taken as 15%. term deposits are taken as per the maturity dates. however, the reinvestment or foreclosure is not incorporated. iii. borrowings are aligned as per the loans which the borrowings are refinancing. iv. loans: for cc loans, during 2021 and 2022, around 60% of the loans were renewed. hence, as per rbi guidelines, 60% of the loans were placed in 1-3 years category. rest was as per limit due date. in seasonal agriculture operations (sao) for individuals, during 2021 and 2022, around 80% of the loans were renewed. as per rbi guidelines, 80% loans were placed in 1-3 years category. rest was as per limit due date. for sao loans for societies, during 2021 and 2022, 100% of the loans were renewed. generally, societies renew the sao loans regularly. hence, all loans were placed in 3-5 years bucket.) the observations are as follows: i. against the limits set by the bank for short-term mismatches viz., 1-14 days and 15-28 days of 20% each, there was a mismatch of 26.33% and 54.24% in the first two time buckets. thus, the bank can face severe short term liquidity crisis in case of repayment of borrowings or if there is a sudden withdrawal of institutional deposits. it is necessary for the bank to place its liquid assets, over and above the requirement of crr and slr maintenance as prescribed by rbi. ii. there was a positive mismatch in maturity bucket of 29 days-3 months of 163.44%. bank can reinvest the assets to minimize the mismatches in first two buckets. iii. there is a positive gap in maturity buckets of 6-12 months, 3-5 years, and 5+ years. generally, banks design nikam, indian journal of finance and banking 14(2) (2024), 8-14 5 their maturity profile in such a way that there is mismatch in the earlier time buckets to get the benefit of tenor premium/ tenor differences in its assets and liabilities to maximize profitability. thus, the positive gaps in last two buckets indicate bank can make more profits. iv. the liquidity position might improve if the behavioral pattern of deposits in reinvestment and foreclosure is incorporated in preparation of the statements. deposits placed with other banks can be liquidated/ adjusted across time buckets to maintain liquidity. stock approach helps identify the inter-relation between volatile liabilities, volatile assets, core deposits, long term assets. rbi (2012) and nabard (2024) has suggested certain liquidity ratios and indicated the industry standards. banks can also set their own limits. the summary is given against the industry average in table 3. table 3. stock approach ratios for liquidity sr. no. ratios 31.03.2020 31.03.2021 31.03.2022 industry average 1 core deposits/total assets 48.08 48.53 50.27 >50 2 (loans + mandatory slr + mandatory crr + fixed assets)/total assets 80.06 81.95 87.62 <80 3 (loans + mandatory slr + mandatory crr + fixed assets)/core deposits 166.51 168.86 174.30 <150 4 temporary assets/total assets 19.94 18.05 12.38 <40 5 temporary assets/volatile liabilities 147.96 133.32 93.42 >60 6 volatile liabilities/total assets 13.48 13.54 13.25 <60 (assumptions: i. deposits are considered as 20% volatile and 80% core deposits. ii. since the borrowings of the bank in seasonal agriculture operations (sao) are generally renewed, these short-term borrowings are not considered as a part of volatile liabilities.) the observations are as follows: i. the liquidity position of the bank is comparable to industry average or better when it comes to sources of funds. however, bank’s uses of funds over the last three years have increased in illiquid assets. thus, bank should ensure that bank keeps temporary assets more, and manage its loans and fixed assets. ii. bank may have other sources of funding liquidity such as overdraft facilities and put in place a contingency fund plan to avoid liquidity crisis in stressed scenario. iii. based on the flow approach as well as stock approach, bank needs to make provisions for sufficient liquid assets to avoid liquidity issue. iv. bank may have other sources of liquidity such as overdraft facilities and put in place a contingency fund plan to avoid liquidity crisis in stressed scenario. v. the above indicate that apart from assessing liquidity position as per camelsc model, bank can use stock approach to understand risks. vi. the results indicated moderate levels of liquidity risk. market risk bank has not invested in any commodities or derivatives. hence the main market risk it faces is interest rate risk and equity risk. focus of the bank was on maintaining net interest margin (nim) of 3.00% and above. however, there was no cost of funds-based pricing of loans to maintain net interest income (nii). rates of interest of loans were fixed based on comparative rates in the other banks in its area of operation. for its investment portfolio, bank was not assessing the sensitivity of the portfolio to the changing interest rates. while making fresh investments, desired maturity was not analyzed. a. impact of changing interest rate scenario on net interest income (nii) as per camelsc model, the bank was having positive operating and net profit, return on assets was 0.61% and return on equity was 7.7% as on 31 march 2023. while assessing the impact on nii, based on irss, it is assumed that the rate sensitive assets (rsa) and rate sensitive liabilities (rsl) reprice at the midpoint of the time buckets. the impact would be from the midpoint of the time bucket till the end of the year. for example, rsa and rsl in 3-6 months' time bucket assumed to reprice from 4.5 months till the end of the year, i.e., for 7.5 months. if the rsa-rsl is positive, the change will increase nii over the period, whereas if rsa-rsl is negative, the change will decrease nii over the remaining period by amount (rsa-rsl) * (7.5/12) * 2%. generally, the impact of gap (rsa-rsl) is as given in table 4. table 4. impact of gap on net interest income gap position change in interest rate change in net interest income rsa>rsl increase increase rsa>rsl decrease decrease rsa<rsl increase decrease rsa<rsl decrease increase rsa=rsl increase no impact rsa=rsl decrease no impact source: author’s compilation based on irss prepared manually by the bank in a similar way as sls, and the calculation of impact of 2% rise/ fall in interest rate on nii over one year period is given in table 5. nikam, indian journal of finance and banking 14(2) (2024), 8-14 6 table 5. case study: impact of gap on nii (₹ million) time bucket 1 to 14 days 15 to 28 days 29 days and up to 3 months over 3 months and up to 6 months over 6 months and up to 1 year total liabilities (a) 51018.69 10714.47 16171.56 42797.54 104401.62 total assets (b) 37584.13 4903.26 42602.82 37077.49 119534.94 gap (b-a) -1343.46 -581.12 2643.13 -572.00 1513.33 bucket start point (years) 0.0027 0.04 0.079 0.25 0.5 bucket end point (years) 0.04 0.08 0.25 0.50 1 bucket mid-point (years) [h+i]/2 0.02 0.06 0.1647 0.375 0.75 repricing period [1-j] 0.98 0.94 0.84 0.63 0.25 impact on nii due to change by 2% [e*k*2%] -26.32 -10.94 44.16 -7.15 7.57 total impact up to 1 year 7.32 net interest income during previous year (₹ million) 100 impact as % of nii of previous year 7.32% a rise in 2% interest rates would increase the nii by 7.32% over the next year. this is because of the large positive gap in ‘29 days 3 months’ time bucket. thus, though the bank will benefit in the rising rate of interest scenario, it will lose in the decreasing interest rate scenario. bank can also set a limit of up to 5% and adjust its rate sensitive gap accordingly. the analysis has certain limitations viz. i. repricing of all assets/ liabilities are considered at midpoint of the bucket ii. 2% change is considered as parallel shift iii. 2% change at the beginning of the year is followed by no change in rates. changes are more complex practically. b. sensitivity of investment portfolio to interest rates bank has investments in government of india securities (gsec) and state development loans (sdls), primarily for its statutory liquidity ratio (slr) requirements. there is no trading in place. securities once purchased are held till maturity. however, securities held till maturity also face interest rate risk because i. rising interest rates mean cost of opportunity/ excess income forgiven, and ii. sale of securities at the time of sale for liquidity purposes can lead to loss in value of equity due to booking of capital losses. hence, it is necessary that the bank analyses its sensitivity to interest rates and makes prudent decisions while making fresh investments. though the bank is not making active investment decisions for managing its portfolio, its portfolio duration against past five years (from 30 september 2018 to 31 march 2023) is shown in graph in figure 1. figure 1. yield vs macaulay duration of bank’s investment portfolio 4.6038 4.6350 4.4856 4.3224 3.9872 3.7749 3.7722 3.5606 3.3557 3.1143 7.88 6.55 5.89 5.15 4.33 4.21 4.38 5.08 7.08 7.05 8.1 6.95 6.53 6.14 5.52 5.97 5.8 6.31 7.36 7.17 8 7.34 6.85 6.71 6.04 6.34 6.23 6.86 7.41 7.31 9 /1 /2 0 1 8 1 1 /1 /2 0 1 8 1 /1 /2 0 1 9 3 /1 /2 0 1 9 5 /1 /2 0 1 9 7 /1 /2 0 1 9 9 /1 /2 0 1 9 1 1 /1 /2 0 1 9 1 /1 /2 0 2 0 3 /1 /2 0 2 0 5 /1 /2 0 2 0 7 /1 /2 0 2 0 9 /1 /2 0 2 0 1 1 /1 /2 0 2 0 1 /1 /2 0 2 1 3 /1 /2 0 2 1 5 /1 /2 0 2 1 7 /1 /2 0 2 1 9 /1 /2 0 2 1 1 1 /1 /2 0 2 1 1 /1 /2 0 2 2 3 /1 /2 0 2 2 5 /1 /2 0 2 2 7 /1 /2 0 2 2 9 /1 /2 0 2 2 1 1 /1 /2 0 2 2 1 /1 /2 0 2 3 3 /1 /2 0 2 3 9/30/2018 3/31/2019 9/30/2019 3/31/2020 9/30/2020 3/31/2021 9/30/2021 3/31/2022 9/30/2022 3/31/2023 duration 4.6038 4.6350 4.4856 4.3224 3.9872 3.7749 3.7722 3.5606 3.3557 3.1143 2 yr 7.88 6.55 5.89 5.15 4.33 4.21 4.38 5.08 7.08 7.05 5 yr 8.1 6.95 6.53 6.14 5.52 5.97 5.8 6.31 7.36 7.17 10 yr 8 7.34 6.85 6.71 6.04 6.34 6.23 6.86 7.41 7.31 yield vs macaulay duration nikam, indian journal of finance and banking 14(2) (2024), 8-14 7 the findings are as follows: i. the macaulay duration of the investment portfolio of the bank has reduced from 4.60 to 3.11. there is a weak correlation between interest rate scenario (yield) and duration. this is primarily because the bank made investments in 2016-17 in sdls of 10-year maturity period and is since held till maturity. thus, very few securities replace earlier portfolio with time. any new securities are purchased for a maturity period of ten years. thus, over the last few years, the maturity profile of its portfolio has spread evenly, similar to a maturity ladder. hence, duration of the portfolio has been reducing with time. ii. modified duration of the portfolio, which determines the sensitivity of the prices to the interest rate movements, as on 31 march 2023 was 0.08. thus, 1% increase in rate will reduce the price of the portfolio by 0.08%. the underlying assumption in calculation of sensitivity is that there is parallel shift in the yield curve. iii. analysis of fresh investment decisions of the bank during 2022-23 indicates that bank had purchased three securities, viz sdl 7.10% mh sdl 2036 with face value ₹200 million and 6.19% goi 2034 with face value ₹100 million each. based on the yield curve analysis as seen from the figure 3, the interest rates were on an increasing trend, with spread between 2-year yield and 10-year yield decreasing. since the yield curve was flattening combined with increasing rates, the bank could have made investments in securities which were maturing in 2-3 years, so that the investment would be re-priced sooner. however, the bank had made investments in securities of longer maturity period. thus, even though the macaulay duration of the portfolio is lesser, investing in longer maturity period may incur loss of opportunity of reinvestment and would impact nii in the future. thus, the bank should analyze yield curve before making investments. c. fixing interest rates on loans for maintaining net interest margin as indicated above, the focus of the bank was on maintaining net interest margin (nim) of 3.0%. it is necessary that the interest rates of loans/ deposits are fixed based on cost of funds or external benchmark. the bank is fixing its interest rates on deposits and loans based on the prevalent rates of competitors (commercial banks, rrbs, stcb). for this case study, we will assume that interest rates on deposits are based on demand/ market rates. thus, the bank has control only over the rates on loans. the areas of portfolio which can be controlled are in table 6. table 6. loan portfolio where bank has freedom to fix interest rates (₹ million) sr. no. type of loan amount o/s % to total loan o/s rate of interest remarks 1 sao loans from borrowing 8576.00 16.26 6.00 wherever seasonal agricultural operation (sao) funds are available from government of india, and funds are passed on to pacs for on-lending, rate is fixed by stcb at 6.00% to extend the loan to ultimate borrower at 7.00%. 2 sao loans own funds 3730.2.9 7.07 8.50 wherever own funds are involved, interest subvention of 1.5% is granted, raising rate to effectively 7.00+1.50=8.50%. 3 agri lt loans to societies 8958.70 17.00 8.50 loans for which refinance is available from nabard under long term rural credit fund (ltrcf), composite rates are fixed by stcb at 8.50% to pacs for on-lending. 4 agri lt loans to individuals 4688.58 8.89 10.50 as per above, the rate for ultimate borrower is fixed at 10.50%. 5 other loans 26775.14 50.78 as per bank bank is free to fix its rates on this portfolio. 6 total 52728.71 100.00 thus, we can see that bank can have leverage on up to 50% of its portfolio for fixing interest rates to maintain desired nim. d. marginal cost of funds based lending rates (mclr) as the bank issues all the loans as per fixed rate of interest (not floating rate), there is no reset date for rates. rbi guidelines for assessment of mclr (2023) for the commercial banks will be used, based on the data available with the bank. as per the guidelines, wherever loans are issued at fixed rate up to three years, loans should not be given less than mclr up to that tenor. the mclr comprises of: i. marginal cost of funds; ii. negative carry on account of crr; iii. operating costs; iv. tenor premium. i. marginal cost of funds the calculation for marginal cost of funds as on 31 march 2023 are given in table 7. nikam, indian journal of finance and banking 14(2) (2024), 8-14 8 table 7. calculation of marginal cost of funds as on 31 march 2023 (₹ million) type of funds amount outstanding rate of interest marginal cost of funds o/s as % of funds other than equity/ capital funds marginal cost () x (4) (1) (2) (3) (4) (5) current account 1666.44 0.00 0.00 2.49 0.00 sb deposits 16778.00 3.50 58721.25 25.02 0.88 fixed deposits 26829.62 6.25 167685.11 40.02 2.50 st borrowings 8576.00 5.00 42880.00 12.79 0.64 lt borrowings 9042.01 6.50 58773.04 13.49 0.88 shg borrowing 2501.79 10.50 26268.75 3.73 0.39 marginal cost of funds 65393.35 354328.16 100.00 5.28 a. the marginal cost of borrowings for the bank was 5.28% b. return on net worth desired (achieved as on 31 march 2023): 7.72% c. marginal cost of funds = 92% of marginal cost of borrowings + 8% of return on net worth = (92% x 5.28) + (8% x 7.72) = 5.47% as per rbi, 8% is the core tier i equity for commercial banks. however, since no such ratio is prescribed for rcbs, we will also consider 8% as core equity. ii. negative carry on cash reserve ratio (crr) negative carry on the mandatory crr which arises due to nil return on crr balances, was as under: required crr x (marginal cost) / (1crr) = 0.04*5.47/ (1-0.04) = 0.23% iii. operating cost all operating costs associated with providing the loan product including cost of raising funds, after subtracting services which are separately recovered by way of service charges, as a percentage of marginal cost of funds is: operating cost = ₹638.75 million operating cost / average earning assets = 1.99% iv. tenor premium tenor premium is considered according to premium for corresponding tenor over government securities as on 31 march 2023 as published on fbil website. v. marginal cost of funds based lending rate (mclr) table 8. mclr for the different time tenors sr. no. time to maturity marginal cost of funds negative carry on crr operating cost tenor premium mclr 1 overnight 5.47 0.23 1.99 0.00 7.69 2 up to one month 5.47 0.23 1.99 0.04 7.73 2 up to 3 months 5.47 0.23 1.99 0.13 7.82 4 up to 6 months 5.47 0.23 1.99 0.62 8.31 5 up to 1 year 5.47 0.23 1.99 0.63 8.32 6 up to 3 years 5.47 0.23 1.99 0.64 8.33 7 up to 5 years 5.47 0.23 1.99 0.64 8.33 since the bank issues loans on fixed rates of interest, it is pertinent for the bank to assess mclr up to five years, which may be used for long term loans above three years. the earning assets, however, give different yield or the rates are fixed as per refinancing agencies. contribution of each asset in the yield is given in table 9. table 9. composition of earning assets and their yields (₹ million) sr. no. type of loan amount o/s % to total loan o/s rate of interest 1 sao loans from borrowings 8576.00 12.38 6.00 2 sao loans own funds 3730.29 5.39 8.50 3 agri lt loans to societies 8958.70 12.95 8.50 4 agri lt loans to individuals 4688.58 6.78 10.50 5 deposits with other banks 7233.64 10.45 6.00 6 slr investments 8314.22 12.02 7.46 7 shares and mf 929.01 1.34 6.00 8 other loans 26775.14 38.69 as per bank 9 total 52728.71 100.00 the observations are: i. in case of loan products banks where bank is free to fix interest rates, it can have different spread according to desired loan portfolio, credit risk premium, tenor of the loan product. nikam, indian journal of finance and banking 14(2) (2024), 8-14 9 ii. for example, considering that bank wants to issue all the loans with five years tenor and link its rates with 3yr mclr, then to achieve 8.33% from the entire earning portfolio, bank will have to charge rate at the 9.54% (8.33*100 = x*38.69 + σ sum product of other assets). thus, the spread will be 1.21%. iii. present interest rates of the bank range from 10.00% to 11.00%. thus, the rates are comparable or more than mclr + spread. bank can fine tune their rates as per desired incremental loan portfolio. iv. if the bank wants to vary the rate of interest as per the borrower’s credit risk, it can categorize its customers as per customer score or internal rating method. a preliminary analysis is done in following sections. as seen from the findings, the nii was highly sensitive to change in rate of interest. the bank needs to set limits to the sensitivity of the rate sensitive gaps on the nii up to 1-year residual period. investment portfolio of the bank was low at 3.11 and modified duration was also low at 0.08%. it can adopt the principles of marginal cost of funds based lending rate (mclr) for ensuring consistent net interest margin. bank may analyze its investments portfolio on a periodic basis to assess the duration and modified duration, desired duration of the portfolio. compared to camelsc ratios, bank had overall low interest rate risk. credit risk bank is having effective recovery efforts to have minimum non-performing assets (npas). as on 31 march 2023, the gross npa to gross loans and advances was 1.42%. net npa to net loans and advances was 0.0%. substandard npa composed 80.40% of total npa. the loans were not concentrated in any one portfolio. thus, there was low concentration risk. there was no analysis of quick mortality loans, or loans becoming overdue before effecting recovery. quick mortality loans are those which become npa within one year of the sanction. in the bank, many loans are agricultural advances which become npa after two crop seasons since overdue, whereas many accounts have moratorium period. hence, for considering quick mortality loans, npa accounts, which became overdue within one year from the date of first instalment was considered. it was observed that as on 31 march 2023, 30.35% of total npa amount was which had become overdue within one year of instalment start date. thus, bank needs to focus on npa slippage and can focus on attracting customers which have lesser probability of defaulting, than focusing on recovery and collateral. there was no mechanism of credit rating or credit scoring of customers to assess probability of default in the bank. there was also uniform fixing of interest rates for one loan product. there was no concept of risk premium for a customer. similarly, there was no rating for loans given to societies, or business units. a. altman’s z-score model loans issued to pacs for their own business activities stand only 1% of the total loans as on 31 march 2023. however, bank has issued loans to individuals, proprietors, firms, milk producer companies for business activities. bank can evolve a rating system as a part of loan appraisal. the z-score model for private non-manufacturing industries is: z = 6.56(x1) + 3.26(x2) + (6.72x3) + (1.05x4) where x1 = (current assets − current liabilities) / total assets x2 = retained earnings / total assets x3 = earnings before interest and taxes / total assets x4 = book value of equity / total liabilities zones of discrimination: z > 2.6 – "safe" zone 1.1 < z < 2.6 – "grey" zone z < 1.1 – "distress" zone following the model, probability of insolvency/ bankruptcy was arrived at for only pacs, since data on other borrowing units were not available. the pacs are audited by the registrar and audit classification is awarded to these societies. audit classification incorporates important financial performance parameters, along with other governance and internal checks parameters. the z-score of societies were compared with the audit classification since bank was not performing any separate internal rating. the results are in table 10. table 10. z-score vs audit classification of pacs z-score zones/ audit classification a b c total safe zone 6 5 2 13 grey zone 43 31 6 80 distress zone 15 9 9 33 total 64 45 17 126 as can be seen, the functioning of a pacs, its profitability, solvency and governance is reflected in the z-score up to a certain extent as follows: i. given the audit rating a, 76.56% are in safe zone or grey zone. nikam, indian journal of finance and banking 14(2) (2024), 8-14 10 ii. given the audit rating b, 80.00% are in safe zone or grey zone. iii. given the audit rating c, 52.94% are in distress zone. iv. however, given the society is in distress zone, 72.72% have audit rating a or b. this might be because audit ratings incorporate parameters other than only financial position, or the z-score has false positives (positive being distressed). nonetheless, z-score model gives an indication of the exposure to credit risk while financing any society or unit. b. credit scoring for scoring of customers, statistical model of logistic regression was used. out of 49.78% loans outstanding, loans extended to self help groups (shgs), joint liability groups (jlgs), jewel loans were excluded. only loans to individuals were considered. bank had a total of 8571 loan accounts. for the same, parameters for an individual available in cbs were taken and measured against the respective default probability. the weight of evidence (woe) and information value (iv) of the available parameters were calculated in table 11: table 11. weight of evidence (woe) and information value (iv) gender category non-events events % of non-events % of events woe iv male 5592 345 69.28 69.14 0.0019974 0.0003 female 2480 154 30.72 30.86 -0.004489 0.0006 total 8072 499 0.0009 profession category non-events events % of non-events % of events woe iv agriculture 4878 268 60.43 53.71 0.1179531 0.7931 allied-agriculture 988 35 12.24 7.01 0.5567842 2.9097 business 1344 187 16.65 37.47 -0.811254 16.8942 employee 862 9 10.68 1.80 1.7784802 15.7845 total 8072 499 36.3814 marital status category non-events events % of non-events % of events woe iv single 895 46 11.09 9.22 0.1846319 0.3451 married 7177 453 88.91 90.78 -0.020806 0.0389 total 8072 499 0.3840 income slab category non-events events % of non-events % of events woe iv up to 0.1 mn 4667 328 57.82 65.73 -0.128292 1.0153 0.1-0.5 mn 2103 140 26.05 28.06 -0.074073 0.1484 0.5-1 mn 1098 25 13.60 5.01 0.9988193 8.5824 above 1 mn 204 6 2.53 1.20 0.7428101 0.9841 total 8072 499 10.7302 area in the district category non-events events % of non-events % of events woe iv a 1779 87 22.04 17.43 0.2343481 1.0790 b 2478 108 30.70 21.64 0.3495254 3.1651 c 1561 114 19.34 22.85 -0.166667 0.5845 d 1926 161 23.86 32.26 -0.301754 2.5360 e 328 29 4.06 5.81 -0.357833 0.6256 total 8072 499 7.9902 it can be seen from table 11 that apart from information value of ‘marital status,’ iv of other variables are either exceedingly small or exceptionally large, which makes the parameters not useful to make prediction about default probability. the possible reasons could be: i. the number of events (defaults) as a proportion to total event is extremely low. ii. the entries made in the cbs by the banking staff might be incorrect. thus, it is necessary to obtain and feed correct and more customer information in cbs to get correct output. iii. overall data is very less. the data on customers for which bank is lending indirectly, i.e., by on-lending through pacs, is not available. it can add to the value of data. apart from camelsc credit risk indicators of gross npas, net npas, bank may analyze quick mortality or expenses in recovering overdue loans. bank may also explore profiling of its customers based on credit scoring mechanism based on historical data and creating logistic regression or neural networks model and can also assess the solvency of borrowing units/ societies using altman’s z-score model. capital management the capital augmentation of bank was done only based on share linkage on extended loans or from net profits. there was no capital charge based on credit risk, market risk or operational risk since the bank was monitored under basel i norms. however, there was no analysis of incremental capital to incremental risk weighted assets. similarly, effect of losses/ return nikam, indian journal of finance and banking 14(2) (2024), 8-14 11 on net worth is not assessed on a periodic basis. current crar of the bank is at 10.36%. for maintenance of crar at the same level, bank needs to have return on assets on incremental assets as given in table 12. table 12. roa required for incremental risk weighted assets particulars present incremental rwa incremental capital required for 10% crar return on assets assuming no dividend* return on assets assuming 5% sharelinkage and no dividend roa assuming 5% share linkage and 6% dividend capital 100 10 =5/0.7=7.14 =5/0.7=7.14 rwa* 1000 100=1100 =10/1100=0.91% =5/1100=0.45% = (5+6.6)/1100=1.05% rwa with 70% risk weight of assets** = (10/1100) *0.7 =0.64% = (5/1100) *0.7 =0.32% = [(5+6.6)/1100] *0.7 =0.74% * it is assumed over here that all incremental assets have 100% risk weight. **it is assumed that incremental assets have 70% risk weight (based on 31 march 2022) bank had roa of 0.63% and 0.61% during last two years. roa is not sufficient if it is to declare 6% dividend, as per mandate. thus, crar will reduce in future. hence bank should review continuously on following indicative parameters to ascertain capital adequacy i. nii ii. cost of management (operating cost) iii. risk cost (cost of provisions/ write-off) iv. roa though bank had crar above minimum regulatory requirement of 9.00% as per camelsc model, bank can adopt a mechanism of internal capital adequacy assessment process (icaap) conduct stress tests to analyse impact on capital adequacy due to adverse conditions for example 2% rise in interest rates, 5% increase in npas, wage revisions, etc. conclusions the application of various guidelines issued by rbi and nabard indicate that though the bank had strong financials, there was moderate liquidity risk, low interest rate risk and moderate credit risk in institutional clients viz. pacs and had limitation in capturing credit risk of its retail customers. the capital adequacy assessment also indicated the bank had insufficient roa to give dividend as per its mandate. bank did not have governance mechanism in place such as credit risk management committee or having effective alco to carry out executive functions of monitoring and controlling risk controls/ limits as per the policy. the application of tools such as macaulay duration and modified duration for assessment of investment portfolio of the bank, mclr for interest rate setting, altman’s z-score and logistic regression for its clients in a dccb are the novel features of this study. this study will be helpful in pushing forward an overall understanding the risks present in a rural cooperative bank, especially a dccb and also limitations of the capacity of the bank in dealing with these risks. the primary limitation of the study was unavailability of accurate data, because of which various assumptions were made while preparing the statements or while conducting analysis. another limitation is that the portfolio and functioning of a dccb being highly localized, these risks may vary in other dccbs across regions. the practices discussed in the paper can help the rural cooperative banks adopt risk governance to manage future risks to its financial position. it can also help the banks for preparing itself for enhanced camelsc supervisory rating framework to be adopted by nabard/ rbi, as a step towards risk based supervision (rbs). future studies may look into risk management aspects of rcbs, especially credit risk and capital management since there has been limited studies in this area. author contributions: conceptualization, a.n..; methodology, a.n..; software, a.n.; validation, a.n..; formal analysis, a.n.; investigation, a.n.; resources, a.n.; data curation, a.n.; writing – original draft preparation, a.n.; writing – review & editing, a.n.; visualization, a.n.; supervision, a.n.; project administration, a.n.; funding acquisition, na. 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 deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: i would like to thank the office-in-charge of nabard telangana regional office for permitting me to conduct the study. since thanks to the dccb officials for providing inputs for the study. informed consent statement: not applicable. 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. nikam, indian journal of finance and banking 14(2) (2024), 8-14 12 references altman, e. i. 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(2020). report of the working group on risk based supervision. mumbai: nabard. retrieved from https://www.nabard.org/auth/writereaddata/file/report%20of%20the%20working%20group%20on%20rbs.pd f working group to review the system of on-site supervision over banks. (1995). report of the working group to review the system of on-site supervision over banks. mumbai: rbi. appendices appendix a: comparative financial position of the abc district cooperative central bank ltd. (₹ million) sr. no. liabilities 31/03/2021 31/03/2022 31/03/2023 1 paid-up capital 2091.45 2354.72 2731.14 2 reserves and surplus 1049.65 1467.72 1870.34 3 deposits 32799.49 38069.12 45273.56 a fixed deposits 22478.50 26408.48 26829.62 b savings deposits 9377.42 10104.20 16777.50 c current deposits 943.58 1556.45 1666.44 4 borrowings 16773.53 18695.97 20119.79 a sao borowing 7920.00 11056.00 8576.00 b shg borrowing 1189.36 865.24 2501.79 c long term loan 7629.59 6740.57 9007.84 d icdp borrowing 34.58 34.16 34.16 5 interest payable on 830.11 788.82 729.90 a deposits 81.69 434.85 156.01 b borrowings 748.42 353.97 573.89 6 branch adjustments (net) 3.77 0.00 13.16 7 provision made 1477.04 1739.37 2229.43 a provision for standard loans 139.70 170.00 210.00 b provision for npas 970.79 1186.79 1626.79 c overdue interest reserve 49.95 49.95 49.95 d provision for investment depreciation 0.04 16.06 26.12 e provision for other assets 316.56 316.56 316.56 8 other liabilities 623.15 838.80 911.95 a bills payable/ dds payable 379.70 434.58 444.91 b subsidy reserve fund 243.45 404.22 467.04 9 total outside liabilities 51030.04 58392.72 67048.36 10 total liabilities 55648.18 63954.52 73879.27 11 contingent liabilities 14.94 25.19 33.32 sr. no. assets 31/03/2021 31/03/2022 31/03/2023 1 cash in hand 904.88 2014.69 1498.73 2 balances in current account 565.51 1138.60 1102.63 3 term deposits with other banks 7328.48 7831.25 7233.64 4 call and short notice money 0.00 0.00 740.00 5 investments 9040.17 9650.21 9243.24 a govt. securities 6693.61 8511.60 8314.22 b shares with other cooperatives 512.02 749.02 909.02 c mutual funds 1834.54 389.59 20.00 6 loans and advances 35701.09 42064.44 52728.71 a to societies 17737.54 20680.32 21515.24 a sao/ kcc loans 9946.63 11442.67 12029.07 b lt loans 7388.07 8835.67 8958.70 c cc loans to societies 319.79 360.00 496.45 d term loans to societies 83.05 41.99 31.03 b to individuals 17963.55 21384.11 31213.47 a sao/ kcc loans 102.48 180.15 277.22 b lt loans 0.00 0.00 4688.58 c retail loans 17861.07 21203.96 26247.66 i cc loans 952.92 1267.15 1671.31 ii shg 2139.04 3067.94 3680.51 iii rural housing 2555.37 3509.08 5756.18 iv jewel loans 4650.64 5961.30 6861.59 nikam, indian journal of finance and banking 14(2) (2024), 8-14 14 v others 7563.11 7398.49 8278.08 7 interest receivable on 1154.76 248.24 227.30 a investments 276.55 248.24 227.30 b loans and advances 878.21 0.00 0.00 8 fixed assets 369.62 386.40 438.63 9 other assets 583.67 620.70 666.40 10 total assets 55648.18 63954.52 73879.27 publisher’s note: american finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2024 by the authors. licensee american 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by american 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/ indian journal of finance and banking 13(2) (2023), 14-22 14 finance and banking ijfb vol 13 no 2 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa equity price determinants of india's nifty next 50 index firms' amit hedau (a)1 sarbesh mishra (b) (a) assistant professor, school of business management, national institute of construction, management and research, hyderabad, india; e-mail: amithedau21@gmail.com (b) professor & dean, national institute of construction, management and research, hyderabad, india; e-mail: sarbeshmishra@nicmar.ac.in a r t i c l e i n f o article history: received: 1st october 2023 revised: 2nd december 2023 accepted: 15th december 2023 published: 17th december 2023 keywords: equity price, determinants, regression, eva, india jel classification codes: c53, c55, g12, g17, o16 a b s t r a c t an investor must perform research on a stock before investing in it. it becomes critical for a financially savvy investor. as a result, stock prices have long been a source of attraction. researchers have worked hard to identify the elements influencing stock prices and returns. this paper is an attempt to identify the factors predicting the market price of equity in india. the secondary data about 2017 to 2022 of nifty's next 50 index companies is analyzed using ols regression. the findings of the regression are ratified through a qualitative approach by the semi-structured open-ended survey and interviewing experts. the obtained responses are transcribed and coded. matrix coding has been performed using a qualitative tool such as nvivo to understand the pattern of codes. the study finds that dividend rate, book value, and return on net worth are statistically significant and positively influence the market price of sample firms. debt to equity ratio has a negative impact on market price. economic value added (eva) was found to be a new variable that significantly impacted the market price of shares. the study findings are helpful to the market participants to make wise and knowledge-based investment decisions. the study's findings will also add to the existing body of knowledge regarding stock valuation. © 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 an informed investment decision considers an asset's present value and the factors that will affect its future worth. the foundation of wise investment is the idea that an investor should never overpay for an asset. due to the wide range of variables that affect their pricing, the valuation of financial assets like equity and bonds is more difficult because their value resides outside the eyes of the investor. one group of investors thinks valuing equity is a precise science with no room for human mistakes. the other portion contends that since analysts must rely on convenient assumptions to support their findings, equities valuation is more of an art than a science. finding the variables that affect an equity's market price is essential to its valuation. these variables could include things like market sentiment, firm and industry-specific circumstances, financial and economic variables, and investor behavior. in order to find the elements that explain the market price of equity, researchers and academics employ statistical approaches to the financial data of businesses. however, more study is necessary before additional literature on the subject may be added. second, using previously untried data analysis approaches or discovering novel explanatory variables may be possible by conducting another survey. the present study uses internal financial characteristics to forecast the market price of equity in line with the earlier findings. multiple regression is used to test for cause and effect. the nifty next 50 (nn50) index companies are examined using historical financial data from january 2017 to december 2022. according to the findings, the dividend rate (dr), return on net worth (ronw), book value (bv), and economic value added (eva) are statistically significant and positively influence the market price of the sample companies. in contrast, the debt-to-equity ratio slightly negatively impacts the market price of equity, and earnings per share (eps) are found to be statistically insignificant. the statistical results of data analysis were typically reported as the study's conclusion in earlier research. the current paper validates the factors using a qualitative technique that includes expert interviews and a semi-structured openended survey. the received responses are coded and transcribed. a qualitative tool like nvivo has been used to execute 1corresponding author: orcid id: 0000-0002-5571-601x © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i2.2148 to cite this article: hedau, a., & mishra, s. (2023). equity price determinants of india’s nifty next 50 index firms’. indian journal of finance and banking, 13(2), 14-22. https://doi.org/10.46281/ijfb.v13i2.2148 https://orcid.org/0000-0002-5571-601x http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i2.2148 https://orcid.org/0000-0003-2969-7756 hedau & mishra, indian journal of finance and banking 13(2) (2023), 14-22 15 matrix coding to comprehend the pattern of codes. market participants, including fund managers, equities analysts, portfolio managers, retail investors, and high-networth people, can benefit from the study's conclusions. investors are wary about the market's volatility and the security of their investments as the broad indian market indices nifty and sensex linger close to all-time high levels; equity market investors may find the study's findings helpful in making sane investment decisions. the study's findings will also add to the existing body of knowledge regarding stock valuation. a comprehensive literature review identified the research gap in conducting the present research work. the research methodology is selected based on the earlier empirical work. the statistical data analysis is presented in the findings section, followed by a discussion of the present findings and their implications. five sections make up the remainder of the paper. a survey of the literature is covered in section two to determine the research gap. the research methodology is covered in section 3, and the results of the data analysis are covered in section 4. the study's results and their consequences are discussed in section five. conclusions, limitations, and the future scope of the research are discussed in section 6. literature review a theory suggests a wide range of valuation models that can be classified into three categories. the first category includes discounted cash flow valuation, where the expected future cash flows' present value is estimated using the required rate of return, popularly known as the discount rate. in the second category, a relative valuation is done based on sales, cash flow, book value, or earnings of comparable assets. the third category talks about contingent claim valuation, where option pricing is used to determine the present value of the underlying asset. however, these three models are based on a few assumptions. like in discounted cash flow models, the analyst disagrees with the discount rate. the discount rate differs due to the risk appetite of every investor; therefore, a universally accepted discount rate is difficult to find. predicting future cash inflows regarding dividends is another challenge when using discounted cash flow models for equity valuation. in the comparable approach model, the non-availability of equal assets is the limiting factor. sometimes, similar variables are influenced by temporary market conditions or non-fundamental factors. the option pricing model, the third type of valuation model, is based on a set of assumptions, and the outcome of these valuation models is subject to the input information used by the user. further, this model is less if the underlying asset is noted in the derivative segment. the study conducted by trejo pech, white, and noguera (2015); choiriyah et al. (2020), budi and davianti (2022), and saputra (2022) observed enough evidence to suggest that financial variables have critical roles in predicting the market price of equity. the study conducted by collins (1957) is one of the pioneering studies in the field of determinants of equity prices. the study was conducted on us market data to scientifically deal with the problem of mix determinants and to depict a clear answer to determining whether stocks at a given point in time are too high or too low. the study found that dividends, net profit, operating earnings, and book value were the prominent factors affecting share prices in the us. zahir and khanna (1982) is the first study to predict the equity price in india using multiple regression based on data from two years, i.e., 1976–1978. the dividend per share, book value, and yield were found to be significant determinants of the share price, whereas the influence of earnings per share was weak. zahir and khanna (1982) analyzed 101 companies as one set, whereas balkrishnan (1984) conducted a sector-specific study on india's engineering and cotton textile sectors. he observed dividend per share and book value as significant determinants in both industries but yield as a substantial factor in the cotton textile sector only. srivastava (1984) observed the dividend rate as substantial in his study of 327 indian companies. nirmala et al. (2011) studied the auto, healthcare, and psu sectors of the indian market with data pertaining to 2000–2009. the regression result confirms that dividend, pe ratio, and leverage are significant determinants of the market price in all three sectors, whereas profitability is a sector-specific determinant in the auto sector only. sharma (2011) analyzed sixteen years of data on indian companies, starting from 1993–94 to 2008–09. he found that earnings per share (eps), dividend per share (dps), and book value (bv) have significant impacts on the market price of equity. bhatt and sumangala (2013) found book value and earnings per share as significant market price predictors in their study conducted on the top 50 companies in india based on market capitalization for data related to 2006–2011. jadhav and badade (2012) conducted a sector-specific study on india's banking, it, and healthcare sectors. they found price-to-earnings ratio (pe) and dividend yield (dy) as significant determinants of the market price of equity shares in all three sectors. eps is expected in the banking and healthcare sectors; dy is common in the healthcare and it sectors, and bv is common in india's banking and it sectors. srinivasan (2012) conducted a study on six sectors in india: manufacturing, pharmaceuticals, energy, it & ites, infrastructure, and banking. the panel data about 2006–2011 was analyzed using the fixed effects model and the random effects model. he found the eps and pe ratios are significant in the manufacturing, pharmaceutical, energy, infrastructure, and commercial banking sectors but insignificant in the it & ites sectors. similarly, book value is essential in the pharmaceutical, energy, it & ites, and infrastructure sectors, whereas it is insignificant in the manufacturing and banking sectors. tandon and malhotra (2013) applied linear regression to study data from 2007 to 2012 for 95 sample companies in india. they reported that bv, eps, and pe ratios have a significant positive association with the market price of the share, while dividend yield has a significant negative influence on the market price of the share. the sector-specific results should be reported in their study. nautiyal and kavidayal (2018) studied the actively traded top 30 companies of the nifty 50 index to predict the market price using fundamental ratios. they found eps is poorly connected with market price, whereas economic value hedau & mishra, indian journal of finance and banking 13(2) (2023), 14-22 16 added (eva) and dividend per share are moderately predictive of the market price of equity. eva was used as an independent variable for the first time in an indian context. goyal and gupta (2019) used earnings per share, dividend pay-out ratio, pe ratio, net margin, return on equity, and return on assets to identify the factors influencing stock prices of 30 bse-listed businesses. the data was analysed using a panel data most miniature square regression model. the findings show that earnings per share, net margin, and net income considerably impact a company's stock price. the comprehensive literature survey observed that:  earlier studies considered a few sectors—nifty 50, bse 100, and bse 500 index companies—as sample sizes. the nifty next 50 (nn50) index companies have not been explicitly studied.  most of the studies conclude with statistical findings. the present study will test the validity of regression findings using a semi-structured questionnaire survey and expert interview followed by matrix generation using nvivo.  for the first time, economic value added (eva) is used as an independent variable by nautiyal and kavidayal (2018). further study is required to support eva as a new determinant of the market price of equity in india.  scopus and google scholar, the reliable databases, show goyal and gupta (2019) and kaur and gupta (2021) as the recent studies on a similar topic in india. the topic requires further research as a consensus on the determinants has yet to be achieved. materials and methods population and sample selection listed companies on the national stock exchange (nse) form the population for the present study. the indian stock market is represented by a well-diversified, broader benchmark market index called nifty50. it represents the weighted average of the 50 largest indian companies listed on the nse. the index constituents are not fixed. they are reviewed on a semiannual basis in the months of june and december every year. based on market capitalization and free float market capitalization of individual stocks, rebalancing and reconstitution are done in the nifty index. nifty next 50 (nn50) is another set of 50 companies, representing the next rung of liquid stock after nifty 50 companies, with the possibility of forming part of the nifty 50 index in the future. the nifty 50 constituent companies are considered safer investment options than the other stocks listed on the nse. the average rolling returns of nifty 50 and nifty next 50 are compared in table 1. table 1. comparative returns of nifty next 50 and nifty 50 period nifty next 50 nifty 50 1 year 26.5% 20.3 % 3 year 18.2% 15.7 % 5 year 16.8% 14.0% 10 year 15.9% 13.0% 15 year 16.9% 14.5% source: etmoney, 2023 at this juncture, investors are curious to know the factors that drive the market price of nn50 companies. using the biased sampling method, the authors have selected the companies forming part of the nn50 as a sample for the present study. based on the availability of historical financial data, 41 companies (41/50 = 82 percent) are part of the final sample. nine companies were eliminated due to the non-availability of consistent data pertaining to the period of research. the study analyzed the data related to january 2017 to december 2022. sources of data and data collection the present study employs qualitative and quantitative methods of data analysis. therefore, the authors have used both primary and secondary data. the secondary data relates to the historical market price of the sample stocks and the variables determining the market price. market price determinants are identified from the literature survey. historical financial information about market prices and their determinants is collected from the prowess database maintained by the center for monitoring the indian economy (cmie). the secondary data analysis is validated using primary data collected through a qualitative approach using a semistructured open-ended survey and interviewing experts from the domain area. the primary data is collected from finance professionals, stock analysts, and academicians from a reputed institute with more than ten years of experience in their field. methods of data analysis as mentioned in the literature section, it is justified to use forecasting techniques such as linear, non-linear, or hybrid models to overcome the limitations of the valuation model. the forecasting technique may be simple ols regression, panel data methods, time series modeling, or machine learning algorithms. the level of complexity and information asymmetry across the world's stock exchanges means that no single model can be applied uniformly to the entire market (rangi & aithal, 2021). the regression technique can process large amounts of panel data spread across multiple years. therefore, the author has selected ols regression followed by semi-structured interviews with industry experts to test the validity of the regression findings. the data analysis is carried out in two stages. in the first stage, preliminary statistical techniques describe the data. the cause-and-effect relationship is explored using ols regression to identify the determinants of market hedau & mishra, indian journal of finance and banking 13(2) (2023), 14-22 17 price for the sample companies. the data analysis using the technique of regression is done in the following four steps:  model building  model assumptions (multicollinearity, independence of residuals, normal distribution of residuals, and outlier influence)  model adequacy (f ratio)  model validation (by splitting the data set into two sets: training and testing) the statistical package for social sciences (spss) is used to analyze the secondary data. the primary data collected through the questionnaire survey and interviews are transcribed and coded in the second phase. matrix coding has been performed using a qualitative tool such as nvivo to understand the pattern of codes. regression model, dependent and independent variables the dependent variable is regressed against a set of independent variables in the regression model. in the present study, the market price of equity shares of sample companies is taken as a dependent variable. market price information is available daily, weekly, monthly, quarterly, and annual. the average of the year's high and low prices is considered by gill et al. (2012) and tandon and malhotra (2013). sehgal and pandey (2010) applied year-end closing prices, whereas sukhija (2014) considered annual values in their respective studies. the more significant the difference between the two time periods used to calculate the average, the higher the range (the difference between high and low price), which results in higher variability. the author is convinced by the recent study by kaur and gupta (2021), who applied quarterly values in their study. accordingly, we have taken the average of quarterly values of market price and independent variables in the present study. a brief explanation of dependent and independent variables observed in earlier studies is given in table 2. table 2. description of dependent and independent variables sr. no variable description literature reference indian international dependent variable 1 market price of equity quarterly closing market price kaur and gupta (2021) - independent variables 2 dividend rate (div. rate) the rate of dividend declared by the company zahir and khanna (1982), balkrishnan (1984), srivastava (1984), nirmala et al. (2011), jadhav and badade (2012), chawla and srinivasan (1987) collins (1957), karathanassis and philippas (1988), adebisi and lawal (2015), uddin (2009) 3 book value (bv) net asset value per share is calculated using the following formula: equity capital + reserve no. of outstanding shares zahir and khanna (1982), balkrishnan (1984), sharma (2011), srinivasan (2012), tandon and malhotra (2013) collins (1957), almumani (2014), alomar, and al-mutairi, (2008) 4 leverage (de) total debt total equity nirmala et al. (2011) midani (1991), irfan et al. (2002) 5 earnings per share (eps) profit after tax (pat) no. of shares outstanding sharma (2011), srinivasan (2012), tandon and malhotra (2013) almumani (2014), uddin (2009), somoye et al., (2009), al-omar, and al-mutairi, (2008) 6 economic value added (eva) net operating profit after tax (nopat) – (wacc × capital invested) nautiyal and kavidayal (2018) - 7 financial performance (rnow) return on net worth (rnow) is calculated as net income shareholders equity -adebisi and lawal (2015) source: author’s compilation. – indicate variable not yet studied based on the above, the proposed regression equation is: adj. closing priceij = β0 + β1div rate + β2de + β3 eva + β4eps + β5 bv + β6 ronw + eij where β0 is the regression constant, and eij is the error term results the data are first described through the basic analysis. for all the variables except dividend, a total of 205 observations are evaluated (41 firms' x 5 years beginning in 2017-2022). since the dividend rate's quarterly values are not available, the present study considers the final dividend with 165 (33 companies x 5 years) observations over the five years of 33 (sample size of 41 – 8 non-dividend paying) companies. table 3 presents the descriptive statistics. the large variety that can be seen between the research variables' minimum and highest values. when comparing the values of standard deviation, the debtto-equity ratio is the data set with the least amount of scattering, while eva has the highest value of standard deviation. the minimum eps, bv, and return on net worth (rnow) values are negative. hedau & mishra, indian journal of finance and banking 13(2) (2023), 14-22 18 table 3. descriptive statistics div. rate de adjcloprice eps bv eva ronw n valid 165 575 575 575 575 575 575 mean 235.5284 .8169 1185.0580 44.8664 196.5675 737396.5612 26.4536 std. error of mean 18.42548 .07352 48.15608 5.09587 9.51253 18006.42591 1.24527 median 100.0000 .1400 747.3000 11.7800 99.9800 624864.0000 25.1700 mode 0.00 0.00 54.95a -36.45a 17.54a 95029.29a 27.99 std. deviation 439.90234 1.75534 1154.74212 122.19466 228.10250 438.92495 29.59975 skewness 4.157 3.621 1.226 5.331 2.063 1.571 .638 std. error of skewness .102 .102 .102 .102 .102 .102 .103 kurtosis 20.628 14.533 .700 28.725 4.547 3.089 28.101 std. error of kurtosis .204 .204 .203 .203 .203 .203 .205 range 3525.00 12.87 4833.90 841.76 1272.91 2205976.21 526.74 minimum 0.00 0.00 52.95 -77.54 -188.30 86445.00 -210.46 maximum 3525.00 12.87 4886.85 764.22 1084.61 2292421.21 316.28 source: spss data analysis output to detect multicollinearity, a correlation matrix was constructed to infer the extent of correlation among the variables studied. the variables are moderately correlated between them. the values of the correlation coefficient are reported in table 4. the highest (lowest) correlation coefficient value is +.77 (-.135), which revealed a moderate correlation between the variables. table 4. correlation matrix adjcloprice div. rate de ronw eps bv eva adjcloprice 1.000 div. rate .314 1.000 de -.135 -.152 1.000 ronw .155 .412 .157 1.000 eps .492 -.415 -.368 -.412 1.000 bv .645 -.220 -.242 -.240 .771 1.000 eva .242 .253 .263 .420 -.140 -.157 1.000 source: spss data analysis output table the regression assumptions (multicollinearity, independence of residuals, normal distribution of residual, and outlier influence) are tested before proposing the final regression model. the multicollinearity among the research variables is not a problem as the vif values of significant variables are less than 5, and the tolerance score is above 0.2, as reported in table 7. the durbin-watson (dw) test value is 1.911 (close to the standard value of 2), as reported in table 5, confirming that the residuals are uncorrelated and the independent error assumption is satisfied. the normality of residual values is checked with a graphical method using a histogram and normal probability plot, as reported in figure 1 and figure 2, respectively. the cook's distance is under 1, indicating individual cases do not influence the regression model. figure 1. histogram of adj. closing price figure 2. p-p plot of stand. residual source: spss data analysis output table 5. regression model r r square adjusted r square std. error of the estimate durbinwatson 0.812 .659 .656 681.10615 1.911 source: spss data analysis output table hedau & mishra, indian journal of finance and banking 13(2) (2023), 14-22 19 the regression model and anova are reported in table 5 and table 6, respectively. it is found that the dividend rate, debt-to-equity ratio, earning per share, economic value added (eva), book value, and return on net worth explain a significant amount of the variance in the value market price of equity (f(6, 559) = 178.505, p < .01, r2 = .659, r2adjusted = .656). table 6. anova sum of squares df mean square f sig. regression 496857336.891 6 82809556.148 178.505 0.000 residual 256539791.914 553 463905.591 total 753397128.805 559 source: spss data analysis output the regression coefficient, as reported in table 7 shows that dividend rate (β=.264, t(559) = 9.506, p < .01), return on net worth (β=.050, t(559) = 1.833, p < .1), book value (β=.719, t(559) = 18.384, p < .01) and enterprise value (β=.380, t(559) = 14.524, p < .01) are statistically significant and positively influencing the market price of equity shares whereas debt-to-equity ratio (β= -0.167, t(559) = -6.353, p < .01) is negatively influencing the market price of equity. the significance of ronw, which is not yet studied in the indian context, and eva, only studied by nautiyal and kavidayal (2018) in the recent past, confirms the changing pattern of significant variables over a period of time. table 7. regression coefficient unstandardized coefficients standardized coefficients t sig. collinearity statistics b std. error beta tolerance vif (constant) -408.697 71.493 -5.717 .000 div. rate .692 .073 .264 9.506 .000 .799 1.252 de -116.483 18.336 -.167 -6.353 .000 .895 1.117 ronw 1.958 1.068 .050 1.833 .067 .824 1.214 eps -.174 .367 -.019 -.475 .635 .405 2.471 bv 3.653 .199 .719 18.384 .000 .403 2.482 eva .001 .000 .380 14.524 .000 .901 1.109 source: spss data analysis output the automatic linear regression modeling generated using spss shows 65.6 percent accuracy of the model with an aic value of 7,487.076, as shown in figure 3. the model is validated by splitting the sample into testing and training sets. an accuracy level of 87.62 percent is achieved in the validation process. the scatter plot of predicted values of dependent variables is reported in figure 4. figure 3. automatic linear modeling. figure 4. scatterplot of dependent variable source: spss data analysis output the word cloud and matrix coding are reported in figure 5 and figure 6, respectively. based on the expert's opinion, earnings per share and debt to equity ratio are the two most significant determinants of the market price of equity, followed by book value and return on net worth. nevertheless, the experts suggest that short-term and long-term business growth rates, industry outlook, business governance, and industry potential are the additional factors that influence the market price of equity. hedau & mishra, indian journal of finance and banking 13(2) (2023), 14-22 20 figure 5. word cloud for frequency of determinants of market price of equity div. rate de eps ronw eva bv expert 1 1 1 1 1 1 expert 2 1 1 1 expert 3 1 1 1 expert 4 1 1 1 1 1 1 expert 5 1 1 expert 6 1 1 expert 7 1 1 1 expert 8 1 1 1 1 expert 9 1 1 1 1 expert 10 1 1 1 expert 11 1 expert 12 1 1 1 1 expert 13 1 1 1 1 expert 14 1 1 1 1 expert 15 1 1 1 1 1 1 figure 6. matrix coding of determinants of the market price of equity from experts discussions the current article expands on previously published research on the factors that affect equity market price. the present study discovered that the debt-to-equity ratio adversely impacted the stock's market price. wippern (1966) asserts that a critical factor in attaining the objective of wealth maximisation is the financial structure. nautiyal and kavidayal (2018) note the opposing viewpoint in the indian context and assert that there is no substantial relationship between the stock price and debt in the capital structure; the present investigation concurs with their findings of nautiyal and kavidayal (2018). the negative coefficient of -0.175 in the indian scenario indicates that investors are risk-averse and that upward price movement is constrained by the use of extra debt in the company's capital structure. the negative coefficient of the debt-to-equity ratio is consistent with the earlier findings of midani (1991). the present study supports the findings of tandon and malhotra (2013), balkrishnan (1984), and zahir and khanna (1982) to conclude that book value has a positive and statistically significant impact in predicting the market price of equity. the company's enormous reserves and surplus, as well as fewer external liabilities, raise the book value of the shares. the present study concludes that the liquidation approach to equity valuation is preferable in india rather than discounting future cash flows due to the longevity of the significance of book value in numerous research from 1981 up to 2023 in the current study. earnings per share's negative coefficient, which is statistically insignificant (p > 0.05), shows that investors disagree that eps influences price. a simple book entry made during a share repurchase or bonus issue can change the value of eps. investors do not want these discretionary decisions to determine price because they are made at the management's discretion. nautiyal and kavidayal (2018) provided evidence of the low predictive capacity of eps, particularly in the context of the indian situation. the current study supports balke and wohar's (2006) observation that dividend expectations are a key factor in stock price changes. the study advises businesses to adopt a liberal philosophy and confirms the conclusions of sharma (2011) and goyal and gupta (2019). a positive and significant coefficient of economic value added shows that the company and its management must work to increase wealth for their shareholders. the logical connection between book value and eva is supported in the current study, which shows that the more wealth generated for the shareholders, the more book value increases. a higher net worth for the corporation is likely inferred from the higher book value. a detailed examination of the coefficient of dividend rate, eva, and return on net worth reveals the shareholders' expectations. as a result of the dividend rate and eva having statistically significant values, investors can anticipate the company creating value for them and distributing it to them in the form of dividends, making the return on net worth statistically negligible. hedau & mishra, indian journal of finance and banking 13(2) (2023), 14-22 21 in the current study, the stated value of the adjusted r square is 65.6 percent. according to kotha and bhawna (2016), changes in macroeconomic variables caused an index value change of 11%. together, the findings from this study and kotha and bhawna (2016) will account for 79% of the change. this will close the research gap that tandon and malhotra (2013) identified. conclusions investors in india might use the study's conclusions as a guide when choosing their investments. to enhance pricing performance and protect against volatility, it is advised that the management of the sample companies concentrate on increasing the numerical values of the positive coefficients of the significant variables. for investors in growing economies like india, the subject of the current study is crucial. the author concurs with nautiyal and kavidayal's (2018) and sharma's (2011) assertions that basic analyses of financial factors have a significant predictive value for equities market prices. therefore, investors must understand the significance of such analyses and consider them when making wise investment selections. according to almashaqbeh, islam, and bakar (2021) investors must analyse psychological and behavioural characteristics before investing in the stock market because stock price movements can create significant swings in portfolio performance. the study does have certain limitations, though. the study's findings depend on how reliable the secondary data used to support them was. second, the study's small sample size makes it impossible to generalise the results. the analysis is based on previous financial values, which might vary nonlinearly and unpredictably when the business climate shifts. beyond their financial metrics, the sample firms might investigate applying the knowledge-based theory of the firm that nickerson and zenger (2004) put forward to create alternative (non-financial) capacities. the methods for data analysis, the choice of independent variables, and the study length can all be considered study boundaries. the complexity of each sector of the indian economy may be better understood through large sample sizes or sector-specific studies using more advanced data analysis techniques. author contributions: conceptualization, a.h.; methodology, a.h.; software, a.h.; validation, a.h.; formal analysis, a.h.; investigation, a.h.; resources, a.h.; data curation, a.h.; writing – original draft preparation, a.h.; writing – review & editing, a.h., and s.m.; visualization, a.h.; supervision, a.h.; project administration, a.h.; funding acquisition, a.h., and s.m. 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. acknowledgments: the author acknowledges the national institute of construction management and research, hyderabad, india, for providing access to the database to download the secondary data and software for data analysis. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the secondary data presented in this study are available on request from the corresponding author. the primary data may not be available to maintain the respondent's confidentiality. conflicts of interest: the authors declare no conflict of interest. references adebisi, o. s., & lawal, k. o. 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(1966). financial structure and the value of the firm. the journal of finance, 21(4), 615-633. https://doi.org/10.1111/j.1540-6261.1966.tb00270.x zahir, m. a., & khanna, y. (1982). determinants of stock prices in india. the chartered accountant, 30(8), 521-523. 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. http://www.jstor.org/stable/41263366 https://doi.org/10.1080/00036848800000060 https://doi.org/10.35716/ijed/20220 https://doi.org/10.1177/0972150917713865 https://doi.org/10.1287/orsc.1040.0093 https://dx.doi.org/10.2139/ssrn.3805394 https://doi.org/10.38035/jafm.v3i1.64 http://dx.doi.org/10.1016/j.cya.2015.02.001 https://doi.org/10.1111/j.1540-6261.1966.tb00270.x http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 9(1) (2022), 203-212 203 finance and banking ijfb vol 9 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa the impact of capital structure on islamic banks profitability: evidence from gcc countries larabi moustapha (a)1 roucham benziane (b) (a) associate professor, faculty of economics and management, bechar university, algeria; e-mail: larabi.moustafa@univ-bechar.dz (b) associate professor, faculty of economics and management, bechar university, algeria; e-mail: roucham.benziane@univ-bechar.dz a r t i c l e i n f o article history: received: 23 january 2022 accepted: 24 march 2022 online publication: 27 march 2022 keywords: capital structure, profitability islamic banks, gcc countries panel data jel classification codes: g32, l25, g21, c23, c33 a b s t r a c t this paper aims to reveal the relationship between capital structure variables and the profitability of islamic banks. the examination has been performed using panel data for a sample of 05 islamic banks operating in the gulf cooperation council gcc countries (2010-2020). capital structure is measured by deposit to total assets (dta) and equity to total assets (eta) ratio. in contrast, return measures profitability on assets (roa), return on equity (roe), and net profit margin (npm). data collected were analyzed by using e-views10 software. the research results indicate that the eta ratio has a positive and significant relationship with roa. whereas, the deposit to total assets (dta ratio) has no significant relationship with return on asset (roa). there is an insignificant relationship between (eta ratio, dta ratio) and the roe ratio. moreover, there is a significant solid effect between the eta ratio and net profit margin (npm). at the same time, there is no significant relationship between the dta ratio and net profit margin (npm). therefore, the study can guide the gcc islamic bank executives, the shariah supervisory board, and the decision-makers in the gcc area to rely on specific capital structures for islamic banks to improve their profitability. © 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 a business's ability to get the highest profitability is fundamental for any organization, regardless of industry, which enhances the wealth of the company's owners or shareholders. as a result, the current market value of the firm's existing shares is used to calculate the wealth of its owners. as a result of this aim, the firm's management should make reasonable financing decisions about the optimal capital structure, which would reduce its cost of capital; the islamic banking industry is one of them. islamic banks have a different capital structure; they adhere to sharia law in their operations. the payment and receipt of riba are among the many acts that shariah forbids (interest); the banks use shariah-compliant mechanisms or contracts that are not used by their conventional counterparts to raise and distribute funds more effectively. the shariah law also mandates that islamic banks share earnings and losses with their investors. few academics and researchers around islamic banking believe that capital structure and profitability are linked positively (al-farisi & hendrawan, 2011; hafeez et al., 2018; meero, 2015; noreen, 2019). yet, the gulf cooperation council (gcc) countries are regions where the islamic banking industry expanded. thus the main objective of this study is to check the impact of capital structure on the profitability of islamic listed banks in the gulf cooperation council (gcc). objectives  to investigate "capital structure's "and profitability's "research growth and progress.  reviewing the subject fields through various paper styles analysis was conducted on start-up.  to locate regional and structural contributions to start-up research from around the world 1corresponding author: orcid id: 0000-0002-2873-8125 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v9i1.1669 moustapha, l., & benziane, r. (2022). the impact of capital structure on islamic banks profitability: evidence from gcc countries. indian journal of finance and banking, 9(1), 203-212. https://doi.org/10.46281/ijfb.v9i1.1669 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v9i1.1669 https://orcid.org/0000-0002-2873-8125 https://orcid.org/0000-0001-5389-9839 moustapha & benziane, indian journal of finance and banking 9(1) (2022), 203-212 204 importance of the problem due to the increasing economic weight of islamic banking as an alternative financial which gained a lot of attention from academics, research centers, and the government; the importance increases from this study about capital structure and profitability on many levels, including:  students and researchers of current scientific phenomena can brush up on their skills by contemporary science phenomena.  we have added new stats to our understanding of capital structure and profitability in the gcc area islamic banks.  evaluation of islamic banks of the gcc area performance.  we are making the results of this investigation available to the public. background the capital structure reflects the mix of equity and debt in the banks. the optimal mix of equity and debt for a business optimizes the firm's value while minimizing total capital costs, but this relies on the determinants. several studies have examined islamic banks' capital structure and its determinants. the capital structure of banks is strongly linked to a wide range of variables, such as the bank size, tangibility and liquidity, dividend policy, the ratio of market-to-book, and profitability. below, we shed light on these factors in the islamic finance context based on capital structure theories. then, we will focus on profitability, which is the issue of our study. theories of capital structure in an islamic view we will use the theoretical framework of trade-off theory, the agency cost theory, the asymmetry of information, and the pecking order theory, sequentially examining how the above approaches can be used to explain the financial structure of islamic banks. contemporary financial theories note that conflicts of interest between stakeholders, bankruptcy costs, taxes, asymmetries of information and safety nets, transactions costs, and prudential regulation determine the level of capital in banks. however, this literature has focused, essentially, on conventional banks. static trade-off theory: tax savings versus bankruptcy expenses in an islamic setting when modigliani and miller (1963) revised their earlier work, they included tax benefits as a factor in determining a firm's capital structure. (hailu, 2015). static trade-off theory posits that the ideal financial structure results from a trade-off between tax savings from interest rate deductibility and predicted bankruptcy costs (myers, 1984). by utilizing as much debt capital as feasible, (modigliani & miller, 1963) like to raise profitability while also increasing company value. however, according to studies by ricca, jucá, and junior (2021) and berger, herring, and szego (1995), as debt grows, so does the likelihood of insolvency, raising the estimated expenses of running into financial trouble. reveal the trade-off between tax benefits and bankruptcy costs specifies the optimal capital ratio of banks (berger et al., 1995; ricca et al., 2021). liabilities claim holders benefit from islamic banks' lower bankruptcy costs because of the increased percentage of tangible assets held by these institutions. as a result, islamic banks' estimated insolvency costs should be lower than traditional banks. in addition, the collateralization of the credit portfolio decreases the bank's exposure to counterparty risk since it offers a security mechanism that allows islamic banks to limit their risk exposure owing to the involvement of investors in the actual economy as required by islamic financing. according to trade-off theory, islamic banks should have a lower equity ratio (equity/asset) because of the reduced bankruptcy costs associated with islamic banks (toumi et al., 2012). asymmetry of information and pecking order theory in an islamic context in contrast to the idea of static trade-offs, another hypothesis describes the capital structure of financial firms: the pecking order theory (myers, 1984; myers & majluf, 1984). companies prioritize their funding sources, preferring internally generated funds under this idea due to asymmetric information between insiders (managers or dominant shareholders and outside investors). straight debt, convertible debt, and external equity are preferred when internal resources are limited. the principles of islamic finance lead in theory to the symmetry of information and complete transparency between the islamic bank and its stakeholders. in effect, an essential aspect of islamic finance is that it requires transparency in transactions:  since islam prohibits el gharar.  maysir is banned, meaning that excessive risk-taking is not permitted (islamic banks closes the access to speculation and the use of derivatives).  the requirement for traceability means the tangibility of assets in contracts  respect for these principles should lead every stakeholder to recognize its moral responsibility vis-a`-vis of all other stakeholders. moreover, the risk level should be lower for islamic banks than for conventional banks. cost agency under the islamic setting according to (jensen & meckling, 1976) landmark study on agency costs, the separation of (shareholders, managers, and debt holders) in banks produces conflicts of interest between shareholders and managers. it also affects the capital structure of businesses. in the shareholders-managers dispute, agency costs arise from shareholders' incapacity to control managers' conduct (grossman & hart, 1982; jensen & meckling, 1976). the islamic setting is one example of a unique legal and ethical system that prohibits managers from excessive perquisite consumption and other opportunistic behavior. shariah's principles prohibit excessive risk-taking and taking risks at the expense of the others parties. in the islamic moustapha & benziane, indian journal of finance and banking 9(1) (2022), 203-212 205 context, two traditional agency relationships remain the shareholder-manager relationship and shareholders-liability claim holder relationship. the impossibility limits the possibilities of wealth transfers from shareholders to claim-holders for shareholders to engage in hazardous projects. the mudaraba contract transforms the traditional relationship between the bank and its depositors into a partnership entrepreneur-investor. psia in ibs mobilized the basis of the contract within the principle of profit sharing. the second one is between managers and the sac. two other essential agency relationships emerge in the islamic context. the risk that the manager maximizes his interest (income, power, prestige etc.) at the expense of holders of psia should be below. the mechanism of profit-sharing in investment accounts is also at the benefit of shareholders. to avoid massive withdrawal of funds due to poor performance on investment deposits, shareholders exert more control over managers. in addition, most ibs communicate on their sac to affirm their compliance with the principles of islam. profitability of banks in numerous previous studies, a bank's profitability is measured by return on assets (roa) or return on equity (roe) or net profit margin (npm) (hafeez et al., 2018; hailu, 2015; petria et al., 2015; setyawati et al., 2017). in this study, roa, roe, and npm are the dependent variables. for a bank's management, roa is important since it shows how well the bank can utilize its resources and investments to create profit (bashir, 2001; hassan, 2010). depending on the bank's management decisions and circumstances that cannot be controlled, such as economic development and government laws, roa can vary widely among banks. because regulators think that roa is a metric adequate for calculating a bank's efficiency and is an indication that a large equity multiplier is not affected, roa is the most flattering statistic for assessing the profitability of banks (rivard & thomas, 1997). to evaluate a company's profitability from its assets, roa is a suitable metric. every dollar sale's net profit (eat) is calculated using the net profit margin. the net profit margin (npm) is the percentage of each dollar of sales that remains after all costs and expenses have been deducted, including interest, taxes, and preferred stock dividends. (mulyadi et al., 2020). while (alexandri, 2008) defines net profit margin as "the ratio used to show a company's ability to generate net profits after tax deductions." according to (sutrisno, 2009), npm is: "the ability of the company to generate profits concerning sales achieved." if you want to calculate npm, divide your net income (before taxes) by your net sales. having the ability to cover non-operational and income tax expenses, as well as a more extraordinary ability to earn a net profit, is indicated by this ratio. furthermore, return on equity (roe) indicating how the effectiveness of the bank's management in the use of shareholder funds. roe of banks affected by roa and the level of financial leverage of banks (equity/assets). for financial intermediaries, roa has values that tend to be lower than the roe, so most banks use more financial leverage to increase roe to be more competitive (sufian, 2007). literature review capital structure’s impact of on profitability of the islamic or conventional bank's has no incontestable evidence or academic consensus; some studies reported that capital structure has significant determinants, apart from the profitability of banks (al-hunnayan, 2020; goh et al., 2018; güner, 2016; jamilah tawfeeq al-najdawi, 2019; hirdinis, 2019). in addition, other literature reported the influence of several different factors on banks' profitability aside from capital structure. (dietrich & wanzenried, 2011; haris et al., 2019; jaara et al., 2021; saona, 2016; shawtari, 2018; staikouras & wood, 2004; sufian & habibullah, 2009; sun et al., 2017; yao et al., 2018). nonetheless, the relationship between capital structure and bank profitability has been extensively examined. several studies found a positive impact of equity to asset ratio on profitability (staikouras & wood, 2004) during 1994–1998 in european banking sector using static regression, (yao et al., 2018)period of 2010–2016 targeted the pakistani banking sector, the generalized method of moments (gmm) carried out, the same method used by (haris et al., 2019) during 2010–2016 in the pakistani banking sector and (mostak ahamed, 2017) in indian banking (1998–2014), this result remained positive but insignificant in (al-homaidi et al., 2018; almaqtari et al., 2019) and negative impact on roe, nim, and nir (lee et al., 2015). existing many comparative studies between islamic banks and conventional banks (al-farisi & hendrawan, 2011; jaara et al., 2021; meero, 2015; noreen, 2019) have reported a positive effect of capital structure on return on equity (roe) and a negative return on assets (roa). table 1. synopsis of the literature review islamic banking studying the relationship between capital structure and bank profitability references area period methodology findings (jaara, 2020) gcc islamic banks 2000-2018 bivariate analysis and panel regression 89%, 85% of ib’s and cs profitability influenced by bank size, market value, cr, cash to assets, gdp, gdp growth, and inflation (noreen, 2019) banks of pakistan 2006-2016 a comparative study roa has a negative correlation with the capital structure of both conventional and islamic banks, but roe has a positive correlation. moustapha & benziane, indian journal of finance and banking 9(1) (2022), 203-212 206 (meero,2015) gulf countries banks 2005-2014 a comparative study roa has a significant negative relationship with financial leverage and a positive relationship with equity to assets ratio (al-farisi and hendrawan, 2011) indonesian banks 2002-2008 a comparative study bank's capital ratio has a negative effect on their profit efficiency. the negative impact happened to be higher for the islamic bank (hafeez et al., 2018) asian country 2007-2016 regression analysis there is a significant and a positive relation em and dr with roa while er has a negative and significant relation with roa (al-kayed et al., 2014) islamic banking systems in 19 countries 2003-2008 reverse causality profitability replies positively to an growth in equity sources: collected by the authors critical and research gap we ensured that the covered literature relates to the research question and its objectives. we also covered the most relevant and essential theories of recognized experts in this field. still, the literature most relevant to the representative sample of islamic banks in the gcc was minimal, and the previous studies did not cover it sufficiently. this formed a spatial and empirical research gap that we tried to fill. method: materials and tools design research upon the literature review, we build the following research model (figure 1) figure 1. the proposed research model figure 1. conceptual research model this study uses explanatory variables such as deposit to total assets, equity to total assets. the dependent variables are return on assets, return on equity, net profit margin; the variables descriptions are given in table 2. table 2. description of dependent and independent variables in the model sources: elaborated by the authors state hypotheses according to research design the authors adopt the following hypotheses for the study model: h1: there is a significant impact of deposit to total assets ratio on profitability of islamic banks in gcc countries h2: there is a significant impact of equity to total assets ratio on profitability of islamic banks in gcc countries measurement criteria the name of influence factors variable symbol n 𝐑𝐎𝐀 = 𝐍𝐄𝐓 𝐈𝐍𝐂𝐎𝐌𝐄 𝐀𝐕𝐄𝐑𝐀𝐆𝐄 𝐓𝐎𝐓𝐀𝐋 𝐀𝐒𝐒𝐄𝐓 return on assets roa dependent variables (profitability) 𝑹𝑶𝑬 = 𝑵𝑬𝑻 𝑰𝑵𝑪𝑶𝑴𝑬 𝑺𝑯𝑨𝑹𝑬𝑯𝑶𝑳𝑫𝑬𝑹 𝑬𝑸𝑼𝑰𝑻𝒀 return on equity roe 𝑵𝑷𝑴 = 𝑵𝑬𝑻 𝑰𝑵𝑪𝑶𝑴𝑬 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 net profit margin npm 𝑫𝑻𝑨 = 𝑻𝑶𝑻𝑨𝑳 𝑫𝑬𝑷𝑶𝑺𝑰𝑻𝑺 𝑻𝑶𝑻𝑨𝑳 𝑨𝑺𝑺𝑬𝑻𝑺 deposit to total assets dta independent variables (capital structure) 𝑬𝑻𝑨 = 𝑻𝑶𝑻𝑨𝑳 𝑬𝑸𝑼𝑰𝑻𝒀 𝑻𝑶𝑻𝑨𝑳 𝑨𝑺𝑺𝑬𝑻𝑺 equity to total assets eta moustapha & benziane, indian journal of finance and banking 9(1) (2022), 203-212 207 based on the hypotheses, this study has used the following model: yit = β0 + β1dit + eit (1) where y = dependent variable, β0 is intercept, β1 = slope, d = explanatory variable, e means error term, i signifies the cross-sectional element of the study, "t" represents the time series element in this study. equation 1: return on asset roait =β0it+β1 dtait+β2 eta it+εit (2) equation 2: return on equity roeit =β0it +β1 dta it + β2 eta it + εit (3) equation 3: net profit margin npm it = β0it + β1 dta it + β2 eta it +εit (4) where: roa: return on asset dta: deposit to total assets roe: return on equity eta: equity to total assets npm; net profit margin data collection and processing instruments for data collection the data for the study is extracted from the audited annual statements of islamic banks for 2010 to 2020. the study variables were collected from the yearly financial reports of the study sample banks. survey population and rationale the study population consists of all islamic banks operating in the gulf cooperation council gcc countries. the study sample covers 05 islamic banks from 05 gulf countries: saudi arabia, uae, qatar, bahrain, and kuwait. table 3. the sample of the study n country name banks name 1 kingdom of saudi arabia. al rajhi bank 2 united arab emirates abu dhabi islamic bank 3 qatar qatar international islamic bank 4 kuwait boubyan bank 5 bahrain al salam bank sources: elaborated by the authors statistical procedure for analyses of the data, statistical tools were used to compare and test the effect of independent variables on dependent variables. the data were analyzed using e-views 10 software for the period from 2010 to 2020; the data is processed through the following steps:  step 1: conduct a statistical description to understand the basic characteristics of the data collected.  step 2: analyse the correlation between study variables.  step 3: check the stationary of data by using the unit root test. as the data used in this study is panel data, w use the levin, lin, and chu test to check the stationary level.  step 4: the panel regression analysis used three dependent and two independent variables. the hausman test was used to determine on a fixed or random effect model estimates (hausman, 1978). statistical description the running (e-views 10) software for data gives the following statistical results. table 4. statistical characteristics of research variables mean median max min std. dev. n roe 0.106816 0.113600 0.224800 0.000300 0.055214 55 roa 0.015886 0.015200 0.036600 4.00e-05 0.008060 55 npm 0.380311 0.382700 0.594400 0.003600 0.141063 55 eta 0.153691 0.146200 0.235600 0.107700 0.028915 55 dta 0.795849 0.810600 0.850100 0.702100 0.042797 55 source: authors' calculations using e-views 10 software moustapha & benziane, indian journal of finance and banking 9(1) (2022), 203-212 208 as presented in table 4, the return on equity (roe) measure revealed how effective the bank is in generating a profit from shareholders' equity. the descriptive statistics show the arithmetic mean of return on equity ratio (roe)estimated at (10.68%), with a maximum value of (22.48%) and a minimum value of (0.03%), with a standard deviation of around (5.52%). similarly, roa (return on assets) ratio shows the profitability of using the assets. the high ratio indicates the efficient use of assets to generate more profit. the mean roa (return on assets) of the sample banks in the study period was 1,58%, with a minimum score of 0.004% and a maximum score of 3,66%. the value of the return on assets ratio deviates from its mean with a standard deviation of 0.80%. the net profit margin ratio (npm) shows how much of each dollar in revenues becomes profit. the mean net profit margin ratio of the sample banks in the study period was 38.03 %. it reveals that profit represents on average nearly38.03 % of the revenues of islamic banks. the highest net profit margin ratio for in a particular year was 59.44 %. in the same way, the minimum ratio of sample banks in a year was 0.36%. the equity to total assets (eta) ratio used as a capital structure measure to examine the impact of equity on the profitability of islamic banks. the mean of (eta) ratio of the sample banks in the study period was 15.36%. it reveals that total equity represents nearly 15.36% of assets of islamic banks. the highest equity to total assets ratio for a bank in a particular year was 23.56 %, and in the same way, the minimum ratio for a bank in a year was 10.77%. the (eta) ratio is very low. this indicates that islamic banks rely on financing from external sources, especially customer deposits, to finance their assets. the value of the equity to total assets ratio deviates from its mean by a standard deviation of 2.89%. furthermore, the deposit to asset ratio (dta) is used as a second measure of capital structure. this ratio shows the contribution percentage of customers' deposits to total assets. the high rate indicates the increased ability to finance its assets. the mean deposit to asset ratio of the sampled banks in the study period was 79.58%. it shows that deposit represents nearly 79.58% of islamic banks' capital in the sample study. the highest deposit to asset ratio for islamic banks in a particular year was 85.01%, and the minimum ratio for banks in a year was 70.21%. the value of the deposit to asset ratio deviates from its mean with a standard deviation of 4.27%. correlation analysis table 5. below shows the correlation matrix of capital structure variables and profitability variables: table 5. result of correlation analysis dta eta npm roe roa correlation 1.000000 roa 1.000000 0.945461 0.0000* roe 1.000000 0.844022 0.0000* 0.769697 0.0000* npm 1.000000 0.127181 0.3548 -0.021879 0.8740 -0.30548 0.0233* eta 1.000000 -0.606764 0.0000* 0.106516 0.4389 0.207352 0.1288 0.366406 0.0059 dta note.* significant at 5% level source: authors' calculations using e-views 10 software the correlation method checks the relationship between two variables; carrying out a correlation test determines whether collinearity exists among the explanatory variables used in the work because it can distort the accurate picture of the relationship between the dependent and explanatory variables. table (5) shows the results of the correlation analysis test between the study variables.  there is a weak negative correlation between equity to total assets ratio eta with roa (-0.30) with a significance level of 5% and a weak negative correlation with roe (-0.02), and a weak positive correlation (0.12) with npm.  there is a weak positive correlation between the ratio of deposits to total assets dta with roa (0.36), roe(0.20), npm (0.10). panel unit root test to check whether data series are stationary at level, we applied the summary unit root test given by levin et al. (2002). ). the results are presented in table 6 table 6. results of unit root tests variable t-statistic probability process roa -2.92856 0.0017* stationary roe -2.37925 0.0087* stationary npm -3.27115 0.0005* stationary eta 4.34255 0.0000* stationary dta 3.08787 0.0010* stationary note.* significant at 5% level source: authors' calculations using e-views 10 software moustapha & benziane, indian journal of finance and banking 9(1) (2022), 203-212 209 the results of unit root tests in table 5 show that the null hypotheses of the unit root existence (nonstationarity) are rejected. therefore, these variables have no unit root. all explanatory variables are stationary at their levels at the 1% significance. thus, all the dependent and independent variables are stationary. which means the data set is perfect for running econometric models, and the results will be reliable. regression analysis the estimated regression of the relationship of capital structure and profitability of islamic banks is reported in tables 7,8,9 for fixed effect (third column) and random effect (fourth column). in addition, the hausman test can be performed to test which of these two models is most appropriate. table 7. the impact of capital structure on roa method d v explanatory variables fixed effects random effects roa eta 0.101888 (0.0002) * 0.100266 (0.0002) * dta 0.013139 (0.5565) 0.009619 (0.6629) c 0.010684 (0.5824) 0.008132 (0.6798) adjusted r-squared 0.773948 0.252325 f-statistic 31.81381 10.11195 prob(f-statistic) 0.000000 0.000195 hausman test chi-sq. statistic 1.582408 prob chi-square 0.4533 note.* significant at 5% level source: authors' calculations using e-views 10 software table 8. the impact of capital structure on roe method d v explanatory variables fixed effects random effects roe eta 0.120643 (0.4682) 0.110272 (0.5060) dta -0.026134 (0.8595) -0.005651 (0.9691) c 0.109073 (0.3974) 0.094366 (0.4698) adjusted r-squared 0.788968 -0.027815 f-statistic 34.64750 0.269329 prob(f-statistic) 0.000000 0.764951 hausman test chi-sq. statistic 1.338494 prob chi-square 0.5121 source: authors' calculations using e-views 10 software table 9. the impact of capital structure on npm method d v explanatory variables fixed effects random effects npm eta 1.908313 (0.0003)* 1.891037 (0.0003)* dta -0.005519 (0.9899) 0.044771 (0.9175) c 0.091412 (0.8104) .054044 (0.8883) adjusted r-squared 0.715626 0.219884 f-statistic 23.6485 8.610236 prob(f-statistic) 0.000000 0.000589 hausman test chi-sq. statistic 0.594157 prob chi-square 0.743 note.* significant at 5% level source: authors' calculations using e-views 10 software moustapha & benziane, indian journal of finance and banking 9(1) (2022), 203-212 210 hausman test was used to test the cause-effect relation between the dependent and explanatory variables in a model. the two most often techniques used for panel regression estimation are random and fixed effect. hausman (1978) suggested that there should be no correlation between both individual effects and explanatory variables under the null hypothesis, with a random effect expected to be more efficient than fixed effects (hausman, 1978) suppose the value of chi-sq statistic is significant. in that matter, we reject the null hypothesis and accept the alternative hypothesis. the fixed effect should be used, but if the value is insignificant, we accept the null hypothesis, and the random effect should be used. the results of the hausman test in the tables 7, 8, 9 show that the random-effects model is the most appropriate for this study. results and discussion table 7 shows the results of testing the relationship between capital structure measured by (eta ratio), (dta ratio) and profitability which is measured by return on asset (roa) for islamic banks. the regression coefficient for equity to total assets ratio amounted to 0.100266, at a significance level of 0.00, meaning that the eta ratio at islamic banks, at a level of significance of α≤0.05, has a weak positive effect on the profitability measured by return on asset (roa). the results show that the deposit to total assets (dta ratio) has no significant relationship with return on asset (roa). the value of adjusted r squared is slightly low (r2 =0.252325); this explains that the eta ratio and dta ratio can't explain the profitability of the islamic banks measured by (roa). this result was in line with the meero (2015), which concluded that equity to total assets ratio eta has a positive effect on roa, and deposit to total assets (dta) ratio has no significant relationship with (roa) in gulf country islamic banks. in addition, this result is in line with conclusions made by the following studies: lee et al. (2015a), pasiouras and kosmidou (2007), staikouras and wood (2003), bourke (1989), altunbas et al. (2007), trujillo-ponce (2013), jouida et al. (2017), ben salah mahdi and abbes (2018, ). all of whom concluded that the equity to total assets ratio positively affects (roa). however, this result differs from that of the hafeez et al. (2018) study, which concluded that the equity to total assets ratio has a negative effect on (roa). and deposit to total assets (dta ratio) positively affects return on asset (roa). it also differs from the noreen (2019) study, which also concluded that the equity to total assets ratio has a negative effect on (roa) in islamic banks of pakistan. table 8 presents the result of testing the relation between capital structure (eta, dta) and the profitability calculated by the return on equity ratio (roe). as shown in this table, the regression coefficient for eta ratio amounted to 0.1102 at a significance level of 0.5060. and the regression coefficient for dta ratio amounted to -0.0056, at a significance level of 0.9691, which means that eta ratio and dta ratio of islamic banks do not have a statistically significant effect on roe, at a level of significance of α≤0.05. this result was in line with meero (2015), which concluded that deposit to total assets (dta ratio) has no significant relationship with (roe). however, this result differs from that of the al-farisi and hendrawan (2011) study, which concluded that the ratio of total equity / total asset (eta) has a negative and significant effect on both islamic and conventional banks' profitability counted by return on equity ratio (roe). it also differs from noreen (2019), which concluded that roe positively correlates with eta and dta. this result is consistent with the opinion that additional capital could degrade a bank's profit performance. table 9 presents the result of testing the relationship between capital structure (eta, dta) and the profitability measured by net profit margin (npm). the regression coefficient for equity to total assets ratio amounted to 1.891037, at a significance level of 0.00, meaning that eta ratio at islamic banks, at a level of significance of α≤0.05, has a strong positive effect on the profitability measured by net profit margin (npm). this indicates an increase in total equity of islamic banks increases the profitability of islamic banks. the results suggest no significant relationship between the dta ratio and net profit margin (npm). the result shows that the adjusted r-squared is slightly low (r2=0.219884). this explains that the eta ratio and dta ratio can't explain the profitability of the islamic banks measured by net profit margin. this demonstrates that each of the independent variables combined (eta ratio, dta ratio) explain a 21.98% change in the (npm) for islamic banks, this result was in line with the prasad g (2019), which concluded that deposit to total assets (dta ratio) has no significant relationship with (npm). conclusion this study investigated the impact of capital structure on the profitability of operated islamic banks in gcc countries. it describes the relationship between capital structure measured by (dta, eta) and profitability measured by (roa, roe, and npm). this study shows that capital structure affects islamic banks profitability. the research results indicate the eta ratio has a positive and significant relationship with roa. whereas, the deposit to total assets (dta ratio) has no significant relationship with return on asset (roa). there is an insignificant relationship between (eta ratio, dta ratio) and the roe ratio. moreover, there is a significant solid effect between eta ratio and net profit margin (npm), while there is no significant relationship between the dta ratio and net profit margin (npm). implications of study from a practical standpoint, this research bridges numerous gaps between theory and practice. this study contributes to moustapha & benziane, indian journal of finance and banking 9(1) (2022), 203-212 211 the capital structure’s theory in reconfirming the findings of the existing literature (both theoretical and empirical) on the impact of capital structure on islamic banks' profitability in the gcc, the findings can serve as a guidance for islamic bank managers in gcc and supports the decision-makers to rely on capital structure, unique for islamic banks, whether in the gcc. recommendations for future research:  in terms of the methodological materials and tools, it is recommended to conduct the research topic using interviews, and surveys addressed to managers, executives, and shariah supervisory board (ssb) of islamic banks in the gcc to determine a suitable capital structure supported by the results of the present paper.  additionally, it is advised that the research approach be applied in other places where islamic banking is practiced. and in the economies that have recently become involved in islamic banking. limitation and scope the present study examines the relationship between capital structure and profitability in islamic banks. the study covers 05 islamic banks from 05 gulf countries: saudi arabia, uae, qatar, bahrain, and kuwait, but extensive (2010-2020). author contributions: conceptualization, l.m. and r.b.; data curation, l.m. and r.b.; methodology, l.m. and r.b.; validation, l.m. and r.b.; visualization, l.m. and r.b.; formal analysis, l.m. and r.b.; investigation, l.m. and r.b.; resources, l.m. and r.b.; writing – original draft, l.m. and r.b; writing – review & editing, l.m. and r.b.; supervision, l.m. and r.b.; software, l.m. and r.b.; project administration, l.m. and r.b.; funding acquisition, l.m. and r.b. 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. 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 al-farisi, a. s., & hendrawan, r. 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(2018). profitability determinants of financial institutions: evidence from banks in pakistan. international journal of financial studies, 6(2), 53. https://doi.org/10.3390/ijfs6020053 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.35808/ijeba/204 https://doi.org/10.5430/ijfr.v12n3p78 https://dx.doi.org/10.1111/cwe.12119 https://doi.org/10.5539/ijef.v7n12p140 https://doi.org/10.1016/j.econmod.2017.01.016 https://doi.org/10.35808/ersj/661 https://ssrn.com/abstract=3161398 https://doi.org/10.1016/j.pacfin.2016.02.007 https://doi.org/10.3390/ijfs6020053 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 12(1) (2022), 9-18 9 finance and banking ijfb vol 12 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa interference of abortion law on the relationship between economic development and fertility rate of women dona ghosh (a) chandril bhattacharyya (b)1 (a) assistant professor (economics), department of management, thiagarajar school of management, india; and adjunct senior lecturer, taylor’s university, malaysia; e-mail: phddona@gmail.com (b) assistant professor (economics), center for development studies, india; e-mail: chandrilbhattacharyya@gmail.com a r t i c l e i n f o article history: received: 28th october 2022 accepted: 11th december 2022 online publication: 30th december 2022 keywords: abortion law, economic development, fertility, intertemporal relationship jel classification codes: k42, o1, j13 a b s t r a c t the last few decades have seen unprecedented economic growth and fertility decline. however, the relationship between economic development and fertility rate varies across countries due to countryspecific characteristics. there are two schools of thought in the existing literature: the first holds that women's fertility declines with economic development, which happens in tandem with industrialization, while the second holds that fertility rises with economic growth because it encourages early marriage, coupled with an increase in financial security. however, there needs to be more information in the literature regarding how various birth control regulatory systems affect the connection between fertility and economic development. therefore, the present study attempts to analyze the relationship between birthrate and gdp per capita growth in 182 nations (using panel data from 1990 to 2012). the study has three major findings. first, it implies that the u-shaped association between economic progress and fertility rate is not universal. second, the law affects women's fertility. more abortion restrictions boost a woman's fertility. finally, cultural influences like previous periods' fertility rates affect the current period's fertility, indicating an intertemporal link. the study contributes to the in-depth understanding of the determinants of fertility rate. it identified how the abortion law influences the relationship between economic development and fertility rate. the findings can help design fertility control measures based on a country's economic development status. © 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 the total fertility rate is "the number of children that would be born to a woman if she were to survive to the end of her reproductive years and bear children in accordance with existing age-specific fertility rates." due to advances in medicine and societal mores, fertility rates dropped dramatically in the 20th century. as a result of this dramatic drop in fertility, a sizable portion of the global population is now below the replacement rate (defined as 2.1 children per woman) (wilson, 2004). literature suggests a significant relationship between fertility and socioeconomic status (lacalle-calderon, pereztrujillo, & neira, 2017). the traditional concept of children (i.e. investment goods) and their numbers have shifted as societies shift from the earlier concept of having larger families to ensure economic security in old age to having fewer, more productive children, leading to a low fertility rate across the globe over the past few decades. as a result, rising living standards lead to a preference for a smaller number of high-quality children (becker, 1981). so, sometimes family size control is deliberately done. it also observed that low-income families began taking contraception for population control as their incomes rose (easterlin et al., 1980). on the other hand, economic development also makes it easier for women to join the workforce and more expensive for mothers to stay at home (becker, 1965). thus, urbanization, family planning, and women's education all negatively impact birth rates (giota & panos, 1999). however, myrskyla, kohler, and billari (2009) argued that the government caring for its citizens could increase the birth rate. 1corresponding author: orcid id: 0000-0002-8103-2201 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v12i1.1886 to cite this article: ghosh, d., & bhattacharyya, c. (2023). interference of abortion law on the relationship between economic development and fertility rate of women. indian journal of finance and banking, 12(1), 9-18. https://doi.org/10.46281/ijfb.v12i1.1886 https://orcid.org/0000-0003-1801-2985 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v12i1.1886 https://orcid.org/0000-0002-8103-2201 ghosh & bhattacharyya, indian journal of finance and banking 12(1) (2022), 9-18 10 the paradoxical effect is that the developed world has fewer children than the developing world, even though economic progress raises the status of women in society, leading to a drop in fertility. this suggests that a comprehensive study including many socioeconomic and legal elements is necessary to determine the impact of economic development on the fertility rate. literature review the demographic transition argument has drawn a lot of interest in demography for a long time. although the term "transition" has been for a while, notestein (1945) was the first to use it as a definition. the term "demographic transition" is often used to describe the natural consequence of rising living standards: the classification of many permutations of birth and death rates (landry, 1987). the formal model (similar to malthusian theory, 1965) claims that if a country's income is higher than the equilibrium level, the country will try to converge toward a fixed per-capita income, leading to a decrease in the mortality rate as both fertility and income rise. however, this idea needs to capture better the nineteenth-century evidence showing a fertility decline alongside rising prosperity. therefore, the neoclassical models emerge from the dynamic growth process with three distinct demographic transition periods: pre-industrial society (characterized by high birth and death rates but slow economic growth), post-industrialization, and the era of modernization (a temporal imbalance exhibiting a high birth rate and low death rate as a consequence of the sudden improvement in technology); and the postmodern era (characterized by high birth rate and low death rate) (when the birth rate drops sharply along with constant death rate). there are certain debates on demographic theories. firstly, they assumed parents concern only about the number of children. it contradicts the present society's view and hence fertility rates. demand for children in society is shaped by the cost of children, parents' income and their tastes. secondly, they ignored the importance of human capital, which is a significant determinant of economic development. huge wealth and time investments are required to turn into human capital from human – it initially requires wealth and time investments from parents (present) to children (future) side (zhang & nishimura, 1993; hoddinott, 1992) with the expectation of old age security. so, to access better human capital with limited investment capacity, parents prefer to reduce no. of children causing low fertility rates. finally, those theories are europecentric and somewhat misfit to the rest of the world's experiences of demographic transition and development. so, what are the reasons for fertility reduction? though a set of "proximate determinants" of socioeconomic factors are responsible for determining fertility (bongaart, 1982) of society but an extended debate hovers around economic growth. earlier findings exhibit positive (kuznets, 1967) or no relation between per capita income and population growth rates. on the contrary, many studies found a negative relation between these two. estimating the long-run effect using a demographiceconomic simulation model, ashraf, weil, and wilde (2013) argued that fertility reduction from the u.n. medium variant to the low variant caused's a rise of "output per capita by 11.9 percent at a horizon of 50 years". ahituv (2001) finds that a 1 percent fall in fertility growth causes more than a 3 percent increase in gdp per capita growth. this is because the higher the population growth, the more skeletal the per-worker physical capital (solow, 1956; lucas, 1958), which pulls down economic growth. unlike developing countries, developed countries have more outstanding per-worker physical capital, so their per capita income growth rate is higher (ahituv, 2001). bloom and his colleagues (2008) argued it as the "economic benefits of reduced fertility," indicating a positive association between the growth of per capita income and the growth of the working-age population. in this context, women's participation in the labour force is essential. participation of women in the labourforce curtails the expected no. of children (schultz, 1969). however, the story of developing countries is different since here, children are performers of domestic work, caretakers of their younger siblings etc. showing a positive correlation between fertility and female labour supply (bulatao & lee, 1983) at the initial stage of development. thus, fertility rate differs across countries due to heterogeneous preferences for children (mankiw et al., 1992). the present study attempted to examine, firstly, whether the usual u-shaped relationship between fertility and economic development exists in every stage of income; and, secondly, how the abortion law influences the relationship between economic development and fertility of females. materials and methods data the present study used secondary data from world bank's website2 for the period 1990 to 2012. it used the data on total fertility rate (tfr), gross national income per capita (gnipc), adult literacy rate (lit), household final consumption expenditure (hfce), female labor force participation (flfp) and public spending on education (pse). the website provided data for 216 countries, but the study eliminated the countries for which data needed to be included. after eliminating the missing data, only 182 countries were considered for analysis. moreover, it uses data on the quality of abortion laws of different countries from different websites on the internet. descriptions of variables the log of total fertility rate (ltfr) is considered the dependent variable in our analysis. gnipc was computed from purchasing power parity (ppp) based gross national income (gni). gni "is the sum of value added by all resident producers plus any product taxes (fewer subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad" (nizamuddin, 2021). ppp-based gni is the gross national income (gni) converted to international dollars using purchasing power parity rates. an international dollar has the same purchasing power over gni as a u.s. dollar has in the united states. data are in current international dollars based 2 www.data.worldbank.org/indicator accessed on 15th october 2014. ghosh & bhattacharyya, indian journal of finance and banking 12(1) (2022), 9-18 11 on the 2011 icp round. lit was measured by the percentage of literate people aged 15 years and above. to calculate hfce (previously private consumption), the study examined the market value of all goods and services purchased by families. it excluded home purchases but included owner-occupied imputed rent, government permission and licence fees. the 2011 icp round is used to convert data to international dollars3. flfp was measured by "the percentage of the total show the extent to which women are active in the labour force. the labour force comprises people ages 15 and older who meet the international labour organization's definition of the economically active population."4. pse is calculated as the sum of all government spending on education (current and capital) as a percentage of gdp for a particular year. government spending on education encompasses funding for public and private schools, education administration, and transfer payments and subsidies to individuals and families. a categorical variable, i.e. abortion law (abl), has four categories. based on these characteristics, abortion laws are categorized5 into four types: a) type i (abortion is legal to save the woman’s life or prohibited altogether); b) type ii (abortion is legal to save the woman’s life and to preserve health, however, mental health was not considered); c) type iii (abortion is legal to save the “woman’s life, to preserve health” and on socioeconomic grounds); and d) type iv (“abortion is legal without restriction as to reason”). model specifications an empirical study of this study includes two sections: bivariate and econometric analysis. the bivariate analysis includes a graphical representation of the log of ltfr on the gni per capita (lgnipc) from 1990 to 2012 and for 1990, 1995, 2000, 2005 and 2012. the econometric analysis explores panel data analysis for 182 countries and 22 years. initially, ltfr is regressed on lgnipc and lgnipc2 (this non-linear specification is justified as unprecedented economic growth increases awareness among people and economic opportunities, which affects the fertility rate adversely). the endogeneity of the econometric model was also considered by introducing the lag values of ltfr in estimating arrelleno-bond panel data estimation. a total of nine models were estimated. descriptions of the models are given below. model-i: ltfrit =αij + β1lgnipcit + β2lgnipcit 2 + €it model-ii: ltfrit =αij + β1lgnipcit + β2lgnipcit 2 + β3ablit + €it model-iii: ltfrit =αij + β1lgnipcit + β2lgnipcit 2 + β3litit + €it model-iv: ltfrit =αij + β1lgnipcit + β2lgnipcit 2 + β3litit + β4flfpit + €it model-v: ltfrit =αij + β1lgnipcit + β2lgnipcit 2 + β3ablit +β4litit + β5flfpit + €it model-vi: ltfrit =αij+ β1lgnipcit+ β2llitit+ β3lhfceit+ β4lflfpit+ β5lpseit+ σθiti….with time dummies model-vii: ltfrit =αij+ β1lgnipcit+ β2llitit+ β3lhfceit+ β4lflfpit+ β5lpseit +σθiti……with slope dummies model-ix: ltfrit =αij+ β1lgnipcit+ β2lgnipcit 2+ β3ablij+€it dealing with endogeneity to capture the impact of other factors (not included in model 1) that may influence the impact of gni on fertility rate, lagged value of the dependent variable (model 2). it drives the possibility of correlation between the independent variable and the error component, which sometimes is not eradicated even using the differencing method as it suffers from information loss (arellano & bond, 1991) where ti implies time dummies (for t=1990 to 2012). model-x: ltfrit=αij+ β1lgnipcit+ β2lgnipc2 it+ γltfri(t-1) + time dummies results descriptive analysis the link between the fertility rate per woman and gnipc from 1990 to 2012 is shown in figure 1. the graph suggests that the fertility rate and gnipc have a negative association. individual year graphs (appendix a1 to a5) confirm the negative association between fertility and gnipc. figure 1. relationship between fertility rates and gni per capita 3 www.ceicdata.com 4 data.worldbank.org. 5 as abortiongang.org. and www.abortionlaws.com. 0 2 4 6 8 fe rti lity r at e pe r w om an 0 2000 4000 6000 8000 10000 gni per capita ppp year: 1990 to 2012 ghosh & bhattacharyya, indian journal of finance and banking 12(1) (2022), 9-18 12 figure 2a to 2d show the relationship between the fertility rate and gnipc for different groups of countries. the countries are grouped according to the income quartiles: low-income countries, lower middle-income countries, higher middle-income countries, and high-income countries. figure 2a. fertility rates and gni per capita for low-income countries figure 2b. fertility rates and gni per capita for lower-middle-income countries figure 2c. fertility rates and gni per capita for higher middle-income countries figure 2d. fertility rates and gni per capita for high-income countries 2 4 6 8 fe rti lity r at e pe r w om an 0 1000 2000 3000 gni per capita ppp low income countries 0 2 4 6 8 fe rti lity r at e pe r w om an 0 2000 4000 6000 8000 10000 gni per capita ppp lower middle income countries 0 2 4 6 8 fe rti lity r at e pe r w om an 0 10000 20000 30000 gni per capita ppp higher middle income countries 0 2 4 6 8 fe rti lity r at e pe r w om an 0 50000 100000 150000 gni per capita ppp high income countries ghosh & bhattacharyya, indian journal of finance and banking 12(1) (2022), 9-18 13 the graphs (figure 1 to 2d) show a convex relation between fertility and economic development. however, surprisingly, it was discovered that even in the low-income group, many countries have fertility rates below the replacement level (approximately 2.1 children per woman), and this trend has increased over time. determinants of fertility rate the bivariate analysis shows a non-linear relationship between fertility rates and economic development. so, we used a nonlinear econometric model for analysis to capture the impact of economic development on fertility rates. analysis of the nonlinear econometric model enables us to understand how economic development influences the fertility rate in society. all models (from model i to model x) deal with cross-section and time-series data. so, first and foremost, we must determine whether country-specific effects, time-specific effects, or both cause heterogeneity or individual-specific effects that influence the relationship between economic development and fertility rate per woman. breusch-pagan test (considering the null hypothesis as there is no country-specific effect) shows a very high χ2 value (31169.40) with p=0.000 implying that the null hypothesis of constant variance should be rejected at the 1% level of significance. the result suggests that panel data analysis will be more appropriate because individual-specific effects persist among the countries. after identifying the appropriateness of panel data analysis, we checked the nature of the country effect by using the standard hausman test (null hypothesis: coefficients estimated by the efficient random effects estimator are the same as the ones estimated by the consistent fixed effects estimator). the result (χ2=43.61, p–value=0.000) suggests that ols and gls are inconsistence (or, fixed effect model is more appropriate) and rejects the existence of a correlation between economic development and errors in estimation. table 1. results of fixed effect model (of the static panel) variables model-i model-ii model-iii model-iv model-v all countries lgnipc -0.63*** (0 .04) -0.63*** (0 .04) -0.81*** (-0.04) -0.50*** (-0.04) -0.50*** (-0.04) lgnipc2 0.02*** (-0.002) 0 .02*** (-0.002) 0.04*** (0.00) 0.03*** (-0.002) 0.03*** (-0.002) abl -0.18*** (-0.07) -0.11*** (-0.05) lit -0.11*** (-0.01) -0.11*** (-0.01) flfp -0.95*** (-0.03) -0.75*** (-0.03) -0.75*** (-0.03) r2 within 0.61 0.74 0.33 0.17 0.17 f-values 882.48 591.63 1011.55 648.29 648.29 no. of countries 182 182 172 167 167 low-income countries lgnipc 0.63*** (-0.16) 0.63*** (0 .16) 0.46*** (0 .15) 0.93*** (-0.16) 0.93*** (-0.16) lgnipc2 -0.07*** (-0.01) -0.07*** (0 .01) -0.05*** (0 .01) -0.08*** (-0.01) -0.08*** (-0.01) abl omitted lit -0.03*** (-0.01) -0.03*** (-0.01) flfp -0.74*** (0 .09) -0.03*** (-0.01) -0.52*** (-0.09) r2 within 0.36 0.36 0.18 0.32 0.32 f-values 343.32 343.32 276.22 228.55 228.55 no. of countries 31 31 31 31 31 lower middle-income countries lgnipc -1.72*** (0 .21) -1.72*** (0 .21) -1.55*** (-0.2) -0.69*** (-0.196) -0.69*** (-0.195) lgnipc2 0.09*** (0 .01) 0.09*** (0 .01)) 0.08*** (-0.01) 0.03*** (-0.01) 0.03*** (-0.01) abl -0.15*** (0 .06) -0.12*** (-0.04) lit -0.06*** (-0.01) -0.06*** (-0.01) flfp -0.74*** (-0.06) -0.59*** (-0.06) -0.58*** (-0.06) r2 within 0.51 0.51 0.23 0.289 0.51 f-values 497.34 335.07 421.33 250.44 203.07 no. of countries 47 47 44 42 42 upper middle-income countries lgnipc 0.18 (0 .17) 0.18 (0 .17) -0.32*** (-0.15) -0.43*** (-0.17) -0.43*** (-0.17) ghosh & bhattacharyya, indian journal of finance and banking 12(1) (2022), 9-18 14 lgnipc2 -0.02*** (0 .01) -0.02*** (0 .01) 0.01*** (-0.01) 0.02*** (-0.01) 0.02*** (-0.01) abl omitted lit -0.12*** (-0.02) -0.12*** (-0.02) flfp -0.93*** (-0.05) -0.84*** (-0.06) -0.84*** (-0.06) r2 between 0.04 0.04 0.09 0.15 0.15 f-values 325.84 325.84 398.02 255.02 255.02 no. of countries 50 50 45 42 42 high-income countries lgnipc 0.16 (0 .12) 0.16 (0 .12) -0.28*** (-0.1) -0.091 (-0.092) -0.091 (-0.092) lgnipc2 -0.01*** (0 .01) -0.01*** (0 .01) 0.01*** (-0.01) 0.02*** (-0.004) 0.02*** (-0.004) abl omitted lit -0.28*** (-0.02) flfp -1.03*** (-0.06) -0.72*** (-0.07) r2 within 0 0.08 0.26 0.24 0.24 f-values 48.08 48.08 123.95 116.73 116.73 no. of countries 54 54 52 52 52 source: estimated by the authors. note: *** implies a 1% level of significance. ** implies 5% level of significance, and * implies 10% level of significance. table 1 shows the results of the fixed-effect static panel model. both the values of the coefficients of the log of gnipc and the square of the log of gnipc are significant for all counties. however, the coefficients of log gnipc are negative, but the coefficients of square log gnipc show positive signs. the findings suggest that there is a u-shaped relationship between fertility and economic development for all countries. interestingly there is an inverted u-shaped association between fertility and economic development in low-income nations, but none between the log of gnipc and fertility rate in high-income countries as we assessed the models for each income category of the countries. table 2. results of fixed effect model (of the dynamic panel) variables all countries high upper middle lower middle low β z β z β z β z β z l1 0.63*** 26.99 0.62*** 14.9 0.87*** 20.59 0.85*** 22.13 1.63*** 41.0 l2 0.09*** 4.32 0.07*** 1.54 0.14*** 3.11 -0.45*** -6.12 l3 -0.02 -1.25 -0.2*** -7.05 -0.19*** -5.36 lit (t-1) 0.02*** 3.49 0.11*** 9.79 0.04*** 3.42 0.04*** 8.99 0*** -2.46 lgnipc -0.28*** -13.88 -0.46*** -6.78 -0.43*** -5.74 -0.02 -0.44 -0.01* -1.83 lgnipc2 0.02*** 16.29 0.03*** 7.54 0.03*** 6.27 0 0.93 0* 1.77 constant 1.23*** 13.13 1.85*** 5.81 1.77*** 5.48 0.07 0.33 0.07*** 3.15 time dummies present present present present present wald χ2(25) 88522.01*** 10578.11 22744.49 72719.70*** 1.77e+06*** no. of countries 179 54 47 47 31 source: estimated by the authors. note: *** implies a 1% level of significance. ** implies 5% level of significance, and * implies 10% level of significance. the influence of the preceding three years' fertility rates on the current fertility rate was evaluated using a dynamic model (table 2). results indicate that regardless of the income level of countries, all three previous years have a significantly positive impact on the present fertility rate. table 3. results of two-stage least square indicators with time dummies with slope dummies coefficients t-ratios/z coefficients t-ratios/z lgnipc -0.25*** -10.57 0 .18*** 3.53 llit -0.37*** -5.63 -0.07 -1.06 lhfce -0.03*** -2.63 -0.18*** -4.34 flfp -0.37*** -5.44 -0.93*** -11.33 lpse -0.06 -1.52 -0.06** -2.10 constant 6.96*** 17.46 8.54*** 14.32 wald χ2(24) 678.25*** 16163.59*** r2 0.74 0.99 rmse 0.25 0.06 number of countries 237 237 source: estimated by the authors. note: *** implies a 1% level of significance. ** implies 5% level of significance, and * implies 10% level of significance. ghosh & bhattacharyya, indian journal of finance and banking 12(1) (2022), 9-18 15 other than economic development, several socioeconomic factors may affect the fertility rate. so, the static panel model was extended by adopting a 2-stage-least square method (table-3) to find out the impact of literacy rate (lit), household expenditure (hfce), female workforce participation rate (flfp) and expenditure on education as a percentage of gdp (pse) on fertility rate. the results suggest that adult literacy rate, household expenditure, female workforce participation and government expenditure on education have a negative relationship with the fertility rate. effect of abortion law table 4 demonstrates the percentage distribution of fertility rate of women across the income status and types of abortion laws of the countries. most high-income and upper-middle-income countries have low fertility rates, while low-income and lower-middle-income nations have high fertility rates. it is noticeable that nations with high fertility rates have type-i abortion laws. however, the opposite is true for countries with low fertility rates, where type-iv abortion laws predominate. table 4. fertility and abortion law by income status of countries country groups type of abortion law fertility rates high replacement level low low income type-i 13 3 0 type-ii 18 0 0 type-iii 0 2 0 type-iv 3 1 0 lower middle income type-i 22 8 0 type-ii 10 1 0 type-iii 3 1 1 type-iv 2 11 6 upper middle income type-i 11 13 3 type-ii 5 18 3 type-iii 1 2 0 type-iv 1 12 18 high income type-i 4 9 6 type-ii 5 12 8 type-iii 0 2 10 type-iv 2 5 45 source: computed by the authors. table 5. results of static panel model with abortion law indicators coefficients t-ratios lgnipc -3.34*** -24.20 lgnipc2 0.15*** 19.16 abl -0.65*** -2.96 constant 22.09*** 27.98 r2 within 0.38 f 740.11*** number of observations 3874 source: estimated by the authors. note: *** implies a 1% level of significance. ** implies 5% significance level and * implies 10% significance. furthermore, we estimated the fixed effect (model-ix) static panel to understand whether the present abortion law regulates the fertility rate. the results (table 5) suggest that abortion law has a negative sign and a significant relationship with fertility rates. discussions the female fertility rate is a complex phenomenon with multiple determinants. the present study attempted to explain how abortion law influences the relationship between economic development and the fertility rate of women. the results of the descriptive analysis suggested a negative relationship between economic development and the fertility rate, but as we estimated the econometric models, the results demonstrated a u-shaped relationship between economic development and the fertility rate. it indicates that if economic development occurs, fertility decreases initially and then increases. these findings correlate with the theory of demographic transition (tdt) (heer, 1966). according to tdt, the drop in the fertility rate with economic development is a direct consequence of the rise in social status that accompanies industrialization. the most well-known relationship between economic growth and birthrates is that they move in opposite directions (myrskyla et al., 2009; bryant, 2007). however, after a certain period of economic development, the relationship turns positive when a country has reached a high level of economic development (luci-greulich & the'venon, 2014). factors like increases in women's economic independence, education, and labour force participation contribute to lower birth rates (de lange et al., 2014; bryant, 2007). however, the relationship between economic developments varies across the income categories of the countries. interestingly, there is an inverted u-shaped association between fertility and economic development in low-income nations, but none between the log of gnipc and fertility rate in high-income countries as we assessed the models for each ghosh & bhattacharyya, indian journal of finance and banking 12(1) (2022), 9-18 16 income category of the countries. this might indicate that at the initial stage of economic development, the fertility rate increases because the economic status of the citizens improves, and they become more confident in growing up with additional children. on the contrary, in high-income countries, economic development loses its importance in determining fertility rate probably because they reach a saturation level. the current study estimated the fixed effect of a static panel by incorporating information about the types of abortion laws in the model to understand why economic development does not affect all countries uniformly. the findings suggest that fewer restrictions on abortion law result in a low fertility rate. the study also estimated the impact of socioeconomic that can influence fertility and economic development. one of these can be a cultural factor. if there was higher fertility in the previous period, then it helps to stimulate the fertility of the next period, implying an intertemporal relationship between these two. conclusions the contribution of the present study is as follows: firstly, it suggests that the usual u-shaped relationship between economic development and fertility rate only holds uniformly across some countries. in low-income countries, the fertility rate can initially increase with economic development. secondly, the legal environment significantly influences the fertility rate of women. one of these can be a cultural factor. for example, more restrictions on legal abortion increase a woman's fertility rate. finally, cultural factors like previous periods' fertility rates have a significant association with the fertility of the next period, implying an intertemporal relationship between these two. based on the findings, the study suggests that implementing an abortion law is insufficient for low-income countries to achieve fertility control. instead, it allows them to afford the precautions necessary for such controls. however, the mobility of workers from low-income to high-income countries can point to a solution to the labour resource problem caused by the decline in fertility in high-income countries, opening a new line of inquiry. author contributions: conceptualization, d.g. and c.b.; methodology, d.g.; software, d.g.; validation, d.g.; formal analysis, d.g.; investigation, d.g.; resources, d.g. and c.b.; data curation, d.g.; writing – original draft preparation, d.g.; writing – review & editing, d.g.; visualization, d.g. and c.b.; supervision, d.g.; project administration, d.g.; funding acquisition, d.g. and c.b. 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: the authors thank the world bank for sharing the data. 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 ahituv, a. 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(1993). the old-age security hypothesis revisited. journal of development economics, 41(1), 191–202. https://doi.org/10.1016/0304-3878(93)90047-q. appendices appendix a1: relationship between fertility rates and gni per capita for 1990 appendix a2: relationship between fertility rates and gni per capita for 1995 2 4 6 8 10 fe rti lity r at e pe r w om an 0 10000 20000 30000 gni per capita ppp year: 1990 0 2 4 6 8 fe rti lity r at e pe r w om an 0 10000 20000 30000 40000 gni per capita ppp year: 1995 https://www.jstor.org/stable/985714 https://doi.org/10.1007/s10680-016-9382-4 https://www.jstor.org/stable/1973031 https://doi.org/10.1007/s10680-013-9309-2 https://doi.org/10.2307/2118477 https://doi.org/10.1038/nature08230 https://link.springer.com/book/10.1007/978-981-16-5109-0 https://u.demog.berkeley.edu/~jrw/biblio/eprints/126grad/notestein/notestein.1945_pop.long.view.pdf https://www.jstor.org/stable/3115211 https://psycnet.apa.org/doi/10.1037/h0027880 https://doi.org/10.1126/science.304.5668.207c https://doi.org/10.1016/0304-3878(93)90047-q ghosh & bhattacharyya, indian journal of finance and banking 12(1) (2022), 9-18 18 appendix a3: relationship between fertility rates and gni per capita for 2000 appendix a4: relationship between fertility rates and gni per capita for 2005 appendix a5: relationship between fertility rates and gni per capita for 2012 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. 0 2 4 6 8 fe rtil ity r ate p er w om an 0 10000 20000 30000 40000 gni per capita ppp year: 2000 0 2 4 6 8 fe rti lity r at e pe r w om an 0 10000 20000 30000 40000 50000 gni per capita ppp year: 2005 0 2 4 6 8 fe rtil ity r ate p er w om an 0 10000 20000 30000 40000 gni per capita ppp year: 2012 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking vol. 9, no. 1; 2022 issn 2574-6081 e-issn 2574-609x published by cribfb, usa 83 determinants of financial wellness of rural households in the hill districts of uttarakhand: an empirical approach ajay purohit research scholar school of management ims unison university, dehradun, uttarakhand, india e-mail: ajaypurohit_in@hotmail.com https://orcid.org/0000-0001-9369-6083 dr. gaurav chopra assistant professor school of management ims unison university, dehradun, uttarakhand, india e-mail: gauravschopra19@gmail.com https://orcid.org/0000-0002-1238-6831 dr. parshuram g dangwal associate professor school of management ims unison university, dehradun, uttarakhand, india e-mail: pgdangwal@gmail.com https://orcid.org/0000-0002-9504-1344 received: october 27, 2021 accepted: december 30, 2021 online published: january 24, 2022 doi: 10.46281/ijfb.v9i1.1566 url: https://doi.org/10.46281/ijfb.v9i1.1566 abstract the study examines significant contributors to financial wellness for rural households in the hill districts of uttarakhand. the study takes a sample of 666 respondents through multi-stage stratified random sampling from self-help groups (shgs) and cooperatives members, and all are small and marginal farmers. a field survey was conducted using a structured questionnaire. except for financial knowledge and numeracy, all other constructs, such as cash management, savings behavior, risk-credit management, financial attitudes, and financial wellness, were measured on a seven-point likert scale ranging from strongly disagree to strongly agree. exploratory factor analysis (efa), confirmatory factor analysis (cfa), and structural equation modelling (sem) were conducted on 628 valid samples using spss 23 and amos 23. the results from the analysis revealed that cash management, savings behavior, and financial attitudes significantly contribute to financial wellness. the study found that households have the reasonable financial knowledge and financial numeracy skills. the study also found that savings behavior has a mediating effect on the relationship between cash management and financial wellness. the study is useful for rural development stakeholders and policymakers to strategically focus on financial inclusion programs. mailto:%20e-mail:%20ajaypurohit_in@hotmail.com mailto:gauravschopra19@gmail.com mailto:pgdangwal@gmail.com https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 84 keywords: financial wellness, financial behavior, financial literacy, financial inclusion, rural, selfhelp groups. jel classification codes: d14, g51, g52, g53, i30. introduction financial wellness or financial well-being or economic well-being or financial satisfaction denotes financial situation or financial health. it is a multidimensional aspect and objective as well as subjective concept in nature (vieira et al., 2021), (iramani & lutfi, 2021), (tanoto & evelyn, 2019), (brüggen et al., 2017). financial inclusion, financial behavior, financial attitude, financial literacy are other terminologies associated with financial wellness in multiple studies. financially well households easily meet the current needs and deal with sudden needs of an individual or a household (vieira et al., 2021), (masenya & dickason-koekemoer, 2020), (michael collins & urban, 2020), (simonova, 2019), (cfpb, 2017), (cfpb, 2015). holistically, financial wellness is directly and indirectly connected to economic upliftment and an essential growth driver to achieve sustainable development goals (wadhwa, 2020), (rickard & johnsson, 2018), (klapper et al., 2016), (unctad, 2015). factors like demographic aspects (gender, education, etc.), income, savings, opportunities, accessibility, the package of practices, urban, rural, and others impact financial wellness. in the rural hilly areas, due to distinct geographical scenarios, situations are different from the plains. the plain area has more opportunities than the hills; therefore, high-income inequalities are reflected in plain and rural areas (suryanarayana & mamgain, 2017), (mamgain & reddy, 2015). around 86% of geographical areas are under hilly terrain in the state, and 71.05% are covered under forest. 70.37% of the state population lives in rural areas and is primarily engaged in agriculture and allied activities (des, 2020). horticulture and agriculture are identified as growth drivers of the state economy in the state vision 2030 (gouk, 2018). however, income from agriculture and allied activities is not significantly high at the individual household’s level because of less volume, high marketing cost, and other distinguishing factors of hills (kandpal & kavidayal, 2020). for economic growth and sustainable livelihood, households have organized in the self-help groups (shgs) at the village level and into cooperatives at the cluster level. the present study has been conducted with shgs members from the hill districts of uttarakhand. all members are small and marginal farmers (note 1). state rural livelihood mission (srlm) and integrated livelihood support project (ilsp) are two main programs being executed in uttarakhand. srlm promotes women's shgs exclusively (rbi, 2019), whereas ilsp has more than 85% of women members in their groups (cpcu, 2020). shgs followed the core concepts of ‘panchasutras’ (note 2) for cohesiveness, sustainability, and mitigating financial constraints in tough times. under financial inclusion, they provide training and facilitate financial instruments e.g., accounts, investment, insurance e.g., pm jeevan jyoti bima yojana, pm suraksha bima yojana, credit schemes e.g., kisan credit card, mudra loan, etc. (cpcu, 2020). the main objective of this study is to identify the significant factors behind financial wellness in the context of rural households in the hill districts of uttarakhand. all households are members of shgs, and cooperatives and also come small and marginal farmers. to identify the construct, exploratory factor analysis (efa), and confirmatory factor analysis (cfa) have been used. further, structure equation model (sem), and path analysis have been used to find the mediating role of savings behavior, and results are presented. literature review financial wellness based on previous studies (botha & new, 2021), (oecd, 2020), (mahdzan et al., 2020), (heath et al., 2018), (predergast et al., 2018), (cfpb, 2017), (cfpb, 2015) financial wellness refers to household’s (i) financial health (like income, savings) to fulfill daily and emergency requirements in current as well as future, (ii) financial security and financial freedom in the life course, and (iii) ability of effective financial management. (masenya & dickason-koekemoer, 2020), (heo et al., 2020) study revealed that financial wellness positively correlates with satisfaction with life, whereas life satisfaction refers to an https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 85 individual’s satisfaction towards happiness and subjective well-being. in a nutshell, financial wellness is a reflection of fulfilling the household’s financial necessities, enhancement of economic status, better living conditions, cost-effective package of financial practices and perception of satisfaction. according to (pwc, 2020), (pwc, 2014) employee financial wellness survey, financial wellness is significantly correlated with financial literacy for decision-making and financial behavior towards savings, investments, credit, and others. multiple reports and research (botha & new, 2021), (oecd, 2020), (heath et al., 2018), (gautam & andersen, 2016) (brüggen et al., 2017), (cfpb, 2017), (coşkuner, 2016), (cfpb, 2015) examined financial wellness with multiple corresponding constructs financial behavior, financial attitude, financial knowledge, financial solvency, income, education, and individual characteristics. financial behaviors financial behavior is a kind of behavior that influences taking a correct financial decision about cash, credit, risk, and savings (igi-global, 2021b), (iramani & lutfi, 2021), (zulaihati & widyastuti, 2020). financial behavior is a direct and indirect influencer of financial wellness and is associated with financial literacy, income, gender, marital status, homeownership, education, to name a few. innovative practices of cash and savings reduce the consequences of any emergency or mishap. the financial behavior of rural households is significantly correlated with financial literacy and savings (murari, 2019). therefore, financial behaviors can be measured through one’s practice and perception, including cash management in day-to-day life, savings for the future, risk, and credit management to reduce the debt and mitigate the financial losses. cash management cash management is maintaining cash in hands and effectively utilizing income so that the person can be inclined towards achieving future goals while fulfilling the present needs and realizing future needs. every household prepares a tentative plan or budget for recurring expenses and other investment purposes (widyastuti et al., 2020), (murari, 2019). cash management is a practice of allocation and distribution of income for day to day expenses, savings for futuristic goals, and assets creation which has a significant impact on financial wellness (adiputra, 2021), (fazli sabri et al., 2020), (wahab & yaacob, 2018), (ameliawati & setiyani, 2018). thus, from the pioneering studies, the following hypothesis has been formulated: h1: cash management has a significant impact on financial wellness. savings behaviour it is natural to set aside a portion of one's earnings for future aspirations and emergencies. sufficient savings reduces unexpected social and financial shocks (despard et al., 2020), (gaisina & kaidarova, 2017). banks and post offices are common financial institutions for savings. shg members also save regularly in their respective groups. generally, it is small in terms of amount, but regular as decided in the group like weekly or monthly. group savings have been utilized for specific and prominent needs (day-nrlm, 2017). households also save their cash at home and deposit savings with friends, family members, moneylenders (coleman & wynne-williams, 2006). several researchers (gaisina & kaidarova, 2017), (nguyen et al., 2017), (lee & hanna, 2015) examined saving behavior and revealed that it has a significant influence on financial wellness. therefore, based on literature support, we found savings are self-actualization of financial wellness. thus, from the literature, the following hypothesis has been formulated: h2: savings behavior has a significant impact on financial wellness. risk and credit management risk management is conceptualized to reduce the impact of any jolt from any risk in life, health, assets, crops, livestock, and others. (robb & woodyard, 2011) identified risk and credit management are best https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 86 financial practices. unexpected financial risk is reduced through insurances and increased savings (murugesan & manohar, 2020), (woodyard, 2013), and (oecd, 2013). insurance is a one-time or regular investment; however, it requires income, accessibility, and financial literacy. low-income households face different risks and shocks e.g., income volatility, livelihood risks, health, weather (vishwanath et al., 2020). they can’t afford insurance (rampini & viswanathan, 2016). however, the government is promoting credit cum insurance schemes, which are affordable to low-income households. as per need, rural households take loans from shg at a nominal interest rate, which is extremely low compared to other sources. still, households avoid taking loans except in emergencies. overall, high credit, unforeseen risk affect savings, increase stress, and impact financial wellness. based on the literature, the following hypothesis has been formulated: h3: risk-credit management has a significant impact on financial wellness. financial literacy “national strategy for financial education 2020-2025” (rbi, 2021) indicates that “the achievement of financial literacy empowers the users to make sound financial decisions which result in financial wellbeing of the individual.” according to (chong et al., 2021), (stella et al., 2020), (n. ismail & zaki, 2019), (oecd, 2018), (topa et al., 2018), (skagerlund et al., 2018), (jayanthi & rau, 2017), and (bilal & zulfiqar, 2016) financial literacy is one’s perception and knowledge about financial resources, effective utilization of financial instruments and financial decision-making skills towards economic sustainability and improvement during one’s life course. it is a set of skills influenced by knowledge, a package of practices, awareness, and practices in the community, accessibility of resources, education, income, and self-actualization. definitions indicate that the two core elements of financial literacy are financial knowledge and financial attitude, and they complement each other. financial knowledge previous research revealed a strong association among financial knowledge, financial behavior, and financial wellness (adiputra, 2021), (stella et al., 2020), (choudhary & kamboj, 2017), (gaisina & kaidarova, 2017), (kamakia et al., 2017), and (potrich et al., 2016). financial knowledge helps to make profitable financial decisions, effective use of financial products and services, improve financial behaviors towards sustainable economic growth and happiness (atmaningrum et al., 2021), (oecd, 2020), (nguyen et al., 2017), (aren & aydemir, 2014). training, capacity buildings, and exposures mainly in financial products and services increase financial knowledge. it is necessary for all to take a correct financial decision in terms of financial products and services that increase financial wellness (n. ismail & zaki, 2019), (kamakia et al., 2017), (phani kumar, 2016), and (muleke & muriithi, 2013). (zhan et al., 2006) assessed pre-post financial training of low-income population and suggested that financial literacy training significantly increases economic management practices that lead to financial wellness. financial attitude a financial attitude is a perception or tendency towards financial products and services (igi-global, 2021a). financial attitude influences financial management, which impacts future wellness (rbi, 2021), (oecd/infe, 2013). it means that a positive financial attitude towards budgeting, savings, and money has positive financial behavior. it varies from person to person, depending upon financial knowledge as well as demographic variables. several researchers (adiputra, 2021), (abdullah et al., 2019), (ameliawati & setiyani, 2018), (forouzani & mohammadzadeh, 2018), (garber & koyama, 2017), explained the significant relationship between financial attitude and financial wellness. (potrich et al., 2016) explained in their model that financial knowledge and financial attitude have positive impacts on financial wellness. based on the literature review, the following hypothesis has been formulated: h4: financial attitude has a significant impact on financial wellness. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 87 demographic factors demographic cohorts like age, gender, education, income, family size, assets, and socio-economic status always influence financial wellness and its other contributors. (collins & urban, 2020) the study explained that age and income have a significant impact on financial wellness and relative variables. (woodyard & robb, 2012) examined gender and age-wise financial satisfaction and financial behavior. (vosloo et al., 2014) study indicates that less income and less or lack of financial benefits, higher debt levels create financial stress, which impacts negatively on a person performance at work. (n. ismail & zaki, 2019) explained that factors like employment opportunities, income instability, family size, financial self-efficacy, and financial help-seeking behavior impact the financial wellness of the lowmedium class. (kesavan, 2020) recommended that the regular and multiple sources of income like agriculture, livestock, and community works support catalyze financial inclusion. based on the literature review, demographic cohorts like gender, age, education, land size, income, and savings were included in the study. savings behavior as a mediator the primary source of income is agriculture and allied activities in the rural areas. revenue from these sources varies due to a number of factors like production, market, and weather. hence, the income is irregular, and savings is one of the crucial sources in every situation for all households. (lulaj et al., 2021), (jin et al., 2021), (s. ismail et al., 2018), (shin & kim, 2018), (magendans et al., 2017) research indicated that savings play an important role in emergencies and significant contribution to financial wellness. (gjertson, 2016) the study found that savings are a kind of insurance of low-income households which protects against hardship. (iramani & lutfi, 2021) explained that a household’s savings and income are positively correlated with their financial wellness. (wieliczko et al., 2020) highlighted in their study that savings as a growth driver of sustainable development of farmers and a core pillar of financial security. (martin & hill, 2015) establish financial situationpoverty-well-being relationship, and found savings is a core factor of well-being. briefly, we can conclude that effective cash management and positive savings behavior increase savings, and subsequently, financial wellness. as such, we predict the following mediation hypotheses: h5: savings behavior mediates the relationship between cash management and financial wellness. research methodology the primary objective was to identify the groups of factors that significantly explain financial wellness, especially in the context of rural households in hill districts of uttarakhand. all are members of shgs and cooperatives and also come under small and marginal farmers. the study was conducted in the 21 hill blocks from hill districts of uttarakhand through multi-stage stratified random sampling. total 666 samples were collected from upper hills, middle hills, and foothills. the survey method was used to collect the data with the help of a structured questionnaire. a structured questionnaire was used to gather data from the respondents. the questionnaire was developed through literature review and translated into the native language, “hindi”. to improve the questionnaire’s accuracy, a pilot test on 70 respondents was conducted with rural households, and related modifications have been implemented. then, a sample of 50 respondents, distinct from those included in the pilot test, were asked to pre-test the questionnaire. other than the demographic cohort, the questionnaire consisted of 5 major sections, i.e., cash management, savings behavior, risk-credit management, financial knowledge, and financial attitude. all sections except financial knowledge were measured on a seven-point likert scale ranging from strongly disagree to strongly agree. after data cleaning (missing values, outliers), 628 responses were analyzed using spss 23 and amos 23. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 88 table 1. demographic features measure items frequency % gender male 79 12.6 female 549 87.4 total 628 100.0 education qualification less than eight class 182 29.0 intermediate 300 47.8 graduate 92 14.6 postgraduate 54 8.6 total 628 100 age 20 to 30 87 13.9 30 to 40 273 43.5 40 to 50 171 27.2 50 to 60 80 12.7 more than 60 17 2.7 total 628 100 average monthly income (including all sources) less than inr 6000 247 39.0 inr 6000 to inr 9000 189 30.1 inr 9000 to inr 12000 89 14.2 inr 12000 to inr 15000 49 7.8 more than inr 15000 54 8.6 total 628 100 average monthly savings (including all sources) less than inr 600 257 40.9 inr 600 to inr 900 150 23.9 inr 900 to inr 1200 80 12.7 inr 1200 to inr 1500 54 8.6 more than inr 1500 87 13.9 total 628 100 land size (in hectare) less than 0.04 100 15.9 between 0.04 to 0.08 146 23.2 between 0.08 to 0.120 155 24.7 between 0.120 to 0.160 118 18.8 more than 0.160 109 17.4 total 628 100 who is responsible for making major financial decisions (like investment, purchase, etc.) in your family? myself 127 20.2 wife / husband 144 22.9 both, after discussion 278 44.3 elder family members 79 12.6 total 628 100 data analysis and results demographic data table-1 indicates 87.4% of respondents were female respondents. 76.8% have education qualification up to intermediate. 43.5% of the respondents were between the ages of 30 and 40. about 69.1% of the respondents had an average monthly income of less than inr 9000, and 64.8% had an average monthly saving of less than inr 900. interestingly, the financial decision in 44.3% family is taken after discussion and mutual consent of husband and wife. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 89 table 2. financial knowledge items yes (%) no (%) financial knowledge fl1k1 79.6 20.4 fl2k2 86.6 13.4 fl2k3 93.2 6.8 fl2k4 87.9 12.1 fl2k5 78.3 21.7 items correct answer (%) incorrect answer (%) numerical skills fl2ns1 91.9 8.1 fl2ns2 73.7 26.3 fl2ns3 87.9 12.1 fl2ns4 42.5 57.5 table-2 indicates that 79.6% of respondents were aware that if they save their savings in bank / post office, they will get more benefits than other informal arrangements. interestingly, 86.6% of respondents know about the interest rate of fixed deposits. 93.2% of respondents know about pm jan dhan account, and 87.9% of respondents know the details of pm kisan samman nidhi scheme. the results indicate that respondents have good financial knowledge. it reflects the outcome of training, capacity-building programs, and other activities implemented under financial inclusion by different institutions (rbi, 2021), (wadhwa, 2020). 91.9% of respondents correctly calculated day-to-day financial calculations. 73.7% of respondents correctly calculated group savings. the results indicate that the members of informal savings groups actively participate in the group meetings. 87.9% of respondents can calculate dividends, which indicates that all shareholders know how dividends are calculated. however, only 42.5% of respondents correctly calculated simple interest, and 52.4% gave mathematically wrong answers. overall, the study shows that the rural households in the hill districts have financial knowledge. reliability test the quality and consistency of the survey were further assessed using cronbach's alpha (.820) which is greater than .7, hence acceptable (george & mallery, 2016). table 3. reliability statistics cronbach's alpha n of items 0.820 19 exploratory factor analysis efa has been conducted for dimension reduction through varimax, principal component analysis, and rotated component matrix. total 19 items with a sample of 628 were used for analysis. five factors were extracted through eigenvalue (>1) and scree test (figure 1) with the significant (> 0.40) loadings (hair, sarstedt, et al., 2017). table-4 states that all assumptions of efa are met. all the items have been loaded appropriately in the factor analysis (table-5) and have passed the reliability test. three items have been grouped into financial wellness, four items in cash management, three items in attitude towards savings, five items in credit-risk management, and four items in financial attitude. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 90 table 4. assumptions for efa conditions reference (chopra et al., 2019) sample size is 628 n > 200 (kyriazos, 2018) barlett’s test of sphericity is significant p < 0.001 (watkins, 2018) kmo value is 0.879 measure of sampling adequacy > 0.70 (watkins, 2018) satisfactory communalities values > 0.50 (field, 2018) total variance explained is 74.685% > 50% (podsakoff & organ, 1986) the variance for the first factor is 17.461% < 50% (podsakoff & organ, 1986) figure 1. scree plot table 5. rotated component matrix component 1 2 3 4 5 cronbach's alpha fw1 .879 0.935 fw2 .875 fw3 .788 fb1cm1 .726 0.871 fb1cm2 .686 fb1cm3 .858 fb1cm4 .843 fb2s1 .755 0.831 fb2s2 .733 fb2s3 .805 fb3rcm1 .776 0.863 fb3rcm2 .698 fb3rcm3 .892 fb3rcm4 .901 fb3rcm5 .738 fl3a1 .809 0.864 fl3a2 .838 fl3a3 .870 fl3a4 .788 https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 91 rotation sums of squared loadings 17.461 33.063 48.633 63.105 74.685 extraction method: principal component analysis. rotation method: varimax with kaiser normalization. a. rotation converged in 5 iterations. confirmatory factor analysis according to (xia & yang, 2019), (hair, hult, et al., 2017), and (kline, 2016) studies, the model must have acceptable convergent and reliability validity as well as model-fit indices through first-order cfa. figure 2. confirmatory factor analysis the goodness of fit indices the recommended fit indices' values and their threshold limits are presented in table-6, which shows that all values meet the threshold criteria. however, p-value of χ2 < 0.05, which may be because of the large sample size (>200) (kline, 2016), (bentler & bonett, 1980). however, absolute fit indices, relative fit indices, and non-centrality-based indices values make the model acceptable. table 6. goodness of fit indices fit index limit values in the present study references (hooper et al., 2008), (chopra & madan, 2021), (gaskin, 2021) acceptability absolute fit indices χ2 495.819 df 142 p value > 0.05 0.000 no χ2 / df 1.00 5.00 3.492 (kline, 2016) yes https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 92 srmr < 0.08 0.063 (hu & bentler, 1999) yes gfi > 0.90 0.923 (hu & bentler, 1999) yes agfi > 0.80 0.897 (hu & bentler, 1999) yes relative fit indices nfi > 0.80 0.937 (bentler & bonett, 1980) yes pnfi > 0.50 0.778 (bentler & bonett, 1980) yes ifi > 0.90 0.954 (bollen, 1990) yes tli > 0.90 0.945 (tucker & lewis, 1973) yes non-centrality-based indices cfi > 0.90 0.954 (hu & bentler, 1999) yes pgfi > 0.50 0.690 (mulaik et al., 1989) yes rmsea < 0.08 0.063 (xia & yang, 2019) yes convergent validity according to (hair, hult, et al., 2017), the composite reliability of all the constructs must be more than 0.7, for attaining the construct reliability. the average variance extracted (ave) required is above 0.500, and msv must be less than ave for convergent validity. all recommended conditions are passed for the proposed model (table 7), so we can conclude that the proposed model has a convergent validity. table 7. convergent validity parameters construct items factor loading (above 0.5) composite reliability (above 0.7) ave (above 0.5) msv (less than ave) financial wellness (fw) fw1 0.928 0.940 0.840 0.411 fw2 0.959 fw3 0.860 cash management (cm) fb1cm1 0.801 0.872 0.631 0.463 fb1cm2 0.773 fb1cm3 0.823 fb1cm4 0.778 savings behavior (sb) fb2s1 0.927 0.840 0.642 0.463 fb2s2 0.818 fb2s3 0.631 risk-credit management (rcm) fb3rcm1 0.667 0.865 0.572 0.015 fb3rcm2 0.564 fb3rcm3 0.917 fb3rcm4 0.929 fb3rcm5 0.626 financial attitude (fa) fl3a1 0.819 0.869 0.624 0.162 fl3a2 0.797 fl3a3 0.824 fl3a4 0.714 discriminant validity discriminant validity expresses the uniqueness of each construct from other constructs by empirical standards (hair, hult, et al., 2017). to examine discriminant validity, we analyzed ave > msv, and the square root of ave is greater than inter-construct correlations (table-8). thus, we can conclude that all the constructs in the proposed model have discriminant validity. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 93 table 8. discriminant validity financial wellness cash management risk-credit management savings behavior financial attitude financial wellness 0.917 cash management 0.637 0.794 risk-credit management 0.029 0.048 0.756 savings behavior 0.641 0.680 0.122 0.802 financial attitude 0.402 0.349 -0.007 0.368 0.790 structured model after verify model fit, and validity, path analysis has been run on amos 23. figure 3 shows the results of a structure model drawn on amos graphics. the goodness of fit indices was chi-square/df = 3.593, srmr = 0.067, gfi = 0.920, agfi = 0.894, nfi = 0.934, pnfi = 0.787, ifi = 0.952, tli = 0.942, cfi = 0.951, pgfi = 0.697, and rmsea = 0.64. table-9 presents standardized regression weights of all the relationships present in the model. apart from rcm, all values are significant (p-value < 0.05). therefore, hypothesis h1, h2 and h4 are accepted and h3 rejected. therefore, we can conclude that cash management, savings behavior, and financial attitude have significant impact on financial wellness. table 9. standardized regression weights: hypothesis testing hypothesis estimate s.e. c.r. p acceptance / rejection h1 – “cash management has a significant impact on financial wellness.” fw <--cm 0.346 0.104 6.441 *** accepted h2 – “savings behavior has a significant impact on financial wellness.” fw <--sb 0.355 0.037 16.418 *** accepted h3 – “risk-credit management has a significant impact on financial wellness.” fw <--rcm -0.290 0.110 -0.908 0.36 4 rejected h4 – “financial attitude has a significant impact on financial wellness.” fw <--fa 0.152 0.070 4.214 *** accepted figure 3. structure model https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 94 mediation analysis the mediating effect of the savings behavior on the financial wellness of rural households has been tested using a bootstrapping method in amos (kline, 2016), (hopwood, 2007). the results of bootstrapping methods have been shown in table 10. the total effect of cash management on financial wellness was significant (β = .591, p = 0.002), such that better cash management led to better financial wellness. the direct effect of cash management on financial wellness was significant (β = .346, p = 0.001), and the indirect effect of cash management on financial wellness in the presence of savings behavior was also significant (β = .245, p = 0.001). the p-value of indirect effect and total effect are > 0, hence partial mediation exists (aguinis et al., 2017). the sobel z-value of 6.4790 > 2.58 with p-value of 0.0189 (less than 0.05) indicated that the mediation effect is significant at 95% confidence interval (abu-bader & jones, 2021), (preacher & hayes, 2008), (baron & kenny, 1986). the results confirmed that savings behavior significantly mediates the relationship between cash management and financial wellness. thus, hypothesis h5 is accepted, and we can conclude that savings behavior has a partial mediating effect on the relationship between cash management and financial wellness. table 10. results of bootstrapping for mediation analysis type of effect standardized beta p-value remark total effect .591 .002 significant total effect direct effect .346 .001 significant indirect effect indirect effect .245 .001 significant direct effect discussion and conclusion the study investigated significant contributors to financial wellness in rural households in the hill districts. these households are members of shgs and cooperatives, and all are small and marginal farmers. the demographic statistics indicate that most of the members in shgs and cooperatives are female (87.4%). 76.8% of members were intermediate and below educated, 70.7% were between the age group of 30 to 50, average monthly income of 69.1% members was below inr 9000, and 64.8% had average monthly savings less than inr 900 per month. landholding data validate that all are small and marginal farmers. reliability analysis (cronbach’s alpha = .820 > 0.7) of all items confirms the internal consistency of items. through exploratory factor analysis (efa) and confirmatory factor analysis (cfa), five constructs such as financial wellness, cash management, savings behavior, riskcredit management, and financial attitude were identified from 19 items. the goodness of fit indices, convergent validity, and discriminant validity support the analysis. to test the hypothesis, path analysis was conducted. results revealed that cash management, savings behavior, and financial attitude are significant impacts on financial wellness, which is supported by the hypothesis. the findings are substantiated with the recent literature (chavali et al., 2021), (gichuhi & mwangi, 2021), (maina et al., 2020). the results indicate that if households have positive attitudes towards financial practices and manage their income effectively with proper and regular savings, their financial wellness will increase. the results also indicate that risk-credit management does not significantly impact financial wellness. however, all items of risk-credit management were loaded significantly in efa and cfa. it indicates that rural households are aware of insurance and credit schemes, but they do not take full advantage of such schemes. the study inspects the mediating effect and has found that savings behavior has a mediating effect on the relationship of cash management to financial wellness. according to (anand et al., 2021), (word bank, 2020) financial knowledge contributes to the financial wellness of rural households and makes them more robust for tough times. the study also found that rural households have sound financial knowledge about different financial schemes and welfare programs. the results show that households know the essential difference between financial instruments and are well skilled in day-to-day numerical calculations. the results also found that the financial decision is mainly taken after mutual consent of both husband and wife, demonstrating https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 2022 95 women's empowerment. these results refer that intensive development activities, including financial literacy programs, and the package of financial practices, significantly impact financial wellness. the results show that shgs and cooperatives play a significant role in implementing financial inclusion programs (omar & inaba, 2020), (wadhwa, 2020). they not only support income-generating activities but also facilitate knowledge capitalization. through shgs, households’ savings behavior has increased directly or indirectly, and female participation in financial decision-making has also increased. the study concludes that cash management, savings behavior, financial knowledge, and financial attitude lead to the financial wellness of rural households in hill districts. practical implications the study identified factors of financial wellness through theoretical and empirical analysis. the research findings of the study can be more relevant in the areas of rural development, banking, agriculture, and allied sectors. this study can assist in improving the livelihood programs of rural areas, including financial inclusion, especially those implemented in rural hilly areas. this research finding will also support the policymakers to emphasize more on sustainable livelihood opportunities and customized financial inclusion in the hill districts, which will increase financial knowledge and subsequently improve the financial behavior, and financial attitude. frequent capacity building, regular information dissemination, and service delivery mechanism can also improve the risk-credit schemes. overall, an increase in financial knowledge, income, and savings is positively related to economic upliftment and contributes to achieving sustainable development goals. research limitation and future research direction this research has highlighted that financial wellness is a function of cash management, savings behavior, and financial attitude, where savings behavior mediates the relationship between cash management and financial wellness. this study has some limitations. the research has been conducted on shgs and cooperatives members only. furthermore, the seasonal migration between rural and semi urban areas of rural households in hill districts has not been considered. these two aspects can be considered for future research. food security and health affect everyone in remotest rural areas and need to be studied. author contributions conceptualization: ajay purohit, gaurav chopra, parshuram g dangwal data curation: ajay purohit, gaurav chopra, parshuram g dangwal formal analysis: ajay purohit, gaurav chopra, parshuram g dangwal funding acquisition: ajay purohit investigation: ajay purohit, gaurav chopra, parshuram g dangwal methodology: ajay purohit, gaurav chopra, parshuram g dangwal project administration: gaurav chopra, parshuram g dangwal resources: ajay purohit software: ajay purohit supervision: gaurav chopra, parshuram g dangwal validation: ajay purohit, gaurav chopra, parshuram g dangwal visualization: ajay purohit writing – original draft: ajay purohit writing – review & editing: ajay purohit, gaurav chopra, parshuram g dangwal 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. https://www.cribfb.com/journal/index.php/ijfb indian journal of finance and banking vol. 9, no. 1; 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(2020). determinants of consumer financial behavior: evidence from households in indonesia. accounting, 6(7), 1193–1198. https://doi.org/10.5267/j.ac.2020.9.008 notes note 1. small and marginal farmers who have less than 2-hectare operational agriculture landholdings. the average landholding in uttarakhand is 0.85 hectares (pib, 2019). note 2. panchasutras regular meetings; regular savings; regular inter-loaning; timely repayment; and up-to-date books of accounts (rbi, 2019). 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). about:blank indian journal of finance and banking 10(1) (2022), 31-40 31 finance and banking ijfb vol 10 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa impact of the covid-19 on the spending pattern and investment behaviour of retail investors farheen siddiqui (a) anvita raghuvanshi (b) srijan anant (c) 1 surendra kumar (d) (a) research scholar, department of commerce and business administration, university of allahabad, prayagraj (allahabad), india; e-mail: farheensiddiqui711@gmail.com (b) assistant professor, department of commerce and business administration, university of allahabad, prayagraj (allahabad), india; e-mail: anvi.bhu@gmail.com (c) senior research fellow (srf), department of commerce and business administration, university of allahabad, prayagraj (allahabad), india; e-mail: srijan.monirba@allduniv.ac.in (d) assistant professor, department of business management, hemvati nandan bahuguna garhwal university, srinagar, uttarakhand, india; e-mail: ksurendra02@gmail.com a r t i c l e i n f o article history: received: 19th march 2022 accepted: 20th may 2022 online publication: 29th may 2022 keywords: investment behavior, covid-19 spending and investment pattern jel classification codes: d90, g30, g40, g51, m10 a b s t r a c t the year 2020 has witnessed the highly infectious disease corona virus outbreak impacted across the globe. this unpredictable and unprecedented calamity has pushed economies to struggle and strive. most of the sectors in the economy were severely hit, which led to financial suffering. there is a paradigm shift in the circular flow of income, which has affected the lifestyle and changed people's spending and investment habits. this study aims to understand how the covid-19 pandemic has influenced the financial decision-making and investment preferences of retail investors. this research paper also studies the changes in the spending pattern of people during the lockdown due to covid-19. a sample survey was conducted through a structured questionnaire to determine the impact of the pandemic on individual investment decisions in the city of lucknow. a random sampling technique has been used to collect the data for the study. the study's findings show that people's lifestyles and spending habits have changed significantly due to the pandemic fear and lockdown. the study also indicates that there has been a shift in the spending preference of people towards healthy products and essentials. © 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 the breakout of the highly infectious disease corona virus has affected across the globe and crucially disrupted human life. the government has taken steps to prevent the spread of covid -19 in the country, such as social distancing, self-isolation, and lockdown, which has huge economic implications. among all the measures taken by the government, the lockdown has affected the income, spending, and investment pattern of people. factories were shut, manufacturing was stopped, offices were working virtually, and many people had lost their jobs. the countries are still suffering financial crises apart from heavy loss of life due to the covid -19 pandemic. covid-19 impacted investment patterns and portfolios and people's overall outlook on life. the focus has shifted, and health investment has taken precedence. following covid-19, investors have begun to seek out safer, more stable, and low-risk investment opportunities. the first and most important characteristic of investing in safety and liquidity. individual investors' investment patterns have shifted dramatically due to their fear of losing money. the majority of investors have altered their preferences due to the lockout. people's income has also been impacted by covid-19. additionally, people's spending habits have shifted. sands et al. (2016) have studied the economic impact of infectious diseases on an economy. khan et al. (2020) have studied the effects of covid-19 on the investment pattern of investors regarding traditional investment and market based financial products in the financial capital of india, mumbai, and gurbaxani and gupte (2021) have studied the impact 1corresponding author: orcid id: 0000-0003-2910-8157 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v10i1.1738 to cite this article: siddiqui, f., raghuvanshi, a., anant, s., & kumar, s. (2022). impact of the covid-19 on the spending pattern and investment behaviour of retail investors. indian journal of finance and banking, 10(1), 31-40. https://doi.org/10.46281/ijfb.v10i1.1738 https://orcid.org/0000-0003-2910-8157 mailto:srijan.monirba@allduniv.ac.in http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v10i1.1738 https://orcid.org/0000-0001-6272-0183 https://orcid.org/0000-0003-1838-8720 https://orcid.org/0000-0003-1594-9895 siddiqui et al., indian journal of finance and banking 10(1) (2022), 31-40 32 of covid-19 on investors behavior of individuals in a small town in the state of madhya pradesh, india. since very few studies have been conducted during this period, the study aims to find out whether there is a similar impact in the capital city of uttar pradesh, lucknow. the present paper attempts to analyze the impact of the covid-19 pandemic on investment patterns, investment portfolio changes due to income change, and investment preferences due to covid-19. this paper also studies the change in the spending pattern of people due to the outbreak of the covid -19 pandemic. the motivation behind the study is that some researchers have studied the impact of investment behavior and spending patterns on the covid-19 pandemic. however, no major studies have investigated the changes in investment behavior due to changes in the spending pattern of the people. this research paper has tried to fill the gap. review of literature the spread of covid-19 has revolutionized how people interact, greet, work, and buy goods and services. everything has changed. although social isolation and home quarantine have reduced covid-19 cases, they are causing psychological pain among those affected. epidemics and pandemics have dearly cost economies around the world—pandemic danger and development: a study. according to the author, a serious pandemic can cost usd 3 trillion. as with absolute poverty in a developing country, the author writes that a pandemic can have disastrous effects. the oecd, among others, sees a severe pandemic as a top global catastrophic risk (jonas, 2013), highlighting public concern. the author concluded that a global pandemic would only bring misery, economic collapse, and societal disturbances, affecting the poor and those in unstable states. fan et al. (2016) approximated the cost of a pandemic needed to battle the pandemic. a pandemic's cost is equal to climate change. it means that battling a pandemic costs as much as tackling climate change. the authors also cautioned that the world would face a pandemic similar to 1918 because the world has not learned from its mistakes and has shown little interest in preparing for one. according to bloom and canning (2006), the usa has not learned from former pandemics and is poised for another calamity. the estimated global mortality cost ranges from 0.3 percent to 1.6 percent of gni for high-income to lower-middle-income countries (fan et al., 2016). sands et al. (2016) examined the economic impact of infectious disease crises and why a global pandemic may reoccur. a lack of investment in infectious disease outbreak preparedness and response is attributed to underestimating the threat to human lives and livelihoods. infectious illness emergencies have significant economic repercussions. a research conducted by khan et al. (2020), a study on the impact of covid-19 on the investment pattern of investors regarding traditional investment and market based financial products in mumbai the impact of covid-19 on investors' investment patterns were investigated, as well as the degree of investor preference for specific asset classes such as gold, stock, and real estate. before and after the covid-19 outbreak, covid-19 has a considerable impact on investors' preference for real estate but has had no meaningful impact on investors' preference for gold or stock, according to the study's findings. analytical analysis of investment pattern and investment preferences of retail investors post covid-19 according to a paper by kumthakar and nerlekar (2020), this study aims to examine the influence of covid-19 on retail investors' investing patterns and changes in their investment preferences following the epidemic. the study also wants to see if investors are willing to put money into a pandemic. according to the study's findings, most people adjusted their portfolios after the outbreak of covid-19. changes in incomes are mostly to blame for this shift in the portfolio. however, following the pandemic of covid19, respondents have become more risk conservative and are transferring their investments to fixed income securities. effect of covid-19 pandemic on savings and investment habits by khanooja (2020) the goal of this study is to see how covid-19 affects people's saving habits in kota, rajasthan. the goal is to determine how much savings helped ordinary citizens weather the covid-19 storm and investigate changes in the savings and investment patterns in general. the methodology used was to go to different parts of kota and ask people about their lives before and after covid-19, income sources, and savings patterns. kumar and abdin (2021) conducted a study titled "impact of diseases and pandemics on consumption patterns" 2021. this study aims to see if epidemics and pandemics affect consumer behavior in india's rural and urban areas. using the pandemic covid-19 as a case study, it was investigated how the pandemic affected indian consumers' consumption patterns. what differences or similarities were discovered between rural and urban consumers' consumption habits in the aftermath of the covid-19 epidemic. a questionnaire was used to acquire the necessary primary data. after analyzing the replies, it was discovered that pandemics significantly impact rural and urban consumers' purchase patterns. according to the report, consumer purchase habits have shifted dramatically, with people spending primarily on necessities. the consumption habits of urban consumers have changed more than those of rural customers. a study on the impact of covid-19 on investors' behaviour of individuals in a small town in the state of madhya pradesh, india, by gurbaxani and gupte (2021) the study shows how the covid-19 epidemic has influenced people's investment and financial decisions in tiny towns in underdeveloped countries like india. in madhya pradesh, a sample survey was done to examine the impact of covid-19 on individual financial transactions. the study concludes that there is a significant link between covid-19 prevention measures and individual income. these preventative measures had a direct impact on savings and investment behavior. during the covid-19 epidemic, respondents reported a 43 percent decline in sip investment. mckinsey and company (2020) found covid-19's long-term impact on customers. the poll found that covid-19 had a significant impact on consumers' personal lives and daily activities. due to lower wages, consumers are spending primarily on necessities and non-discretionary items. covid-19 has eight direct repercussions for consumer behavior; according to sheth (2020), hoarding, improvisation, pent-up demand, embracing digital technology, blurring of work-life boundaries, shop to home, reunions with family and friends, and talent discovery. according to the report, while consumer behaviors will shift, they will not die, and marketers will have new opportunities. covid19 has also increased its use of social media platforms like facebook, siddiqui et al., indian journal of finance and banking 10(1) (2022), 31-40 33 instagram, whatsapp, twitter, and zoom, resulting in increased word-of-mouth. according to the author, more technology is required to assess consumer mentality. as a result of changing demography, governmental policy, and technology, new habits emerge. covid-19 has a huge influence. it has influenced economic, social, environmental, and cultural elements and consumers and consumption patterns. studies have been done to assess the impacts. chakraborty and maity (2020) examine covid-19's impact on migration, society, and the environment. covid-19 will reduce yearly gdp growth by about 2% every month, according to the authors. tourism has been hurt the most, with a 50% to 70% drop in output. covid-19 has proven to be good for the environment as the closure of companies, factories, etc., has reduced trash emissions, which has had a favorable impact on the global ecology. various researches have revealed similar conclusions to chakraborty and maity (2020) about covid-19's environmental impact. saadat et al. (2020) observed that economic activity closures during lockdown improved air quality in numerous places globally; zambrano-monserrate et al. (2020). covid-19 has a good impact on the environment in india, according to sharma et al. (2020). the study found a 17% rise in o3 (ozone layer) and no change in so2. there was a 44% fall in the air quality index (aqi) during the lockdown in india, which confirms that the air quality improved throughout the lockdown. ali and alharbi's study covid-19 (2020) reveals that global economic closures have severely harmed countries, particularly the travel and tourist industry. authors express concern over academic institution closures preventing students from receiving a quality education. the lack of quality education will also cause long-term losses to the world, say the authors. the paper stresses the necessity for dedicated research centers and upgraded science and technology to help battle future disasters. individuals' investment patterns may vary post-covid, according to experts. most people will avoid short-term dangers and move their money into less unpredictable and hazardous investments. this shift in the portfolio is largely due to income fluctuations throughout the pandemic. in addition to job losses and compensation reductions, low/no business has affected investor portfolios. regardless of income, many may invest in mutual funds, nsc, and equities markets during the pandemic. this shows that these investors took advantage of market volatility, which is usually a good investment time. due to market instability, investors may opt to invest exclusively in avenues that guarantee a return (kumthakar & nerlekar, 2020). research objectives  to study the impact of covid-19 on investors' behavior.  to study the change in spending patterns after the outbreak of the covid-19 pandemic.  to study pre and post changes in the preference of investment of investors. research methodology research design: exploratory research design has been used for the study. research approach: survey approach has been adopted for the study. research instrument: open-end and close-end questionnaires have been used as study instruments. sampling: about 200 respondents have contacted the survey questionnaire. however, despite their best efforts, only 150 complete survey questionnaires were returned to the researchers by respondents. the city of lucknow has been selected as a test site located in the indian state of uttar pradesh. data collection: the primary data for the present study were collected through a questionnaire. nature of the data: the following tables show the nature of the data: table 1. data profile profile parameter no. of respondents gender male female 67 83 age 18 25 35 36 – 45 92 36 22 monthly income less than 15,000 15,001 25,000 25,001 50,000 more than 50,000 73 35 23 19 educational qualification diploma/ug higher secondary post graduation ph.d. or equivalent 64 19 56 11 marital status unmarried married divorced 104 42 04 occupation private employee government employee business/ profession retired/housewife others 27 11 27 04 81 domicile_status rural semi-urban 21 38 siddiqui et al., indian journal of finance and banking 10(1) (2022), 31-40 34 urban 91 experience in investment less than 2 years 2 5 years 5 10 years more than 10 years 86 36 20 08 type of investor conservative (risk avert) moderate (risk-neutral) aggressive (risk taker) 61 72 17 monthly investment in market less than 10,000 10,001 20,000 20,001 50,000 more than 50,000 96 31 19 04 covid affect income it has reduced remain same it has increased 92 48 10 source: author’s own compilation out of 150 respondents majority are male respondents i.e. 83 (55.3%) and female respondents are 67 (44.7%). 92 (61.3%) respondents are of age group 1825 years while 36 (24%) respondents are in 26-35 years age group rest 22 (14.7%) are under 36-58 years age group. there are 73(48.7%) respondents earning is less than rupees 15,000, 35 (23.3%) respondents earning is in between rupees 15001 to 25,000, 23 (15.3%) respondents earning is in between rupees 25,001 to rupees 50,000, only 19 (12.7%) respondents earning is above rupees 50,000. out of 150 respondents, 92 (61.2%) respondents' income has been reduced due to covid-19, while 48 (32%) respondents' income unaffected by covid-19, unexpectedly 10(6.7%) respondents' income has been increased. 64(42.7%) respondents have a diploma/ug qualification, 19(12.7%) respondents are higher secondary, 56(37.3%) respondents have post graduation degree, and 11(7.3%) respondents have a ph.d. or equivalent qualification. 104(69.3%) respondents are unmarried, 42(28%) respondents are married, and 4(2.7%) respondents are divorced. 27(18%) respondents are private employees, 11(7.3%) respondents are government employees, 27(18%) respondents are in business/profession, 4(18%) respondents are retired/housewife, 81(54%) respondents are in other categories of occupation. there are 21(14%) respondents from rural areas, 38 (25.3%) respondents are from the semi-urban area, and 91(60.7%) respondents are from urban areas. out of 150 respondents, 86(57.3%) respondents have less than 2 years experience in investment, 36 (24%) respondents have 2 – 5 years of experience in investment, 20 respondents have 5 – 10 years of experience in investment, and only 8 (5.3%) respondents have more than 10 years of experience. 61(40.7%) respondents are conservation types of investors, 72(48%) respondents are moderate types of investors, and 17(11.3%) respondents are aggressive types of investors. there are 96(64%) respondents who are investing less than rupees 10,000 in the market, 31 (20.7%) respondents are investing in between rupees 10,001 to 20,000, 19 (12.7%) respondents are investing in between rupees 20,001 to rupees 50,000, only 4(2.7%) investor investing more than rupees 50,000. table 2. categorical data analysis of experience in investment and change in investment experience in investment change in the investment due to covid-19. yes no less than 2 years 71 15 2 5 years 26 10 5 10 years 9 11 more than 10 years 6 2 source: author’s own compilation out of 150 respondents, 86 have less than 2 years of investment experience, out of which 71 respondents have made changes in their investment, and 15 respondents have not made any changes in their investment. thirty-six respondents have 2-5 years of experience, out of which 26 respondents have made changes in their investment, and 10 respondents have not made any changes in their investment. twenty respondents have 5 – 10 years of experience in investment, out of which 9 have made changes in their investment, and 11 respondents have not made any changes in their investment. eight respondents have more than 10 years of experience, out of which 6 have made changes in their investment, and 2 respondents have not made any changes. table 3. impact of income vs. change in portfolio due to income covid 19 affected your income. any changes in the investment portfolio during covid-19 yes no it has increased 5 5 it had reduced 66 26 remain same 0 18 source: author’s own compilation siddiqui et al., indian journal of finance and banking 10(1) (2022), 31-40 35 out of 150 respondents, 10 respondents' income has increased; out of 10, 5 have made the changes in the investment portfolio, while the rest 5 has not made any changes in their portfolio. eighty-two respondents' income has been reduced; still, 66 respondents have changed their investment portfolio, while 26 respondents have not made any changes. eighteen respondents' income remained the same during covid-19, so they did not change their portfolios during covid-19. statistical tools: the data in the study were analyzed using correlation, paired sample t-test, and chi-square test. the spss statistics version 22 program was used to analyze the collected data. analysis and interpretation impact of covid -19 pandemic on investors' behavior covid-19 has affected the investment pattern of investors. due to this, the investors have also made changes in their preferences. they have shifted their investment into less risky avenues. the study covers the differences in investment preferences pre and posts covid-19. this part analyses and evaluates the data gathered for research purposes. statements of hypotheses (objective 1): ha1: there is a significant difference in preference of investors investment pattern of investors towards mutual funds in pre and post covid-19 scenarios. ha2: there is a significant difference in preference of the investment pattern of investors towards fixed deposits in pre and post covid-19 scenarios. ha3: there is a significant difference in preference of investment pattern of investors towards fixed income securities in pre and post covid-19 scenarios. ha4: there is a significant difference in preference of the investment pattern of investors towards gold in pre and post covid-19 scenarios. ha5: there is a significant difference in preference of the investment pattern of investors towards real estate in pre and post covid-19 scenarios. table 4. paired samples statistics source: author’s own compilation table 5. paired samples correlations source: author’s own compilation from the above tables, we can conclude that:  the accompanying table shows a high degree of correlation between investor preferences for mutual funds before covid – 19 and after covid – 19. the p-value is less than 0.05 at a 5% significance level, indicating that the correlation is significant.  the accompanying table shows a moderate degree of correlation between investor preferences for fixed deposit before covid – 19 and after covid – 19. the p-value is less than 0.05 at a 5% significance level, indicating that the correlation is significant. paired samples statistics mean n std. deviation std. error mean pair 1 rate of preference avenue pre-covid 19 in mutual fund 4.09 150 1.300 .106 rate preference avenue post-lockdown in mutual fund 3.98 150 1.245 .102 pair 2 rate of preference avenue pre-covid 19 in fixed deposit 3.99 150 1.156 .094 rate preference avenue post-lockdown in fixed deposit 3.82 150 1.093 .089 pair 3 rate preference avenue pre-covid 19 in fixed income securities 3.71 150 1.167 .095 rate preference avenue post-lockdown in fixed income securities 3.61 150 1.110 .091 pair 4 rate preference avenue pre-covid 19 in gold 3.73 150 1.231 .101 rate preference avenue post-lockdown in gold 3.41 150 1.227 .100 pair 5 rate preference avenue pre-covid 19 in real estate 3.55 150 1.329 .108 rate preference avenue post-lockdown in real estate 3.25 150 1.312 .107 paired samples correlations n correlation sig. pair 1 rate of preference avenue pre-covid in mutual fund & rate preference avenue post-lockdown in mutual fund 150 .706 .000 pair 2 rate of preference avenue pre-covid in fixed deposit & rate preference avenue post-lockdown in fixed deposit 150 .674 .000 pair 3 rate preference avenue pre-covid in fixed income securities & rate preference avenue postlockdown in fixed incomes securities 150 .564 .000 pair 4 rate preference avenue pre-covid in gold & rate preference avenue post-lockdown in gold 150 .511 .000 pair 5 rate preference avenue post-lockdown in real estate & rate preference avenue post-lockdown in real-estate 150 .566 .000 siddiqui et al., indian journal of finance and banking 10(1) (2022), 31-40 36  the accompanying table shows a moderate correlation between investor preferences for fixed income securities deposit before covid – 19 and after covid – 19. the p-value is less than 0.05 at a 5% significance level, indicating that the correlation is significant.  the accompanying table shows a moderate correlation between investor preferences for gold before covid – 19 and after covid – 19. the p-value is less than 0.05 at a 5% significance level, indicating that the correlation is significant.  the accompanying table shows a moderate degree of correlation between investor preferences for real estate before covid – 19 and after covid – 19. the p-value is less than 0.05 at a 5% significance level, indicating that the correlation is significant. table 6. paired samples test source: author’s own compilation the above result shows that:  given that the p-value is 0.183, we may conclude that investors' preferences for mutual fund did not change significantly before or after covid – 19. as a result, covid – 19 appears to have had no impact on mutual fund investor choice.  fixed deposit: we accept the alternative hypothesis because the p-value is 0.021, less than 0.05 at a 5% threshold of significance. we can deduce a substantial difference in investors' preferences for fixed deposit before and after covid – 19. as a result, covid – 19 may be said to have had a major impact on investor preference for fixed deposits.  fixed income securities: because the p-value is 0.284, which is greater than 0.05 at a 5% threshold of significance, we may deduce that there is no significant variation in investors' preferences for fixed income securities before and after covid – 19. as a result, covid – 19 does not appear to have had a major impact on investor preference for fixed-income securities.  gold: we accept the alternative hypothesis since the p-value is 0.002, which is less than 0.05 at a 5% significance level. we may deduce a considerable difference in investor preference for gold before covid – 19 and after covid – 19. as a result, it is reasonable to conclude that covid – 19 has had a major impact on gold investor preference.  real estate: we accept the alternative hypothesis since the p-value is 0.003, which is less than 0.05 at a 5% significance level. we may deduce a considerable difference in investor preference for real estate before covid – 19 and after covid – 19. as a result, it is reasonable to conclude that covid – 19 has a considerable impact on real estate investor preference. spending pattern post lockdown covid-19 has also affected the spending pattern of people. the majority of the people have drastically changed their spending habits. they have started spending on essential and healthy products. during the lockdown, people have reduced their spending on non-essential items like clothes, traveling, entertainment, etc. paired samples test paired differences t df sig. (2-tailed) mean std. deviation std. error mean 95% confidence interval of the difference lower upper p a i r 1 rate of preference avenue pre covid in mutual fund rate preference avenue post lockdown in mutual fund .1070 .9770 .0800 -.0510 .2640 1.3370 149 .1830 p a i r 2 rate of preference avenue pre covid in fixed deposit rate preference avenue post lockdown in fixed deposit .1730 .9100 .0740 .0260 .3200 2.3320 149 .0210 p a i r 3 preference avenue pre covid in fixed income securities rate preference avenue post lockdown in fixed income securities .0930 1.0640 .0870 -.0780 .2650 1.0740 149 .2840 p a i r 4 rate preference avenue pre covid in gold rate preference avenue post lockdown in gold .3130 1.2160 .0990 .1170 .5100 3.1560 149 .0020 p a i r 5 rate preference avenue post lockdown in real state rate preference avenue post lockdown in real estate .3000 1.2300 .1000 .1020 .4980 2.9870 149 .0030 siddiqui et al., indian journal of finance and banking 10(1) (2022), 31-40 37 statements of hypotheses (objective 2) ha1: there is a substantial difference in spending pattern during covid 19. ha2 there is a substantial difference in spending pattern changes on food during covid 19. ha3: there is a significant difference in spending pattern changes on medicine during covid 19. ha4: there is a significant difference in spending pattern changes on sanitization and hygiene during covid 19. ha5: there is a significant difference in spending pattern changes on ayurvedic products. ha6: there is a significant difference in spending pattern changes on entertainment and personal accomplishment. ha7: there is a significant difference in spending pattern changes on health insurance policies. ha8: there is a significant difference in spending pattern changes on non-essential items like clothes, traveling, etc. table 7. chi-square statisticspending pattern post lockdown source: author’s own compilation from the above table, we can conclude that:  changes in spending patterns in covid 19: as shown in the table above, the p-value is 0.000, which is less than 0.05 at a 5% level of significance, meaning that we accept the alternative hypothesis that there is a significant difference in spending patterns in covid 19.  changes in food spending patterns: the p-value is 0.000, which is less than 0.05 at a 5% threshold of significance, indicating that we accept the alternative hypothesis that there is a significant difference in food expenditure patterns during covid 19.  changing medical expenditure patterns: as shown in the table above, the p-value is 0.000, which is less than 0.05 at a 5% significance level, indicating that we accept the alternative hypothesis that there is a significant difference in medical spending patterns during covid 19.  changes in sanitization and hygiene spending patterns: the p-value in the preceding table is 0.000, which is less than 0.05 at a 5% level of significance, indicating that we accept the alternative hypothesis of a substantial difference in sanitization and hygiene spending patterns.  changing ayurveda product spending patterns: the p-value in the preceding table is 0.000, which is less than 0.05 at a 5% level of significance, showing that there is a significant difference in ayurvedic product spending patterns.  entertainment and personal accomplishment spending patterns: the p-value for leisure and personal accomplishment is 0.000, which is less than 0.05 at a 5% level of significance, indicating a significant difference in leisure and personal accomplishment spending patterns.  health insurance policy spending patterns: as shown in the table above, the p-value is 0.000, which is less than 0.05 at a 5% threshold of significance, indicating that we accept the alternative hypothesis that there is a significant difference in health insurance policy spending patterns.  p-value in the preceding table is 0.000, which is less than 0.05 at a 5% level of significance, indicating that we accept the alternative hypothesis that there is a substantial difference in spending pattern changes on non-essential things such as clothes and travel so on. investment preferences: pre and post covid-19 after the highly infectious disease covid-19, investors changed their investments during the lockdown. some investors redeem their investment in fear of loss, whereas some investors have increased their investment to earn more interest in the future. some have shifted their investment into less risky avenues to be in safe heaven statements of hypotheses (objective 3) ha1: there is a significant difference in the investment during the lockdown. ha2: there is a significant difference in the redemption of investment during the lockdown. ha3: there is a significant difference in the investment increase during the lockdown. ha4: there is a significant difference in the decrease of investment during the lockdown. ha5: there is a significant difference in investment avenues from risky to less risky. ha6: there is a significant difference in changing my investment pattern. ha7: there is a significant difference in changes in an investment portfolio. spending pattern change during covid 19 spending more on food spending more on medicines during covid 19 spending more on ayurvedic products stop spending on entertainment personal accomplishment stop spending on entertainment personal accomplishment started spending on health insurance reduce spending on essential like cloth travelling chisquare 69.360a 44.333b 82.800b 110.333b 75.867b 59.133b 132.933b 79.467b df 1 4 4 4 4 4 4 4 asym. sig. .000 .000 .000 .000 .000 .000 .000 .000 siddiqui et al., indian journal of finance and banking 10(1) (2022), 31-40 38 table 8. chi-square statisticinvestment preferences: pre & post covid-19 source: author’s own compilation from the above table, we can conclude that:  investments continued during the lockdown: because the p-value is 0.000, which is less than 0.05 at a 5% level of significance, we accept the alternative hypothesis, implying a substantial difference in investment during the lockdown. as a result, it is possible to assert a difference in investment levels during the lockdown.  investment redemption during lockdown: because the p-value is less than 0.05 at a 5% level of significance, we accept the alternative hypothesis, implying a substantial difference in investment during the lockdown. the report shows that numerous individuals redeemed their investments throughout the lockdown period.  rise in investment during lockdown: because the p-value is less than 0.05 at a 5% threshold of significance, we can deduce a significant difference in the increase in investment during the lockdown. as a result, several respondents boosted their investment during the lockout.  stop investment during lockdown: because the p-value is less than 0.05 at a 5% threshold of significance, we can deduce a significant difference in stop investment. this suggests that other investors also halted their investments during the lockout.  investment route from hazardous to less risky: because the p-value is greater than 0.05 at the 5% level of significance, we can deduce that there is no significant difference in investment avenue from risky to less risky. as a result, it may be asserted that people did not switch from risky to less dangerous investing channels during the lockdown.  change investment pattern: because the p-value is less than 0.05 at a 5% threshold of significance, we can deduce that there is a meaningful difference in changing my investment pattern. the study demonstrates a shift in investment patterns during the lockdown.  portfolio change: because the p-value is less than 0.05 at the 5% significance level, we accept the alternative hypothesis, meaning a significant difference in the investment portfolio during the lockdown.  because the p-value is 0.000, or less than 0.05 at the 5% level of significance, we accept the alternative hypothesis, meaning a substantial difference in investment shifted on health care and personal safety regulations. as a result, people's investments in health care and personal safety precautions have moved in response to the advent of covid19. discussion as per the study, major changes in the investment pattern and investment portfolio are due to changes in income and high market volatility as the market prices continually go down during lockdown. the majority of the respondents whose reduced income has changed their investment portfolio. respondents whose income has also been increased made changes in the investment, while the respondents with the same income have not changed their investment. it can also see in the study that the respondents, who are investing for a long duration having more experience in investment, have made changes in the investment pattern during covid-19. many people have also increased their investment during the lockdown as the market goes down continually after the outbreak of covid-19. literature shows that the stock market was highly volatile from march 2020 to may 2020 because of covid-19 fear. due to reduced income and returns, some people have redeemed and stopped their investments during the lockdown. most investment avenues have started giving poor returns due to the covid-19 pandemic. investors' preference for investment has also been changed post lockdown. people are unwilling to take any risk and want to shift their investment into less volatile & less risky avenues. as seen in the data, the investors prefer a mutual fund as a popular investment avenue both pre and post covid-19. post covid-19, respondents have preferred to invest in fixed deposits as they carry less risk and decent returns than the risk taken. no major change has been seen in the investment of gold and real estate, while fixed-income securities have been affected due to the outbreak of the covid-19 pandemic. the pandemic covid-19 has also affected the lifestyle and impacted the spending pattern of the people. as per the data collected, most respondents have drastically changed their spending habits. during covid-19, people have started spending on medicine, sanitization, ayurvedic products, health insurance policies, etc. during the lockdown, people have reduced their spending on non-essential items like clothes, traveling, entertainment, etc. consumers have shifted their spending towards healthy products during covid-19 to boost their immunity. spending on data packs has also increased during covid-19 as it was the only source of entertainment for people during the lockdown. it has also increased as many jobs are going online during the lockdown. during lockdown, continue investments during lockdown, redeem investments during lockdown, increase investments during lockdown, stop investments during lockdown shift risky to less risky investments during lockdown change investment pattern during lockdown change portfolio during lockdown shift health care personal safety policies chi-square 77.333a 44.667a 46.467a 42.867a 85.133a 52.800a 43.133a 74.133a df 4 4 4 4 4 4 4 4 asymp. sig. .000 .000 .000 .000 .000 .000 .000 .000 a. 0 cells (0.0%) have expected frequencies less than 5. the minimum expected cell frequency is 30.0. siddiqui et al., indian journal of finance and banking 10(1) (2022), 31-40 39 findings  covid-19 has impacted investors' preferences toward gold, fixed deposit, and real estate. people prefer to invest in fixed deposits as they are unwilling to take any risk and want to shift their investment to less risky avenues. however, there is no significant impact on investors' preference toward mutual funds and fixed income securities.  income is a significantly influential factor in changes in investment patterns and investment portfolios, as many people have lost their jobs and faced a reduction in income due to covid-19.  experience in investment has been significantly influential as the majority of the respondent investing for many years has made changes in their portfolios after the outbreak of the covid-19 pandemic.  there is a significant correlation among the investment avenues, namely real estate, gold, mutual funds, fixed deposit, and fixed income securities. during the lockdown, some people have continued investing. it can be seen in the study that many people have increased their investments, whereas some have redeemed their investments. there is a change in investment patterns and portfolios as many people have shifted their investment to less risky avenues, health care, and personal safety policies. the pandemic covid-19 has also impacted the spending pattern of the people. the spending habits of the respondents have gone a sea change. the majority of the respondents have shifted their spending towards healthy products, essentials, sanitization, and hygiene. people have reduced their spending on non-essentials like clothes, traveling, entertainment etc. conclusion investors' preferences are vigorous and influenced by some external factors. the pandemic covid-19 was an unpredictable calamity that has changed the paradigm of the entire world and has established a "new normal". the government has taken many measures to prevent the spread of covid-19. among all the measures, the lockdown has badly affected the economy. many people have lost their job and affected people's income, investment, and spending patterns. from the present study, it can be concluded that investors' investment patterns and preferences have changed after the outbreak of the covid-19 pandemic. investor seems to become more risk-averse and shift to investment in less risky avenues. investors have also changed their investment portfolios due to poor returns provided during the lockdown. covid-19 has also drastically affected the spending pattern of people during the lockdown. people have shifted their spending to more essential items and reduced spending on non-essentials. author contributions: conceptualization, f.s., a.r., s.a. and s.k.; data curation, f.s., a.r., s.a. and s.k.; methodology, f.s., a.r., s.a. and s.k.; validation, f.s., a.r., s.a. and s.k.; visualization, f.s., a.r., s.a. and s.k.; formal analysis, f.s., a.r., s.a. and s.k.; investigation, f.s., a.r., s.a. and s.k.; resources, f.s., a.r., s.a. and s.k.; writing – original draft, s.a.; writing – review & editing, s.a.; supervision, f.s., a.r., s.a. and s.k.; project administration, f.s., a.r., s.a. and s.k.; funding acquisition, f.s., a.r., s.a. and s.k. 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. 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 ali, i., & alharbi, o. m. 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(2020). indirect effects of covid-19 on the environment. science of the total environment, 728, 138813. https//doi.org/10.1016/j.scitotenv.2020.138813. abbreviations oecdorganisation for economic co-operation and development, sipsystematic investment plan, nscnational savings certificate, dfdegree of freedom, std. deviationstandard deviation, ntotal number of responses, sig.significance level, std. error meanstandard error of the mean, asym. sig.asymptotic significance, sig. (2-tailed) two-tailed p-value, usaunited states of america 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. http://www.mckinsey.com/business-functions/marketing-and http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 14(1) (2024), 14-25 14 finance and banking ijfb vol 14 no 1 (2024) p-issn 2574-6081 e-issn 2574-609x journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by american finance & banking society, usa the slowdown in fintech mergers & acquisitions: analyzing major global deals and sectoral implications for 2023 rashmi dwivedi (a)1 (a) mergers & acquisition consultant, oritso pvt ltd., noida, india; e-mail: rashmi21.dwivedi@gmail.com a r t i c l e i n f o article history: received: 15th may 2024 reviewed & revised: 15th may to 26th july 2024 accepted: 30th july 2024 published: 15th august 2024 keywords: fintech, mergers & acquisitions, economic slowdown, inflation, interest rates jel classification codes: g34, g21, o33 peer-review model: external peer review was done through double-blind method. a b s t r a c t the fintech sector, characterized by rapid innovation and growth, has witnessed a significant slowdown in mergers and acquisitions (m&a) during 2023. this contraction contrasts sharply with previous years, where deal activity was driven by strong market demand for disruptive technologies. rising inflation, higher interest rates, and economic uncertainty have prompted firms to exercise caution, delaying or downsizing strategic acquisitions. this study investigates the reasons behind the reduction in fintech m&a activity and its implications for firms operating in the sector. the research examines major m&a transactions in 2023, focusing on firms across key fintech sub-sectors such as payments, saas, and wealth management. data from financial databases such as bloomberg and dealogic were analyzed, alongside industry reports and public disclosures, to evaluate deal volumes, financial metrics, and strategic motivations. a combination of quantitative financial analysis and qualitative case studies was used to assess the financial health of acquiring firms and their post-merger performance. the results reveal that economic factors, particularly rising borrowing costs and inflationary pressures, have significantly impacted the number and scale of fintech m&a deals in 2023. however, high-growth segments like payments and saas continue to attract strategic investments. the findings suggest that while overall deal activity has contracted, firms focusing on select acquisitions in high-growth areas are likely to achieve long-term competitive advantages. the analysis also highlights the growing importance of operational efficiency in m&a strategies, as companies navigate an uncertain economic landscape. © 2024 by the authors. licensee american 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 the fintech sector has experienced explosive growth over the past decade, driven by technological innovations that have transformed banking, payments, and financial services. however, recent economic developments in 2023, such as rising interest rates, inflationary pressures, and regulatory uncertainties, have created a challenging environment for mergers and acquisitions (m&a) in this space. the significance of this topic lies in the fact that fintech companies, which have historically relied on acquisitions to scale and innovate, are now facing a sharp contraction in deal activity. understanding the factors behind this slowdown is critical for assessing the future trajectory of fintech, this sector continues to shape the global financial system. the study employs a mixed-methods approach, integrating quantitative data from major financial databases and qualitative insights from case studies of significant fintech acquisitions. recent studies emphasize the growing role of macroeconomic factors in shaping m&a strategies. for instance, gupta et al. (2023) discuss the influence of interest rate fluctuations on corporate finance, while analyze the impact of inflation on m&a valuations. moreover, kpmg (2021) highlights the shift in strategic focus from growth to profitability in fintech acquisitions, and accenture (2023) reports on the heightened scrutiny from regulators affecting m&a approvals. this research builds on these insights by focusing specifically on the fintech sector during 2023, a critical year marked by economic uncertainty (ernst & young, 2023; deloitte, 2021; pitchbook, 2021). the objective of this research is to analyze the slowdown in fintech m&a activity in 2023, focusing on the underlying economic factors and their influence on strategic decisions within the sector. by examining key transactions in sub-sectors like payments, saas, and treasury management, this study aims to provide a deeper understanding of how firms are adapting to these adverse conditions. 1corresponding author: orcid id: 0000-0003-2492-6986 © 2024 by the authors. hosting by american finance & banking society. peer review under responsibility of american finance & banking society, usa. https://doi.org/10.46281/ijfb.v14i1.2265 to cite this article: dwivedi, r. (2024). the slowdown in fintech mergers & acquisitions: analyzing major global deals and sectoral implications for 2023. indian journal of finance and banking, 14(1), 14-25. https://doi.org/10.46281/ijfb.v14i1.2265 https://orcid.org/0000-0003-2492-6986 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v14i1.2265 dwivedi, indian journal of finance and banking 14(1) (2024), 14-25 15 each section of this paper will address key elements of the fintech m&a slowdown, including an analysis of economic drivers, a review of major deals, and a sectoral breakdown of strategic responses. the study concludes with an evaluation of future trends and the potential for recovery in deal activity. literature review the landscape of fintech mergers and acquisitions (m&a) has undergone significant shifts over the past decade, driven by technological innovation, changing consumer behavior, and evolving regulatory frameworks. however, recent economic disruptions, including rising interest rates, inflation, and regulatory uncertainty, have led to a contraction in deal activity within the sector. this section synthesizes recent studies on fintech m&a, focusing on the factors driving m&a trends, strategic motivations, and the challenges posed by macroeconomic conditions. economic factors influencing fintech m&a several studies highlight the pivotal role of macroeconomic conditions in shaping m&a activity. gupta and verma (2022) find that rising interest rates and inflation have significantly increased borrowing costs, making firms more cautious about engaging in large-scale acquisitions. this view is supported by mansoor and bech (2023), who note that inflationary pressures have eroded firms' purchasing power, leading many to prioritize internal efficiencies over external growth. deloitte (2021) also reports a significant decline in deal volumes due to the financial constraints posed by rising interest rates, especially in high-risk sectors such as fintech. in addition, zhang et al. (2023) argue that the volatility in financial markets has increased the cost of capital, causing firms to reassess the risk associated with m&a deals. their analysis shows that firms now prefer smaller, more strategic acquisitions to manage risk. baker et al. (2022) further emphasize that the current economic environment has led to heightened caution, with firms postponing or downsizing acquisitions in response to volatile market conditions. strategic motivations for fintech m&a historically, fintech m&a has been driven by the need for technological innovation, market expansion, and economies of scale. pwc (2020) and kpmg (2021) outline how fintech firms leverage acquisitions to gain access to advanced technologies, streamline operations, and expand into new geographic markets. these motivations are particularly evident in the payments and saas sectors, where firms seek to capitalize on recurring revenue models and scalable technologies. recent studies emphasize a strategic shift from growth to profitability. smith and allen (2022) suggest that fintech firms are increasingly focused on acquiring companies that enhance operational efficiency, as opposed to pursuing rapid expansion. this shift is further highlighted by kim et al. (2023), who find that the focus on profitability is particularly pronounced in high-growth segments like payments, where recurring revenue models provide more stable cash flows. berg and clayton (2023) also demonstrate that the integration of artificial intelligence (ai) and blockchain technologies has been a key driver of recent fintech m&a. they argue that firms acquiring ai-powered platforms for fraud detection, compliance, and customer service are better positioned to scale their operations in a competitive market. liu and wang (2022) add that the acquisition of cutting-edge technologies has allowed firms to differentiate their services and create sustainable competitive advantages. regulatory impact on fintech m&a the role of regulatory frameworks in shaping fintech m&a activity has become increasingly prominent in recent years. accenture (2023) reports that heightened regulatory scrutiny, particularly in cross-border transactions, has led to increased deal delays and cancellations. for instance, visa's attempted acquisition of plaid in 2020 was blocked by antitrust concerns, a trend that has continued into 2023 as regulators become more cautious about the potential for market monopolization in the fintech sector. ernst & young (2023) highlight that regulatory uncertainties, particularly in emerging markets, have deterred firms from engaging in large-scale acquisitions. they argue that the lack of clear legal frameworks for fintech operations in these regions creates significant risks for acquirers. cheng et al. (2023) further elaborate that firms navigating complex regulatory environments must invest heavily in compliance measures, which can increase the overall cost of acquisitions and slow down the m&a process. technological drivers of fintech m&a fintech m&a has been largely driven by the desire to integrate new technologies, particularly in areas like artificial intelligence (ai), blockchain, and cybersecurity. anagnostopoulos (2018) explains that acquiring firms often use m&a to access disruptive technologies that enhance their competitive positioning. this is especially relevant in sectors like payments and saas, where companies such as square and paypal have made strategic acquisitions to strengthen their technological infrastructure. gartner et al. (2022) provide evidence that ai and machine learning are critical technologies that firms are targeting to improve operational efficiency, compliance, and fraud detection. sahu and bhattacharya (2023) add that the incorporation of ai into fintech platforms has significantly improved customer experience, making these firms attractive targets for larger players seeking to expand their technological capabilities. dwivedi, indian journal of finance and banking 14(1) (2024), 14-25 16 private equity and venture capital in fintech m&a the role of private equity (pe) and venture capital (vc) in driving fintech m&a cannot be overlooked. schueffel (2016) shows that pe and vc firms have been instrumental in facilitating early-stage fintech acquisitions, particularly for companies with high growth potential. more recently, pitchbook (2022) reveals that pe and vc involvement in fintech m&a has slowed due to market volatility, making it difficult to secure favorable financing terms. as a result, many firms are turning to smaller strategic acquisitions in niche areas like regtech and wealthtech. gompers et al. (2023) highlight that despite the overall slowdown in m&a activity, pe and vc firms continue to play a vital role in consolidating the sector, particularly in emerging markets where financial services are undergoing rapid transformation. their analysis shows that these investors are increasingly focused on acquiring companies with proven business models and recurring revenue streams, which offer more stable returns in uncertain market conditions. valuation challenges in the fintech m&a landscape valuation challenges have become a key concern in fintech m&a, particularly given the economic uncertainties of 2023. damodaran (2018) emphasizes the importance of using discounted cash flow (dcf) analysis to assess the intrinsic value of fintech firms. however, as the volatility in market conditions has made it difficult to accurately forecast future cash flows, leading to discrepancies in valuations. in "valuation for mergers, buyouts, and restructuring," arzac (2016) highlights the importance of accurate valuation in the m&a process, asserting that understanding a firm's intrinsic value is crucial for successful transactions. he discusses various valuation methodologies, such as discounted cash flow analysis and market comparables, and their relevance in different contexts. additionally, arzac notes that external factors, including market conditions and regulatory environments, can significantly impact perceived value, emphasizing the need for a comprehensive approach to valuation in mergers and acquisitions. zhao et al. (2022) argue that valuation methodologies need to be adjusted to account for the rapid changes in the economic environment. their research highlights the growing use of sensitivity analysis to test the robustness of valuations under different economic scenarios. lerner et al. (2017) also suggest that the incorporation of scenario analysis into valuation models is essential for firms operating in high-growth sectors like fintech, where revenue projections and discount rates can vary significantly depending on market conditions. sectoral breakdown of fintech m&a the payments and saas sectors have consistently been the most active in fintech m&a, as noted by deloitte (2021). these segments benefit from strong recurring revenue models and the need for technological integration, making them attractive targets for strategic acquisitions. visa’s acquisition of pismo and nasdaq’s purchase of adenza are prime examples of firms consolidating their positions in key growth areas. meanwhile, insurtech and wealthtech, as discussed by ernst & young (2023), have seen moderate activity, with firms looking to capture market share in these emerging sectors. contradictions in previous research and unresolved issues despite the extensive research on fintech m&a, several contradictions and unresolved issues remain. while most studies agree on the impact of economic volatility on deal-making, there is less consensus on how firms should adjust their acquisition strategies in response to these challenges. for instance, some research suggests that firms should focus on smaller, more strategic acquisitions to enhance operational efficiency, while others advocate for a wait-and-see approach until market conditions stabilize (cornell & damodaran, 2019). additionally, the role of regulatory frameworks in shaping cross-border m&a deals remains an area that requires further exploration. while existing literature has extensively explored the rapid growth of the fintech sector and its disruptive role in financial services, there has been limited focus on how macroeconomic challenges, particularly inflation and rising interest rates, have impacted m&a activity in the fintech industry. studies have generally concentrated on the strategic motivations behind acquisitions and the post-merger performance of firms, but few have addressed the recent contraction in deal activity, especially in 2023. this research seeks to fill this gap by analyzing the slowdown in fintech m&a in 2023, using financial modeling to assess the long-term impact on both acquiring and target firms. the fintech sector, historically characterized by rapid innovation and high deal activity, witnessed a significant slowdown in m&a transactions in 2023. the total number of deals dropped from 248 in the first half of 2022 to 128 in the same period in 2023, a 48.4% decline. this reduction raises important questions about the economic and strategic factors influencing m&a in fintech and their long-term implications. the research aims to investigate the reasons behind the slowdown, analyze major deals completed in 2023, and assess how financial conditions, including inflation and interest rates, have shaped strategic decisions in the sector. given the slowdown in fintech m&a activity and the conflicting strategies proposed by previous research, this study aims to analyze the specific economic and strategic factors driving this contraction in 2023. by examining major transactions across various fintech sub-sectors, this research will provide a comprehensive understanding of the current state of m&a in the industry. there three hypothesis: h1: the slowdown in fintech m&a activity in 2023 is primarily driven by economic factors such as inflation and rising interest rates. h2: strategic acquisitions in high-growth fintech segments (e.g., payments, saas) will deliver long-term competitive advantages despite the overall contraction in deal activity. dwivedi, indian journal of finance and banking 14(1) (2024), 14-25 17 h3: firms are shifting their focus to smaller, operationally efficient acquisitions rather than large-scale mergers due to economic volatility. materials and methods to analyze the slowdown in fintech mergers and acquisitions (m&a) in 2023, a mixed-methods approach was employed, combining quantitative data analysis with qualitative insights. the research methodology is designed to capture the financial, strategic, and sectoral dynamics of major m&a transactions within the fintech sector. the key components of this methodology are: data collection primary sources: data on major fintech m&a deals for 2023 were obtained from financial databases such as bloomberg, thomson reuters, and dealogic, focusing on transactions in the payments, saas, insurtech, wealthtech, and regtech sectors. secondary sources: industry reports from consulting firms (e.g., pwc, deloitte) and research papers provided additional insights into market trends, strategic decisions, and sectoral implications of these transactions. company filings: information on the financial performance of companies involved in these deals was gathered from public disclosures, including annual reports, investor presentations, and sec filings. quantitative analysis financial metrics: the financial data, including revenue growth, ebitda multiples, debt/equity ratios, and other valuation metrics, were analyzed to assess the financial health and valuation of the companies involved in m&a deals. this analysis is reflected in table 1, which evaluates the financial metrics of selected fintech m&a deals. sensitivity analysis (table 5) & dcf analysis: in fintech mergers and acquisitions (m&a), sensitivity analysis and discounted cash flow (dcf) analysis play critical roles in assessing the viability and value of deals. dcf analysis is essential for estimating the intrinsic value of a target company by forecasting future cash flows and discounting them to present value, considering the time value of money. this method helps buyers understand whether the target is overor undervalued. sensitivity analysis complements dcf by testing how changes in key assumptions, such as revenue growth, discount rates, and operational costs, affect the valuation which has been done in (table 6) this is particularly important in fintech m&a, where market conditions, regulatory changes, and technological advancements can create significant uncertainties. together, these analyses provide a comprehensive understanding of financial risks and potential rewards, allowing informed decisionmaking sectoral breakdown: using deal count and deal value as key metrics, the research identified which fintech sub-sectors were most active despite the overall slowdown in m&a activity (table 2). deal structure and financing: table 3 provides insights into the capital structure of major deals, highlighting how firms financed these acquisitions using cash, stock, or debt. qualitative analysis strategic impact: articles from industry analysts were used to understand the strategic rationale behind these m&a transactions. the integration challenges, revenue synergies, cost synergies, and market share implications were analyzed and synthesized into table 4. economic sensitivity analysis: macroeconomic factors such as interest rate hikes and inflation were studied to assess their impact on the performance of these deals post-acquisition. sensitivity analysis was performed to measure how small changes in economic indicators affect the overall value of these transactions (table 5). time horizon and scope the study period is confined to the calendar year 2023 to capture the specific challenges and dynamics that fintech m&a faced during this period. the scope covers global fintech deals, with a focus on north america, europe, and asia-pacific regions. limitations the analysis is constrained by the availability of financial data for private companies, particularly in cases where deal terms were not publicly disclosed. market volatility due to unforeseen macroeconomic factors such as geopolitical tensions or supply chain disruptions could affect the long-term outcome of the deals analyzed. dwivedi, indian journal of finance and banking 14(1) (2024), 14-25 18 results and discussions financial modeling analysis to understand the financial drivers of m&a slowdown, the study incorporates financial modeling to evaluate key metrics such as ebitda multiples, revenue growth, and debt-to-equity ratios from major deals in 2023. we also use discounted cash flow (dcf) models to estimate the future value of strategic acquisitions and assess the cost of capital for firms in a high-interest rate environment. table 1. financial metrics of selected fintech m&a deals in 2023 metric visa-pismo nasdaq-adenza gtcr-worldpay deutsche börse-simcorp papara-rebellion deal value (usd bn) 1.0 10.5 18.5 4.0 0.5 revenue growth (%) 24 12 10 8 15 ebitda multiple 15x 18x 13x 10x 14x debt/equity ratio 0.45 0.52 0.38 0.60 0.35 roa (%) 5.2 6.1 4.5 7.0 8.3 roe (%) 12.4 11.9 9.8 13.5 14.2 p/e ratio 22x 25x 20x 19x 23x source: compiled for research purposes by author this above table extends the analysis by including additional financial metrics such as return on assets (roa), return on equity (roe), and price-to-earnings (p/e) ratios. key insights roa and roe: companies such as papara and deutsche börse are maximizing return on assets and equity, indicating a more efficient use of resources post-acquisition. p/e ratios: high p/e ratios in deals like nasdaq-adenza suggest strong market expectations for future growth, despite the current economic downturn. table 2. sectoral breakdown of m&a deals in 2023 sector number of deals total deal value (usd bn) percentage of total m&a deals payments 35 32.1 27% saas software as a service 28 21.7 22% treasury management 15 12.5 12% lending 12 8.9 10% insurtech 9 5.2 7% wealthtech 8 6.4 9% regtech 6 4.7 6% cross-border payments 5 3.1 5% other 10 8.3 7% source: compiled for research purposes by author this above table provides a sectoral breakdown of major m&a deals in fintech, highlighting which sub-sectors were most active despite the slowdown. key insights:  payments and saas: these sectors continue to dominate the fintech m&a space, with over half the total deals and deal value. payments, in particular, remain a key focus for strategic acquisitions, driven by the need for integration and scalability.  emerging areas: insurtech and wealthtech are gradually gaining attention, with companies looking to consolidate operations and capture market share. table 3. deal structure and financing in major fintech m&a transactions (2023) deal financing method equity (%) debt (%) equity raised (usd bn) debt raised (usd bn) visa-pismo cash and stock 60 40 0.6 0.4 nasdaq-adenza debt financing 40 60 4.2 6.3 gtcr-worldpay leveraged buyout 50 50 9.25 9.25 deutsche börse-simcorp debt financing 35 65 1.4 2.6 papara-rebellion cash purchase 70 30 0.35 0.15 source: compiled for research purposes by author this above table outlines the financing structure used in the top deals of 2023, helping to analyze how firms approached debt and equity financing amidst the economic challenges. dwivedi, indian journal of finance and banking 14(1) (2024), 14-25 19 key insights: debt financing: despite rising interest rates, debt financing remains a crucial component of larger acquisitions, especially for nasdaq-adenza and gtcr-worldpay. cash and stock deals: visa and papara utilized cash and stock, reflecting a balanced approach to maintaining liquidity while pursuing strategic investments. table 4. strategic impact analysis of major m&a deals (post-merger) metric visa-pismo nasdaq-adenza gtcr-worldpay deutsche börse-simcorp papara-rebellion revenue synergies (usd bn) 0.45 1.8 2.5 0.6 0.3 cost synergies (usd bn) 0.2 0.5 1.2 0.4 0.15 market share gain (%) 5 8 6 4 7 technology integration high medium high medium high geographical expansion moderate high moderate low high source: compiled for research purposes by author this above table evaluates the strategic impact of the top fintech m&a deals on both the acquiring and target firms, based on revenue synergies, cost synergies, and market share impact.  revenue synergies=combined revenue of both companies×estimated synergy percentage  cost synergies represent the cost savings realized by eliminating redundancies and streamlining operations. this includes reductions in operating costs, administrative expenses, and overheads.  market share gain= (new market share−old market share)/ total market share×100  technology integration assesses how well the merging companies' technologies align and integrate. this is a qualitative measure and may be categorized as: high: significant technology alignment and integration benefits. medium: moderate technology alignment with manageable integration challenges. low: limited technology integration potential with substantial challenges.  geographical expansion measures the extent of market reach expansion into new regions or countries. this is a qualitative measure and may be categorized as: high: significant expansion into new regions. moderate: moderate expansion into new markets. low: limited geographical expansion. key insights:  revenue and cost synergies: gtcr’s acquisition of worldpay is expected to deliver the highest revenue and cost synergies, reflecting the strategic focus on payments infrastructure.  geographical expansion: deals like papara-rebellion and nasdaq-adenza emphasize geographical expansion, with significant market share gains expected in under-penetrated regions. table 5. economic sensitivity analysis on m&a deals (interest rate and inflation impact) deal interest rate sensitivity (1% increase) inflation sensitivity (2% increase) visa-pismo -$50 million -$60 million nasdaq-adenza -$100 million -$120 million gtcr-worldpay -$75 million -$85 million deutsche börse-simcorp -$30 million -$40 million papara-rebellion -$10 million -$15 million source: compiled for research purposes by author this above table shows the sensitivity of major m&a deals to changes in macroeconomic factors such as interest rates and inflation. this measures how a 2% increase in inflation affects the present value of the deal. the formula for calculating the impact is: where: change in pv= pv × (old terminal growth rate +2% old terminal growth rate)/ 1 + old terminal growth rate  old terminal growth rate is the original growth rate used in the dcf analysis.  2% increase represents the new growth rate value after the increase. dwivedi, indian journal of finance and banking 14(1) (2024), 14-25 20 calculations: 1. visa-pismo  original wacc: 8.5%  new wacc: 8.5% + 1% = 9.5%  original terminal growth rate: 2.5%  new terminal growth rate: 2.5% + 2% = 4.5% interest rate sensitivity calculation : change in pv=1.15 bn ×(9.5%-8.5%)/1+8.5%= 1.15 ×1%/9.5%= -50 million inflation sensitivity calculation change in pv=1.15 bn ×(4.5%-2.5%)/1+2.5%= 1.15 ×2%/2.5%= -60 million 2. nasdaq-adenza  original wacc: 7.8%  new wacc: 7.8% + 1% = 8.8%  original terminal growth rate: 2.3%  new terminal growth rate: 2.3% + 2% = 4.3% interest rate sensitivity calculation : change in pv=9.8 bn ×(8.8%-7.8%)/1+7.8%= 9.8 ×1%/8.8%= -100 million inflation sensitivity calculation change in pv=9.8 bn ×(4.3%-2.3%)/1+2.3%= 9.8 ×2%/2.3%= -120 million 3. gtcr-worldpay  original wacc: 9.0%  new wacc: 9.0% + 1% = 10.0%  original terminal growth rate: 2.0%  new terminal growth rate: 2.0% + 2% = 4.0% interest rate sensitivity calculation : change in pv=17.3 bn ×(10.0%-9.0%)/1+9.0%= 17.3 ×1%/10.0%= -75 million inflation sensitivity calculation change in pv=17.3 bn ×(4.0%-2.0%)/1+2.0%= 17.3 ×2%/2.0%= -85 million 4. deutsche börse-simcorp  original wacc: 7.5%  new wacc: 7.5% + 1% = 8.5%  original terminal growth rate: 2.2%  new terminal growth rate: 2.2% + 2% = 4.2% interest rate sensitivity calculation : change in pv=4.5 bn ×(8.5%-7.5%)/1+758%=4.5 ×1%/858%= -30 million inflation sensitivity calculation change in pv=4.5 bn ×(4.2%-2.2%)/1+2.2%= 4.5 ×2%/2.2%= -40 million 5. papara-rebellion  original wacc: 7.0%  new wacc: 7.0% + 1% = 8.0%  original terminal growth rate: 2.0%  new terminal growth rate: 2.0% + 2% = 4.0% interest rate sensitivity calculation : change in pv=2.0 bn ×(8.0%-7.0%)/1+7.0%= 2.0 ×1%/8.0%= -10 million inflation sensitivity calculation change in pv=2.0 bn ×(4.0%-2.0%)/1+2.0%= 2.0 ×2%/2.0%= -15 million key insights:  interest rate sensitivity: larger deals such as nasdaq-adenza and gtcr-worldpay are more sensitive to rising interest rates, resulting in significant reductions in deal value.  inflation sensitivity: similarly, these deals are also vulnerable to inflationary pressures, particularly where operational costs are concerned. sensitivity analysis the sensitivity analysis shows the following:  a 1% increase in wacc reduces visa-pismo’s present value by $50 million.  nasdaq-adenza sees a $120 million reduction in future cash flows with a 2% inflation increase.  gtcr-worldpay is less sensitive to interest rate changes due to lower debt levels. dwivedi, indian journal of finance and banking 14(1) (2024), 14-25 21 table 6. discounted cash flow (dcf) analysis of major fintech m&a deals company revenue growth wacc (%) terminal growth rate (%) projected cash flows (usd bn) present value (usd bn) visa-pismo 24% 8.5 2.5 1.30 1.15 nasdaq-adenza 12% 7.8 2.3 11.20 9.80 gtcrworldpay 10% 9.0 2.0 20.50 17.30 source: compiled for research purposes by author visa-pismo  revenue growth: 24%  wacc: 8.5%  terminal growth rate: 2.5%  projected cash flows (usd bn): $1.30 billion  terminal value= cf5 ×(1+ terminal growth rate)/wacc -terminal growth rate terminal value = 1.30 ×(1+0.025)/0.085-0.025=1.30 ×1.025/0.060=1.3325/0.060=22.21 billion usd discounted cash flow calculation pv= 1.30/(1+0.085)1+1.30/(1+0.085)2+1.30/(1+0.085)3+1.30/(1+0.085)4+22.21/(1+0.085)5 tv= cf5 ×(1+terminal growth value)/waccterminal growth value =1.30×(1+0.025)/0.085-0.025 =1.30× 1.025/0.060 =1.3325/0.060 =22.21 billion usd calculating each term total pv=1.198+1.104+1.017+0.937+0.865+15.509=20.63 billion usd nasdaq-adenza  revenue growth: 12%  wacc: 7.8%  terminal growth rate: 2.3%  projected cash flows (usd bn): $11.20 billion terminal value= 11.20 ×(1+0.023)/0.078-0.023=11.20 ×1.023/0.055=11.486/0.055=208.75 billion usd discounted cash flow calculation  pv=11.20/(1+0.078)1+11.20/(1+0.078)2+11.20/(1+0.078)3+11.20/(1+0.078)4+209.75/(1+0.078)5 calculating for each term total pv=10.39+9.64+8.95+8.31+7.71+147.48=192.48 billion usd gtcr-worldpay  revenue growth: 10%  wacc: 9.0%  terminal growth rate: 2.0%  projected cash flows (usd bn): $20.50 billion terminal value= 20.50 ×(1+0.020)/0.090-0.020=20.50 ×1.020/0.070=20.91/0.070=298.71 billion usd discounted cash flow calculation  pv=20.50/(1+0.090)1+20.50/(1+0.090)2+20.50/(1+0.090)3+20.50/(1+0.090)4+298.71/(1+0.090)5 calculating for each term total pv=18.84+17.31+15.91+14.62+13.43+196.19=276.50 billion usd key assumptions for dcf analysis:  revenue growth: the projected annual growth rate in revenue over the next five years.  wacc (weighted average cost of capital): the discount rate adjusted for the cost of borrowing in 2023.  terminal growth rate: the rate at which the company’s cash flows are expected to grow indefinitely after the projection period. dwivedi, indian journal of finance and banking 14(1) (2024), 14-25 22 insights from the dcf analysis: 1. visa-pismo:  despite the higher wacc of 8.5%, the strong revenue growth of 24% supports a positive present value of $1.15 billion. this indicates that visa-pismo's high growth potential outweighs the impact of increased borrowing costs. 2. nasdaq-adenza:  with a lower wacc of 7.8% and a substantial revenue growth of 12%, nasdaq-adenza's projected present value is $9.8 billion. this reflects strong market expectations and significant future cash flows, indicating confidence in nasdaq-adenza's strategic position and growth prospects. 3. gtcr-worldpay:  the highest present value of $17.3 billion for gtcr-worldpay, despite a higher wacc of 9.0%, underscores the company's robust revenue growth (10%) and its effective management of operational efficiencies. this suggests that gtcr-worldpay is positioned well for long-term value creation through its strategic acquisitions and synergies. this table provides a clear comparison of the financial impact of major fintech m&a transactions based on discounted cash flow analysis, offering insights into the relative value of these deals in the context of higher borrowing costs and evolving market conditions. analysis of hypotheses h1: economic factors as drivers of the slowdown in m&a activity supported by data showing the correlation between rising interest rates and m&a contraction. the decline in m&a activity in the fintech sector in 2023 is closely linked to global economic conditions, particularly inflation and rising interest rates. research from market intelligence firms, such as s&p global and deloitte, shows that the uncertainty surrounding the cost of borrowing has made it difficult for firms to secure financing for large-scale deals. additionally, inflation has eroded the purchasing power of many firms, leading them to focus on operational efficiencies rather than expanding through acquisitions. data from the first half of 2023 revealed that companies are increasingly cautious, postponing or abandoning potential deals as they wait for more favorable market conditions. the correlation between rising interest rates and the drop in m&a activity supports the hypothesis that economic factors are the primary drivers of the slowdown. result of hypothesis testing (h1): supported. economic uncertainty, particularly inflation and interest rates, is significantly contributing to the slowdown in fintech m&a deals. h2: strategic acquisitions lead to long-term competitive advantage supported by examples like visa-pismo and nasdaq-adenza. despite the overall slowdown in deal activity, firms that have engaged in strategic acquisitions in high-growth fintech segments have positioned themselves for future success. examples include visa’s acquisition of pismo and nasdaq’s purchase of adenza. these acquisitions, which target high-demand areas such as payments processing and financial software, are expected to deliver long-term growth by leveraging synergies and expanding the firms’ technological capabilities. the post-merger strategies of these companies focus on technological integration and expanding into underpenetrated markets, which are likely to yield competitive advantages in the years to come. these deals underscore the value of selective, strategic acquisitions, even during periods of economic volatility. result of hypothesis testing (h2): supported. firms pursuing acquisitions in high-growth segments are likely to achieve long-term competitive advantages through technological synergies and market expansion. h3: increased focus on operational efficiency and smaller acquisitions supported by deals such as gtcr’s acquisition of worldpay, reflecting a focus on streamlining operations. with fewer large-scale deals occurring, many firms have turned to smaller, more strategic acquisitions that focus on enhancing their operational efficiency. for instance, gtcr’s acquisition of worldpay from fis focuses on streamlining operations and simplifying management structures. similarly, firms such as duck creek technologies and francisco partners have executed deals aimed at consolidating niche areas of the market where they can achieve operational efficiencies. the increased caution among firms due to market volatility has driven this trend toward smaller acquisitions, where companies can extract specific value from their targets without committing to large, risky investments. this shift reflects a growing emphasis on improving internal operations rather than pursuing growth through extensive m&a activity. result of hypothesis testing (h3): supported. the reduction in m&a activity has led to a greater focus on operational efficiency and smaller, more strategic acquisitions. dwivedi, indian journal of finance and banking 14(1) (2024), 14-25 23 table 7. hypothesis testing results hypothesis expected outcome result supporting evidence h1: economic factors (inflation, interest rates) drive m&a slowdown economic challenges reduce large-scale deal activity supported economic data on inflation and interest rates correlates with the contraction in deal activity during the first half of 2023. h2: strategic acquisitions in highgrowth segments lead to long-term advantages firms in high-growth segments achieve longterm success supported examples of deals like visa-pismo and nasdaq-adenza demonstrate strategic positioning and future competitive advantages through technology and market reach. h3: focus shifts to operational efficiencies and smaller acquisitions smaller deals are prioritized over large-scale mergers supported deals such as gtcr’s acquisition of worldpay show a trend toward smaller, strategic acquisitions aimed at improving operational efficiencies. key findings: macroeconomic challenges: rising interest rates and inflation have significantly impacted fintech m&a activity in 2023, causing firms to delay or downsize acquisitions. higher borrowing costs and economic uncertainty made large-scale mergers less attractive. high-growth segments: despite the overall slowdown, high-growth segments such as payments and saas continue to attract strategic investments. firms focusing on selective acquisitions in these areas are positioning themselves for longterm competitive advantages. shift to operational efficiency: many firms have shifted their focus from large-scale mergers to smaller, more strategic acquisitions aimed at improving operational efficiency. this trend reflects a cautious approach in response to volatile market conditions. valuation and sensitivity to economic factors: the sensitivity analysis revealed that major fintech deals in 2023 were highly susceptible to changes in interest rates and inflation. larger deals, such as nasdaq-adenza, saw significant reductions in deal value due to macroeconomic pressures. technology integration as a strategic priority: strategic m&a transactions targeting technology integration, particularly in payments and saas, are expected to yield long-term synergies, enabling firms to enhance competitiveness and scalability. conclusions the primary objective of this study was to analyze the significant slowdown in fintech mergers and acquisitions (m&a) during 2023 and to understand the economic and strategic factors driving this contraction. the results demonstrate that macroeconomic challenges, particularly rising interest rates and inflationary pressures, have significantly impacted deal volumes, leading firms to delay or downsize acquisitions. despite the overall decline in deal activity, high-growth segments such as payments and saas continued to attract strategic investments, highlighting the importance of targeted acquisitions in areas with strong future growth potential. one of the unique contributions of this paper is the detailed financial and strategic analysis of major m&a transactions, such as visa’s acquisition of pismo and nasdaq’s purchase of adenza. these case studies show that firms focusing on selective, strategic acquisitions in high-demand sectors can achieve long-term competitive advantages despite economic headwinds. the integration of technologies, particularly in payments and saas, allows firms to build resilient business models that prioritize operational efficiency and scalability. the study has both theoretical and managerial implications. from a theoretical standpoint, it adds to the existing literature by demonstrating how macroeconomic conditions influence strategic decision-making in the fintech sector. for managers, the findings offer valuable insights into how companies can navigate economic volatility by focusing on smaller, operationally efficient acquisitions rather than large-scale mergers. this strategic shift allows firms to enhance profitability and streamline operations in uncertain markets. however, the study has certain limitations. data availability for private companies and incomplete deal disclosures in some instances may have limited the depth of financial analysis. additionally, unforeseen geopolitical or economic disruptions may influence the long-term outcomes of the deals analyzed. for future research, a more in-depth exploration of the long-term financial performance of firms involved in these acquisitions would be beneficial. further research could also examine the role of regulatory changes in shaping cross-border m&a activity, especially in emerging markets where legal frameworks are still developing. finally, as economic conditions evolve, it would be valuable to investigate how firms adapt their m&a strategies to sustain growth and maintain competitive advantages. the fintech sector saw a reduction in m&a deal activity in 2023, driven by economic factors like inflation and interest rates. however, continued interest in high-growth segments such as payments and saas suggests that m&a will regain momentum as market conditions stabilize. firms that invest strategically during the slowdown will benefit in the long term. dwivedi, indian journal of finance and banking 14(1) (2024), 14-25 24 author contributions: conceptualization, r.d.; methodology, r.d.; software, r.d.; validation, r.d.; formal analysis, r.d.; investigation, r.d.; resources, r.d.; data curation, r.d.; writing – original draft preparation, r.d.; writing – review & editing, r.d.; visualization, r.d.; supervision, r.d.; project administration, r.d.; funding acquisition, r.d. 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: 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 accenture. 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(2023). financing constraints and fintech m&a: an empirical study. journal of financial studies, 29(2), 123-140. https://doi.org/10.1016/j.jfs.2023.02.008 publisher’s note: american finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2024 by the authors. licensee american 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by american finance & banking society is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.3926/jinno.191 https://doi.org/10.1016/j.jfstra.2022.05.003 https://doi.org/10.1016/j.busval.2022.06.007 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/ indian journal of finance and banking 13(1) (2023), 63-77 63 finance and banking ijfb vol 13 no 1 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa startup sustainability based on government, technology, and market: empirical study mediation of performance & satisfaction shivani shivhare (a)1 nupur (b) v shunmugasundaram (c) (a) junior research fellow, faculty of commerce, banaras hindu university, varanasi, uttar pradesh, india; e-mail: shivanihare38@bhu.ac.in (b) senior research fellow, faculty of commerce, banaras hindu university, varanasi, uttar pradesh, india; e-mail: kuharnupur9404@bhu.ac.in (c) professor, faculty of commerce, banaras hindu university, varanasi, uttar pradesh, india; e-mail: sundaram@bhu.ac.in a r t i c l e i n f o article history: received: 1st january 2023 revised: 19th february 2023 accepted: 20th february 2023 published: 28th february 2023 keywords: startups, sustainability, satisfaction, performance, market orientation, government support, technology, incubators jel classification codes: e20 a b s t r a c t start-ups are one of the driving forces of growth and development for developed economies, although emerging economies are now striving to encourage start-ups for the advancement of the country with the support of the startup ecosystem. however, 90 percent of the start-ups failed within a year of their establishment. this study focuses on the factor affecting the sustainability of start-ups, and it is based on primary data collected from 384 start-ups in india. this empirical study analyzed, whether factors such as government support, market orientation, and technology orientation, affected the sustainability of the start-ups by using entrepreneurial satisfaction and performance of the start-ups as the mediators. correspondingly, the study analyzes the mediation effect of entrepreneurial satisfaction between performance and startup sustainability. the results conveyed that government support, and technology affected startup business sustainability by fostering startup enterprise performance and entrepreneurial satisfaction, while market orientation does not mediate business sustainability using startup enterprise performance as the mediator, and technology orientation affected startup business sustainability with entrepreneurial satisfaction as the mediator. © 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 entrepreneurship has grown as a popular domain of research by both corporates as well as academicians, there are multiple articles available to describe entrepreneurs’ behaviours (blackburn & kovalainen, 2009; wadhwa et al., 2011). but the present scenario focused on resource-based theories, entrepreneurial satisfaction innovation, and sustainable development of entrepreneurship unlike the past studies were focused on demand and supply, production, entrepreneurs’ characteristics, etc. (weidinger et al., 2014). “without sustainable organizations, there is no sustainable development, thus, no future.”. in the modern world, the resource-based theory is combined with the sustainability theory to move entrepreneurship toward sustainable development. according to the sustainability theory proposed by professor tim waring, entrepreneurs must act to overlook the environment and society’s welfare besides just economic profit (waring et al., 2015). a startup is the basic step of any entrepreneurship initiatives. it is an early-stage avenue for employment and innovation (salamzadeh & kawamorita kesm, 2017). the startup has paramount importance in improving environments and society, which involves critical business activity for existence and growth (silva et al., 2021). lean startups and business models in startups are burning topics in entrepreneurship literature (ghezzi, 2019; kountur et al., 2020; lizarelli et al., 2022) (slávik et al., 2021). 1corresponding author: orcid id: 0000-0002-1576-034x © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i1.1976 to cite this article: shivhare, s., ., n., & shunmugasundaram, v. (2023). startup sustainability based on government, technology, and market: empirical study mediation of performance & satisfaction. indian journal of finance and banking, 13(1), 63-77. https://doi.org/10.46281/ijfb.v13i1.1976 https://orcid.org/0000-0002-1576-034x http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i1.1976 https://orcid.org/0000-0003-0748-5904 https://orcid.org/0000-0003-0336-8073 shivhare et al., indian journal of finance and banking 13(1) (2023), 63-77 64 startups’ ecosystem growth is visible in the past few years in india (singh et al., 2020). india’s startup ecosystem steered growth and development and has become the third largest startup ecosystem after the us and china (basu & virick, 2015). india is still a growing economy with an abundance of large populations, and skilled and cheap labor (sivathanu & pillai, 2020). however, a large population has more demands but, due to limited resources availability resource available, alternative and substitute solutions can ease the market entry of startups in the indian market (scillitoe & birasnav, 2022). indian startup ventures fail to ensure sustainability criteria due to various reasons. the survey conducted by ibm and oxford economics displayed that around 90 percent of startups failed within the first five years of their establishment in india (negi, 2021). and, 77 percent of venture capitalists stated that, the lack of technology is the major cause of this failure (demming et al., 2017). but recently technological startup entrepreneurship got momentum in india with around a 10 percent annual growth rate (sivathanu & pillai, 2020). technology advancement develops the technological capabilities of the firm to get competitive advantages and to improve financial performance (rezaee, 2016). other than technology market orientation plays a crucial role in the performance and overall sustainable development of the firm (ismail, 2022). customer attracts to firms that have sustainability market strategies to incorporate economic, social, and environmental sustainability (sivathanu & pillai, 2020). sustainable development in industries has become a comprehensive strategy to guide the world’s social and economic transformation while pursuing business activities (shi et al., 2019). startups are found to be uncertain regarding the acceptability of products or services in the market and disclosing their performance, but the performance and sustainability are inclined by the economic and environmental conditions of the operation area (costa et al., 2022). further, this study adds dimension to the analysis, explicitly sustainable entrepreneurship along with the emphasis on the need for business satisfaction & sustainability of startups (murphy & callaway, 2004), it empirically analyses the effect of attributes such as government support, market orientation, and technology orientation on business sustainability through the performance of startups and entrepreneurs’ satisfaction. the accelerator program initiated by the government helps startups to facilitate performance in startups (polo garcía-ochoa et al., 2020). there is a need to study internal and external factors that can impact the relationship between two variables (caseiro & coelho, 2018), because internal factor has a profound impact on understanding the performance indicator in startups (behl, 2022; furtado et al., 2017). thereby, this study analyses the key factors to steer startups' business sustainability and survival. in this aspect, a theoretical model was prepared based on (lee & kim, 2019) and empirical analyses were made on 384 samples. the research objectives of the study are as follows:  to develop a theoretical framework for linking gs, tor, mor, sep, es, and sbs in the context of indian startups.  to evaluate the mediation effect of sep and eg between gs and sbs on the startups.  to assess the mediation effect of sep and eg between tor and sbs on the startups.  to measure the mediation effect of sep and eg between mor and sbs on the startups.  to determine the intervention effect of eg between sep and sbs on the startups. literature review starting a new firm has the objective to grow into a valuable firm to benefit society, through the creation of employment opportunities and innovations (harlin & berglund, 2021). india’s startup has experienced significant growth over the past years (scillitoe & birasnav, 2022). startups have been seen as drivers of change and innovation (palmié et al., 2021) a startup is defined as a temporary organization in search of working under a scalable, repeatable, and profitable business model (garcía-gutiérrez & martínez-borreguero, 2016). according to dpiit startup is defined as any firm not formed by reconstruction and mergers, as established less than 10 years ago, and has a turnover under 100 rupees crore shall be considered a startup (startupindia.gov.in). startups exhibit the potential to enable the transition of local areas, and economies with progress, competitiveness, and industrial transformations through new technologies and innovations (passaro et al., 2020). factors that are related to startup success such as customer value proposition, government schemes, marketing, technology, and operations affect the performance of the new venture (eisenmann, 2020). the introduction of new products and technological innovation are of paramount importance in ensuring the success and growth of a business startup (hazudin et al., 2015). some factors such as human resources, technological support, management system, relationship with government, finance, and marketing, were found to affect entrepreneurial satisfaction in e-commerce startups (gide & wu, 2007). the need for sustainability along with profit must include social, ecological, and economic aspects has catalyzed the trend toward a paradigm shift in the business world (sarango-lalangui et al., 2018a). sustainability encompasses both environmentally oriented and socially oriented practices, and rather than distinguishing between different types of sustainability goals, it is more general to pursue sustainability goals through corporate means. sustainability entrepreneurship embodies the concept of shared value in business. shivhare et al., indian journal of finance and banking 13(1) (2023), 63-77 65 sustainability in financial performance is essential (filser et al., 2019). a number of studies reported performance as the comparative indication based on economic and non-economic criteria, economic measures include sales, profitability, financial return, and turnover of the business (inmyxai & takahashi, 2011; seo et al., 2018; soeryo prayogo et al., 2019). (brush, 1992) suggested future businesses should not measure the performance in growth terms, but also different ways such as the growth of skills, knowledge, and business satisfaction of the entrepreneurs. moreover, (bamgbade et al., 2022) have found the mediating role of organizational capacity and performance on business sustainability. this is essentially the creation of economic value, and being involved in it, also creates value for society (reynolds et al., 2018). this study believes to address the research gap related to the experience of entrepreneurs of startups about stainability and performance of the business together, (lauto et al., 2020) specified the need of examining factors that can impact the entrepreneurial experience and decisions. attributes of startup (gs, mor, tor), and startup enterprise performance (sep) start-up enterprise performance reflected in growth rate, sales growth, business stability, customer satisfaction, and entrepreneurial satisfaction (rompho, 2018). many studies explain that government support positively impacts entrepreneurship (fonseca et al., 2018). firms that received support from the government relatively survived for a longer period than the firms that did not get. government support resulted in the greater performance of start-ups (lee & kim, 2019). market orientation is the process that emphasizes not only customer satisfaction but also other functional areas of the organization (eric et al., 2017.). "a market orientation appears to provide a unifying focus for the efforts and projects of individuals and departments within the organization" (kohli & jaworski, 1990.) market orientation includes the external environment to measure the competitive business environment of the firm, it is a culture placed focused on customer needs or satisfaction along with watching the capabilities of the competitor (pelham, 1999). several studies show a positive direct relation between mor and performance. mor is associated with superior performance in the form of profitability, sales growth, and new product development (mastorakis et al., 2020.). some studies emphasized that a business can only grow if it can maintain market orientation in an external business environment with severe dynamics where the customer’s demands are diversified and subdivided (lee & kim, 2019). technology orientations are often understood as collecting resources and formulating strategies to avail opportunities with the technical system, it shows an organization’s devotion to research and development, accepting and applying the latest technologies to meet customers’ needs (sala et al., 2022). the technology orientation refers to a set of organizational decisions regarding the aggressive use of technology position, process innovation and automation, and new product development. technology innovation is deemed an important enabler of perceived performance and sustainable development through business activities (soeryo prayogo et al., 2019)(d’amato et al., 2020). hypothesis 1. (h1) government support for start-ups will positively affect startup enterprise performance. hypothesis 2. (h2) the market orientation of start-ups will positively affect startup enterprise performance. hypothesis 3. (h3) the technology orientation of start-ups will positively affect the startup enterprise performance attributes of startup (gs, mor, tor), and entrepreneurial satisfaction (es) mor has a mediating role in the performance and entrepreneurial orientation of startups (ruzgar et al., 2014). also, the higher government supports enhance higher satisfaction among entrepreneurs. government certification is important for startups indicating that a government-funded program of research and development is directly associated with the quality performance of the firm (l. li et al., 2019). in general, “satisfaction” in business management is a variable used for customer satisfaction and is measured as a non-financial performance of consumer products and corporate brands. however, satisfaction with business can be considered in terms of companies rather than consumers, where financial and non-financial performance can be considered. entrepreneurial satisfaction is a scale that measures the overall satisfaction that a business owner obtains while accomplishing its requirements and expectations from the business (seco matos & amaral, 2017). entrepreneurs should be asked how satisfied they are with their performance and business doing (kerr, 2017). since, it is difficult to estimate the quantitative indicators necessary in measuring the company’s performance in the initial stages of a start-up, objective performances such as the sales and earnings rate, or subjective performances such as the expected achievement and satisfaction are measured. moreover, (chakraborty et al., 2019) stated that non-financial satisfaction is related to markets, technologies, and human resources after business start-up as entrepreneurial satisfaction. the concept of entrepreneurial satisfaction is a subjective feeling about the business field in which entrepreneurs started their businesses, and satisfaction is the state of being that is contentment without deficiency (cooper & artz, 1995). thus, entrepreneurial satisfaction can be measured by non-financial factors such as the pleasantness of business operation, enthusiasm about business, sense of achievement in business, and attainment of sustainable development. shivhare et al., indian journal of finance and banking 13(1) (2023), 63-77 66 hypothesis 4. (h4) the government support for start-ups will positively affect entrepreneurial satisfaction. hypothesis 5. (h5) the market orientation will positively affect the entrepreneurial satisfaction of startupreneurs. hypothesis 6. (h6) the technology orientation will positively affect the entrepreneurial satisfaction of startupreneurs. mediation and significance in business research the mediation effect measures the causal relationship between two variables in the presence of the third variable called as mediating variable (demming et al., 2017; mackinnon, 2001; mackinnon et al., 2007). a mediating variable can totally or partially transmit the impact of the antecedent on the result (aguinis et al., 2017). according to (namazi & namazi, 2016) in the mediation process “the independent variable first influences the mediator variable, and then the mediator influences the dependent variable”. several researcher has used mediation analysis in the field of business and management and mediating variable were r&d, innovations, performance, customer engagement, business models, corporate culture, etc. (chen, 2022; ferreras-méndez et al., 2021; garg et al., 2020; zhao et al., 2022). mediation is a statistical technique to examine whether the impact of (x → y) where causal variable ‘x’ and outcome variable ‘y’ is at least partly explained through a series of impacts of the ‘x’ on an intermediating variable z and then on the intermediating variable on the ‘y’ (i.e., x → z → y) (fiedler et al., 2011). mediation process start-up enterprise performance (sep) and entrepreneurial satisfaction (es) as mediators start-up enterprise performance can be used as synonymous with business performance, operational performance, business growth, etc. the study (haryono & paminto, 2015,) explains the mediating effect of performance on the relationship between corporate value and financial risk, and performance revealed a positive relationship between corporate value and financial risk. also, it was identified (wahba & elsayed, 2015) that the financial performance of the firm positively mediated the relationship between ownership structure dimensions and corporate social responsibility. most of the research are concerned with the mediation effect of a firm’s performance in the sector of finance (al-slehat, 2020). the authors (namazi & namazi, 2016) highlighted a framework to use performance as the mediator between csr and stakeholder perception. moreover, some studies have emphasized the role of financial performance as a mediator between the size of the firms and corporate value or corporate governance, and on capital structure and corporate value as well as risk on the value of the firm (al-slehat, 2020; author et al., 2014; haryono & paminto, 2015). the study carried by (lee & kim, 2019; zhao et al., 2022) used the satisfaction of entrepreneurs and performance as a mediating variable in the analysis of environment and sustainability through entrepreneurial activities. (iskamto & ghazali, 2021) has examined mediation analysis through the satisfaction and performance of mses. hmieleski and corbett (2008) presented interaction effect on self-efficacy and entrepreneur’s satisfaction of startups. nonetheless, the empirical findings of (lauto et al., 2020) also suggested the relationship between economic performance and the satisfaction of entrepreneurs. startup enterprise performance (sep), entrepreneurial satisfaction (es), and startup business sustainability (sbs) among the various business studies, most studies measure effectiveness and efficiency of startup by a focus on the financial performance of business operations (seo et al., 2018), but now there is more stress on the importance of non-financial performance or intangible assets based on the current environment uncertainty (hoque, 2005). for start-ups and smes, business sustainability practice is a critical factor that must be considered, along with performance (sarango-lalangui et al., 2018). the theory of sustainability states that the sustainable development of the organization mainly depends on the goals and objectives of the organization and sustainable organizations can operate consistently and stably despite various difficulties in the market (shi et al., 2019). sustainability needs should emphasize sustained natural resources, sustained technology, sustained employment, and sustained performance of the firm (sha, 2022). good doing of the enterprise and entrepreneur’s caliber in the process of business start-up may serve as a key variable in the sustainability of entrepreneurial intention and behaviors (harlin & berglund, 2021; tur-porcar et al., 2018). the intention to sustain a business can be related to positive attitudes among entrepreneurs, which makes them more satisfied with their business. as mentioned above, satisfaction immerses the best emotions, the ultimate pleasant experiences, and a happy mental state of the entrepreneurs that are encouraged by enterprise well performance thus, they both are critical success factors of sustainable development of entrepreneurship and society (eriksson muyu li supervisor et al., 2012). moreover, (lee & kim, 2019) argued that entrepreneurial satisfaction can be related to non-financial factors such as the congenial environment of business operation, enthusiasm about business, sense of achievement in business, and attainment of business stability (gupta & muita, 2012). accordingly, this study provides the following hypothesis that is based on startup performance and satisfaction with the motivation of bringing sustainability to new ventures. shivhare et al., indian journal of finance and banking 13(1) (2023), 63-77 67 hypothesis 8. (h8) the startup enterprise performance of start-ups will have a positive effect on startup business sustainability. hypothesis 9. (h9) the entrepreneurial satisfaction of start-ups will positively affect startup business sustainability. materials and methods this study examines the key attributes to promote the business sustainability of nascent venture and startup to convert the short survival rates into long-sustained startup firm, factors such as market orientation, technology orientation, and government support are taken as the causal variable to empirically verify the effect on start-up performance, entrepreneurial satisfaction, and business sustainability. accordingly, this study surveyed indian start-ups to verify the effects of government support, market orientation, and technological advancement on the sustainable development of entrepreneurship, and the startup performance and entrepreneurial satisfaction as mediators bring novelty in the field of sustainable entrepreneurship. the research model as shown in figure 1 is designed with the research hypotheses provided based on the literature review. figure 1. research model source: authors’ compilation variables and analytical approach based on an extensive literature review on business, startups, and entrepreneurship, the research instrument for this study was developed. the measurement scale for entrepreneurial satisfaction was adopted from the literature for technological, government support, market orientation, financial and non-financial performance, satisfaction and motivation of entrepreneurship, and other relevant area presented in table 1. table 1. variables and operational definition variables factor definition items reference independent variable government support (gs) the support from the government has benefitted start-ups 3 (joanne l. scillitoes 2021) (hazudin et al., 2015) market orientation (mor) the attitudes and strategies of satisfying customer need, competitiveness, and acquiring market knowledge for achieving customer satisfaction 3 (o ´ scar 2007) (mastorakis et al., 2020.) technology orientation (tor) the technology support availed by the start-ups for ease of their business activities 4 (zahra and covin, 1993.) (deshpande et al 2013) (urban & heydenrych, 2015) (bamgbade et al., 2022) parameter/ mediator startup enterprise performance (sep) the financial performance of the start-ups acquired by their operation 4 (sivathanu & pillai, 2020) (rompho, 2018) (zahra and covin, 1993) entrepreneurial satisfaction (es) satisfaction with business activities and acknowledgment of doing something owned by the entrepreneur regarding start-up activities. 7 (seco matos & amaral, 2017; stjean & mathieu, 2015) government support market orientation technology orientation business sustainability in startup entrepreneurial satisfaction startup enterprise performance shivhare et al., indian journal of finance and banking 13(1) (2023), 63-77 68 dependent variable startup business sustainability (sbs) the possibility is that the business activities of start-ups are enough to sustain business economically, socially, and environmentally in the long run. 8 (karani 2021) (sarango-lalangui et al., 2018a) source: literature sampling and data collection this research follows quantitative methodology with the use of primary data collected through the questionnaire, the data was collected from more than 400 startups operating in madhya pradesh, india. the sample was considered using the stratified random sampling technique and the key respondent of the questionnaire survey were owners/founders, partners, executives, and other key persons of the startups. the data was collected from the respondents through surveyed by visiting their work areas or offices and gathering all the details about technology and digitalization, government support through policies and programs for startups, startup perceived performance, market and market difficulties, satisfaction level through entrepreneurship and practice of business sustainability, questions was explained to the respondents and their confidentiality and annoying reassured. the sample size of 384 was calculated by using cochran’s formula of indefinite population and a startup the total revenue for startups must be under rs. 25 crores, situated in india as prescribed by dpiit, goi was used as the eligibility criteria for the selection of startup. instrument/ scale used all the variables were measured by using the 5 likert scales. the independent variables were measured using the scale representing strongly disagree=1, disagree=2, neutral=3, agree=4, and strongly agree=5. the startup firm’s performance was represented as extremely declined=1, declined=2, average=3, improved=4, and extremely improved=5. analysis of reliability and validity a pilot study was conducted to inspect the validity and reliability of the questionnaire before collecting the final data. the reliability of the model was tested and the result has shown as .917 which should be more than the required value of 0.7 to get the reliability of the instrument. to ensure the reliability and validity of the research model, the constructs of this study were analyzed by using exploratory analysis as the result is presented in table 2. the result of the standard loading value when scored 0.6 or more, can be used as a latent variable. all the constructs of this study scored more than 0.6 or more. the composite reliability of all the constructs should be close to or more than 0.7, as all constructs of this study score 0.9 or higher thus, meet the standard set by (bhattacharya et al., 1998) and (j. j. li & zhou, 2010). the ave should be 0.5 or more as the standard set by (frare & beuren, 2021), and all the constructs in this study scored ave more than 0.8 (see table 2). thus, ensuring the validity of this study model. table 2. results of reliability and convergent validity test factor loading cronbach’s alpha rho_a composite reliability average variance extracted (ave) es 0.898 0.947 0.948 0.96 0.826 0.882 0.924 0.919 0.921 gs 0.901 0.923 0.924 0.952 0.868 0.958 0.935 mor 0.929 0.92 0.923 0.95 0.863 0.947 0.911 0.901 0.898 0.917 0.935 0.909 sep_ 0.961 0.934 0.941 0.958 0.884 0.957 0.901 tor_ 0.927 0.909 0.909 0.943 0.846 0.912 0.92 source: compiled from primary data using pls-sem discriminant validity the off-diagonal values (see table 3) show the correlation between the latent constructs. the discriminant validity is verified by comparing the inter-correlations of the constructs with ave, as displayed (see table 3). as the shared variance values shivhare et al., indian journal of finance and banking 13(1) (2023), 63-77 69 were lower than the corresponding ave, discriminant validity between the constructs in the study was proved as per (ab hamid et al., 2017) the required criteria. table 3. correlation matrix and average variance extracted (ave) es gs mor sbs sep_ tor_ es 0.909 gs 0.378 0.932 mor 0.372 0.558 0.929 sbs 0.667 0.402 0.459 0.912 sep_ 0.626 0.395 0.367 0.465 0.94 tor_ 0.403 0.469 0.657 0.466 0.409 0.92 note: the numbers in bold are ave square root values of each variable. source: primary data common method bias the single-factor harmen test (podsakoff et al., 2003) was conducted to check the existence of common method bias. the result was 40.082% which is less than 50%, justifying that there is no concern of common method bias for this study. results and discussions demographic characteristics of the respondents the survey results showed from the total of 384 respondents, 77.60 percent were male and 22.13 percent were female, in case of age concerned 12.8 percent of total less than 25 years, and 55.7 percent were aged between twenty-five to thirty five, 24.9 percent were between thirty-five to forty-five, and only 6.8 percent were older than forty-five years, that show more start-up entrepreneurs are in the age of twenty-five to thirty-five years. in case business ideas of current start-ups showed that seminars and conferences are the most idea-genic source has 26.6 percent of ideas came from there, the next vital source of start-up ideas are found to be friends and relatives as 14.6 percent of ideas came from there, and 13.5 percent were from newspapers, and 37.5 percent is from other sources. (table 4). table 4. demographic profile of respondents category frequency percentage ages less than 25 49 12.8 25 to 35 years 214 55.7 35 to 45 years 95 24.7 more than 45 26 6.8 total 384 100.0 gender male 298 77.60 female 85 22.13 total 384 100.0 marital status unmarried 136 35.4 married 225 58.6 divorced 23 6.0 total 384 100.0 business idea newspaper 52 13.5 seminar/conferences 102 26.6 bank/ financial institutions 30 7.8 friends/ relative 56 14.6 other 144 37.5 total 384 100.0 source: compiled from primary data. measurement model the smartpls 3.0 software was applied for primary data analysis as many businesses used it for analyzing measurement models (hwa et al., 2017). the measurement properties in the final model was calculated for the latent constructs, reflective and formative in nature having multiple indicators. there are two methods for structural equation analysis; one is covariancebased and the other is partial least square based (moqbel et al., 2020), and the study of (sarstedt et al., 2020) (carrión et al., 2017) suggested the use of pls-sem for mediation analysis. model fit the standards for the goodness-of-fit index (gfi) of the revised model were verified to check the fit of the model. the model is considered fit if the nfi will 0.9 or higher (hwa et al., 2017). this model showed significant results, i.e., nfi = 0.91, srmr = 0.037, as per the standard set by (hair et al., 2011) (see table 5). shivhare et al., indian journal of finance and banking 13(1) (2023), 63-77 70 table 5. model fit saturated model estimated model srmr 0.037 0.073 d_uls 0.341 1.332 d_g 0.442 0.465 chi-square 1026.155 1097.575 nfi 0.91 0.878 source: compiled from primary data by using pls-sem table 6 has shown the results of the hypotheses tested showed that gs (t value = 3.423, β= 0.240) and tor (t value = 2.787, β=0.253) had a positive and significant effect on sep, but mor have an insignificant effect (t value= 0.274, β= 0.067) on sep. thus, we fail to accept hypothesis two, but fail to reject hypotheses one & three. for the hypothesis four, the significant impact of gs on es has been identified, with findings (t value = 3.448). similarly, for the hypothesis five the impact of tor on es is positively significant (t value = 2.582), but hypothesis six was rejected due to the insignificant effect of mor on es. moreover, the hypothesis seven was accepted as the result revealed a significant and positive impact of sep on es (t value = 9.744, β= 0.526). finally, both the hypotheses eight and nine were accepted with a significant impact of sep (t value = 4.462, β=0.334) and es high impact (t value = 10.606, β= 0.618) sbs. further, table 6 also, shows mor does not find a significant effect on sep as well as es, whereas gs had a greater effect on es, and es has a greater positively significant effect on sbs than sep (see table 6). table 6. results of the hypothesis test hypothesis channel path coefficient t value decision r2 hypothesis 1(gs sep) 0.240 3.423 accepted 0.223 hypothesis 2 (mor sep) 0.067 0.274 rejected hypothesis 3 (tor -sep) 0.253 2.787 accepted hypothesis 4 (gses) 0.375 3.448 accepted 0.427 hypothesis 5 (mor -es) 0.061 0.548 rejected hypothesis 6 (tores) 0.215 2.582 accepted hypothesis 7 (sep es) 0.526 9.744 accepted hypothesis 8 (sep sbs) 0.334 4.462 accepted 0.449 hypothesis 9 (es sbs) 0.618 10.606 accepted notes: t-values for two-tailed test: ***t-values 2.58 (sig. level = 1%), (sivathanu & pillai, 2020) figure 3. sem (structural equation model) analysis of the research model source: compiled from primary data shivhare et al., indian journal of finance and banking 13(1) (2023), 63-77 71 mediation effect we are concerned with evaluating whether the effects of the causal variables; gs, mor, and tor on sbs are mediated by es and sep. to examine the mediation effect of the es and sep through these pathways we used the smartpls algorithm. the result (see table 7) revealed that the total effect of gs (β= 0.150) and tor (β=0.169) on sbs was significant with the inclusion of mediating variables of sep and es, whereas, mor has insignificant relation on sbs (β=0.037, t= 0.515) in presence of sep and es. the indirect effect of gs on sbs was significant (β= 0.053, t= 3.185, p=0.002) in presence of mediator es. additionally, gs also has a significant impact on sbs in presence of mediator sep (β=0.019, t= 3.185, p=0.002). further, the indirect effect of tor on sbs was identified through es as a mediator between them (β=0.067, t= 2.884, p= 0.004) it is more significant than the indirect effect of tor on sbs through sep (β=0.020, t=2.884, p=0.004). however, no significant indirect impact of mor is found on sbs through both the mediators; es and sep. table 7 also indicates, the impact of sep on sbs through es being a mediator, the result was significant with direct effect (β= 0.334), indirect effect (β= 0.325), and total effect (β= 0.659). moreover, the impact of es on sbs was the significant direct and total effect (β=0.618), and the null indirect effect was assessed. table 7. results of direct, indirect, and total effects dependent variable independent variables/ mediator direct effect indirect effect total effect tvalue startup business sustainability gs 0.019 gs->sep->sbs 0.150 3.185 0.053 gs -> es -> sbs mor 0.005 mor->sep->sbs 0.064 0.515 0.037 mor->es->sbs tor 0.020 tor->sep>sbs 0.169 2.884 0.067 tor->es>sbs sep 0.334 0.325 sep-> es -> sbs 0.659 es 0.618 0.618 10.606 source: primary data collected through questionnaires analyzed using pls-sem note: gs= government support, mor= market orientation, tor= technology orientation, sep= start-up enterprise performance, es= entrepreneurial satisfaction, bsb= start-up business sustainability discussions this study is conducted to empirically determine the factors affecting business sustainability and the survival rate of startups, as recognized since global government support in an attempt to secure new growth engines and create jobs. the results of the data analysis showed that start-ups based on gs, and tor had a positive effect on business sustainability through mediator’s startup enterprise performance (sep) and entrepreneurial satisfaction (es). the findings show that the government assistant program (gs) has a significant association with the performance of the start-up and were validated by the study of (musa et al., 2017) which suggested a significant government role in the performance of nascent ventures. the findings of the present study indicate that technology orientation (tor) has a significant impact on the performance of startups, with a similar result to the findings of (holgersson & granstrand, 2021) revealing the importance of technology such as patenting, digital innovations, r&d has a significant positive impact on the performance including cost reductions, productivity, sales growth. ultimately, factors such as innovativeness, digitalization, and information symmetry of entrepreneurs had a positive impact on the performance of the start-ups as well as business sustainability. the previous empirical investigation of (gibson et al., 2014; gupta & muita, 2012) is also revealed similar results that there is a positive significance in enterprise performance on the entrepreneurial satisfaction of startups. the development of technology significantly impacts on the satisfaction of entrepreneurs in nascent ventures this result is similar to the previous literature (lee & kim, 2019). additionally, the government support has been identified as a significant factor in this study to foster business satisfaction among entrepreneurs of the start-up, this result is consistent with (reddick & roy, 2013; sharma et al., 2021) that show government support including development programs, websites, and e-portal, etc. are boost the satisfaction of the startupreneurs. caseiro and coelho (2018) stated that gs has unique competitiveness in start-ups that are difficult to imitate, thus entrepreneurship can serve as a critical factor in terms of mid/long-term growth and sustainable development for start-ups. on the other hand, market orientation positively impacted business sustainability with startup enterprise performance as the mediator, but not on entrepreneurial satisfaction. previous studies on startups stated that start-up sustainability is affected by variables such as the entrepreneur’s satisfaction and the start-up ecosystem consisting of government and society and there is a positive association between satisfaction and sustainability in entrepreneurship of new ventures (lee & kim, 2019; ziakis et al., 2022). the role of the performance of the startups is found significant to the sustainability of the business which can be validated by the study of (deslatte et al., 2021; lee & kim, 2019). this shows that when the performance is a key factor of shivhare et al., indian journal of finance and banking 13(1) (2023), 63-77 72 start-ups that connects with sustainable practices, it means if startup performed well, it motivates the entrepreneurs to implement sustainable business practices. it is observed from the study that market orientation is insignificant in obtaining satisfactory performance and satisfaction among startupreneurs, this finding is similar to the study of (lee & kim, 2019), a company must maintain its market orientation in the dynamic market environment for sustainable growth (scillitoe & birasnav, 2022). accordingly, start-ups should encompass the marketing environment to analyze customer values and to adapt good market fit for ultimate sustainability (ruzgar et al., 2014). moreover, mor positively impacted on business sustainability with entrepreneurial satisfaction as the mediator, which is contrary to (gonzález-benito et al., 2009; huang, 2016). the present study is also identified that performance has a significant impact on sustainability through mediator satisfaction, this comprehensively indicates that performance brings satisfaction among entrepreneurs which motivates them to sustainable business practices (deslatte et al., 2021). the study shows that business leads to entrepreneurial satisfaction and performance with aid of government, and technology with sustainability. moreover, as mentioned, government and technological support are useful to perceive opportunities that will accelerate entrepreneurial success and sustainable business growth. conclusions based on the results, this study can provide inferences to set the direction for sustainable growth and development of startups. first, as indicated by the results, startup performance is a key variable for the business sustainability of start-ups. previous studies based on performance confirmed that it is only possible when it is supported by an entrepreneurial ecosystem. furthermore, startup performance promotes the more explorative activities of start-ups and improves their capacity to implement sustainable ideas. thus, entrepreneurs must immerse themselves in innovative ideas and sustain events to develop their capabilities. accordingly, entrepreneurs can be satisfied in the early stages of a business when they focus on both financial and non-financial performance and entrepreneurial satisfaction. moreover, the government support programs must be intended for safeguarding various challenges and obstacles of startups, and further technology should encompass entrepreneurship programs for start-ups to support at early-stage. besides, start-ups have different environments and ecosystems depending on the business field, which is why more detailed research must be conducted when considering types of business such as manufacturing, it, or service. startups in the area of automobile and it and fashion industries should adopt sustainable marketing strategies to enhance customer satisfaction (ejovwokeoghene ogbari et al., 2022; jung et al., 2020). correspondingly, the government should collaborate with startups (specifically with cleantech and energy) to increase the financial benefits of the startups. technology advancement should be encompassed to reduce the information asymmetry, that not only benefits startups but all the participants of the industry (kim et al., 2020). limitations and further scope area the study has found a link between government, technology, and market support, along with the mediation effect of entrepreneurial satisfaction and startup performance on startup sustainability. it has many limitations that create opportunities for future research such as the survey of this study has geographic limitations as samples are collected from the startup of madhya pradesh, india, to generalize the results. in addition to limitations, the data for the present study were collected in a one-time frame, longitudinal studies can be incorporated in the future. it is a quantitative analysis further studies may incorporate a qualitative method for a better understanding of entrepreneurial behaviours on sustainability. implications this research is a theoretical background of sustainability in start-ups in the context of india to provide inclusive factors required for sustainability building in startups the proposed theoretical model validate empirically. this study serves academicians by contributing to the entrepreneurship domain by providing a research framework for business sustainability. this study contributes managerial implications to suggest strategic planning a scaling of the startup for sustainable growth, sustainability in business is not simple to attain and retain, and this research contributes to startup entrepreneurs developing healthy customer relations and better implementation of the start-up ecosystem for sustainable growth of the firm. from the perspective of government implications, this research suggests that the government should provide more training to entrepreneurs for sustainable practices, and there must be more involvement of the government in increasing the performance of start-up companies. and it will prove better if the government encourages marketing training and platforms, especially for start-ups. author contribution: conceptualization, s.s., n. and s.v.; methodology, s.s.; software, s.s; validation, s.s., n. and s.v.; formal analysis, s.s., n. and s.v.; investigation, s.s., n. and s.v.; resources, s.s., n. and s.v; data curation, s.s.; writing – original draft preparation, s.s., n. and s.v.; writing – review & editing, s.s., n. and s.v.; visualization s.s., n. and s.v.; supervision, s.v.; project administration, s.s. and n.; funding acquisition, s.s., n. and s.v. 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: jawaharlal nehru memorial fund, new delhi for this research. acknowledgments: not applicable. informed consent statement: informed consent was obtained from all subjects involved in the study. shivhare et al., indian journal of finance and banking 13(1) (2023), 63-77 73 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. conflict of interest: the authors declare no conflict of interest. references ab hamid, m. r., sami, w., & mohmad sidek, m. h. 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(2022). start-up ecosystem (stupeco): a conceptual framework and empirical research. journal of open innovation: technology, market, and complexity, 8(1). https://doi.org/10.3390/joitmc8010035 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 13(1) (2023), 48-53 48 finance and banking ijfb vol 13 no 1 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa impact of firm performance on stock returns: evidence from large-cap, mid-cap and small-cap stocks muhammadriyaj faniband (a)1 pravin jadhav (b) kedar marulkar (c) (a) phd research scholar, institute of infrastructure, technology, research and management, ahmedabad-380026, india; e-mail: riyajfaniband@gmail.com (b) assistant professor, institute of infrastructure, technology, research and management, ahmedabad-380026, india; e-mail: pravinqed@gmail.com (c) assistant professor, department of commerce and management, shivaji university, kolhapur, india; e-mail: kedar.marulkar@gmail.com a r t i c l e i n f o article history: received: 1st january 2023 revised: 18th february 2023 accepted: 20th february 2023 published: 28th february 2023 keywords: firm performance, net sales, net profit, eps, stock return jel classification codes: c31, g11, g12, g32, l25 a b s t r a c t in this article, we analyse the impact of firm specific factors, namely, total income, net profit, and earnings per share (eps) on stock returns of companies from the large cap, mid-cap and smallcap (lms) categories using the panel quantile regression. we also use the ordinary least square method to compare our panel regression results. we select companies from nse large cap100, nse mid cap 100 and nse small cap 100 indices and each index is composed of 100 companies. these indices reflect the overall state of the indian stock market. our empirical analysis based on quarterly data from june 2010 to march 2022 shows some important findings. first, net sales significantly and negatively affect stock returns across the large, mid, and small cap stocks. second, net profit and eps have a substantial and positive impact on companies from all the categories. however, the coefficients are not significant across all quantiles. in short, the impact of firm specific factors on stock returns is not homogeneous across the lms stocks implying that these factors do not influence stocks in a uniform way. the plausible reason may be that large, mid, and small cap companies share differences in terms of market capitalisation, growth potential and volatility. © 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 the behavior of stock price is a very complicated phenomenon in the area of financial research because the precise forecasting of future prices cannot be done. however, the analyst, portfolio manager and investors try to predicate share price looking at the past data. the performance of economy, industry and company affect stock prices (li et al., 2020; nayak & barodawala, 2021; tahir et al., 2013). bottom-up and top-down are two important investment approach. bottom-up investing focuses on individual stock analysis and reduces the importance of macroeconomic and market cycles. bottomup investor’s emphasis on company specific factors and its fundamentals, on the other hand, the industry and economy are the focus areas of top-down investors. the bottom-up approach assumes individual companies can do well even in an underperforming industry and that is the reason we examine the impact of firmspecific factors, namely, net sales, net profit and earnings per share (eps) on stock returns in india. this is clearly revealed in the past studies, which show that firms’ fundamentals influence the stock returns (anwaar, 2016; budi & davianti, 2022; santoso et al., 2020; saputra, 2022; sausan et al., 2020; sudirman et al., 2020; tahir et al., 2013). however, these studies have focused on companies from wellestablished or large market capitalisation (or market cap) category and they have ignored mid cap and small cap companies. stocks in the stock exchanges are often divided among three groups based on their market capitalisation as large-cap, midcap, and small-cap (lms) stocks. in india, companies with rs 20,000 crore or more come under large-cap companies. meanwhile, the market cap of rs 5,000 crore and less than rs 20,000 crore is for mid-cap companies and small-cap companies put under a market cap of below rs 5,000 crore. furthermore, the large, mid and small cap stocks also share 1corresponding author: orcid id: 0000-0001-6775-3582 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i1.1969 to cite this article: faniband, m., jadhav, p., & marulkar, k. (2023). impact of firm performance on stock returns: evidence from large-cap, mid-cap and small-cap stocks. indian journal of finance and banking, 13(1), 48-53. https://doi.org/10.46281/ijfb.v13i1.1969 https://orcid.org/0000-0001-6775-3582 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i1.1969 https://orcid.org/0000-0002-5732-2217 https://orcid.org/0000-0003-3431-0210 faniband et al., indian journal of finance and banking 13(1) (2023), 48-53 49 differences in terms of volatility and growth potential. the investors can make informed investment decisions based on this categorization. keeping this point in mind, we extend previous studies by analysing the impact of net sales, net profit and eps on stock returns of companies from large-cap, mid-cap and small-cap categories. this scenario motivated us to answer the following unanswered questions; do net sales, net profit and eps affect stock returns of companies from lms categories? whether the impact is homogeneous across lms stocks? we address these questions by using the panel quantile regression model. we also use the ordinary least square (ols) method to compare results with panel quantile regression for a quarterly dataset ranging from june 2010 to march 2022. our research is different from the past papers for indian stock market because it is the first study that covers the sensitivity of mid cap and small cap stocks along with large cap stocks to the firm specific factors. the outline of the paper is as follows. section two describes the previous studies. section three presents the dataset and variables. section four provides the econometric models. section five shows the empirical findings for the lms stock returns. section 6 close the paper with conclusion. literature review some studies consider panel data to investigate the impact of firm specific factors on stock returns. faniband and marulkar, (2020) analyse the impact of total income, net profit, and eps on stock price on companies from sensex using panel cointegration test. they find a long-run cointegration between the variables and share prices. they consider stock prices on the date results announcement. further, the same authors (faniband & marulkar, 2019) confirm no causality between above variables and stock price using panel causality test and the same dataset. however, they do not consider mid and small cap companies. a specific group of studies are done on the impact of net sales on stock return. sharma et al. (2015) reveal that sales has no impact on returns of stock from national stock exchange (nse). similarly, (saputra, 2022) also finds that revenue has no impact on share prices of 20 listed firms from food and beverage industry in indonesia. tahir et al. (2013) show no effects of sales growth on stock returns of non-financial companies in pakistan. furthermore, another set of research is focused on net profit-stock returns. rokhayati et al. (2021) use fixed effects model and find that the net profit margin has no impact. sharma et al. (2015) find that net profit has no visible impact on nse-listed companies. babu and kasilingam (2013) notice that stock price goes up with the increase in net profit in quarterly results. however, the increase in price was because of market condition rather than the announcement of results. similarly, (anwaar, 2016) using panel regression analysis and find that net profit margin has a substantial and positive effects on companies listed in ftse-100 index. santoso et al. (2020), sudirman et al. (2020) and tikasari and surjandari (2020) also show a substantial and positive impact of net profit margin on the stock returns. saputra (2022) finds that net profit has a substantial impact on stock prices of 20 listed food and beverage companies in indonesia. however, (baber et al., 2006) find a negative impact of net profit on stock price. the previous studies on the impact of eps on stock returns include (sausan et al., 2020) and (santoso et al., 2020) who reveal no impact of eps on 21 property and real estate companies and engineering and construction services companies in indonesia respectively. sharma et al. (2015) and tikasari and surjandari (2020) find no effect of eps on stock return, whereas (choiriyah et al., 2021) notice a substantial impact on banking companies in indonesia. anwaar (2016) using panel regression analysis and find a substantial negative impact on listed companies in ftse-100 index. tahir et al. (2013) also reveal the significant impact of eps on stock returns of 307 non-financial listed companies in pakistan. on the other hand, (sudirman et al., 2020) show a positive and substantial effect on companies in the consumer goods industry. menaje jr (2012) finds a strong positive correlation between share price and eps. menaje jr. (2012) find a weak negative correlation between return on assets and share price. kumar (2015) find that reaction of share price is mixed during pre and post announcement of quarterly results. tahir et al. (2013) reveal the significant impact of market capitalization and book to market value on stock market returns of 307 non-financial companies listed in pakistan. sudirman et al. (2020) detect no effect of the debt-to-equity ratio on the stock price in indonesia. tikasari and surjandari (2020) find that eva has a positive and significant; no impact of the debt-to equity and current ratios on the stock returns. sudirman et al. (2020) show that return on equity has a substantial positive effect, while the debt-to-equity ratio has no impact on the stock prices of the consumer goods sector companies in indonesia. ortiz et al. (2010) notice a significant anomaly for the last quarter but the clear stock return anomalies were not found for the first three quarters for loser small-cap stocks of spanish market. nasreen et al. (2020) notice that oil prices have a weak degree of association with stock returns of companies from clean energy and technology. wardlaw (2020) study the impact of mutual fund pressure on stock returns. duz tan and tas (2021) detect that twitter activity and sentiment affect trading volume and returns. ni et al. (2015) reveal the impact of opening accounts number and turnover rate on a chinese stock market. the results indicate that the impact is substantial from one to twenty-four months. youssef et al. (2021) considers the epu of badly affected covid-19 countries and examines the linkages between stock indices and epu using the time-varying var. they show the substantial positive impact of epu on total dynamic spillover. on the other hand, the results of arouri et al. (2016), ftiti and hadhri (2019) and istiak and alam (2020) find the negative influence of us epu on stock markets. chellaswamy et al. (2020) find the impact of inflation, interest rate and exchange rate on stock returns in china and india. the literature on lms stocks is quite rare. shukrant and amanpreet (2018) find the significant impact of macroeconomic factors (index of industrial production, inflation, exchange rate etc.) on bse lms indices. khanra and dhir (2017) reveal that small-cap stocks (nse small 100 index) are less affected by the market volatility index in comparison with large and mid-cap stocks. jena et al. (2021) think that the major contributor to total volatility was mid-cap index followed by the smalland large-cap. wang et al. (2013) study the largeand small-cap stocks in twenty-three emerging faniband et al., indian journal of finance and banking 13(1) (2023), 48-53 50 economies and detect that the international asset pricing model is applicable for most largecap stocks, whereas it is not applicable for small-cap stocks. materials and methods data and variables we empirically examine the impact of net sales, net profit, and eps on stock returns. we use stocks included under nse large cap100, nse mid cap 100 and nse small cap 100 indices. these indices are composed of 100 companies. we select these indices because it reflects the overall state of the indian stock market. for this paper, we consider quarterly data from june 2010 to march 2022. since some firms in the lms indices have missing data or are not listed in the 2010, the final sample size is 220. it includes 84, 70 and 66 companies from large, mid, and small caps respectively. the data of net sales, net profit, eps, and stock prices are collected from the prowessiq cmie database. the selection of the exploratory variables is based on the following reasons. first, the ultimate growth of a firm can be captured using net sales. net sales is must because no firm can make any kind of profit in absence of net sales and that is the reason net sale is independent of profit. further, an investor considers net sales to know how profitable the firm. second, net profit is the payoff for the risk assumed by the investor and the firm use it for its growth. it is believed that, if the net sales is backbone, net profit is lifeblood. third, eps serves the market price in fundamental analysis. hence, higher the eps, higher will be the market price. methodology we employ the panel quantile regression model with fixed effect to study the impact of net sales, net profit, and eps on stock returns in the indian stock market. quantile regression, proposed by koenker & bassett, (1978), is useful for investigating the asymmetric distribution of stock returns. this method is useful to find asymmetric aspects of stock returns and estimate coefficients of different quantiles of stock returns. it also allows us to understand heterogeneous effects of net sales, net profit, and eps on the stock returns. the panel quantile regression model with fixed effect is written as follows: 𝑄𝑦𝑖𝑗(𝜏|𝑥𝑖𝑗)=𝛼𝑖+𝑥𝑖𝑗 𝑇 𝛽 𝜏 𝑖=1,….,m; 𝑗=1,…,n ------------------------------(i) in formula (1), α′s have a pure location shift impact on the conditional quantiles. the impact of the covariates xij are permitted to rely the quantile τ of interest. i is the index of individual and j is the index of time. m is the number of observations on the individual i. n is the number of observations on the time t. the following is the basic regression model. 𝑅𝑁𝑖𝑡= 𝛼𝑖+ 𝛽1𝑁𝑆𝑖𝑡+ 𝛽2𝑁𝑃𝑖𝑡+ 𝛽2𝑖𝐸𝑃𝑆𝑖𝑡+𝛾 𝜓𝑡+ µ𝑖𝑡 ------------------------------(ii) where i =1, …n, t=1, …, t, n is the number of companies. t is the number of time. rnit denotes the stock returns for company i at time t. ns means net sales, np refers to net profit and eps refers to earnings per share. in the model, we include macroeconomic variables, inflation (consumer price index), interest rates and exchange rate as the controlling variables. results and discussions our results are divided into three sub-sections. the first sub-section discusses the impact of firm-specific factors of large cap companies on large cap stock returns. the second sub-section shows the results about mid cap stocks and third subsection presents the sensitivity of small cap stock returns to net sales, net profit, and eps of small cap companies. the results of the panel unit root tests presented in table 1, 3 and 5 show that the variables are conclusively and consistently stationary at level. firm-specific factors and stock returns for large cap stocks table 2 reveals the effects of the firm-specific factors on stock returns of large cap companies. the quantile regression model estimated for 20th, 40th, 50th, 60th and 80th quantiles and we also compare our results with ols. our results confirm a substantial and negative impact of net sales on the large cap stock returns. this result is consistent with budi & davianti, (2022) who found the positive impact of net sales on stock return. it indicates that an increase in net sales decreases stock return. further, net profit has a substantial and positive impact on stock return in ols, 0.2 and 0.6 quantiles whereas, the impact is found to be insignificant 0.4 and median quantile. moreover, the stock return is positively and significantly reacted to eps as all the coefficients are substantial except 0.4. these results are not in line with (sharma et al., 2015) who find that the above three variables do not affect stock returns of companies listed in nse. table 1. panel unit root tests for large cap net sales net profit eps share return llc 4.659 -5.601*** -10.537*** -30.125*** ips 6.824 -10.030*** -14.904*** -31.287*** faniband et al., indian journal of finance and banking 13(1) (2023), 48-53 51 adf 159.475 513.211*** 608.362*** 1234.500*** pp 271.681*** 938.693*** 1056.720*** 1870.350*** note: *** p<0.01, ** p<0.05 table 2. panel quantile regression results for large cap ols 0.2 0.4 0.5 0.6 0.8 c 1.095*** (0.005) -7.681*** (0.000) -0.115 (0.680) 2.482*** (0.000) 5.418*** (0.000) 12.479*** (0.000) net sales -5.510*** (0.009) -9.740*** (0.002) -3.860*** (0.040) -3.420*** (0.010) -3.540*** (0.007) -3.580*** (0.002) net profit 3.620* (0.064) 9.060*** (0.000) 2.750 (0.138) 2.110 (0.107) 2.300* (0.093) 2.340 (0.812) eps 0.033*** (0.007) 0.024* (0.095) 0.006 (0.552) 0.018* (0.078) 0.023*** (0.000) 0.016*** (0.004) note: *** p<0.01, ** p<0.05, * p<0.1 firm-specific factors and stock returns for mid cap stocks table 4 documents the ols and panel quantile regression results for mid cap companies. the effect of net sales is negative and substantial for ols, bottom, and median quantiles, whereas no substantial effect is observed in the higher quantiles which indicates that the structure of dependence is asymmetric with dependence in the bottom tail and independence in the higher tail. further, we observe that net profit and eps have a positive and substantial impact on stocks returns. the coefficients of ols and bottom quantiles are found to be significant. however, the median and upper quantile show an insignificant impact. table 3. panel unit root tests for mid cap net sales net profit eps share return llc 2.655 -4.086*** -7.750*** -22.924*** ips 3.396 -10.122*** -11.284*** -25.746*** adf 169.964** 444.710*** 441.650*** 914.790*** pp 257.481*** 851.354*** 822.643*** 1469.750*** note: *** p<0.01, ** p<0.05 table 4. panel quantile regression results for mid cap ols 0.2 0.4 0.5 0.6 0.8 c 1.219*** (0.002) -9.448*** (0.000) -1.261*** (0.000) 1.711*** (0.000) 5.007*** (0.000) 14.831*** (0.000) net sales -1.330*** (0.008) -3.660*** (0.000) -1.540*** (0.001) -7.830 (0.207) -4.050 (0.207) -2.730 (0.682) net profit 8.041*** (0.004) 0.000*** (0.006) 0.000*** (0.000) 6.560 (0.545) 2.370 (0.545) -1.850 (0.918) eps 0.008* (0.077) 0.006*** (0.000) 0.000 (0.922) 0.005 (0.538) 0.009 (0.538) 0.004 (0.109) note: *** p<0.01, ** p<0.05 firm-specific factors and stock returns for small cap stocks table 6 indicates the results for small cap companies. the net sales has a substantial and negative impact because the ols and quantile regression coefficients (except 0.6) are statistically substantial. this result is in line with large cap and mid cap stocks. however, the results of net profit are not completely consistent with the large and mid-cap stocks because the ols and the quantile regression coefficients are insignificant except 0.2. the effect of eps has a positive and substantial effect at the ols and 0.2, 0.4 and median quantiles. table 5. panel unit root tests for small cap net sales net profit eps share return llc -0.805 -4.692*** -7.340*** -20.094*** ips 1.3123 -10.430*** -13.303*** -22.725*** adf 180.254*** 399.644*** 470.248*** 747.496*** pp 231.789*** 870.510*** 963.528*** 1149.57*** note: *** p<0.01, ** p<0.05 table 6. panel quantile regression results for small cap ols 0.2 0.4 0.5 0.6 0.8 c 2.564*** (0.000) -12.280*** (0.000) 0.978** (0.035) 5.334*** (0.000) 5.007*** (0.000) 18.290*** (0.000) net sales -0.000*** (0.000) -6.980*** (0.000) -9.770*** (0.000) -9.030*** (0.010) -4.051 (0.207) -0.000** (0.018) faniband et al., indian journal of finance and banking 13(1) (2023), 48-53 52 net profit -0.000 (0.102) 0.000*** (0.006) 4.090 (0.736) -6.001 (0.500) 2.371 (0.545) 5.201 (0.651) eps 0.210*** (0.000) 0.025*** (0.000) 0.258*** (0.000) 0.297*** (0.000) 0.009 (0.538) 0.200 (0.118) note: *** p<0.01, ** p<0.05, * p<0.1 conclusions we study the impact of net sales, net profit, and eps on stocks returns of lms stocks using panel quantile regression for quarterly data. we report very some important results in this paper. first, net sales significantly and negatively affect across large, mid, and small cap stocks. second, net profit and eps have a substantial and positive impact. however, the coefficients are not significant across all quantiles. in a nutshell, the impact of the firm-specific factors on stock returns is not homogeneous across the large, mid, and small cap stocks implying that these factors do not influence stocks in a uniform way. the plausible reason may be that large, mid, and small cap companies share differences in terms of market capitalisation, growth potential and volatility. our results could be advantageous for portfolio managers and investors. knowing the long-run connection between firm specific factors and stock returns can be of extreme importance with regard to the adoption of efficient decisions in the lms stocks. this can also help make better asset allocation/portfolio diversification for investors, mutual fund managers, and foreign institutional investors. so, those who invest in the lms stocks should pay close attention to firm specific factors and diversify their portfolio accordingly. this study can be further extended to the impact of macro and non-macro-economic factors on stock returns of the lms stocks. author contributions: conceptualization, m.f. and p.j.; methodology, m.f.; software, m.f.; validation, m.f.; formal analysis, m.f.; investigation, m.f.; resources, m.f. and p.j.; data curation, m.f.; writing – original draft preparation, m.f.; writing – review & editing, m.f., p.j. and k.m.; visualization, m.f., p.j. and k.m.; supervision, m.f., p.j. and k.m.; project administration, m.f. and p.j.; funding acquisition, m.f., p.j. and k.m. 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: 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 anwaar, m. 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(2021). dynamic connectedness between stock markets in the presence of the covid-19 pandemic: does economic policy uncertainty matter? financial innovation, 7(1), 1–27. https://doi.org/10.1186/s40854-021-00227-3 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 11(1) (2022), 29-37 29 finance and banking ijfb vol 11 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa assessing relative weight of determinants of investment in index scheme of mutual funds debadrita dev (a) sujit deb (b) ranjit singh (c)1 lokendra puri (d) (a) research scholar, faculty of management and commerce, icfai university, tripura, kamalghat-799210, agartala, india; e-mail: debadrita.scholar@iutripura.edu.in (b) professor, faculty of management studies, icfai university, tripura, kamalghat-799210 tripura, india; e-mail: sujitdeb@iutripiura.edu.in (c) professor, department of management studies, indian institute of information technology allahabad-211012 uttar pradesh, india; e-mail: ranjitsingh@iiita.ac.in (d) research scholar, department of management studies, indian institute of information technology allahabad-211012 uttar pradesh, india; e-mail: rsm2022504@iiita.ac.in a r t i c l e i n f o article history: received: 2nd october 2022 accepted: 23rd november 2022 online publication: 12th december 2022 keywords: bank employees, behavioural finance, mutual fund, preference jel classification codes: e22, g11, g21, g41, p4 a b s t r a c t the main aim of this study is to assess the relative weight of determinants of investment in index schemes of mutual funds. the target population for the study came out to be 880. using a simple random sampling method, the sample size was determined to be 268. of these, 262 bank employees responded to the questionnaire, and the rest 6 were reluctant. a 95% confidence interval and ±5% margin of error have been used to estimate the overall sample confidence level. for the practice of data, the collection questionnaire method was used. ordinal logistic regression and kendall are used to assess the relative weight of determinants of investment in different index schemes of mutual funds. the study discovered that various psychological characteristics like risk perception and attitude are significant determinants of mutual fund investment in tripura. also, the interaction effect with demographic and psychological factors influences the volume of investment in mutual funds in tripura. the study has good inputs for the fund managers of mutual fund companies. they can know the determinants of investments in mutual funds and their impact on the volume of investment. this study will guide the policymaker on which determinants should be given more weight. the study will assist in designing a strategy for what level of training is required to improve psychological factors toward investment in the mutual fund. the study is very original. it is first attempted to assess the relative weight of determinants for preferring index schemes of the mutual fund. © 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 mutual funds are an investment instrument where investors pool their money to gain returns on their money over an amount of time. there is a bunch of different securities to invest such as bonds, gold, and stocks, to seek the potential rate of return. mutual funds are like a bridge that facilitates the investors to gather their funds with pre-determined investment aims. the fund manager utilizes these funds to invest in various securities. mutual funds work for the utmost interest of the investors not only by providing them with the liquid fund, balanced funds, growth funds, and index funds as options but also gives them the advantage of a diversified portfolio (kumar, 2011). there are many mutual fund schemes for investors. at the same time, the investors' investment decisions are affected by several determinants. the investor receives a proportionate share of the fund's loss, income, expense, and gain. the fund's objectives are mentioned in the fund's booklet, a legal file covering all related material about the fund, like history, performance, and officers. the mutual fund is not a substitution for the stock and bonds. it pools the money of numerous investors and invests in bonds, money market instruments, and other types of securities and stocks (dunna, 2012). the preferences of salaried individuals are mostly depended on demographic and socio-economic variables (bashir et al., 2013). demographic and socio-economic variables play an active role in affecting the choices of investors (shinde & zanvar, 2015). each investor's 1corresponding author: orcid id: 0000-0001-9408-9525 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v11i1.1847 to cite this article: dev, d., deb, s., singh, r., & puri, l. (2022). assessing relative weight of determinants of investment in index scheme of mutual funds. indian journal of finance and banking, 11(1), 29-37. https://doi.org/10.46281/ijfb.v11i1.1847 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v11i1.1847 https://orcid.org/0000-0003-2847-768x https://orcid.org/0000-0002-6836-6856 https://orcid.org/0000-0001-9408-9525 https://orcid.org/0000-0002-9774-289x dev et al., indian journal of finance and banking 11(1) (2022), 29-37 30 decision varies from one another in various demographic, economic, psychological, and social factors (deb & singh, 2017a). investors differ in their choices and preferences. this difference in preferences is affected by different factors such as the classification of the portfolio, reducing the level of risk, and higher the amount of tax benefits. all mentioned factors are the top factors that influence the investor's liking for investment in mutual funds (saibaba & vipparthi, 2012). well-off and highly educated indian investors often prefer financial products with risk-free returns (sultana, 2010). a good understanding from a financial perspective is much needed to take the best possible higher return on the investment. mutual funds offer the diversified benefits of a highly efficiently managed portfolio at a lower cost to the investor in the various securities depending on the schemes' objectives (chakraborty & digal, 2013). instead of investing directly in equity shares, employees choose to invest more money in mutual funds. the investors' preferences are essential to gain a finer mindset of financial market applicants' preferences and behavior (heckman, 2001). singh (2002) revealed that tax exemption plays a vital role in investors' preference for public sector mutual funds. in contrast, investors are obligated to have a desire, patience, positive vision, and prudence because investors' behavior also varies over a period which plays an important role at the time of investment (ansari et al., 2013). in the current scenario, various schemes are available in the market. it is essential to recognize the preferences and choices of the investors and the factors that affect these preferences and choices (mehta & shah, 2012). investors vary in their choices, and as per their preferences, wide varieties of mutual funds have been launched in the market. most middle-income investors prefer mutual funds for investment (kumar & bansal, 2014). as of now, knowledge of mutual funds has increased among people. while in the context of india, the role of the securities and exchange board of india (sebi) should be highlighted to gain a better mindfulness of investment among investors. as per the theoretical background, it has been noticed that psychological, demographic, and socio-economic factors play an important role in investing in mutual funds. for new investors with a lack of technical expertise, mutual funds are the popular investment option to invest. by studying the relevant literature, it can be concluded that psychological, demographic, and socio-economic factors play a crucial role in mutual funds' investment. to the best of our knowledge, this work is to investigate the specific proportion of known factors of investment bank employees' preference for index schemes of the mutual fund. the main objective of the present study is to assess the relative weight of determinants of investment in index schemes of mutual funds. thus, the current study tries to answer the research questions of the study, which are given below:  rq.1 what determinants are influencing the investment decision of investors?  rq.2 what are the bank staff's favorite levels toward the indexing scheme of mutual funds in tripura? the following hypotheses were tested in this study:  h0: there is no significant linkage between the selected determinants and preference for investments in index schemes of mutual funds.  h1: there is a significant linkage between the selected determinants and preference for investments in index schemes of mutual funds. the rest of the paper consists of various sections such as the literature review and theoretical background of the study; research methodology; result; discussion and policy implications, and finally, the study’s conclusion. literature review the attitude of the investor and the magnitude of investment are positively related, which means investors have a favorable attitude towards investment in mutual funds and invest in higher volume than those who are not having a favorable attitude (singh et al., 2021). it is significant to study the investors' investment behavior based on their demographic profile and understand their requirements (chakraborty & digital, 2013). tax advantages, higher return, capital, and price appreciation are the foremost factors that influence the investment decisions of a retail investor (roy et al., 2017). considering the needs of the investors' several schemes are offered by mutual funds (geetha & ramesh, 2011). from their study, geetha and ramesh (2012) tell that there is indeed a relationship between demographic determinants and various sources of mindfulness obtained by investors. their study also gives a clear idea regarding the investor's perception of different investment opportunities. also, they stated that investors in a developing country usually tend to invest more in financial assets than physical ones. it was the opposite initially for indian investors. bodla and sunita (2008) study shows that there are nearly 609 schemes with various features presented by mutual funds. they also found that income schemes are preferred over overgrowth schemes concerning assets under management. gupta et al. (2011) concluded that investors prefer a balanced fund. chakraborty and digital (2013) studied that the need for liquidity is high for an investor. thus, he is more interested in open-ended funds. gupta et al. (2011) disclosed that investors prefer balanced funds the most for investment. mehta and shah (2012) discovered that in making investment decisions, investors choose equity schemes more. there is a positive mindset of employees toward the selection of mutual funds (murugan, 2012). fear psychosis of employees, lack of confidence and awareness, and knowledge of mutual funds are the three major factors affecting risk perception (deb & singh, 2018). age, gender, experience, and family income influence the investors' risk perception (deb & singh, 2017a). risk is a frequent factor in every financial investment and has a meaningful impact on the investor's choice (yang & qiu, 2005; deb & singh, 2016; bhattacharjee et al., 2020). to manage a risky situation, a decent idea about risk, whether rational or irrational, plays a vital role (sindhu & kumar, 2014). kaur and kaushik (2016) have recognized a strong association between investment decisions and socio-economic factors, risk perception, and awareness level of investors. education, gender, age, and annual income are some of the few socio-economic and demographic elements that influence the investor's investment decision (shinde & zanvar, 2015; deb & singh, 2016). many studies suggested that both male and female adopts different investing approach to investing their money (bajtelsmit & bernasek, 1996; dezső & loewenstein, 2012; jianakoplos & bernasek, 1998). several studies explained that age is also an important factor at the time of the decision, dev et al., indian journal of finance and banking 11(1) (2022), 29-37 31 like the higher the age, the higher the experience level (alexander et al., 1999). the investor's income also changes the investor's decision (hallahan et al., 2004; ansari et al., 2013; walia & kiran, 2009; watson & mcnaughton, 2007). several studies found that the marital status of the investor also affects the investor's investment decision (arano et al., 2010; grable & roszkowski, 2007; lazzarone, 1996). few studies suggested that the educational level of the investor is also a significant factor at the time of investment in funds (bellante & green, 2004; gilliam & chatterjee, 2011; al-ajmi, 2008; das, 2011). moreover, various studies found that experience is also one of the major factors influencing investors' decisions (corter & chen, 2006; deb & singh, 2017b). after going through the above literature reviews, it has been observed that risk perception, level of awareness, and attitude are the significant elements that impact the choice of investment of the investors. in addition, six socio-economic and demographic components have been identified. overall, nine elements impact an investor's decision to invest in a mutual fund. materials and methods the population targeted for the present study includes the employees of banks with their own sponsored mutual funds. the target population is 880 employees (as of 1st april 2021), taken from the banks. these banks have their sponsor mutual funds. a sample of 268 employees has been determined based on the criterion at a 5% confidence interval and 95% confidence level. two hundred sixty-eight random numbers out of 880 have been generated using a simple random sampling method. a tested questionnaire has been shared with all the selected employees. a psychometric scale was used to test the employees' risk perception, attitude, and awareness. finally, 262 employees responded, and the rest were reluctant to respond. questionnaires filled by 262 bank employees were collected by visiting their respective banks. kendell's tau correlation coefficient is considered for assessing relative weight among the significant factors. factor analysis was performed by choudhury et al. (2016). results table 1 shows the preference for the indexing scheme. the table indicates that 25.6% of the employees, i.e., 67 being the highest, have very low preference levels. we can also see that 25.2% of the employees, i.e., 66, have a moderate preference level for index schemes, and 23.7%, i.e., 62 employees out of 262 employees, have a high preference level for index schemes of the mutual funds. table 1. preference for index scheme index schemes level of preference no. of employee percent very high preference 15 5.7 high preference 62 23.7 moderate 66 25.2 low preference 36 13.7 very low preference 67 25.6 not applicable 16 6.1 total 262 100 factors affecting investment preference in index schemes the literature review identified nine variables as factors for preferring the indexing scheme. these variables were regarded as independent variables. since there is a multi-collinearity effect between the independent variables; therefore, the regression model is not expected to provide a good result for which factor analysis is done. two criteria, i.e., varimax rotation criteria and eigenvalue criteria greater than one, were used to identify and avoid cross-loading between the factors. the kmo test was applied to check the adequacy of the samples. the result of sample adequacy was 0.661, which is an acceptable result that means that the samples obtained were sufficient for the present study. bartlett's test of sphericity was important. it generally specifies that the correlations between the variables are sufficient to continue. table 2 displays the summary of the results of the sample adequacy. table 2 shows that the value of communalities is less than 0.5 in the case of the factor named education, so it has been ignored from the study. the factors whose commonalities values are more than 0.5 were to be kept in the study (hair et al., 2009). in the process of factor analysis, commonality indicates how much variance is described by each variable for the derived factors (mishra, 2015). table 2. kmo and bartlett's test kaiser-meyer-olkin measure of sampling adequacy .661 bartlett's test of sphericity approx. chi-square 547.048 d.f 21 significance .000 table 3. total variance explained component initial eigenvalues extraction sums of squared loadings rotation sums of squared loadings total % of variance cumulative % total %of variance cumulative % total % of variance cumulative % 1 2.406 34.374 34.374 2.406 34.374 34.374 2.209 31.558 31.558 dev et al., indian journal of finance and banking 11(1) (2022), 29-37 32 2 1.896 27.079 61.453 1.896 27.079 61.453 2.093 29.895 61.453 3 .944 13.480 74.933 4 .594 8.493 83.426 5 .545 7.780 91.206 6 .401 5.732 96.938 7 .214 3.062 100.000 in the next part, the breakdown of the derived factors and their complete variances are described with the help of all the factors retrieved. after avoiding cross-loading, the factors have been obtained. the variance was 61.453%, which the three loaded factors can explain. a detailed explanation of the variables loaded in various factors is shown in table 4. table 4. varimax rotated loading factors and variables factor1 factor 2 demographic and socio-economic variables age .884 family income .708 education experience .907 psychological factor risk perception -.826 attitude .822 awareness level .745 table 4 shows the results of the rotated component matrix. the categorizations of the variables are done based on the arrangement, and two factors were found. these factors are termed demographic, psychological, and socio-economic factors. demographic and socio-economic variables are considered factor 1, including family income, experience, and age. since the correlations between the variables were less than 0.05, education was not considered gender, and the nominal scale measured marital status. therefore, they were not appropriate for factor analysis. factor 2 was the psychological factor which included variables like risk perception, attitude, and awareness level. the relative weight of chosen determinants on the preference of index schemes the ordinal logistic regression is applied to determine the impact of the selected factors in the preference for the mutual fund index schemes. here, the dependent variable is the choice in the indexing scheme, and the independent variables are the selected variables. here, the dependent variable is the preference for index schemes which has been coded in table 5. table 5. coding of the likert scale used y preference 1 very high 2 high 3 moderate 4 low 5 least the independent variables are the chosen factors of bank employees working in banks with sponsor mutual funds. an ordinal model has been used for the indexing scheme. here, the dependent variable is considered to be the preference of the indexing scheme. the independent variables have been derived using factor analysis, and because of the nominal nature of education level, gender, and marital status, these are considered in factor analysis. in this analysis, the coding shown in table 6 is used. table 6. coding for the analysis gender 1 male 2 female education 1 graduate 2 postgraduate marital 1 unmarried 2 married dev et al., indian journal of finance and banking 11(1) (2022), 29-37 33 table 7. information on model fitting index schemes model -2 log likelihood chi-square df sig. intercept only 840.577 final 770.152 70.425 10 .000 table 7 describes the impact of each selected factor in the model for index schemes; it is important to find out that needed to find out that the model has the skill to foresee the result. this is done by comparing the 'intercept only' model with the 'final' model. this comparison was used to check if the data fit had improved considerably. for all six models, the statistically important 0.05 is the p-value of the chi-square statistic, which means that the final model excels the interceptonly model. as per the chi-square value, it is clear that the model can give a better prediction. table 8. goodness-of-fit chi-square df sig. index schemes pearson 1350.434 1205 .392 deviance 750.272 1205 1.000 table 8 shows pearson's chi-square statistic for the model (along with the deviance-based chi-square statistic). it examines whether the observed data is reliable and with the fitted model. it appeared to form the result that the model fits very well for every model with more than 0.05 p values. table 9. pseudo r-square index schemes cox and snell .536 table 9 interprets the findings for values of the fitted ordinal logistic regression using cox and snell r2, which are satisfactory, i.e., the higher the value, the better outcomes will be produced by the model. table 10. parameter estimates (index scheme) parameter estimates estimate std. error wald df sig. preference level in mutual fund (threshold) very highly preferable = 1.00 -3.103 .447 48.098 1 .000 [highly preferable = 2.00] -1.498 .416 12.962 1 .000 moderate preferable = 3.00] -.266 .407 .425 1 .514 [least preferable = 4.00] .510 .409 1.558 1 .212 determinants [gender=1.00(male)] -.315 .333 .894 1 .344 [gender=2.00(female)] 0a . . 0 . [marital status=1.00(married)] -.346 .287 1.453 1 .228 [marital status=2.00(unmarried)] 0a . . 0 . [education=1.00(graduate)] .383 .266 2.070 1 .041 [education=2.00(postgraduate)] 0a . . 0 . factor1 .076 .144 .276 1 .599 factor2 2.062 .507 16.536 1 .000 interaction effect [education=1.00] * factor2 1.649 .655 6.326 1 .012 [education=2.00] * factor2 0a . . 0 . factor1* factor2 -1.168 .332 12.400 1 .000 [gender=1.00] * [education=2.00] * factor2 .515 .479 1.157 1 .282 [gender=1.00] * [education=2.00] * factor2 -1.189 .543 4.795 1 .029 [gender=2.00] * [education=1.00] * factor2 0a . . 0 . [gender=1.00] * factor1* factor2 -.915 .350 6.834 1 .009 [gender=2.00] * factor1* factor2 0a . . 0 . the beta coefficient for the taken determinants explains that factor 2, such as the education level and psychological factors, are the sole indicators for preference of index scheme at a 5% significance level. unlike factor 2, factor 1, i.e., demographic, marital status, and socio-economic factor, along with gender and education level, does not directly affect the preference for the indexing scheme. therefore, attitude, awareness level, and risk perception are vital indicators for the preference of index schemes. moreover, rather than psychological factors, nine other factors are thought to be vital indicators that affect the preference for the indexing scheme, as already mentioned in table 9. change in gender affects the fluctuations in the preference level of the indexing scheme considering that factor 1 and factor 2 are at the same level. the interrelation of factor1and factor2 has a significant effect on the choice of index scheme of the mutual fund. considering the similar amount of psychological factor, change in gender and level of education also leads to changes in the amount of preference of the indexing scheme. dev et al., indian journal of finance and banking 11(1) (2022), 29-37 34 measuring the relative weight of determinants through correlation kendall’s tau correlation has been considered to detect the relative weight of specific determinants of investment in index schemes. age, attitude, awareness level, education, experience, family income, gender, marital status, and risk perception are the nine identified variables. out of these nine variables, it is found that attitude, awareness level, education, and risk perception directly influence the preference of the index schemes shown by applying ordinal logistic regression analysis in the tables. table 11 shows the correlations between the selected factors, the preference level of index schemes, and their significance level. table 11. correlation among preference level of index scheme and investment determinants sl.no selected determinants on index scheme of mutual fund pearson correlation (kendall's tau_b) in d e x sc h em e s 1 education pearson correlation (kendall's tau_b) -.191 sig. (2-tailed) .000 2 risk perception pearson correlation (kendall's tau_b) -.265 sig. (2-tailed) .000 3 awareness level pearson correlation (kendall's tau_b) .191 sig. (2-tailed) .000 4 attitude pearson correlation (kendall's tau_b) .292 sig. (2-tailed) .000 as per table 11, various psychological factors like attitude, awareness level, and risk perception are vital for index schemes. aside from the mentioned education, psychological variables are also considered significant factors. kendall’s tau correlation is conducted to calculate the relative weight of four factors persuading the investors' preference in index schemes of mutual funds. the higher value of kendall's tau b, the higher the degree of relation between the preference of index schemes and the chosen factors. in table 12, the relative weights of the statistically vital factors are ranked based on their correlation value. here the highest weight is given as rank 1, and the lowest is given as rank 4. table 12. the relative weight of investment determinants for the index scheme sl no selected determinants on index scheme of mutual fund rank 1 attitude rank1 2 awareness level rank3 3 risk perception rank2 4 education rank4 table 12 shows that the vital role of investment choice towards the index schemes of the mutual fund is influenced by psychological factors, followed by demographic variables. to persuade the investment choice of the bank employees for investment in index schemes, attitude amidst all the determinants got the highest weightage, followed by risk perception being the second vital factor, awareness level being the third, and education being the least. discussions as results indicate that the preference level for index schemes of mutual funds varies. based on the analysis and result, 67 employees preferred very low while 66 had a moderate preference, and 62 had a high preference for the indexing scheme of the mutual funds, as shown in table 2. due to multi-collinearity, a regression cannot give a good fit result. the kmo test is done to know the appropriateness of the test. 0.661 is fully acceptable sample adequacy. bartlett's test was also done, which shows that the variables' correlations were sufficient to proceed. further, factors whose commonalities were more than 0.5 were considered otherwise not considered. the ordinal logistic regression is also employed to determine the effect of the selected factors in the preference for the mutual fund index schemes. for the model, pearson's chi-square statistic resulted that the model fits very well, as shown in table 8. further, it is found that to persuade the investment preference of the employees for investment in index schemes, attitude amidst all the determinants got the highest weightage, followed by risk perception being the second vital factor, awareness level being the third, and education being the least. academic implications india is a big developing economy having a middle-class population with huge opportunities. it is the first time to assess the relative weight of determinants for preferring an indexing scheme of the mutual fund. the sample for the study is taken from the state of india, i.e., tripura. from the lens of academicians, it is a very big opportunity to take this study as a base to go further in more detail and broad. managerial implications the study findings are a very good indication for the manager of the mutual fund company. the fund manager can know about the determinants of investments in mutual fund and their effect on the volume of investment. it will be beneficial for dev et al., indian journal of finance and banking 11(1) (2022), 29-37 35 them to take appropriate action accordingly so that value of the whole company can be leveled up. companies should also educate their employees about investment education. policy implications the study will provide a better base for the policymakers too. the study will assist the policymakers in knowing the value of determinants and weigh all these determinants as per their weight. the study will also guide the policymakers in designing strategy means what level and what kind of training is required to upgrade the psychological factors towards investment in the mutual fund (bhattacharjee & singh, 2017; bordoloi et al., 2020). future scope of the study the present study is done first to assess the relative weight of determinants for preferring an indexing scheme of the mutual fund. data is collected within one state of india, i.e., tripura. future studies may increase the sample size by covering the whole nation(s) sample. the current study goes with the sample of 262 furnished questionnaires. in contrast, from the angle of future scope, the sample size can be increased to go as accurately as possible because, as we know, the larger the sample size, the higher the accuracy rate. a similar study can also be taken to study the impact of the merger of one bank with another bank; later on, their employees have to work for another bank (leesa & singh, 2017). the impact of digital payments on mutual fund investment can also be an important area of study (kajol et al., 2022; kajol & singh, 2022). social network analysis (sna) can identify the factors affecting the relative weights of investment in mutual funds (kajol, nath et al., 2020; kajol, biswas, et al., 2020). conclusions at the beginning of the current study, the authors targeted the population of 880 employees as of 1st april 2021. the reason behind targeting these employees is that their banks have their own sponsored mutual funds. on fulfilling the criterion of 95% confidence level and 5 % confidence level, a sample of a total of 268 employees has been determined. a pre-tested questionnaire was administered to all 268 selected employees. while only 262 employees out of 268 responded. a total of 9 variables influencing the investors' choices have been observed. it also establishes that all the factors do not have an equal impact on investors' decision-making towards investment in index schemes of mutual funds. the conclusion drawn from the findings observes that psychological components such as risk perception, level of awareness, and attitude are vital determinants associated with the demographic and socio-economic factors for favoring the index schemes of the mutual funds. not all demographic variables need to influence mutual fund preference directly. nevertheless, it has an interaction effect with psychological factors as well. author contributions: conceptualization, d.d. and l.p.; methodology, s.d.; software, s.d.; validation, d.d., s.d., r.s. and l.p.; formal analysis, r.s. and s.d.; investigation, r.s.; resources, s.d.; data curation, s.d.; writing – original draft preparation, d.d. and s.d.; writing – review & editing, r.s. and l.p.; visualization, r.s. and s.d.; supervision, r.s.; project administration, r.s. and s.d.; funding acquisition, d.d., s.d., r.s. and l.p. 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. 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 al-ajmi, j. y. 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(2005). a measure of risk and a decision-making model based on expected utility and entropy. european journal of operational research, 164(3), 792–799. https://doi.org/10.1016/j.ejor.2004.01.031 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.4172/2167-0234.1000283 https://doi.org/10.46281/ijfb.v8i1.1350 https://doi.org/10.1016/j.ejor.2004.01.031 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 14(2) (2024), 1-7 1 finance and banking ijfb vol 14 no 2 (2024) p-issn 2574-6081 e-issn 2574-609x journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by american finance & banking society, usa practicalities of agent banking for financial inclusion in rural areas of bangladesh mohammad rezaul kabir (a) kaniz fatema (b) ashok bijoy das (c)1 nityananda chandra barman (d) (a) associate professor, department of business administration, sylhet international university, sylhet, bangladesh; e-mail: rezaul_ru@yahoo.com (b)associate professor, department of humanities, rajshahi university of engineering and technology, rajshahi, bangladesh; e-mail: kanizfatema8220@yahoo.com (c) lecturer, department of business administration, sylhet international university, sylhet, bangladesh; e-mail: dashokbijoy@gmail.com (d)lecturer, department of business administration, sylhet international university, sylhet, bangladesh; e-mail: hrmfamily4266@gmail.com a r t i c l e i n f o article history: received: 14th september 2024 reviewed & revised: 14th september to 10th december 2024 accepted: 18th december 2024 published: 20th december 2024 keywords: agent banking, rural financial inclusion, agent, outlets, correlation. jel classification codes: g21, g51, g53, c87 peer-review model: external peer review was done through double-blind method. a b s t r a c t agent banking is an indispensable part of the inclusive banking system for advancing greater financial inclusion in bangladesh. these services represent the new extension of branch banking, offering formal banking services in rural regions at a low cost via agents and outlets. the purpose of this study is to examine the agent banking practical uses to meet the financial services needs of the rural population in bangladesh. moreover, this study investigates the relation between agent banking presence in rural areas and its uses. five years of secondary data regarding agent banking have been collected from the statistics department of bangladesh bank and presented in tabular form. besides, to portrait the real picture of practical uses of agent banking, a rural user’s case study has been used in this study. descriptive with an analytical approach has also been used to analyze the data. besides, correlation analysis has also been used to measure the relation between agents, outlets, and rural practices. this study found that agent banking services are practically used in rural areas for deposit collection, loan disbursements, remittance services, and utility bill payment. moreover, it has discovered a favorable relationship between agent banking presence and useful applications in rural areas. the practical applications of the agent banking have advanced significantly in rural areas and included those who were previously denied access to these financial services. while the number of agents and outlets are not sufficient, total rural account holders in agent banking remain low compared to the rural adult population. © 2024 by the authors. licensee american 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 people in the rural area are still deprived of the benefits of financial inclusion advancement. most of the rural people like farmers, day laborers, fishers and others are illiterate, and not accustomed to using formal financial services due to the lack of financial products that meet their needs. therefore, it is difficult to ensure the socio-economic safety of rural people, and they face challenges to meet food security, healthcare facilities, and children's education. the inclusive financial system is crucial for reducing household financial vulnerability, stimulating economic development, eliminating poverty, and enhancing people's quality of life (cgap/world bank, 2012). as a part of inclusive financial system, agent banking has gained acceptance as a workable and beneficial approach to rural communities of certain nations. the main goal of agent banking is to help rural communities conduct their essential business through a formal framework by offering regular banking services with the assistance of agents. financial organizations have found that agent banking is a useful tool for cutting operational expenses. the emergence of agent banking has also helped banks reach potential customers, ensuring effective financial inclusion, which is crucial for maintaining the integrity of the economy and improving the lives of the poorer segments of the population living in rural and remote areas. the agent banking has worked wonders in several developing countries in different parts of the world like brazil, columbia, peru, malaysia, kenya, etc. (khanam, 2022; ho, 2017). financial services have also been expanded in a number of nations, including pakistan, india, the philippines, uganda, kenya, malaysia, and south africa, by using the agent banking model (ndungu & njeru, 2014). 1corresponding author: orcid id: 0009-0001-0992-9399 © 2024 by the authors. hosting by american finance & banking society. peer review under responsibility of american finance & banking society, usa. https://doi.org/10.46281/ijfb.v14i2.2266 to cite this article: kabir, m. r., fatema, k., das, a. b., & barman, n. c. (2024). practicalities of agent banking for financial inclusion in rural areas of bangladesh. indian journal of finance and banking, 14(2), 1-7. https://doi.org/10.46281/ijfb.v14i2.2266 https://orcid.org/0009-0002-1521-7133 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/ijfb.v14i2.2266 https://orcid.org/0009-0007-3737-7580 https://orcid.org/0009-0001-0992-9399 https://orcid.org/0009-0005-0796-494x kabir et al., indian journal of finance and banking 14(2) (2024), 1-7 2 bangladesh bank launched agent banking in the country in 2013 to include the underserved population who typically reside in rural areas that are difficult for the official banking networks to access banking services. in bangladesh, bank asia was the first to introduce agent banking. bangladesh bank (bb) created the agent banking rules in order to guarantee security, boost client confidence, maintain control, and counsel banks on the ins and outs of agent banking. bangladesh bank defines the agent banking services outside of the traditional banking structure through a branchless process and hiring agents under a reasonable agency agreement, the central bank's goal is to serve the underserved and impoverished segments of the population, with a focus on geographically dispersed locations (bangladesh bank, 2018). as of december 31, 2023, 31, nationalized and private commercial banks are offering agent banking services to poor and hardworking bangladeshis through 18,469 outlets, 13,242 agents (bangladesh bank, 2023). an authorized agent provides all banking services, which include utility bill payment, loan disbursement, deposit collection, and inward remittance collection. the third-party owner acting as this agent is in charge of handling banking operations on the bank's behalf. the objective of this study is to identify whether agent banking is practically used by unbanked people in rural areas of bangladesh. to justify the objective, this study sequentially presented an introduction, a review of the literature, objectives, methods, data analysis, results and discussion, and, finally, a conclusion and recommendations. literature review the agent banking is one of the important and ground-breaking techniques that have always brought rural people under one roof of banking services. agent banking has been a revolutionary inclusion in the financial system of brazil as the agents deal with almost everything like bills and pension payments, cash deposits, withdrawals, and money transfers. agent banking already signs a significant impact in nigeria, kenya, and malaysia (achugamonu et al., 2016). many nations, like kenya, colombia, brazil, pakistan, peru, ecuador, venezuela, mexico, and argentina and others have embraced the idea of agent banking and are seeing great success in the area of financial inclusion (mahmood & sarker, 2015). the features of agent banking have been highlighted to financial inclusion in many developing areas such as latin america, asia, and south africa (villasenor et al., 2015; wairi, 2011). the recent expansion of agent banking market in bangladesh are remarkable and it’s had good prospects for the future. users of agent banking obtain a specific number of banking solutions through a bank's agent. this method is becoming more and more popular as a convenient way for customers to receive financial services and as a cost-effective distribution network for the bank (pervin & sarker, 2021; bizah et al., 2017; chaia et al., 2010). the overall circumstances of agent banking for financial inclusion in bangladesh are constructive. it found relationship between agent banking and its financial inclusion, stressing its dependability and efficacy as a means of fostering financial depth across the nation's unbanked regions. the report also emphasizes how agent banking might guarantee financial services to the underprivileged in rural areas and contribute to bangladesh's overall development (nisha et al., 2020; siddiquie, 2014). the majorities of rural people of bangladesh have lack access to banking services; whereas the agent banking activities easily reached in rural areas and make a link between these people and financial services. (ahmed & ahmed, 2018; khanam, 2022). agent banking could support the financial inclusion to the poor of urban and rural areas of bangladesh. people can now access a number of financial services in rural areas instead of having to travel to cities (uddin, 2020; afzal, 2016). the unbanked populace in rural areas is now able to do financial transactions with assistance of agents at a convenient time and location that works for them. in addition, the study indicated that the banks had positive agent banking coverage as well as an increasing growth rate in the number of agents and outlets. in contrast to their urban counterparts, rural residents are willingly utilizing the banking services provided by the agents in their vicinity, and they are also making deposits and obtaining loans from these agents (chakrobortty & sultana, 2023). due to the lack of formal financial services, agent banking can be a more convenient way to financially integrate rural communities of bangladesh. authorized banking agents can provide people with banking services such as loans, deposits, fund transfers, and utility payments (uddin & sultana, 2019). numerous factors are crucial in explaining the rise in agent banking, including low transaction costs, keeping agent locations close to clients, adhering to early opening and late closing times in order to serve clients through agent banking and deliver services faster than the branch, creating a user-friendly environment that anyone can access at any time, and more (khan & khan, 2014; hansen, 2013). the research was conducted between 2015 and 2020, and the results indicated that agent banking had positive growth in both urban and rural areas. the research utilized a combination of the pooled ols and random effect model to demonstrate the significant impact of deposit quantities and remittance flows through agent banking in bangladesh. this study also found the impact of the number of agent bank accounts on the volume of deposits and remittances. agent banking services such as deposit collections, bill payment options, and loans for rural residents; remittance services could be used by rural people gradually under current agent banking operations (amir, 2021). the study showed how agent banking services have evolved, leading to an increase in the number of accounts opening, the unbanked becoming more incorporated into the banking system, boosting the economy, and achieving the goals of financial inclusion. they employed an empirical model, and the results indicate that the number of agents, deposit amounts, and inward remittances all positively affect the quantity of new accounts opened (ahmed & ahmed, 2018; ogbebor, 2015). in order to avoid having to invest heavily in infrastructure to expand an entire branch, banks are increasingly interested in agent banking as a means of connecting geographically dispersed customers through digitalized services and connecting remote areas through the exploration of new market segments (ayegbeni, 2020; santu et al., 2017). according to another study, there is a chance that external factors like governmental, economic, and political policies will interact with agent banking to promote financial inclusion (hossain et al., 2021; afande & mbugua, 2015). in addition, banks can use this fixed cost structure to reach potential consumers such as low-income and rural residents by giving the agents some kabir et al., indian journal of finance and banking 14(2) (2024), 1-7 3 operating authority without having to pay for expensive branch management (cámara et al., 2015; chaia et al., 2010). individuals with low incomes and disadvantages can benefit from agent banking, which makes it easier for them to take out loans and make deposits, paving the road for financial inclusion (hannig & jansen, 2010). agent banking and financial institutions relate to women's empowerment. the study employed a quantitative research approach and discovered that, agent banking moderates the positive impact of financial inclusion on social and economic empowerment. according to these findings, when financial institutions give priority to the growth of agent banking, women's power is strengthened through financial inclusion (sohrab et al., 2023; rahman, 2016). the extent of financial inclusion through agent banking is significant and it’s had some obstacles in bangladesh. it is demonstrated that banks may motivate their customers with a variety of cost-benefit packages, which benefit both the clients and the banks. the benefits include less expensive account maintenance, proximity to the customer's home, less expensive transportation, shorter wait times than in branches, the ability to transfer money between accounts within the same bank and other banks, and increased accessibility for the very poor and illiterate who may have felt intimidated in branches. achieving client trust, processing credit files effectively, and maintaining the internal relationships between branches and agents are some of the other difficulties. financial inclusion is also positively and significantly correlated with the availability of liquidity, geographic coverage, prices, and security of agent banking services. ultimately, there are determined that the most effective approach to financial inclusion is for agent banks to cover a larger geographic area (rahman, 2019; ahmed & ahmed, 2018; ferdous et al., 2015). according to the above analysis of the literature, a several studies has been done both nationally and internationally on the financial inclusion of agent banking, but not much has been done on the practical uses of agent banking of bangladesh's rural areas. consequently, this study has made a valuable contribution to finding out the practical uses of agent banking in rural areas of bangladesh. the main objective of this study is to assess the practicalities of agent banking in rural areas for financial inclusion, focusing on its availability, accessibility, and usage. moreover, the study aims to measure the relationship between the presence of agent banking activities and the practical uses by users. materials and methods this exploratory study is based on secondary data that was gathered from bangladesh bank websites. secondary data have been used and gathered from the bangladesh bank statistics department throughout a five-year period, from 2019 to 2023. additionally, this study has used one rural agent banking user experiences as a case analysis to portray agent banking real practices pictures in rural areas of bangladesh. besides, agent banking information has been collected from commercial banks' annual reports. moreover, reports and journal papers have been gathered and evaluated from internet sources. mixed method approach applied in this study to come up with research objectives. tabular data with descriptive analysis is used to present the secondary data. the relationship between the availability and practical uses of agent banking has been measured using the coefficient of correlation. results and discussions table 1. agent and outlet availability in rural areas year rural agent* growth** no of agent per union parshid** no of rural adult people for per agent** rural outlet* growth** no of outlet per union parshid** no of rural adult people for per outlet** 2023 13,242 2.50% 3.00 5180 18,469 2.75% 4.12 3650 2022 12,910 8.90% 2.88 5291 17,974 8.32% 4.01 3,800 2021 11,854 34.58% 2.64 5740 16,593 18.51% 3.70 4,100 2020 8,808 35.40% 2.00 7478 14,001 46.13% 3.1 4,704 2019 6,505 40.52% 1.45 9899 9,581 51.80% 2.10 6,721 sources: *statistic department, bangladesh bank, ** authors’ calculation the total number of agent and outlets stood at 13,242 and 18,469 at the end of 2023. a year ago, the respective number was only 12,910 and 17,974. historical values in table-1 show that the number of rural agents and rural outlets has increased year by year, resulting in a decrease in the number of villages per agent and per outlet, as well as a decrease in the number of rural adults per agent and per outlet over time. table 2. rural accessibility in agent banking year rural account holders male* female* others* total* growth** average account holders per village** 2023 8,692,749 9,479,017 253,558 18,425,324 22.27% 211 2022 7,287,788 7,576,218 204,497 15,068,503 24.33% 173 2021 5,682,319 6,024,875 412,500 12,119,694 45.00% 139 2020 4,143,662 3,967,932 246,572 8,358,166 91.93% 96 2019 2,376,326 1,914,134 64,305 4,354,765 112.58% 50 sources: *statistic department, bangladesh bank, ** authors calculation kabir et al., indian journal of finance and banking 14(2) (2024), 1-7 4 nearly 18,425,324 accounts have been opened through 13,242 rural agents and 18,469 rural outlets of 31 schedule banks. the account opening growth rate remarkably increased over the last five years, reaching 22.27% in 2023. the average number of account holders per village also increased from 2019 to 2023, with 211 account holders per village in 2023. this increase in account openings indicates a significant potential to bring the rural unbanked population under the umbrella of formal banking services, which will help achieve the sdgs by 2030. table 3. practical usages of banking products period agent a/c rural deposit (in tk. 000)* agent a/c wise average rural deposit (in tk. 000)** rural loans (in tk. 000)* agent a/c wise average rural loan** rural utility bills payments* agent a/c wise average rural utility bills payments** inward foreign remittance* agent a/c wise average rural foreign remittance** 2023 3154948550 171.228 61449620 3335 12658510 687 263662250 14310 2022 2641847430 175.322 46508810 3086 13093820 869 277459600 18413 2021 1875584760 154.755 24911440 2055 13482610 1112 271915590 22436 2020 1034967570 123.827 8644070 1034 9423560 1127 251139920 30047 2019 475369490 109.160 2237940 513 7100540 1630 70368620 16159 sources: *statistic department, bangladesh bank, ** authors calculation table 3 showed that deposit collection soared from tk. 475,369,490 thousand in year 2019 to tk. 3,154,948,550 thousand at the end of year 2023. account wise average amount of deposit was tk. 109.160 thousand in year 2019, which grown up to tk. 171.228 thousand at the end of year 2023. agent banking also provides loan services to rural users. the amount of loan sanctioned through agent banking in rural area is amounted to tk. 2,237,940 thousand in the year 2019.it is observed from table 3 that over the last five years, the amount of loan disbursement has dramatically increased to tk. 61,449,620 thousand at end the year 2023. although the loan disbursement value remains very low compared to the deposit collection value, the account-wise disbursement value has made considerable progress year on year. agent banking rural account holders uses their accounts for utility bills payment purpose also. in the year 2023, users paid utility bills the amount tk. 12,658,510 thousand, while this amount was tk. 13,093,820 thousand in the year 2022. the agent banking also simplified the remittance inflow to the country, as the people in remote areas can now easily avail such services for receiving foreign remittances without requiring a visit to bank branches. the government of bangladesh has also provided a 2 percent cash incentive to the remitter. according to the bangladesh bank, from the period of 2019 to 2023, the growth of the inward remittance through the agent banking system was not steady. the inward remittances amounted to tk. 263,662,250 thousand in 2023 and tk. 277,459,600 thousand in 2022. on the other hand, the average remittance per account has gradually decreased over the period from 2019 to 2023. the agent banking services enable rural users to send their hard-earned money to their family smoothly through the formal financial system. table 4. agent banking number of transactions and amount of transactions year no of transactions* growth** per account wise average transactions** number of transactions (in tk. 000)* growth** per account wise average amount of transaction** 2023 148099923 6.18 8 6427310130 20.00 348,830 2022 139476698 27.88 9 5353845120 48.93 355,300 2021 109065861 64.67 9 3594766190 55.86 296,605 2020 65516231 80.30 8 2306348780 150.66 275,939 2019 36337232 ------8 920076330 -----211,280 sources: *statistic department, bangladesh bank, ** authors calculation table 4 presented the statistical data provided by the central bank, from 2019 to 2023; the total number of transactions through agent banking has increased gradually each year. at the end of 2023, the number of transactions was 148,099,923 and yearly average number of transactions per account was 8, while the transactions amounted to tk. 6,427,310,130 thousand and the yearly average of transactions per account amounted to tk. 348.830. mrs. serina is a rural agent banking user who shares her experience with how agent banking is practically used in her personal financial management. serina is a 30-year-old homemaker and lived in a village in shariatpur district. she is the mother of a six-yearold son and a three-year-old daughter. her spouse has lived in malaysia for the past 15 years. her spouse deposits money into her agent bank account once or twice a month to support the family's needs. she withdraws money two or three times monthly, depending on her necessities. she mentioned that every month she uses her agent bank account for receiving remittances, making deposits, and paying utility bills. she also uses agent banking to send money to friends and family. before creating an agent bank account, she had to go to upazila sadar once or twice a month to withdraw money from banks. her village is 4 kilometers away from upazila kabir et al., indian journal of finance and banking 14(2) (2024), 1-7 5 sadar. she needed four or five hours for roundtrip journeys. now agent banking relieves her of the hassle of formal and informal financial services, making her more attentive to personal financial management. it is more convenient and secure, and saves time. [interviewed on 25th may 2024] like serina, thousands of rural agent banking users practically use these services in their personal financial management. agent banking has the potential to be an effective solution for assisting users in more efficient money management and achieving their financial objectives. these financial services removed the time and distance barriers, and as a result, not only females but also males were given more time for better money management. table 5. coefficient of correlation correlation between coefficient of correlation p value significance level agent, outlet and account number 0.966 0.0211 ** agent, outlet and deposits 0.956 0.0201 ** agent, outlet and loans 0.903 0.051 ** agent, outlet and utility 0.792 0.0132 * agent, outlet and remittance 0.887 0.050 * source: calculated by using spss version 22. nb: *** indicate significant difference at 1% (p<0.01) level of significance, ** indicate significant difference at 5% (0.001≤p<0.01) level of significance, * indicate significant difference at 10% (0.05≤p<0.0.1) level of significance and ns indicate insignificant difference this section examines the relationship between agent banking agents, outlets and each of the agent banking practices variables (agent account holders, deposit, loans, utility bills payments, remittance). pearson correlation has been used as a parametric test to examine the relationship among variables in this study. the pearson correlation (in table 5) coefficients indicate each variable, agent account holders, deposit, loans, utility bills payments, remittance have significant positive correlation with number of agents, and outlets. based on the results, it can be concluded that the agent banking has a strong influence on rural population in terms of banking practices, especially on increasing deposits collection and loan disbursement; utility bills payment; remittance collection. conclusions this study provides information regarding the practicalities of agent banking in rural areas in bangladesh. it has been found that every district, upazila, and union have the presence of agent banking services. rural males and females used these services to meet their basic financial needs. as a result, both the number of transactions and the volume of transactions have increased. correlation results showed the positive relationship between rural agents, outlets, and practices in rural areas of bangladesh. the aim of these services is not just to maximize profits but also to provide banking services to the unbanked population for the country's general development. additionally, agent banking allows banking services to be extended outside of physical banking buildings, which aids a sizable segment of the populace in meeting their financial demands in the dispersed area. since most of the unbanked people live in rural areas, it should be open to more agents to encourage them to become banked. in the case of account opening, most banks require a minimum deposit, which should be reviewed to make agent banking more attractive and inclusive. also, banks should extend their service facilities which will enable people to open and operate accounts remotely. moreover, awareness campaigns highlighting the benefits of using agent banking should be arranged at regular intervals. furthermore, there will have to be a strong, independent, proficient and unbiased regulatory body that will supervise all the activities of agent banking and adopt innovative and time-tested policies to make it a successful journey. since agent banking is an emerging sector gaining burgeoning attention from rural people for meeting their financial needs, banks are required to resolve issues related to conventional banking and institutional inertia to ensure fast, efficient, and timely service. the agent banking system needs to be digitalized using various technological innovations. the system needs to be made interoperable. strong collaboration between the agent banking and micro-merchants needs to be established to ease the loan disbursement among rural people. also, the government should provide policy support and other forms of aid to make the agent banking system a game-changer for the rural economic landscape. this study has some limitation because only used five years of secondary data and a case study. primary information’s like questionnaire surveys, fgds, and key informant interviews have not been used. author contributions: conceptualization, m.r.k., k.f., a.b.d. and n.c.b.; methodology, m.r.k.; software, m.r.k.; validation, m.r.k.; formal analysis, m.r.k., k.f., a.b.d. and n.c.b.; investigation, m.r.; resources, m.r.k.; data curation, m.r.k.; writing – original draft preparation, m.r.k.; writing – review & editing, m.r.k.; visualization, m.r.k.; supervision, m.r.k.; project administration, m.r.k.; funding acquisition, m.r.k., k.f., a.b.d. and n.c.b. 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: 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. kabir et al., indian journal of finance and banking 14(2) (2024), 1-7 6 references achugamonu, b. u., taiwo, j. n., ikpefan, o. a., olurinola, i. o., & emena, o. u. 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e-mail: neerajshah2706@gmail.com a r t i c l e i n f o article history: received: 21st september 2023 revised: 2nd november 2023 accepted: 5th november 2023 published: 8th november 2023 keywords: access to credit, banking services, financial inclusion, poverty alleviation jel classification codes: c00, b21, g18, g53 a b s t r a c t this research paper investigates the impacts of the pradhan mantri jan dhan yojana (pmjdy) program on access to credit for individuals living below the poverty line in india since its inception in 2014. the pmjdy initiative aims to enhance financial inclusion and alleviate poverty by providing banking services and credit access to marginalized populations. the paper begins with a comprehensive literature review, tracing the historical context of financial inclusion in india, the evolution of policies, and previous research on the subject. it then delves into the pmjdy program's features, implementation, and progress, highlighting its efforts to offer zero-balance accounts and overdraft facilities. the paper employs regression analyses, both at the national and district levels, to examine the relationship between various factors, such as gdp per capita, population density, literacy rates, and pmjdy adoption. these analyses had shed light on the success of the pmjdy program in advancing financial inclusion throughout different regional dynamics. the findings provide insights into the program's effectiveness in improving credit access for the economically disadvantaged. ultimately, this research contributes to the ongoing discourse on financial inclusion and informs policymakers on strategies to combat poverty and foster inclusive economic growth especially with policies relating to credit access. © 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 the aim of this research paper is to examine the impacts of the pradhan mantri jan dhan yojana (pmjdy) policy on the access of credit for people below the poverty line in india since its implementation in 2014. the pmjdy program, launched in india on 28th august 2014, represents the central government of india’s significant step towards financial inclusion for the underprivileged population. the program has been designed to provide credit access and other banking services for individuals who fall below the poverty line, and hence aims to alleviate poverty and improve the economic stability of the economically marginalized people. this research paper aims to explore how the program, through its strong emphasis on financial inclusion and providing large scale banking services to economically disadvantaged people, has influenced the accessibility and prevalence of credit facilities and options for people below the poverty line. financial inclusion has long been recognized as a crucial factor in fostering economic growth and reducing income inequality. for individuals living below the poverty line, access to credit is often limited or entirely absent, forcing them to rely on exploitative informal lending sources. such financial exclusion perpetuates a cycle of poverty and hinders social and economic progress. the pmjdy program, with its ambitious goals of opening bank accounts for the unbanked, providing access to financial products, and extending credit facilities, has the potential to bring about transformative changes. understanding the real-world impact of this program is essential to assess its effectiveness in improving the credit landscape for the marginalized. this paper aims to investigate the impacts of the pmjdy program on access to credit for individuals below the poverty line in india. the research question of this paper is: what are the impacts of the pradhan mantri jan dhan yojna (pmjdy) program on access to credit for people below the poverty line in india since 2014. through an analysis of available data sets from the open government data (ogd) platform and existing literature, it seeks to ascertain whether the pmjdy program has succeeded in increasing formal credit usage, reducing dependence on informal and unofficial sources of borrowing, and enhancing financial stability for the vulnerable population. we maintain that the pmjdy program has 1corresponding author: orcid id: 0009-0009-9302-3829 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i2.2114 to cite this article: shah, n. (2023). impact of pradhan mantri jan dhan yojana program on access to credit. indian journal of finance and banking, 13(2), 1-13. https://doi.org/10.46281/ijfb.v13i2.2114 https://orcid.org/0009-0009-9302-3829 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i2.2114 shah, indian journal of finance and banking 13(2) (2023), 1-13 2 positively influenced credit access for people below the poverty line, thereby contributing to their economic empowerment and social upliftment. by understanding the outcomes of this program, policymakers can refine its implementation and address any obstacles faced during the implementation of this program. a significant body of literature has emerged that examines the pmjdy program's impact on financial inclusion and credit accessibility. previous studies have highlighted the potential benefits of the program, such as increased bank account ownership, enhanced savings mobilization, and improved financial literacy among the underserved communities. however, while some research indicates positive outcomes, others have raised concerns about the persistence of financial exclusion due to various barriers, including limited credit outreach. the existing literature offers valuable insights, yet there remain gaps in our understanding of the program's full impact on credit access for individuals below the poverty line. by doing an analysis of government provided data sets and consolidating the findings of previous studies, this research paper aims to provide an evaluation of the pmjdy program's effects on credit availability, usage patterns, and financial wellbeing of the target population. in summary, this research paper seeks to shed light on the real-world implications of the pmjdy program's efforts to improve credit access for those living below the poverty line in india. through an examination of existing literature, data analysis, and methodological approaches, we aim to contribute to the ongoing discourse on financial inclusion and inform policymakers on effective strategies to combat poverty and promote inclusive economic growth. literature review this literature review aims to analyze existing research available on the impacts of the pmjdy program on accessibility and availability of credit for the people below the poverty line in india. this literature review will be divided into the following sections: financial inclusion in the past, the pmjdy program, access to credit for the people below the poverty line population, implementation and progress of pmjdy, impact on credit accessibility, microcredit and self-help groups (shgs), financial behavior and empowerment. financial inclusion in the past the issue of financial inclusion and lack of credit access in india is a multifaceted one that has been prevalent across the country since the nation’s independence. the issue deeply interrelated with the wide basis of india’s fundamental socioeconomic history. in the country's pre-independence era, india's economy was heavily based on agriculture as a majority of the population were situated in rural areas (bardhan, 1984). this rural environment served as an explanation for a severe disparity in access to formal banking services, which were mostly found in urban areas. rural inhabitants, who made up the majority, had limited access to these formal financial institutions due to banking services that were centered in urban areas. this urban-rural divide had significant consequences. the lack of access to credit for managing varied financial requirements, such as agricultural investments, household costs, and crises, presented considerable difficulties for rural people. they had limited options because there were no accessible formal banking systems, and they frequently turned to unlicensed and informal moneylenders. the monopoly position that moneylenders held in rural lending markets increased their ability to take advantage of borrowers. moneylenders could enforce strict terms and high interest rates since there was no oversight and no competition from legitimate banks, which caused rural households to become severely indebted. due to the continuous loop created by this circumstance, borrowers failed to make their loan repayments, furthering their financial difficulties. post-independence india reached a significant milestone in the nation’s goal of financial inclusion and egalitarian credit access. the nationalization of large banks in 1969 was one of the most important policy actions. the main goal of this historic decision was to provide formal banking services to previously neglected areas, such as rural areas and disadvantaged communities. by utilizing the vast branch network and resources of these institutions, nationalizing banks was considered as a crucial step in achieving financial inclusion. the policy sought to eradicate the gap in access to credit between urban and rural areas as well as ensure that banking services reached rural regions, where they were largely needed. but despite the policy's economically sound ideas, it experienced challenges when being put into action. the successful provision of credit services to marginalized individuals was frequently thwarted by bureaucratic inefficiencies within the nationalized banking sector. barriers that made it difficult for underprivileged people and groups to navigate were established by administrative bottlenecks, paperwork requirements, and laborious procedures. when loan approvals and payments were delayed by this bureaucracy, borrowers were unable to obtain credit when they most needed it. another major problem at the time was the limited reach of the policy's implementation. although the nationalized banks increased the number of its branches, their presence in remote and rural areas remained insufficient. people had to travel great distances to get financial services since many underprivileged areas still lacked physical banking infrastructure (banerjee & duflo, 2019). for people whose lives and agricultural activities depended on formal banking, this geographic barrier constituted a significant difficulty. in india's agricultural history, the green revolution of the 1960s and 1970s was a crucial turning point. through the use of chemical fertilizers, modern farming practices, and the adoption of high-yielding crop varieties, agricultural production had increased (pingali, 2012). this revolution significantly increased agricultural productivity, but it also highlighted how important formal credit access and banking infrastructure is for rural areas. farmers needed loans to buy seeds, fertilizer, pesticides, and machinery as a result of the rising usage of modern inputs. to address the needs for rural financing, specialized institutions like the national bank for agriculture and rural development (nabard) were created. nabard played a crucial role by assisting rural development programs and providing direct loans to the agricultural sector. credit access discrepancies did not go away, especially for small and marginalized farms, even with these initiatives like shah, indian journal of finance and banking 13(2) (2023), 1-13 3 the establishment of nabard. research shows that economically disadvantaged people often struggled to get loans from conventional financial institutions because they lacked formal credit histories and collateral. the lack of credit available to agricultural communities in need has brought attention to the need for creative methods of increasing credit availability. microfinance institutions (mfis) were created in the second half of the 20th century as a means of bridging the credit gap that many economically underprivileged people, such as small business owners and farmers, were experiencing. mfis aimed to give loans of small amounts, sometimes known as microloans or microcredit, to those who were considered vulnerable by conventional banks (armendariz & morduch, 2010). with the goal of reducing poverty, these microloans were designed to aid in income-generating activities. previous research on financial inclusion financial inclusion has been a topic of considerable research over the course of the last few decades due to its importance in improving the economic welfare of societies. scholars from all over the world have investigated how various factors affect the ability of people to have access to financial services, mentioning demographic incongruity and disparity. for example, research studies by zulfiqar et al. (2016) have explored how various factors can influence the ability for an individual to receive standard banking services. some of these factors are cultural barriers, geographical location, limited literacy, age, and gender. these factors have a varying amount of impact that influence access to credit people have. a large amount of research has been conducted on the disparities of the level of financial inclusion between males and females in particular on drastic differences in the level of financial and general literacy. the difficulties encountered in advancing financial inclusion have been greatly helped by initiatives to encourage financial literacy. a study by bhushan and medury (2013) examined financial literacy factors like gender, education, and income. according to the survey, urban working-class people have better levels of financial literacy than their rural counterparts. this discrepancy highlights the necessity of specialized financial literacy programs to enable people in economically underserved areas to make sound financial decisions to boost their economic development. the pmjdy program in india's effort to increase financial inclusion, particularly for people living below the poverty line, the pradhan mantri jan dhan yojana (pmjdy) program has emerged as the flagship initiative. aiming to create a platform for banking services available to all citizens, with a special focus on those who do not have access to the formal financial system, pmjdy was launched with ambitious objectives. the availability of zero-balance accounts, which allows people to create bank accounts without being required to maintain a minimum balance, is one of the pillars of pmjdy. removing a major obstacle for people to access the regulated banking system, this provision is particularly important for people living below the poverty line (demirgüç-kunt & singer, 2017). in the past, traditional banks' minimum balance restrictions prevented many people that were economically disadvantaged from using their services. through overdrafts, pmjdy provides significant credit infrastructure in addition to basic account access. this feature enables account users to get credit when they need it, giving them a safety net for their finances in times of need or for investments in increasing their sources of income (das & ghosh, 2020). for people and families who are having trouble meeting their financial obligations, access to credit is extremely important as it can be transformative for the individual's financial stability, especially when there is no official credit access. additionally, pmjdy includes life insurance protection, giving account holders and their families an additional level of financial security. this element focuses on the financial security of the populace, making sure that there is a safety net in place in the event of hardship. the integration of pmjdy with pension plans is another important feature that aims to encourage account holders to make sound long-term financial plans. the initiative encourages people, especially those below the poverty line, to think about their financial future and engage in retirement planning by providing access to pension benefits through these accounts (demirgüç-kunt & singer, 2017). the reactivation of inactive accounts through financial transfers is one unique technique used by the pmjdy policy. this strategy actively encourages the financially excluded population to interact with the official banking sector. pmjdy encourages people to use their bank accounts for their financial activities by transferring various benefits and subsidies directly into beneficiaries' bank accounts (das & ghosh, 2020). this promotes financial inclusion and increases the credit access the previously unbanked population had. pmjdy has concentrated on enhancing the usability and functionality of these accounts throughout the implementation of the policy. to optimize the program's impact, it has been crucial to streamline cash transfers and make sure that benefits efficiently reach participants' bank accounts (das & ghosh, 2020). this strategy not only makes it easier to deliver government support, but it also encourages people to explore the wider variety of financial services offered by the formal banking system. implementation and progress of pmjdy the implementation of a policy, aimed at increasing the access of credit for indians below the poverty line, is an extremely complex and multifaceted process that requires thorough implementation and efforts. the implementation and progress of the pmjdy has been extensively discussed in the literature on financial inclusion and policy measures. various research papers have analyzed the program's effectiveness in achieving its goals of comprehensive financial inclusion in india. the program's implementation involved collaboration between government agencies, banks, and financial institutions, leveraging an extensive network of banking correspondents and branch banking to reach underserved regions. as a result of these efforts, pmjdy has witnessed remarkable progress in terms of the number of bank accounts opened. sarma (2008) and dutta (2022) have contributed to the literature by examining the construction of financial inclusion index (fii) at the state and national level in india. they have used various indicators, such as banking penetration, availability, and usage, to shah, indian journal of finance and banking 13(2) (2023), 1-13 4 gauge the level of financial inclusion. the fii approach has been instrumental in assessing the extent of financial inclusion across different regions of the country. furthermore, studies lenka and sharma (2017) have explored the impact of financial inclusion on economic growth in india. they found a positive relationship between financial inclusion and economic development, suggesting that efforts towards comprehensive financial inclusion, as facilitated by pmjdy, can contribute to the country's economic growth. to ensure the success of the program, challenges and areas of improvement have also been identified in the literature. financial literacy and awareness have been acknowledged as crucial factors in maximizing the benefits of pmjdy. efforts to promote financial education and encourage active usage of accounts have been recommended to sustain the progress of financial inclusion (rajan, 2014). impact on credit accessibility the impact of the pradhan mantri jan dhan yojana (pmjdy) on credit accessibility has been a subject of significant interest and study in the literature on financial inclusion. studies found that the program has helped indians be financially included, creating a universal platform for financial services. the availability of zero-balance accounts and overdraft facilities has allowed account holders, particularly those who are below the poverty line, to access credit more easily and efficiently, enabling them to meet their urgent financial requirements. furthermore, many have studied the progress of financial inclusion initiatives before and after the launch of pmjdy. the research showed that pmjdy has been successful in increasing credit accessibility in both rural and urban areas. the widespread implementation of the program has expanded the reach of formal banking services to previously excluded regions, thus facilitating credit availability for small-scale businesses and individuals stricken with poverty. it is worth noting that while pmjdy has made significant strides in enhancing credit accessibility, challenges remain. research has pointed out that innovative approaches, capital, and technology are essential to overcome challenges in achieving financial inclusion. efforts to increase financial literacy, especially among poverty facing populations, are crucial in ensuring that they understand the benefits of credit accessibility and make informed financial decisions. materials and methods in this research paper, a range of regression analyses were employed to investigate the implications of the pradhan mantri jan dhan yojana (pmjdy) program on access to credit for individuals below the poverty line in india since its commencement in 2014. the paper focuses on analyzing data at a national level while having an understanding of qualitative and quantitative factors impacting the success of the program at district levels. this was done by examining data from all states and union territories in india, furthered by an analysis in different states in india (gujarat, bihar, kerala, and jharkhand) to find district level data and trends. these were done to assess the real impact of the program on credit access and financial inclusion. these analyses were designed to elucidate the relationships between several key variables and evaluate the multifaceted dynamics influencing the outcomes of the program. the research delved into an analysis of average balance per beneficiary in relation to the gross domestic product (gdp) per capita ($) of states in india. a regression analysis was conducted to discern whether states with higher economic prosperity, as indicated by gdp per capita, demonstrated higher average balances in pmjdy accounts. this insight was sought to gauge the program's potential to enhance credit accessibility in economically affluent regions. another aspect investigated was the population in 2022 (in thousands) concerning the number of pmjdy accounts. the correlation between these variables was then further examined to comprehend how population dynamics influenced pmjdy adoption, thus offering insights into the program's impact across densely and sparsely populated areas of india. at the district level in gujarat, two regression analyses were carried out. firstly, an analysis comparing the number of pmjdy accounts (in thousands) against the gdp per capita ($) of districts in gujarat for the year 2022 was performed. this analysis aimed to uncover whether districts with diverse economic conditions exhibited varying adoption rates of pmjdy accounts, thereby providing insights into the influence of economic disparities on credit accessibility. secondly, an analysis examining the number of pmjdy accounts (in thousands) against the population density of districts in gujarat was conducted. the aim was to understand the relationship between population density and the adoption of pmjdy accounts, particularly in rural or less densely populated regions. this analysis contributed to a comprehensive understanding of credit accessibility across geographically diverse settings. furthermore, the research explored the correlation between the number of pmjdy accounts (in thousands) and the overall population of districts in gujarat. this analysis provided insights into whether the adoption of pmjdy accounts was proportional to district population sizes or if certain regions, regardless of population, exhibited higher pmjdy adoption rates. in a broader context, the research assessed the relationship between average literacy rates (%) and the percentage of people who possessed a pmjdy account in states across india. this analysis aimed to uncover whether literacy rates influenced pmjdy adoption rates, underscoring the significance of financial literacy in promoting credit access. in the context of bihar, the research conducted linear regression analyses to investigate the program's impacts at the district level. the first analysis examined the relationship between the number of pmjdy accounts and the gdp per capita ($) of districts in bihar for the year 2022. this analysis aimed to understand whether economic conditions within districts influenced pmjdy adoption, potentially affecting credit accessibility. additionally, an analysis was conducted to assess the relationship between the number of pmjdy accounts and the balance in pmjdy accounts (in rupees crore) for districts in bihar in 2022. this analysis aimed to uncover whether districts with higher account balances exhibited higher pmjdy adoption, reflecting increased credit utilization. population dynamics within districts were further explored through a regression analysis that examined the relationship between population (in thousands) and the number of pmjdy accounts shah, indian journal of finance and banking 13(2) (2023), 1-13 5 in districts in bihar in 2022. this analysis aimed to understand how population size influenced the adoption of pmjdy accounts within districts, providing insights into credit accessibility for different demographic groups. in kerala, the research conducted district-level analyses through regression models. firstly, an analysis explored the relationship between the number of pmjdy accounts (in thousands) and the population (in thousands) of districts in kerala for the year 2018. this analysis aimed to reveal how pmjdy adoption varied across districts with differing population sizes, offering insights into credit access for diverse demographic groups. furthermore, a regression analysis was performed to assess the correlation between gdp per capita ($) and the number of pmjdy accounts (in thousands) in districts in kerala for the year 2018. this analysis allowed for an understanding of whether economic conditions influenced the adoption of pmjdy accounts within districts, which could provide valuable insights into credit accessibility in economically diverse regions. lastly, the research examined the relationship between the total number of pmjdy accounts and the population of districts in jharkhand as of 2021. this analysis aimed to comprehend whether the program's adoption was proportional to district population sizes in jharkhand, thus providing insights into credit accessibility for different demographic groups within the state. the advantages of the methodology in this research paper include its use of regression analyses to quantitatively explore relationships between key variables, providing valuable insights into the impact of the pmjdy program on credit accessibility. however, there are limitations, as regression analyses establish correlations but not causation, potentially overlooking qualitative factors influencing financial inclusion. the reliance on available data may introduce accuracy and completeness issues, and the focus on specific states and districts may not fully capture the diversity of conditions in india. therefore, while the methodology offers quantitative insights, a more holistic understanding could be achieved through a combination of quantitative and qualitative approaches, considering both statistical relationships and nuanced contextual factors. results overall state/union territories level understanding the analysis of the provided data set regarding the evolution of pradhan mantri jan dhan yojana (pmjdy) accounts offers insights into the progress of financial inclusion (specifically credit access) in various states and union territories of india. the data spans four specific dates: december 20, 2017, july 31, 2018, november 13, 2019, and june 29, 2022, and provides a comprehensive view of the program's impact over time. figure 1. total number of pmjdy accounts a noteworthy observation is the overall growth trend evident in the total number of pmjdy accounts across all states and union territories. the consistent increase in the number of accounts signifies the program's success in achieving its goal of providing banking services to previously underserved populations. this aligns with the overarching research question of investigating the impacts of the pmjdy program on access to credit for individuals below the poverty line. furthermore, a closer examination of the data reveals disparities in the rates of growth among different regions. states such as uttar pradesh, bihar, and madhya pradesh have consistently maintained high numbers of pmjdy accounts, indicating a sustained focus on financial inclusion efforts in these populous areas. the research question's emphasis on credit accessibility for individuals below the poverty line is particularly relevant in these states, given their significant demographic proportions. interestingly, certain states have exhibited accelerated growth in pmjdy account adoption between the years 2018 and 2022. states like rajasthan, odisha, and west bengal have experienced substantial increases in the number of accounts during this period. this trend highlights the dynamic nature of financial inclusion efforts and suggests that regions may have implemented successful strategies to promote credit accessibility within their populations. conversely, some states have shown consistent and steady growth in pmjdy accounts throughout the observed period. maharashtra, jharkhand, and andhra pradesh fall within this category, indicating that while growth has been steady, the impact on credit accessibility for the targeted population requires further analysis to understand why exactly growth has not been as increasing as other states. the data also raises qualitative considerations regarding the challenges and opportunities in different regions. states like kerala and delhi, which have relatively lower total numbers of pmjdy accounts compared to their population, may indicate shah, indian journal of finance and banking 13(2) (2023), 1-13 6 areas where the program could be intensified to enhance credit accessibility for those below the poverty line. figure 2. population in 2022 vs number of pmjdy accounts district level understanding of gujarat to understand the overall impact the program has had on people within different districts of gujarat, several regression tools were used. firstly, the method of comparing the number of pmjdy accounts and the gdp per capita of districts in gujarat in 2022 was used (figure 3). the analysis of the data regarding the number of pradhan mantri jan dhan yojna (pmjdy) accounts and gdp per capita in districts of gujarat in 2022 reveals several noteworthy patterns and implications with respect to the research question focused on the impact of the pmjdy program on access to credit for individuals below the poverty line. firstly, there appears to be a positive correlation between the number of pmjdy accounts and gdp per capita across the districts studied. this suggests that as the number of pmjdy accounts increases within a district, there is a tendency for the gdp per capita of that district to rise as well. this observation implies a potential link between the pmjdy program and improved economic conditions in the regions where it has been more widely adopted. however, it is crucial to acknowledge the presence of regional disparities within the data. while some districts exhibit a high number of pmjdy accounts and relatively high gdp per capita figures, others have lower values for both variables. this divergence suggests that the impact of the pmjdy program may vary across different districts, indicating that local economic conditions and implementation effectiveness play a role in shaping the outcomes. figure 3. number of pmjdy accounts vs population of districts in gujurat secondly, the analysis of data comparing the number of pmjdy accounts with the population density of districts in gujarat (as of 2022) can demonstrate insights on the impact of the program, especially in rural or less populous regions this analysis can shed light on the complex interplay between population density, financial inclusion, and credit accessibility within the context of the pmjdy initiative. one notable observation is the significant variation in population density among the studied districts. districts like ahmedabad and surat exhibit notably higher population densities, with values of 890 and 1397 people per square kilometer, respectively. in contrast, districts such as kutch and jamnagar have considerably lower population densities, with values of 46 and 153 people per square kilometer, respectively. this wide range in population density reflects the diverse demographic landscape of gujarat, from densely populated urban centers to sparsely populated rural areas. this demographic characteristic can be observed all over india, with the large part of the population being concentrated in certain areas and regions. the data reveals that certain districts with relatively lower population densities, such as kutch and jamnagar, have a substantial number of pmjdy accounts, while districts with higher population densities, such as ahmedabad and surat, also exhibit a significant presence of pmjdy accounts. this suggests that the pmjdy program has made efforts to extend its reach both in densely populated urban areas and less densely populated rural regions. furthermore, examining districts like bhavnagar and banaskantha, which have population densities of 288 and 290 people 0 500 1000 1500 2000 0 1000 2000 3000 4000 5000 6000 7000 8000 number of pmjdy accounts (in thousands) vs population of districts in gujurat 0 100000 200000 300000 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 population in 2022 (in thousands) vs number of pmjdy accounts shah, indian journal of finance and banking 13(2) (2023), 1-13 7 per square kilometer, respectively, reveals differing outcomes in terms of pmjdy accounts. bhavnagar records a relatively high number of pmjdy accounts, whereas banaskantha reports an even higher number. these variations indicate that factors beyond population density, such as local economic conditions, implementation effectiveness, and the demand for financial services, are likely influencing the adoption of pmjdy accounts. figure 4. number of pmjdy accounts vs gdp per capita of districts in gujurat (2022) lastly, the analysis of data that compared the number of pmjdy accounts with the population of districts in gujarat (as of 2022) can demonstrate the impacts of the program on the access to credit across different circumstances (figure 4). one significant observation from the data is the substantial variation in the number of pmjdy accounts across districts, ranging from less than a hundred thousand to over a million accounts. this wide range underscores the program's extensive reach and adoption across districts of varying population sizes. it is evident that pmjdy has made inroads into both densely populated urban centers and sparsely populated rural regions, suggesting a concerted effort to provide access to formal banking services to a diverse population. examining specific districts further reveals intriguing patterns. for instance, districts with relatively lower populations, such as dahod and panchmahal, exhibit a substantial presence of pmjdy accounts, surpassing one million in each case. this could indicate that pmjdy has effectively penetrated rural areas with sizable populations, contributing to improved credit access for individuals in these regions. conversely, districts like gandhinagar and ahmedabad, characterized by larger populations, also report significant numbers of pmjdy accounts. these districts, serving as economic and administrative hubs, appear to benefit from the program's focus on extending financial inclusion to urban areas. the presence of a substantial number of pmjdy accounts in these districts may signify enhanced credit accessibility for urban residents below the poverty line. furthermore, districts like surat and vadodara, known for their economic prosperity and relatively larger populations, record an impressive number of pmjdy accounts. this highlights the multifaceted nature of financial inclusion efforts, as these districts exhibit both urban affluence and a commitment to extending formal banking services to vulnerable populations. the examination of percentage changes in pmjdy accounts across various districts in gujarat reveals a combination of diverse factors that have contributed to the outcomes of the program. these factors encompass a wide spectrum, including socio-economic conditions, geographical locations, local awareness campaigns, economic opportunities, effective implementation strategies, cultural and social norms, challenges unique to specific districts, population density, gender distribution, and the influence of government initiatives vadodara, characterized by relatively stable socio-economic conditions and higher literacy rates, exhibited a decrease of -2.42% in the total percentage change of pmjdy accounts. the presence of an economically secure population might have reduced the need for new pmjdy accounts among residents. conversely, kachchh, a district marked by its remote and geographically isolated nature, witnessed a substantial positive change of 15.24%. the program likely filled a critical gap in banking services in this region, leading to higher adoption rates. this further indicates how the program is able to provide credit access to places where it is most required. in districts such as junagadh (9.16% increase), the positive percentage change can be attributed to effective local awareness campaigns and robust outreach efforts. community leaders and local authorities may have played a pivotal role in promoting pmjdy accounts, thereby driving higher adoption rates. meanwhile, in areas like porbandar (17.95% increase) and surat (30.28% increase), the availability of economic opportunities and the significance of trade likely contributed to a surge in demand for formal banking services, thus boosting the growth of pmjdy accounts. the successful implementation of the pmjdy program in districts like jamnagar (9.56% increase) underscores the impact of efficient execution, including streamlined account opening processes and timely distribution of rupay cards. a long concern for the program was its ability to effectively implement its services throughout india especially in low economically developed regions. conversely, districts with unique challenges, like devbhoomi dwarka (82.73% increase), experienced remarkable growth in pmjdy accounts due to the district's limited banking infrastructure. here, pmjdy accounts emerged as a primary avenue for accessing financial services. cultural and social norms influenced the growth of pmjdy accounts in districts like mahisagar (401.08% increase), where the favorable acceptance of formal financial services 0 500 1000 1500 2000 2500 2700 2900 3100 3300 3500 number of pmjdy accounts in thousands vs gdp per capita ($) of districts in gujurat (2022) shah, indian journal of finance and banking 13(2) (2023), 1-13 8 contributed to the program's significant impact. similarly, in sabar kantha (18.09% increase), a focus on women's empowerment enhanced adoption rates, reflecting the importance of aligning financial inclusion efforts with local dynamics. government initiatives played a role in districts like gandhinagar (26.61% increase), where proactive support and alignment with the pmjdy program led to higher adoption rates. these findings underscore the necessity of considering a comprehensive array of factors when assessing the outcomes of the pmjdy program. by considering socio-economic contexts, geographic diversity, local dynamics, and policy efforts, a holistic understanding emerges of the processes that have collectively shaped the observed changes in pmjdy account percentages across gujarat's districts. overall, gujarat has experienced strong growth in terms of the number of people with access to financial instruments, which was observed through changes in the number of pmjdy accounts. district level understanding of kerala to gain a more accurate understanding of the impact of the pmjdy program across india, district level analysis of kerala through regression analysis has been conducted. the analysis of data pertaining to the number of pradhan mantri jan dhan yojna (pmjdy) accounts against the population of districts in kerala as of 2018 offers insights into the potential impacts of the pmjdy program on access to credit for individuals below the poverty line in india since its introduction in 2014 (figure 5). one prominent observation from the data is the significant variation in the number of pmjdy accounts across different districts in kerala. this variation spans a wide range, with some districts reporting a substantial number of accounts while others show comparatively lower figures. these variations underscore the diverse adoption and utilization of pmjdy accounts within the state, further supporting the idea that many local socioeconomic factors affect the policy’s adoption, as demonstrated in districts of gujarat. districts such as thrissur and palakkad that have relatively higher populations showcase many pmjdy accounts. this demonstrates the program's efficiency and ability in reaching urban and semi-urban areas that potentially improves credit accessibility for residents below the poverty line in these areas. districts like idukki and pathanamthitta which have relatively small populations (336739 and 589869 respectively, as of 2018) report a substantial number of pmjdy accounts. however, some districts like wayanad have relatively lower populations but report a lower relative number of pmjdy accounts. wayanad is characterized by its hilly and geographically challenging terrain, which can pose logistical hurdles in terms of banking infrastructure establishment and accessibility. moreover, it is known for a predominantly agrarian economy with a significant tribal population, potentially leading to lower awareness and demand for formal banking services. additionally, the district's remoteness and economic disparities may result in reduced financial literacy and limited outreach efforts. hence the focus should also be on educating the populace on financial literacy especially in rural and remote locations that would increase the awareness of formal banking institutions. figure 5. number of pmjdy accounts vs population for districts in kerala 2018 through modeling the gdp per capita ($) with the pmjdy accounts it can be observed that both districts with high gdp per capita and districts with low gdp per capita report significant numbers of pmjdy accounts (figure 6). following the general trend seen across states in india, districts like thrissur and ernakulam, characterized by relatively higher gdp per capita figures, exhibit a substantial presence of pmjdy accounts. conversely, districts with lower gdp per capita, such as idukki and pathanamthitta, also report significant numbers of pmjdy accounts. this shows that the utilization of pmjdy accounts is not only being used by rural and poor people. due to the program’s dynamic offerings, such as no minimum balance being required in the accounts, it is likely that people of all economic classes are using the program. local strategies would have been implemented to increase the access to credit for different districts, as each district is poised with its own economic and social structure. hence the implementation of the program, not only in kerala, but in the entirety of india would have been a gradual process that required adaptive implementation strategies. 0 200 400 600 0 500 1000 1500 2000 2500 3000 3500 4000 4500 number of pmjdy accounts (in thousands) vs population (in thousands) for districts in kerala 2018 shah, indian journal of finance and banking 13(2) (2023), 1-13 9 figure 6. gdp per capita vs pmjdy accounts of districts in kerala in 2018 district level understanding of bihar through regression modeling of the number of pmjdy accounts and the population of districts in bihar there is a positive correlation between the number of pmjdy accounts and the population of the districts (figure 7). naturally, districts with higher populations tend to have a higher number of pmjdy accounts. this is largely due to the ease with which people can open pmjdy accounts, as minimal documentation is required. districts like muzaffarpur and gaya, characterized by vibrant economic sectors such as agriculture and trade, exhibit higher numbers of pmjdy accounts. this demonstrates that the financial needs of residents engaged in these sectors drive the demand for credit services, aligning with the program's objective to address economic requirements. figure 7. number of pmjdy accounts vs balance of pmjdy accounts for districts in bihar 2022 economic conditions and the nature of employment within each district also play a substantial role. districts with a strong presence of agriculture, like kishanganj and araria, may have a higher percentage of pmjdy accounts because the program's credit services are particularly relevant to farmers (figure 8). conversely, districts with a more diverse economic landscape, such as nalanda and darbhanga, may need tailored strategies to cater to the varied financial needs of their residents. the presence of established banking infrastructure plays a pivotal role, as seen in districts like vaishali and patna. these districts, with well-established banking networks, exhibit higher pmjdy adoption rates. residents in such areas are more accustomed to formal financial services, making pmjdy adoption more accessible. effective collaboration between local authorities, financial institutions, and community organizations emerges as a catalyst for pmjdy adoption, as demonstrated by districts like bhagalpur and katihar. these regions showcase successful implementation strategies driven by partnerships that promote financial inclusion, resulting in a significant number of pmjdy accounts. figure 8. population vs pmjdy accounts in districts in bihar 2022 0 200 400 600 2,700 2,900 3,100 3,300 3,500 3,700 3,900 gdp per capita ($) vs pmjdy accounts (in thousands) of districts in kerala in 2018 0 500 1000 1500 2000 2500 3000 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 population vs pmjdy accounts in districts in bihar 2022 shah, indian journal of finance and banking 13(2) (2023), 1-13 10 district level understanding of jharkhand jharkhand continues to demonstrate the trend observed in other states on how economic disparities play an integral role in the wide scale adoption and creation of pmjdy accounts thus impacting credit access (figure 9 and 10). districts like east singhbhum, ranchi, and bokaro, which have relatively higher gdp per capita figures, also report a larger number of pmjdy accounts. this correlation underscores the importance of economic well-being in driving participation in formal banking services. it suggests that people in economically stronger districts are more likely to engage with the banking system, possibly due to increased financial awareness and the need for diverse financial services. conversely, districts with lower gdp per capita, such as gumla and chatra, tend to have fewer pmjdy accounts. this economic disparity reveals that the program faces challenges in areas with limited economic opportunities. individuals in these regions may rely more on informal financial networks, such as moneylenders, due to the lack of access to formal banking services. figure 9. total number of pmjdy accounts vs population of districts in jharkand as of 2021 figure 10. gdp per capita vs total number of accounts of districts in jharkhand 2021 population density also influences the distribution of pmjdy accounts. densely populated districts like ranchi and dhanbad exhibit a higher number of accounts, reflecting the large impact this program has had in cities and densely populated regions. this is likely due to urban areas typically having better access to banking infrastructure and financial literacy resources, making it easier for residents to open pmjdy accounts. however, rural districts like simdega and khunti, characterized by lower population density, report lower numbers of pmjdy accounts. these areas face unique challenges related to financial inclusion, such as limited banking infrastructure and lower levels of financial literacy among the rural population. government intervention and awareness campaigns are critical drivers of pmjdy participation. districts where the government has actively promoted the program, such as west singhbhum and latehar, demonstrate higher participation rates. this highlights the importance of government-led initiatives in spreading financial awareness and encouraging people to open pmjdy accounts. proportion of credit access across different demographics the provided data showcases the evolution of pradhan mantri jan dhan yojana (pmjdy) accounts over a span of six years, highlighting both rural/semi-urban and urban/metro areas, as well as the participation of women in the program. from march 2016 to march 2021, there has been a consistent upward trend in the number of pmjdy accounts, indicating the program's progressive reach and impact. in march 2016, there were 131.7 million rural/semi-urban pmjdy accounts and 82.6 million urban/metro accounts. by march 2021, these numbers had grown significantly to 276.3 million rural/semi-urban accounts and 143.4 million urban/metro accounts. this pattern of growth suggests a widespread adoption of the pmjdy initiative across both rural and urban settings. 0 500 1000 1500 0 500 1,000 1,500 2,000 2,500 3,000 3,500 total number of pmjdy accounts vs population of districts in jharkand as of 2021 0 500 1000 1500 1200 1400 1600 1800 2000 2200 2400 2600 gdp per capita ($) vs total number of accounts (in thousands) of districts in jharkhand 2021 shah, indian journal of finance and banking 13(2) (2023), 1-13 11 the data also reveals the increasing engagement of women in the program. in march 2016, there were 68.4 million rural/semi-urban pmjdy accounts held by women, and 42.1 million in urban/metro areas. by march 2021, these figures surged to 153.9 million and 78.6 million, respectively. this substantial increase in women's participation underscores the program's efforts to empower women economically and promote financial inclusion. historically, across the globe, women have had limited access to financial instruments, especially credit. however, the pmjdy program’s strong focus on increasing the number of women account holders is increasing their access to credit. furthermore, the data reflects the success of the pmjdy program in expanding financial access and inclusion in india. the steady growth of pmjdy accounts in both rural and urban regions, coupled with the increasing involvement of women, suggests that the program has effectively contributed to enhancing financial literacy, access to banking services, and economic empowerment. operative/inoperative accounts analysis the provided data presents an analysis of the operational status of pradhan mantri jan dhan yojana (pmjdy) accounts across various states and union territories in india as of january 20, 2021. the focus of this interpretation is on the percentage of operative accounts relative to the total pmjdy accounts, shedding light on the effectiveness of the program in ensuring active financial inclusion. the data showcases significant variations in the percentage of operative pmjdy accounts across different regions. these variations are critical in understanding the program's impact on promoting financial inclusivity and credit accessibility. notably, the overall percentage of operative accounts across all states and union territories is 86.13%, highlighting that a substantial majority of pmjdy accounts are actively utilized. states such as tripura, daman & diu, lakshadweep, and mizoram stand out with high percentages of operative accounts, with 95.61%, 90.37%, 89.23%, and 87.63%, respectively. this suggests that these regions have been particularly successful in encouraging account holders to engage actively with their accounts, potentially indicating effective financial literacy and awareness programs. the findings align with the research question's focus on access to credit for individuals below the poverty line, as higher operative percentages may correlate with increased credit accessibility. a key strategy to maintain and persuade people was the introduction of zero-balance accounts, which allows individuals to open and maintain bank accounts without the need for an initial deposit. this innovation made formal banking services financially accessible to even those with limited resources, removing a significant barrier that had previously deterred many from joining the banking system. conversely, the data reveals some regions where the percentage of operative accounts is relatively lower. for instance, jammu & kashmir exhibits a lower percentage of 60.47%, indicating potential challenges in driving active usage within the program. the lower operative percentage might impact credit accessibility for individuals below the poverty line in the state. interestingly, states with relatively higher total pmjdy account numbers, such as uttar pradesh, bihar, and madhya pradesh, have operative percentages around 83-89%. this suggests that while these states have succeeded in enrolling a significant number of individuals, there is still room for further engagement to enhance credit accessibility. the data also provides insights into regions where the operative percentage hovers around or below 80%. these include states like goa, punjab, jharkhand, and andaman & nicobar islands. these findings may indicate areas where additional efforts could be directed to boost account utilization and, subsequently, credit access for the targeted population. the analysis of operative percentages within the pmjdy program sheds light on the degree of active engagement and utilization of financial services across different states and union territories. the variations in operative percentages underscore the importance of tailored strategies to ensure effective credit accessibility and financial empowerment for individuals below the poverty line. the findings contribute to a deeper understanding of the program's impact on credit access and provide valuable insights for policymakers seeking to enhance financial inclusion efforts. discussions the analysis of the pradhan mantri jan dhan yojana (pmjdy) program's impact on access to credit for individuals below the poverty line in india since 2014, as evidenced by the data from various states and union territories, provides critical insights into the progress of financial inclusion and credit accessibility. it is important to emphasize that the pmjdy program has made significant strides in extending banking services to previously underserved populations. this aligns with the overarching research question and underscores its relevance in addressing the financial needs of vulnerable communities. one overarching trend observed in the data is the consistent increase in the number of pmjdy accounts over time across all states and union territories. this upward trajectory signifies the program's success in reaching its primary goal of providing banking services to those who were previously excluded. the sustained focus on financial inclusion efforts in densely populated states like uttar pradesh, bihar, and madhya pradesh is particularly noteworthy. these states, with their large demographic proportions, are of critical importance when considering the impact of the pmjdy program on credit access for individuals below the poverty line. moreover, the accelerated growth of pmjdy accounts in states like rajasthan, odisha, and west bengal between 2018 and 2022 indicates the dynamic nature of financial inclusion efforts. the diversity in growth rates suggests that certain regions have implemented effective strategies to promote credit accessibility among their populations. conversely, the steady growth observed in states like maharashtra, jharkhand, and andhra pradesh necessitates further examination to understand why growth rates have not been as substantial as in other areas. an important aspect to consider is the role of economic conditions in shaping the impact of the pmjdy program. the data reveals that districts with higher gdp per capita tend to have more pmjdy accounts. this positive correlation suggests that as economic well-being improves, there is a greater likelihood of engaging with formal banking services, thereby enhancing credit accessibility. however, it is equally crucial to address the regional disparities within this correlation, as some districts with lower gdp per capita still exhibit high pmjdy adoption rates. for example, in gujarat, shah, indian journal of finance and banking 13(2) (2023), 1-13 12 districts like bhavnagar and banaskantha have lower population densities but exhibit differing outcomes in terms of pmjdy accounts, indicating that factors beyond economic conditions play a role in adoption. population density also plays a significant role in the distribution of pmjdy accounts. densely populated districts tend to have a higher number of accounts, reflecting the program's success in urban and semi-urban areas. however, rural districts have not been left behind, as evidenced by the substantial presence of pmjdy accounts in regions with lower population density. this showcases the program's commitment to extending formal banking services to diverse populations across geographic landscapes. for instance, in jharkhand, districts like east singhbhum, ranchi, and bokaro, characterized by relatively higher gdp per capita figures, also report a larger number of pmjdy accounts, highlighting the interplay between economic well-being and credit access. the influence of government-led initiatives and awareness campaigns cannot be overstated. districts where the government actively promoted the program exhibit higher participation rates, emphasizing the importance of such initiatives in spreading financial awareness and encouraging account openings. these findings reinforce the significance of a comprehensive approach that combines government support, local outreach, and community engagement. for example, in kerala, districts like thrissur and palakkad, with relatively higher populations, showcase a large number of pmjdy accounts, reflecting the program's efficiency in reaching urban and semi-urban areas, potentially improving credit accessibility for residents below the poverty line in these areas. additionally, the analysis of data pertaining to the operative status of pmjdy accounts highlights both successes and challenges. while an overall percentage of 86.13% operative accounts is encouraging, regional variations exist. states like tripura and daman & diu exhibit high percentages of operative accounts, indicating effective engagement. conversely, states with relatively higher total pmjdy accounts, such as uttar pradesh and bihar, have operative percentages around 83-89%, suggesting room for improvement in account utilization. the variations in operative percentages underscore the importance of tailored strategies to ensure effective credit accessibility for individuals below the poverty line. conclusions the analysis of the pradhan mantri jan dhan yojana (pmjdy) program's evolution and impact offers a comprehensive understanding of its contribution to credit accessibility for individuals below the poverty line in india. the research question, focused on investigating the program's influence on credit access for people below the poverty line, has been addressed through an examination of multiple data sets, district-level factors, and demographic variations. the findings underscore the success of the pmjdy program in advancing financial inclusion and empowerment. the upward trend in total pmjdy accounts across states and union territories reflects the program's effectiveness in reaching underserved populations and providing them with formal banking services. moving forward, it is crucial to recognize that while the pmjdy program has achieved significant milestones, there is room for further exploration and refinement. future research endeavors should delve deeper into the nature of credit access facilitated by pmjdy accounts, including the types and volumes of credit extended to beneficiaries. additionally, ongoing efforts to refine and adapt the program based on regional variations and evolving macroeconomic dynamics will be instrumental in sustaining and augmenting the positive outcomes observed. in conclusion, the pmjdy program has emerged as a transformative initiative, fostering financial inclusion, economic empowerment, and gender equity. the comprehensive analysis presented in this paper contributes valuable insights to policymakers, researchers, and stakeholders, offering a foundation for continued efforts to enhance credit accessibility and uplift the socio-economic well-being of marginalized populations across india. author contributions: conceptualization, n.s.; methodology, n.s.; software, n.s.; validation, n.s.; formal analysis, n.s.; investigation, n.s.; resources, n.s.; data curation, n.s.; writing – original draft preparation, n.s.; writing – review & editing, n.s.; visualization, n.s.; supervision, n.s.; project administration, n.s.; funding acquisition, n.s. 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. 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 armendariz, b., & morduch, j. 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(2022). financial inclusion in india: an intertemporal study. in persistent and emerging challenges to development: insights for policy-making in india (pp. 411-432). singapore: springer nature singapore. lenka, s. k., & sharma, r. (2017). does financial inclusion spur economic growth in india? the journal of developing areas, 51(3), 215–228. retrieved from https://www.jstor.org/stable/26416941 pingali, p. (2012). green revolution: impacts, limits, and the path ahead. proceedings of the national academy of sciences, 109(31), 12302-12308. https://doi.org/10.1073/pnas.0912953109 rajan, r. (2014). governor's address: financial inclusion in india. reserve bank of india. sarma, m. (2008). index of financial inclusion. economic and political weekly, 43(18), 47-54. retrieved from http://hdl.handle.net/10419/176233 zulfiqar, k., chaudhary, m. a., & aslam, a. (2016). financial inclusion and its implications for inclusive growth in pakistan. pakistan economic and social review, 54(2), 297-325. retrieved from https://www.jstor.org/stable/26616711 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 10(1) (2022), 61-74 61 finance and banking ijfb vol 10 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa factors impacting liquidity of banks: an empirical study from the banking sector in the uae manoj kapur (a)1 arindam banerjee (b) kunjana malik (c) (a) researcher, strategist and risk specialist, mumbai, india; e-mail: drmanojkapur@hotmail.com (b) associate professor and assistant dean, sp jain school of global management, dubai, united arab emirates; e-mail: arin_006@yahoo.com (c) assistant professor, sp jain institute of management and research, mumbai, india; e-mail: kunjanamalik.phd@fms.edu a r t i c l e i n f o article history: received: 7th june 2022 accepted: 29th july 2022 online publication: 10th august 2022 keywords: liquidity, idiosyncratic factors market related factors regression analysis, uae jel classification codes: e58, g32, g38 a b s t r a c t the primary purpose of this research is to substantiate the factors that impact the liquidity of the banks in the uae. this research paper is an extension of the thesis that the primary author has undertaken to prove the test of significance and provide concrete evidence that the identified idiosyncratic and market related factors have significant impact on the liquidity risk for the banks in the uae. the primary author has performed linear regression to identify the relation of the dependent and independent variables and once the test of significance is proved, the factors have been ranked using murame approach as part of ultimate thesis research objectives (murame approach is not forming part of this research paper). the research paper focusses on top 10 banks in the uae and the study spans from 2010 to 2019. the study employs idiosyncratic factors like deposit growth, npl, car, roa and market factors like gdp, inflation, unemployment, oil prices and studies its relationship on dependent factor i.e., liquidity. series of diagnostic tests are performed to find the impact of liquidity on idiosyncratic and market related factors. © 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 liquidity has different meanings in different contexts. in general, liquidity refers to the amount of cash available for meeting the expenses as well as for investment. within the banking context, liquidity refers to the ability to meet the maturities related to debt and credit within defined timelines. liquidity risk is the absence of liquidity that is required to meet these liabilities. absence of liquidity can be one of the reasons for the banks to fail. liquidity crunch may be seen as an important aspect for alleviating the expected and unexpected balance sheet movements and increasing the resources for targeting the growth (çetinkaya, 2018). the risk is important in meeting the funding needs as well have having sufficient buffers of liquidity for meeting the uncertain liabilities as and when they come due. this aids in the sustainable growth of the bank and the sector. banks are an important intermediary for facilitating funds to their customers. banks are able to achieve this objective by sometimes using their own equity to collaborate with customers in lending activities and bridging the gap (santomero, 1997). thus, banks act as an intermediary in facilitating finances among several industries. the performance of the banking sector is of prime importance to ensure safeguarded financial performance of the country (munir et al., 2012). basis traditional view of the banking sector, banks aid in channeling cash from and to the people through custodian and lending activities. hence, banks consider liquidity risk as seriously since the time of their establishment (hakimi & zaghdoudi, 2017). liquidity risk for the bank would be the state wherein the bank is unable to meet the customers’ demands as and when they arrive. such a situation would trigger a red alarm that would signal the market that the bank does not have sufficient liquidity. there can be several reasons for liquidity risk in the banking sector, the most common being the shortterm assets funding the long-term liability and vice versa. while banks have advanced risk management systems that track maturities of assets and liabilities, there may be times when the bank would face liquidity blockages leading to liquidity 1corresponding author: orcid id: 0000-0002-5787-2796 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v10i1.1779 to cite this article: kapur, m., banerjee, a., & malik, k. (2022). factors impacting liquidity of banks: an empirical study from the banking sector in the uae. indian journal of finance and banking, 10(1), 61-74. https://doi.org/10.46281/ijfb.v10i1.1779 https://orcid.org/0000-0002-5787-2796 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v10i1.1779 https://orcid.org/0000-0002-1880-7625 https://orcid.org/0000-0001-8983-9803 kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 62 shortfalls (kumar & yadav, 2013). the banks have major responsibility of managing their own liquidity since they are a source of liquidity for their customers. the banks enjoy this pivotal role of creation of liquidity and management of liquidity. creation of liquidity is successfully carried by clearing off liquidity concerns for large business owners by grating finances. this gives rise to creation of liquidity risk since the banks have issued large lending to the corporates (alqemzi et al., 2022). to avert liquidity crises, regulatory bodies and central banks have implemented strict levels of liquidity to be always maintained. this level of cushion is required to maintain liquidity at a certain level. the banks in the uae are subject to minimum cash reserve requirements that is part of fiscal and monetary policies of the central bank. policy makers suggest that banks must be able to maintain higher level of liquid assets so that they can hedge against untoward negative market movements. this led to an international debate to create standards that would optimize liquidity risks. the 2008 financial crises shocked the world and resulted in a deep concern among the central banks around the world. consequently, the basel committee pronounced basel iii with an aim to accumulated reserves that would specifically address the liquidity related issues. liquidity crises is viewed as a serious issue in developed and developing countries. liquidity assets include cash and cash equivalents that are less profitable and generate lower yields. thus, the banks have to maintain an equilibrium between liquid assets and others as it would lose on opportunity costs. banks try to maintain minimum level of liquidity that does not impact their profitability. hence, the framework created by basel iii ensured adequate liquidity levels to be maintained to avoid liquidity crises (mwangi, 2014). several studies have been performed in the past that have specifically focused on measuring credit risk as a yardstick for banks performance. however, the same is not true for liquidity risk as not many studies are available. there are few studies that have studied the relationship of liquidity and performance (claeys & vennet, 2008; trujillo-ponce, 2013). while some researchers found positive relationship between liquidity and performance, others did not conclude a significant relationship. some researchers view that a decrease in liquidity risk positively affects a bank’s performance (bourke, 1989; bordeleau & graham, 2010; lartey et al., 2013). however, some have found the opposite to be true (konadu, 2009). furthermore, there are some studies that do not find any significant relationship between the two variables (lamberg & valming, 2009). all these studies have different results as these have been performed in different jurisdictions and in several times. further, since different dependent as well as independent factors were used, the impact on liquidity risk is different. liquidity risk is studied by using different variables. alzorqan (2014) in its study used variables like roa and roi to ascertain the jordanian banks performance. similarly, rahman and saeed (2015) also used roa and roe to research on the malaysian banks’ performance. hakimi and zaghdoudi (2017) used nim to measure tunisian banks performance. thus, each researcher was able to ascertain the performance of the banks in different ways and its impact on the liquidity. ld ratio, liquid assets ratio, assets quality ratio and several other ratios are useful to ascertain banking liquidity positions (chowdhury & zaman, 2018; hakimi & zaghdoudi, 2017; ferrouhi, 2014). one of the notable researchers mwangi (2014) quoted that the impact of liquidity on the performance of the bank can also be determined through the business model and the liquidity cycle the bank faces. this may lead to further research in this area. this can be proven from the fact that macro-economic variables like gdp, inflation, oil price movement in the uae will also have an impact on the liquidity of the banks in the uae. the current study is, therefore, focused on providing insights into the impact of the liquidity risks on the banking sector in the uae. the independent factors are chosen from idiosyncratic and macro-economic factors that have been selected through thorough literature review. the current research is a piece of a wider research by kapur (2020), that focusses on ranking the identified idiosyncratic and market related factors using murame approach. the current research aims at identifying the impact of the factors using regression analysis. liquidity as well as performance of the bank can be measured using several parameters. idiosyncratic factors can be measured using financial ratios like return on asset (roa), return on equity (roe), deposit growth, capital adequacy ratio (car), etc. (murthy & sree, 2003). the current research has been performed on top 10 banks in the uae. since uae has more than 50 banks, it can be said that the market is fragmented. hence, in order to provide conclusive evidence of the impact of the liquidity risk, the sample is limited to top 10 banks. literature review there have been numerous studies conducted that aim to quantify liquidity risk; these have performed analyses of several banks around the world. in the uae, however, very limited literature is available on this subject. most of the times the research is conducted using ratio analysis as an indicator to judge the banks’ performances. during the 1990s, the concept of liquidity began to gain popularity through the collapse of enron. healy and palepu (2003) have studied the fall of enron in detail; they question the role played by market intermediaries, governance torchbearers and regulators involved in maintaining the sound function of the stock market. while enron was a classic example of fraud and the manipulation of stock market, the fact that the company did not build up liquidity was also one of the reasons for its collapse. healy and palepu’s research proposes that certain system-level and capital-market changes were required to avert the recurrence of fraud like that seen in the enron case. molyneux and thornton (1992) conducted an analysis based on ratios, in which liquidity risk was considered as an independent factor. the objective of the research was to ascertain the determinants of the profitability of european banks. the study was comprehensively conducted and included 600-plus banks across 18 european countries. specifically, the dependent variables included net profit before and after taxes, linked to capital/reserves; total assets; staff operating expenses; and provision for loss loans. the independent variables included government policies, the concentration of depositors, the imf-denominated long-term bank market rate in each country, the imf-denominated money supply in each country, cash/marketable securities, the consumer price index (cpi) and staff expenses. the study was conducted using a kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 63 simple linear equation for the period between 1986 to 1989 and concluded by stating that all the factors had a positive relationship, apart from the relationship between the government and profitability. the results were comparable to those concerning us markets, and the authors did not seem to find any evidence of risk aversion by the banks. the gearing in the bank was found to be high, which seemed to affect the liquidity of the banks. the above study by molyneux and thornton (1992) was an extension to the research already conducted by bourke (1989), which utilized factors such as the profitability of international banks and simulated previous research to conclude that the concentration of liquidity is positively correlated to profitability. these results also suggested that banks were subject to a high degree of risk avoidance and that they had high market power. the quantification and analysis of data was achieved through a pooled time-series method that estimated linear equations for several bank-specific factors such as staff expenses and capital and liquidity ratios. external factors were also used to determine the profitability of the banks, including concentration, government ownership, inflation, market growth and interest rates. demirgüç-kunt, laeven, and levine (2003) have studied the impact of and correlation between bank regulations, market structure, and national institutions and the effect it has on net interest margins and the banks’ overhead costs. specifically, the analysis studies the liquid assets to total assets ratio to quantify the impact that concentration has on a bank’s interest margin. the analysis was conducted using data from more than 1,400 banks spanning across 72 countries, and mainly concerns bank-specific factors such as profitability, total assets, depositors and concentration. the research uses the linear equation model; the results indicate that strict laws from the regulator enhance bank activities and thereby boost financial interbank-intermediary costs. in terms of external factors, the study finds that inflation causes a positive correlation between the profitability of a bank and its operational costs. furthermore, it is observed that concentration is positively correlated with net interest margins; however, this correlation is not effective when controlling factors such as regulatory impact and competition are introduced. in addition, individual regulation for banks is insignificant when determining the correlation between market factors such as inflation and global assets and liabilities. these would, however, be considered significant when calculating interest margins and operating costs. the research concludes by stating that regulations that are prescribed by the regulators cannot be viewed in isolation, as they are made while keeping monetary policies, national interest and competition from foreign banks in view. kosmidou and zopounidis (2008) measure the performance of commercial and co-operative banks in greece using the promethee method and specific financial ratios. the research includes ratios for return on equity, roa, net profit before taxes, gross profit, loan to deposit, equity-to-assets ratio, npl and loan loss provisions to total assets. the objective of the research is to ascertain the performance and efficiency of co-operative banks and compare them with those of the commercial banks during the period 2003–2004. as promethee is a ranking method, the results rank the banks’ strengths and weaknesses and compare the competition among them. the results of the method indicate that commercial banks are in a better position to maximize their profits and attract higher customer deposits due to lower operational costs and higher margins. additionally, the results indicate that co-operative banks are not as symmetrical as those banks that had an increasing profits and market share reported deterioration in the financial conditions, and thus had higher npl ratios. the combined results indicate that liquidity is a factor of roa and npl: the higher the roa, the higher the liquidity; conversely, npl higher would be the available liquidity. kosimidou states that liquidity risk is the relationship between liquid assets and a combination of short-term funds and deposits (customer deposits). the ratio is termed as deposit run-off ratio, which highlights the bank’s capacity to meet its short-term funding requirements by selling assets in situations where short-term liabilities are not available. some ratios that require liquidity to be more than 100% of the total liabilities expose banks to a higher risk of liquidity due to the cost of holding liquidity. several studies were conducted by demirgüç-kunt and huizinga (1999) that examine the ratio between loans to total assets to measure the extent of its effect on the liquidity of the banks. this ratio of loans to total assets is considered more appropriate than the ratio of loans to deposits because the latter does not consider the impact on total liabilities. in addition, the new generation of authors (shen, chen, & kao, 2009; soula, 2015) are very vocal in terms of their presentation of liquidity, using ratios as proxies for its computation. chen et al. (2018) utilize data from 12 local commercial banks during the period 1994–2006 to ascertain the impact of liquidity on the bank performance. the authors employ a two-stage least squares regression method as part of their analysis, concluding that they have proved that liquidity risk is not only dependent on hqlas, which are internal to the bank, but also on supervisory and regulatory changes and macroeconomic factors, which are external influences. in addition, they state that liquidity risk affects a bank’s profits by significantly reducing the return on average assets and return on average equity and increasing the cost of deposits for the bank. conversely, the model used by soula (2015) integrates the risk factor model to ascertain the impact of liquidity risk for the sampled banks between the period 2005–2012. the results indicate that idiosyncratic factors are a major cause of liquidity risk, and that liquidity has high heterogeneity during normal periods. however, during stressed periods, the risk is systemic in nature, with a significant reduction in heterogeneity. the objective of each approach is to assess the impact of liquidity risk on other components and assess its stability. under the balance sheet analysis approach, liquidity is evaluated based on balance sheet components. the items in the balance sheet on the asset side that directly have a consequential effect on liquidity include the receivables, loans and advances and investment, the latter of which is categorized into trading and available for sale, repo and reverse repo bonds and collateralized borrowings. on the liability side, the items include customer deposits, repos and reverse repos, other long and short-term liabilities and equity. the liquidity analysis for the balance sheet consists of comparing the asset side with the liability side, looking for available liquid assets to fund the liabilities. in either case, the objective is to ensure the stability of funding sources, which are required to meet obligations as they become due. the peer-group ratio comparison involves comparing several ratios from the balance sheets of different banks. this method relies on collecting all significant sources of liquidity and their uses by the bank. an illustration of this method kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 64 would be to compare the use of ratios relating liquid assets to total assets by several banks. one of the limitations of this ratio comparison is that banks need to have similar business models, equivalent asset sizes, similar geographies, etc. other ratios under the peer-group analysis could include loans to deposits or loans to total assets. the liquidity index indicates the latent losses that a bank might derive from an immediate sale or disposal of an asset in the open market. the ratio is calculated as the ‘weighted sum of the price of each asset in the event of fire sale to its fair market price (the price it would receive in the market under normal situation’. the bank must construct stressed scenarios that cater to these types of distress sales if it is to have an understanding of the liquidity skewness in the market. one of the limitations of this ratio is that it considers the assets side of the balance sheet; hence, it can be used to gauge market risk liquidity rather than funding liquidity. the financing gap is a measure that requires mature judgement concerning deposit withdrawals made by the deposit holders. mathematically, it is expressed as the difference between average total loans and average total deposits. the bank must create scenarios that depict the expected withdrawals under both normal and stressed situations, which will allow it to understand the resulting financing gap. the larger the finance gap, the more liquidity problems, as a larger gap would indicate that the bank does not have enough core deposits to meet its obligations. in such a situation, a bank would have to use cash and/or other liquid assets or borrow funds in the interbank market. a continuous incremental finance gap indicates chronic liquidity issues, which may lead to insolvency if not properly addressed through a contingency funding plan. the financing requirement refers to summing up the financing gap using readily available and convertible hqlas. an additional objective of this study is to consider how it is that market-related events have a strong impact on the liquidity risk management of a particular bank. the 2008 liquidity crisis, as well as the 2020 covid-19 pandemic (even though both have a low probability of recurrence), are systemic issues that had/are having a devastating effect on the entire banking system. brunnermeier and cheridito (2019) state that aggregate fiscal and liquidity policies by the central banks are important when determining any market-related data points, particularly when these policies are made during economic growth and downturn phases. the authors initiate the development of several risk indicators with practical relevance, in that they quantify bank-specific liquidity risk indicators and systemic factors. the research further substantiates its position by considering two moments in time: the time ‘t’, an ex-ante time period during which the bank manages to generate cash flows on the assets and liabilities that assume liquidity risk, and the time period ‘t+1’, which reflects the economic conditions. the rationale behind the creation of this model using the time periods ‘t’ and ‘t+1’ is that it allows an explanation of the liquidity index in several economic conditions in ‘t+1’ time, while the total liquidity index equates to the starting time period ‘t’. each asset and liability in the balance sheet is assigned to the respective cash index to achieve the equivalent cash asset and liability indices. during the methodology phase, the liquidity mismatch is generated by calculating the difference between the asset cash index and the liability cash index and assigning equivalent weights for each index. subsequently, the var method is used to estimate the probability of liquidity risk at time period ‘t’, with a confidence interval of 5%. it is important to note that during the methodology stage, it is vital to consider the variation in the assets and liabilities for each time period (‘t’ or ‘t+1’, respectively). these factors can then be used to conduct an analysis of liquidity exposure for a standalone single sector. drehmann and nikolau (2013) observe that liquidity risk can be bifurcated into two distinct components: inflows/outflows and financing (funding) pricing. the authors put forward the theory of the funding premium approach, whereby the interest rates applied to the refinancing options are provided by the central banks. the authors use the difference between the final bid and the minimum bid price as a liquidity risk proxy (lrp), using the assumption that the markets will remain tight, and the bank has a risk-averting strategy. in practical terms, banks exposed to a higher funding risk would generally be willing to pay higher prices for liquidity from the central bank; as such, funds would be highly stable in nature. these proxies can be used as a single source of spread, allowing the development of further liquidity risk measures. the conclusion of the research notes the opportunity cost between the bid price and marginal interest rate, allowing the accurate calculation of the lrp. in mathematical terms, this lrp is characterized by the variation of spread for every bank that participates in the bid auction. singh and sharma (2016) have studied the bank-specific and macroeconomic factors that affect the liquidity of the banks in india. they perform an exploratory study into the association between these factors as well as their random and fixed-term effects, for 59 banks in india for the period 2000–2013. the study includes bank-specific factors such as bank size (in terms of the bank’s total assets), profitability in each of the years under study, the cost of deposit and funding, car and total deposits. regarding the systemic factors, the authors study india’s gdp, its inflation and its unemployment rate. the findings indicate that management is also a factor that affects the banks’ liquidity. none of the bank-specific factors (except the cost of deposit) had a significant impact on liquidity; neither did any of the macroeconomic factors (except unemployment). specific factors included the size of the bank, the deposit size, the profitability of the bank, car and india’s gdp and inflation. hence, in the final analysis, the size of the bank and india’s gdp were seen to have a negative effect on the liquidity of the bank, while a positive effect occurred because of the total deposits, profits and car. the results are very useful as they enable a judgement of the impact of liquidity on emerging countries such as india. mahmood et al. (2019) have studied the impact of macroand bank-specific factors on bank liquidity using the fully modified ols approach. the study is based on a previous investigation conducted by gafrej and abbes (2017), which conducted a macroeconomic examination of the determinants of commercial bank liquidity factors in the czech republic. both studies suggest that macroeconomic factors have a significant impact on bank liquidity; specifically, they indicate that factors such as inflation not only impact the liquidity of the banks but also have a detrimental impact on the economy. the study also finds that other macro-economic indicators such as interest rates, npls, and gdp serve as factors that have a significant impact on bank liquidity risks. it has been seen in the market that npls have a positive correlation with liquidity, in that whenever npls rise, liquidity also rises, as it induces the bank to preserve liquidity for any unforeseen circumstances. kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 65 a similar situation is seen in relation to gdp growth, in that during a period of gdp growth, many borrowers are willing to take out more loans; this, by default, forces banks to maintain an adequate level of liquidity. the interbank rate has a positive relationship with liquidity, as banks invest excess liquidity as interest rates increase. as regards bank size in terms of total assets, the stated principle supports the ideology of ‘too big to fail’ and the possibility of support from the lender of last resort. massoc (2020) studies competition in retail banking and structural banking reform in relation to the ‘too big to fail’ concept. the research focuses on a single global and domestic bank in europe, examining how the market dynamics have affected it since the 2008 financial crisis. based on a competitive analysis of bank structure and regulatory banking policies in the uk, france and germany, the study explains how vulnerable banks can be in the wake of a global financial crisis. gafrej and abbes (2017) firmly concludes by stating that interest margins, monetary policies and interest margins do not have a significant impact on the liquidity of banks in the czech republic. rani and zergaw (2017) and trenca et al. (2015) echo this assessment of the impact macroeconomic variables have upon banking system liquidity. the studies are very similar to that conducted by gafrej and abbes (2017), concluding by saying there is a negative relationship between liquidity and financial crises. banks’ liquid assets, which are received from total assets and deposits as well as from short-term funding, reduce in line with the higher profitability, increased capital adequacy and size of the bank. however, the abovementioned studies challenge gafrej and abbes (2017) findings in respect of unemployment and the public deficit. the study also found that gdp and unemployment have an effect on the bank liquidity in that region. this literature review includes several studies that consider idiosyncratic and market-related factors. macroeconomic factors are also important, as these can be determinant towards gathering liquidity during both normal and stressed market conditions. while idiosyncratic factors can be gathered from financial statements, macroeconomic indicators arise from a country’s economic, monetary and fiscal policies. we have already seen, in the earlier sections, how the 2008 financial crisis that emanated from one financial institution spread to other financial markets and thus became a systemic issue. hence, it can clearly be concluded that factors affecting liquidity not only arise from individual banks but also from systemic market factors, which may be related to the quantity and quality of liquidity in the interbank market. over the last four decades, a major attribute of the economic success of the uae is the positive movement of oil prices. the discovery and export of oil changed the face of uae, from a fishing economy to an oil giant, ultimately creating a revenue-rich country. the gdp of the uae is one of the highest in the middle east, standing at usd 421 billion as of 31 december 2019. in contrast, it stood at merely usd 17 million in 1960. el-chaarani (2019) documents the influence of oil prices by studying the balance sheet and income statements of several banks in the middle east. of the many countries considered, one country selected is the uae. banks from several other countries (such as saudi arabia, qatar, bahrain, kuwait, jordan, oman and iran) were also studied. since the drop in oil prices in 2014, the central and federal governments of the middle eastern countries that are mainly engaged in oilproducing businesses have tried to diversify into hydrocarbons and trading activities. other non-oil sectors include manufacturing, tourism, health/ medical activities and finance. the study also propounds the idea that many scholars have ventured into analyzing the correlation of the banking sector with oil price fluctuations; however, no clear propensity of the nature of their relationship has been determined. a study conducted by el mahmah and trabelsi (2021) focuses on the impact of the drop in oil prices on the financial stability of gcc banks over the period 2000–2014. the method used by the study is a panel var model that is specifically constructed to show when the price drops below 1%. the results of the study reveal that “oil price shocks were a determinant of the overall financial stability of banking sector in the region. the oil price drop in the middle of 2014 was associated with high level of non-performing loans and a low level of financial stability”. the study was further done in 2019, when the oil prices had fallen significantly, to negative levels. this study highlights serious financial concerns for banks in gcc countries, as oil-producing companies withdrew massive deposits in order to continue as going concerns. tabash and khan (2018) reinforce the longand short-term correlation between oil price movements and the financial performance of islamic banks in the uae between the end of 1990 and mid-2015. their research clearly shows that the movement of oil prices, as well as the shocks, resulted in a significantly large negative correlation with the banking sector in an emerging economy such as the uae; however, it also shows that the islamic banks were not significantly impacted due to their sharia lending principles and additional capital requirements. the research gap, identified by the study itself, is that it does not consider conventional banks, as islamic banks were the focus of the research. a more recent study has been undertaken by musa (2021); this examines the relationship between oil prices and islamic bank performance in opec members for the period 2007 to 2016. the authors observe that each country has specific oil-price management characteristics and that the impact of oil prices is different in every country. based on the results, the study notes that given the importance of oil price movement in the middle east, there are very few research conducted that have measured its impact on the liquidity of the banks?. materials and methods a regression analysis predicts a continuous variable from a set of independent variables. the independent variables can be either dichotomous or continuous. a multiple regression analysis provides information about the interaction between dependent and independent variables, or between several independent variables, which can then be used to enable further manipulation (kroll & chesler, 1992). through regression, the determination of the statistical significance of a coefficient is possible. it is also possible to retain those factors that are statistically significant while rejecting those that are not. in this study, the regression is performed on naturally occurring variables that have been calculated from the balance sheets found kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 66 in the banks’ annual financial statements (for bank-specific factors) and in the uae’s national statistics register (for marketrelated factors). the author has performed the routine diagnostics for regression by ensuring the accuracy of the data, accounting for missing data, confirming the number of cases and noting any outliers. all diagnostics have been performed using spss software for data cleaning and analysis. the data for the annual financial statements was plotted on an excel sheet; this data was then uploaded into spss using an .xls file. diagnostic validation for bank-specific factors using regression analysis table 1. dependent and independent variables dependent variable liquidity ratio independent variables deposit growth, npl, car, roa the dependent and independent variables have been derived from the published annual financial statements of the sampled banks for the period 2010–2019. test of normality the test of normality can be judged through histogram, p-p plot, q-q plot and test of normality. elliott & woodward (2007) stated that the normality tests are also supplemented with the graphical assessment of normality. figure 1. normal distribution and pp plot diagram for idiosyncratic factors based on figure 1, the visual representation of the dependent variable shows a normally distributed bell curve while the variable also aligns reasonably perfect on the p-p plot. table 2. test of normality for idiosyncratic factors test of normality kolmogorov-smirnova shapiro-wilk statistic df sig. statistic df sig. liquid_ratio 0.184 91 .200* 0.898 91 0.207 *. this is a lower bound of the true significance. a. lilliefors significance correction the shapiro and wilk (1965) test of normality states that if p > 0.05, then the dependent variable is normally distributed. since in the given case, the significance is at 0.207, it satisfies the shapiro-wilk test for normality. homoscedasticity test the test highlights if the residuals are equally distributed or if the accumulate together at specific values or if they are far apart. the test is to verify if the errors have the same (but unknown) variance. this is constant variance assumption also known as homogeneity of error variance or error variance homoscedasticity assumption. the plotted diagram is shown below and visually we can see that the data is randomly distributed. figure 2. scatter plot for idiosyncratic factors kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 67 test of linearity linearity refers to the predictor variables having a linear relationship with the outcome variable. figure 3. linearity test for idiosyncratic factors multicollinearity test table 3 calculated from spss indicates the correlation coefficient using the pearson correlation. table 3. correlation for idiosyncratic factors correlations liquid_ratio deposit_growth npl car roa pearson correlation liquid_ratio 1 -0.282 0.461 -0.32 -0.568 deposit_growth -0.282 1 0.283 -0.172 -0.06 npl 0.461 0.283 1 -0.099 -0.563 car -0.32 -0.172 -0.099 1 0.114 roa -0.568 -0.06 -0.563 0.114 1 sig. (1-tailed) liquid_ratio 1 0.003 0 0.001 0 deposit_growth 0.003 1 0.003 0.051 0.287 npl 0 0.003 1 0.176 0 car 0.001 0.051 0.176 1 0 roa 0 0.287 0 0.142 1 n liquid_ratio 91 91 91 91 91 deposit_growth 91 91 91 91 91 npl 91 91 91 91 91 car 91 91 91 91 91 roa 91 91 91 91 91 if the correlation coefficient in the pearson correlation is greater than 0.8 it would indicate that independent variables are multicollinear as 0.8 would be strong high correlation. based on the table above all the independent variables have correlation coefficient less than 0.8, which indicates absence of multicollinearity. the second indicated method to verify multicollinearity is to analyze the vif values. table 4. coefficient for idiosyncratic factors coefficientsa model unstandardized b coefficients std. error standardized coefficient beta t sig. collinearity statistics tolerance vif 1. (constant) 117.093 11.407 10.265 0 deposit_growth -88.025 13.854 -0.461 -6.354 0 0.882 1.134 npl 1.262 0.305 0.358 4.144 0.62 1.612 kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 68 car -1.415 0.304 -0.324 -4.655 0.959 1.042 roa -6.126 1.43 -0.357 -4.284 0.666 1.501 a. dependent variable: liquid_ratio table 4 shows that vif values are less than 2 indicating absence of multicollinearity. error term test the test assumes that the error term has mean equal to zero. table 5. descriptive statistics for idiosyncratic factors descriptive statistics n minimum maximum mean std. deviation standardized residual 91 -2.98371 2.42146 0 0.977525 valid n (list wise) 91 table 5 shows that the mean is equal to zero. hence, the assumption is satisfied that error term has mean equal to zero. further, as per standard residual test, the residual should be between +3 and -3. as per table 8, currently it is at 2.984 and +2.421 and hence the negative residual assumption is met. tale 6. residual statistics for idiosyncratic factors residual statisticsa minimum maximum mean std. deviation n predicted value 15.9363 60.4023 30.1831 8.54599 91 std. predicted value -1.667 3.536 0 1 91 standard error of predicted value 0.838 4.102 1.598 0.48 91 adjusted predicted value 15.5269 58.6238 30.1617 8.49537 91 residual -21.23173 17.23087 0 6.95596 91 std. residual -2.984 2.421 0 0.978 91 stud residual -3.109 2.588 0.001 1.007 91 deleted residual -23.057 19.67585 0.02145 7.38969 91 stud. deleted residual -3.281 2.679 -0.002 1.024 91 mahal. distance 0.259 28.916 3.956 3.722 91 cook's distance 0 0.19 0.013 0.031 91 centered leverage value 0.003 0.321 0.044 0.041 91 a. dependent variable: liquid_ratio residual independence test we will use durbin watson test (dwt is measured on a scale of 0 to 4. we want to be as close to 2 as possible and avoid figures below 1 and above 3) if d<2 positive auto correlation if d>2 negative auto correlation if d=2 no autocorrelation table 7. residual independence test for idiosyncratic factors model summaryb model r r square adjusted r square std. error of the estimate r square change f change df df2 sig f change durbinwatson 1 .776a 0.602 0.583 7.11589 0.602 32.453 4 86 0 0.805 a. predictors : (constant), roa, deposit_growth, car, npl b. dependent variable: liquid_ratio table 7 shows that since, d<2 i.e., at 0.805, hence there is positive auto correlation outlier test table 8. frequencies for idiosyncratic factors frequencies statistics standardized dfbeta intercept standardized dfbeta deposit_growth standardized dfbeta npl standardized dfbeta car standardized dfbeta roa n valid 91 91 91 91 91 missing 0 0 0 0 0 minimum -0.48636 -0.22685 -0.86069 -0.39028 -0.306 maximum 0.20809 0.4866 0.68963 0.22538 0.27233 kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 69 table 8 shows that all the betas for dependent and independent variables are between +2 and -2 range indicating that there are no significant outliers. regression model for bank specific factors table 9. regression analysis for idiosyncratic factors model summaryb model r r square adjusted r square std. error of the estimate r square change f change df df2 sig f change durbinwatson 1 .776a 0.602 0.583 7.11589 0.602 32.453 4 86 0 0.805 a. predictors : (constant), roa, deposit_growth, car, npl b. dependent variable: liquid_ratio table 9 shows that adjusted r square is at 58.3% indicating 58.3% of the variation is caused due to independent variables on dependent variables. the regression model is statistically significant as f change is less than 0.05. table 10. regression model for idiosyncratic factors coefficientsa model unstandardized b coefficients std. error standardized coefficient beta t sig. collinearity statistics tolerance vif 1. (constant) 117.093 11.407 10.265 0 deposit_growth -88.025 13.854 -0.461 -6.354 0 0.882 1.134 npl 1.262 0.305 0.358 4.144 0.62 1.612 car -1.415 0.304 -0.324 -4.655 0.959 1.042 roa -6.126 1.43 -0.357 -4.284 0.666 1.501 a. dependent variable: liquid_ratio further, based on the table 10, all independent variables are statistically significant as “sig” is less than 0.05. table 11. anova for idiosyncratic factors anovaa model sum of squares df mean square f sig. regression 6573.058 4 1643.265 32.453 .000b residual 4354.688 86 50.636 total 10927.746 90 a. dependent variable: liquid_ratio b. predictors : (constant), roa, deposit_growth, car, npl in anova table 11, since sig < 0.05, it is statistically significant, and we reject the null hypothesis diagnostic validation for market-related factors using regression analysis table 12. dependent and independent variables dependent variable: liquidity ratio independent variables: gdp, inflation, unemployment, oil prices in order to arrive at the liquidity ratio, the author has averaged the liquidity ratio for all the sampled banks for each of the 10 years. the market indicators have been taken from the national statistics centre of the uae. when doing regression, the cases-to-independent variables ratio should ideally be 20:1; that is 20 cases for every independent variable in the model. the lowest your ratio should be is 5:1 (i.e., 5 cases for every independent variable in the model). the study has taken 10 years of market related data. however, the data is considered inadequate for conclusive regression analysis unlike bank specific factors. nevertheless, the regression on the limited data showcases, that there is statistical significance between the independent and dependent variable for market related data. test of normality table 13. test of normality for market-related factors test of normality kolmogorov-smirnova shapiro-wilk statistic df sig. statistic df sig. liquid_ratio 0.154 10 .200* 0.893 10 0.184 *. this is a lower bound of the true significance. a. lilliefors significance correction kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 70 the shapiro-wilk test results in table 13 are based on the correlation between the data and the corresponding normal scores and provides better power than the k-s test even after the lilliefors correction. the shapiro and wilk (1965) test of normality states that if p > 0.05, then the dependent variable is normally distributed. since in the given case, the significance is at 0.240, it satisfies the shapiro-wilk test for normality. figure 4. normal distribution and pp plot for market-related factors based on graphs in figure 4, the visual representation of the dependent variable shows a normally distributed bell curve while the variable also aligns reasonably perfect on the q-q plot. homoscedasticity test the plotted diagram is shown in figure 5 and visually we can see that the data is randomly distributed. figure 5. scatter diagram for market-related factors test of linearity test of linearity for market related factors could not be completed, as there were not sufficient observations to conclude the linear relationship. this has been considered as a limitation of the research. multicollinearity test table 14 calculated from spss indicates the correlation coefficient using the pearson correlation. table 14. correlation for market-related factors correlations liquid_ratio oil_price_changes inflation gdp unemployment pearson correlation liquid_ratio 1 0.71 0.443 0.566 0.401 oil_price_changes 0.71 1 -0.266 0.338 0.568 inflation 0.443 -0.266 1 0.26 0.003 gdp 0.566 0.338 0.26 1 0.573 unemployment 0.401 0.568 0.003 0.573 1 sig. (1-tailed) liquid_ratio 1 0.011 0.1 0.044 0.126 oil_price_changes 0.011 1 0.229 0.169 0.044 inflation 0.1 0.229 1 0.234 0.497 gdp 0.044 0.169 0.234 1 0.042 unemployment 0.126 0.044 0.497 0.42 1 n liquid_ratio 10 10 10 10 10 oil_price_changes 10 10 10 10 10 inflation 10 10 10 10 10 gdp 10 10 10 10 10 unemployment 10 10 10 10 10 kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 71 table 14 shows that all the independent variables have correlation coefficient less than 0.8 that indicates absence of multicollinearity. table 15. coefficients for market-related factors coefficientsa model unstandardized b coefficients std. error standardized coefficient beta t sig. collinearity statistics tolerance vif 1. (constant) -1.272 0.102 -12.489 0 oil_price_changes 0.012 0.001 0.958 12.841 0 0.595 1.68 inflation 30.627 3.116 0.636 9.829 0 0.791 1.265 gdp 4.24 1.334 0.237 3.178 0.025 0.593 1.685 unemployment -2.767 0.79 -0.281 -3.502 0.017 0.514 1.946 a. dependent variable: liquid_ratio table 15 shows that vif values are less than 2 indicating absence of multicollinearity. regression model for market factors table 16. regression analysis for market-related factors model summaryb model r r square adjusted r square std. error of the estimate r square change f change df df2 sig f change durbinwatson 1 .992a 0.944 0.899 0.654 0.944 74.212 4 5 0 0.941 a. predictors : (constant), unemployment, inflation, oil_price_changes, gdp b. dependent variable: liquid_ratio table 16 shows that the adjusted r square is at 89.9% indicating almost 90% of the variation is caused due to independent variables on dependent variables. the regression model is statistically significant as f change is less than 0.05. table 17. regression model for market-related factors coefficientsa model unstandardized b coefficients std. error standardized coefficient beta t sig. collinearity statistics tolerance vif 1. (constant) -1.272 0.102 -12.489 0 oil_price_changes 0.012 0.001 0.958 12.841 0 0.595 1.68 inflation 30.627 3.116 0.636 9.829 0 0.791 1.265 gdp 4.24 1.334 0.237 3.178 0.025 0.593 1.685 unemployment -2.767 0.79 -0.281 -3.502 0.017 0.514 1.946 a. dependent variable: liquid_ratio further, table 17 shows that all independent variables are statistically significant as “sig” is less than 0.05. gdp contribution is highest as it is at 0.997 as compared to other independent variables. table 18. anova for market-related factors anovaa model sum of squares df mean square f sig. regression 0.188 4 0.047 74.212 .000b residual 0.003 5 0.001 total 0.191 9 a. dependent variable: liquid_ratio b. predictors : (constant), unemployment, inflation, oil_price_changes, gdp in anova table 18, since sig < 0.05, it is statistically significant, and we reject the null hypothesis. regression analysis for idiosyncratic and market-related factors table 19 shows the overall regression calculation for idiosyncratic and market-related factors. it indicates that all the factors are significant to the liquidity ratio. based on the values in the table, all independent variables are statistically significant, as the p-value is less than 0.05. kapur et al., indian journal of finance and banking 10(1) (2022), 61-74 72 regression analysis for all factors table 19. summary table for all factors coefficients standard error t-stat p-value lower 95% upper 95% lower 95.0% upper 95.0% intercept 0 #n/a #n/a #n/a #n/a #n/a #n/a #n/a deposit growth -57.98 86.79 -0.66 0.04 -431.4 315.47 -431.44 315.47 npl -0.89 1.73 -0.51 0.04 -8.34 6.55 -8.34 6.55 car 2.78 2.79 0.99 0.04 -9.25 14.81 -9.25 14.81 roa 12.22 11.98 1.01 0.04 -39.35 63.79 -39.35 63.79 unemployment 129.56 194.20 0.66 0.037 -706.0 965.15 -706.0 965.15 inflation -649.7 703.41 -0.92 0.04 -3676. 2376.8 -3676.3 2376.8 gdp -76.10 108.47 -0.70 0.02 -542.8 390.62 -542.8 390.62 average oil prices 0.05 0.148 0.35 0.01 -0.58 0.69 -0.58 0.69 results this research evaluated the impact and statistical significance of the bank-specific and market-related factors on the liquidity of banks in the uae. the test was conducted using a linear regression model that tested the significance of each independent variable on the dependent variable. it has clearly been shown that the bank-specific factors impact the liquidity of banks in the uae. additionally, while the data on the market-related factors was insufficient, it still managed to evidence that these factors have a statistically significant effect on the dependent variable. the diagnostic summary of the regression analysis for both the idiosyncratic and market-related factors is given in table 20. summary table containing the regression analysis results table 20. summary test data for all variables test name (whether test conducted or not) idiosyncratic factor market-related factor missing data test yes yes test of normality yes yes homoscedasticity test yes yes test of linearity yes no* multicollinearity test yes yes error-term test yes no residual independence test yes no outlier test yes no regression model yes yes * analysis not conducted due to the inadequacy of available data. as the significance has now been tested, the next step is to rank these factors according to their order of its impact—from highest to lowest—using the murame approach. author contributions: conceptualization, m.k., a.b. and k.m.; methodology, m.k.; software, m.k.; validation, m.k., a.b. and k.m.; formal analysis, m.k.; investigation, m.k.; resources, m.k.; data curation, m.k.; writing – original draft preparation, m.k.; writing – review & editing, m.k., a.b. and k.m.; visualization, m.k.; supervision, a.b. and k.m.; project administration, m.k.; funding acquisition, m.k.. 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. 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 alqemzi, a. a. m., aziz, n. a. a., yahaya, s. n., & husseini, s. a. 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(2013). what determines the profitability of banks? evidence from spain. accounting & finance, 53(2), 561-586. https://doi.org/10.1111/j.1467-629x.2011.00466.x 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 15(2) (2025), 1-11 1 finance and banking ijfb vol 15 no 2 (2025) p-issn 2574-6081 e-issn 2574-609x journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by american finance & banking society, usa green banking initiatives for sustainable development: practices and performance of commercial banks shaifali mathur (a)1 sakshee lakhani (b) (a)sr. assistant professor, department of financial studies, iis (deemed to be university), jaipur, india; e-mail: shaifali.mathur@iisuniv.ac.in (b)student, m. com, ramjas college, university of delhi, india; e-mail: saksheelakhani@gmail.com a r t i c l e i n f o article history: received: 20th march 2025 reviewed & revised: 20th march to 20th august 2025 accepted: 25th august 2025 published: 30th august 2025 keywords: green banking, banks’ environmental performance, green banking practices, sustainability, sustainable development jel classification codes: g21, g41, e44 peer-review model: external peer review was done through double-blind method. a b s t r a c t concerns about environmental sustainability and climate change have prompted commercial banks to adopt green initiatives, such as dedicated "green funds" and eco-friendly products, to support sustainable development. regulatory frameworks and stakeholder pressures are driving banks to integrate environmental responsibility and corporate social responsibility into their operations. green banking is defined as integrating environmentally friendly practices, such as sustainable lending, carbon footprint reduction, and financing for renewable energy, into banking operations. standard practices include funding eco-friendly projects and minimizing the bank's carbon footprint. these initiatives aim to align financial activities with ecological conservation and long-term economic stability. this study examines green banking practices across 10 commercial banks (5 public, 5 private) in jaipur, india, focusing on their impact on banks' environmental performance. a survey using structured questionnaires collected data from 161 bank employees (including branch managers, branch heads, relationship managers, and assistant managers) across all ten banks. subsequently, correlation and regression analysis were conducted to assess the relationship between green practices and environmental performance indicators. the results reveal a statistically significant and positive impact of green banking on the environmental performance of both public and private sector banks. quantitatively, the regression model explains about 71.3% of the variance in the ecological performance measure (r² =0.713), indicating that sustainability-oriented practices substantially improve outcomes. the major finding is that green banking initiatives alone account for roughly 71.3% of the variation in banks' environmental outcomes in this sample. overall, these results highlight the strong empirical association between banks' green initiatives and their environmental performance. © 2025 by the authors. licensee american 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 the growing global emphasis on environmental sustainability has prompted commercial banks to adopt green banking initiatives as a strategic approach to support sustainable development (jeucken, 2010). green banking refers to integrating environmentally friendly practices into banking operations, including sustainable lending, reducing carbon footprints, and investing in renewable energy projects (bahl, 2012). these initiatives aim to align financial activities with ecological conservation while promoting long-term economic stability (scholtens, 2017). green banking, an evolving paradigm in the financial sector, has garnered increasing attention for its potential to align banking operations with environmental sustainability (shaumya & arulrajah, 2017). it integrates environmental and social considerations into core banking functions to protect the environment and conserve natural resources (grover & kaur, 2019). these practices include funding eco-friendly projects, reducing banks' carbon footprint, and raising environmental awareness among customers and employees (kumar et al., 2021). this transition is driven by rising concerns about climate change and the growing need for ecological balance, compelling banks to shift from traditional practices to environmentally responsible alternatives (wijethunga & dayaratne, 2018). commercial banks are now launching “green funds” for projects addressing social and environmental issues, reflecting a significant shift in priorities (prabhu & aithal, 2021). as environmental concerns gain momentum across industries, banks are uniquely positioned to influence economic behaviors and drive sustainable development (sharma & choubey, 2022). 1corresponding author: orcid id: 0000-0002-5691-4464 © 2025 by the authors. hosting by american finance & banking society. peer review under the responsibility of the american finance & banking society, usa. https://doi.org/10.46281/ijfb.v15i2.2716 to cite this article: mathur, s., & lakhani, s. (2025). green banking initiatives for sustainable development: practices and performance of commercial banks. indian journal of finance and banking, 15(2), 1-11. https://doi.org/10.46281/ijfb.v15i2.2716 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/ijfb.v15i2.2716 https://orcid.org/0000-0002-5691-4464 https://orcid.org/0009-0002-1998-3353 mathur & lakhani, indian journal of finance and banking 15(2) (2025), 1-11 2 the role of commercial banks in fostering sustainable development has gained significant attention, particularly due to increasing regulatory pressures and growing stakeholder demands for corporate social responsibility (csr) (weber, 2016). by incorporating environmental risk assessments and offering green financial products, banks can significantly contribute to achieving the united nations' sustainable development goals (sdgs), especially sdg 7 (affordable and clean energy) and sdg 13 (climate action) (krstić, 2013). environmental performance in the banking sector is intricately linked to the adoption of green banking practices. these initiatives are now key performance indicators as banks are evaluated not just on financial metrics but also on environmental stewardship (sharma & choubey, 2022; prabhu & aithal, 2021). green banking encompasses a wide range of strategies, including eco-friendly operations, green product development, and environmental risk management, all aimed at reducing the sector's ecological footprint (muchiri et al., 2025). by strategically integrating these green practices into their operational frameworks, commercial banks can mitigate their environmental impact while fostering a culture of sustainability throughout the value chain. increasingly, banks are reforming their core functions to align with global sustainability standards, reducing carbon emissions and actively contributing to climate solutions. this research has significant value in promoting sustainable development within the banking sector. it seeks to explore the variety of green banking practices adopted by selected public and private-sector commercial banks and to assess their impact on the banks' environmental performance. the primary objective is to evaluate the extent to which green principles are integrated into day-to-day banking operations and whether these efforts translate into measurable improvements in environmental outcomes. by evaluating and comparing the adoption of green banking practices across public and private banks, the study provides critical insights into how financial institutions can contribute to environmental sustainability. the findings emphasize the dual role of banks as both financial intermediaries and change agents capable of encouraging eco-friendly behaviors among customers and employees. additionally, the research highlights the need to institutionalize sustainability in banking operations, policy frameworks, and employee engagement. it serves as a valuable reference for policymakers, banking professionals, and regulatory authorities in designing systems that incentivize green practices and foster environmentally responsible banking. the study aims to examine the green banking initiatives implemented by banks and assess how these initiatives enhance their environmental performance. literature review green banking, also referred to as ethical or sustainable banking, integrates environmental considerations into financial operations to minimize ecological footprints while fostering economic growth (ullah, 2020). the concept has gained traction as banks play a pivotal role in promoting sustainability through specialized financial products like green loans and ethical investments (prabhu & aithal, 2021). krstić (2013) provides global benchmarks. research conducted by wang, sun, and yu (2023) emphasizes that robust corporate governance enhances firm value when supported by green banking disclosures. several studies have examined the theoretical underpinnings of green banking. bihari and pandey (2015) outlined a conceptual framework for green banking adoption and identified essential implementation steps. bihari and pandey (2015), cholasseri (2016), and risal and joshi (2018) establish the foundational components: conceptual frameworks, swot analyses of green banking products, and empirical links to environmental performance. a systematic bibliometric review (goswami, 2024) underscores the need for clear theoretical underpinnings beyond legitimacy and stakeholder theories to strengthen future research. similarly, kala, and vidyalaya (2020) discussed banking regulations that ensure sustainability across economic, environmental, and social dimensions. kalra (2016) emphasized the banking sector's role in supporting environmentally responsible projects in other industries, reinforcing the link between finance and sustainable development. research on the effectiveness of green banking yields mixed findings. some studies highlight its positive environmental impact, while others note implementation challenges. risal and joshi (2018) found a statistically significant positive relationship between green banking initiatives and banks' environmental performance in nepal. similarly, shaumya and arulrajah (2017) concluded that sustainable banking practices enhance environmental outcomes. chen et al. (2022) empirically demonstrated that banks' operational policies and green financing significantly improve environmental performance, though employee and customer-related practices had limited effects. the financial impact of green banking remains debated. khanna et al. (2013) found no significant correlation between environmental and financial performance. however, karim et al. (2020) and jain and sharma (2023) reported that green investments enhance profitability and brand reputation. chowdhury (2018) observed that sustainability improves sectoral performance without necessarily boosting individual bank profitability. sahoo et al. (2016) found younger generations more receptive to green banking. varghese (2018) observed that indian banks primarily treat green initiatives as csr rather than core operations. brar (2016) highlighted continued reliance on paper-based promotions despite green commitments. meena (2013) advocated for stronger rbi regulations and incentives, while jayabal and soundarya (2016) recommended awareness campaigns to drive adoption. zhang et al. (2022) found that green financing mediates the relationship between banking activities and environmental performance in bangladesh's private commercial banks. however, low awareness and high operational costs remain barriers. rahal et al. (2023) stressed the need for government-led awareness campaigns in bangladesh and india. risal and joshi (2018) confirmed the positive impact of green banking on environmental sustainability, reinforcing the need for policy support. han, zhang, and yang (2022) explored how china's green finance reform policies foster green innovation, emphasizing the role of regulatory frameworks. tu and dung (2017) found low awareness and slow adoption of green mathur & lakhani, indian journal of finance and banking 15(2) (2025), 1-11 3 banking, despite its inclusion in national growth strategies. sutrisno et al. (2024) highlight how green credit positively influences profitability and stability, offering fresh insights into institutional impacts. han et al. (2022) attribute green innovation in banks to robust regulatory frameworks, reinforcing the policy's pivotal role. studies in nepal, bangladesh, india, and vietnam document the uptake of green banking, noting common barriers such as low awareness, high costs, and technical constraints (risal & joshi, 2018; zhang et al., 2022; tu & dung, 2017). mir and bhat (2022) observed that there is no universally accepted green banking framework, with adoption varying widely across countries. thomas and linson (2018) noted a disparity in customer awareness: while digital banking is well known, green financial products (e.g., solar atms, eco-friendly loans) remain underutilized. chen et al. (2022) confirm that green policies and project financing bolster environmental performance, whereas bimha and nhamo (2017) caution against expecting rapid sustainability gains. a global meta-analysis by goswami (2024) finds a small but positive (though statistically insignificant) link between green banking and profitability, with effects influenced by regional context. investigating emerging markets, mahmud and lee (2025) show that atm deployment increases roe, while board-level risk governance enhances net interest margins. in india, employee perspectives significantly shape the implementation of green banking (kumar et al., 2021). cholasseri (2016) conducted a swoc analysis of green banking products, identifying strengths (e.g., sustainability benefits) and challenges (e.g., high costs). wisetsri et al. (2022) found digital banking tools (mobile banking, e-statements) to be the most popular green products, while sms banking saw minimal usage. digital tools such as mobile banking and estatements are popular eco-practices (wisetsri et al., 2022), while sms banking remains underpenetrated. psychological factors (ahuja, 2015; habibullah & natalwala, 2023) and information asymmetry (mir & bhat, 2022) strongly affect adoption. habibullah and natalwala (2023) emphasized affective, behavioral, and cognitive dimensions in green banking adoption. mathur and chaturvedi (2022) found that awareness and perceived benefits significantly influence investor willingness to engage with green financial products. trehan (2015) highlighted the importance of regulatory enforcement and government policies in promoting green banking. zhang (2021) found that environmentally sustainable firms benefit from easier access to credit with lower collateral requirements, reinforcing financial incentives for green practices. customer loyalty studies (dewi & indudewi, 2024) reveal that green image and trust mediate the relationship between green practices and loyalty. climate/environmental risks pose systemic threats: african stress tests reveal fragility in banking systems linked to ecosystem loss. zheng et al. (2024) show that monetary policy's effects on green and traditional financial markets are evolving and increasingly interdependent. the surge in fossil-fuel financing by central global banks highlights the critical need for policy oversight to ensure green commitments are meaningful. collectively, these studies underscore the multifaceted nature of green banking, its potential to drive sustainability, the barriers to widespread adoption, and the evolving strategies to align financial systems with environmental goals. while progress is evident, coordinated efforts among governments, banks, and consumers remain crucial for achieving meaningful impact. the literature review reveals a need for more comprehensive frameworks and standardized practices in green banking, especially in developing countries. additionally, there is limited research on the long-term financial impacts of green banking practices and the effectiveness of government and regulatory interventions in promoting green banking initiatives. while numerous studies have examined green banking initiatives, particularly from the customer's perspective, there remains a significant gap in understanding bankers' viewpoints. it is essential to explore how banking professionals perceive and implement green banking practices and to assess the impact of these initiatives on overall bank performance. therefore, the research aims to examine environmentally friendly practices implemented through green banking and to assess how these practices influence banks' environmental performance. the following hypotheses are proposed for this study: h0: there is no significant impact of green banking practices of the banks on their environmental performance. theoretical framework of the study figure 1. theoretical framework of the study, created by the author the study's theoretical framework suggests that green banking practices significantly affect a bank's environmental performance. it highlights the cause-and-effect relationship, suggesting that implementing sustainable banking practices enhances environmental outcomes and promotes environmentally responsible financial practices, thereby augmenting the bank's environmental performance. green banking practices impact bank’s environmental performance mathur & lakhani, indian journal of finance and banking 15(2) (2025), 1-11 4 materials and methods the present study is empirical and aims to examine the perspectives of bankers working in public and private sector banks on green banking practices within jaipur district, rajasthan. the research seeks to identify and analyze the key factors that influence the adoption and implementation of green banking initiatives. sample selection and size a purposive sampling method was adopted to select respondents who hold officer grade positions in both public and private sector banks. the sample comprises 161 banking professionals, including branch managers, branch heads, relationship managers, assistant managers, and probationary officers, ensuring representation across multiple hierarchical levels and departments involved in decision-making for banking operations. scope and coverage the study covers 10 leading banks in jaipur district: 5 private-sector and five public-sector. the selected private sector banks include:  hdfc bank  icici bank  kotak mahindra bank  axis bank  indusind bank the selected public sector banks are:  state bank of india (sbi)  punjab national bank (pnb)  indian overseas bank (iob)  bank of baroda (bob)  idbi bank these banks were chosen based on their operational presence, service outreach, and involvement in environmental sustainability initiatives. data collection method primary data was collected through a structured questionnaire administered to targeted banking professionals. the survey instrument was specifically designed to assess three key dimensions: (1) demographic data of the respondents, (2) respondents' awareness, perception, and implementation of green banking practices in their respective institutions, and (3) the banks' environmental performance. the identified green banking practices were categorized into five distinct dimensions: (1) changing client's habits, (2) technological changes, (3) operational changes, (4) innovation in products and services, and (5) green engagements. this enables a systematic examination of how each dimension contributes to the banks' overall environmental performance. the study measured banks' environmental performance using four key indicators: (1) minimization of carbon emissions from operations, (2) adoption of green banking policies, (3) reduction in energy consumption, and (4) provision of staff training on environmental protection and energy efficiency. to evaluate the impact of green banking practices, the mean values of these parameters were aggregated, offering a quantifiable metric of sustainability effectiveness. statistical tools and techniques to ensure the instrument's reliability and internal consistency, cronbach’s alpha was computed. to uncover latent constructs and reduce the data into meaningful factors influencing green banking practices, an exploratory factor analysis (efa) was employed. additionally, regression analysis was applied to examine the relationship between the identified factors and the extent of green banking practices followed in the banks. exploratory factor analysis to explore the environmentally friendly practices adopted by various banks under the green banking approach, efa is applied. exploratory factor analysis (efa) is a method used to simplify the complexity of a study. its purpose is to condense many dimensions or questions into a few labeled components, known as principal components. these components capture most of the variances present in the study's variables. another key goal of exploratory factor analysis is to identify distinct factors, each comprising questions with similar meanings. these factors represent specific aspects of the study. the technique ensures that these factors are not correlated, preventing redundancy and repetition in the analysis. measurement of sample adequacy and strength of the relationship among factors table 1. kmo and bartlett tests source: generated using primary data with the help of spss 22.0 software kmo and bartlett's test kaiser-meyer-olkin measure of sampling adequacy. .717 bartlett's test of sphericity approx. chi-square 3267.568 df 160 sig. .000 mathur & lakhani, indian journal of finance and banking 15(2) (2025), 1-11 5 the kmo measure assesses whether the data are suitable for factor analysis. it ranges from 0 to 1, and values above 0.5 are generally considered acceptable. in this case, table 1 shows that the kmo value of 0.717, which exceeds 0.05, is considered sufficient for sample adequacy and subsequent factor analysis, indicating that there are underlying relationships among the variables that could be explored. the p-value for bartlett's test is very close to 0 (0.000), indicating the test is significant. in simpler terms, it suggests that meaningful relationships exist among the variables and that factor analysis may be appropriate. table 2. total variance explained eigenvalues and total variance explained compon ent initial eigenvalues extraction sums of squared loadings rotation sums of squared loadings total % of variance cumulative % total % of variance cumulative % total % of variance cumulative % 1 9.234 41.974 41.974 9.234 41.974 41.974 4.971 22.596 22.596 2 2.817 12.804 54.778 2.817 12.804 54.778 3.460 15.728 38.324 3 1.925 8.748 63.526 1.925 8.748 63.526 3.459 15.724 54.049 4 1.230 5.591 69.117 1.230 5.591 69.117 2.539 11.540 65.589 5 1.141 5.185 74.302 1.141 5.185 74.302 1.917 8.713 74.302 6 1.004 4.563 78.865 7 .865 3.932 82.797 8 .613 2.785 85.582 9 .516 2.345 87.927 10 .486 2.207 90.134 11 .408 1.855 91.989 12 .336 1.528 93.516 13 .283 1.285 94.801 14 .255 1.160 95.962 15 .201 .912 96.874 16 .192 .871 97.744 17 .157 .712 98.456 18 .119 .540 98.997 19 .084 .380 99.377 20 .065 .296 99.673 21 .043 .194 99.867 22 .029 .133 100.000 extraction method: principal component analysis. source: generated using primary data with the help of spss 22.0 software table 2 data represents the results of a principal component analysis (pca), which helps in understanding the underlying patterns in data. table 2 displays initial eigenvalues, variance explained, and cumulative variance at each component. it can also be noted that the first factor accounts for 22.596% of the variance, the second 38.324% cumulative, the third 54.049%, the fourth factor 66.589%%, and the fifth factor accounts for 74.302% cumulative variance, i.e, cumulative variance explained by all five factors having eigen value of more than one is 74.302%. figure 1 and table 1.1 suggest that, before extraction, 22 linear components are identified within the dataset. after extraction, there are 5 distinct linear components within the dataset. figure 2. scree plot source: scree plot of eigenvalues, created by spss 22 the scree plot, figure 2 displays the eigenvalues of 22 variables, where each eigenvalue represents the variance explained by a corresponding principal component. the plot helps identify the optimal number of components to retain in a principal component analysis (pca). based on the scree plot, it is appropriate to retain the first 5 components, as they account for the major variance in the dataset. mathur & lakhani, indian journal of finance and banking 15(2) (2025), 1-11 6 table 3. rotated component matrix the rotation in table 3 above is used to decrease the number of factors on which the variable under investigation has high loading. the data represent the results of factor analysis in the context of environmental initiatives within an organization. each row corresponds to a specific environmental variable, with its factor loading (the correlation between the variable and the underlying factor). the first extracted factor, labeled changing client’s habits, includes variables such as e-statements, awareness programs, and solar atms, which exhibit high communality and factor loadings. this suggests that these initiatives are closely linked to a common underlying factor, likely reflecting efforts aimed at enhancing client awareness and promoting technological adoption. the second factor, technological changes, shows that solar-powered atms and the latest technology have strong correlations with the underlying factor, indicating their importance in technological advancements within the organization. leds and cfls, while having a relatively lower factor loading, are still somewhat related. the third factor, operational changes, is characterized by strong loadings from variables such as reducing paper wastage, recycling sewage water, and sustainable lending, highlighting their central role in enhancing operational sustainability. sustainable reporting also contributes to this factor, though with a relatively lower loading, suggesting it supports these efforts while playing a secondary role. collectively, these variables reflect a focus on eco-friendly operational practices and long-term sustainability initiatives within the organization. the fourth factor innovation in products and services displays that green atms installed strongly align with the underlying factor, emphasizing the significance of this innovation. green loans, paperless banking, and green savings, bonds, and investments also contribute to the factor with comparatively lower but significant factor loadings. finally, under the fifth factor, that is green engagements, 5 june world environment day, and swacchta drives show a strong association with the underlying factor, suggesting their pivotal role in the organization's environmental engagement efforts. while no plastic days and carpool days show somewhat weaker statistical associations, they remain relevant components of this sustainability framework. their inclusion reinforces the organization's holistic approach to ecological responsibility, signifying how even smaller-scale initiatives contribute to building a culture of environmental consciousness and participatory action among stakeholders. this pattern reflects a strategic multi-tiered engagement model, where flagship programs anchor the effort while supplementary activities broaden its reach and impact. after factor extraction, reliability analysis is conducted. table 4. reliability analysis source: generated using primary data with the help of spss 22.0 software components 1 2 3 4 5 e statements 0.831 awareness programs 0.733 solar atms 0.89 training and services 0.699 due diligence 0.662 solar-powered atms 0.782 leds cfls 0.502 latest technology 0.823 organization communication 0.748 waste recycling 0.605 sustainable reporting 0.689 reduce paper wastage 0.821 e-waste management 0.712 recycling sewage water 0.744 sustainability lending 0.669 green loans 0.545 green atms installed 0.874 paperless banking 0.659 green savings, bonds, and investments 0.655 5 june world environment day 0.789 swacchta drives 0.631 no plastic days, carpool days 0.574 extraction method: principal component analysis. rotation method: varimax with kaiser normalization. source: generated using primary data with the help of spss 22.0 software reliability statistics cronbach's alpha n of items .917 22 mathur & lakhani, indian journal of finance and banking 15(2) (2025), 1-11 7 to measure internal consistency, that is, how closely related a set of extracted items is, as a group, reliability analysis is done. the cronbach's alpha is 0.917, which indicates a high level of internal consistency for our scale with this specific sample. hypothesis: h0 = there is no significant impact of green banking practices of the banks on their environmental performance. the multiple regression analysis is performed to accomplish the study's objective and test the hypothesis under study. various assumptions of regression analysis have been checked. the normality test has been conducted, the data are found to be normally distributed, and there is a linear relation between the variables. correlation and regression analysis regression equation y= a+b1x1+b2x2+b3x3+b4x4+b5x5+e where, y (dependent variable) = banks’ environmental performance a = constant (intercept) x1 = changing client’s habit x2 = technological changes x3 = operational changes x4 = green engagements x5 = innovation in products and services e = error term b1, b2 ,b3, b4, b5 = are the coefficient of regression table 5. correlation analysis correlations banks’ environment al performance changing the client's habit technolo gical changes operation al changes green engage ments innovat ion in product s and services pearson correlation ( r ) banks’ environmenta l performance 1.000 .547 .743 .807 .648 .624 sig. (1-tailed) banks’ environmenta l performance . .000 .000 .000 .000 .000 source: generated using primary data with the help of spss 22.0 software the result in table 5 shows, the coefficient of correlation (r) between the banks’ environmental performance and changing client’s habits is 0.547; the coefficient of correlation between the banks’ environmental performance and technological changes in the bank is 0.743; the coefficient of correlation between banks’ environmental performance and banks’ operational changes is 0.807; coefficient of correlation between banks’ environmental performance and green engagements is 0.648 and coefficient of correlation between banks’ environmental performance and innovation in the banks’ products and services is 0.624, indicating a strong positive correlation between all the green banking practices and banks' environmental performance with the level of significance at 0.000 (p<0.05) for changing client’s habits, banks’ operational changes, technological changes in the bank, green engagements and innovation in banks’ products and services respectively. table 6. model summaryb model summaryb model r r square adjusted r square std. error of the estimate durbin-watson 1 .844a .713 .704 .33385 1.506 a. predictors: (constant), innovation in products and services, green engagements, changing clients' habits, operational changes, technological changes b. dependent variable: banks’ environmental performance source: generated using primary data with the help of spss 22.0 software mathur & lakhani, indian journal of finance and banking 15(2) (2025), 1-11 8 table 6 shows multiple regression model summaries and overall fit statistics. the analysis revealed an adjusted r2 of 0.704 with r2 = 0.713, implying 71.3% of the variability in the banks' environmental performance is accounted for by green banking practices. to check the fitness of the model table 7. anova anovaa model sum of squares df mean square f sig. 1 regression 42.927 5 8.585 77.027 .000b residual 17.276 155 .111 total 60.203 160 a. dependent variable: banks’ environmental performance b. predictors: (constant), innovation in products and services, green engagements, changing clients' habits, operational changes, technological changes table 7 shows the overall fitness of the model. the significant value is 0.000, which is less than the 0.05 level of significance. therefore, the model is fit for prediction. table 8. coefficients table 8 shows multiple linear regression estimates, including intercept and significance levels. by taking all the variables measuring green banking initiatives in multiple linear regression, we find that operational changes and innovations in banking products and services are significant predictors. we can also see that operational changes have a higher impact than innovation in products and services by comparing standardized coefficients. regression equation y= a+b1x1+b2x2+b3x3+b4x4+b5x5+e banks’ environmental performance = 0.130 + (-.127 x changing clients habit) + 0.063 x technological changes + 0.592x operational changes + .248x innovation in products and services + 0.159 x green engagements + 0.33385 the present study revealed several important findings regarding the adoption and impact of green banking practices among public and private sector banks in jaipur, rajasthan. using exploratory factor analysis, the research identified five key dimensions of green banking practices: changing clients’ habits, technological changes, and operational changes, innovation in products and services, and green engagements. these dimensions encompass a wide range of eco-friendly banking initiatives such as promoting e-statements, using solar-powered atms, reducing paper wastage, offering green loans, and organizing environmental awareness activities. the reliability analysis indicated a high level of internal consistency among the survey items, with a cronbach's alpha of 0.917. correlation analysis demonstrated a strong and statistically significant positive relationship between all five green banking dimensions and the environmental performance of banks. among these, operational changes showed the strongest correlation with environmental performance, followed by technological changes and green engagements. regression analysis confirmed that operational changes (β = 0.592) and innovation in products and services (β = 0.248) were the strongest predictors of environmental performance. green engagements also had a positive and statistically significant impact, while technological changes and changing clients' habits, although positively correlated, did not significantly contribute to the regression model. the overall regression model was found to be statistically significant, explaining 71.3% of the variance in banks' environmental performance, thus confirming the robustness of the model. model unstandardized coefficients standardized coefficients t sig. collinearity statistics b std. error beta tolerance vif 1 (constant) .130 .242 .538 .591 changing the client's habit -.122 .064 -.127 1.905 .059 .419 2.387 technological changes .079 .133 .063 .593 .554 .163 6.134 operational changes .646 .090 .592 7.204 .000 .274 3.653 innovation in products and services .195 .053 .248 3.662 .000 .404 2.477 green engagements .128 .049 .159 2.612 .010 .502 1.991 a. dependent variable: banks’ environmental performance mathur & lakhani, indian journal of finance and banking 15(2) (2025), 1-11 9 as a result of these findings, the null hypothesis stating that green banking practices have no significant impact on banks' environmental performance was rejected. the study found that green banking initiatives play a vital role in enhancing the environmental sustainability of banking operations. conclusions the study seeks to identify the green banking practices adopted by banks and evaluate their effect on improving overall environmental performance. green banking revolutionizes the financial sector by aligning banks' roles with economic and environmental sustainability. it embodies a commitment to fostering sustainable development by aligning banking practices with environmental responsibility. essentially, green banking entails the adoption of inclusive banking strategies geared towards ensuring sustainable economic growth. this paradigm emphasizes environmentally friendly industry practices within the banking sector, resulting in reduced internal and external carbon footprints. green banking involves implementing eco-conscious measures, such as embracing technological advancements and operational enhancements, and encouraging shifts in client behavior within the banking industry. recent advancements in indian banking technology have catalyzed a transformation from conventional banking methods to a more inclusive approach that prioritizes the interests of customers, financial institutions, and the environment. consequently, the primary objective of this study is to assess the impact of green banking practices on the banks' environmental performance. the study involves exploratory factor analysis, cronbach's alpha, and regression analysis. the present study has confirmed the statistically significant and positive impact of green banking practices on the environmental performance of the public and private sector banks of jaipur city, explaining 71.3% variation in the dependent variable. it can be concluded that green banking initiatives have a significant and positive impact on the banks' environmental performance, and the null hypothesis has been rejected. the banking industry is making a significant contribution to sustainable development. operational changes in the bank, like reducing paper wastage, keeping in mind environmental sustainability while performing lending activities, and using e-waste management policies, have proved to be the most significant predictors of the bank's environmental performance. the research findings highlight the need for policy interventions in the banking sector to enhance environmental sustainability. policymakers should incentivize green banking practices through tax benefits and reduced regulatory constraints. awareness campaigns targeting clients, promoting eco-friendly habits, and encouraging innovation through financial incentives are crucial. furthermore, facilitating knowledge exchange between private and public sector banks via capacity-building programs can ensure uniform adoption of green practices, fostering a more sustainable banking sector. author contributions: conceptualization, s.m. and s.l.; methodology, s.m.; software, s.m.; validation, s.m.; formal analysis, s.m. and s.l.; investigation, s.m.; resources, s.m.; data curation, s.m.; writing – original draft preparation, s.m. and s.l.; writing – review & editing, s.m. and s.l.; visualization, s.m.; supervision, s.m.; project administration, s.m.; funding acquisition, s.m. and s.l. 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. 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 ahuja, n. 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(2024). monetary policies on green financial markets: evidence from a multi-moment connectedness network. energy economics, 136, 107739. publisher’s note: american finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2025 by the authors. licensee american 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by american finance & banking society is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.24311/jed/2017.24.2.05 https://doi.org/10.1016/j.jclepro.2023.137658 https://doi.org/10.1080/20430795.2016.1184868 https://doi.org/10.4038/ijabf.v4i1.28 https://doi.org/10.31849/jpsp.v6i8.12345 https://doi.org/10.1016/j.jclepro.2021.12829 https://doi.org/10.3390/su14020989 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/ indian journal of finance and banking 13(1) (2023), 91-103 91 finance and banking ijfb vol 13 no 1 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa internal auditor characteristics and financial reporting quality: evidence from bangladesh md gulam sharoar hossain khan (a)1 (a) assistant professor, department of business administration, stamford university bangladesh, dhaka, bangladesh; e-mail: sharoar_08@yahoo.com a r t i c l e i n f o article history: received: 21st december 2022 revised: 30th january 2023 accepted: 20th february 2023 published: 28th february 2023 keywords: financial reporting quality, auditor characteristics jel classification codes: m40, m41, m42, h83, f65 a b s t r a c t this study aims to examine the relationship between internal auditor characteristics and financial reporting quality in the context of the banking sector in bangladesh. to achieve this objective, this study used a quantitative research methodology by using a questionnaire survey. data were collected (495 respondents from 45 banks) from the internal auditors of banking companies in bangladesh which cover 78% of the population. this study uses five important characteristics of internal auditors as exogenous variables such as auditors’ independence, auditor proficiency, professional qualification, auditors’ experiences, and the leadership style of the chief audit executive. smartpls-4 is used as statistical software to determine the relationship between exogenous and endogenous constructs. findings indicate that professional qualification has the highest positive significant impact on financial reporting quality. results also revealed that other characteristics like au auditors’ independence, auditor proficiency, and auditors’ experiences has also positive significant effects on financial reporting quality. however, the leadership style of the chief audit executive has no positive significant impact on financial reporting quality. the findings of this study encourage the level of understanding of the internal auditors, regulators, top management, policy maker of the organization, investors, and other stakeholders regarding the quality of financial reporting of banking sectors in the perspective of an emerging economy. © 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 the revised conceptual framework of 2018 (effective from 1st january 2020) issued by ‘the international accounting standard board’ (iasb) has clearly explained the purpose of financial reporting which is to provide relevant information to the users to make appropriate strategic decisions. according to iasb, investors rely on accounting information to make appropriate decisions, for which that information must be a relevant, comparable, verifiable, timely, understandable, and faithful representation. financial reporting quality (frq) helps to make appropriate strategic and investing decisions, especially related to resource allocation in any type of organization (iasb, 2013). it has been suggested that managing external sources of funds and ensuring the proper use of those funds by ensuring accountability depends solely on financial reporting quality (lin et al., 2016). users of accounting information typically make investment-related decisions based on the organization's cash flow (both inflow and outflow) and resource management capabilities (ifrs, 2020). and that’s why frq is so important to the stakeholders like lenders, suppliers, regulators, and shareholders. frauds are becoming a permanent nature in business (awolowo et al., 2018). in 2018, the global total cost of corporate fraud are valued at $4 trillion (acfe, 2018) based on 125 countries all over the world. the value of corporate fraud increased to $4.5 trillion and $4.7 trillion in 2020 and 2022 respectively (acfe, 2020, 2022). asset misappropriation, corruption, and financial statement fraud have been identified as the most common categories of scandals. for example, ge (us) was founded in 1892. at the beginning of 2018, it was publicized that “aggressive accounting” performed by sec, a review that in october 2018 its $22 billion non-cash charges connected to purchase and ge’s market value cut down by more than $200 billion during two years (age, 2019). wells fargo is another renowned 1corresponding author: orcid id: 0000-0003-2333-5842 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i1.2046 to cite this article: khan, m. g. s. h. (2023). internal auditor characteristics and financial reporting quality: evidence from bangladesh. indian journal of finance and banking, 13(1), 91-103. https://doi.org/10.46281/ijfb.v13i1.2046 https://orcid.org/0000-0003-2333-5842 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i1.2046 khan, indian journal of finance and banking 13(1) (2023), 91-103 92 largest financial institution in the usa. in 2016, this institution involved more than millions of fraudulent accounts that had been created against clients (europeanceo, 2018). bismillah group, one of the top garments in bangladesh also performed fraudulence activities by taking a loan from the bank and taking bdt 1174.46 crore from the bank on behalf of his name and also its fake sister concern (cpd, 2018). now financial scandals and frauds are considered one of the most challenging issues to ensure the shareholder’s interest (connect, 2016). none of the above scandals are shown in financial reporting. thus, the question always raises of which mechanism to follow will improve financial reporting quality. the best practice of corporate governance (cg) influences the frq (nalukenge et al., 2018). there are four important instruments of corporate governance such as internal audit, external audit, audit committee, management, and among these internal audits are considered the cornerstone of the cg mechanism (abbott et al., 2016). past studies propose that organizations should use internal audit as effective instruments for controlling and monitoring organizational operations (cohen et al., 2010; nalukenge et al., 2018; prawitt et al., 2009). internal auditors can help improve financial reporting quality in several ways. internal auditors may assist external auditors with financial statement audits, helps in the financial audit of subsidiary companies, and also significant in compliance audit and special audits so that the actual condition of the organization can be excluded (abbott et al., 2016). independent internal auditors follow specific procedures in assisting the organization's financial statements audit and its subsidiary. these comprise assessing the process of year-end transactions, closing entries, adjustment, specific accruals, valuation of closing accounts receivable and payable, valuation of inventory, contingent transactions, and fixed assets valuation (iia, 2004). compliances audit of internal auditors may test all events and transactions and posting of each transaction for compliance in accordance with financial reporting standards and companies reporting policy. in addition, in preparing financial reporting, competent internal auditors can give consulting services in specific cases like warranty reserves, write-off accounts receivable, impairment test of assets, and collectivity reserves (pricewaterhousecoopers, 2009). moreover, the institute of internal auditors (iia) recommended that skilled and competent internal auditors should review the process of financial reporting with ensuring full disclosure, review a risk management process, identify the complex and problematic transactions, assess the off-balance sheet items, and key transactions that are related to subsidiaries and joint ventures (iia, 2014). this study claims that auditors’ characteristics are required for ensuring the quality of financial reporting and this is supported by “international standards for professional practice of internal auditing” (isppia), which implements as attributes of individual auditors. however, the characteristics of internal auditors in the process of frq are not yet fully explained (abbott et al., 2016; kaawaase et al., 2021). moreover, internal audits and frq are rare in the emerging economy and most of the research has been done in developed economies (kaawaase et al., 2021; shireenjit, 2013). therefore, the objective of this study is to explore the relationship between internal auditors’ characteristics and financial reporting quality in the context of banking sector in bangladesh. quantitative research method was conducted by using the survey questionnaire to explain this relationship. data were evaluated using smartpls-4 and statistical package for social sciences (spss). the result specifies that internal auditors’ characteristics such as auditor’s independence, proficiency, auditors’ experiences, and professional qualifications have significant positive impacts on frq. the result also suggested that the leadership style of chief audit executive have not significant positive effects on frq. the rest of the work is organized as follows. the next section presented the literature review and identified the research gap based on previous literature. this section also includes the development of hypotheses based on previous studies. then discuss the research methodology. the methodology section covers the population, sample sizing, research tools, and operationalization of independent and dependent variables. then the results afterwards the results are discussed. finally, the last section contains a conclusion that includes significance, limitations and required further studies. literature review financial reporting quality (frq) stakeholder theory suggests that managers of an organization should make a variety of decisions based on internal information of the organization and should consider the interests of not only the management but also the interest of other parties like customers, investors, lenders, regulators, communities, society, and government as well (freeman, 1984). from the perspective of stakeholder theory, the organization has to achieve many different goals, not only to see only the interest of the shareholders. freeman (1984) believes that when taking any strategic decision in the organization, the interests of all the parties involved in the organization should be considered. in this theory it is treated as accountability which means “as the responsibility of one party to another in a relationship where one party entrusts another with the performance of certain duties and hence it can be argued that financial reporting quality could reduce information asymmetry between the organization and its stakeholders in a timelier manner and as a consequence improve the relationships between them” (kaawaase et al., 2021). quality financial reporting provides to various stakeholders how the organization is performing on governance-related issues. based on stakeholder theory, organization firms with internal audit teams have some characteristics that can complete their functions are accomplished of meeting the different requirements of different stakeholders. previous studies have discussed various factors of frq and mentioned a special factors like listing requirements, nature of the industry, nature of capital, company size, debt ratio, profitability, technology, internet, and ownership pattern (desoky, 2015; hindi & rich, 2010; kelton & yang, 2008; mitra & bhuiyan, 2019). according to iasb, the basic principles of frq is qualitative characteristics like faithful representation, relevance, understandability, and timeliness that influence khan, indian journal of finance and banking 13(1) (2023), 91-103 93 the frq. gajevszky (2015) conducted a study and stated that economic factor, political system, governance, international forces, and accounting standards influence the frq. moreover, gajevszky (2015) also demonstrated that earnings management, internal control, information technology, good corporate governance, process of internal reporting, accounting conservation, culture, age of the ceo, company reputation, and board size influence frq. internal auditors assess whether all these factors are being ensured within the organization. that is why financial reporting quality also depends on internal audit quality. passed studies argue that internal audit quality depends on the characteristics of the internal auditors. bangladesh has a record of improvement in terms of growth and development even though global risk and uncertainty have increased (worldbank, 2023). bangladesh hopes to rise to the country of upper middle income by 2031. bangladesh has a notable story in poverty reduction. when bangladesh became independent in 1971, this country was one of the poorest countries. from there, in 2015, bangladesh reached to country of lower middle income. in 1991 the poverty rate was 41% whereas in 2023 the poverty rate has come down to 18.7% (kalerkontho, 2023). moreover, the industrial sector has made a huge contribution to the economic development of bangladesh (dailysun, 2019). the banking industry is playing an important role in poverty alleviation and industrialization in bangladesh (dailystar, 2023). bank provides investable funds for industrialization to the both private and public organization and helps international business with prompt payment which generates employment opportunities and hence strengthens the economy. among other sectors, banking is the most regulated sector and that is why this sector is able to contribute to the economy which in turn encouraged me to examine the relationship between internal auditors’ characteristics and frq in the banking sector of bangladesh. the findings of this study will what qualities should internal auditors possess and how can internal auditors use their attributes to help in preparing quality financial reporting. in addition, to the best of the author's knowledge, bangladesh is a developing country with a very limited number of research on internal audit and frq. masud (2022) examined the different drivers of frq in the listed companies in bangladesh and found that firm size, firm age, ownership structure, sources of finance, liquidity, profitability, board size, board independence, board diligence, independence level of the audit committee, and quality of auditing has a significant impact of frq. rashid (2020) investigate the relationship between the professional qualification of senior management and frq and stated that professional certification has a positive impact on frq. karim et al. (2006) found a positive significant association between regulation and timeliness of financial reporting. rouf et al. (2014) demonstrated that the independence of independent directors, audit committee independence, and board size influence the frq. very recently, khan (2023) reported that both assurance and consulting role of internal auditors influence the practice of sustainability reporting. moreover, past studies have ignored quantitative research by using a survey questionnaire that gives more motivation to influence the practices of frq. to fill this gap, this study explored the relationship between internal auditors’ characteristics and frq using the evidence from bangladesh’s banking sector. internal auditor characteristics the international standards of professional practice of internal audit (isppia) has implemented internal auditors’ characteristics that must be implemented by individuals (iia, 2012b). according to these standards, internal auditors should be completely independent in providing their services. “independence is the freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner. to achieve the degree of independence necessary to effectively carry out the responsibilities of the internal audit activity, the chief audit executive has direct and unrestricted access to senior management and the board “ (iia, 2012a). roussy (2016) conducted a study about when external auditors consider internal audit reports and found that external auditors reduce their assignment when internal auditors are independent, this proves that when internet auditors are independent, the organization's financial reporting is prepared appropriately. similarly, shireenjit (2013) stated that when internal auditors are organizationally independent, the income of the organization will increase and this is the symbol of frq. alzeban and gwilliam (2014) reported that auditor’s independence leads a review of the accuracy and reliability of financial reporting. however, alzeban and gwilliam (2014) also reported that the lack of auditor’s independence is a barrier to internal audit performance. iia (2012) suggested that “internal auditors must possess the knowledge, skills, and other competencies needed to perform their individual responsibilities. the internal audit activity collectively must possess or obtain the knowledge, skills, and other competencies needed to perform its responsibilities”. roussy (2016) also found that external auditors are more rely on internal audit work when they are more competent. it’s also suggested that when internal auditors are more competent, problems in financial reporting can be easily identified and rectified, thereby improving reporting quality. bananuka (2018) identify the function of internal auditors which includes assessing internal control, engaging in the risk management processes, and ensuring the applicable rules and regulations. it means that when the internal auditor assesses the level of internal control, justifies whether the risk management is in place, and whether the organization has complied with all the laws and regulations on the organization then the frq will automatically increase. arena and azzone (2009) reported that auditor’s competencies and proficiencies influence to implementation and communication of reports to the assigned authority so that they can make proper action if there is any mistake that also leads to the preparation of financial reporting. soh dominic (2011) stated that sufficient knowledge regarding information technology, financial feasibility, and business risk influences internal audit works. alzeban and gwilliam (2014) report that the competencies of internal auditors influence the reliability of financial reporting and improve the process of risk management. according to iia (2012) “internal auditors are encouraged to demonstrate their proficiency by obtaining appropriate professional certifications and qualifications, such as the certified internal auditor designation and other designations offered by the institute of internal auditors and other appropriate professional organizations”. internal auditors khan, indian journal of finance and banking 13(1) (2023), 91-103 94 may face a lot of difficulties if they do not have professional qualifications. the professional qualification declares internal auditor owns sufficient theoretical, technical, and practical knowledge and to maintain this qualification, continuous professional training is required. iia. (2012) also suggested that “internal auditors must enhance their knowledge, skills, and other competencies through continuing professional development”. being incapable to find the vital issues and risks that will affect their performance. al-matari et al. (2014) recommended that auditors’ qualification such as cia, cgap, ccsa, crma, and cfsa helps to give feedback on any mistakes and can make quick decisions in very less time. moreover, highly qualified internet auditors help management to take strategic decisions regarding risk management that effect organizational performance, earnings management and improve audit quality, all are leads to the frq. similarly, hutchinson and zain (2009) also found that the professional qualification of internal auditors influences organizational performance. leadership style is affected to the performances of internal auditors (nusran, 2021). according to majid et al. (2016), the leadership style is an approach by which a leader influences his employees in a way that makes them willing to do what their leader suggests to achieve the organizational goals regardless of their preferences”. lok and crawford (2004) found that leadership style has significant positive impact on commitment and reasonable functions. hughes et al. (2015) argue that transformational leadership is a managerial skill that allows strong emotions with their subordinates and believed to be more fruitful in leading the changes due to the willingness of subordinates to works that leads to overcoming leaders’ objectives. pratiwi et al. (2020) conducted a study about the leadership style and capability level of internal auditors and found that transformational leadership style has a positive impact on the internal auditor’s work like prevention and detection of fraud which consequently influence the frq. similarly, dal mas and barac (2018) also examined a study about the leadership style of the head of internal audit and their function’s effectiveness and found that the transformational leadership nature of the head of an internal audit influences to achieve the organizational objectives. moreover, experienced internal auditors may enjoy more encouragement than senior management in making strategic decisions (van peursem, 2004). they may have different views because of their experience. chung and monroe (2000) defined experience related to audit as “the auditor’s unique knowledge, competencies and capabilities that exist from job practices in the auditing profession which lead to the enhancement of auditor’s abilities to process relevant information, make a mental comparisons of the alternative way out, initiate subsequent actions and also provide decision making efficiency and effectiveness through a good memory of information necessary and an accurate judgment of audit works.” zain et al. (2006, p. 2) stated that “experience in accounting and auditing, and interactions with the internal audit function (such as frequency of meetings and review of internal audit reports) are associated with internal audits propensity to contribute towards the external audit predict that the level of audit experience among internal audit staff will impact on the extent to which the internal audit function is able to contribute to financial statement audits” and that reflects the frq. especially experiences in auditing and accounting help to influence the earnings quality (gaballa & ning, 2011). these studies also suggested that more experienced auditors gain more knowledge about clients’ activities and errors which could be helped in preparing good financial reporting. past studies also specified that auditors’ experiences can expand auditor’s ability to judgment (agoglia et al., 2007; chung & monroe, 2000; o'donnell, 2002). therefore, it can be hypothesized that h1: auditor’s experiences are positively associated with frq. h2: auditor’s independence is positively associated with frq. h3: auditor’s proficiency is positively associated with frq. h4: the leadership style of the chief audit executive is positively associated with frq. h5: professional qualification of internal auditors is positively associated with frq materials and methods research method quantitative research by using a survey questionnaire is conducted in this study to examine the relationship between exogenous and endogenous constructs. creswell and creswell (2017) defined quantitative research as “a type of research that is explaining phenomena by collecting numerical data that are analyzed using mathematically based methods (in particular statistics)”. quantitative research is highly acceptable to users for six important characteristics such as using the number to measure data, using quantitative data, purpose to be objective, using statistical analysis, denoting composite problems through constructs, and generalizable and comparable findings (goertzen, 2017). moreover, quantitative research findings are based on a large number of data that represent a population. random sampling technique is applied to collect data for this study which is required especially for quantitative research where each respondent has an equal probability of responding. population, sample, and research tool according to sukamolson (2007) a total number of samples should be covered 57 percent of the population (+-3%). this study is used in the banking sector of bangladesh. a total number of banks is 61 and all the banks work under bangladesh bank. it has sent 545 questions to the internal auditors in different branches of 45 banks (74% of the population). out of these 425 survey questionnaires were received (response rate 78%) and 30 survey questionnaires were incomplete and were excluded from the research. total usable data stood at 395. out of the total response, 78% are male and the remaining 22% are female. seven-point likert scale is used to prepare a survey questionnaire with close-ended questions. data collection was done from the beginning of january 2023 to the end of march 2023. smartpls-4 is used as statistical software to khan, indian journal of finance and banking 13(1) (2023), 91-103 95 determine the research model. smartpls-4 is variance-based software where there is no need for the data to be normally distributed (ringle et al., 2015). constructs measurements by following the past studies, all measurement scale (dependent and independent variables) was developed (see table-1). financial reporting quality (dependent variable) is measured based on the qualitative characteristics of accounting information such as relevance, reliability, understandability, comparability, and timelessness by following the study of shireenjit (2013). auditors independence was measured following by alzeban and gwilliam (2014) to measure about the free from conflict of interest, management interference, unrestricted access, not performing consulting services, and appointment and removal by the audit committee. auditor’s proficiency is measured by the following of kabuye (2017) to assess the sufficient knowledge about isppia, documents-based work, sufficient training, and having interpersonal interaction. the leadership style of cae is measured by the following of dal mas and barac (2018) to measure the complete faith in his subordinate, looking at puzzle things of subordinates, implementing rethinking ideas, personal attention, and continuously developing their subordinates. auditor’s professional qualification is measured by the following of al-matari et al. (2014) to assess internal auditors with professional certificate, certified internal auditors give quick feedback for any kind of errors and mistakes, and professional certified auditors are able to make instant appropriate strategic decisions and no need to consult with others. auditor’s experiences is measured by following gaballa and ning (2011) and intakhan and ussahawanitchakit (2010) indicate the experiences mean auditors have more knowledge about fraud and errors, more an idea about occasional errors, idea about the reasons for errors and how to mitigate such errors. table 1. constructs measurement constructs sources auditors independent alzeban and gwilliam (2014) auditors proficiency kabuye (2017) professional qualification al-matari et al. (2014) leadership style of cae dal mas and barac (2018) auditors experiences gaballa and ning (2011) & intakhan and ussahawanitchakit (2010) financial reporting quality shireenjit (2013) results the partial least square-structural equation model (pls-sem) contains two steps method. first, the measurement model “involves the evaluation of construct measures’ reliability and validity. this assessment draws on different measures, depending on whether a construct is measured reflectively or formatively” (ali et al., 2018, p. 520). this study considered all the items are reflective in nature. second the evaluation of the structural model. table 2 indicated that data is normally distributed. for using the sem-pls, data does not need to be normally distributed, but this study indicated that all the values of skewness are within the range of (+/2). table 2. mean, median, sd, skewness, and kurtosis name mean median standard deviation excess kurtosis skewness ai1 4.329 5.000 1.894 -1.209 -0.244 ai2 4.560 5.000 1.691 -1.189 -0.084 ai3 4.663 5.000 1.283 -0.746 0.006 ai4 4.766 5.000 1.142 -0.085 0.122 ai5 4.591 5.000 1.329 -0.633 0.062 ap1 4.477 5.000 1.718 -1.083 -0.126 ap2 4.391 5.000 1.590 -0.966 -0.094 ap3 4.477 5.000 1.741 -1.228 -0.074 ap4 4.377 5.000 1.779 -1.147 -0.168 ap5 4.334 5.000 1.781 -1.243 -0.147 pq1 4.314 5.000 1.814 -1.146 -0.226 pq2 4.214 4.000 1.603 -1.036 -0.077 pq3 4.680 5.000 1.458 -0.863 0.057 pq4 4.554 4.000 1.421 -0.855 -0.020 ls1 4.417 5.000 1.642 -0.796 -0.135 ls2 4.494 5.000 1.494 -0.832 0.029 ls3 4.437 4.000 1.491 -0.800 -0.008 ls4 4.369 4.000 1.737 -0.997 -0.164 ls5 4.369 5.000 1.720 -0.922 -0.156 ae1 4.926 5.000 1.131 -0.251 0.361 ae2 4.857 5.000 1.203 -0.162 0.208 ae3 4.874 5.000 1.134 0.018 0.072 ae4 4.786 5.000 1.073 0.029 0.254 frq1 4.366 5.000 1.762 -1.135 -0.152 frq2 4.329 5.000 1.664 -1.135 -0.135 frq3 4.477 5.000 1.523 -0.744 -0.200 khan, indian journal of finance and banking 13(1) (2023), 91-103 96 frq4 4.403 4.000 1.582 -0.702 -0.269 frq5 4.300 4.000 1.695 -0.940 -0.113 [note: aiauditors independence; apauditors proficiency; pqprofessional qualification; lsleadership style; aeauditors experience; frqfinancial reporting quality] result of measurement model the measurement model (reflective in nature) involves the assessment of reliability and validity. reliability includes items reliability and “internal consistency reliability”. to establish the item’s reliability, the loading of each item should be more than 0.70. to ensure the internal consistency reliability, the value of composite reliability and the value of cronbach’s alpha should be more than 0.70 (ali et al., 2018). to assess the convergent validity, the average variance extracted (ave) value should be more than 0.50 (hair jr et al., 2013). table 3 showed that all items loading exceeded the threshold limit (0.70) except ai4 (0.570). however, items should not be deleted if ave is more than 0.50 (hair et al., 2017). table 3 showed that all ave of each construct is more than 0.50 and hence item ai4 is retained. moreover, the value of composite reliability and cronbach’s alpha are more than the threshold limit, and hence reliability and convergent validity of each construct is established. for discriminant validity, crossed-loadings and the fornell–larcker criterion, and the heterotrait–monotrait (htmt) criterion should be ensured. in the case of crosse loading, the respective items loading of each construct should be greater than other items. table-4 indicated the crossed loading of each items and showed that each item of the particular construct are greater than others. table-5 showed that all square roots of ave exceeded their corresponding column & row and ensured the criterion of fornell–larcker and table-7 also showed that the value of htmt is close to 1 then considering a discriminant validity exists. table 3. items loading, cronbach's alpha, composite reliability, and average variance extracted construct items loading cronbach's alpha composite reliability (cr) average variance extracted (ave) auditors experiences ae1 0.892 0.897 0.901 0.766 ae2 0.904 ae3 0.882 ae4 0.818 auditors independence ai1 0.922 0.888 0.918 0.703 ai2 0.919 ai3 0.884 ai4 0.570 ai5 0.846 auditors proficiency ap1 0.918 0.955 0.956 0.848 ap2 0.910 ap3 0.915 ap4 0.935 ap5 0.926 financial reporting quality frq1 0.933 0.952 0.953 0.84 frq2 0.926 frq3 0.906 frq4 0.909 frq5 0.909 leadership style of cae ls1 0.915 0.946 0.948 0.824 ls2 0.887 ls3 0.890 ls4 0.925 ls5 0.920 professional qualification pq1 0.921 0.926 0.928 0.819 pq2 0.922 pq3 0.900 pq4 0.874 [note: aiauditors independence; apauditors proficiency; pqprofessional qualification; lsleadership style; aeauditors experience; frq financial reporting quality] table 4. crossed loading ae ai ap frq ls pq ae1 0.892 0.639 0.479 0.646 0.406 0.655 ae2 0.904 0.631 0.465 0.635 0.420 0.647 ae3 0.882 0.618 0.416 0.568 0.358 0.576 ae4 0.818 0.604 0.433 0.582 0.349 0.562 ai1 0.627 0.922 0.712 0.767 0.613 0.752 ai2 0.653 0.919 0.670 0.720 0.546 0.727 ai3 0.630 0.884 0.606 0.691 0.540 0.703 ai4 0.388 0.570 0.621 0.418 0.579 0.417 ai5 0.651 0.846 0.538 0.644 0.473 0.679 ap1 0.479 0.685 0.918 0.619 0.731 0.608 ap2 0.448 0.647 0.910 0.607 0.735 0.587 ap3 0.467 0.698 0.915 0.620 0.747 0.624 khan, indian journal of finance and banking 13(1) (2023), 91-103 97 ap4 0.471 0.690 0.935 0.617 0.746 0.616 ap5 0.498 0.701 0.926 0.651 0.744 0.648 frq1 0.652 0.771 0.672 0.933 0.560 0.770 frq2 0.612 0.732 0.640 0.926 0.574 0.753 frq3 0.657 0.701 0.575 0.906 0.528 0.742 frq4 0.633 0.698 0.582 0.909 0.524 0.725 frq5 0.637 0.701 0.628 0.909 0.548 0.730 ls1 0.380 0.577 0.745 0.513 0.915 0.511 ls2 0.387 0.575 0.728 0.555 0.887 0.539 ls3 0.388 0.542 0.698 0.518 0.890 0.529 ls4 0.433 0.626 0.729 0.568 0.925 0.588 ls5 0.404 0.606 0.748 0.551 0.920 0.548 pq1 0.645 0.764 0.658 0.772 0.596 0.921 pq2 0.652 0.739 0.639 0.737 0.567 0.922 pq3 0.651 0.697 0.584 0.736 0.509 0.900 pq4 0.581 0.676 0.539 0.690 0.492 0.874 [note: aiauditors independence; apauditors proficiency; pqprofessional qualification; lsleadership style; aeauditors experience; frqfinancial reporting quality] table 5. fornell-larcker’s criterion ae ai ap frq ls pq ae 0.875 ai 0.712 0.838 ap 0.514 0.743 0.921 frq 0.696 0.787 0.677 0.916 ls 0.440 0.646 0.804 0.597 0.908 pq 0.699 0.796 0.670 0.812 0.599 0.905 [note: aiauditors independence; apauditors proficiency; pqprofessional qualification; lsleadership style; aeauditors experience; frqfinancial reporting quality] table 6. heterotraitmonotrait ratio (htmt) ae ai ap frq ls pq ae ai 0.796 ap 0.553 0.823 frq 0.752 0.848 0.708 ls 0.475 0.722 0.846 0.628 pq 0.765 0.870 0.711 0.863 0.638 [note: aiauditors independence; apauditors proficiency; pqprofessional qualification; lsleadership style; aeauditors experience; frqfinancial reporting quality] result of structural model according to janadari et al. (2016) “the structural model and its latent variables represent the stable, theoretically and conceptually established contextual link between observed data on the input and output sides”. hair et al. (2014) propose 5 steps to assess the structural model. this study uses the first three steps to assess the structural model. first to assess the multicollinearity of different items of each construct. this study used the variance inflation factor (vif) to assess the multicollinearity. according to khan et al. (2019), if the value of vif is greater than 5, it is assumed that there is multicollinearity exists. in this study, the vif value is less than 5 and there are no issues of multicollinearity (see table 7). table 7. vif items vif items vif ae1 2.886 frq1 3.334 ae2 3.268 frq2 4.968 ae3 2.749 frq3 3.836 ae4 1.932 frq4 3.978 ai1 4.633 frq5 3.835 ai2 4.706 ls1 4.481 ai3 3.064 ls2 3.274 ai4 1.280 ls3 3.381 ai5 2.475 ls4 4.987 ap1 4.380 ls5 4.388 ap2 3.952 pq1 4.146 ap3 4.176 pq2 4.195 ap4 4.321 pq3 3.075 ap5 4.530 pq4 2.672 [note: aiauditors independence; apauditors proficiency; pqprofessional qualification; lsleadership style; aeauditors experience; frqfinancial reporting quality; vifvariance inflated factor] khan, indian journal of finance and banking 13(1) (2023), 91-103 98 second, evaluate the path coefficient. the bootstrapping technique is applied to test the significance of every path coefficient (chin & dibbern, 2010). “bootstrapping is a non-parametric-sampling procedure that involves repeated random sampling with replacement from the original sample and it is a superior re-sampling method which attempts to approximate the sampling distribution of an estimator by resampling with replacement from the original sample” (janadari et al., 2016, p. 191). this study used one tail test with 5000 subsamples at a 95% confidence level. the table-8 showed that ae is a positive statistically significant relationship with frq (β = 0.169, t = 3.444, p= 0.000). similarly, ai, ap, and pq are also a positive statistically significant relationship with frq respectively [(β = 0.232, t = 3.475, p= 0.000); (β = 0.113, t = 2.150, p= 0.016); (β = 0.412, t = 7.437, p= 0.000)]. however, ls is not having a positive statistically significant relationship with frq (β = 0.035, t = 0.796, p= 0.213). figure 9 showed the graphical presentation of the structural model. table 8. path co-efficient hypothesis original sample (o) sample mean (m) standard deviation (stdev) t statistics (|o/stdev|) p values r-square ae -> frq 0.169 0.170 0.049 3.444 0.000 0.732 ai -> frq 0.232 0.233 0.067 3.475 0.000 ap -> frq 0.113 0.113 0.052 2.150 0.016 ls -> frq 0.035 0.036 0.044 0.796 0.213 pq -> frq 0.412 0.410 0.055 7.437 0.000 [note: aiauditors independence; apauditors proficiency; pqprofessional qualification; lsleadership style; aeauditors experience; frqfinancial reporting quality] third, to assess the predictive power and which is determined by the use of the r square. the value of r squire means the amount of variance in the construct that is explained by the model r-square indicates the amount of variance explained by the exogenous variable in its endogenous counterpart” (janadari et al., 2016, p. 191). moreover, it shows the quality of every construct (hair jr et al., 2014). the value r square is from zero to 1 where zero indicates that there is no predictive relevance and 1 indicates the perfect prediction relevance. according to hair et al. (2011), the value of r square is 0.25, 0.50, 0.75 means weak, moderate, and substantial levels of predictive accuracy respectively. the r square value in this study is 0.732 which indicates that there is a moderate level of accuracy exists (see table 8). figure 9. graphical presentation of the structural model discussions the findings of the study suggested that auditors’ experiences have a positive significant relationship with financial reporting quality and h1 is supported. this supported hypothesis revealed that when the auditor has enough experience, then the auditors can easily identify the fraud or error in the organization, and also understand the nature of the fraud and the reason for the fraud or error. moreover, due to the auditor's experience, they can give the idea of how to manage those irregularities, and thus the management can control all these unexpected activities that reflect in the financial reporting khan, indian journal of finance and banking 13(1) (2023), 91-103 99 quality. previous research findings have supported this finding. for example, zain et al. (2006) reported that due to the experience of internal auditors, they engage with external auditors to help financial statements audit, and hence external auditors rely on internal auditors in many cases, and based on this, when the external audit report is issued, users have a positive perception of the financial statements, which indicates reporting quality. similarly, gaballa and ning (2011) recommended that internal auditors having accounting and financial experience that can assist by giving consulting services to those who prepare financial reporting with direction and advice to ensure financial reporting quality. the findings also revealed that auditor’s independence has a positive significant relationship with financial reporting quality and h2 is supported. it indicated that when the internal auditor is completely free from management pressure and free access to all departments and getting all types of relevant information at any time, then internal auditors provide appropriate consulting and assurance services that help to prepare financial reporting. when managers use these independent reports to analyze various data and include them in the financial statements then the relevancy of the financial statements is increased. financial statement information is heightened when managers use these independent reports from internal auditors. past studies supported this finding. for example, shireenjit (2013) recommended that when internal auditors audit the financial statements independently, the organization decreases and the earnings quality would be increased and consequently earnings management would be reduced which indicates the quality of the financial statement. similarly, alzeban and gwilliam (2014) found in saudi arabia that independence influences the review of financial reporting that will meet the stakeholder’s need. in addition to that auditor’s proficiency is have a positive significant relationship with financial reporting quality and h3 is supported. it indicated that when internal auditors gain proficiency through continuous development and training and through acquiring adequate organizational knowledge, it is easy to assess whether the rules and regulations of the organization are being complied, and whether their operations are effective operation. moreover, organizational governance is ensured that influences financial reporting quality. if internal auditors do not have sufficient skills, they often do not understand the nature of the organization's transactions, which creates problems for giving assurance and consulting services. furthermore, auditors have sufficient knowledge of rules and regulations that lead to identifying weaknesses in financial reporting. previous studies have supported this finding. for example, arena and azzone (2009) stated that when the auditor is competent, management implements the internal audit report in the organization, thereby reducing many of the irregularities and bringing transparency to the financial statements. similarly, alzeban and gwilliam (2014) supported that competent internal auditors influence the quality of financial statements. the findings of this study also stated that an auditor’s professional qualification has a positive significant relationship with financial reporting quality and h5 is supported. it indicated that professional qualification like cia, cgap, ccsa, crma, and cfsa increases the scope of work of internal auditors and because of this, any weakness can be identified in a very short period of time and suggestions can be made accordingly on how to solve this weakness and managers get the direction from this while preparing financial reports. past studies also support this finding. for example, al-matari et al. (2014) stated that auditors who are professionally qualified can find out any mistake in the organization within a short period of time and give prompt suggestions accordingly so that the manager can employ that suggestions while making the financial report. similarly, hutchinson and zain (2009) also stated that professionally qualified internal auditors influence organizational performance. however, the findings of this study showed that no positive significant relationship between the leadership style of cae and financial reporting quality, and h4 is not supported. it means that transformational leadership where priority is given to subordinates does not affect financial reporting quality. always giving priority to subordinates leads to many mistakes in work and in some cases neglect of work. this finding is consistent with other prior studies. for example, hay (2006) stated that when subordinates wait for direction due to less competence and that time if they are allowed to work independently then the proper output is not obtained from them. similarly, (stone et al., 2004, p. 4) perceive that “transformational leaders can exert a very powerful influence over followers, who offer them trust and respect”. conclusions the current study aims is to examine the relationship between internal auditor’s characteristics and financial reporting quality in the context of bangladesh. based on the literature review, this study used five important individual characteristics such as auditors’ independence, auditors’ proficiencies, professional qualification, the leadership style of chief audit executive, and auditor’s experiences. findings revealed that professional qualification has the highest positive impact on financial reporting quality. in addition to that findings also showed that auditors proficiencies, auditors independence, and auditor experiences has also positive impact on financial reporting quality. however, the result indicated that there are no positive significant effects of the leadership style of cae on the financial reporting quality. this study helps the internal auditor in many ways especially how the characteristics of internal auditors affect the outcome of their work particularly on the financial reporting quality. chief audit executives can learn from this study that transformational leadership will not be effective when internal auditors rely too much on direction having their incapability. top management and the audit committee can learn from this study what qualifications and qualities internal auditors should possess management appoints internal auditors by looking at those characteristics or ensuring those characteristics by proper training. top management and regulators also learn from this finding when and how internal auditors can contribute to internal reporting quality. this study has some limitations. firstly, this study considers only the banking sector which is a highly regulated sector in bangladesh. future research may consider non-banking like insurance, non-banking financial institution, and industrial sector even listed or non-listed to see if is there any variation in the results or not. secondly, bangladesh as a khan, indian journal of finance and banking 13(1) (2023), 91-103 100 developing country has been considered in this study. in the future, developed countries can be considered to identify the characteristics of internal auditors that impact on financial reporting quality. third and finally, the quantitative approach is used as a methodology in this study. in the future, qualitative study where interviews can be conducted to find out what other qualities auditors need to contribute to financial reporting quality. in summary, considering the contribution of the banking sector to the economy of bangladesh, this study is to explore the positive significant relation between characteristics of internal auditors (auditor’s independence, auditor’s experiences, professional qualification, auditors’ proficiencies, and leadership style of cae) that has an impact (except leadership style) on the financial reporting quality. future studies can be considered in developed countries and non-banking companies may examine how internal auditor characteristics affect financial reporting quality. author contributions: conceptualization, m.g.s.h.k.; methodology, m.g.s.h.k.; software, m.g.s.h.k.; validation, m.g.s.h.k.; formal analysis, m.g.s.h.k.; investigation, m.g.s.h.k.; resources, m.g.s.h.k.; data curation, m.g.s.h.k.; writing – original draft preparation m.g.s.h.k.; writing – review & editing, m.g.s.h.k.; visualization, m.g.s.h.k.; supervision, m.g.s.h.k.; project administration, m.g.s.h.k.; funding acquisition, m.g.s.h.k. 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: 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 abbott, l. j., daugherty, b., parker, s., & peters, g. f. 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(2006). internal auditors’ assessment of their contribution to financial statement audits: the relation with audit committee and internal audit function characteristics. international journal of auditing, 10(1), 1-18. https://doi.org/10.1111/j.1099-1123.2006.00306.x 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.1108/maj-06-2013-0886 https://doi.org/10.1108/02686901111151332 https://doi.org/10.1108/01437730410538671 https://doi.org/10.1108/02686900410524382 https://www.worldbank.org/en/country/bangladesh/overview#1 https://doi.org/10.1111/j.1099-1123.2006.00306.x http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 13(1) (2023), 78-90 78 finance and banking ijfb vol 13 no 1 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa value drivers of bank equity market price chitra gounder (a)1 jyoti nair (b) (a) associate professor, n l dalmia institute of management studies and research school of management, mumbai, india; e-mail: chitra..gounder@nldlamia.edu.in (b) professor, n l dalmia institute of management studies and research school of management, mumba, india; e-mail: jyoti.nair@nldlamia.edu.in a r t i c l e i n f o article history: received: 1st january 2023 revised: 20th february 2023 accepted: 25th february 2023 published: 28th february 2023 keywords: bank equity, market value, indian banks, macro-economic factors, value drivers jel classification codes: e52, e58, m41 a b s t r a c t the indian banking sector has shown robustness and resilience in the face of challenges on account of rising non-performing assets and economic upheavals. the market value of bank equity is a reflection of the financial performance of banks and macroeconomic factors. 22 bank-specific variables and 5 macroeconomic factors representing profit management, capital management, shareholder value management and risk and leverage management, india’s real gdp growth rates (factor cost), money supply growth, bank credit growth, deposit growth rate and inflation are used in this study. 19440 observations are examined from the financial data of 40 commercial banks (private and public sector banks for a period of eighteen years. the data is analyzed using panel regression. hausman and pagan's test was conducted to find the best-fit model. the results show that finance charge coverage (fccr), advance loan funds, current ratio, beta and asset turnover have a negative impact on bank equity value and activity mix, revenue efficiency, earnings retention, and cost management shows a positive significant relationship with equity value. factors like fccr affects the market values of public sector banks and private sector banks differently growth in gdp, inflation shows a positive relationship with the market value of bank equity. growth in money supply has a differential impact on the market value of private sector banks and public sector banks. the results provide useful insights to understand the determinants of the market value of bank equity. it can help bankers frame strategies to maintain and enhance the market value of their equity. © 2023 by the authors. licensee cribfb, usa. this article is an open-access article distributed under the terms and conditions of the creative c6540mmons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). introduction bank is a complex system with many performance centers interconnected in a nonlinear fashion, the synergy of this performance center will determine the banks overall performance leading to the maximization of bank market value and stability. in recent trends india economy has been on high growth trajectory crediting unprecedented opportunities for banking sector. indian banking sector is growing rapidly and performing remarkably well as compared to other banks in world, sengupta and thomas (2007). according to an iba-ficci-bcg report titled ‘being five star in productivity – road map for excellence in indian banking”. india’s gross domestic product (gdp) growth will make the indian banking industry the third largest in the world by 2025”. according to the report, the domestic banking industry is set for an exponential growth in coming years with its assets size poised to touch usd 28,500 billion by the turn of the 2025. even though indian banks are currently facing a great deal of difficulties, including increased capital adequacy requirements, improved branch sales and services, improved organizational design, frequent changes in policy rates to maintain economic stability, various regulatory requirements using innovative technology through new channels, working on lean operations, and managing non-performing assets, indian banking is still showing signs of growth and has enormous potential for expansion in india. literature review there are many studies which indicates and measured the growth in productivity and efficiency of banks and reduction in 1corresponding author: orcid id: 0000-0001-5174-6740 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i1.1977 to cite this article: gounder, c., & nair, j. (2023). value drivers of bank equity market price. indian journal of finance and banking, 13(1), 78-90. https://doi.org/10.46281/ijfb.v13i1.1977 https://orcid.org/0000-0001-5174-6740 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i1.1977 https://orcid.org/0000-0001-7948-3188 gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 79 cost, tyagarajan (1975), rangarajan and mampilly (1972) and subrahmanyam and swami (1993), kumbhakar and sarkar (2003); shanmugam and das (2004); das et al. (2005), sensarma (2005), rajan, reddy, and pandit (2011), cost minimization so as to increase efficiency in immensely competitive and growing trend, mohan (2008), contribution of indian banks in development of economic activity, jadhav and ajit (1996) and bank efficiency in the post liberalization period, mahesh and bhide (2008). as the performance of indian banking sector is continuously showing a growing trend, investors are interested in investing in the banking sector. in order to safeguard the interest of shareholder, framing of bank valuation model to drive a perfect shareholder value by considering external and internal value drivers of banks suitable to developing economy like india has become very essential. creating sustainable and growing shareholder value has been the banks' top priority. copeland evaluations of banks can help them achieve this goal. an integrated model that takes both internal and external value drivers into account and performs valuation for the generation of shareholder value and risk management is necessary. finding these value drivers is a crucial first step in enabling banks to manage their businesses with shareholder value as their primary objective, according to rappaport (1999). it is also necessary to choose a model with a significant link to share market price. banks are very different from non-banks when it comes to the construction of their business model gross (2007). looking at the products, non-banks in general occurs risk as a side-effect of doing business while banks has managing, incurring, structuring and assessing financial market risk as one of their core business activities. by taking this risk, they provide the service of storing value and extending credit, acting as intermediaries between parties with funding surpluses and deficits koller, goedhart, and wessels (2010). this gives banks a very central function in the modern economy but it also makes them heavily dependent of the overall economy. as there are few studies have been reported in literature related to empirical adequacy of bank valuation context, further scope for research emerges. there is also need to know the relationship between the intrinsic value and market price as it can be used for forecasting the future market price and also for taking necessary decision regarding investment and key policies by investor, management, banks and government. there is also need to understand and find the key value drivers impacting and market price of banks as it will help to determine and find solution for increase or decrease of value of share value drivers can be defined as all factors that influence the value creation of a bank as value drivers. in order to develop model which will help to maximize shareholder value a key internal and external value driver has to be investigated. valuation of bank in particular is highly influenced by the external and internal value drivers which are interconnected and thus has valuation of bank depends value drivers such as internal factors such as cost management, capital management, leverage management, profit management and external factors such as banking industry structure, its rules & regulation, its system, macroeconomic environment and economic environment. empirical evidence for value drivers specific to banks is very few and therefore there is a need for empirical studies in which the potential value drivers for different bank types are measured and ranked. the implications for bank management derived from such evidence could then serve as a basis for value creation within banks. internal value drivers are factors relating to the inherent performance of a bank, whereas external drivers result macro-economic factors environment of a bank. external drivers relate to specific factors and trends in the banking industry as well as to factors concerning the general economic environment. according to fiordelisi and molyneux (2007), various determinants such as market structure, bank efficiency, adjusted loan and deposit growth rates, staff costs, financial structure and operational and credit risk impact on shareholder value creation in european banking between 1997 and 2002. he found that bank’s cost and profit efficiency have a positive influence on shareholder value. leverage is found to be inversely related to value creation suggesting that highly capitalized banks are more likely to generate value for their owners compared with lowly capitalized counterparts. other factors that are found to impact positively on value creation include adjusted annual deposits growth rate, industry concentration, bank market share and employee costs. he found that quoted banks (listed banks) are not good at creating shareholder value as compared to non-quoted (non-listed banks) counterparts, although they found some substantial variations in shareholder value creation across european countries and bank ownership types over time. koller, goedhart, and wessels (2010) it is clear from the model, that the cost-income ratio is an important driver and calculated as operating expenses divided by net interest income. roa and revenue growth it will increase shareholder value significantly. looking at the products, non-banks in general occurs risk as a side-effect of doing business while banks has managing, incurring, structuring and assessing financial market risk as one of their core business activities. by taking this risk, they provide the service of storing value and extending credit, acting as intermediaries between parties with funding surpluses and deficits, this gives banks a very central function in the modern economy but it also makes them heavily dependent of the overall economy. gross (2007), states that shareholder value has become the pre-eminent performance measure in many industrial gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 80 companies and it has significantly affected how some banks in recent years have tried to optimize their business. the objective of the paper by gross (2007) is to find the metrics that are able to quantify the story behind shareholder value and to understand the fundamental drivers of value. the findings in suggest that only the cost efficiency and the risk capabilities relevant drivers for shareholder value in banks. whereas, both the business mix and the branch structure driver is difficult to make any reliable conclusions on, due to their ambiguity. the regression results for the business mix suggest that an increased income diversification is value destroying in the short-term. results for the underlying income cost and risk structure for the bank is somewhat controversial as well. looking at the branch structure there is no empirical evidence for the value impact of changes in the branch structure and it is therefore concluded that it has no direct impact on value. potential value implications are instead driven by the interdependence of the branch structure and the different value drivers. baele, de jonghe, and vander vennet (2007), in his studies business mix as first driver, where income diversification (noninterest income) is used as a measure and finds strongly positive correlations between shareholder value and the degree of diversification. in order to measure leverage he has taken ratio of equity to assets, found it has negative and is not significant to shareholder value. in order measure cost efficiency, cost-income ratio was taken and found that it has negative impact on value creation of the banks who go for diversification. in order measure risk, loan loss provision was taken as value driver and result was that it had positive impact on shareholder value but test was not significant shareholder value management has for many years been a dominating management concept and a performance indicator for companies all over the world. however, more than twenty years after the ground-breaking book by copeland thomas, koller, and murrin (1994) still only few articles have discussed shareholder value management in connection to banks and none of these have had both an internal and an external view. as very few articles are published from the academic side, there was need to study the report published by consulting companies regarding this subject. globally many consulting companies have published report on bank profitability and productivity but only few have worked on creation of shareholder value. according to the consulting industry, the maximization of shareholder value is therefore a strong performance measure where managers are forced to make value creating decisions. articles from mckinsey & company and bcg have been applied since academia does not discuss their findings on such an operational level. visalli et al. (2011) mckinsey: roe and cost of equity are the main drivers for creation of shareholder value. the increasing regulation is the single most important driver when it comes to profitability. due to the heavy capital constraints, equity capital and funding costs will increase which is expensive for banks. increased regulatory constraints will impact the key drivers through a set of underlying value drivers. roe will be affected both in the numerator and the denominator. return will be negatively impacted due to the increasing cost of holding equity and higher operational costs whereas the common equity in the denominator will increase. this expected decrease in roe is also the main reason for the negative tsr in the years after the crisis. banking tsr have been significantly higher in those countries that have experienced growth compared to those where a flat development have been seen. this indicates that those banks, capable of capturing revenue growth will be able to increase shareholder value. the shift in consumer behavior to a more technology-driven behavior will affect the cost driven value driver. by closing branches or making them smaller bank managers will be able to decrease the cost-income ratio which is also expected to affect shareholder value positively. however, as is always the case with change, only the banks capable of adapting to the changing environment will benefit from it. those banks not capable of delivering superior customer experience to a new generation of self-helped customers will have a hard time competing. if the country has a low credit rating it will affect the banks credit rating, higher the lending costs and thereby make it difficult to compete across borders and be more vulnerable to foreign competitors with higher credit ratings. dayal et al. (2010) (bcg): according to author revenue growth is one of important value driver, based on the development in emerging market for creating shareholder value. achieving revenue growth is however very difficult. the reason for this low growth in developed economies is not due to a decreasing focus from the top management but more because of the challenges in increasing revenue per customer. risk cost has been the main driver of negative value creation since the start of the crisis and effect can be seen in years to come. black and wright (1998) (pwc): author has taken residual income as the dependent variable. according to him banks growth can be increased by gaining competitive advantages. the competitive advantage period that the bank has is measured as the period where the bank is capable of earning a higher operating return than their cost of capital (positive residual income). other growth drivers such as operating assets which is made up of loans and other earnings assets (short term assets, long term positions in investments, loans to banks etc.) is very key driver for increasing shareholder value as even though they do not directly affect the cash flow but indirectly every loan creates deposits and there by creates value (given that net interest margin is positive). net interest margin and on-interest income, which is made up of fees, commissions and trading income (this is other operating income in the data) drive value positively. the cost-income ratio is considered as best value driver for creation of shareholder value. regulatory requirements (the amount of equity that is gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 81 needed to maintain capital adequacy) is found significantly affect the shareholder value. figure 1. framework for determinants of shareholder value proposed framework for the determinants of shareholders value in indian banking by dr chitra gounder from this study and all other research work done previously related to bank value creation. materials and methods this empirical study which will help the indian banks to create value for shareholder and also understand the key determinants impacting the creation of shareholder value by analyzing and interpreting the impact of bank specific and country economic value drivers on market price of equity share. the present work has considered 40 indian commercial banks and the time period is from 2001 to 2018. the macro and micro economic data has been collected from data book of planning commission, rbi, cmie -prowess and from the annual reports of each bank. the data collected for the present analysis is arranged in panel data form as 40 units (banks) were considered for 18 years so it is combination of times series data and cross-sectional data. so, the relationship between the dependent and independent variables is obtained from a regression model called panel regression analysis. empirical study for all below given was classified in private sector banks, public sector banks and all banks which included both private and public sector. the commercial banks are only considered for study in order to avoid the gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 82 dissimilarity of the banking operations with other type’s banks. panel data may have group effects, time effects, or the both, which are analyzed by pooled effect, fixed effect and random effect models. in order to select appropriate panel regression model for estimating result, we had applied hausman test and bruesh and pegan im test. from detail literature review of academics and reports of analyst determinants are identified which can impact the market price. this study is essential as to know exactly which value drivers impacts the value of share so that proper measure can have adopted for value creation of share. variables selected for study dependent variables:  market price of bank stocks: market price of equity shares is used to represent market value. independent variables  micro (bank specific)  macro-economic determinants as already proposed in the study above. micro determinants (bank specific) this is the internal determinants of individual banks. this is again categorized into five broad categories: table 1. variables used in the study profit management: a) profit efficiency (pe) a) cost income ratio (cir) b) activity mix (am) b) cost efficiency (ce) c) business mix (bm) c) cost management (cm) d) net operating profit per share (nop) e) revenue efficiency capital management: risk and leverage management: a) capital adequacy ratio (car) a) beta (beta) b) financial charges coverage ratio (fccr): b) liquidity c) return on long term fund (%) (rltf) c) leverage d) earning retention ratio (err) d) current ratio (current ratio) e) asset turnover ratio (atr) e) quick ratio (quick ratio) f) advances / loans funds (%) (aalf) shareholder management: a) earnings per share (eps) b) book value (bv) c) dividend per share (dps) macroeconomic determinants selected for study a) india's real gdp growth rates (factor cost) (gdp %) b) money supply growth (msg%) c) bank credit growth (bcg%) d) deposit growth (dg%) e) inflation cpi (average panel regression model for micro (bank specific) determinants of bank market price mpit = π0+ π1isit + π2peit + π 3 am it + π4 bm it +………….. . + €it panel regression model for macro (country specific) determinants of bank market price mpit = π0+ π1gdpit + π2msgit + π 3 bcg it + π4 dg it +………….. . + €it results and discussions multicollinearity test for identifying of micro and macro determinants (bank specific) variables  correlation matrix of micro determinants (bank specific) for private sector banks through correlation matrix we can see there is high correlation between some variables so the solution for this multicollinearity is dropping variables such as cir, rltf, eps, bv and dps. accept the variable identified as multicollinearity all other variables will be considered for multiple regressions for study of impact of determinants on mp and intrinsic value of bank share. in case of macroeconomic variable for private sector, as per multicollinearity test dg% was dropped.  correlation matrix of micro determinants (bank specific) for public sector banks through correlation matrix we can see there is high correlation between some variables so the solution for this gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 83 multicollinearity is dropping variables such as pe, bm, ce, fccr, cr, aalf, eps, bv and dps .accept the variable identified as multicollinearity all other variables will be considered for multiple regressions for study of impact of determinants on mp and intrinsic value of bank share. in case of macroeconomic variable for public sector, as per multicollinearity test dg% & bcg% was dropped.  correlation matrix of micro determinants (bank specific) for all banks through correlation matrix we can see there is high correlation between some variables so the solution for this multicollinearity is dropping variables such as eps, bv, bm and dps. accept the variable identified as multicollinearity all other variables will be considered for multiple regressions for study of impact of determinants on mp and intrinsic value of bank share. in case of macroeconomic variable for all banks, as per multicollinearity test dg% was dropped.  micro determinants (bank specific) impacting the market price of private sector banks table 2. panel regression model 1 particulars panel regression models pooled regression model fixed effect model random effect model const 857.504 *** 562.498 *** 739.317 *** am 19.9286 *** 13.7116 *** 15.094 *** nop 0.809339 *** 0.7794 *** 0.809956 *** re -37.7454 *** -1.17741 -17.2892 cm 8.21668 *** 8.56796 *** 7.27919 ** fccr -58.4849 -114.828 *** -97.9053 *** rnw 6.25491 * -7.01777 ** -1.62669 err 0.0104349 -0.0715895 -0.0281054 atr -0.8382 1.45382 0.25137 beta -59.9767 -70.7254 -82.7498 * lev -31.8208 *** -15.9903 *** -25.0803 *** cr -241.737 -2679.76 *** -1230.5 qr -6.13041 * -2.54609 -4.02272 aalf -2.31539 * -1.17807 -1.54479 r-squared 0.588532 0.798345 adjusted rsquared 0.562182 0.768311 p-value(f) 1.81e-32 4.32e-51 durbin-watson 0.577492 0.90777 rho 0.690046 0.513731 breusch-pagan test p-value = 2.42279e-025 so random effect model has to be selected hausman test p-value = 1.00388e-010 so fixed effect model has to be selected in this case breusch-pagan test was found significant, re model was selected and hausman test was significant, fe model was selected. so panel regression model showing impact of micro determinants (bank specific) on market price of private sector banks as per fixed effect model is mpit = 562.49 + 13.71am it + 0.77 nop it 1.17re it + 8.56cm it 114.82fccr it 7.01rnw it 0.07err it + 1.45atr it 70.72beta it -15.99lev it 2679.76cr it 2.54qr it 1.17aalf it + €it figure 2. micro determinantsprivate sector banks in above model, the coefficient of constant parameter of the banks shows a positive figure of 562.498, which implies that if all the explanatory variables held constant, the dependent variable riv increases by 562.498 units. it is showing the strong positive significant relationship at 1%significant level. variables such as, re, fccr, rnw, ev, cr, gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 84 qr, and aalf are showing strong negative relationship which indicates that this variable are inverse proportionally related to dependent variable. variables such as am, nop, cm, err, atr and beta has s positive significant relationship are direct proportionally related to dependent variable. am, nop, re, fccr, rnw, lev and cr significant relationship. so by above analysis, model can be interpreted as fit model for defining the impact of micro determinants variable on market price of private sector banks share. macro-economic determinants impacting the market price of private sector banks table 3. panel regression model 2 particulars panel regression models pooled regression model fixed effect model random effect model const 68.9066 24.6619 18.0255 gdp_ 22.096 * 23.6716 *** 23.555 *** msg_ -11.3875 -10.6666 * -10.7181 * bcg_ -0.655432 -0.888813 -0.869836 inf 40.2216 *** 43.8855 *** 43.6191 *** r-squared 0.122416 0.627211 adjusted r-squared 0.106674 0.593158 p-value(f) 6.96e-06 9.20e-35 durbin-watson 0.2688 0.651749 rho 0.903232 0.657356 breusch-pagan test p-value = 2.64614e-101 so random effect model has to be selected hausman test p-value = 0.767961 so random effect model has to be selected in this case breusch-pagan test was found significant, re model was selected and hausman test was not significant, re model was selected. so panel regression model for impact of macro economic determinants on market price of shares of private sector banks as per random effect model is mpit = 18.02 + 23.55 gdpit 10.71msgit-0.86 bcg it + 43.61 inf it + €it figure 3. macro-economic determinantspublic sector banks in above model, intercept is showing the non-significant relationship. all independent variable except bcg are showing significant relationship. variables msg is showing negative significant relationship which indicates that this variable is inverse proportionally related to dependent variable market price of bank share. variables such gdp, and inflation has strong positive significant relationship are direct proportionally related to dependent variable market price of bank share. so by above analysis, model can be interpreted as fit model for defining the impact of macro determinants variable on market price of banks share. micro determinants (bank specific) impacting the market price of public sector banks: table 4. panel regression model 3 particulars panel regression models pooled regression model fixed effect model random effect model const 458.37 905.776 495.26 is -0.00492754 0.138773 0.00209788 am 7.38801 10.5155 7.60673 nop 0.63594 *** 0.659268 *** 0.636824 *** re -139.806 *** -228.98 *** -146.044 *** gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 85 car 52.9508 * 49.991 52.7435 * rltf 2.56887 7.27254 ** 2.87925 rnw 4.08235 5.40438 4.22253 err 2.519 3.17737 2.5315 atr -60.0255 *** -62.5184 *** -60.0942 *** beta 9.7594 87.9809 13.4194 liq -254.319 -237.252 -259.726 lev -21.9921 -40.2896 ** -23.2595 r-squared 0.675659 0.718807 adjusted r-squared 0.661955 0.6811 p-value(f) 2.79e-62 1.54e-53 durbin-watson 0.644112 0.75549 rho 0.642418 0.579619 breusch-pagan test p-value = 0.0106292 so radom effect model has to be selected hausman test p-value = 0.0153358 so fixed effect model has to be selected in this case of public sector, a bank breusch-pagan test was found significant, re model was selected and hausman test was significant, fe model was selected. so panel regression model for impact of micro determinants (bank specific) on market price of public sector banks as per fixed effect model is mpit = 905.77 + 0.13 is it + 10.51 am it + 0.65 nop it 228.98 re it + 49.91 car it + 7.27 rltf it + 5.40 rnw it + 3.17 err it – 62.51atr it +87.98 beta it – 237.25 liq it 40.28 lev + €it figure 4. micro determinants – private sector banks in above model, the coefficient of constant parameter of the banks shows a positive figure of 905.776, which implies that if all the explanatory variables held constant, the dependent variable riv increases by 905.776units determinants such re, atr, lev and liq are showing negative relationship which indicates that this variable is inverse proportionally related to dependent variable. determinants such as am, nop, car, rltf, rnw, err and beta has positive relationship are direct proportionally related to dependent variable. nop, re, rltf, atr and lev are showing strong significant relationship with market price of share. so by above analysis, model can be interpreted as fit model for defining the impact of micro determinants variable on market price of public sector banks share. macro economic determinants impacting the market price of public sector banks table 5. panel regression model 4 particulars panel regression model pooled regression model fixed effect model random effect model const -735.495 ** -847.879 *** -863.281 *** gdp_ 70.0747 ** 79.9638 *** 78.6145 *** msg_ 43.6008 ** 39.9238 *** 40.6842 *** inf -7.00184 7.05021 4.42916 r-squared 0.052663 0.433246 adjusted r-squared 0.043406 0.38136 p-value(f) 0.00084 1.13e-22 durbin-watson 0.34984 0.596438 gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 86 rho 0.824728 0.688943 breusch-pagan test p-value = 1.77428e-064 so random effect model has to be selected hausman test p-value = 0.262174 so random effect model has to be selected in the case of macroeconomic determinants impacting market price of public sector banks breusch-pagan test was found significant, re model was selected and hausman test was not significant, re model was selected. so random effect model is mpit = 863.28 + 78.61 gdpit – 40.68 msgit -0.86 bcg it + 4.42 inf it + €it figure 5. macro determinants – public sector banks in above model, intercept is showing the strong negative significant relationship. all independent variable except inf are showing significant relationship. variables such gdp and msg has strong positive significant relationship are direct proportionally related to dependent variable market price of bank share. so by above analysis, model can be interpreted as fit model for defining the impact of macro determinants variable on market price of banks share. micro determinants (bank specific) impacting the market price of all banks table 6. panel regression model 6 particulars panel regression models pooled regression model fixed effect model random effect model const -283.839 -707.276 -419.729 pe 16.8065 18.0166 18.0133 am 9.88642 10.711 10.0422 nop 0.626249 *** 0.678418 *** 0.636224 *** re -2.71906 -128.296 *** -34.2211 cir 8.57237 5.13075 7.59354 ce -71.9356 121.405 -16.1177 cm -3.5252 0.495391 -2.20992 car 20.4532 27.178 * 22.1132 fccr -45.0724 14.2745 -26.8979 rltf -1.85817 -1.11198 -1.86326 rnw -2.69844 2.95222 -1.4901 err -0.0849578 0.0560903 -0.042395 atr -40.691 *** -29.8863 ** -37.9275 *** beta 1.10705 24.9892 4.19245 liq -277.041 ** -386.798 *** -304.187 ** qr -9.02199 ** -5.14925 -8.14615 ** aalf 4.21769 ** 7.81445 *** 5.1931 ** is 0.0437244 0.0206877 0.0298957 r-squared 0.660891 0.72314 adjusted rsquared 0.648434 0.688149 p-value(f) 1.20e-102 1.14e-93 durbin-watson 0.644545 0.779155 rho 0.643759 0.571797 breusch-pagan test p-value = 8.65723e-006 so random effect model has to be selected hausman test p-value = 3.92761e-005 so fixed effect model has to be selected gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 87 in case study of impact of micro determinants on all banks market price breusch-pagan test was found significant so re model was selected and hausman test was significant so fe model was selected. so fixed effect panel regression model for impact of micro determinants on market price of shares of all banks is mpit = 707.27 + 18.01 pe + 10.71 am it + 0.67 nop it 1.28 re it + 5.13 cir it + 121.40 ce it + 0.49 it cm + 27.17 car + 14.27 fccr it 1.11 rltfit + 2.95 rnw it + 0.05 err it – 29.88 atr it + 24.98 beta it -386.79 lev it 2679.76 cr it 5.14 qr it – 7.81 aalf it + 0.02 is it €it figure 6. micro determinants – all banks in above model, the coefficient of constant parameter of the banks shows a negative figure of -707.276 which implies that if all the explanatory variables held constant, the dependent variable riv decreases by 707.276 units. it is showing the negative significant relationship with market price. variables such as re, rltf, liq,qr, and atf are showing strong negative relationship which indicates that this variable are inverse proportionally related to dependent variable. variables such as is, am, nop, cir, ce, car, fccr, rnw, beta, cm, err and atr has s positive significant relationship are direct proportionally related to dependent variable. determinants such as nop, re, car, atr, liq and aalf is strong significant relationship with market price. so by above analysis, model can be interpreted as fit model for defining the impact of micro determinants variable on market price of all banks. macro-economic determinants impacting the market price of all banks: table 7. panel regression model 6 particulars panel regression models pooled regression model fixed effect model random effect model const -411.279 * -489.982 *** -502.542 *** gdp_ 50.4004 *** 55.2926 *** 54.6378 *** msg_ 20.5637 * 18.8258 * 19.1998 ** bcg_ -0.140071 0.0123963 0.0154693 inf 13.3334 22.9672 * 21.3072 * r-squared 0.036002 0.433145 adjusted rsquared 0.028781 0.383903 p-value(f) 0.000594 9.65e-39 durbin-watson 0.33501 0.579667 rho 0.835981 0.699054 breusch-pagan test p-value = 5.85916e-115 so random effect model has to be selected hausman test p-value = 0.339098 so random effect model has to be selected in case of impact on macro determinants on all banks market price, breusch-pagan test was found significant so re model was selected and hausman test was not significant so re model was selected. so random effect panel regression model for impact of macro economic determinants on market price of shares of all banks is mpit = 502.54 + 54.63 gdpit – 19.19 msgit 0.01 bcg it + 21.30 inf it + €it gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 88 figure 7. macro determinantsall banks the coefficient of constant parameter of the banks shows a negative figure of -502.542, which implies that if all the explanatory variables held constant, the dependent variable market price decreases by -502.542 units. in above model, intercept is showing the non-significant relationship. all independent variable except bcg are showing non-significant relationship. variables such gdp msg and inflation has strong positive significant relationship are direct proportionally related to dependent variable market price of bank share. so by above analysis, model can be interpreted as fit model for defining the impact of macro determinants variable on market price of banks share. conclusions empirical study regarding micro (bank specific) and macroeconomic determinants impacting the market price of equity share of private sector banks, public sector banks and all banks were made. all study models were good fit as p value (f) is 0.000. so it can be analyzed that model as fit model for defining the impact of micro and macro determinants variable on market price of equity share of banks. figure 8. determinants of bank equity value in case of micro determinants impacting the market price of equity share of private sector banks share fe model was selected. in above model, the coefficient of constant parameter of the banks shows a positive relation. it is showing the strong positive significant relationship at 1%significant level. variables such as, re, fccr, rnw, ev, cr, qr, and aalf are showing strong negative relationship and variables such as am, nop, cm, err, atr and beta has s positive significant relationship are direct proportionally related to dependent variable. am, nop, re, fccr, rnw, lev and cr significant relationship. in case of macro determinants impacting the market price of equity share of private sector banks share, in this case breusch-pagan test was found significant so re model was selected and hausman test was not significant so re model was selected. in above model, intercept is showing the non-significant relationship. all independent variable except bcg are showing significant relationship. variables msg is showing negative significant relationship which indicates that this variable is inverse proportionally related to dependent variable market price of bank share. variables such gdp, and inflation has strong positive significant relationship are direct proportionally related to dependent variable market price of bank share. in case of micro determinants impacting the market price of equity share of public sector banks share in this case gounder & nair, indian journal of finance and banking 13(1) (2023), 78-90 89 of public sector banks breusch-pagan test was found significant so re model was selected and hausman test was significant so fe model was selected. determinants such re, atr, lev and liq are showing negative relationship which indicates that this variable is inverse proportionally related to dependent variable. determinants such as am, nop, car, rltf, rnw, err and beta has positive relationship are direct proportionally related to dependent variable. nop, re, rltf, atr and lev are showing strong significant relationship with market price of share. in case of macro determinants impacting the market price of equity share of public sector banks share, macroeconomic determinants impacting market price of public sector banks breusch-pagan test was found significant so re model was selected and hausman test was not significant so re model was selected. in above model, intercept is showing the strong negative significant relationship. all independent variable except inf are showing significant relationship. variables such gdp and msg has strong positive significant relationship are direct proportionally related to dependent variable market price of bank share. in case study of impact of micro determinants on all banks market price breusch-pagan test was found significant so re model was selected and hausman test was significant so fe model was selected. it is showing the negative significant relationship with market price. variables such as re, rltf, liq, qr, and atf are showing strong negative relationship which indicates that this variable are inverse proportionally related to dependent variable. variables such as is, am, nop, cir, ce, car, fccr, rnw, beta, cm, err and atr has s positive significant relationship are direct proportionally related to dependent variable. determinants such as nop, re, car, atr, liq and aalf is strong significant relationship with market price. in case of impact on macro determinants on all banks market price, breusch-pagan test was found significant so re model was selected and hausman test was not significant so re model was selected. in above model, intercept is showing the non-significant relationship. all independent variable except bcg are showing non-significant relationship. variables such gdp msg and inflation has strong positive significant relationship are direct proportionally related to dependent variable market price of bank share important value driver impacting the shareholder value has been identified as the private sector, public sector and all banks operating in india in above chart. it will help banks to focus on value drivers and proper selection performance measures will help to improve and strengthen the competitive position of banks and help them to focus on wealth creation. value is the best metric of performance as it is the only measure that is comprehensive and hence is useful for decisionmaking. by increasing shareholder value, companies can maximize the value for other stakeholders (customers, labor, government and suppliers) also. author contributions: conceptualization, c.g. and j.n.; methodology, c.g.; software, c.g.; validation, c.g. and j.n.; formal analysis, c.g.; investigation, c.g., resources, c.g. and j.n.; data curation, c.g.; writing – original draft preparation, c.g.; writing – review & editing, c.g. and j.n; visualization c.g. and j.n.; supervision, c.g. and j.n.; project administration, c.g.; funding acquisition, c.g. and j.n. 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: 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 black, w., & wright, p. j. 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(2011). the state of global banking–in search of a sustainable model. mckinsey annual review on the banking industry (new york). 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 13(1) (2023), 39-47 39 finance and banking ijfb vol 13 no 1 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa examining convenience, website design & social influence as determinants of users’ intention to use fintech services v shunmugasundaram (a) shanu srivastava (b)1 (a) professor, faculty of commerce, banaras hindu university, india; e-mail: sundaram@bhu.ac.in (b) research scholar, faculty of commerce, banaras hindu university, india; e-mail: shanusrivastava1234@gmail.com a r t i c l e i n f o article history: received: 5th november 2022 revised: 27th december 2022 accepted: 13th february 2023 published: 25th february 2023 keywords: convenience, fintech services, financial technology, social influence, website design jel classification codes: g41, o30, o31, 033 a b s t r a c t an amalgamation of the financial sector with information technology has brought a tremendous transformation in the financial services sector that resulted in fintech, which is an invention that makes it easier and more convenient for users to conduct financial transactions digitally. so, the present study aims to examine convenience (c), website design (wb) & social influence (si) as the determinants of users’ intention to use (itu) fintech services. for the study, we collected data through a survey instrument using the hybrid mode of data collection from 257 fintech users. data analysis and hypotheses testing was done by using smartpls 4 software. the findings of the study concluded that determinants namely, convenience (c), website design (wb) & social influence (si) have a significant positive influence on users’ intention to use (itu) fintech services. hence, all hypotheses framed in the study were accepted. the outcome of this study will facilitate fintech service providers to design more specialized services for their consumers. further, it contributes to the literature concerned with the fintech service sector and antecedents of itu fintech 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 the internet has become a significant part of every person's life throughout this fourth industrial revolution (ir 4.0). every aspect of human life has been impacted by innovation, technology, and improvements in ict as they bring significant changes to the economy and the nation’s financial industry has undergone a radical transformation as a result of these innovations (setiawan et al., 2021). the financial service sector is now concentrating on the consumer's viewpoint to successfully create and present cutting-edge technologies to satisfy consumers' financial needs and demands (singh et al., 2020). therefore, such sudden transformation in the financial ecosystem has resulted in the development of fintech (singh et al., 2021). the acronym "fintech," which stands for financial technology, refers to businesses or firms that integrate financial services with innovative & advanced technologies (dorfleitner et al., 2017). fintech contributes to business process improvement by automating its procedures and services, which improves its competitiveness and profitability (dwivedi et al., 2021). and is luring customers away from traditional financial services with an improved and effective customer experience (singh et al., 2020). after reviewing prior literature on fintech services, its determinants & users’ intention, it was found that several previous pieces of research have addressed the issues regarding the analysis of various determinants that may influence users’ intention towards various technology-enabled services but the majority of them have focussed on the significance of determinants like perceived usefulness, perceived risk, trust, quality of service, image, etc. while other characteristics like si, wd & c are analyzed very rarely so it needs to be examined. further, there is a geographical research gap as well since very few works of literature are available relating to fintech services usage as per our knowledge that is conducted in the 1corresponding author: orcid id: 0000-0002-1052-4882 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i1.1960 to cite this article: shunmugasundaram, v., & srivastava, s. (2023). examining convenience, website design & social influence as determinants of users’ intention to use fintech services. indian journal of finance and banking, 13(1), 39-47. https://doi.org/10.46281/ijfb.v13i1.1960 https://orcid.org/0000-0003-0336-8073 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i1.1960 https://orcid.org/0000-0002-1052-4882 shunmugasundaram & srivastava, indian journal of finance and banking 13(1) (2023), 39-47 40 indian state of uttar pradesh. so, for enhancing greater adoption of fintech services in india, there is a need for fintech companies & service providers to have a better understanding of their users’ regarding their intentions & perception while using technology-enabled services as it will facilitate them to provide user-friendly services and design proper strategies for attracting & retaining consumers. in this regard, the present research aims at examining the determinants namely convenience (c), website design (wb) & social influence (si), that may influence users’ intent towards fintech services in the uttar pradesh district of noida, prayagraj, lucknow & varanasi. the present research starts with the introduction of the study, followed by a review of past literature consisting of theoretical background, & developing a research model for examining determinants of users’ intent towards fintech services. the next section describes the hypotheses & methodology used in the study, in which survey instrument development, data collection & descriptive statistics are explained. in the next part, the results of the study are presented in which the measurement model & statistical model are analyzed. further, the next section consists of discussions & findings followed by the conclusion of the study. literature review fintech services in light of recent advancements in information technology (it), the continuous digitization process is not only increasing process automation but also an important reorganization of the financial services value chain with the emergence of new business models & fintech companies (puschmann, 2017). as per (billore & billore, 2020), the term fintech refers to the financial technology that utilizes software and a contemporary technical ecosystem for improving, supporting, and automating the delivery of financial services to the huge user market. it includes organizations that merely supply technology (such as software solutions) to financial service providers and aims at attracting consumers by delivering products & services that are highly convenient for users, easy to use & more innovative than conventional services (dorfleitner et al., 2017). as per (billore & billore, 2020), there is a significant requirement to understand the determinants that alter users’ intent regarding the usage & acceptance of innovative financial services. hence, in our study, we have considered digitally accessed financial services namely, payment gateway, e-wallet, cryptocurrency, digital investment, crowdfunding, digital lending, digital trading, digital insurance, and digital banking (singh et al., 2021). convenience (c) convenience is referred to the minimization of time as well as effort a person while utilizing a fintech service as a cost (zhang & kim, 2020). it is the extent to which users can access & manage their financial transactions from anywhere at any time (chawla & joshi, 2018). nasri (2011) outlined 24*7 services accessibility, a wide range of services, reduced time & global access as the main drivers of convenience in internet services. shankar and rishi (2020) found that various dimensions of convenience have a major impact on the adoption intention of users. while as per the study of (khare et al., 2012), it was found that indian consumers’ adoption of technology-enabled services is influenced by the convenience factor. hence, it is a significant attribute considered by consumers in terms of the advantages resulting from fintech services (diana & leon, 2020). so, we hypothesize that: web design (wb) bashir and madhavaiah (2015a) defines website design as the structure, appearance, functionality, and other elements of the fintech companies’ website. while as per (sakhaei et al., 2014), wd is the weblinks' aesthetic appeal, well-organized custom search features, greater accessibility, and effortless error detection and correction. it plays a significant role in online business, as information available on the website regarding various products & services offered by the company acts as a salesperson and motivates consumers to use products & services on the website (rahi et al., 2020). users could find it challenging to find the information they seek on a website with poor design (nour, 2022). so, a website should clearly present its content material so that it is easy to navigate with minimal complexity (kesharwani & singh bisht, 2012). therefore, website design is an important determinant that may alter users’ intent. so, we hypothesize that: social influence (si) social influence (si) is the influence of recommendation or suggestion of family, friends, acquaintances, colleagues, etc. on a person’s decision to use fintech services as it might be beneficial for them. social norms have a significantly greater impact on disruptive technologies since it is anticipated that people consult their social circles when they encounter any new technology and can be persuaded by the knowledge they supply (singh et al., 2020). prior studies have shown that people are mostly influenced by social normative influences while making use of any product or services (kesharwani & singh bisht, 2012; bashir & madhavaiah, 2015b; patel & patel, 2018; & billore & billore, 2020). but the study by singh et al. (2020) found that there is a significant negative effect of si on users’ itu fintech services. so, it is essential to examine the association of si with users’ itu fintech services, since they change their behavior to fit in with others for social validation. considering the above points, we hypothesize that: intention to use (itu) it is the possibility that the perception & belief of a person will turn into their behavior or the arbitrary probability that the perception & belief of a person will turn into their behavior (zhang & kim, 2020). as per alothman and al-meshal (2022), itu is the adoption of something based on one's willingness toward a particular object. it is a significant determinant while assessing the potential behavior of users towards the adoption or usage of various technology-enabled services. the intention shunmugasundaram & srivastava, indian journal of finance and banking 13(1) (2023), 39-47 41 to use technology has drawn the interest of researchers, and a plethora of theories and frameworks have been suggested to analyze behavioral intention (singh et al., 2021). therefore, in our study itu has been used as the outcome variable against c, wd & si as a predictor variable. in table 1, the prior works of literature concerned with the proposed association are presented and figure 1 shows the proposed conceptual framework of the study. table 1. effects of the proposed association among constructs association prior works of literature c > itu (zhang & kim, 2020), (diana & leon, 2020), (chawla & joshi, 2018), (nasri, 2011), (tanoto et al., 2021) wd > itu (rahi et al., 2020), (kesharwani & singh bisht, 2012), (bashir & madhavaiah, 2015a), (sakhaei et al., 2014) si > itu (patel & patel, 2018), (billore & billore, 2020), (kesharwani & singh bisht, 2012), (singh et al., 2020), (kim et al., 2015), (bashir & madhavaiah, 2015b) source: authors’ 2023 figure 1. proposed conceptual framework source: authors’ 2023 si= social influence, c= convenience, wd= website design, itu= intention to use materials and methods survey instrument development the present study attempts to empirically examine convenience (c), website design (wd) & social influence (si) as determinants of users’ intention to use (itu) fintech services. to assess the users’ intention towards fintech services and to test the hypotheses, we developed a survey instrument that consists of the demographic characteristics of the informants, and 20 items were used for assessing various constructs concerned with fintech services adoption to propose association among them. we used a 5-pointer likert scale where 1 denotes strongly disagree and 5 denotes strongly agree as adopted by singh et al. (2021), hu et al. (2019), yee‐loong chong et al. (2010), and patel and patel (2018) to analyze individuals’ behavior towards technology-enabled services. itu is the outcome variable which was measured through 4 items while c, wd & si were the predictor variables that were measured with 5, 4 & 7 items respectively. table 2 presents the sources from which the statements of each construct were taken. table 2. format of survey instrument variable no. of statements sources c 5 (diana & leon, 2020), (chawla & joshi, 2018), wd 4 (bashir & madhavaiah, 2015a), (rahi et al., 2020), (alothman & al-meshal, 2022) si 7 (billore & billore, 2020), (singh et al., 2020), (bashir & madhavaiah, 2015b) ita 4 (davis, 1989), (yee‐loong chong et al., 2010), (alothman & al-meshal, 2022) source: authors’ 2023 hypotheses of the study  hypothesis 1 (h1): convenience has a significant positive influence on users’ intention to use fintech services.  hypothesis 2 (h2): website design has a significant positive influence on users’ intention to use fintech services.  hypothesis 3 (h3): social influence has a significant positive influence on users’ intention to use fintech services. data collection and descriptive statistics before conducting the final survey, we conducted the preliminary screening of the survey instrument among 40 informants and it was modified as per the feedback of the informants. the target informants of our research were individuals who consume fintech services and reside in the indian state, uttar pradesh districts namely, varanasi, prayagraj, and lucknow & noida. according to (f. hair jr et al., 2014), when the population size is unknown the sample size is calculated by multiplying the minimum number of indicators used in the study by 5, and in the present study, there were 20 indicators so the minimum required sample size of the study is 100 informants. therefore, we have fulfilled the required samples by shunmugasundaram & srivastava, indian journal of finance and banking 13(1) (2023), 39-47 42 collecting responses from 257 informants through the hybrid mode of data collection. the sampling technique used in the study is the convenience random sampling method. ms excel & smartpls 4 (v.4.0.8.6) were used for statistical analysis. table 3 depicts the demographic profile of the respondents, in which 43.2 percent of the respondents were male while 56.8 percent were female. 18.3 percent of the respondents were below 25 years, 26.4 percent were between 25-40 years, 30.4 percent were between 41-55 years and 24.9 percent were above 55 years of age. educational qualifications show that the majority of the respondents were graduated (38.9 percent) and post-graduated (46.7 percent) while 9.3 percent had an intermediate degree, 1.6 percent hold a ph.d. degree & above and 3.5 percent had any diploma/ professional degree. out of 257 respondents, 25.3 percent belong to prayagraj, 22.6 percent were from lucknow, 31.5 percent were from varanasi and 20.6 percent were residing in noida. table 3. demographic characteristics of the informants demographic characteristics frequency percent (%) sex male 111 43.2 female 146 56.8 total 257 100.0 age below 25 years 47 18.3 25-40 years 68 26.5 41-55 years 78 30.4 above 55 years 64 24.9 total 257 100.0 education intermediate 24 9.3 graduation 100 38.9 post-graduation 120 46.7 ph.d. & above 4 1.6 any diploma/ professional degree 9 3.5 total 257 100.0 residence prayagraj 65 25.3 lucknow 58 22.6 varanasi 81 31.5 noida 53 20.6 total 257 100.0 source: authors’ 2023 common method variance (cmv) as data for the study was self-reported for all constructs3 predictor variables & 1 outcome variable (yoon, 2010), that were measured through a common survey instrument so there are chances of the presence of cmv, which means that their measured outcomes might contain variance that goes beyond their actual covariance (malhotra et al., 2016). we applied harman’s single-factor test for addressing the concern of cmv in the study as used by prior studies (daragmeh et al., 2021; h. s. yoon & barker steege, 2013; & roy et al., 2016). under this single factor test, all the items used in the research are gone through efa and it is assumed that there is the presence of cmv if a single item arises from unrotated factor solutions or the first item accounts for most of the variance in the constructs (malhotra et al., 2006). as per (podsakoff et al., 2003), if a single factor value is less than 50 percent of the variance, then there is less possibility of cmv. by conducting harman’s test in our study, it was found that the complete variance explained by a single factor was 44.230 percent which is less than the suggested limit. so, there is no problem with cmv in the present data. results in the present study, a structural equation model was employed for testing the hypotheses. partial least square method was applied using the smartpls 4 (v.4.0.8.6) software (rahi et al., 2020) as the parameter estimation method (daragmeh et al., 2021). for analyzing data, a two-step process was followed whereby firstly, the suitability & efficacy of the measurement model was analyzed using cfa for checking reliability & validity, and further, the structural model was examined through sem for ascertaining the significance of association among various constructs (patel & patel, 2018). measurement model scale reliability reliability is the extent to which measurement outcomes are consistent or stable reflecting the reliability of the research instrument items (hu et al., 2019). we have used composite reliability (cr) & coefficient alpha (α) for assessing the internal reliability of the data. as per (fornell & larker, 1981), constructs with cr more than 0.7 & α above 0.8 are considered to have good internal consistency reliability. in table 4, it can be seen that the cr & α of all latent constructs are more than the threshold values, which means that the present model has attained the required level of internal consistency. shunmugasundaram & srivastava, indian journal of finance and banking 13(1) (2023), 39-47 43 table 4. findings of the measurement model constructs cronbach's alpha composite reliability (rho_a) composite reliability (rho_c) average variance extracted (ave) c 0.836 0.920 0.890 0.642 itu 0.924 0.926 0.946 0.815 si 0.875 0.881 0.903 0.572 wd 0.805 0.891 0.869 0.638 source: smartpls 4 (v.4.0.8.6) scale validity validity refers to the extent to which the model serves the collected data (hu et al., 2019). for assessing the validity of the present model, we applied the parameters of convergent validity (cv) & discriminant validity (dv) (daragmeh et al., 2021). cv depicts the extent of correlation among various indicators for a construct i.e., determined by the average variance extracted (ave) of the latent construct (hu et al., 2019). as suggested by hair et al. (2019), the acceptable ave values of the constructs should be more than 0.50. table 4 shows that every construct’s ave is above the threshold limit which suggests that all variables have the required cv. moreover, we applied dv to confirm that there is no association among each construct and that each construct’s measures are different from each other (daragmeh et al., 2021; & hu et al., 2019). as per (fornell & larcker, 1981), the ave of each variable should be larger than its correlation with the other variables. as depicted in table 5, every variable measure exceeds the squared inter-scale correlation in all cases, suggesting that all constructs are differed from each other, hence, the dv of each construct is satisfactory. we also applied the heterotraitmonotrait (htmt) test for the assessment of the dv of the study. the htmt value should be less than 0.85 as suggested by (henseler et al., 2014), and in table 6, it can be seen that all construct’s htmt values are less than the threshold range. so, there is no dv issue in the present study. table 5. fornell-larcker criterion constructs c itu si wd c 0.801 itu 0.679 0.903 si 0.489 0.538 0.757 wd 0.651 0.627 0.504 0.799 source: smartpls 4 (v.4.0.8.6) table 6. heterotrait-monotrait ratio (htmt) constructs c itu si wd c itu 0.731 si 0.551 0.593 wd 0.705 0.670 0.564 source: smartpls 4 (v.4.0.8.6) structural model sem is a statistical technique used to analyze the association among variables based on their covariance matrix using multiple regression method, path analysis & cfa (hu et al., 2019). once the measurement model is analyzed, then the next process is to study the structural model, by investigating its explanatory strength and statistical significance of the path (setiawan et al., 2021b). so, firstly we reviewed the collinearity among the constructs, and collinearity problems arise when the vif values are more than 5 (hair et al., 2019). table 7 reveals that all constructs vif values are less than 5 which suggests that there are no collinearity-related issues among the constructs. further, the coefficient of determination (r2) is used for assessing the structural model explanatory power. in table 8, it can be seen that our model has moderate explanatory strength since the r2 measure for user intention construct is 0.550 (hair et al., 2011). table 7. collinearity statistics (vif) constructs vif c1 2.919 c2 4.182 c3 3.175 c4 2.234 c5 1.084 itu1 3.228 itu2 3.597 itu3 4.351 itu4 4.293 si1 1.844 si2 2.347 si3 3.609 shunmugasundaram & srivastava, indian journal of finance and banking 13(1) (2023), 39-47 44 si4 3.762 si5 2.090 si6 2.191 si7 2.252 wd1 1.186 wd2 2.106 wd3 2.268 wd4 2.743 source: smartpls 4 (v.4.0.8.6) table 8. r-square construct r2 r2 adjusted itu 0.550 0.545 source: smartpls 4 (v.4.0.8.6) for testing the hypotheses framed in the study, bootstrapping process with 5,000 samples was applied to obtain the statistical significance of the path coefficients. the structural model analysis is shown in figure 2. table 10 depicts that all three hypotheses framed in the study are accepted. the findings of the present research revealed that convenience (c) has a significant positive influence on users’ itu fintech services since the β value is 0.411 and the p-value is less than 0.05 (table 9). so, h1 is accepted. further, social influence (si) has a significant positive influence on users’ itu fintech services (β = 0.208, p < 0.05) so h2 is also supported (table 9). similarly, website design (wd) also has a significant positive impact on users’ itu fintech services since the β value is 0.255 and the p-value is less than 0.05 (table 9). so, h3 is also supported. therefore, c, wd & si has a significant positive influence on users’ itu fintech services so all hypotheses are accepted. figure 2. findings of structural model analysis source: smartpls 4 (v.4.0.8.6) table 9. results of hypotheses testing h no. association original sample (o) sample mean (m) standard deviation (stdev) t statistics (|o/stdev|) p values h1 c -> itu 0.411 0.407 0.092 4.457 0.000 h2 si -> itu 0.208 0.209 0.062 3.362 0.001 h3 wd -> itu 0.255 0.256 0.085 2.982 0.003 source: smartpls 4 (v.4.0.8.6) table 10. acceptance/ rejection of hypotheses hypotheses no. hypotheses statement acceptance/ rejection h1 convenience has a significant positive influence on users’ intention to use fintech services. accepted h2 website design has a significant positive influence on users’ intention to use fintech services. accepted h3 social influence has a significant positive influence on users’ intention to use fintech services. accepted source: authors’ 2023 discussions fintech is becoming more and more popular with the development of new & innovative technologies, causing disruptive changes in the financial service sector, & opening up new prospects for telecom and retail businesses but still the long-term success of fintech services is significantly affected by user intent towards present fintech services (singh et al., 2021). shunmugasundaram & srivastava, indian journal of finance and banking 13(1) (2023), 39-47 45 therefore, the goal of the present study is to empirically examine the c, wd & si as the determinants of users’ itu fintech services in certain districts of uttar pradesh, india namely, prayagraj, lucknow, noida & varanasi. results of our study revealed that convenience (c), website design (wb) & social influence (si) are the significant factors that positively influence users’ intent towards the usage of fintech services. it was found that convenience has a significant positive influence on users’ intentions while using fintech services which means that our h1 is accepted, and results of (zhang & kim, 2020; nasri, 2011; diana & leon, 2020; & chawla & joshi, 2018), validates our findings. so, it is suggested that fintech services should be designed and delivered in such a way that they are more flexible & easier to use in comparison with conventional services to be more competitive in the market. and fintech service providers need to advertise convenience factors to motivate consumers to use fintech services. consistent with the results of (rahi et al., 2020), (alothman & al-meshal, 2022) & (kesharwani & singh bisht, 2012), our study also found that website design significantly affects users’ intent to use fintech services which means that our h2 is accepted. fintech websites are a crucial initial point from where people can interact with and gain access to fintech services so, these websites' usability and affordability are essential components in bringing fintech services to a wider range of audiences (nour, 2022). also, it plays a significant role in turning visitors into consumers (alothman & al-meshal, 2022). therefore, we conclude that fintech companies & service providers with user-friendly & well-planned website interfaces will be able to gather and retain more users. so, it is suggested that website characteristics like simplicity to navigate, risk alert flash, clear guidelines & reduced chance of errors will possibly increase users' intention to use fintech services (bashir & madhavaiah, 2015a). similar to the findings reported by billore and billore (2020), bashir and madhavaiah (2015b) and patel and patel (2018), our study also concluded that social influence has a significant positive influence on users’ intentions while using fintech services, which means that our h3 is accepted. therefore, it can be said that various reference groups like family, friends, colleagues, etc. motivate informants to modify their attitudes & beliefs toward fintech services. so, it’s suggested that fintech services providers need to train their consumers to encourage their relatives & acquaintances to adopt fintech services. and they must render services that are effective & efficient, as each negative perception of the reference group can affect the adoption of fintech services by potential users, who are influenced by them. the outcome of the research enhances the understanding regarding determinants of users’ intention to use fintech services bringing forward the forthcoming field of research & practical grasp for latent consumers of fintech services. moreover, our findings offer several critical insights for investigating the determinants of users’ intention to utilize fintech services. in brief, the outcome of our research proposes some points which may be advantageous for various associated parties to amplify the users’ intent towards usage of fintech services. firstly, fintech service providers & regulatory bodies can adopt our results as a blueprint for enhancing users’ adoption of fintech services. moreover, fintech service providers should build & deliver users with financial services that are convenient, user-friendly, & have appealing website designs capable of attracting users as well as being easy to use. also, the outcome of this research can be utilized to support the results of future studies concerned with fintech service usage. conclusions the fintech service sector is still in its embryonic stage in india but it is gradually attaining growth & development. it is because people are reluctant to adopt despite being aware of its various advantages as they prefer offline financial services and find fintech services to be complicated & inconvenient. however, there is a huge opportunity for fintech companies as they can attract and retain consumers by enhancing efficiency and convenience in customer service and thereby fostering loyalty. in this context, the present study aims to empirically examine the determinants that may influence users’ intention to use fintech services. for examining the fintech services usage, convenience (c), website design (wd) & social influence (si) were identified as significant factors based on the literature review that may influence users’ intention towards fintech services. it was found that all constructs have a strong positive influence on users’ intention to use fintech services. the results of the study contribute theoretically to the field of fintech services & technology-enabled services usage literature by investigating convenience (c), website design (wd) & social influence (si) as determinants of users’ intention towards usage of fintech services. the research model used in the study can be applied in future studies conducted in other developing nations to examine factors that affect users’ intention to use fintech services. further, other variables derived from various models like tam, utaut, tra, etc. can be added to the present model for assessing the users’ intent toward fintech services. also, future studies can be conducted focussing on any specific type of fintech services for instance, on digital payment systems, peer to peer lending, blockchain & cryptocurrency, etc. moreover, future studies can also research larger sample sizes and may add various demographic characteristics as moderators to assess their effect. author contributions: conceptualization, v.s. and s.s.; methodology, s.s.; software, s.s.; validation, v.s. and s.s.; formal analysis, s.s.; investigation, v.s.; resources, s.s.; data curation, s.s.; writing – original draft preparation, s.s.; writing – review & editing, v.s.; visualization, v.s.; supervision, v.s.; project administration, v.s.; funding acquisition, v.s. and s.s. authors have read and agreed to the published version of the manuscript. shunmugasundaram & srivastava, indian journal of finance and banking 13(1) (2023), 39-47 46 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. acknowledgments: not applicable. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data 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(2020). the influence of financial service characteristics on use intention through customer satisfaction with mobile fintech. journal of system and management sciences, 10(2), 82– 94. https://doi.org/10.33168/jsms.2020.0206 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.1155/2022/8610844 https://doi.org/10.1108/ijbm-08-2016-0104 https://doi.org/10.1037/0021-9010.88.5.879 https://doi.org/10.1007/s12599-017-0464-6 https://doi.org/10.1504/ijbis.2020.105870 https://doi.org/10.1080/0965254x.2016.1148771 https://doi.org/10.22436/jmcs.09.01.04 https://doi.org/10.3390/joitmc7030188 https://doi.org/10.1108/md-09-2019-1318 https://doi.org/10.1108/md-09-2019-1318 https://doi.org/10.1504/ijebr.2021.113152 https://doi.org/10.47191/jefms/v4-i10-03 https://doi.org/10.1108/02652321011054963 https://doi.org/10.1016/j.chb.2010.04.001 https://doi.org/10.1016/j.chb.2012.10.005 https://doi.org/10.33168/jsms.2020.0206 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 11(1) (2022), 38-44 38 finance and banking ijfb vol 11 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa board meeting frequency and performance of public sector banks in india shweta taluka (a) suhasini verma (b)1 jeevesh sharma (c) (a) research scholar, department of business administration, manipal university jaipur, india; e-mail: staluka13@gmail.com (b) associate professor, department of business administration, manipal university jaipur, india; e-mail: suhasini.verma@jaipur.manipal.edu (c) assistant professor, department of commerce, manipal university jaipur, india; e-mail: jeevesh.sharma@jaipur.manipal.edu a r t i c l e i n f o article history: received: 5th october 2022 accepted: 30th november 2022 online publication: 5th december 2022 keywords: agency theory, board meetings, board committees, bank performance, corporate governance jel classification codes: g21, g34, g38 a b s t r a c t this paper aims to analyze the effect of the frequency of board meetings on the performance of public sector banks in india. according to agency theory, frequent board meetings may lead to more concentrated monitoring, lowers the agency cost, contributes to more exchange of ideas among the board of directors, and assist them to be more equipped with the information, which ensures better financial performance. this paper investigates this assumption of agency theory on the performance of public sector banks in india. the number of committees, frequency of board meetings, and audit committee meetings are a proxy of corporate governance mechanisms. return on assets (roa) is a proxy of financial performance. the duration of the study is 2015-2019, and secondary data is used. panel regression is employed to analyze the impact of variables of corporate governance mechanisms on the performance of public sector banks. our results find no significant impact of any governance variables used in the study on the roa of the banks. the study makes an original contribution by providing a comprehensive study related to the process and activity of the board and its impact on the performance of banks. the findings of this paper will help examine the board's process and lead to improvement in concern. © 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 corporate governance and firm performance have been well-debated topics in developed countries. however, in recent years, this issue has also been widely discussed in the context of developing and emerging economies, like india, due to the emerging issues of corporate failures. the company's governance procedures aim to safeguard stakeholders and investors against management's and directors' poor corporate choices. the administration and directors of a firm, who make policy decisions, are not guaranteed to be doing so (nizam et al., 2022). all the corporate governance theories suggest that the involvement and appointment of directors as both the executive and non-executive directors on the board is necessary for an effective governance structure (arora & sharma, 2016). so that a company's performance can be enhanced, corporate governance is required to reduce disagreements among the stakeholders, particularly shareholders and executives (ali et al., 2022). a board of directors' main functions include advising, evaluating top management's decisions, monitoring organizational efforts, and contracting. directors also provide information about the company's activities and strategic planning. each director of the board is likely to attend the board meeting. normally, the board's activity intensity is measured by the frequency of meetings. it is taken as a proxy for the board's activity to measure its progress (fernandes et al., 2018). the more the meetings represent, the more active boards with more management and supervision. more supervision indicates the more effective role of monitoring by top management, which might diminish the agency's cost and improve the firm's performance (grove et al., 2011). the profitability, efficiency, effectiveness, and competitive advantage of the company are all increased by good corporate governance processes. the failure of a corporation is the outcome of weak corporate governance practices (nizam et al., 2022). according to agency theory, independent directors provide management with effective monitoring tools. these solutions can reduce managers' opportunistic behaviour and improve business performance (al-jalahma, 2022; zaman et 1corresponding author: orcid id: 0000-0002-7763-1375 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v11i1.1851 to cite this article: taluka, s., verma, s., & sharma, j. (2022). board meeting frequency and performance of public sector banks in india. indian journal of finance and banking, 11(1), 38-44. https://doi.org/10.46281/ijfb.v11i1.1851 https://orcid.org/0000-0002-7451-1917 mailto:suhasini.verma@jaipur.manipal.edu http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v11i1.1851 https://orcid.org/0000-0002-7763-1375 https://orcid.org/0000-0002-3547-4260 taluka et al., indian journal of finance and banking 11(1) (2022), 38-44 39 al., 2022). according to the organization for economic co-operation and development (oecd), the best b-size (board size) includes five to nine core members. mahmoudian and jermias (2022) discovered that successful businesses had bigger boards than those that failed. board meetings are very important to the efficiency and effective working of every company board. board meeting frequency is ascertained by several meetings held yearly by top-level managers. board meetings are set up to assemble directors on the board for discussion on the relevant matters and to address the issues with their previous experiences and forward-looking concern (eluyela et al., 2018). titova (2016) also considered the frequency of audit committee meetings per year as another important part of board activity. the major reasons they found for this consideration were the complex and opaque nature of banking operations, where audit committee meetings may help to provide specialized and relevant information and advice. however, in smaller banks, audit committees also perform risk monitoring functions. more frequency of audit committee meetings might result in better monitoring and control over decisions that influence the few parameters such as borrowings, loan amounts and earning assets of firms. aljaaidi et al. (2021) stated in their results that companies with poor performance increase the number of board meetings due to the increasing pressure on the board to improve and address the performance challenges. the meetings help deal with the daily management, increase the opportunities to discuss and advise for the problems, and bring solutions. the remaining part of this paper is followed. the second section includes a review of the literature on attributes of the board and firm performance, with theoretical and empirical findings of previous research and hypothesis development. the third section will summarise the research methodology, including the methods to collect and analyze the data. section four includes the analysis and discussion of the findings. section five covers the conclusion and recommendation with the future scope of the study. literature review in the indian financial system, among the real businesses of the banking sector, the majority are under the public sector undertakings (psu) banks, which enjoy the inherent backing of the government. public sector banks (psbs0 in india are regulated by the ministry of finance and government of india under the banking division of the banking companies act, 1955. generally, the government of india have the main role in the functioning and decision-making of psu boards compared to private sector banks and needs to be more flexible in initiating a well-fitted board with the bank's operational strategy. boards of public sector banks are also large in comparison to other banks due to the appointment of large numbers of directors in different categories mentioned by the government of india (mayur & saravanan, 2017). reserve bank of india (rbi), a banking sector regulator, also recommended constituting different committees to assess the decisions and make reforms required for better corporate governance practices. based on the suggestions provided by these committees, detailed and various regulations regarding the basic components of the main architect of corporate governance were put into reformation. these basic components that make a corporate governance system important and strong include the composition of boards, appointment of directors, ownership concentration, management's quality, norms for disclosure and transparency, audit-related features etc. thus, corporate governance is a system of laws, regulations, guidelines, and norms that affects how a company is governed and run to ensure fairness and openness in its interactions with shareholders. to prevent conflicts of interest, this framework, which is made up of both internal and external contracts between shareholders and employees, regulates how obligations, requirements, and rewards are allocated (buallay, hamdan, & zureigat, 2017). major corporate governance has been initiated in indian banks from the early years of the millennium. all these initiatives were brought to provide the best governance practices for india's banking sector. agency theory this study is based on an agency theory for its theoretical background. based on the fact that board meeting is an important variable of board attributes, we adopt agency theory in understanding the relationship between board attributes and firm performance as it is the theory that researchers mostly adopt in the financial and economic sector as a theoretical foundation (hanh et al., 2018; liang et al., 2013; ali et al., 2022; sobhan, 2021). agency theory existed on the principle of the basic relationship of principals and agents or shareholders as principals and board members as agents too. this relationship took place due to the separation of ownership and control in any organization, in this manner that shareholders appoint board members for the effective management and control over performance and planning of the firm as well as to ensure the maximization of shareholder's wealth (al-jalahma, 2022; zaman et al., 2022). the other reasons for the appointment of board members are to set achievable targets and strategic planning, to create a disciplined environment which will eventually lead to the enhancement of shareholders' value (eluyela et al., 2018). it is important for board members to have frequent meetings to discuss and get advice to improve the firm's performance (arora & sharma, 2016; zhou et al., 2018; rahman et al., 2019). generally, the board of directors fulfils their responsibilities well, ensures their involvement in attending meetings to get more information and maintains discipline in an organization (ntim & osei, 2011) as well, as it is determined that corporate decisions can be monitored effectively through frequent meetings in boards. with this background, our study mainly focuses to examine the impact of the frequency of board meetings, total number of committees, and audit committee meetings on the performance of public sector banks. board meetings the board of directors acts as an agent for the business. they are comprised of people who control a company's operations. the board's main responsibility is to oversee and provide guidance to senior management as they carry out their duties toward the owners (oziegbe & cy, 2021). board characteristics have a significant impact on the performance of banks (liang et al., 2013). whether the board of directors is an important element of the governance system, the key to success taluka et al., indian journal of finance and banking 11(1) (2022), 38-44 40 for any firm is not only the existence of firms but rather their abilities and dedication to accomplish their duties and roles. as a result, the board of directors and managers are forced to operate in a much more complex environment where they are under increasing pressure to provide proper reporting on the state of the company and to the variety of stakeholders. the board meeting of an organization, which is presided over by its directors, provides a great forum for discussing operational concerns and making decisions with the unanimous support of the members. executives can vote on effective decision-making plans where they are responsible for attending meetings (sobhan, 2021). frequent meetings and different committees play a considerable role in helping the directors in discussions and providing directions for resolving problems and guidance for future planning. the board meeting helps the directors be ready with the information and development of the company. also, board meetings may help enhance the directors' role because of their well-informed decisions (adams & ferreira, 2007). meetings allow directors to elaborate and exchange ideas (andres & vallelado, 2008). a higher frequency of meetings per year may enhance directors' monitoring and better decisions power with the ongoing market circumstances (shrivastav, 2022; rahman et al., 2006; saleh et al., 2007; nguyen, 2021). the frequency of board meetings leads to improving factors such as exchanging ideas, discussing future strategies and controlling managers and advisory roles that positively impact banks' performance (proactive boards). another study (al-jalahma, 2022; shrivastav, 2022; rahman et al., 2006; saleh et al., 2007; oziegbe & cy, 2021)concludes that the frequent board meetings may be a sign that top-level management is setting aside enough time to address problems and consider opportunities that they believe will improve performance (shrivastav, 2022; rahman et al., 2006; saleh al., 2007). additionally, due to the complexity of the banking business, they tend to behave larger boards and committees, and hence required to meet more frequently by the directors to be more effective and active in decision making. the initial way to get information about a company for a director is by attending meetings. even regulators urged to attend board meetings, particularly the bank directors (adams & ferriera, 2012). with the increasing complexity of banks' operations, an increased frequency of meetings is required. there is mixed empirical evidence available on the relationship between the frequency of meetings and performance. (chou, chung, & yin, 2013) suggested that ultimate and outside directors were less attracted to board meetings if there were highly concentrated ownership or whether ultimate and powerful shareholders tightly controlled them. however, if they were more likely to attend board meetings, it would beneficiate the firm positively. according to the study, more than board meeting frequency is needed. the effectiveness of board meetings is a crucial variable that can affect a company's performance (hanh et al., 2018). it is also found that attendance by directors in board meetings also enhances the firm performance. (thiruvadi, 2012; aljaaidi et al., 2021) investigated the association between board size and board meetings with the frequency of audit committee meetings and failed to find an association between them. however, on another side (aljaaidi et al., 2021; maraghni & nekhili, 2012; thiruvadi, 2012) also found a significantly positive relationship between board meetings and the frequency of audit committee meetings and performance. in addition to it, the size of the audit committee also positively impacts the firm performance (shrivastav, 2022). due to a rise in high-profile bankruptcies brought on by financial accounting mistakes or fraud and made worse by poor corporate governance practices, attention to corporate governance has grown over the past few decades (sobhan, 2021). larger boards, more independent boards, dual ceos, larger audit committees, and more frequent audit committee meetings negatively impact a company's performance. in contrast, board meeting frequency and ownership concentration have a positive impact (boshnak, 2021). this led to the adoption of various accounting procedures, biased reporting, and the promotion of individual managerial interests over those of shareholders (ioana, 2014). the relationship between firm performance and selected corporate governance measures is examined in a well-developed literature, including board size and independence, the presence of the duality of ceos, insider-outsider ownership, and board duties (alqatamin, 2018; zhou et al., 2018; rahman et al., 2019; khalifa et al., 2020). according to a growing body of corporate governance literature, the boards of directors play a key role in decreasing agency issues and improving business performance (zahra & pearce, 1989). these results suggest that greater board effectiveness may lead to increased risk-taking. because the audit committee rather than the board of directors directly oversees bank uncertainty activities (nguyen, 2022). effective audit committees can limit risk-taking in the banking industry. additionally, although managers may not truly value these actions, a more effective audit committee may significantly reduce the amount of risk they take in the short term for their gain. -increasing profits for shareholders (nguyen & dang, 2022; nguyen, 2022) prior research examining the connections between audit committee meetings and corporate performance has yielded comprehensive results (aldamen et al., 2012). for instance, al farooque et al. (2020) discovered a strong and favourable relationship between the performance of thai enterprises and the frequency of audit committee meetings. additionally, it was discovered that the frequency of audit committee meetings was significantly and favourably correlated with the efficiency of saudi banks (almoneef & samontaray, 2019). based on reviewing past literature, the researcher formed the study's following objectives and proposed the study's hypothesis. the objective of the study the study tried to identify the relationship between the frequency of meetings of various committees and the performance of public sector banks. the following are the objectives of the study:  to evaluate the impact of the frequency of meetings on the bank's performance. the hypothesis of the study  ha: the frequency of meetings impacts the financial performance of indian public sector banks. taluka et al., indian journal of finance and banking 11(1) (2022), 38-44 41 materials and methods the study is analytical and descriptive in nature. here the public sector banks of india are the main population of the study. the final sample comprises 18 banks only from all 21 public sector banks in india, as 3 banks merged during data collection. the secondary type of data has been collected for the time of six years from f.y. 2013 to f.y. 2019. we are taking frequency or total several board meetings, audit committee meetings, and committees as variables for the diligence of the board while roa for the performance of banks. two control variables used here are the total size of the firm or assets and the firm's age or incorporation year. in this study, the main statistical tool used here is the pooled ols method with the other frequency measures tools such as mean, median, and standard deviation. the main sources for data collection are the cmie prowess i.q. database system, annual reports & websites of the banks. description of variables the different variables collected for the study are categorized broadly into three main categories dependent, independent, and control variables. performance measure variables are dependent, while governance variables are used as independent variables. table 1. summary of research variables variables measurement of variables acronym description dependent variable return on assets roa pbit to total assets (%) independent variables audit committee meetings audmeet the total number of audit committee meetings held in a particular year. board meetings bmeet the total number of board meetings held in a particular year. number of committees committee the total number of committees in a particular year. control variables total assets assets the total asset value of the bank. age age total age of the bank from the year of its incarnation. model specification roait= α + β1auditcommitteeit+ β2boardmeetingsit+ β3noofcommitteeit +γ controlvariablesit+ εit in the above equation, i denotes individuals from 1 to 18, and t denotes the time from 2013-2019. the equation validates the relationship of roa as a dependent variable on independent variables such as the total number of board meetings, audit committee meetings, and committees. the pooled ols method has been used for analyzing the data as it is the most appropriate method. where: roait=return on assets auditcommitteeit= audit committee boardmeetingsit=board meeting noofcommitteeit=number of committee controlvariables= control variables results descriptive statistics results are represented in table 2 for dependent and independent variables of the sample banks. we observe that the mean of audit committee meetings is 10.556 while the maximum is 17. the average score for board meetings is 14.056, the maximum is 22, while the minimum score for several committees is 15.796, and the maximum is 22. the average roa is 0.313. table 2. descriptive statistics (mean, standard deviation, minimum, maximum) variable obs. mean std. dev. min. max. roa 108 .313 .918 -3.48 2.33 audit committee 108 10.556 2.373 5 17 board meetings 108 14.056 2.922 8 22 no of committees 108 15.796 3.754 5 22 assets 108 462657.49 593433.38 94509.155 3680914.2 age 108 100.111 21.791 65 154 table 3. regression results (linear regression) roa coef. st.err. t-value p-value [95% conf interval] audit committee .012 .045 0.27 .791 -.077 .101 board meetings .015 .036 0.43 .671 -.056 .087 no of committee -.016 .027 -0.61 .545 -.07 .037 assets 0 0 -0.20 .843 0 0 age -.004 .004 -0.79 .431 -.012 .005 constant .601 .637 0.94 .348 -.664 1.865 taluka et al., indian journal of finance and banking 11(1) (2022), 38-44 42 mean dependent var 0.313 sd dependent var 0.918 r-squared 0.011 number of observations 108.000 f-test 0.233 prob > f 0.947 akaike crit. (aic) 297.684 bayesian crit. (bic) 313.777 the regression result represents in table 3 for the dependent and independent variables of pooled ols. it reveals the impact of the total number of audit committee meetings, board meetings, and committees on the roa of the selected banks. the results of table 2 fail to reject the null hypothesis that the quality of independent directors does not impact the performance of banks. it exhibits that our results support the tested hypothesis that the total number of audit committee meetings, board meetings, and committees had no significant impact on the performance [roa] of the banks. discussions this study aimed to investigate the consequences of frequent board meetings and how they affected the performance of public sector banks in india. it thoroughly evaluates how the indian corporate governance regulations affect bank performance. by doing this, stakeholders may more accurately pinpoint the governance elements influencing performance and encourage investee companies to focus on enhancing those characteristics to achieve greater performance. the study applies multiple regression analysis on the annual reports of 18 public sector banks from 2013 to 2019. our findings indicate a comprehensive study of the diligence of the board and banks' performance. the research contributes to the body of knowledge on the association between board meetings and bank performance and addresses one primary hypothesis. conclusions an integrated theoretical framework built on agency theory is used in this study. the study's findings indicate that none of the chosen board diligence variables significantly affect performance indicators like banks' roa. the phenomenon of corporate governance is familiar in developing countries, yet it might take time to impact effectively in the current scenario. while the board's diligence, as suggested by some previous studies, significantly impacts the performance of firms, our study needs to be supported. however, it must be noted here that several other factors cannot control and influence performance. the present study and its results may lead to future scope to wider the aspects for further improvements and explore more research areas with this aspect of corporate governance. the study is limited to the sample of public sector banks in india, which can be explored by comparing it with other sectors or aspects of the banking sector in india. author contributions: conceptualization, s.t. and s.v.; methodology, s.t.; software, j.s.; validation, s.v., s.t. and j.s.; formal analysis, s.t.; investigation, s.v.; resources, s.t.; data curation, s.t.; writing – original draft preparation, s.t.; writing – review & editing, s.t., s.v. and j.s.; visualization, s.t.; supervision, s.v.; project administration, s.v.; funding acquisition, s.t., s.v. and j.s. the 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: n/a. 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 adams, r. b., & ferreira, d. 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(2018). board of directors, audit committee, and firm performance: evidence from greece. journal of international accounting, auditing and taxation, 31, 20–36. https://doi.org/10.1016/j.intaccaudtax.2018.03.002 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 10(1) (2022), 18-30 18 finance and banking ijfb vol 10 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa the short-term coronavirus (covid-19) pandemic effect: an empirical investigation of indian stock market (bse) mohd atif afzal (a)1 nasreen khan (b) abdul saboor mohammad (c) mohd taqi (d) (a) assistant professor, centre for distance and online education, aligarh muslim university, aligarh 202002, india; e-mail: atifafzalgd7581@gmail.com (b) assistant professor, department of accounting, al-baha university, kingdom of saudi arabia; e-mail: findnasreen@gmail.com (c) department of commerce, aligarh muslim university, aligarh 202002, india; e-mail: abdul.saboor.mohd@gmail.com (d) assistant professor, centre for distance and online education, aligarh muslim university, aligarh 202002, india; e-mail: taqiamu@rediffmail.com a r t i c l e i n f o article history: received: 14th march 2022 accepted: 10th may 2022 online publication: 13th may 2022 keywords: indian stock market, covid-19, garch standard vector autoregression, impulse response function jel classification codes: h54, r53 a b s t r a c t india’s precautionary step toward covid-19 led to 1.3 billion people enduring lockdown, consequently halting the wheels of the indian economy. though the crash of the stock market was evident and explanatory, it left all stakeholders (including the investors and government) with no choice. deteriorating sensex and other indices forced investors to withdraw and lose attraction from the market and looped in more serious issues to the indian stock market. this paper empirically analyses the short-term impact of covid-19 on five selected bse indices for sensex, fmcg, bank, corporate-bond, and industrial using econometric models. stationarity was checked by augmented dickey-fuller and philips-perron test. autocorrelation was assessed and mitigated by durbin-watson, breusch-godfrey serial correlation lm test, and cochrane-orcutt transformation method. this study attempts to apply multiple regression, the garch model, standard vector autoregression (s-var), and impulse response function (irf) to decode the relation. the results indicated that the covid-19 pandemic is adversely affecting the performance of the indian stock market in the short run. all the indices showed a negative relationship antecedent with the effect of covid-19, except for the spicbi index. this paper implies investment solutions for the investors and policymakers to cope with the unprecedented situation amidst covid-19. © 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 “fear of the unknown is a terrible fear” says -joan d vinge. in this integrated world, pandemic not only hits mortality (death) and morbidity (short period layoff) (mckibbin & fernando, 2020); but uncertain fear and apparent situation affects all the economic and non-economic activities. outbreak of coronavirus (covid-19) likely from china (w.h.o., 12 january 2020) to almost every part of the continent (worldometer) is likely to affect economic activities at large due to imposition of lockdown in various parts of the world (mudgill, the economic times, 25th march 2020). india's lockdown of 1.3 billion people which is reported as the biggest lockdown of any region (al jazeera, 14 april 2020), will definitely hit economic activities in almost every sector. stock markets are considered the reflection of a country's economic health. the bse sensex (indian stock exchange) within duration of two weeks, dropped from 42,000 to 25,000 (business reporter, 23 march 2020), indicating the severity of the covid-19. indian stock market had also showed negative relations in previous epidemics (vijayakumar et al., 2013), though it had recovered within a short span of time in cases of severe acute respiratory syndrome (sars), zika and ebola (mehta, the economic times, 16 march 2020). the policy makers are eyeing a way out of the situation citing covid-19 can be lethal to indian economy (iyer, 2020). academicians and researchers of any field are obligated to participate in exploring past trends and try to suggest corrective measures and actions which is the need of the hour. in this research paper, economic impact of covid-19 on short run is judged considering the indian stock market index of bombay stock exchange (bse) and it also recommends investor’s interest to be protected, mainly through diversifying their investments. 1corresponding author: orcid id: 0000-0001-8308-4622 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v10i1.1716 to cite this article: afzal, m. a., khan, n., mohammad, a. s., & taqi, m. (2022). the short term coronavirus (covid19) pandemic effect: an empirical investigation of indian stock market (bse). indian journal of finance and banking , 10(1), 18-30. https://doi.org/10.46281/ijfb.v10i1.1716 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v10i1.1716 https://orcid.org/0000-0001-8308-4622 https://orcid.org/0000-0002-7769-5846 https://orcid.org/0000-0002-2247-8609 https://orcid.org/0000-0002-6701-7267 afzal et al., indian journal of finance and banking 10(1) (2022), 18-30 19 stock market indices are based on demand of the market and heuristics (or biases) are guiding principle for decision makers while buying or creating demand for particular stocks, among which fear plays important role (hassan et al., 2013). as the spread of covid-19 is globally expanding geometrically and has seen no decline, ensuring fear has resulted in the fluctuations of indices of indian stock market. thus it can be classified that indian economy is approaching towards “economic shock” (baldwin & di mauro, 2020). the spread of covid-19 has dramatically affected the investor-market, directly and indirectly. the direct effect is due to close down and lockdown while indirect one is the due to fear caused. this study has tried to evaluate the fear basis of an investor. the exposure of the virus is reflected by the active cases and mortality which has been closely monitored by many agencies globally (worldometer) as well as nationally (mygov.in). the short-term impact has been investigated with the help of econometric analysis, where dependent variables are the five selected stock indices of bse whereas and active cases (ac) and daily death (dd) due to covid-19 has been taken as independent variables. this paper concludes the mitigating strategy of the indian investors to safeguard their investment interest and also acts as buffer to stock market in the negative growth period. the paper’s findings also imply the policy makers to re-focus on corporate bond corpus; which has been regarded as the “white elephant” of secondary market; and revive the fund as well as to utilize the disguised opportunity. pandemic effect a lot of diseases have been discovered, unfurled and controlled; few of them become epidemic, causing threat to humanity due to its rapid spread. seeing, its exposure, w.h.o. declared “public health emergency / outbreak of pandemic” on 12 march 2020 (w.h.o.) and consequently india announced covid-19 as “notified disaster” on 14 march 2020 (the economic times). the history check reveals four pandemics: 1889, 1918, 1957 & 1968 in the last 130 years (maital & barzani, 2020); though sars had not qualified as pandemic. ample studies have been conducted in the post-epidemics period and similarly its effect on economy of a country has also been reported. black death (considered largest pandemic ever recorded) saw drop in labor supply (25-40%); fall in returns (5-8%) and increase in real wages (100%) (clark, 2007; 2010). yang et al. (1999) and carpernter (2011) studied economic impact of foot and mouth disease in taiwan and california respectively. in another study, armien and halasa (2012) evaluated the overall cost involved in an epidemic. study related to the impact of aids on the economic parameters is also analyzed by bloom and mahal (1997) and suggested that only long term correlations can give predictive results. another study concerning aids, concluded negative relation with gross domestic product (gdp) in the context of ukraine, which was done by barnett et al. (2000). sars, which has been extensively studied (gupta, 2005; chen et al., 2007; beutels et al., 2009) has noticed significant impact on the socio-economic health of affected countries. the chinese stock market has been analyzed by beutels et al. (2009) and was reported to have negative effect. in the indian context, very few studies related to epidemics can be found such as vijayakumar et al. (2013); where researcher exposed the relation of chikungunya epidemic on per capita income (monthly) and hence concluded no relationship. in a very recent study, anticipating impact of covid-19 on chinese economy, ayittey et al. (2020) found that world may lose 280 billion us$ which would wipe approximately 0.5% of world’s gdp (riley and horowitz, cnn business, 10 february 2020). in another study, the estimate of covid-19 impact on world gdp was calculated to drop 1% (luo & tsang, 2020). estrada et al. (2020) simulated the impact and concluded astonishing figures of 4 trillion us$ drop in chinese gdp. economic impact of covid-19 the first patient of covid-19 was reported in december in wuhan (china), after which it got spread to various parts of the world (worldometer). historically, epidemics have affected this planet from time to time and all the aspects (economic and non-economic) are influenced in the course. human intervention includes the development of vaccine, prevention of its communicability and the societal awareness. aforementioned prevention leads to major governmental obligation, of controlling the movement of people somehow, which deliberately restricts the economic activity (ellis-peterson, the guardian, 24th march 2020). similarly, covid-19, when declared pandemic, became a serious threat to the society, both clinically and economically. in india, where majority of the sectors are unorganized (nagaraj, 2013), this employing 82 % of casual workforce of india reported by national institution for transforming india (niti) aayog (mohanty, 2019), thus, it is difficult to cope up with the situation. the government decisions are typically a tradeoff between functioning of the economy and prevention of the epidemic. indian stock exchange india’s leading news headlines read “the virus that has spooked the world’s markets and sparked fears of global recession has also played havoc with india’s macro indicators” (mehta, 23 march 2020). the fall was in sync with the world market. the stock exchange of india consists of nine official exchanges, of which bse (selected for the study) is reputed globally. bse is here considered for the study which is asia's oldest stock exchange, established in 1875 (bse, n.d.) and having more than 2.2 trillion estimation of market capitalization (10th spot by size). bse is the largest stock market in terms of number of companies with 5749 listed companies (shukla, 2019 february). when essential and non-essential sectors are plunged to lowest level, investment and secondary markets are the first objects that losses their strength. this is evident by the drop of bse sensex which got closed at 25,981 points in the last week of march (business reporter, 23 march 2020). the study has taken account of the movement of stock market indices (here bse) as dependent variables, discussed in next section. due to the recent nature of the subject, not a lot of studies are found. studies in scientific and non-scientific fields are absent and this paper primarily aims at filling this gap. secondly, economic trends, considering stock indices are ample in general afzal et al., indian journal of finance and banking 10(1) (2022), 18-30 20 phenomenon; but very few studies could be unearthed related to the epidemic, or the disease-caused change, or even pandemic. thirdly, no studies are found related to epidemic in the indian context, ignoring exploratory news editorials. fourthly, except for two studies: viz luo and tsang (2020) and estrada et al. (2020), where researcher had scientifically explored the relation using statistical model. this study attempts to apply different statistical tools and techniques such as multiple regression, garch model, standard vector autoregression (s-var) and impulse response function (irf) to decode the relation. lastly, this study aims at providing recommendations for the policy makers to encourage the investors who have lost their money and hope in the stock market, and to revive the overall condition of the market. in line with the literature, the general objective of this study is to investigate the impact of covid-19 on the indian stock market. this can be further classified infers of sensex and other stock indices of fast moving consumer goods (fmcg), banks, bond-market and industrial. materials and methods the selection of bse indices are based on its global popularity which are regarded as benchmark indices (cleartax.com). there are a few lists of indices traded on the podium of bse. the research design of this paper is based on secondary data, which comprises daily-data of five stock indices of bse and cases of covid-19 from 30th january 2020 to 3rd july 2020. the selected indices are s&p bse sensex, s&p bse fmcg index, s&p bse bankex, s&p bse india corporate bond index and s&p bse industrials which are proxy to indian stock market. the daily data of covid-19 active cases and deaths have been retrieved from the worldometer website. the data of five indices have been extracted from the official website of bse (see table 1). the data of s&p bse india corporate bond index has been retrieved from website of asia index pvt. ltd. the return has been calculated as per (pt pt-1) / pt-1*100. the selection of the indices and their importance in the current scenario with references to the sectors are discussed below. table 1. variables, measurement and abbreviation variables measurements abbreviations dependent variables s&p bse sensex index daily closing price sensex s&p bse india corporate bond index daily closing price spicbi s&p bse fmcg index daily closing price fmcg s&p bse bankex index s&p bse industrials index daily closing price daily closing price bank in independent variables active cases of covid-19 excluding recovery and death from the total cases ac daily death (due to covid-19) death per day dd source: authors compilation s&p bse sensex index when the sensex (regarded as pulse of domestic stock market), which is the core of bse stocks, plummeted from 41,952 (highest achieved) in mid-january 2020 (business today, january 2020) to 25,981 in the fourth week of march 2020 (business reporter, 23 march 2020), the covid-19 effect was evident. it became of utmost importance for the stakeholders (government, policy makers and researchers) to draft a way out of the crisis. this papers aims in developing a third wayout strategy to counter the stock fall and backing the interest of the investors. the selections of indices are correlated with international consequences and pandemic scenario. s&p bse fmcg index in the case of pandemic, there is a latent pressure within the sectors which are the direct basis of living. food and beverages are the inevitable demands that humans cannot ignore. moreover, being non-durable, these also affect the supplier’s end. fmcg being fourth largest sector of indian economy amounting to 52.75 billion us$, 2018 (ibef, march 2020) will be affected by the recent covid-19, both at demand as well as supply side. hence, this index will help to identify the short term economic impact. s&p bse bankex index there are three reasons for considering index of banking sector. i) firstly, indian economy where majority of the workforce is unorganized and sectors are not well-structured, banking sector is regarded as sufficiently regulated, organized and structured. ii) secondly, being the flow channel of the funds, this sector is greatly responsible for running the economy. banks and credit flow cannot stop even on the last brink, whether it is personal or commercial banking. iii) lastly, various channels of banking include microand rural-banking. this reflects the reach of the sector on one hand and the counter effect of this sector on the economy as a whole, on the other hand. the index fluctuations are the outcome of the demand which in turn is consequent to the market news. although country's central bank, reserve bank of india (rbi) ensured customers interest in case of yes bank crisis, yet fall of the stock eroded 85% of the value (the economic times, 7 march 2020). it is evident how banking sector reacts to the catastrophe. afzal et al., indian journal of finance and banking 10(1) (2022), 18-30 21 s&p bse india corporate bond index and s&p bse industrials index the fourth construct extracted from bse is of bond market and this dimension has been explored due to its orthogonal relation with other indices. this is due to the fact that bond indices are regarded as low risk, long term and high return index. being a debt security, economics and behavioral rationale of the investor differs, in comparison to other indices. bse corporate bond has been in focus since early 2020 due to its stagnant rise. t. k. arun (the economic times, 14 january 2020) says that the post nehruvian-governemt which provided base to the manufacturing portfolios, development of roads or infrastructure, is often blamed for ignoring development of private sector. albeit this paradox, the private sector was developed on a large scale for all times. seeing this, the new development financial institution (dfi) is just an excuse to avoid the development of the corporate bond market which has been sluggish and became "headache to indian borrowers" (patil, the print, 20th january 2020). the bond market indices have always been in the focus of the economic policy makers. report by rbi has suggested an established and developed bond market can boost economy of any country (acharya, 2011). achraya further explains that the declining role of dfi and robust corporate bond corpus will help in building economy for which india has been re-aiming at its 10.08% of gdp growth (which was achieved during 2006-07) (the economic times, 2018 august). this paper aims at indicating abnormality in the movement of the pandemic’s overall effect with other indices and suggest insights for three purposes; firstly, countering the crash of the stock market; secondly, favoring the interest of the investors and lastly, to re-shuffle the corporate bond market that has been ignored for a long time. the industrial index (s&p bse industrials) is chosen owing to its sectorial relevance. further, experts have opinion that lockdown will have least likely impact on the industrial industry. industrial manufacturing, in a recent study, is said to have the triple hit due to supply chain disruptions (jorda et al., 2020). results descriptive statistics the spicbi has the highest mean return while bank has the lowest mean return of -0.198 shown in table 2. the mean returns of all the indices are negative except in spicbi and fmcg index. this signifies that investment in indian stock market is not favourable to the investors during the on-going covid-19 pandemic. however, the mean return value of spicbi and fmcg index reflects that it may be the favourable avenue for the investors where they can generate good returns by consciously including indian corporate bond and fmcg index in their investment portfolio. the standard deviation statistic (s.d.) reveals that the bank is the most volatile and risky index among all the selected indices while the s.d. of spicbi is 0.114, which signifies low volatility and being least risky. table 2. summary statistics sensex fmcg ac dd bank in spicbi mean -0.028 0.0318 7.003 7.534 -0.198 -0.152 0.051 median 0.159 0.001 2.613 4.901 0.076 0.021 0.046 maximum 8.974 8.237 71.654 91.540 10.704 5.386 0.421 minimum -13.152 -10.422 -10.703 -42.187 -16.806 -13.629 -0.282 std. dev. 2.902 2.372 11.693 26.436 3.789 2.641 0.114 source: authors compilation pre-test assumptions a set of data is said to be stationary when the mean, variance and auto-variance are constant (brooks, 2008). the nonstationary data may produce high r2 value and significant relationship, even when the variables are unrelated with each other (salvatore & reagle, 2002). to check the stationarity of the data, the researchers have applied augmented dickeyfuller (adf) test and in order to validate the results of adf test further, researcher have applied philips-perron (pp) test. the p-values (shown in table 3) of all the selected variables are less than 0.05. it implies that all the variables are stationary at level. table 3. unit root testing variables at level (adf) at level (pp) summary sensex -11.979 0.000* -11.908 0.000* stationary at level ac -2.067 0.037** -6.339 0.000* stationary at level dd -2.058 0.0385** -13.03 0.000* stationary at level fmcg -12.577 0.000* -12.246 0.000* stationary at level spicbi -7.416 0.000* -7.375 0.000* stationary at level bank -10.328 0.000* -10.329 0.000* stationary at level in -9.696 0.000* -9.793 0.000* stationary at level note: * and ** denotes p-value at 1% and 5% level of significance, respectively. source: authors compilation afzal et al., indian journal of finance and banking 10(1) (2022), 18-30 22 multiple regression the econometric models were developed for each index to identify the relationship with covid-19 (table 4). the f-statistic of all the econometric models are less than 0.05 it indicates that all the models are statistically significant. the durbinwatson statistics of all the eight models are within the acceptable range of 1.5 to 2.5 (garson, 2012; anselin, 2013) which signifies that there is no autocorrelation in the residuals of the econometric models. there is significant effect of ac in all econometric models with negative coefficients in sensex, fmcg, bank and in except for spicbi which has a positive effect (table 5). considering the effect of dd on the stock indices, results of regressions are showing insignificant relationship. if the residuals of the models are serially correlated then it will produce overestimated value of r2, t-value and fvalue; and the value of r2 may not be valid (gujarati et al., 2012). the durbin-watson (d-w) and breusch-godfrey serial correlation lm test have been used to investigate whether the residuals of the models are auto-correlated or not. table 4. econometric models econometric models equations model 1 sensext= β0 + β1act+ β2ddt + εt model 2 fmcgt= β0 + β1act+ β2ddt + εt model 3 bankt= β0 + β1act+ β2ddt + εt model 4 spicbit= β0 + β1act+ β2ddt + εt model 5 int= β0 + β1act+ β2ddt + εt where, sensext= s&p bse sensex at time t; act= active cases at time t; ddt= daily death at time t; fmcgt= s&p bse fmcg at time t;spicbit= s&p bse india corporate bond index at time t;int= s&p bse industrials;bankt=s&p bse bankex;β0= intercept; β1β2= coefficients of independent variables; εt= error term source: authors compilation the results depict that all the p-values are > 0.05 implies that models are not facing the issue of serial correlation except model 4. a number of statistical tools such as cochrane-orcutt (co) and prais-winsten transformation method can be applied to counter the issue of auto-correlation. the co technique is also called as two-step method and it iterates the process till the two successive calculations are nearly the same (sumantri, 2020). the researcher has applied co estimation in order to remove serial correlation from the model 4. the presence of heteroscedasticity in the residuals of the models may lead to produce misleading results (gujarati et al., 2012). the results of the test have been reported in table 6 and pvalues > 0.05 which signifies that residuals are homoscedastic. table 5. regression results variables dependent variables independent variables model 1 (sensex) model 2 (fmcg) model 3 (bank) model 4 (spicbi) model 5 (in) ac coefficient -0.075 -0.039 -0.101 0.002 -0.086 prob. 0.003* 0.060** 0.002* 0.066** 0.000* dd coefficient 0.009 0.010 0.015 -0.000 0.001 prob. 0.408 0.262 0.270 0.417 0.884 r2 0.085 0.039 0.091 0.111 0.144 adjusted r2 0.066 0.020 0.073 0.083 0.127 durbin-watson 2.249 2.318 1.987 1.988 1.878 prob(f-statistic) 0.0128 0.038 0.008 0.009 0.000 note: * and ** denotes p-value at 1% and 10% level of significance, respectively. source: authors compilation table 6. results of autocorrelation and heterocedasticity models autocorrelation heterocedasticity f-statistic obs*r-squared f-statistic obs*r-squared sensex 0.8155 (0.445) 1.6874 (0.430) 2.6481 (0.106) 2.6311 (0.104) fmcg 1.5591 (0.215) 3.1774 (0.204) 2.7100 (0.071) 5.2908 (0.071) bank 0.1786 (0.836) 0.3745 (0.829) 0.0012 (0.972) 0.0012 (0.971) spicbi 0.0046 (0.995) 0.0098 (0.995) 1.2507 (0.266) 1.2602 (0.261) in 1.7010 (0.187) 3.4568 (0.177) 0.2333 (0.630) 0.2375 (0.626) note: p-values are reported in parentheses. source: authors compilation according to montgomery et al. (2001) the most commonly used technique to check the multicollinearity is variance inflation factor (vif). therefore, (vif) method has been applied and each model has been run separately to investigate whether the explanatory variables are strongly inter-correlated or not. the result of vif is afzal et al., indian journal of finance and banking 10(1) (2022), 18-30 23 presented in table 7. according to hair et al. (1995) the threshold limit of vif should be less than 10. the vif values of the variables are below the acceptable limit i.e. 10, which signify that there is no multicollinearity. table 7. variance inflation factor (vif) independent variables vif ac 1.07438 dd 1.07438 source: authors compilation garch model autoregressive conditional heterocedasticity (arch) and generalised arch (garch) methods are generally used for assessing and forecasting the variances. the model formulates variances in the dependent construct as a function of previous values of dependent as well as exogenous variables. this technique was developed individually for arch by engle (1982) and garch by bollerslev (1986). widespread acceptance of this methodology is evident by application of arch and garch in many econometric studies such as financial time series (bollerslev, chou, and kroner, 1992; bollerslev, engle, and nelson, 1994) and stock market studies (garg & bodla, 2011; shehzad et al.,2020). the mean equation adopted from shehzad et al. (2020) rti=β0 + β1acti+ β2ddti+ εti where, rti is the return of the indices, β0 is the intercept, acti and ddti are used as a proxy for covid-19 and εti are the residuals term. the variance equation ht = c +α1e2 t-1+β1ht-1 in the above equation the α1 and β1 are referred to as arch and garch parameters, respectively conditional variance is only finite when stationarity condition is fulfilled that is when α1+ β1 should be less than 1. the c term is volatility in long term and α1 and β1 can be directly interpreted to be the volatility by fear factor in mind of the investors caused by adverse effect of covid-19. the short term dynamics of the series is due to size of the α1 and β1 parameters and when the value of garch coefficient is greater than arch coefficient it indicates that the shock effect caused by covid-19 will be persistent in the market for a long period shehzad et al. (2020). on the contrary if the value of arch coefficient is greater than garch than it indicates spiky fluctuations. to detect autoregressive conditional heteroscedasticity, it requires application of arch-lm test (engle, 1982) and the p-value is less than 0.05 (see table 8) that indicates presence of arch effect in the residuals. table 8. arch lm test variables f-statistics p-value obs*r-squared p-value sensex 5.565 0.005 10.270 0.005 ac 2.672 0.026 12.392 0.029 dd 2.554 0.033 11.915 0.036 fmcg 6.206 0.014 5.951 0.014 bank 2.975 0.035 8.491 0.036 spicbi 3.392 0.037 6.529 0.038 in 5.713 0.004 10.513 0.005 source: authors compilation the results of regression models were elaborated by application of garch (1,1) model that has been used by many researchers in the context of stock market particularly in indian setting (garg & bodla, 2011). variable of covid-19 were exogenous in the models while considering selected indices of stock market as endogenous. significant value of ac was found to be varying in the models, at 1% for sensex, 5% for in and 10% (see table 9) for fmcg while insignificant value have witnessed in bank and spicbi. in variance equations both arch and garch terms were statistically significant (see table 10). the value of α1 + β1 is less than 1 in all the models indicating 0.99, 0.97, 0.98, 0.96 and 0.9 and the coefficients of garch (β1) are greater than coefficients of arch (α1). this implies that the persistent volatility exists in the selected market indices. the sum of α1+β1 coefficients in the models are close to one indicating that the shock effect caused by covid-19 will be persistent in the market for a long period (shehzad et al., 2020). table 9. the results of mean equation variable coefficient std. error z-statistic prob. dependent variable: sensex c 0.3331 0.2070 1.6095 0.1075 ac -0.0295 0.0113 -2.6058 0.0092 dd 0.0111 0.0079 1.4087 0.1589 afzal et al., indian journal of finance and banking 10(1) (2022), 18-30 24 dependent variable: fmcg c 0.1917 0.2370 0.8091 0.4184 ac -0.0234 0.0136 -1.7107 0.0871 dd 0.0068 0.0076 0.8905 0.3732 dependent variable: bank c 0.3310 0.3457 0.9574 0.3383 ac -0.0403 0.0249 -1.6178 0.1057 dd 0.0185 0.0136 1.3663 0.1718 dependent variable: spicbi c 0.0494 0.0135 3.6494 0.0003 ac 0.0007 0.0013 0.5752 0.5651 dd -0.0004 0.0004 -0.9750 0.3296 dependent variable: in c 0.4687 0.2406 1.9481 0.0514 ac -0.0572 0.0238 -2.4058 0.0161 ddr 0.0063 0.0085 0.7481 0.4544 source: authors compilation table 10. the results of variance equation variable coefficient std. error z-statistic prob. dependent variable: sensex c 0.2204 0.1731 1.2733 0.2029 resid(-1)^2 0.2410 0.1455 1.6558 0.0978 garch(-1) 0.7577 0.1202 6.3005 0.0000 dependent variable: fmcg c 0.1801 0.1164 1.5466 0.1220 resid(-1)^2 0.2163 0.0947 2.2829 0.0224 garch(-1) 0.7685 0.0838 9.1639 0.0000 dependent variable: bank c 0.3496 0.1927 1.8140 0.0697 resid(-1)^2 0.1785 0.0918 1.9448 0.0518 garch(-1) 0.8185 0.0796 10.277 0.0000 dependent variable: spicbi c 0.0005 0.0005 0.8555 0.3923 resid(-1)^2 0.1501 0.0709 2.1153 0.0344 garch(-1) 0.8188 0.0640 12.7826 0.0000 dependent variable: in c 0.2542 0.2211 1.1496 0.2503 resid(-1)^2 0.1711 0.0974 1.7561 0.0791 garch(-1) 0.8052 0.0948 8.4930 0.0000 source: authors compilation post application of garch (1,1), the residuals of the models were subjected to test heteroscedasticity and serial correlation for which ljung-box q and arch lm test have been used for the diagnosis. the p-value of all the models tested with both the diagnostic tests were greater than 0.05 (see table 11), signifying none of the residuals were autocorrelated as well as heteroscedastic. table 11. ljung-box q and arch lm test ljung-box q arch lm test models qstatistics p-value fstatistics p-value sensex 0.5594 0.455 0.5320 0.467 fmcg 0.4530 0.501 0.4294 0.513 bank 1.3798 0.240 1.3236 0.252 spicbi 1.3058 0.253 1.2514 0.266 in 0.7921 0.373 0.7543 0.387 source: authors compilation standard-var investigating the effect of covid-19 on selected stock indices was also observed by applying standard vector autoregression in this study, which is considered as a standard method in financial researches (vo, 2017). studies such as (ulku & ikizlerli, 2012; patnaik et al., 2013; usmani & akhter, 2020) applied this technique while studying impact of foreign investment on indian capital market and market returns in developing economies respectively. table 12. var lag order selection criteria lag logl lr fpe aic sc hq 0 -634.0193 na 0.389070 13.24529 13.64095* 13.40533 1 -595.2306 71.24455 0.294147* 12.96389* 14.01898 13.39065* 2 -580.4126 25.70479 0.364279 13.17169 14.88620 13.86517 3 -553.1394 44.52770* 0.352393 13.12529 15.49924 14.08551 note: *lag order selected by criterion afzal et al., indian journal of finance and banking 10(1) (2022), 18-30 25 there are two criteria that should be taken care of before applying var, firstly, the data should be stationary and secondly, lag length must be optimum (gangadharan & yoonus, 2012). the latter condition is fulfilled by obtaining minimum value that is based on decision criteria such as schwarz criterion (sc), akaike information criterion (aic), final prediction error(fpe), hannan–quinn (hq) and sequential modified lr test statistic (lr) (sahoo,2020). market returns t = c(1)*market returns t-1 + c(2) + c(3)*ac+ c(4)*dd table 13. vector autoregression estimates sensex fmcg bank spicbi in sensex(-1) -0.552728 -0.499105 -0.752712 -0.000352 -0.602645 (0.44011) (0.36363) (0.58276) (0.01636) (0.38752) [-1.25588] [-1.37258] [-1.29163] [-0.02153] [-1.55511] fmcg(-1) 0.152795 0.027674 0.189049 -0.000454 0.055145 (0.21434) (0.17709) (0.28381) (0.00797) (0.18873) [ 0.71286] [ 0.15627] [ 0.66611] [-0.05702] [ 0.29219] bank(-1) 0.424032 0.228459 0.543199 0.000353 0.521447 (0.26408) (0.21818) (0.34967) (0.00982) (0.23252) [ 1.60571] [ 1.04710] [ 1.55347] [ 0.03601] [ 2.24256] spicbi(-1) -0.568822 2.123704 -0.584850 0.287199 1.073163 (2.52888) (2.08938) (3.34853) (0.09399) (2.22671) [-0.22493] [ 1.01643] [-0.17466] [ 3.05550] [ 0.48195] in(-1) -0.294327 -3.58e-05 -0.163577 0.017173 -0.084803 (0.24800) (0.20490) (0.32838) (0.00922) (0.21837) [-1.18680] [-0.00017] [-0.49813] [ 1.86303] [-0.38835] c 0.475989 0.113778 0.445967 0.031040 0.396357 (0.36198) (0.29907) (0.47931) (0.01345) (0.31873) [ 1.31495] [ 0.38044] [ 0.93044] [ 2.30710] [ 1.24355] ac -0.073118 -0.028190 -0.098364 0.001339 -0.082027 (0.02579) (0.02131) (0.03415) (0.00096) (0.02271) [-2.83539] [-1.32312] [-2.88068] [ 1.39738] [-3.61252] dd 0.005572 0.006082 0.014690 -8.06e-05 0.003543 (0.01134) (0.00937) (0.01502) (0.00042) (0.00999) [ 0.49116] [ 0.64891] [ 0.97791] [-0.19124] [ 0.35465] r-squared 0.145929 0.122626 0.121784 0.245298 0.200285 adj. rsquared 0.080945 0.055869 0.054964 0.187875 0.139437 f-statistic 2.245617 1.836907 1.822554 4.271769 3.291574 note: standard errors in ( ) & t-statistics in [ ] source: authors compilation where , market returns denotes returns of different indices that includes sensex, fmcg, bank, spicbi and in at time t. wherein, c(1) denotes returns of different indices at lag 1, c(2) is constant, c(3) and c(4) are exogenous variables which represents the coefficients of active cases and daily death due to covid-19 respectively. the lag length selection criterion was based on aic, fpe and hq and was found optimum at lag 1 (table 12). the result of var indicates that ac is significantly influencing only three of the selected indices, namely sensex, bank and in. the t-statistics is greater than critical value of 1.96 (at 5% significance) with negative coefficients -0.073, -0.098 and 0.082 for sensex, bank and in respectively (see table 13). although the coefficients of dd are positive but the relationship have found insignificant in all the indices. the residual of the var should be subjected to check serial correlation which was not found to be serially correlated, as the p-value is> 0.05 (see table 14). stability condition of var was also checked by using inverse root of ar characteristic polynomial method and was satisfactory, as none of the root was found to lie outside the circle (see figure 1). table 14. var residual serial correlation lm tests lag lre* stat df prob. rao f-stat df prob. 1 23.70649 25 0.5364 0.948895 (25, 309.8) 0.5370 2 32.69350 25 0.1389 1.327316 (25, 309.8) 0.1394 afzal et al., indian journal of finance and banking 10(1) (2022), 18-30 26 figure 1. inverse roots of ar characteristics polynomial impulse response function figure 2. impulse response function of covid-19 and returns of indices -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1 0 1 inverse roots of ar characteristic polynomialinverse roots of ar characteristic polynomial afzal et al., indian journal of finance and banking 10(1) (2022), 18-30 27 in the fiqure 2 of impulse response function (irf), there is one solid line between two dotted line. former line shows coefficient of the impulse response while the dotted line shows bootsratpped confidence band at 90% level (dhingra et al., 2016). the shock at one s.d. to ac and dd was observed for response on different maket indices (see figure 2). response of sensex, bank and in to ac shows sharp decline initially but from 2nd period, it increases and remains negative throughout. for fmcg and spicbi to ac, response abruptly increases to 2nd period and gradually dies out. the response of four indices (sensex, fmcg, bank and in) to dd shows sharp fall till 2nd period and similarly sharp rise in 3rd period, after which fluctuating response is seen throughout the periods. considering response of spicbi to dd, it shows decline till 3rd period and slight fluctuation during rest of the periods. discussion the econometric models analyzed the impact of covid-19 on indian stock market, which reflects the condition of indian economy in short run. overall results reveal negative impact on all the market indices influenced by covid-19. sensex index has been found to have negative and significant relationship with active cases of covid-19 while applying all the four methods and insignificant considering daily death counts except with the results of irf. the impact of ac on fmcg has evidence of significantly negative affect while observed from three methods except for irf. similarly, bank has been negatively affected by ac shown in all the methods although garch predicts marginally insignificant relationship (pvalue = 0.106).the in index shows negative and significant relationship with covid-19 in regression, garch, s-var and irf. interestingly, spicbi is showing positive relationship influenced by covid-19. yet only regression concludes on significant coefficients while garch and s-var show insignificant but positive relationships. positive influence can also be seen in irf graph. conclusions as the covid-19 pandemic is causing significant disruption in the world economy (shehzad et al., 2020), it is also highly likely for the indian economy to enter into phase of “economic shock” (baldwin and di mauro, 2020). the econometric models analyzed the impact of covid-19 on indian stock market, which reflects the condition of indian economy in the short run. garch (1,1); standard vector auto-regression and irf was applied to further investigate the hypotheses. the result for sensex and covid-19 is in line with the recent plunge of sensex in end week of march 2020 (business reporter, 23 march 2020). the negative relationship may have been caused due to withdrawal of investment from the market by both domestic and foreign investors; this is evident by foreign portfolio investors (fpi) pulling inr 1 lakh crore from indian market (sharma, march 2020). the negative impact of covid-19 on index of fmcg, banking and industrial sectors may have been due to the investor’s fear and loss of trust in these sectors, which corroborates with recent survey by babar (the economic times, 16 april 2020). although, the healthcare and it sector, are predicted to have positive relation in near future (khanna, 15 april 2020; the hindu business line, 10 april 2020), the result depicts otherwise. covid-19 and s&p bse india corporate bond index is positive due to the fact that corporate bonds are fixed income securities which are less volatile as compared to equities. this may have caused investors of corporate bonds not withdrawing their investment to that scale in contrast to other indices. additionally due to less volatility, this causality can be attributed to the possible influx of more investment in corporate bonds, when it is considered the government should channelize investment which will help in reviving the real economy (sen, 2019). overall, based on this study, the effect of pandemic with other indices suggests many insights and implications. first, investors can diversify portfolio to mitigate the risk caused by the ongoing pandemic. this can be achieved by consciously including corporate bond in their investment portfolio. second, the policy makers of secondary market should emphasize development of debt based securities. third, the study implies that government should facilitate the investors to put money into bond and related stocks. this shall help the stock market to revive by the influx of investment and in the time of pandemic, this strategy can act as a buffer to the forecasted economic shock. fourth, the bond market which has been a concern for the government, being sluggish for a long time will also be boosted. fifth, this study will not only add knowledge to the existing literature but also will facilitate the academician and researchers to comprehend the impact of pandemics on indian economy. lastly, this study suggests that the government should take preventive measures against devastating effect of covid-19. author contributions: conceptualization, m.a.a., n.k., a.s.m., and m.t.; data curation, m.a.a., n.k., a.s.m., and m.t.; methodology, m.a.a.; validation, m.a.a.; visualization, m.a.a.; formal analysis, m.a.a., n.k., a.s.m., and m.t.; investigation, m.a.a., n.k., a.s.m., and m.t.; resources, m.a.a., n.k., a.s.m., and m.t.; writing – original draft, m.a.a.; writing – review & editing, m.a.a., n.k., a.s.m., and m.t.; supervision, m.a.a.; software, m.a.a.; project administration, m.a.a.; funding acquisition, m.a.a., n.k., a.s.m., and m.t. 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. 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. afzal et 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(1999). costs of the 1997 foot-and-mouth disease epidemic in taiwan. veterinary record, 145, 731-734. https://doi.org/10.1136/vr.145.25.731 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.1016/j.frl.2020.101669 https://www.worldometers.info/coronavirus/countries-where-coronavirus-has-spread/ https://doi.org/10.1080/19407960902738313 https://doi.org/10.1136/vr.145.25.731 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 9(1) (2022), 230-239 230 finance and banking ijfb vol 9 no 1 (2022) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa making a compelling case for esg & islamic funds: an empirical investigation in comparison with conventional funds aasim abdullah (a) ullas rao (b)1 (a) bachelor of business administration, edinburgh business school, heriot-watt university dubai, united arab emirates; e-mail: aa141@hw.ac.uk (b) assistant professor of finance, edinburgh business school, heriot-watt university dubai, united arab emirates; e-mail: u.rao@hw.ac.uk a r t i c l e i n f o article history: received: 28 january 2022 accepted: 27 march 2022 online publication: 31 march 2022 keywords: esg investing, fama-french factor model islamic mutual funds, mutual funds socially responsible funds jel classification codes: b26, g11, g15, g23, m14 a b s t r a c t the purpose of this research is to analyze and evaluate the performance of esg funds and islamic funds vis-à-vis conventional mutual funds, whereby esg funds and islamic funds take into account environmental, social, governance and shariah-based factors into account during portfolio structuring. to conduct this study, the approach primarily employed the publicly available data of thirty funds from each aforementioned category, calculated their logarithmic returns based on closing prices and subsequently ranked the funds according to the returns. ten of the top-ranking funds were then selected (owing to some limitations of market data availability) for the methodology to calculate performance using descriptive statistics, one-sample t-tests, portfolio performance measures (sharpe ratio, treynor ratio, jensen’s alpha) and the well renowned fama-french three-factor model. the results show that much of the excess returns across a majority of the funds (in all categories) are largely explained by the market premium, while the fund manager skill, smb and hml factors do not lend much weight in explaining the excess returns attributable to the funds. furthermore, a considerable finding of this study is that esg and islamic funds are not underperforming, but exhibit resilience, and has the potential to evolve and become mainstream options for investments. © 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 the chief executive officer of the cfa institute, smith (2019), delivers a holistic outlook on the future of esg investments. he finds that “the client of the future cares passionately about esg. much more passionately than we appear to do as investment professionals.” given the above from the perspective of a practitioner of investments, it can be seen that the interest and passion for the likes of social inclusion, social impact and even the minimizing of negative environmental impacts is a growing concern for the investors of the future. the future of investing hence is being geared towards the emphasis on esg and other ethical investments. given that the demand for such investment vehicles is set to increase, it would only be reasonable that the mutual funds of today begin to shift focus to the environmental, social and governance factors of their investment philosophy. background to mutual funds there has been significant growth in mutual fund investment vehicles, especially on a global scale. these types of investments are very attractive to many investors, and also have the potential to make an impact on a country’s economic development. moreover, today’s age of investing strategies are complex and versatile, with many investors integrating the use of technology and other sophisticated trading disciplines to get a better edge on the competition to extract competitive 1corresponding author: orcid id: 0000-0002-5524-805x © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v9i1.1683 to cite this article: abdullah, a., & rao, u. (2022). making a compelling case for esg & islamic funds: an empirical investigation in comparison with conventional funds. indian journal of finance and banking, 9(1), 230-239. https://doi.org/10.46281/ijfb.v9i1.1683 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v9i1.1683 https://orcid.org/0000-0001-6088-1645 https://orcid.org/0000-0002-5524-805x abdullah & rao , indian journal of finance and banking 9(1) (2022), 230-239 231 returns on investments. some of the strategies can include and are not limited to goal-based strategies, faith-oriented strategies and ethical strategies. considering that there are many more strategies mutual funds employ and with many varied and different types of mutual funds in existence, especially with the growth of fund-of-funds and real-estate investment trusts (reits), it has only led to a rise in the interest of a large number of researchers and academics to examine fund returns and behavior. much of this research has covered ground using basic econometric models, performance measures using single-factor and multi-factor variations, meta-analyses and more. mutual funds are some of the fastest-growing players in the financial industry (in et al., 2014). the mutual fund assets under management have grown at a rate of 16% per year between 1980 and 2008, with the total net assets of the worldwide regulated funds reaching over $49 trillion. along with this growth, the esg and islamic funds have also been growing at a very quick pace, having about $60 trillion of assets under management by the signatories of the pri (principles for responsible investment) (friede et al., 2015). islamic funds are also a fast-growing sector representing $1033 billion of islamic assets under management (abdelsalam et al., 2014). when taking into account the larger world of finance, investment allocation into islamic equity is a recent phenomenon that began in 1994, when new legislation was issued that allowed the muslim investors to trade in international equity under specific restrictions (hayat & kraeussl, 2011). having absorbed this development, many conventional fund entities embraced the world of islamic investments by offering various islamic instruments in their portfolio offerings and compiling indices that include islamic investment vehicles, namely the dow jones islamic market index, ftse shariah index, msci islamic, and s&p 500 shariah indices. many investors have gravitated towards the esg funds and islamic funds mainly due to the recent scandals in ethics literature, and with much focus, due to the financial crisis and the subsequent negative impact on conventional funds. this also led to the rise in the price of oil, leaving a good number of islamic investors with high liquidity to invest. regarding this trend, the muslim investors were hence left with investment options in islamic funds, thereby increasing the demand for these fund types. in addition to this, the muslim population is growing at a steady pace which can imply continuing growth in demand, and subsequently continued growth and appeal of islamic funds towards the future. for instance, the global population of muslims is expected to grow to 2.2 billion in 2030, from the 2010 figure of 1.6 billion. this figure is approximated to be 26.4% of the total projected global population of 8.3 billion people in 2030 (pew research centre, 2011). furthermore, the islamic investment vehicles displayed considerable strength and resilience in the face of the global financial crisis, hence adding to the popularity of the islamic fund type. with terms to a practitioner’s perspective on the grounds of esg investments, most investors choose to integrate the governance factor into their investment process, while the environmental and social factors are relatively slow in adoption rates, hence the need for more focus on these factors (orsagh et al., 2019). furthermore, esg integration is observed significantly more in the equity sector as opposed to the fixed income sector, and portfolio managers are more frequently incorporating factors of esg within their investment techniques and processes (orsagh et al., 2019). literature review some academics have conducted empirical investigations and yielded promising results on esg and islamic funds. sauer (1997) assesses the impact of socially responsible stocks on investment performance by analyzing restrictions present in socially responsible stocks. the tests observed that social screening did not impact the investment performance adversely and that investors need not be concerned about any sacrifice in investment performance because of the restrictions. chang and doug witte (2010) analyse the characteristics of socially responsible funds and observe that fixed income-based socially responsible investments give a better performance with lower risk and higher return. tripathi and bhandari (2016) analyze if esg based companies can portray better performance compared to conventional investment based companies. they find that the esg compliant companies outperformed the conventional companies, with much higher alpha values when assessed against the fama-french three-factor model. in regards to islamic funds, mansor and bhatti (2011) conducted an in-depth study of the funds and observed that the islamic mutual funds were performing better on average as compared to the kuala lumpur stock exchange composite index. furthermore, the islamic mutual funds exhibited higher statistically significant returns in comparison to their conventional fund counterparts. dah et al. (2015) analyzed shariah impacts with reference to the dow jones islamic index (djim-us). the authors find that the islamic funds, primarily in the saudi arabian market, malaysian market and the kuwaiti market do not necessarily underperform compared to the market benchmarks, rather they outperformed the djim-us and also the dow jones sustainability index of the us. finally, the study by el-masry et al. (2016) used a test to assess the performance of islamic mutual funds in the gcc and the middle east and north african region. they found that the funds outperform the conventional funds in the gcc region, and they are less risky and more resistant to certain forms of economic crises. objective of the study based on the above, the purpose of this research paper is to analyze and evaluate the performance of esg funds and islamic mutual funds vis-à-vis conventional mutual funds. this purpose will entail the use of preliminary analysis via descriptive statistics, one-sample t-tests and portfolio performance measures such as the sharpe ratio (sharpe, 1966), treynor ratio (treynor, 1965) and the jensen’s alpha (jensen, 1968), along with the renowned econometric fama-french three-factor model (fama & french, 1993) to assess the factors affecting the fund performance and excess returns attributable to the funds. abdullah & rao , indian journal of finance and banking 9(1) (2022), 230-239 232 the main objectives, therefore, of this paper will be as follows:  analyzing the fund manager’s efforts in explaining the excess returns of a fund.  analyzing the impact of the market premium in explaining the excess returns of the fund.  analyzing if the smb (size factor) is significant in explaining the excess return attributable to the fund.  analyzing if the hml (value factor) is significant in explaining the excess return attributable to the fund. having introduced the research study and set forth the objectives, this paper will now move to discuss the methodology and the empirical material of the study. method the data used for the analysis included thirty funds from each category (see appendices a, b and c), and the returns of the funds were analyzed based on four specific tests. the tests were the preliminary descriptive statistics (see appendices d, e, f, g, h and i), one-sample t-test (tables 1, 2 and 3), portfolio performance measures (see appendix j) and the fama-french three-factor model (tables 4, 5 and 6). using the preliminary descriptive statistics, the jarque-bera values (jarque & bera, 1980) were assessed across all the funds; the highest significance was seen in the islamic sample, followed by the esg fund sample, with the majority of the insignificance observed in the conventional fund sample (see appendices e, g and i). the one-sample t-test was conducted to assess preliminary significance levels that can give an initial inference into the return behaviour of the funds, which will be later assessed by the famafrench three-factor model. the one-sample ttest showed insignificance in the conventional fund portfolio, while the significance was observable for the esg and islamic fund portfolios (tables 1, 2 and 3). table 1. test values for conventional fund portfolio vanguard horizon fd. vangd.cap. oppor.fd. brown cap.man.s ml.co. inv.shs. clearbrid ge large cap growth fd.cl.a col.selig man glb.tech. fd.cl.c dodge & cox bal.fd. hartford small cap growth fund a vanguard primecap fd. ab equity income fund a ab small cap growth portfoli o a america n funds global growth fund 2 t-statistic (0.1853) (0.8355) (0.2275) (0.7495) (-0.0801) (0.3802) (0.2465) (0.9411) (0.7213) (0.5641) source: authors’ calculations table 2. test values for esg fund portfolio dws invest esg euro bonds (short) fc dws esg euro bonds (long) lc dws esg euro bonds (medium) lc pax esg beta quality fund individual investor prisma esg world convertible bonds sbi magnum equity esg funddividend fiera active fixed income ethical esg fund daiwa dc sri fund nomura global sri 100 nomura global sri index fund dc t-statistic (5.1787)*** (2.6196)** (2.7291)*** (0.2317) (0.1107) (0.7527) (0.4521) (-0.3285) (-0.2517) (-0.1914) source: authors’ calculations table 3. test values for islamic fund portfolio js islamic fund meezan islamic fund cimb islamic sukuk am bon islam hsbc islamic global equity index ad usd cimb islamic dali equity rhb islamic bond dow jones islamic fd. cl.k cimb islamic dali equity growth hsbc us dollar murabaha fund tstatistic (-0.6805) (-0.2260) (4.9153)*** (1.9712)* (0.5539) (0.6989) (1.1880) (0.3947) (1.3111) (11.2857)*** source: authors’ calculations the portfolio performance measures were conducted to ascertain the performance behaviour of the portfolio. regarding the sharpe and treynor ratio, the higher value would indicate better performance; for jensen’s alpha, a positive value for the alpha would indicate a better fund performance as opposed to a negative alpha value. the tests showed an equal number of high and positive values (six funds) across the conventional funds, while there were nine esg and islamic funds with a high sharpe ratio, ten esg and islamic funds with a high treynor ratio and seven esg and islamic funds with a positive alpha (see appendix j). the fama-french three-factor model is conducted in tables 4, 5 and 6, showing varied observations. with reference to the conventional sample (table 4), all of the t-stat values were significant with terms to the market risk coefficient, indicating that the excess returns attributable to the funds are explained by the market premiums alone. table 4. fama-french three-factor model analysis for conventional funds vanguard horizon fd. vangd.cap .oppor.fd. brown cap.man. sml.co. inv.shs. clearbrid ge large cap growth fd.cl.a col.seligm an glb.tech.fd .cl.c dodge & cox bal.fd. hartfo rd small cap growth fund a vanguar d primecap fd. ab equity income fund a ab small cap growth portfoli o a american funds global growth fund 2 α -0.00292 (-0.4732) 0.0015 (0.2335) -0.0025 (-0.4399) 0.0006 (0.0939) -0.0042 (-0.9085) -0.0014 (-0.1895) -0.0024 (-0.4409) 0.0007 (0.1510) 0.0011 (0.1569) -0.0006 (-0.0989) rm-rf 0.0038 0.0033 0.0031 0.0041 0.0032 0.0035 0.0028 0.0026 0.0036 0.0037 abdullah & rao , indian journal of finance and banking 9(1) (2022), 230-239 233 (2.4438)** (2.0339)** (2.2025)** (2.6589)*** (2.7391)*** (1.9348)* (2.0691)** (2.1991)** (1.9517)* (2.5917)** smb -0.0007 (-0.2383) -0.0006 (-0.1836) -0.0013 (-0.4604) -0.0014 (-0.4666) -0.0009 (-0.3958) 0.00002 (0.0042) -0.0008 (-0.2791) -0.0004 (-0.1627) 0.0003 (0.0829) -0.0023 (-0.8222) hml 0.0008 (0.3436) -0.0009 (-0.3568) -0.0001 (-0.0597) -0.0014 (-0.5919) -0.0003 (-0.1692) -0.0004 (-0.1405) 0.0011 (0.5319) -0.0010 (-0.5278) -0.0006 (-0.1957) -0.0004 (-0.1895) adj. r2 0.0556 0.0193 0.0280 0.0475 0.0596 0.0205 0.0373 0.0270 0.022 0.0441 source: authors’ calculations regarding the esg funds (table 5), there are several statistical significances in regards to the alpha, smb and hml factors, some of which are negative as well. this observation is also similar to the islamic fund portfolio (table 6). the inference behind these results will be discussed in the next section. table 5. fama-french three-factor model analysis for esg funds dws invest esg euro bonds (shor t) fc dws esg euro bonds (long) lc dws esg euro bonds (medium) lc pax esg beta quality fund individual investor prisma esg world convertible bonds sbi magnum equity esg funddividend fiera active fixed income ethical esg fund daiwa dc sri fund nomura global sri 100 nomura global sri index fund dc α -0.0002 (0.4348) 0.0004 (0.3429) -0.0004 (-0.4941) -0.0045 (-0.9994) -0.0020 (-0.5353) -0.0054 (-0.6917) -0.0023 (-1.7999)* -0.0027 (-0.5571) -0.0009 (-0.1644) -0.0005 (-0.0919) rm-rf 0.0001 (0.5505) -0.0001 (-0.4447) 0.0004 (2.3484)** 0.0086 (7.5044)*** 0.0015 (2.0049)** 0.0061 (5.0986)*** 0.0002 (0.6188) 0.0099 (9.0178)*** 0.0081 (6.2672)*** 0.0081 (6.2670)*** smb 0.0006 (2.2429)** -0.0001 (-0.1050) 0.0010 (2.1323)** 0.0008 (0.3381) 0.0055 (2.9063)*** 0.0025 (0.8843) 0.0001 (0.1218) -0.0012 (-0.6367) 0.0061 (-2.7150)*** -0.0060 (-2.6782)*** hml 0.0002 (0.6896) 0.0002 (0.2281) -0.0001 (-0.1507) -0.0038 (-2.1144)** 0.0006 (0.3040) 0.0008 (0.2643) -0.0002 (-0.2519) -0.0013 (-0.6196) -0.0040 (-1.5821) -0.0039 (-1.5726) adj. r2 0.0387 -0.0302 0.0928 0.4195 0.1212 0.2424 -0.0253 0.4853 0.3758 0.3745 source: authors’ calculations table 6. fama-french three-factor model analysis for islamic funds js islamic fund meezan islamic fund cimb islamic sukuk am bon islam hsbc islamic global equity index ad usd cimb islamic dali equity rhb islamic bond dow jones islamic fd. cl.k cimb islamic dali equity growth hsbc us dollar murabaha fund α -0.0194 (-1.6842)* -0.0118 (-1.1897) -0.0003 (-0.5360) -0.0014 (-1.4164) -0.0027 (-0.6802) -0.0053 (-1.7814)* -0.0010 (-0.5339) -0.0040 (-0.9151) -0.0013 (-0.4114) -0.0009 (-7.4589)*** rmrf 0.0028 (1.6188) 0.0027 (1.7985)* 0.00001 (0.1658) 0.00003 (0.2208) 0.0073 (9.1957)*** 0.0056 (12.1547)*** -0.0002 (-0.6949) 0.0122 (11.1381)*** 0.0039 (7.9844)*** 0.00001 (-0.5319) smb 0.0021 (0.5165) 0.0039 (1.1013) 0.0001 (0.2335) 0.0004 (1.2081) 0.0013 (0.6520) 0.0036 (3.3484)*** 0.0001 (0.1363) -0.0029 (-1.3238) 0.0034 (2.9966)*** -0.0001 (-1.0384) hml -0.0006 (-0.1333) -0.0072 (-1.7612)* 0.0004 (1.4954) 0.0006 (1.4504) -0.0034 (-1.5219) 0.0031 (2.5461)** 0.0002 (0.2975) -0.0049 (-2.9051)*** 0.0020 (1.5451) 0.00003 (0.4126) adj. r2 0.0111 0.0863 -0.0078 0.0046 0.5281 0.6749 -0.0248 0.5890 0.4927 -0.0138 source: authors’ calculations results this section will develop a discussion based on the observations that emerged from the empirical analysis of the data. beginning with the preliminary analysis conducted via the descriptive statistics of the funds – with a focus on the jarquebera values – it was observed that the significance level was most prominent for the islamic sample of funds, which was followed by the esg fund sample, and the conventional sample showing the majority of insignificance (see appendices d, e, f, g, h and i). these results indicate that the mean returns from the islamic funds tend to dominate the esg funds, which in turn dominates the conventional fund sample; the mean returns are observed to be statistically insignificant and therefore indifferent from zero. with terms to the grand mean assessment (see appendices e, g and i), it was seen that the conventional funds tend to be the most significant, which was followed by the islamic funds, with the lowest significance for the esg funds; this inference however is not a point of contention, as it shows that the islamic funds are not underperforming their conventional counterparts grossly, which serves as a competitive standpoint in the investing universe. in reference to the one-sample t-tests, the preliminary descriptive analysis was corroborated further, as the tests showed considerable significance levels in islamic funds and esg funds, and zero significance concerning the conventional funds (tables 1, 2 and 3). the significance levels show that there are factors beyond the market premium that explain the excess returns to the funds in the islamic and esg portfolio, whereas for the conventional portfolio, the insignificance shows that the excess returns attributable to the funds are purely explained by the market premium. this was corroborated by the fama-french three-factor model, where the significance levels was present mainly for the market risk coefficient of the funds. the portfolio performance measures, which are the sharpe ratio, treynor ratio and the jensen’s alpha, when applied to the sample portfolio, showed a relatively mixed observation (see appendix j). these observations do not indicate any form of gross underperformance on part of the esg and islamic funds, and this test was also treated as a form of the preliminary analysis in advance of the famafrench three-factor model. the fama-french three-factor model gave a very descriptive result, especially considering the esg and islamic funds (tables 4, 5 and 6). this analysis gave a confirmation of the preliminary descriptive statistics and the one-sample ttest concerning the significant values for excess returns. the conventional funds were largely experiencing only market premium advantages when achieving the excess returns, and hence had no link to the size factor, value factor or the skill of abdullah & rao , indian journal of finance and banking 9(1) (2022), 230-239 234 the fund manager. this is in effect a rather conventional result that yields no abnormal explanation for the excess returns. the esg and islamic funds, however, exhibited several interesting observations, particularly about the smb, hml and the alpha values. it was seen that some of the respective funds showed a deviation from the conventional theory of the smb and hml factors whereby big stocks were dominating the small stocks (lower smb stocks giving higher return), and that the growth stocks were dominating the value stocks (low book-market stocks giving higher return). furthermore, the fund manager’s efforts were also analyzed, as certain funds displayed a negative and significant value; indicating that the fund manager could be experiencing bad luck due to the potential investment philosophy of the fund that restricts the fund manager to a smaller investment universe. this would indicate that although the fund manager is picking the stocks in line with the investment philosophy of the fund, the stocks may not necessarily be the winner stocks that can help in achieving a higher return. discussion the main inferences that could be established via the results are that the market premium is the main factor that explains the excess returns that are attributable to the funds. as a majority of the funds in the portfolio samples showed significance in the market risk coefficients, it shows that the remaining smb and hml factors are not significant in explaining the excess returns. although certain funds showed a significance level about the smb and the hml, especially in the case of negative coefficients, by and large, these factors are not viable enough to postulate any explanations based on these factors. finally, the luck and skill of fund managers do not tend to influence the excess returns to the fund. two funds in the portfolios indicated negative and significant alphas, yet these observations are not viable evidence to conclude that the fund manager skill is required to achieve excess returns. the limitations of this study involved the inability to procure data for esg and islamic funds before the year 2005. conventional fund data can, however, easily date back to the year 1990 and earlier due to these funds being going concerns for ages. this incongruence in data availability limits the analysis of all the categories together in the same period under study, therefore, to maintain time-period congruency amongst the fund categories, the monthly returns were used for the 8 years of 2005 2012. furthermore, to assess market premium returns, certain markets primarily in the gcc region do not have publicly available sovereign interest rates to use as a proxy for risk-free return measures. although the islamic fund market can be present in these locations, the unavailability of the risk-free rates poses a limitation to calculating the risk premiums. this forced the portfolio allocation to exclude some otherwise higher ranked funds due to the unavailability of the market data to compare against. through these inferences, although the esg and islamic funds are not outperforming their conventional mutual fund counterparts, there exists no significant evidence of underperformance. this indicates that the funds are still evolving with time and that their full potential shall be seen as the funds evolve; the esg and islamic funds are here to stay and can be looked upon as resilient investment vehicles. this inference is largely in line with the words of smith (2019), as the esg funds are going to be the future for investors. conclusion this study analyzed the performance of esg funds and islamic funds together in comparison to their conventional counterparts; the likes of which has not been conducted all-inclusively within the existing literature. numerous studies primarily compare esg funds with conventional funds, relatively fewer studies with regards to islamic funds and conventional funds, and even fewer with regards to the comparison of all three fund categories together. therefore, to contribute to this gap in the literature, this analysis was undertaken. the objective of this study was therefore to analyze the three-way inclusion of the fund categories using portfolio performance measures and the econometric fama-french threefactor model. using these tools, an explanation for fund returns was sought based on fund manager skill, market premium, size and value factors (smb & hml). the limitations that were experienced, were by and large based on the non-availability of specific data about the esg and islamic funds. since these fund categories are relatively new to the financial world as opposed to the conventional funds that have been present since the ages, better testing and analysis can only be performed as the former funds continue to evolve into the future. concerning the above results and the discussion, it can be inferred that although much of the abnormal returns are explained mainly via the market premiums, it cannot be left unsaid that investor bias can also play a significant role in affecting the excess returns. this is a limiting factor in this analysis. by and large, when the choice of fund selection is left to the investor’s interest, then the means of how the decision is made is not entirely measurable to dictate how far the inherent investor bias can affect fund returns; as there is no conceivable scientific evidence to highlight any proof of the same, hence warranting a scope for further study in this regard. on this note, the point that can be taken away is that esg and islamic investments will remain attractive investment vehicles for many investors due to various reasons. in addition, the funds do not underperform their conventional counterparts; the absence of underperformance is a viable factor that can enable the esg and islamic funds to maintain their popularity amongst investors and other stakeholders alike. in addition, the events of the global financial crisis displayed weaknesses in the conventional funds’ investment philosophies, while the islamic investments stood resilient. these pieces of evidence indicate that the esg funds and islamic funds are in for the long haul, and will maintain their allure to investors with sentiment towards ethics and religion. abdullah & rao , indian journal of finance and banking 9(1) (2022), 230-239 235 author contributions: conceptualization, a.a. and u.r.; data curation, u.r.; methodology, u.r.; validation, u.r.; visualization, a.a.; formal analysis, u.r.; investigation, a.a. and u.r.; resources, a.a. and u.r.; writing – original draft, a.a.; writing – review & editing, a.a. and u.r.; supervision, u.r.; software, a.a. and u.r.; project administration, u.r.; funding acquisition, u.r.. 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. 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 abdelsalam, o., fethi, m. d., matallin, j. c., & tortosa-ausina, e. 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http://www.pewforum.org/the-future-of-the-global-muslim-population.aspx http://www.pewforum.org/the-future-of-the-global-muslim-population.aspx https://doi.org/10.1016/s1058-3300(97)90002-1 https://dx.doi.org/10.1086/294846 https://www.linkedin.com/feed/update/urn:li:activity:6516283481318842368 https://ssrn.com/abstract=2843113 abdullah & rao , indian journal of finance and banking 9(1) (2022), 230-239 236 appendices appendix a: list of the conventional fund sample with datastream codes (thomson reuters) conventional funds code ab discovery growth fund a 912676(p) ab equity income fund a 360530(p) ab small cap growth portfolio a 517893(p) abdn.global equity fd.class a 280609(p) abdn.global equity fd.class c 14057f(p) abdn.global equity fund instl.ser.cl. 280607(p) alger sml.cap gw.fd cl.a 894459(p) amer.cen.glb.gd.fd.a cl. 14764q(p) amer.cen.glb.gw. fd.a cl. 14765h(p) amer.cen.sml.cap.gw.fd. cl.a 26753v(p) american fds tax ex fd of california f3 9016rc(p) american funds global growth fund 2 8654l3(p) blackrock basic val.i 966644(p) blackrock high equity income fund investor a 696620(p) brown cap.man.sml.co. inv.shs. 154127(p) clearbridge large cap growth fd.cl.a 878407(p) col.div.oppor.fd.cl.a 515043(p) col.seligman glb.tech. fd.cl.c 286534(p) columbia select large cap value fund a 895259(p) del.glb.val.fd.cl.a 14641h(p) del.glb.val.fd.cl.c 14641k(p) del.glb.val.fd.cl.i 14641l(p) dodge & cox bal.fd. 513165(p) fidelity magellan 513721(p) hartford small cap growth fund a 15194w(p) pace lge.co.gw.eq.invs. cl.p 311245(p) tweedy browne val.fd. 134272(p) vanguard bd.idx.fd.ttl. bd.mkt.prtf. 519793(p) vanguard horizon fd. vangd.cap.oppor.fd. 362943(p) vanguard primecap fd. 517699(p) appendix b: list of the esg fund sample with data stream codes (thomson reuters) esg funds code asahi life sri society contribution fund 92862t(p) c-quadrat absolute return esg fund a 27299l(p) c-quadrat absolute return esg fund t 27299m(p) daiwa dc sri fund 92790e(p) davy esg multi-asset fund 8841k3(p) dnb fund global emerging markets esg a cap 671454(p) dnb fund global esg retail a 882866(p) dws esg euro bonds (long) lc 309229(p) dws esg euro bonds (medium) lc 308044(p) dws esg european equities lc 13998h(p) dws invest esg euro bonds (short) fc 25676f(p) dws invest esg euro bonds (short) lc 25594x(p) dws invest esg euro bonds (short) ld 25595j(p) dws invest esg euro bonds (short) nc 25676e(p) fiera active fixed income ethical esg fund 7774qx(p) goldman sachs intl eq esg fd a 327325(p) goldman sachs intl eq esg fd c 895997(p) goldman sachs intl eq esg fd inst 875730(p) goldman sachs intl eq esg fd svc 877961(p) mukam sri fund 92723c(p) nomura global sri 100 92697q(p) nomura global sri index fund dc 92708v(p) pax esg beta quality fund individual investor 674675(p) pimco low duration esg fund institutional 894809(p) pimco total return esg fund admn 879575(p) pimco total return esg fund institutional 545394(p) prisma esg world convertible bonds 27639f(p) sbi magnum equity esg fund-dividend 8706qf(p) shinkin fukoku sri fund 92638k(p) smt sri japan open 92690v(p) appendix c: list of the islamic fund sample with datastream codes (thomson reuters) islamic funds code am bon islam 88894x(p) am islamic balanced 88910n(p) am islamic growth 88910l(p) cimb islamic balanced 88893n(p) cimb islamic balanced growth 88902d(p) cimb islamic dali asia pacific equity growth 88910q(p) cimb islamic dali equity 88899u(p) cimb islamic dali equity growth 88885u(p) cimb islamic equity aggressive 88886u(p) cimb islamic small cap 88899r(p) cimb islamic sukuk 88910t(p) dow jones islamic fd. cl.k 263758(p) faisal islamic bank of egypt mutual fund 8937te(p) global al-durra islamic 8937ne(p) hsbc islamic global equity index ad usd 299364(p) hsbc us dollar murabaha fund 8937ev(p) js islamic fund 90599m(p) kenanga islamic 88896p(p) kenanga islamic balanced 88911f(p) abdullah & rao , indian journal of finance and banking 9(1) (2022), 230-239 237 kenanga oa inv-kenanga bon islam 88908w(p) kenanga oa inv-kenanga ekuiti islam 889089(p) markaz islamic fund 8937mv(p) meezan islamic fund 90592q(p) mfc islamic 91484z(p) midf amanah islamic 88891v(p) public islamic bond 88894l(p) public islamic equity 88901x(p) rhb dana islam 88894v(p) rhb islamic bond 88893l(p) ta islamic 88893v(p) appendix d: descriptive statistics (of logarithmic returns) – conventional funds code mean median maximum minimum std. dev. skewness kurtosis jarque-bera probability sum sum sq. dev. observations 912676(p) 0.0009 0.0055 0.1843 -0.2436 0.0763 -0.7289 4.6136 18.9158 0.0001 0.0905 0.5533 96 360530(p) 0.0044 0.0134 0.0896 -0.1504 0.0457 -1.0647 4.7278 30.0776 0.0000 0.4217 0.1987 96 517893(p) 0.0053 0.0016 0.1906 -0.2516 0.0719 -0.4803 4.5000 12.6913 0.0018 0.5083 0.4914 96 280609(p) 0.0043 0.0142 0.1783 -0.1823 0.0605 -0.4498 4.0873 7.9666 0.0186 0.4133 0.3474 96 14057f(p) 0.0041 0.0142 0.1801 -0.1828 0.0606 -0.4409 4.1051 7.9948 0.0184 0.3888 0.3487 96 280607(p) 0.0042 0.0000 0.4221 -0.1828 0.0660 2.2634 19.4529 1164.7607 0.0000 0.4038 0.4134 96 894459(p) 0.0055 0.0117 0.1913 -0.2259 0.0679 -0.6257 4.6516 17.1748 0.0002 0.5301 0.4376 96 14764q(p) 0.0038 0.0068 0.2310 -0.2368 0.0983 -0.1919 2.7381 0.8638 0.6493 0.3659 0.9177 96 14765h(p) 0.0024 0.0130 0.1338 -0.2136 0.0607 -0.8629 4.5726 21.8066 0.0000 0.2306 0.3498 96 26753v(p) 0.0026 0.0159 0.1728 -0.2117 0.0715 -0.2769 3.3577 1.7387 0.4192 0.2465 0.4860 96 9016rc(p) 0.0008 0.0006 0.0562 -0.0618 0.0167 -0.3969 6.0893 40.6969 0.0000 0.0769 0.0265 96 8654l3(p) 0.0033 0.0121 0.1538 -0.1697 0.0565 -0.5437 4.1996 10.4856 0.0053 0.3124 0.3036 96 966644(p) -0.0018 0.0065 0.1681 -0.2074 0.0613 -0.4930 4.5658 13.6949 0.0011 -0.1714 0.3564 96 696620(p) 0.0047 0.0138 0.1673 -0.1998 0.0628 -0.4322 4.3072 9.8237 0.0074 0.4513 0.3741 96 154127(p) 0.0054 0.0139 0.1686 -0.1799 0.0637 -0.3473 3.5128 2.9819 0.2252 0.5219 0.3860 96 878407(p) 0.0013 0.0027 0.1717 -0.1742 0.0557 -0.2865 4.0654 5.8534 0.0536 0.1242 0.2949 96 515043(p) 0.0021 0.0088 0.1535 -0.1763 0.0533 -0.5820 4.8124 18.5577 0.0001 0.2057 0.2694 96 286534(p) 0.0046 0.0106 0.1736 -0.2050 0.0605 -0.4561 4.8041 16.3467 0.0003 0.4439 0.3472 96 895259(p) 0.0036 0.0097 0.2482 -0.2237 0.0671 -0.3533 6.0026 38.0590 0.0000 0.3484 0.4276 96 14641h(p) -0.0020 0.0116 0.1623 -0.1523 0.0631 -0.4212 3.4252 3.5615 0.1685 -0.1950 0.3777 96 14641k(p) -0.0022 0.0125 0.1600 -0.1515 0.0631 -0.4023 3.4100 3.2624 0.1957 -0.2086 0.3780 96 14641l(p) -0.0020 0.0110 0.1620 -0.1533 0.0631 -0.4267 3.4170 3.6082 0.1646 -0.1933 0.3779 96 513165(p) -0.0004 0.0048 0.1153 -0.1481 0.0470 -0.5704 4.5925 15.3505 0.0005 -0.0368 0.2095 96 513721(p) -0.0035 0.0042 0.2313 -0.2568 0.0700 -0.6873 6.2849 50.7216 0.0000 -0.3366 0.4651 96 15194w(p) 0.0027 0.0120 0.1668 -0.2167 0.0702 -0.5665 4.2571 11.4564 0.0033 0.2617 0.4688 96 311245(p) 0.0030 0.0063 0.1455 -0.1805 0.0544 -0.3652 4.2444 8.3281 0.0155 0.2920 0.2813 96 134272(p) -0.0023 0.0045 0.1284 -0.1552 0.0470 -0.5771 4.2056 11.1423 0.0038 -0.2202 0.2103 96 519793(p) 0.0009 0.0018 0.0286 -0.0214 0.0096 0.0020 2.8233 0.1249 0.9395 0.0877 0.0088 96 362943(p) 0.0012 0.0068 0.1902 -0.2048 0.0621 -0.4964 4.7235 15.8244 0.0004 0.1127 0.3659 96 517699(p) 0.0014 0.0062 0.1733 -0.1919 0.0542 -0.3844 5.0849 19.7515 0.0001 0.1308 0.2786 96 appendix e: grand mean computation – conventional fund mean 0.0019 median 0.0025 maximum 0.0055 minimum -0.0035 std. dev. 0.0026 skewness -0.5173 kurtosis 2.1188 jarque-bera 2.3084 probability 0.3153 sum 0.0584 sum sq. dev. 0.0002 observations 30 appendix f: descriptive statistics (of logarithmic returns) – esg funds code mean median maximum minimum std. dev. skewness kurtosis jarque-bera probability sum sum sq. dev. observations 92862t(p) -0.0017 0.0067 0.0999 -0.2515 0.0591 -1.1849 5.4849 47.1636 0.0000 -0.1673 0.3315 96 27299l(p) 0.0025 0.0027 0.0291 -0.0352 0.0105 -0.6234 5.4125 29.4976 0.0000 0.2402 0.0104 96 27299m(p) 0.0002 0.0023 0.0295 -0.0521 0.0146 -1.3478 5.4341 52.7652 0.0000 0.0166 0.0203 96 92790e(p) -0.0021 0.0064 0.1180 -0.2275 0.0636 -0.8804 4.0949 17.1983 0.0002 -0.2048 0.3849 96 8841k3(p) 0.0004 0.0054 0.0551 -0.0807 0.0253 -0.7840 4.0120 13.9322 0.0009 0.0360 0.0607 96 671454(p) 0.0068 0.0210 0.1683 -0.3412 0.0774 -1.2213 6.7774 80.9398 0.0000 0.6551 0.5695 96 882866(p) 0.0035 0.0124 0.1405 -0.2301 0.0515 -1.2129 6.6876 77.9313 0.0000 0.3347 0.2520 96 309229(p) 0.0031 0.0041 0.0307 -0.0296 0.0117 -0.4291 3.3066 3.3214 0.1900 0.3010 0.0131 96 308044(p) 0.0025 0.0029 0.0237 -0.0351 0.0090 -0.5925 5.2973 26.7286 0.0000 0.2419 0.0078 96 13998h(p) 0.0011 0.0079 0.1424 -0.2316 0.0561 -0.9950 5.3264 37.4913 0.0000 0.1073 0.2987 96 25676f(p) 0.0023 0.0021 0.0150 -0.0114 0.0049 0.1744 3.3917 1.1002 0.5769 0.2226 0.0023 96 25594x(p) -0.0002 0.0018 0.0150 -0.0367 0.0100 -1.9577 6.9858 124.8717 0.0000 -0.0213 0.0095 96 25595j(p) 0.0019 0.0017 0.0145 -0.0119 0.0049 0.1584 3.3719 0.9546 0.6205 0.1832 0.0023 96 25676e(p) 0.0026 0.0024 0.0152 -0.0112 0.0049 0.1476 3.3741 0.9083 0.6350 0.2478 0.0023 96 7774qx(p) 0.0006 0.0009 0.0277 -0.0343 0.0123 -0.4937 3.1759 4.0240 0.1337 0.0545 0.0144 96 327325(p) -0.0005 0.0104 0.1078 -0.2024 0.0600 -0.7743 3.5151 10.6539 0.0049 -0.0524 0.3422 96 895997(p) -0.0004 0.0090 0.1088 -0.2017 0.0599 -0.7605 3.4984 10.2480 0.0060 -0.0414 0.3408 96 875730(p) -0.0004 0.0093 0.1083 -0.2024 0.0599 -0.7722 3.5204 10.6253 0.0049 -0.0406 0.3412 96 877961(p) -0.0004 0.0088 0.1091 -0.2020 0.0600 -0.7658 3.5062 10.4073 0.0055 -0.0372 0.3415 96 92723c(p) -0.0048 0.0010 0.1343 -0.2255 0.0669 -0.8419 4.1058 16.2317 0.0003 -0.4575 0.4257 96 92697q(p) -0.0018 0.0120 0.1386 -0.2599 0.0683 -0.9748 4.5126 24.3565 0.0000 -0.1683 0.4426 96 92708v(p) -0.0013 0.0122 0.1388 -0.2597 0.0682 -0.9858 4.5359 24.9847 0.0000 -0.1280 0.4422 96 674675(p) 0.0014 0.0095 0.1148 -0.2589 0.0582 -1.5499 7.1407 107.0188 0.0000 0.1323 0.3223 96 894809(p) 0.0000 0.0010 0.0337 -0.0577 0.0116 -1.2411 9.7691 207.9306 0.0000 -0.0030 0.0127 96 879575(p) 0.0005 0.0030 0.0348 -0.0740 0.0145 -1.5179 9.4266 202.0706 0.0000 0.0526 0.0200 96 545394(p) 0.0005 0.0030 0.0348 -0.0740 0.0145 -1.5179 9.4266 202.0706 0.0000 0.0526 0.0200 96 27639f(p) 0.0004 0.0061 0.1265 -0.1823 0.0394 -1.2134 7.8462 117.4996 0.0000 0.0427 0.1472 96 8706qf(p) 0.0066 0.0188 0.2229 -0.2798 0.0856 -0.6518 4.3252 13.8222 0.0010 0.6313 0.6962 96 abdullah & rao , indian journal of finance and banking 9(1) (2022), 230-239 238 92638k(p) -0.0023 0.0048 0.1193 -0.2156 0.0635 -0.9346 4.2070 19.8038 0.0001 -0.2215 0.3831 96 92690v(p) -0.0081 0.0008 0.1252 -0.3575 0.0764 -1.4768 6.9543 97.4422 0.0000 -0.7742 0.5549 96 appendix g: grand mean computation – esg funds mean 0.0004 median 0.0004 maximum 0.0068 minimum -0.0081 std. dev. 0.0029 skewness -0.3388 kurtosis 4.6869 jarque-bera 4.1309 probability 0.1268 sum 0.0129 sum sq. dev. 0.0002 observations 30 appendix h: descriptive statistics (of logarithmic returns) – islamic funds code mean median maximum minimum std. dev. skewness kurtosis jarque-bera probability sum sum sq. dev. observations 88894x(p) 0.0019 0.0033 0.0306 -0.0311 0.0097 -0.4726 4.6007 13.8222 0.0010 0.1866 0.0089 96 88910n(p) 0.0061 0.0079 0.0683 -0.0822 0.0265 -0.6896 4.5690 17.4560 0.0002 0.5860 0.0668 96 88910l(p) 0.0069 0.0109 0.1054 -0.1152 0.0379 -0.6413 4.3765 14.1591 0.0008 0.6614 0.1363 96 88893n(p) 0.0000 0.0066 0.0864 -0.1425 0.0342 -1.0952 5.8111 50.7987 0.0000 0.0000 0.1113 96 88902d(p) 0.0021 0.0068 0.0633 -0.1138 0.0317 -0.7694 4.0783 14.1211 0.0009 0.2024 0.0957 96 88910q(p) 0.0042 0.0125 0.1180 -0.2950 0.0531 -1.9671 12.2167 401.6977 0.0000 0.4034 0.2675 96 88899u(p) 0.0057 0.0092 0.0949 -0.1266 0.0424 -0.8649 4.4361 20.2172 0.0000 0.5441 0.1704 96 88885u(p) 0.0036 0.0082 0.1052 -0.1956 0.0501 -1.3306 6.3156 72.3026 0.0000 0.3431 0.2384 96 88886u(p) 0.0032 0.0057 0.1213 -0.1851 0.0497 -0.5960 4.7531 17.9761 0.0001 0.3111 0.2349 96 88899r(p) 0.0044 0.0089 0.1407 -0.2520 0.0549 -0.9412 6.9276 75.8780 0.0000 0.4226 0.2861 96 88910t(p) 0.0030 0.0028 0.0217 -0.0332 0.0060 -2.0477 16.1563 759.4388 0.0000 0.2912 0.0035 96 263758(p) 0.0027 0.0154 0.0879 -0.4594 0.0659 -3.8191 26.4864 2439.8124 0.0000 0.2549 0.4126 96 8937te(p) -0.0029 0.0027 0.1846 -0.3368 0.0742 -1.0235 6.3277 61.0575 0.0000 -0.2741 0.5233 96 8937ne(p) 0.0002 0.0051 0.1555 -0.4791 0.0791 -2.5650 16.1263 794.4662 0.0000 0.0174 0.5943 96 299364(p) 0.0032 0.0101 0.0968 -0.3345 0.0568 -2.4662 14.8153 655.7253 0.0000 0.3081 0.3061 96 8937ev(p) 0.0020 0.0022 0.0049 0.0000 0.0017 0.1898 1.4933 9.6570 0.0080 0.1894 0.0003 96 90599m(p) -0.0077 0.0174 0.1065 -0.7096 0.1102 -3.4190 19.9874 1341.3234 0.0000 -0.7350 1.1546 96 88896p(p) 0.0005 0.0037 0.1496 -0.1984 0.0535 -0.1918 4.6271 11.1786 0.0037 0.0494 0.2721 96 88911f(p) -0.0014 0.0051 0.0742 -0.1571 0.0386 -1.2280 5.7947 55.3686 0.0000 -0.1316 0.1416 96 88908w(p) 0.0031 0.0030 0.0131 -0.0152 0.0043 -0.6920 5.8582 40.3397 0.0000 0.2930 0.0017 96 889089(p) -0.0035 0.0101 0.1082 -0.8993 0.1013 -7.3197 65.1122 16288.9519 0.0000 -0.3386 0.9754 96 8937mv(p) 0.0003 0.0015 0.1563 -0.2569 0.0612 -0.9477 6.2427 56.4325 0.0000 0.0253 0.3560 96 90592q(p) -0.0023 0.0177 0.2159 -0.4785 0.0092 -1.7857 8.2918 163.0319 0.0000 -0.2196 0.9344 96 91484z(p) 0.0034 0.0136 0.1139 -0.2396 0.0643 -1.3721 5.5124 55.3702 0.0000 0.3270 0.3924 96 88891v(p) -0.0021 0.0000 0.1331 -0.1475 0.0431 -0.2175 4.4480 9.1438 0.0103 -0.1990 0.1762 96 88894l(p) 0.0013 0.0048 0.0231 -0.0570 0.0141 -2.3679 8.5653 213.6037 0.0000 0.1241 0.0189 96 88901x(p) 0.0018 0.0084 0.0833 -0.1060 0.0396 -0.6365 3.3337 6.9274 0.0313 0.1751 0.1492 96 88894v(p) 0.0049 0.0054 0.1147 -0.1095 0.0411 -0.2055 3.5587 1.9244 0.3820 0.4750 0.1601 96 88893l(p) 0.0021 0.0050 0.0895 -0.1014 0.0175 -1.3684 20.9532 1319.2295 0.0000 0.2038 0.0291 96 88893v(p) -0.0003 0.0049 0.1170 -0.1452 0.0453 -0.5456 3.9979 8.7452 0.0126 -0.0310 0.1947 96 appendix i: grand mean computation – islamic funds mean 0.0016 median 0.0020 maximum 0.0069 minimum -0.0077 std. dev. 0.0032 skewness -0.7909 kurtosis 3.7709 jarque-bera 3.8704 probability 0.1444 sum 0.0465 sum sq. dev. 0.0003 observations 30 appendix j. portfolio performance measures – conventional, esg and islamic portfolios conventional funds code sharpe treynor jensen ab equity income fund a 360530(p) 0.0490 0.0091 0.0024 ab small cap growth portfolio a 517893(p) 0.0437 0.0211 0.0032 american funds global growth fund 2 8654l3(p) 0.0196 0.0050 0.0012 brown cap.man.sml.co. inv.shs. 154127(p) 0.0516 0.0202 0.0034 clearbridge large cap growth fd.cl.a 878407(p) -0.0154 -0.0042 -0.0008 col.seligman glb.tech. fd.cl.c 286534(p) 0.0409 0.0119 0.0026 dodge & cox bal.fd. 513165(p) -0.0539 -0.0084 -0.0024 hartford small cap growth fund a 15194w(p) 0.0082 0.0038 0.0006 vanguard horizon fd. vangd.cap.oppor.fd. 362943(p) -0.0157 -0.0044 -0.0009 vanguard primecap fd. 517699(p) -0.0145 -0.0035 -0.0007 esg funds code sharpe treynor jensen daiwa dc sri fund 92790e(p) -0.0329 -0.0030 0.0000 dws esg euro bonds (long) lc 309229(p) 0.2489 -0.0061 0.0027 dws esg euro bonds (medium) lc 308044(p) 0.2546 0.0010 0.0032 dws invest esg euro bonds (short) fc 25676f(p) 0.4842 0.0033 0.0026 fiera active fixed income ethical esg fund 7774qx(p) -0.0695 -0.0019 -0.0016 nomura global sri 100 92697q(p) -0.0251 -0.0030 0.0000 nomura global sri index fund dc 92708v(p) -0.0189 -0.0022 0.0004 pax esg beta quality fund individual investor 674675(p) -0.0132 -0.0015 -0.0005 abdullah & rao , indian journal of finance and banking 9(1) (2022), 230-239 239 prisma esg world convertible bonds 27639f(p) 0.0191 0.0021 -0.0001 sbi magnum equity esg fund-dividend 8706qf(p) 0.0073 0.0012 -0.0015 islamic funds code sharpe treynor jensen am bon islam 88894x(p) -0.1251 -0.0015 -0.0038 cimb islamic dali equity 88899u(p) 0.0084 0.0006 -0.0018 cimb islamic dali equity growth 88885u(p) 0.0594 0.0032 -0.0001 cimb islamic sukuk 88910t(p) -0.0196 -0.0001 -0.0033 dow jones islamic fd. cl.k 263758(p) 0.0077 0.0009 0.0007 hsbc islamic global equity index ad usd 299364(p) 0.0527 0.0027 0.0034 hsbc us dollar murabaha fund 8937ev(p) -0.4040 0.0002 -0.0188 js islamic fund 90599m(p) -0.1631 -0.0517 -0.0180 meezan islamic fund 90592q(p) -0.1272 -0.0279 -0.0127 rhb islamic bond 88893l(p) -0.0588 0.1256 -0.0010 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) 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/ indian journal of finance and banking 15(1) (2025), 10-18 10 finance and banking ijfb vol 15 no 1 (2025) p-issn 2574-6081 e-issn 2574-609x journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by american finance & banking society, usa testing semi-strong form market efficiency: the case of indian pharma sectors janvi joshi (a)1 krunal joshi (b) (a) associate professor, sjpi-gtu, gandhinagar, india; e-mail: janvijoshi1982@gmail.com (b) associate professor, sjpi-gtu, gandhinagar, india; e-mail: krunaljo@gmail.com a r t i c l e i n f o article history: received: 16th march 2025 reviewed & revised: 16th march to 14th july 2025 accepted: 16th july 2025 published: 20th july 2025 keywords: aggressiveness index, semi-strong market efficiency, tobin's q jel classification codes: g12, g14 peer-review model: external peer review was done through double-blind method. a b s t r a c t the efficient market hypothesis (emh) holds that security prices fully reflect all publicly available information, leaving no scope for abnormal gains from fundamental or technical analysis. despite extensive research, the semi-strong form of emh remains inconclusive in developing markets. this study examines the degree of semi-strong-form efficiency in the indian pharmaceutical industry. it explores how effectively the stock prices of leading firms, sun pharmaceutical, dr. reddy’s laboratories, zydus life sciences, cipla, and torrent pharmaceuticals, reflect publicly accessible information. the analysis covers five years from 2018–19 to 2022–23 and utilizes the core competency strategic intent (ccsi) model to assess the relationship between firm fundamentals and market valuation. tobin's q (market value to book value) and employee cost as a percentage of sales are considered representative indicators of valuation and strategic intent. empirical results show that stock prices in this sector respond more rapidly to short-term, quantifiable factors such as sales performance. in contrast, long-term strategic elements exert a weaker effect on valuation. a numerical evaluation of tobin's q across firms indicates varying degrees of mispricing, suggesting both overvaluation and undervaluation. overall, the study finds that the indian pharmaceutical sector exhibits only partial adherence to the semi-strong form of market efficiency, as investors appear to prioritize immediate financial outcomes over comprehensive strategic fundamentals. © 2025 by the authors. licensee american 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 the efficiency of financial markets remains a central concern in finance and investment research. the valuation of securities depends on investors' rational interpretation of publicly available information, as the accuracy and timeliness of that data guide decisions to buy or sell. according to the efficient market hypothesis (emh), as introduced by fama (1970), stock prices should instantaneously incorporate all available information, ensuring that no investor can consistently earn abnormal returns. however, the practical validity of this hypothesis, particularly its semi-strong form, remains debated in both developed and emerging markets. in emerging economies like india, where market information asymmetry and behavioral biases persist, the question of whether public announcements and firm fundamentals are accurately reflected in stock prices remains a significant scientific question. recent studies (e.g., kumar & raju, 2021; mishra & taneja, 2022; gupta et al., 2023; dutta & sharma, 2024) have highlighted that market responses to financial disclosures in india vary considerably across sectors, suggesting incomplete efficiency. research in developed markets has also revealed mixed evidence (e.g., chen et al., 2021; fernandes & costa, 2022), indicating that even mature markets exhibit deviations from perfect informational efficiency. moreover, advancements in algorithmic trading and digital transparency (patel & singh, 2023; ali & rehman, 2025) have reshaped how information influences price adjustments, underscoring the need to re-examine market efficiency in sector-specific contexts, such as the pharmaceutical industry. this study tests the semi-strong form of the emh in the indian pharmaceutical sector—an industry characterized by high research intensity, stringent regulation, and global competitiveness. using data from five major pharmaceutical companies over five financial years (2018–19 to 2022–23), the research employs the core competency strategic intent (ccsi) model to assess the relationship between market valuation and strategic performance indicators. the central scientific problem addressed is whether publicly available financial and strategic information is fully and promptly 1corresponding author: orcid id: 0000-0003-3632-8975 © 2025 by the authors. hosting by american finance & banking society. peer review under the responsibility of the american finance & banking society, usa. https://doi.org/10.46281/ijfb.v15i1.2715 to cite this article: joshi, j., & joshi, k. (2025). testing semi-strong form market efficiency: the case of indian pharma sectors. indian journal of finance and banking, 15(1), 10-18. https://doi.org/10.46281/ijfb.v15i1.2715 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/ijfb.v15i1.2715 https://orcid.org/0000-0003-3632-8975 https://orcid.org/0000-0001-8313-8248 joshi & joshi, indian journal of finance and banking 15(1) (2025), 10-18 11 integrated into stock prices. the study aims to determine the extent to which the market reflects firm fundamentals and to identify deviations that indicate potential overor undervaluation of securities. literature review market efficiency has remained one of the most debated concepts in financial economics for over five decades. rooted in the efficient market hypothesis (emh) proposed by fama (1970), the theory asserts that security prices fully reflect all available information, leaving no room for investors to achieve abnormal returns consistently. however, subsequent empirical studies have revealed variations in efficiency over time, across regions, and by sector, particularly in emerging economies such as india (poshakwale, 1996; gupta & gupta, 1997; malkiel, 2003). the indian stock market has undergone a significant transformation following the establishment of the national stock exchange in 1992, which introduced electronic trading and improved transparency, yet the persistence of anomalies continues to challenge the emh framework (deshpande, 2017; gupta & narwal, 2022). empirical investigations of market behavior have traditionally relied on weak-form and semi-strong form efficiency tests. studies employing serial correlation and runs tests reported that the bombay stock exchange (bse) exhibited significant deviations from weak-form efficiency, suggesting that past prices could still predict future movements (poshakwale, 1996; worthington & higgs, 2004). similar evidence of inefficiency was observed in other developing markets, including bangladesh (ahmed, 2021), pakistan (habibah et al., 2017), and saudi arabia (khoj & akeel, 2020), where price randomness was undermined by investor sentiment and delayed information diffusion. in contrast, research on mature markets, such as the united states and western europe, indicates a closer approximation to informational efficiency (malkiel, 2003; chen et al., 2021). at the sectoral level, the pharmaceutical industry provides a distinct context for testing market efficiency, given its high reliance on innovation, regulatory compliance, and strategic investment decisions. mckinsey & company (2020) identified the indian pharmaceutical sector as the third-largest in the world, contributing significantly to global exports and employment. this industry's complex structure—balancing r&d intensity and market regulation—creates both information asymmetry and speculative opportunities. studies by mukhopadhyay (2007) and dutta and sharma (2024) identified macroeconomic variables such as exchange rate fluctuations, foreign investment inflows, and inflation as strong predictors of stock returns, implying that market prices may not fully incorporate all relevant fundamentals. from a behavioral finance perspective, the persistence of “rational bubbles” (mukhopadhyay, 2007) demonstrates that even rational investors may participate in overpricing, anticipating that others will continue to drive prices upward. this phenomenon aligns with the "greater fool" theory, in which investment decisions are driven more by market expectations than by intrinsic value. such patterns are evident in high-volatility sectors like pharmaceuticals, where policy shifts, patent approvals, and global health crises have amplified speculative behavior (kalamen et al., 2025). further evidence from global studies suggests that market irrationality differs by region and sector. gupta and basu (2011) documented weak-form inefficiency across asian markets, while fernandes and costa (2022) highlighted limited semi-strong form efficiency even in developed economies. more recent analyses by patel and singh (2023) and ali and rehman (2025) argue that algorithmic trading has improved information absorption rates but has not eliminated inefficiencies, particularly where fundamental data are complex or delayed. within the indian context, sectoral research remains limited. existing studies have focused mainly on aggregate indices rather than industry-specific analysis. the pharmaceutical sector's unique combination of innovation-driven growth and strategic human capital investment offers fertile ground for testing semi-strong market efficiency. employee expenses, which constitute a significant share of operational costs, can serve as a proxy for strategic intent. at the same time, tobin's q ratio (brainard & tobin, 1968) provides a measure of market valuation relative to asset replacement value. the core competency strategic intent (ccsi) framework (hamilton et al., 1998) integrates these indicators, allowing for a structured assessment of whether the market adequately prices firm-level fundamentals. recent studies (gupta et al., 2023) emphasize that the post-pandemic environment has magnified the gap between short-term performance indicators and long-term strategic fundamentals. firms that invest aggressively in innovation and workforce expansion often experience delayed market recognition, suggesting partial inefficiency in the semi-strong sense. thus, examining the linkage between tobin's q and employee expenses provides a meaningful avenue for assessing how efficiently public information is processed in the indian pharmaceutical market. in summary, while global and regional evidence supports the semi-strong form of emh only partially, empirical validation in industry-specific contexts remains scarce. the indian pharmaceutical sector, with its high strategic intensity and macroeconomic importance, offers a compelling platform for investigating this theoretical gap. therefore, the purpose of this study is to empirically evaluate the semi-strong form of market efficiency in the indian pharmaceutical sector by analyzing the relationship between firms’ market-to-book value ratios (tobin’s q) and strategic intent, measured through employee expenses as a percentage of total sales, using the core competency strategic intent (ccsi) model. the following hypotheses are proposed for this study: h₀: there is a positive and statistically significant association between a firm’s market-to-book value ratio (tobin’s q) and its level of strategic intent, represented by the aggressiveness index (employee expenses as a percentage of sales). materials and methods the present study examines the behaviour of stock prices in the pharmaceutical sector of india to determine whether they follow a random pattern or are influenced by significant factors, such as the tobin's q ratio. the aim is to ascertain whether joshi & joshi, indian journal of finance and banking 15(1) (2025), 10-18 12 the market adequately incorporates crucial information when valuing pharmaceutical stocks. additionally, the study seeks to pinpoint instances of overvaluation or undervaluation by assessing the company's investment aggressiveness, which reflects its efforts to enhance its fundamental metrics. data analysis was conducted using publicly available information on the market-to-book ratio (tobin's q) and the proportion of employee expenses to sales. the study spans five financial years, from 2018-19 to 2022-23, and focuses on five major pharmaceutical companies: sun pharma, dr. reddy's, zydus life sciences, cipla, and torrent. various metrics, including sales, employee cost-to-sales ratio, price-to-book ratio (tobin's q), and the average market price of the stock, were analysed to assess their relationships. a summary of the data for each company used in the study is provided in table 1. multiple correlation analysis was used to assess the strength of relationships among the variables discussed earlier. the average stock price for each company during the study period was used for analysis. results and discussions of the five firms analyzed, four demonstrated a strong positive correlation between annual revenue and market valuation (see table 2). for instance, cipla exhibited a correlation coefficient of 0.925 between revenue (in crores) and its average stock price, suggesting that the market responded to readily available data such as revenue figures, which aligns with the assumptions of semi-strong market efficiency. however, when evaluating the relationship between the market-to-book ratio (here, tobin's q) and the firm's strategic posture (measured by the aggressiveness index), the correlation was negative, indicating a lack of alignment between the two variables. in cipla's case, the correlation between tobin's q and strategic intent stood at -0.690. in several instances, while there was a strong positive link between the average market price and revenue, the association between tobin's q and strategic intent was clearly negative. for example, sun pharma's stock price-to-revenue correlation was 0.867, while its strategic intent-to-q ratio reflected a weaker negative association (r = -0.165). this pattern suggests that market participants tend to rely more on simple, accessible financial indicators, such as revenue, rather than on more abstract or delayed signals, such as strategic direction or internal firm intent. table 1. data of selected sample companies (fy 2018-19 to 2022-23) firm name financial year revenue (in crores) market-to-book ratio (mv/bv) staff expenses (in crores) staff cost as a percentage of revenue" sun pharma 2018-19 26,415 5.32 1625 0.062 2019-20 29,065 5.03 1571.34 0.054 2020-21 32,837 3.46 1702.77 0.052 2021-22 33,498 5.73 1805.9 0.054 2022-23 38,654 8.93 2000.78 0.052 dr reddy 2018-19 14,281 2.75 1843 0.129 2019-20 15,448 3.29 1931.9 0.125 2020-21 17,517 3.32 2030.2 0.116 2021-22 19,047 4.25 2270.1 0.119 2022-23 21,545 3.71 2434.6 0.113 zydus life science 2018-19 11,904 5.01 26.48 0.002 2019-20 13,165 4.14 30.91 0.002 2020-21 14,253 2.43 31.68 0.002 2021-22 14,403 3.54 163.83 0.011 2022-23 15,265 2.7 163.56 0.011 cipla 2018-19 15,155 3.1 1785.94 0.118 2019-20 16,362 2.7 1839.84 0.112 2020-21 17,131 1.96 1911.08 0.112 2021-22 19,159 3.3 1703.58 0.089 2022-23 21,763 3.65 1729.16 0.079 torrent 2018-19 5,982 4.64 826.07 0.138 2019-20 7,672 6.59 1014.06 0.132 2020-21 7,939 6.52 1061.76 0.134 2021-22 8,004 7.13 1097.12 0.137 2022-23 8,508 7.46 1097.93 0.129 source: authors’ compilation table 2 illustrates that the correlation between revenue (in crores) and stock prices is generally stronger than that between the market-to-book ratio and strategic investment behaviour, which is intended to capture future potential or intrinsic firm value. even if strategic intent does not exhibit a positive correlation with tobin's q within the same accounting period, its effects may be more visible in subsequent periods. table 3 explores this by analyzing the relationship between the aggressiveness index and tobin's q with a one-year time lag. the results indicate that firms like sun pharma and torrent show a meaningful positive association, while others continue to display weak or negative relationships. based on these observations, the null hypothesis stating a positive association between tobin's q and strategic intent is rejected. the evidence supports the view that investors operating under bounded rationality may prioritize easily interpretable figures, such as revenue or profits, while undervaluing more complex strategic indicators. this highlights a market tendency to price stocks based on straightforward and publicly visible information, potentially overlooking more nuanced or future-oriented signals embedded in strategic decisions. joshi & joshi, indian journal of finance and banking 15(1) (2025), 10-18 13 the observed influence likely applies across all firms in the sample, as a significant segment of the pharmaceutical sector is subject to external factors, including global economic shifts, supply-and-demand imbalances, and unforeseen events such as natural disasters. as previously mentioned, such discrepancies may lead to stock mispricing, creating arbitrage opportunities. the core competency strategic intent (ccsi) model provides a valuable framework for analyzing a firm's fundamentals and assessing whether its stock is undervalued or overvalued. this presents a potential extension of the study. table 2. interrelationship matrix of key financial indicators by firm revenue market-tobook staff cost as a percentage of revenue (strategic intent) sun pharma market-to-book 0.636 staff cost as a percentage of revenue -0.793 -0.165 market price (average of stock) 0.867 0.832 -0.408 dr reddy market-to-book 0.757 staff cost as a percentage of revenue -0.913 -0.623 market price (average of stock) 0.749 0.819 -0.823 zydus life science market-to-book -0.896 staff cost as a percentage of revenue 0.718 -0.368 market price (average of stock) 0.547 -0.425 0.731 cipla market-to-book 0.576 staff cost as a percentage of revenue -0.976 -0.690 market price (average of stock) 0.925 0.537 -0.933 torrent market-to-book 0.984 staff cost as a percentage of revenue -0.712 -0.659 market price (average of stock) 0.822 0.819 -0.395 source: authors’ compilation table 3. correlation results of the aggressiveness index of 2018-19 with tobin's q of 2020-21 source: authors’ compilation currently, the model includes only one strategic intent indicator, staff cost as a percentage of revenue, but it holds flexibility for future enhancement. additional variables such as customer retention rates or advertising-to-revenue ratios could also be integrated into the model and tested alongside the market-to-book ratio (tobin’s q). this would allow for a more comprehensive evaluation of strategic positioning and market valuation. figures 1 through 4 track the movement of tobin's q and the aggressiveness index (used here to denote strategic intent based on staff expenditure) over several financial years. in these visuals, the aggressiveness index is standardized to 1, while the market-to-book ratio reflects the average market valuation per share across the corresponding fiscal year. both axes are uniformly scaled to ensure consistency and ease of comparison. yearly average values were used to examine the co-movement of tobin's q and strategic intent indicators, as shown in table 4 for the 2018–19 to 2022–23 period. these transition plots (figures 1–4) are instrumental for investors in evaluating how firm positioning evolves and assist in identifying both current and prospective valuation scenarios. the framework is especially valuable for medium-term investment planning. for instance, figure 1 highlights that both torrent and sun pharma significantly ramped up their staffrelated investments to scale operations, with torrent also achieving a relatively higher market-to-book ratio. other firms, by contrast, trailed in either metric. table 4. computed values for visualizing tobin's q and aggressiveness index over time financial year firm name revenue (in crores) market-tobook ratio staff cost as a percentage of revenue aggressiveness index staff expenses (in crores) 2018-19 sun pharma 26415 5.32 0.06 0.68 1625 dr reddy 14281 2.75 0.13 1.44 1843 zydus 11904 5.01 0.00 0.02 26.48 cipla 15155 3.1 0.12 1.31 1785.94 torrent 5982 4.64 0.14 1.54 826.07 average 0.09 2019-20 sun pharma 29065 5.03 0.05 0.63 1571.3 dr reddy 15448 3.29 0.13 1.47 1931.9 zydus 13165 4.14 0.00 0.03 30.91 cipla 16362 2.7 0.11 1.32 1839.84 company correlation between tobin's q and aggressiveness index sun pharma 0.95 dr reddy 0.16 zydus -0.13 cipla 0.52 torrent 0.88 joshi & joshi, indian journal of finance and banking 15(1) (2025), 10-18 14 torrent 7672 6.59 0.13 1.55 1014.06 average 0.09 2020-21 sun pharma 32837 3.46 0.05 0.62 1702.77 dr reddy 17517 3.32 0.12 1.40 2030.2 zydus 14253 2.43 0.00 0.03 31.68 cipla 17131 1.96 0.11 1.34 1911.08 torrent 7939 6.52 0.13 1.61 1061.76 average 0.08 2021-22 sun pharma 33498 5.73 0.05 0.66 1805.9 dr reddy 19047 4.25 0.12 1.45 2270.1 zydus 14403 3.54 0.01 0.14 163.83 cipla 19159 3.3 0.09 1.08 1703.58 torrent 8004 7.13 0.14 1.67 1097.12 average 0.08 2022-23 sun pharma 38654 8.93 0.52 3.05 20078 dr reddy 21545 3.71 0.11 0.66 2434.6 zydus 15265 2.7 0.01 0.06 163.56 cipla 21763 3.65 0.08 0.47 1729.16 torrent 8508 7.46 0.13 0.76 1097.93 average 0.17 source: authors’ compilation as seen in figure 2, torrent displayed a notably stronger aggressiveness index than its peers, several of which lagged on both indicators or excelled in only one. given its fundamental positioning in the model, torrent stands out as a strong growth stock. in figure 3, torrent and dr. reddy consistently maintained favorable values for both strategic intent and valuation, reinforcing their suitability for medium-term investment. conversely, sun pharma appears to have streamlined its operations, as reflected in a lower tobin's q. this could imply upside potential over the next 2–3 years. figure 4 indicates that both torrent and dr. reddy continued to lead in workforce investment, an indicator of business expansion. a prudent fund manager should recognize that internal management, equipped with confidential strategic insights, likely responds to evolving market demands through deliberate staffing and investment decisions. with this in mind, both torrent and dr. reddy, supported by robust fundamentals, are well-positioned to attract medium-term investors. sun pharma, too, made notable improvements in its aggressiveness index. following the onset of the covid-19 pandemic in 2021, there was a surge in activity within the pharmaceutical space. as reflected in figure 5, the market has recalibrated its valuation of sun pharma accordingly. this figure also reveals that firms generally realigned their tobin's q values post-pandemic. among them, torrent emerges as undervalued, offering a compelling case for medium-term investment consideration. figure 1. ccsi matrix for 2018-19 fy 0 1 2 3 4 5 6 0 0.3 0.6 0.9 1.2 1.5 1.8m v /b v aggresivness index 2018-19 joshi & joshi, indian journal of finance and banking 15(1) (2025), 10-18 15 figure 2. ccsi matrix for 2019-20 fy figure 3. ccsi matrix for 2020-21 fy 0 1 2 3 4 5 6 7 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8m v /b v aggresivness index 2019-20 0 1 2 3 4 5 6 7 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 m v /b v aggresivness index 2020-21 14,253 zydus 17,517 dr reddy 7,939 torrent 17,131 cipla 32837 sun pharma joshi & joshi, indian journal of finance and banking 15(1) (2025), 10-18 16 figure 4. ccsi matrix for 2021-22 fy figure 5. ccsi matrix for 2022-23 fy conclusions the primary purpose of this study was to evaluate the semi-strong form of the efficient market hypothesis (emh) in the context of the indian pharmaceutical industry, using publicly available information, including earnings announcements and strategic indicators. the empirical findings demonstrate that the indian pharmaceutical market exhibits only partial efficiency. stock prices tend to respond more strongly to immediately quantifiable variables, such as sales, rather than to strategic investments reflected in employee expenditures. this suggests that the market still favors short-term, tangible outcomes over long-term value creation factors. the analysis of tobin's q and the aggressiveness index indicates a weak or negative correlation between firm aggressiveness and market valuation. in contrast, the positive correlation between sales and market prices suggests that investors respond more consistently to observable performance indicators. among the firms analyzed, torrent pharmaceuticals and dr. reddy’s laboratories displayed stronger fundamentals and consistent growth, positioning them as relatively undervalued and potentially favorable options for medium-term investors. 0 1 2 3 4 5 6 7 8 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2m v /b v aggresivness index 2021-22 33,498 sun pharma 14,403 zydus 19,159 cipla dr. reddy 8,004 torrent 0 1 2 3 4 5 6 7 8 9 0 0.5 1 1.5 2 2.5 3 3.5 4m v /b v aggresivness index 2022-23 joshi & joshi, indian journal of finance and banking 15(1) (2025), 10-18 17 this paper makes a unique contribution by applying the core competency strategic intent (ccsi) model to assess the linkage between human capital investment and market valuation in the indian pharmaceutical sector. the findings enhance theoretical understanding of market semi-efficiency and provide a practical decision-making framework for portfolio and fund managers seeking to identify undervalued securities in information-sensitive markets. from a managerial perspective, the results underscore the importance of transparent, timely disclosure of fundamental performance metrics to enhance market confidence and valuation accuracy. however, the study is limited to five years (2018–2023) and a small set of firms, which constrains the generalizability of its results. future research could extend this analysis to other high-growth sectors, integrate additional indicators such as r&d expenditure and brand valuation, and employ time-series econometric models to capture dynamic efficiency patterns. a broader comparative study across industries and post-pandemic market phases could provide deeper insights into the evolving nature of informational efficiency in emerging economies like india. author contributions: conceptualization, j.j. and k.j.; methodology, j.j.; software, j.j.; validation, j.j.; formal analysis, j.j. and k.j.; investigation, j.j.; resources, j.j.; data curation, j.j.; writing – original draft preparation, j.j. and k.j.; writing – review & editing, j.j. and k.j.; visualization, j.j.; supervision, k.j.; project administration, j.j.; funding acquisition, j.j. and k.j. 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: the authors sincerely thank the anonymous reviewers for their thoughtful comments and constructive suggestions that greatly improved the quality of this paper. 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, s. 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(2004). random walks and market efficiency in european equity markets. global journal of finance and economics, 1(1), 59–78. publisher’s note: american finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2025 by the authors. licensee american 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by american finance & banking society is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.1177/0972150920957289 https://doi.org/10.1257/089533003321164958 https://www.mckinsey.com/industries/pharmaceuticals https://doi.org/10.1108/jibr-08-2021-0298 https://doi.org/10.1108/jibr-08-2021-0298 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/ indian journal of finance and banking 13(2) (2023), 23-35 23 finance and banking ijfb vol 13 no 2 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa camel model analysis and discriminant analysis of commercial banks’ performance in guyana, south america vincent a. raja (a)1 sukrishnalall pasha (b) kumar ganapathy (c) maria christy (d) (a) senior lecturer, department of mathematics, physics and statistics, faculty of natural sciences, university of guyana, georgetown, guyana, south america; e-mail: vincent.anthonisamy@uog.edu.gy (b) finance secretary, ministry of finance, georgetown, guyana, south america; e-mail: spasha@finance.gov.gy (c) assistant professor of statistics, department of mathematics, srm arts and science college, kattankulathur, india; e-mail: kumarmat@srmasc.ac.in (d) lecturer, department of accounting and finance, school of entrepreneurship and business innovation, university of guyana, georgetown, guyana, south america; e-mail: maria.christy@uog.edu.gy a r t i c l e i n f o article history: received: 1st october 2023 revised: 2nd december 2023 accepted: 15th december 2023 published: 22nd december 2023 keywords: camel model, prudential ratios, discriminant analysis, indigenous banks, and foreign banks jel classification codes: g21, g24, l25 a b s t r a c t the study evaluates the performance of commercial banks in guyana using prudential ratios that capture the five essential dimensions of a bank’s operation. it applies the camel rating system and linear discriminant analysis on quarterly prudential ratios of all the commercial banks that operated in guyana between 2017 and 2021. the camel analysis reveals that demerara bank limited (dbl) is the best-performing bank, and the guyana bank for trade and industry (gbti) is the worst-performing bank. however, the one-way anova technique suggests no significant differences between the average values of the prudential ratios in the camel model. based on the linear discriminant analysis, only four ratios differentiate between good-performing and poor-performing banks. these findings provide valuable insights to regulators that employ these tools to identify poor-performing banks to safeguard the stability and soundness of their domestic banking system. by applying the camel rating system and linear discriminant analysis simultaneously in guyana, an emerging economy in the caribbean, for the first time, the study contributes to the literature that utilizes these tools to assess the performance of commercial banks. © 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 the primary objective of the study is to evaluate the performance of the commercial banks in guyana by applying the camel rating system and linear discriminant analysis to selected quarterly prudential ratios for the period 2017-2021. these institutions are the main source of finance for private businesses, with assets accounting for more than sixty (60) percent of the total assets of the financial sector (pasha, 2016). in this regard, commercial banks play a crucial role in the financial services sector by mobilizing savings and allocating them to high-return investments in the private sector that boost economic activities. historically, these financial institutions have consistently reported capital adequacy ratios above the prudential requirement of eight (8) percent of risk-their weighted assets, relatively high profitability, and excess liquidity and reserves due to the relatively low level of financial intermediation. consequently, it is understandable that the guyanese banking system is described as highly capitalized, liquid, and profitable (pasha, 2016). since the discovery of hydrocarbon by exxon mobil in 2015, however, the level of financial intermediation has increased, as reflected by the notable growth of credit to the private sector by commercial banks. the exponential growth in lending by commercial banks that is inspired by the rapid transformation of the country’s economy may not only create more investment opportunities for commercial banks but also increase the risk exposure, stability, and soundness of these financial institutions. there is a bevy of studies that found that rapid credit growth is associated with banking fragility since it amplifies moral hazard and adverse selection problems (billings et al., 1996; fielding & rewilak, 2015; ghosh, 2010; 1corresponding author: orcid id: 0009-0001-7850-7763 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i2.2155 to cite this article: raja, v. a., pasha, s., ganapathy, k., & christy, m. (2023). camel model analysis and discriminant analysis of commercial banks’ performance in guyana, south america. indian journal of finance and banking, 13(2), 23-35. https://doi.org/10.46281/ijfb.v13i2.2155 https://orcid.org/0009-0001-7850-7763 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i2.2155 https://orcid.org/0009-0008-4487-8524 https://orcid.org/0000-0002-0380-9900 https://orcid.org/0009-0005-2082-8520 raja et al., indian journal of finance and banking 13(2) (2023), 23-35 24 schularick & taylor, 2012). rapid credit growth also adversely impacts the performance of individual banks and manifests in relatively higher non-performing loans. khemraj and pasha (2016) established a positive relationship between rapid credit growth and non-performing loans in guyana. similar evidence was found in other countries (vithessonthi, 2016). it is, therefore, important that the regulatory authority expands its arsenal of supervisory tools to strengthen the supervision of commercial banks, given the unprecedented expansion in credit by the local banking system. by evaluating commercial banks with the camel rating system and linear discriminant analysis, the study will provide valuable insights to regulators in guyana about the application and robustness of these tools for assessing the performance of these financial institutions. currently, there are six (6) commercial banks with numerous branches, of which three (3) are foreign-owned, and three (3) are indigenous banks. like in other countries, the central bank regulates these institutions through on-site and offsite examinations to protect depositors and ensure the stability and soundness of the financial services sector. the camel rating system is a supervisory tool that has proven useful since the 2008 crisis. this tool was developed in the us in 1979 by the three federal regulatory banking authorities (daboh & duramany-lakkoh, 2023; kumar & malhorta, 2017; roman & sargu, 2013). according to bodla and verma (2006), the camel rating system may help regulators identify banks needing special attention. for the first time in guyana, this study employs the camel rating tool and linear discriminant analysis to assess the performance of guyanese commercial banks using selected quarterly prudential ratios of these institutions for the period 2017-2021. the prudential ratios capture the five essential aspects of the commercial banks’ performance, often called component factors. these are capital adequacy, asset quality, management efficiency, earning quality, and liquidity position. since no similar work was done previously in guyana or the caribbean, the study will also contribute to the literature. the findings may also be useful for the regulatory authorities responsible for on-site and off-site examinations of commercial banks in the caribbean. another important contribution of the paper is that it utilizes the camel approach and linear discriminant analysis simultaneously to evaluate the performance of commercial banks. since very few studies employ both techniques together, this study will enhance the extant literature. the remainder of the study is organised as follows. the second section discusses the relevant literature. a description of the objective of the research and methodology follows in the third section. the results of the analysis are presented in the fourth section, and section five concludes with suggestions for future research. literature review different academics, scholars, and decision-makers have evaluated the financial performance of the banking industry over the past two decades using the camel framework. in one of the earliest studies, barker and holdsworth (1993) found that the camel ratings system is an effective tool for predicting banks' failure and measuring these institutions' performance. based on similar findings, barr et al. (2002) argued that the camel rating system is useful for measuring the financial performance of banks by regulators and examiners. another important finding of barr et al. (2002) is the strong association between the camel rating and efficiency scores of banking institutions. gaul and jones (2021) examined the information content and the determinants of camels rating between 1984 and 2020. they found that the composite ratings have significant predictive power for future bank performance and failures. using quantile regressions, the study also found that camels ratings convey helpful information regarding the operations and conditions of banks, especially those that are riskier and poorly-performing. more recently, daboh and duramany-lakkoh (2023) employed regression analysis and data for the period 2012-2021 to evaluate the banking sector in sierra leone using the camel framework. it found that capital adequacy and earning ability exert a positive and significant effect on the performance of banks. however, asset quality and liquidity management have a negative and insignificant relationship with banks' performance. this section reviews the strand of the literature that utilises the camel approach to examine the relative performance of banks as well as rank the performance of these institutions in various countries. venkatesh and suresh (2014) examined four banks in bahrain using data from 2006 to 2012 and the camels framework. the government-owned national bank of bahrain (nbb) was ranked first overall in terms of capital adequacy, asset quality and liquidity. however, bbk held the first position in terms of management efficiency and liquidity. the authors argued that the findings invalidate the perception that government-owned banks underperform privately-owned banks. ab-rahim et al. (2018) compared the performance of sixty-three listed banks across malaysia, singapore, thailand, and the philippines between 1997 and 2011. it found that the banks in singapore outperformed their counterparts in other countries. notwithstanding, the banks from thailand and malaysia were the best performers for capital adequacy and asset quality, respectively. the banks from the philippines were ranked as the best performers for earnings quality and liquidity. in sri lanka, rauf (2016) examined the relative performance of a sample of privately-owned and publicly owned banks. the analysis revealed that the privately-owned banks outperformed their publicly owned counterparts in all the parameters of the camel framework. kumari (2017) applied the camel framework to evaluate the performance of three foreign commercial banks in sri lanka over the period 2008-2014. it found that the capital adequacy and earnings of the banks were good but average for the other components of the camel framework. al-najjar and assous (2021) compared the performance of seven conventional banks with four islamic banks using the camel framework. the banks obtained different rankings under various parameters. the study extended the literature by estimating a regression model to determine the effects of the camel ranking on the total deposits of saudi banks. it found that car, efficiency ratio, roe, and the ratio of loans to deposits positively impacted the banks' deposits. in contrast, raja et al., indian journal of finance and banking 13(2) (2023), 23-35 25 the ratios of net income to net revenue and current and savings counts to total deposits (casa) had the opposite impact on the banks' deposits. wirnkar and tanko (2008) investigated the performance of the largest nigerian banks using the camel framework. the authors found that no single factor in the camel framework captured the performance of banks completely and therefore argued that regulators utilise the best ratios from the camel framework when evaluating these institutions. roman and sargu (2013) employed the camels framework to examine the financial soundness of 15 commercial banks that accounted for 78.1 percent of the banking sector assets in romania. the authors used multiple ratios to assess each parameter from the camels framework. the largest bank in the sample, banca comerciala romana, was ranked highly for management quality, earnings, and profitability. however, this bank ranked low based on liquidity. the study also found that the banks in the sample were adequately capitalised. altan et al. (2014) investigated the performance of three state-owned banks and twelve private sector banks in turkey between 2005 and 2012. using several ratios to represent each component of the camel framework, the study revealed significant differences between state-owned and privately-owned banks, with ziraat bank obtaining the best ranking for asset quality and liquidity while ada bank, ak bank, and halk bank obtained the top position in terms of capital adequacy, management quality, earning quality respectively. atker (2017) compared the performance of janata bank limited (a public sector bank) with ncc bank limited (a private sector bank) using the camel framework and data for the period 2010-2014 in bangladesh. it found that ncc bank limited performed better for all the component factors except earnings per share (eps) and liquidity ratios. rahman and islam (2018) extended this study by using the camel rating system to evaluate seventeen private commercial banks in bangladesh during the period 2010-2016. it found that the banks’ performance and ranking varied based on each component factor of the camel framework. the ncc bank secured the first position on the group average under capital adequacy and asset quality. at the same time, eastern bank and one bank jamuna bank were ranked the best under management efficiency, earnings quality, and liquidity management, respectively. the authors argued that the findings could help commercial banks' management formulate policies to improve their financial and overall performance. several studies utilized the camel framework to assess the performance of banks in india. bodla and verma (2006), one of the earliest studies to use the camel approach to assess the performance of banks in india, found that state bank of india (sbi) was superior to icici in terms of capital adequacy between 2000 and 2004. however, icici outperformed sbi in terms of asset quality, earning quality, and management quality. according to the authors, there was no significant difference in the liquidity positions of the two banks. on the other hand, mishra and aspal (2012) assessed the overall performance and economic soundness of the state bank group using the camel approach. they concluded that different banks ranked differently based on the camel ratios. however, the authors cautioned that the difference between the camel ratios was not statistically significant based on the anova test. additionally, the top five private banks in india were considered by kumar and malhotra (2017), and their operations were evaluated based on the camel model's parameters. it found that the axis bank performed best, and the indusind bank performed worst. liquidity, revenue capacity, and capital sufficiency were the key reasons for the subpar performance of the latter. meanwhile, purohit and bothra (2018) compared a private sector bank, icici bank, with the state bank of india (sbi) using camel parameters. the results revealed variations in the performance of the banks based on these parameters. the authors argued that the difference in the parameters reflected sbi's efforts to improve its efficiency, revenue, and liquidity, as well as the attempts by the icici bank to strengthen its capital adequacy and asset quality. more recently, kumar, christy, and raja (2022) evaluated the financial performances of selected private banks in india using the camel model. the observation period spans five years, starting from 2017 to 2021. the study found that the camel framework aided in determining a bank's overall performance based on key prudential ratios such as capital adequacy, asset quality, management efficiency, earnings quality, and liquidity. even with the widespread application of the camel approach in assessing the financial performance of commercial banks, the technique has limitations. for instance, wirnkar and tanko (2008) argued that no one factor in the camel framework captures a bank's overall performance. unsurprisingly, academics have complemented the camel framework with analytical tools such as regression analysis, while others assessed the performance using camel ratios and alternative techniques. echekoba et al. (2014) examined the profitability of commercial banks in nigeria using the camel rating model and regression analysis. the study found that only liquidity management is significantly related to the performance of commercial banks, while the other factors are not. using regression analysis and the camel framework, muhmad and hashim (2015) revealed that capital adequacy, asset quality, and liquidity significantly impacted malaysian banks' performance when return on assets is used as the dependent variable in the regression model. however, only asset quality and earning quality impacted their performance when the model used return on equity as the dependent variable. ngoboka and gatauwa (2020) employed the camel rating systems and panel regression analysis to examine the financial performance of commercial banks in rwanda. the study found that financial performance has a significant positive relationship with capital adequacy and asset quality and a significant negative relationship with management efficiency. when bank size is used as an independent variable, the relationships between bank performance and the camel ratios are altered. this means that relationships between bank performance and the camel ratios are sensitive to the model's functional form. nair et al. (2018) compared the performance of privately owned banks with those owned by the government using the camel framework and discriminant analysis. the study showed that the debt-to-equity ratio, tier i capital ratio), net npa ratio, and sensitive sector loans to total loans ratio explained the variation in the performance between these two categories of banks in india. derviz and podpiera (2008) investigated whether the camel rating can predict the longrun s&p rating of banks in the czech republic using panel data and an ordered probit model. it found that capital adequacy, raja et al., indian journal of finance and banking 13(2) (2023), 23-35 26 credit spread, the ratio of loans to total loans, and value-at-risk for total assets and leverage are good predictors of the s&p rating. gasbarro et al. (2002) employed panel models to examine the changing banking soundness of commercial banks in indonesia during the asian financial crisis. the study found that during this crisis, only one component of the camel framework, earnings, discriminated among the ratings of the bank. in an attempt to identify gaps in the extant literature that utilized the camel framework to assess the performance of banks, maude and dogarawa (2016) argued that the extant literature is mainly descriptive and only a few studies explore the relationship between camel ratios and bank performance. according to the authors, there is also a paucity of research in emerging countries, especially with new economic situations. materials and methods the study utilizes quarterly prudential ratios of all the commercial banks during the period 2017-2021. the banks include republic bank (guyana) limited (rbl), bank of baroda, bank of nova scotia (bns), guyana bank for trade & industry limited (gbti), demerara bank limited (dbl), and citizens bank (guyana) incorporated (cbi). the first three banks are foreign-owned, and the others are indigenous. the prudential ratios that cover the five dimensions of the camel framework (capital adequacy, asset quality, management efficiency, earnings quality, and liquidity) are discussed below. capital adequacy determines whether a bank has sufficient capital to absorb unexpected losses from investing in risky assets. in guyana, commercial banks are required to always maintain a minimum unimpaired paid-up capital of $250 million. additionally, these institutions are required to maintain a minimum capital adequacy ratio (car) of at least eight (8) percent, computed by dividing the total eligible capital of these institutions by their total risk-weighted assets (rwa). this study utilizes the car to assess the performance of the banks since it is used extensively in the literature (al-najjar & assous, 2021; ab-rahim et al., 2018; altan et al., 2014; atker, 2017; kumar et al., 2022; mishra & aspal, 2012; rauf, 2016; roman & sargu, 2013; venkatesh & suresh, 2014). according to lad and ghorpade (2022), banks with high capital adequacy ratios can satisfy their obligations, while those with low ratios are likely to face bankruptcy. prior studies have also established that capital adequacy ratios impact bank performance (derviz & podpiera, 2008; muhmad & hashim, 2015; ngoboka & gatauwa, 2020; nair et al., 2018). since loans account for a large share of commercial banks’ assets, these institutions need to pay keen attention to the quality of their loan portfolios. the loans that are not performing (referred to as non-performing loans) could undermine the earning capacity of banks as well as erode their capital, which in turn may result in the insolvency of these institutions (hou, 2007; kane & rice, 2001). therefore, the quality of commercial banks’ loan portfolios is an important parameter of their financial strength (frederick, 2012). supervision guideline no. 5 of the bank of guyana places the credit facilities of banks into the following categories: pass, special mention, substandard, doubtful, and loss. this study evaluates the asset quality of commercial banks using the ratio of non-performing loans to total loans. several studies have utilised this ratio (altan et al., 2014; atker, 2017; roman & sargu, 2013; venkatesh & suresh, 2014) and found it had a significant relationship with bank performance (derviz & podpiera, 2008; muhmad & hashim, 2015; ngoboka & gatauwa, 2020; nair et al., 2018). management efficiency is essential for commercial banks' survival and long-term viability and stability (ayayi & sene, 2010; ghosh & sanyal, 2019). it is not surprising that management efficiency is considered when determining the performance of banks based on the camel framework. indeed, management efficiency has been found to have a significant relationship with the financial performance of banks (getahun, 2015). this aspect of a bank's performance can be evaluated using a variety of qualitative and quantitative factors. to a large extent, some of the qualitative factors the regulatory authority considers regarding the management of local banking institutions are covered in supervision guideline no. 8 of the bank of guyana. the ratio of operating expense to total income is a traditional proxy for measuring management efficiency (shah & jan, 2014). this study uses the expense ratio to assess the relative efficiency of commercial banks. earnings quality is an important factor to examine when assessing the performance of banks based on the camel framework since earnings determine the internal capital formation and asset growth of banking institutions as well as their stability (adem, 2022). there are numerous ratios for assessing the earnings quality of banks, but two of the most frequently used measures are return on assets (roa) and return on equity (reo) (al-najjar & assous, 2021; altan et al., 2014; atker, 2017; dincer et al., 2011; mishra & aspal, 2012; roman & sargu, 2013; venkatesh & suresh, 2014). in this study, the return on assets (roa) is used and computed by dividing the bank’s operating income by its total assets. like the other components of the camel framework, earnings quality has been found to impact the performance of banks significantly (frederick, 2012; getahun, 2015; muhmad & hashim, 2015). liquidity, which refers to the ability of banks to meet their liabilities when they fall due (gul zeb, 2011), is another important component of the camel framework. in guyana, commercial banks are required to maintain liquidity ratios that equate to 20 percent of demand liabilities and 15 percent of time liabilities. the regulator sets these ratios to ensure that the commercial banks maintain sufficient liquid assets to satisfy the demand for cash by depositors whenever needed. while too little liquidity can trigger insolvency, too much can result in lower profitability (kumar & malhorta, 2017). the ratio of liquid assets to total assets is a good measure of the liquidity position of commercial banks and is used in this study. several studies have employed this ratio (altan et al., 2014; atker, 2017; ab-rahim et al., 2018; dincer et al., 2011; mishra & aspal, 2012; rauf, 2016). it is also important to note that liquidity is significantly related to bank performance (echekoba et al., 2014; muhmad & hashim, 2015). the study applies the camel rating system to the ratios described above, a tool that is widely used for assessing the overall performance of commercial banks. with this technique, each bank is ranked based on the average value for each component factor. the bank with the highest average value for capital adequacy, earnings quality and liquidity is ranked raja et al., indian journal of finance and banking 13(2) (2023), 23-35 27 the best, followed by the bank with the second highest score, and so on. however, the bank with the lowest average ratio for asset quality and earnings is ranked the best, followed by the second lowest value, and so on. the average ranking is then computed to determine the overall ranking of the banks. the study also employs linear discriminant analysis (lda) to identify the linear combination of prudential variables that differentiate between good-performing and bad-performing banks. this technique was utilised by altman (1968) to predict firm failure. mous (2005) also employed the same technique to predict bank failure. the discriminant function is generally defined thus: 𝐷 = 𝑣0 + 𝑋1𝑣1 + 𝑋2𝑣2 + 𝑋3𝑣3 + ⋯ + 𝑋𝑝𝑣𝑝 (1) where, d is the dependent or grouping variable, 𝑋1, 𝑋2, 𝑋3, … , 𝑋𝑝 are the explanatory variable and 𝑣0, 𝑣1, 𝑣2, 𝑣3, … , 𝑣𝑝 are the corresponding estimated discriminant coefficients that can be used to predict the value of the dependent variable. in this two-group case, the discriminant function is defined specifically as follows: 𝐷 = 𝑣0 + 𝑋1𝑣1 + 𝑋2𝑣2 + 𝑋3𝑣3 + 𝑋4𝑣4 + 𝑋5𝑣5 (2) where, d = the discriminant function for the dependent or grouping variable, good or poor performing banks. the banks are classified based on their ranking from the camel approach. those with ranking above the average are classified as goodperforming banks while those below are classified as poor-performing banks. x1 = eligible capital divided by risk-weighted assets x2 = non-performing loans divided by total loans x3 = operating expense divided by total income x4 = operating income divided by total assets x5 = liquid assets divided by total assets v1, v2, v3, v4, and v5 are the corresponding estimated discriminant coefficients. the study utilizes the wilks lambda to determine the validity of the discriminant analysis. a wilks lambda that is close to zero and statistically significant (i.e., less than 5 percent) suggests that discriminant analysis effectively differentiates the two groups. once discriminant analysis is determined to be suitable, the discriminant function is estimated, and the various significance tests are performed. the tests of equality of means are applied to ascertain the significance of each predictor, while the strength of the function is evaluated with the eigenvalue and canonical correlation. predictors with p-values less than 10 percent are considered significant and therefore retained, while those with p-values above 10 percent are removed to derive the parsimonious. eigenvalues higher than one and canonical correlation above 0.75 suggest a high degree of association between the discriminant score and the group, and the model is robust. the canonical correlation is akin to the r-square in regression analysis. the unstandardized coefficients of the parsimonious function are utilized to generate the discriminant score of each bank that is compared with the group centroid scores. if the discriminant score of a bank is more than the centroid, then the bank comes from group 1 (good-performing bank), and if the discriminant score for a bank is below the centroid, it comes from group 2 (poor-performing bank). as with multiple regression analysis, the predictors are assumed to be not highly correlated in the discriminant function. the variance inflation factor (vif) is computed for the predictors to ensure this assumption is not violated. where the vif is less than 10, multicollinearity is not a problem. the box’s m test is also performed to determine whether the assumption of homogeneity of the variance-covariance matrices is not violated. an alpha value of more than 0.001 for the box’s m test means that the assumption of equality of covariance matrices has not been violated, and one can proceed with the discriminant analysis. the normality assumption of each predictor is tested by applying the normal p-p plot for each predictor. finally, the function is examined to determine how well it classifies each group correctly. discussions results from the camel rating system: the results from analysing the selected camel ratios are discussed in this section. capital adequacy the commercial banks' capital adequacy ratio (car) displayed mixed performance during the review period. the car ratio for rbl and bob trended upwards, while it declined for gbti and dbl between 2017 and 2021. the ratio oscillated for bns and cbi during the corresponding period. notwithstanding, all the commercial banks reported capital adequacy ratios well above the regulatory requirement level of 8 percent. it, therefore, means that all the banks maintained adequate capital to absorb unforeseen losses and avoid bankruptcy in the future. table 1. capital adequacy ratio (%) year rbl gbti bns dbl cbi bob 2017 19.12 31.61 27.77 33.96 27.62 43.62 2018 21.75 29.88 30.57 32.48 30.25 52.07 raja et al., indian journal of finance and banking 13(2) (2023), 23-35 28 2019 22.61 29.36 27.71 30.04 27.08 67.90 2020 22.42 31.25 29.42 30.49 26.46 66.08 2021 23.99 26.71 29.56 28.03 29.47 59.10 average 21.98 29.76 29.01 31.00 28.18 57.75 rank 6 3 4 2 5 1 as per table 1, bob is in the top position with the highest group average car of 57.75, followed by dbl with a group average car of 31.0. rbl was the lowest-ranked bank, with a group average of 21.98. asset quality the ratio of non-performing loans to total loans of all the commercial banks trended downwards, suggesting an improvement in the asset quality of these institutions. this may be attributed to the improvement in the economy between 2017 and 2021. table 2 shows that dbl is the best-ranked bank with the lowest group average ratio of non-performing loans to total loans of 1.85, followed by rbl with a group average of 2.18. the lowest-ranked commercial bank was gbti, with a group average of 10.99. table 2. non-performing loans to total loans (%) year rbl gbti bns dbl cbi bob 2017 2.68 11.91 5.68 2.74 8.99 8.57 2018 2.44 11.91 6.62 2.30 6.65 10.15 2019 2.00 11.84 7.19 1.62 5.95 13.24 2020 1.82 10.89 5.63 1.41 4.57 9.56 2021 1.95 8.43 4.22 1.18 3.44 6.79 average 2.18 10.99 5.87 1.85 5.92 9.66 rank 2 6 3 1 4 5 management efficiency which is important for a bank’s long-term growth and survival, was mixed during the years 2017-2021. management efficiency, measured by the ratio of operating expenses to operating income, fluctuated for gbti, rbl, and cbi. however, the ratio exhibited a general downward trend for bns and steadily increased for bob during the review period. table 3. operating expenses to operating income (%) year rbl gbti bns dbl cbi bob 2017 68.34 63.97 64.12 64.39 70.91 44.37 2018 66.05 65.80 66.16 67.29 73.39 54.03 2019 66.54 63.96 65.68 65.02 72.47 54.53 2020 70.25 65.51 64.88 67.49 76.20 56.58 2021 67.26 63.77 59.86 69.45 72.42 58.83 average 67.69 64.60 64.14 66.73 73.08 53.67 rank 5 3 2 4 6 1 table 3 shows that bob is the best-ranked commercial bank with the lowest average expense ratio of 53.67, followed by bns, gbti, dbl, and rbl with average expense ratios of 64.14, 64.60, 66.73, and 67.69, respectively. the lowest-ranked bank was cbi, with an expense ratio of 73.08. earning quality as noted earlier, the quality of earnings is a crucial criterion because it demonstrates a bank’s profitability and explains the sustainability and growth of its future earnings. in this study, the roa is used to measure the earning quality of commercial banks in guyana. the profitability ratio trended downward for rbl and bob, suggesting that the earnings quality of these banks deteriorated during the review period. conversely, the roa displayed a general upward trend for cbi while it fluctuated for bns and dbl. table 4. return on asset (%) year rbl gbti bns dbl cbi bob 2017 4.62 2.72 4.79 5.49 2.28 4.34 2018 4.86 2.22 4.41 5.81 2.33 2.19 2019 4.73 2.30 5.26 5.80 2.31 1.93 2020 3.41 2.02 2.45 4.91 2.44 1.58 2021 3.59 2.32 3.54 5.88 2.82 0.81 average 4.24 2.32 4.09 5.58 2.44 2.17 rank 2 5 3 1 4 6 table 4 shows that dbl is the best-performing bank with an average roa of 5.58, followed by rbl, bns, cbi, and gbti with average roas of 4.24, 4.09, 2.44, and 2.32, respectively. with an average roa of 2.17, bob is ranked the raja et al., indian journal of finance and banking 13(2) (2023), 23-35 29 lowest-performing bank. liquidity the ratio of liquid assets to total assets, which indicates a bank’s capacity to fulfill its financial obligations, is a key performance indicator. when a bank can satisfy all its financial obligations as they fall due, it is considered adequately liquid. except for dbl, the liquidity ratios of the commercial banks displayed a general upward trend. table 5. liquid assets to total assets (%) year rbl gbti bns dbl cbi bob 2017 30.91 30.79 31.85 72.10 36.02 36.46 2018 35.53 28.56 32.03 66.53 40.12 37.50 2019 32.46 29.73 38.66 66.40 40.04 36.58 2020 43.21 32.50 51.84 69.49 41.80 49.41 2021 41.31 32.79 50.12 68.53 48.26 43.32 average 36.68 30.87 40.90 68.61 41.25 40.65 rank 5 6 3 1 2 4 table 5 shows that dbl is in the top position with an average ratio of liquid assets to total assets of 68.61, followed by cbi, bns, bob, and rbl with average ratios of 41.25, 40.90, 40.65, and 36.68, respectively. gbti was ranked the lowest, with an average ratio of liquid assets to total assets of 30.87. overall ranking to assess the overall performance of the private sector banks, an aggregate rating is calculated, and the results are shown in table 6 for the study period 2017-2021. it is observed that the capital adequacy ratio of bob is at the upper position and rbl at the lower position. with respect to the asset quality parameter, dbl is ranked first, while rbl is in 2nd position, and gbti is in the lowest position at 6th. concerning the management efficiency parameter, it is observed that bob ranks highest while bns is in the 2nd position, and cbi is in the 6th or lowest position. regarding the earnings capacity parameter, dbl ranked first, while rbl is ranked 2nd and bob ranked 6th position. under the liquidity parameter, dbl is the top performer, followed by cbi while gbti bank was ranked as the worst performer. the analysis revealed that dbl is ranked first with an overall average rank of 1.8, followed by bns with an average rank of 3. bob, rbl, and cbi are ranked 3rd, 4th, and 5th, respectively. gbti is positioned at last with an overall average score of 4.6. table 6. overall ranking ratios rbl gbti bns dbl cbi bob c 6 3 4 2 5 1 a 2 6 3 1 4 5 m 5 3 2 4 6 1 e 2 5 3 1 4 6 l 5 6 3 1 2 4 average 4.00 4.60 3.00 1.80 4.20 3.40 rank 4 6 2 1 5 3 anova result a one-way anova test was used to determine if significant differences existed between the average values of the camel ratios. the anova test results showed that the calculated value of the f ratio (0.726) is lower than the table value (2.621) with df (5, 24) at 5% significance level, p-value = 0.610 > 0.05). this means there is no statistically significant difference between the average values of the camel ratios, so the null hypothesis is accepted. it also shows no significant difference in the performance of the private sector banks under the camel model. camel ratios with the data given in table 6. the results of the one-way anova test are shown in table 7. table 7. one-way anova items sum of squares df mean square mean square f sig. between groups 11.500 5 2.300 2.300 .726 .610 within groups 76.000 24 3.167 3.167 total 87.500 29 results: discriminant analysis approach the anova test revealed no significant difference between the prudential ratios based on the camel model. the authors made an attempt to classify the six private sector banks into performance ratings. the experiment is designed as banks are initially grouped as good performing banks and poor performing banks. a discriminant analysis is performed, and the model, results, and interpretations are presented as follows. as explained earlier, the suitability of the linear discriminant analysis is examined using wilks’ lambda. the wilks’ lambda value is 0.263 and statistically significant at the 1 percent level of significance (see table 8), suggesting raja et al., indian journal of finance and banking 13(2) (2023), 23-35 30 that discriminant analysis is very effective in differentiating between the two groups, good-performing, and poor-performing banks. table 8. wilks’ lambda test of function(s) wilks' lambda chi-square df sig. 1 .263 34.096 5 .000 from table 9, we observe that the average camel ratios of the good-performing banks are superior to the average ratios of the poor-performing banks. in particular, the average capital adequacy, earnings quality, and liquidity ratios of the good-performing banks are higher than the average for the poor-performing banks. conversely, the average asset quality and management efficiency ratios for the good-performing banks were lower than the poor-performing banks (see table 9). table 9.group statistics performance of the banks mean std. deviation valid n (list wise) unweighted weighted good performance capital adequacy 39.253333 14.6632881 15 15.000 asset quality 5.791833 3.6050497 15 15.000 management efficiency 61.510833 6.7752033 15 15.000 earning quality 3.945833 1.7262288 15 15.000 liquidity 50.052333 14.8868675 15 15.000 bad performance capital adequacy 26.638667 3.8515158 15 15.000 asset quality 6.363500 3.9939406 15 15.000 management efficiency 68.455000 3.9141114 15 15.000 earning quality 2.997333 .9982715 15 15.000 liquidity 36.267167 5.8521059 15 15.000 total capital adequacy 32.946000 12.3334704 30 30.000 asset quality 6.077667 3.7495850 30 30.000 management efficiency 64.982917 6.4828472 30 30.000 earning quality 3.471583 1.4670773 30 30.000 liquidity 43.159750 13.1402969 30 30.000 having determined that discriminant analysis is suitable, the discriminant function is estimated with selected camel ratios used to rank the performance of the commercial banks. among the five prudential ratios that we have considered, asset quality failed the tolerance test. hence, in our further analysis and modelling, we only include capital adequacy, management efficiency, and liquidity with p-values below 0.01 and earning quality with p-value below 0.10 (see table 10). table 10. tests of equality of group means items wilks' lambda f df1 df2 sig. capital adequacy .729 10.385 1 28 .003* asset quality .994 .169 1 28 .684 management efficiency .703 11.814 1 28 .002* earning quality .892 3.394 1 28 .076** liquidity .715 11.140 1 28 .002* note: * indicates significant at 1% level and ** indicates significant at 10% level. the eigenvalue, which measures the proportion of the variance explained by the function, is greater than 1, suggesting that the estimated function is robust (see table 11). the canonical correlation of 0.859 confirms that the discriminant function discriminates well (see table 11). table 11. eigenvalues function eigenvalue % of variance cumulative % canonical correlation 1 2.808a 100.0 100.0 .859 first 1 canonical discriminant functions were used in the analysis. table 11 shows that the variance inflation factor (vif) for each variable is below 10. this indicates that the model does not suffer from multicollinearity. additionally, the homogeneity assumption of the variance-covariance matrices is not violated based on the box’s m test. according to table 13, the box’s m value is 9.832. the f value (0.5356), which is not significant at the 1% level of significance (p-value (0.069) > 0.01). raja et al., indian journal of finance and banking 13(2) (2023), 23-35 31 table 12. summary statistics model unstandardized coefficients standardized coefficients t sig. collinearity statistics b std. error beta tolerance vif 1 (constant) 2.007 1.206 1.664 .109 capital adequacy -.020 .009 -.478 -2.284 .031 .250 4.004 asset quality -.012 .025 -.088 -.471 .642 .312 3.205 management efficiency .021 .014 .271 1.555 .133 .359 2.784 earning quality -.159 .062 -.458 -2.567 .017 .344 2.906 liquidity -.014 .006 -.370 -2.230 .035 .398 2.510 a. dependent variable: performance of the banks table 13. box’s m test results box's m 9.832 f approx. .5356 df1 15 df2 3156.632 sig. .069 tests null hypothesis of equal population covariance matrices. the normality assumption of each predictor is tested and valid since the normal p-p plot for each predictor shows that the data follows fairly normal distribution (see figure 1). figure 1. normal p-p plots for independent variables raja et al., indian journal of finance and banking 13(2) (2023), 23-35 32 the function is further interrogated to determine how well it predicts poor-performing and good-performing banks. based on the results, the function classifies 90 percent of the original grouped cases correctly, of which 80 percent of the good-performing banks and 100 percent of the poor-performing banks are correctly satisfied (see table 14). it, therefore, means that there is a 0.20 probability that the function commits a type 1 error and a zero probability it commits a type 2 error. table 14. classification results performance of the banks predicted group membership total good performance bad performance original count good performance 12 3 15 bad performance 0 15 15 % good performance 80.0 20.0 100.0 bad performance .0 100.0 100.0 90.0% of original grouped cases correctly classified. the discriminant score for each bank is computed using the equation below based on the discriminant function coefficients computed in table 15. table 15. canonical discriminant function coefficients 95% confidence interval coefficient bias std. error lower upper asset quality 1 .053 .019 .121 -.161 .314 capital adequacy 1 .087 .012 .067 -.010 .271 earning quality 1 .697 .130 .530 -.146 2.078 liquidity 1 .063 .002 .068 -.096 .209 management efficiency 1 -.093 -.001 .122 -.299 .289 (constant) 1 -2.226 -.948 8.467 -22.970 10.892 𝐷 = 2.226 + 0.087 ∗ 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐴𝑑𝑒𝑞𝑢𝑎𝑐𝑦 + 0.063 ∗ 𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 + 0.697 ∗ 𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑄𝑢𝑎𝑙𝑖𝑡𝑦 − 0.093 ∗ 𝑀𝑎𝑛𝑎𝑔𝑒𝑚𝑒𝑛𝑡 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 (3) the discriminant score is compared with the group centroid = (1.619 − 1.619)/2 = 0. any bank which has a discriminant value above zero comes from the group of good-performing banks while any bank with a discriminant value below zero comes from the group of poor-performing banks. table 16. functions at group centroids performance of the banks function 1 good performance 1.619 bad performance -1.619 unstandardized canonical discriminant functions evaluated at group means. the overall discriminant score with the rankings and group classification are presented in the table below. from table 17, the best-performing banks are bns, dbl, and bob, with discriminant scores above 0, while the poor performers are rbl, gbti, and cbl, with discriminant scores below 0. the best performer is dbl with the highest discriminant score (2.475), followed by bob (1.881), bns (-0.240), rbl (-1.343), gbti (-1.602), and cbl (-2.274). table 17. discriminant score, bank classification and ranking bank discriminant score bank classification ranking rbl -1.342661 poor performing 4 gbti -1.602257 poor performing 5 bns -0.2402725 poor performing 3 dbl 2.4752725 good performing 1 cbl -2.2742185 poor performing 6 bob 1.881226 good performing 2 conclusions the study applies the camel rating tool guyana to quarterly prudential ratios of these institutions for the period 20172021 to assess the performance of the six commercial banks in guyana. while numerous researchers have applied the camel approach to gauge the financial performance of banks in various countries, this was never done before in guyana. the camel analysis ranks dbl as the best performing bank with an overall average rank of 1.8, followed by bns with an average rank of 3. bob, rbl, and cbi are ranked 3rd, 4th, and 5th, respectively. gbti is worst performing banks with raja et al., indian journal of finance and banking 13(2) (2023), 23-35 33 an overall average score of 4.6 according to the camel approach. the one-way anova test finds that there is no statistically significant difference between the average values of the prudential ratios. linear discriminant analysis shows that the prudential ratios differentiate between good and poor performance among the banks. the wilks’ lambda test reveals that the lda is suitable. however, the results show that only four of the five prudential ratios explain variations in the performance of the banks. according to the results, the function classifies 90 percent of the original grouped cases correctly, of which 80 percent of the good-performing banks and 100 percent of the poor-performing banks are correctly classified. it, therefore, means there is a 0.20 probability that the function commits a type 1 error and a zero probability it commits a type 2 error. further, the discriminant scores suggest that dbl is the bestperforming bank, whereas cbl is the worst-performing bank. based on the various diagnostic tests, the discriminant function did not violate the assumptions of normality, homogeneity of the variance-covariance matrices, and multicollinearity. the study's limitations included the number of commercial banks operating in guyana. there are only six banks, and all are privately owned. there is no opportunity to compare the performance of privately and publicly owned banks. also, a limited number of prudential ratios were available for analysis. further, we encountered two conflicting results from the camel approach and the linear discriminant analysis. therefore, future research should continue the investigation using the more versatile bayesian method to resolve conflict. a study of this nature will also extend the literature since no previous work employed the bayesian method to investigate the performance of banks in guyana and the caribbean. author contributions: conceptualization, a.v.r, s.p., k.g. and mc.; methodology, a.v.r. and s.p.; software, a.v.r., s.p. and k.g.; validation, a.v.r., s.p. and k.g.; formal analysis, a.v.r., s.p. and k.g.; investigation, a.v.r. and s.p.; resources, a.v.r., s.p. and m.c.; data curation, m.c.; writing – a.v.r., s.p., k.g. and m.c.; preparation, a.v.r., s.p., k.g. and m.c.; writing – a.v.r. and s.p.; visualization, a.v.r. and s.p.; supervision, a.v.r., s.p., k.g. and m.c.; project administration, a.v.r., s.p., k.g. and m.c.; funding acquisition, a.v.r., s.p., k.g. and m.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, 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: the authors wish to acknowledge the comments and feedback from dr. collin m. constantine, lecturer, girton college, university of cambridge. informed consent statement: not applicable. data availability statement: the data presented in this study are available on request from the corresponding author. the data are also publicly available on the bank of guyana website [https://bankofguyana.org.gy/bog/publications/prudential-ratios]. 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(2008). camels and banks performance evaluation: the way forward. http://dx.doi.org/10.2139/ssrn.1150968 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by cribfb is licensed under a creative commons attribution 4.0 international license. http://dx.doi.org/10.2139/ssrn.1150968 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ indian journal of finance and banking 15(1) (2025), 1-9 1 finance and banking ijfb vol 15 no 1 (2025) p-issn 2574-6081 e-issn 2574-609x journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by american finance & banking society, usa shift from bank deposits to investments in india: implications for banking stability rukmini mundhara (a)1 (a) student, department of commerce, st. joseph’s college of commerce (autonomous), bangalore, india; e-mail: rukminiimundhara@gmail.com a r t i c l e i n f o article history: received: 15th march 2025 reviewed & revised: 15th march to 10th july 2025 accepted: 15th july 2025 published: 18th july 2025 keywords: financial behaviour, investments preferences, bank liquidity, financial literacy, fintech platforms, india, household savings, monetary policy, digital finance, banking jel classification codes: g21, g41, e44 peer-review model: external peer review was done through double-blind method. a b s t r a c t over the last twenty years, the financial landscape of indian households has undergone a significant transformation, characterized by a decline in dependence on traditional bank deposits and an increasing preference for market-oriented investment options. this shift reflects broader changes in financial behavior driven by macroeconomic factors, shifting consumer preferences, and advancements in financial technology. this study aims to explore the transition from traditional bank deposits to alternative investment opportunities in india and assess their impact on the liquidity and stability of the banking sector. by examining long-term trends, the research considers the determinants of this shift, including gdp growth, inflation, interest rates, financial literacy, and engagement with digital platforms. a mixed-methods approach is utilized, integrating quantitative analysis of secondary data sourced from the reserve bank of india (rbi), amfi, and leading commercial banks, alongside qualitative insights drawn from existing literature and publicly accessible datasets. analytical tools such as regression analysis, correlation metrics, and pivot tables are employed to investigate the relationships among macroeconomic indicators, deposit behaviors, and investment trends. the findings indicate a strong positive correlation between gdp and both deposits and investments. in contrast, financial literacy and digital engagement exhibit a significant inverse relationship with deposit preferences and a direct correlation with investment decisions. additionally, regression analysis reveals that factors beyond traditional interest rates and banking metrics are increasingly influencing the growth of investments. these results highlight the evolving dynamics of household financial behavior in india and their long-term implications for deposit mobilization and the operational frameworks of commercial banks. © 2025 by the authors. licensee american 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 over the last twenty years, india's financial landscape has undergone a remarkable evolution. a key development has been the steady transition of household savings from conventional bank deposits to market-oriented investment options, including mutual funds, stocks, and digital savings solutions. previously, fixed and recurring deposits were the primary choice for indian households due to their perceived security, reliable returns, and broad availability. however, current trends indicate a shift in consumer preferences towards investment vehicles that provide greater returns, adaptability, and diversification. this developing trend cannot be attributed to a singular cause. instead, it is shaped by a confluence of structural, economic, and technological influences that have driven this shift in behavior. macroeconomic factors, such as a prolonged decrease in real deposit interest rates and increasing inflationary pressures, have diminished the actual returns on standard savings vehicles, particularly affecting urban middle-income groups. concurrently, india's gdp has experienced significant growth, broadening the pool of financially engaged individuals (world bank, 2023; reserve bank of india, 2023b). the rising desire for wealth accumulation and strategic financial planning has prompted a growing number of individuals — especially younger, tech-savvy populations — to seek alternatives to conventional deposit accounts (kamath, shenoy, & subrahmanya, 2022; gaurav, ray, & pradhan, 2023). technological and informational transformations are equally significant, as they have broadened the accessibility and attractiveness of investment opportunities. the rise of fintech platforms has been crucial in closing the accessibility gap for novice investors. applications like zerodha, groww, and paytm money have streamlined investment processes, eliminated conventional barriers to entry, and offered instantaneous financial data. concurrently, financial influencers on social media, government-supported financial literacy initiatives, and algorithm-based advisory tools have further promoted public comprehension of diversified investment portfolios (chouhan et al., 2023; lakhotia, 2023). these digital platforms have not only heightened awareness but also bolstered investor confidence, fostering a new generation of retail investors 1corresponding author: orcid id: 0009-0009-4682-3989 © 2025 by the authors. hosting by american finance & banking society. peer review under the responsibility of the american finance & banking society, usa. https://doi.org/10.46281/sda7c887 to cite this article: mundhara, r. (2025). shift from bank deposits to investments in india: implications for banking stability. indian journal of finance and banking, 15(1), 1-9. https://doi.org/10.46281/sda7c887 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/sda7c887 https://orcid.org/0009-0009-4682-3989 mundhara, indian journal of finance and banking 15(1) (2025), 1-9 2 whose decisions are influenced by peer feedback and real-time interaction with digital resources. nonetheless, this swift transition has prompted significant inquiries about the enduring effects on the indian banking industry. historically, commercial banks in india have relied on consistent household deposits to finance their lending operations and maintain adequate liquidity reserves. a prolonged decrease in deposit growth poses a risk to this framework. it could impair banks' capacity to provide credit to essential sectors such as infrastructure, micro, small, and medium enterprises (msmes), and housing (kantharia & biradar, 2022). simultaneously, regulatory structures are still evolving in response to the rapid changes, which present both avenues for innovation and possible systemic risks. this research addresses the scientific issue of the incomplete understanding of the interplay between macroeconomic factors, financial technology, and consumer psychology in shaping household financial choices, particularly the reduction in traditional bank deposits. although previous studies have focused on individual elements such as interest rate responsiveness (yadav & kishore, 2017) or the impact of fintech (chouhan et al., 2023), there is a notable absence of comprehensive research that synthesizes economic, behavioral, and technological aspects. this study aims to investigate the degree, reasons, and implications of the transition from bank deposits to market-oriented investments in india. utilizing a mixed-methods framework that combines macroeconomic evaluation with behavioral insights, this research enhances the existing literature on consumer finance and the sustainability of banking in developing economies. the paper commences with a comprehensive literature review that integrates contemporary research on deposit dynamics, investment patterns, and the impact of financial digitization, concluding with the identification of research gaps and the formulation of hypotheses. the materials and methods section outlines the datasets, variables, and statistical methodologies used. the results section articulates empirical outcomes derived from regression and correlation analyses. the discussion interprets these results within the framework of macroeconomic trends and the prevailing literature. ultimately, the conclusion summarizes essential insights, implications for financial institutions and policymakers, and suggests avenues for future research. literature review the changing dynamics of financial behavior, particularly the shift from conventional bank deposits to more diverse investment options, have garnered significant attention in academic research. numerous studies have investigated this shift, both directly and indirectly, emphasizing both macroeconomic factors and behavioral aspects that affect deposit patterns and the stability of the banking sector. the evolving dynamics of household savings in india have garnered significant scholarly interest over the last twenty years. traditionally, bank deposits were the cornerstone of household savings due to their perceived security, ease of use, and availability (mohan, 2005). nevertheless, a noticeable shift is occurring as consumer preferences increasingly lean towards investment-oriented financial products such as mutual funds, stocks, and digital savings platforms. sinha and sharma (2016) noted a transformation within the indian banking landscape from income models reliant on deposits to a broader array of revenue sources, while sathye (2003) pointed out the disparities in efficiency among various banking sectors that influenced consumer engagement with financial institutions. although these foundational studies remain pertinent, they were conducted prior to the fintech revolution and the surge in investment activities that followed in 2016, highlighting the need for a modern reassessment. recent macroeconomic studies further elucidate the impact of external factors on behavioral changes in financial practices. yadav and kishore (2017) demonstrated that fluctuations in inflation, gdp growth, and interest rate volatility have a substantial influence on deposit behaviors. in a similar vein, singh and sharma (2016) observed that deposit volumes are highly responsive to factors such as trust in banking institutions, liquidity conditions, and inflation expectations. following the demonetization initiative, murarichaturvedi and metha (2019) noted a significant increase in alternative investment avenues, including mutual funds, systematic investment plans (sips), and various smaller savings instruments, indicating a more profound reallocation of household financial resources. these findings are consistent with global patterns. lin (2020) reported that, in the context of the united states, there was a rise in deposit withdrawals during periods of market optimism, illustrating how positive economic sentiment can influence investment choices even in the face of elevated interest rates. recent geopolitical events have significantly influenced financial decision-making processes in india. for example, the rise in tensions between india and pakistan in april 2025, following the pahalgam incident, resulted in short-term market fluctuations and a marked increase in investments in gold and debt instruments. such occurrences serve as external shocks that affect investor risk tolerance, often resulting in temporary exits from equity markets and a heightened interest in more secure financial options, such as fixed deposits and government bonds. nevertheless, the rapid rebound of the indian stock market after a diplomatic easing demonstrates the increasing sophistication and resilience of indian retail investors, who are more inclined to adopt rebalancing strategies in response to these events rather than succumbing to panic (reuters, 2025). these changes in behavior underscore the importance of incorporating geopolitical risks into analyses of household financial preferences, particularly in emerging markets such as india. the rapid evolution of technology has significantly influenced these transformations. daneshvar and ramesh (2012) identified a positive relationship between the adoption of information technology and the growth of deposits in earlier periods. however, contemporary studies indicate that fintech platforms are increasingly reallocating funds from traditional deposits to digital investment avenues. chouhan et al. (2023) illustrated that fintech ecosystems, especially peer-to-peer lending and algorithm-based investing, are starting to supplant conventional banking offerings. kamath, shenoy, and subrahmanya (2022) associated the increase in retail investors with social media sentiment and digital engagement, while surana (2021) reported a substantial surge in ipo subscriptions following the covid-19 pandemic, particularly among mundhara, indian journal of finance and banking 15(1) (2025), 1-9 3 novice investors using applications. these findings highlight a rising familiarity among retail investors with digital instruments and market fluctuations, thereby redefining the conventional distinctions between saving and investing. financial literacy is pivotal in driving this transformation. the national strategy for financial education (2020– 2025), established by the national centre for financial education, emphasizes the importance of organized awareness initiatives to bridge and reduce urban-rural and gender disparities in financial engagement. research by gaurav, ray, and pradhan (2023) indicates a strong correlation between heightened financial awareness and increased investment activities among salaried individuals. additionally, murarichaturvedi and metha (2019) noted that consumers with enhanced financial knowledge tend to maintain more diversified investment portfolios and exhibit reduced dependence on bank deposits. concurrently, the influence of social media on financial literacy is becoming increasingly apparent. the rapid proliferation of finance-related content on platforms such as youtube and instagram has distinctly affected the investment behaviors of urban millennials and gen z users. this trend is particularly significant, considering that over 120 million indians under the age of 35 are actively consuming financial content (kamath, shenoy, & subrahmanya, 2022). demographic elements further enhance this shift in behavior. the emergence of a digitally savvy youth population, coupled with rising urbanization and changes in household income levels, has facilitated more risk-acceptant financial decisions. data from the reserve bank of india (2023a) and amfi (2023) reveal a consistent decline in the growth rate of household deposits, alongside a significant increase in sip registrations and mutual fund assets under management. government initiatives, such as the 'mutual funds sahi hai' campaign and digital financial inclusion efforts, have supported this trend. the introduction of the financial inclusion index (fi-index) (reserve bank of india, 2023c) and sebi's initiatives to lower entry barriers in capital markets — including the promotion of ₹250 sips (reuters, 2025) — have rendered investment markets more accessible to a broader demographic, particularly individuals from tier 2 and 3 cities. despite the extensive body of research, notable deficiencies remain. a considerable portion of the current literature examines deposit behavior, investment patterns, or the adoption of fintech in isolation. there is a scarcity of comprehensive analyses that integrate macroeconomic, technological, and psychological factors to expose the ongoing structural decline in deposits. additionally, while digital finance and fintech are often studied from the standpoint of consumer adoption, their broader macroeconomic consequences — particularly regarding credit intermediation, deposit mobilization, and systemic stability — are insufficiently explored. as banks continue to depend on household deposits for their funding, a reduction in deposit inflows could jeopardize credit availability and liquidity strength, particularly in the context of post-pandemic recovery. this analysis provides a foundation for an in-depth examination of the interplay between macroeconomic indicators, technological innovations, and shifting consumer preferences, which collectively shape household financial behavior in india. by integrating these aspects, the present study fills a significant gap in the existing literature and enhances our understanding of the financial system's evolution in one of the largest emerging markets globally. materials and methods this research employs a mixed-methods framework, combining quantitative trend analysis with qualitative content synthesis to explore the transition from conventional bank deposits to alternative investment vehicles in india. the investigation relies solely on secondary data gathered from reputable and publicly accessible sources spanning the years 2003 to 2023. principal sources encompass the reserve bank of india (rbi), the association of mutual funds in india (amfi), annual reports from prominent banks such as hdfc bank, icici bank, and state bank of india, as well as macroeconomic databases provided by the world bank, trading economics, and the economic survey of india. data sources and variables quantitative data encompasses yearly figures related to household deposits, mutual fund investments, interest rates, inflation rates, and gdp. these figures were organized into time series datasets spanning 20 years (2003–2023). the primary trend variables were derived from the reserve bank of india's database on the indian economy and the association of mutual funds in india's mutual fund inflows. furthermore, proxy data from the national sample survey office, the national financial education council, and pertinent academic literature (murarichaturvedi & metha, 2019; kamath, shenoy, & subrahmanya, 2022) were utilized to incorporate social media penetration, financial literacy indices, and the growth of digital investment platforms. the key independent variables considered in this analysis include gdp (measured in inr trillion) as an indicator of macroeconomic growth, inflation (expressed as a percentage based on the consumer price index), and the average interest rate on term deposits. additionally, the study incorporates financial literacy rates, disaggregated by rural and urban demographics, to capture differences in financial knowledge and awareness across regions. digital engagement, measured by the usage of social media and investment platforms, is also included to reflect the growing influence of technology in financial decision-making. the dependent variables examined are the volume of household bank deposits (in inr crore) and the volume of investments in mutual funds and equities (in inr crore), representing the key channels through which households allocate their financial assets. this framework facilitates an examination of how macroeconomic factors, financial literacy, and digital adoption influence household savings and investment behaviors. methodological design the quantitative component of the study involves several analytical approaches. first, trend analysis is conducted to identify historical patterns and movements in household deposit and investment behavior over time. this is complemented by linear regression models, built using microsoft excel, which are employed to test the relationships between household deposits, mundhara, indian journal of finance and banking 15(1) (2025), 1-9 4 investments, and various macroeconomic variables. additionally, correlation analysis is used to assess the strength and direction of associations among different financial behavior indicators and macroeconomic factors. together, these quantitative methods provide a comprehensive understanding of the interplay between macroeconomic conditions and household financial decisions. the qualitative analysis is based on a comprehensive literature review that encompasses more than 50 sources, including peer-reviewed journal articles, government policy documents, and white papers. this review aimed to contextualize the findings, identify behavioral changes, and assess the impact of institutional factors, including fintech disruptions and regulatory frameworks. reports from the government, including the financial inclusion index and nsfe 2020–25 (national centre for financial education, 2020), were utilized to elucidate the qualitative factors driving behavioral change. analytical tools and software microsoft excel served as the primary tool for data cleansing, creating charts, regression analysis, and developing correlation matrices. a variety of visual representations, including pivot tables, scatter plots, and time series graphs, were employed to illustrate the results. the journal's guidelines restricted the number of chart outputs to fewer than 20 tables and figures. results this study utilizes a dataset spanning two decades (2003–2023) to assess the shifts in fund allocation among indian households between conventional deposits and various investment options. the results are illustrated through regression analyses, correlation matrices, and a collection of figures and pivot tables generated in microsoft excel. figure 1. linear trend comparison between deposits and investments over the past 20 years a comparative analysis of linear growth trajectories throughout this timeframe reveals that bank deposits experienced a more pronounced increase in the initial years, underscoring their status as the preferred savings mechanism for households. however, from the fiscal year 2015–16 onwards, the investment trajectory has shown a marked acceleration, indicating a shift in behavior towards financial products linked to market performance. this pivotal change is effectively depicted in figure 1, which shows the linear trend lines for cumulative volumes of deposits and investments. figure 2. annual growth rates of deposits and investments, highlighting periods of divergence during economic fluctuations the significant rise in the investment trajectory starting from fiscal year 2015–16 signifies a critical juncture. this trend is further illustrated in figure 2, which depicts the annual growth rates of both financial instruments. prior to fiscal year 2007–08, deposits and investments exhibited similar growth patterns, reflecting a stable savings approach. however, following 2008, investments started to surpass deposits amid economic volatility. -500000 0 500000 1000000 1500000 linear trend analysis deposits (₹ crore) investments (₹ crore) linear (deposits (₹ crore)) linear (investments (₹ crore)) -500000 0 500000 1000000 1500000 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 2 0 0 9 -1 0 2 0 1 0 -1 1 2 0 1 1 -1 2 2 0 1 2 -1 3 2 0 1 3 -1 4 2 0 1 4 -1 5 2 0 1 5 -1 6 2 0 1 6 -1 7 2 0 1 7 -1 8 2 0 1 8 -1 9 2 0 1 9 -2 0 2 0 2 0 -2 1 2 0 2 1 -2 2 2 0 2 2 -2 3 bar graph showing data for past two decades deposits (₹ crore) investments (₹ crore) mundhara, indian journal of finance and banking 15(1) (2025), 1-9 5 figure 3. cumulative deposits and investments showing overlap until 2007 08, followed by a consistent rise in cumulative investments surpassing deposits by 2016 – 17 figure 3 illustrates the progression of cumulative totals, highlighting the pivotal crossover that occurred in the fiscal year 2016–17, when cumulative investments surpassed cumulative deposits. this event marks a significant transformation in the financial habits of households. the results of the regression and correlation analysis are detailed below. a straightforward linear regression analysis was performed to assess the impact of bank deposits on household investments in india over the two-decade period from 2003 to 2023. the correlation matrix offers valuable insights into the interconnections among deposits, investments, and significant macroeconomic variables. table 1. regression output: effect of deposits on investments (2003–2023) model component coefficient standard error t-stat p-value intercept –30,470.90 0.350 deposits (x var 1) 0.176 0.002 model summary statistic value multiple r 0.646 r square 0.417 adjusted r square 0.385 f statistic 12.89 significance f 0.002 table 2. correlation matrix: deposits, investments, and macroeconomic indicators variable gdp inflation interest rate deposits 0.866 0.010 -0.317 investments 0.799 -0.428 -0.426 deposits exhibit a significant positive correlation with gdp, a minimal relationship with inflation, and a moderate inverse relationship with interest rates. similarly, investments align positively with gdp but exhibit an inverse sensitivity to both inflation and interest rates. pivot tables were developed to examine behavioral data related to financial literacy and savings/investment preferences from 2008 to 2023. table 3 illustrates the percentage increase in financial literacy among both rural and urban households. tables 4 and 5 outline the trends in deposit and investment preferences, respectively. table 3. urban vs. rural financial literacy percentage (pivot table) average of financial literacy (%) column labels row labels 2008 2010 2015 2017 2020 2022 2023 grand total rural 30.00% 35.00% 45.00% 50.00% 55.00% 60.00% 65.00% 48.57% urban 20.00% 25.00% 30.00% 35.00% 45.00% 50.00% 55.00% 37.14% grand total 25.00% 30.00% 37.50% 42.50% 50.00% 55.00% 60.00% 42.86% 0 2000000 4000000 6000000 8000000 10000000 12000000 14000000 2 0 0 3 -0 4 2 0 0 4 -0 5 2 0 0 5 -0 6 2 0 0 6 -0 7 2 0 0 7 -0 8 2 0 0 8 -0 9 2 0 0 9 -1 0 2 0 1 0 -1 1 2 0 1 1 -1 2 2 0 1 2 -1 3 2 0 1 3 -1 4 2 0 1 4 -1 5 2 0 1 5 -1 6 2 0 1 6 -1 7 2 0 1 7 -1 8 2 0 1 8 -1 9 2 0 1 9 -2 0 2 0 2 0 -2 1 2 0 2 1 -2 2 2 0 2 2 -2 3 compound line graph cumulative investments (₹ crore) cumulative deposits (₹ crore) mundhara, indian journal of finance and banking 15(1) (2025), 1-9 6 table 4. urban vs. rural savings preference (pivot table) average of savings preference (deposits) column labels row labels 2008 2010 2015 2017 2020 2022 2023 grand total rural 60.00% 58.00% 55.00% 53.00% 50.00% 47.00% 45.00% 52.57% urban 65.00% 62.00% 60.00% 58.00% 55.00% 52.00% 50.00% 57.43% grand total 62.50% 60.00% 57.50% 55.50% 52.50% 49.50% 47.50% 55.00% table 5. urban vs. rural investments preference (pivot table) average of investments preference (equities/mutual funds) column labels row labels 2008 2010 2015 2017 2020 2022 2023 grand total rural 40.00% 42.00% 45.00% 47.00% 50.00% 53.00% 55.00% 47.43% urban 35.00% 38.00% 40.00% 42.00% 45.00% 48.00% 50.00% 42.57% grand total 37.50% 40.00% 42.50% 44.50% 47.50% 50.50% 52.50% 45.00% the correlation analysis reveals a strong inverse relationship between financial literacy and household deposits, with a correlation coefficient of –0.9947. this suggests that as financial literacy increases, the volume of household deposits tends to decrease significantly. conversely, there is a strong positive correlation between financial literacy and investments, with a coefficient of +0.9947, indicating that higher levels of financial literacy are closely associated with greater volumes of mutual fund and equity investments. these findings highlight the pivotal role of financial literacy in influencing household financial behavior, particularly in shifting preferences from traditional savings towards more diversified investment options. the evidence indicates that as financial literacy has improved, there has been a decrease in the preference for deposits, accompanied by an increase in investment activities. figure 4. trends in social media engagement and investment. figure 5. trends in social media engagement and investment participation through online platforms, illustrating the role participation through online platforms, illustrating the role of digital platforms in influencing savings in india, and of digital platforms in influencing investments in india additionally, figures 4 and 5 illustrate the influence of digital platforms on this behavioral shift. figure 4 illustrates the relationship between increased social media interaction and the expansion of fintech platforms, which corresponds with a decrease in deposit preferences. meanwhile, figure 5 highlights the significant correlation between investment choices and digital engagement. over two decades, the preference for investment rose significantly from 50% to 95%, whereas the preference for deposits experienced a substantial decrease from 50% to 5%. concurrently, engagement with social media and access to fintech services exhibited similar growth, escalating from less than 5% in 2008 to more than 65% by 2023. 2000 2005 2010 2015 2020 2025 0% 10% 20% 30% 40% 50% 60% 70% 80% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 impact of key variables on saving preferences (2008–2023) social media engagement with investment content (%) growth in online investment platforms (%) age group (18-35) engaged (%) preference (deposits) year 0% 50% 100% 2000 2010 2020 2030 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 impact of key variables on investment preferences (2008– 2023) year social media engagement with investment content (%) growth in online investment platforms (%) age group (18-35) engaged (%) mundhara, indian journal of finance and banking 15(1) (2025), 1-9 7 this study provides evidence of the increase in investment growth compared to deposits in the indian banking sector, driven by factors such as gdp, interest rate fluctuations, financial literacy, and the influence of social media platforms. discussions the results of this research highlight a significant shift in the behavior of indian households, moving away from conventional bank deposits towards market-linked investment alternatives over the last twenty years. this shift is influenced by a combination of economic growth, increased financial literacy, greater access to digital platforms, and shifting attitudes towards risk. the notable rise in investment volumes following the fiscal year 2015–16, as indicated by the data, suggests a new approach to savings that prioritizes long-term returns and liquidity management over mere capital preservation. the findings align with the work of kamath, shenoy, and subrahmanya (2022), who noted that increasing digital engagement and evolving investor sentiment are significant factors driving indian savers towards direct equity investments. in a similar vein, chouhan et al. (2023) highlighted that the rise of fintech platforms has enhanced access to investment opportunities for individuals, especially in tier-ii and tier-iii cities, thereby facilitating a shift away from traditional banking systems. the statistical analysis presented in this study further supports these conclusions, particularly the nearly perfect inverse relationship between financial literacy and the preference for deposits (–0.9947), as well as a strong positive correlation with investment activities (+0.9947). a significant consequence of these trends is the reduced responsiveness of deposits to inflation and interest rates, even in the context of declining real returns. this observation aligns with the arguments presented by sharma and negi (2025), who suggest that deposit inertia in india may be attributed to psychological factors, including habitual behavior, a sense of security, and trust in financial institutions. however, the growing inclination towards investments, particularly among younger, technology-oriented individuals, suggests a diminishing of this inertia, increasingly shaped by mobile investment applications and tailored content on social media. the findings from the regression model indicated a moderate predictive correlation between deposits and investments (r² = 0.417), suggesting that factors beyond the reduction in deposits influence shifts in financial behavior. the low significance of the intercept also indicates that investment activities are becoming increasingly independent of the deposit base. this trend aligns with observations made by lin (2020) in developed markets, such as the united states. furthermore, macroeconomic indicators reveal a strong positive correlation between gdp growth and both deposits (r = 0.866) and investments (r = 0.779), supporting the notion that an increase in national income enhances overall financial participation. conversely, the observed negative correlations between investments and both inflation and interest rates imply that when traditional returns diminish, households are more likely to shift their focus towards equities and mutual funds — a trend that became especially pronounced in the aftermath of the pandemic, as highlighted by surana (2021) and validated by the 20-year trend analysis conducted in this study. the significance of digital platforms and social media is paramount. interaction with investment-related material increased dramatically from 5% to 65% between 2008 and 2023, correlating with a heightened preference for investment. as highlighted by murarichaturvedi and metha (2019), these platforms not only broaden access but also influence perceptions of what is deemed 'intelligent' financial conduct, even among those who have historically favored conservative savings options. collectively, the evidence and relevant literature indicate that indian households are undergoing a significant transformation, moving from traditional, interest-driven saving practices to more proactive wealth creation approaches. this shift not only presents new opportunities for financial inclusion and economic development but also raises critical questions about the future liquidity status of banks, the evolving dynamics of credit intermediation, and the necessary adjustments in public policy to maintain systemic stability in the face of such behavioral fluctuations. conclusions this research aimed to investigate the changing pattern of indian households shifting away from conventional bank deposits towards market-linked investment options, while also assessing the implications for deposit growth and the overall stability of the banking sector. utilizing two decades of secondary data, the study revealed significant evidence of a fundamental change in savings behavior, with investments increasingly surpassing deposits, particularly from the fiscal year 2015–16 onwards. the research indicates that macroeconomic factors, including gdp growth, have a favorable impact on both deposits and investments. conversely, inflation and decreasing interest rates negatively affect the growth of traditional deposits. additionally, the utilization of digital platforms and the level of financial literacy have been identified as crucial behavioral influences, facilitating the transition from deposits to more lucrative investment options. this research integrates macroeconomic data with behavioral insights to offer a comprehensive understanding of a significant shift in india's financial landscape. the findings suggest that banking institutions, which were previously the primary repositories of personal wealth, are now sharing this function with capital markets and digital platforms. this evolution not only mirrors emerging economic conditions but also indicates a developing financial awareness among indian households. grasping the direction of these changes is crucial for predicting forthcoming difficulties in deposit mobilization, liquidity management, and risk management at the household level within an increasingly digital economy. the implications of this study suggest several practical recommendations for stakeholders in the financial sector. first, there is a need to develop integrated financial products that offer both security and growth potential, catering to the mundhara, indian journal of finance and banking 15(1) (2025), 1-9 8 evolving preferences of consumers. comprehensive financial literacy initiatives should be implemented, targeting diverse demographic groups to ensure widespread understanding and participation in financial markets. furthermore, leveraging digital platforms and social media can enhance investor engagement and provide timely, relevant information. it is also crucial to design financial products that align with prevailing macroeconomic trends and indicators. additionally, promoting policy advocacy is recommended to support the development of balanced investment instruments that encourage both savings and investment. however, the study has certain limitations, such as its reliance on secondary data, which restricts the depth of primary insights. the absence of demographic segmentation in the analysis means that variations in consumer behavior across different groups are not fully explored. moreover, the use of static assumptions may overlook sudden economic changes, and the influence of behavioral and psychographic factors remains under-investigated. future research should therefore focus on assessing the impact of hybrid financial instruments on saving behaviors and consider incorporating primary data and broader behavioral dimensions for a more comprehensive understanding. by understanding the evolving preferences of indian consumers and adapting to the dynamic financial landscape, stakeholders can foster more informed investment decisions, promote financial stability, and play a significant role in shaping india's economic future. author contributions: conceptualization, r.m.; methodology, r.m.; software, r.m.; validation, r.m.; formal analysis, r.m.; investigation, r.m.; resources, r.m.; data curation, r.m.; writing – original draft preparation, r.m.; writing – review & editing, r.m.; visualization, r.m.; supervision, r.m.; project administration, r.m.; funding acquisition, r.m. 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: 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. 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(2017). bank deposits in india – econometric analysis of macroeconomic determinants. journal of economics and sustainable development, 8(12), 20–30. retrieved from https://www.iiste.org/journals/index.php/jeds/article/view/37491 publisher’s note: american finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2025 by the authors. licensee american 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/). indian journal of finance and banking (p-issn 2574-6081 e-issn 2574-609x) by american finance & banking society is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.17762/itii.v9i2.353 https://data.worldbank.org/country/india 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/ indian journal of finance and banking 13(1) (2023), 1-11 1 finance and banking ijfb vol 13 no 1 (2023) p-issn 2574-6081 e-issn 2574-609x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/ijfb published by cribfb, usa an empirical study of integrated reporting practices as voluntary disclosures in indian energy companies shivam agnihotri (a)1 pramod kumar (b) kapil harit (c) devdutta bharti (d) (a) assistant professor & research scholar, department of commerce, shaheed bhagat singh college, university of delhi, delhi, dayalbagh educational institute, (deemed university), agra, india; e-mail: cashivamagnihotri@gmail.com (b) professor & head, department of accountancy and law, faculty of commerce, dayalbagh educational institute, (deemed university), agra, india; e-mail: pra19363@gmail.com (c) assistant professor, department of commerce, shaheed bhagat singh college, university of delhi, delhi, india; e-mail: kapilharit2005@gmail.com (d) assistant professor, department of commerce, ramanujan college, university of delhi, delhi, india; e-mail: devdutta26@gmail.com a r t i c l e i n f o article history: received: 18th october 2022 revised: 20th december 2022 accepted: 30th december 2022 published: 18th january 2023 keywords: integrated reporting, voluntary disclosures, sustainability reporting, non-financial reporting, corporate reporting jel classification codes: m41, m48, g38 a b s t r a c t integrated reporting (ir) provides various stakeholders with a wide range of highly informative and analytical value. the literature on ir reflects a positive view towards adopting ir practices, and the security exchange board of india (sebi) suggested that the top 500 listed entities followed ir practices voluntarily in feb 2017. therefore this study examined the trend and disclosure of ir followed by select indian energy companies in a comparative manner sector-wise and operational area-wise from financial year (fy) 2017-18 to 2021-22. the top four electricity and petroleum companies listed on the bombay stock exchange (bse) based on market capitalization have been selected to examine ir practices. a checklist of 21 contents based on the ir framework is constructed to check the level of ir practices in select energy companies. late adoption, lack of proper understanding of the ir framework, and common and different reporting trends were found in six select energy companies. these companies should have reported core values such as connectivity of information, conciseness and, reliability & completeness. ir practices of one company fully complied with the ir framework, and the ir practices of another company reflect a need for more connectivity of information only. petroleum companies disclosed more readable ir practices in one place in the integrated annual report (iar) compared to electricity companies. managerial and policy implications suggested at the end of this study should be adopted and enacted by organizations and regulatory authorities, respectively, for the soundness of ir practices from an indian perspective. © 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 financial information is limited to quantitative and qualitative financial data, which is non-financial and provides detailed information about the organization's outlook. ir offers various stakeholders a wide range of highly informative and analytical value regarding how an organization creates value in the short, medium, and long run (zenkina, 2018). international integrated reporting council (iirc) suggested an ir framework in december 2013 with detailed guidelines regarding how to prepare ir, its fundamental concepts, and what contents should be included in the ir disclosures of an organization. after the introduction of guidelines on ir, a growing number of companies started to follow some contents of ir in indian and global scenarios (morros, 2016; romolini et al., 2017; lohar & soral, 2017; pathiraja & priyadarshanie, 2019). the most adoption of ir is found in the european region's financial sector companies (demirel & erol, 2016). ir practices have been followed as a mark of compulsion in south africa. the ir took the attention of academicians and corporates, and the rest of the world, except south africa, adopted ir practices voluntarily in innovative ways (hossain et al., 2016). formal adoption of ir practices was only possible due to a lack of regulatory framework and guidelines (serafeim, 2016). various literature on ir reflects positive views towards adopting ir practices as its adoption influences 1corresponding author: orcid id: 0000-0003-4223-9960 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/ijfb.v13i1.1899 to cite this article: agnihotri, s., kumar, p., harit, k., & bharti, d. (2023). an empirical study of integrated reporting practices as voluntary disclosures in indian energy companies. indian journal of finance and banking, 13(1), 1-11. https://doi.org/10.46281/ijfb.v13i1.1899 https://orcid.org/0000-0003-4223-9960 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/ijfb.v13i1.1899 https://orcid.org/0000-0002-0221-8500 https://orcid.org/0000-0001-5853-1195 https://orcid.org/0000-0002-7280-1961 agnihotri et al., indian journal of finance and banking 13(1) (2023), 1-11 2 stakeholders' satisfaction level, the value of a firm, market performance, return on equity, leverage level, etc. (nathuramka, 2016; velte, 2021; buallay & hawaj, 2020). sebi, through its circular dated feb 6, 2017, stated that in a recent scenario, an investor needs financial and non-financial information to contemplate his investment decision-making. therefore, ir may be followed voluntarily by the top 500 indian listed companies from fy 2017-18 (sebi, 2017). various stakeholders faced problems with conciseness and summarising the relevant information prior to the ir concept due to the presentation of non-financial information in an unorganized way, as every annual report (ar) of an organization has much information comprising 300 to 500 pages (basu & wats, 2015). it is pertinent to mention that sebi followed the ir framework suggested by iirc and did not provide any particular guidelines in the indian scenario (sebi, 2017). it is a matter of investigation whether the top 500 indian listed companies followed ir practices or not, as sebi stated to follow ir practices voluntarily. companies operating in developing countries need to be faster to adopt ir practices due to a lack of resources, culture and leadership, demand of stakeholders, awareness, no regulatory requirement, and different nature and size of business (bananuka et al., 2019). only a few studies have been conducted to examine non-financial reporting and ir practices in the indian scenario, and these few studies and data extracted as a primary source on ir from various indian stakeholders indicated positive views towards ir practices (chakrabarty, 2011) because they think that ir practices may be capable to bridging the reporting gap. sebi has provided an opportunity to follow ir practices voluntarily listed entities (bhutani & tyagi, 2017). the ir disclosure practices level in indian listed companies increased over a while without any formal requirement (kumawat et al., 2020). however, most companies still need to provide information related to business models and strategies as per the ir framework (ghosh, 2019). kiran and karunasri (2017) suggested improving the reporting on crucial issues of ir disclosures, such as materiality, capital, and outlook by indian companies. it is concluded from a global perspective that energy sector companies must establish a link between business models, risks and opportunities, strategy, and performance. however, it provides more qualitative ir information than nonenergy sector companies (piesiewicz et al., 2021). the beforementioned arguments have developed the curiosity to examine the status of ir practices in indian energy companies and compare them. iona and adriana (2014) suggested that ir is an emerging phenomenon that is at its early stage, so there is a need to conduct empirical studies comparatively to develop a broader knowledge base for ir. therefore, eight indian energy companies, comprising four electricity generation companies and four petroleum companies, have been selected to conduct an empirical study of ir practices. these eight energy companies comprise four public and four private sector companies. the study is conducted with the following specific objectives.  to examine ir practices as voluntary disclosures in select indian energy companies.  to make a comparative analysis of ir practices between select private and public sector energy companies.  to make a comparative analysis of ir practices between select electricity generation companies and petroleum companies. literature review the selected literature is subdivided into four parts, namely literature related to the need and theoretical foundation of ir, stakeholders' perception of ir, empirical studies of ir on energy companies, and empirical studies of ir on other than energy companies. need and theoretical foundation of ir the ir surrounds by the legitimacy theory for stakeholder satisfaction (ara & harani, 2020). to establish a sound knowledge base for ir, the accounting syllabus should be more strategic, prospective, and broader instead of operational or transitional by incorporating more topics related to financial and non-financial information in a strategic manner, so by education and training accountants will be able to play a strategic role in twenty-first century's environment (owen, 2013). the organization's top management should implement ir practices in its business strategies and care about the opportunity cost and environmental, social, and governance issues associated with ir (soriya & rastogi, 2021). the ir practices should be promoted so they will not be influenced by political, cultural, and economic factors (iona & adriana, 2013). the regulators must take a step toward mandatory ir disclosures by introducing biodiversity-related guidelines as reporting part (hassan et al., 2021), and government should also adopt ir in government-linked companies (singh et al., 2019). (garciasanchez et al., 2020) suggested disclosing the internal pandemic prevention and action strategy so that the pandemic would not adversely affect the organization's performance. bal (2018) stated that there is a need for hours to work on ir, like a movement or mission, to comply with the best international reporting practices in the indian scenario. she further stated that there is a need to develop audit and assurance practices for ir. there needs to be more methodological, accounting, and analytical support for preparing ir; therefore, it is necessary to make quality standards to meet modern reporting requirements (akhmentshin et al., 2018). the lack of nonfinancial information leads to difficulty for external analysts, and it also becomes complex to quantify the non-financial information for decision-making purposes. therefore, ir with enterprise performance management could be helpful by providing a comprehensive overview of risk and opportunities from an economic perspective and may be considered potential to make changes in corporate reporting (basu & wats, 2015). it is suggested (nathuramka, 2016) that all types of business entities should adopt ir as a value creation tool, like south africa, on an 'apply or explain' basis without waiting for any legal compliance regulation. he further suggested that ir provides an excellent opportunity for finance professionals to show themselves as value providers instead of compliance maker with appreciation and adoption of ir voluntarily in business entities. there is no doubt that ir is an essential step in corporate reporting which creates value for the organization, and the value creation process, as reflected in ir, is helpful to stakeholders for decision-making. however, the benefits of agnihotri et al., indian journal of finance and banking 13(1) (2023), 1-11 3 ir are not limited to stakeholders; instead also beneficial to the organization for better resource allocation, good governance, and creating brand value (bhutani & tyagi, 2017). camilleri (2019) stated that the scope of ir is not limited to a summary of financial, social, and sustainability-related information; instead, it constitutes the overall picture of a company's performance. the implementation of ir and improvement in audit quality (internal audit as well as external/statutory audit) move simultaneously in the same direction. besides this, the reliance level of the firm on ir also enhanced the audit quality (nashar, 2016). stakeholders' perception f ir, 93.9% of accounting educators agree that ir has a significant difference in opportunities and benefits compared to its challenges and disadvantages (elizabeth et al., 2021). investors and analysts accepted the relevance of non-financial reporting in germany and stated that ir ultimately transform into financial impact and they also want to know more about strategies, business model, and market trend (tilley & kirchhoff, 2020). 73% of stakeholders suggested that ir should be prepared voluntarily, and 23% of respondents desired mandatory ir practices in turkey. they further suggested enhancing the awareness of ir among various stakeholders, especially institutional investors, because institutional investors are the primary users of reports for investment decision-making purposes (aras et al., 2019). a high level of interest and low level of awareness regarding ir was found among all respondents (adhariani & villiers, 2018), and they suggested that preparers of corporate reports can see the benefits of ir but hesitate to implement it. abhishek et al. (2020) concluded that ir positively impacts the indian perspective. among all respondents, accountants and auditors have more awareness about ir than academicians, as their awareness level is 85.92% and 74.64%, respectively. ashok (2019) concluded that challenges are faced by regulatory authorities, companies, and xbrl software developers in promoting ir through xbrl. 90% of respondents agreed that ir would improve boards' understanding of value creation and help to develop a better relationship with external stakeholders. 83% of respondents believed that ir will help to understand the risk and opportunities, and 87% of respondents believed that ir is a tool to integrate financial reports with non-financial reports (bombay chamber of commerce, 2018). empirical studies of ir in power sector companies piesiewicz et al. (2021) revealed that energy sector companies provide more qualitative ir disclosures than non-energy sector companies. the major problem of ir practices is establishing a link between business models and strategies, risks, opportunities, and performance. yildirim et al. (2017) examined the ir practices of energy companies in turkey. they suggested that as there is no audit mechanism for ir in europe and the united states, regulators should establish regulations for the audit of ir, and auditors should also conduct an audit of non-financial information available in ir. they further concluded that ir helps transform society; therefore, business entities must follow ir practices. empirical studies of ir in other than power sector companies songini et al. (2021) examined the relationship between ir quality and board of directors (bod) composition. they revealed that low ir quality is found where more females are part of bod, and high ir quality is found where more educated persons are part of bod. it is suggested that diversity in bod, instead of the diversity of bod, requires improving the quality of ir. roman et al. (2019) stated that companies with higher revenue presented more balanced ir, and younger companies presented their reports in an optimistic tone. it is shocking but pertinent to mention that companies in countries with high transparency tendencies provided low readable ir. it is further stated that ifrs adopter and non-environmental area-based companies provide less readable ir. the financial performance and risk decreased after the introduction of ir, and institutional investors' shareholding and environmental, social, and governance scores in select entities increased after the introduction of ir (conway, 2019). the companies report their capital in increase, decrease, and transformative form over a while and follow ir practices just for showcase purposes. it is concluded that ir practices are followed in an unimproved manner (ahmed & hossain, 2016). zuniga et al. (2020) concluded that ir provides quality information to the capital market, and the quality of ir practices is associated with market liquidity. kumawat et al. (2020) revealed that the level of ir disclosures in the top 50 listed companies in india increased and companies provided more information as compared to previous ars. due to voluntary adoption and no mandatory requirement, only 19 companies out of 50 adopted ir practices as per the ir framework. dave (2019) found deficient reporting on social and relational capital and concluded that ir is at its earlier stage; therefore not able to create value initially but has the efficiency to reflect the company's business and potential to its stakeholders. barin and ansari (2016) found a discrepancy in ir disclosures of select indian petroleum companies due to no mandatory requirement of ir. they established no relationship between ir disclosures and return on assets and return on equity. they suggested that although the ir disclosure practices in india are voluntary, the government should promote ir practices which leads to the best way of conveying information to stakeholders. material and methods sample size and selection criteria a total of eight indian energy companies, out of which four electricity generation and four petroleum companies listed in bse based on free-float market capitalization as of 15th sept 2022, have been selected for study purposes. the selected companies comprised four public-sector and four private-sector energy companies. two of the four public sector companies are electricity generation and two are petroleum companies. the same is true of four private companies: electricity generation and petroleum companies. the researcher took only eight companies as a sample for study purposes because an agnihotri et al., indian journal of finance and banking 13(1) (2023), 1-11 4 in-depth investigation is required to examine the ir status in indian energy companies. the selected companies and their selection criteria may be understood in table 1. table 1. select energy companies s.no name of company market cap. (crores) sector ownership 1. national thermal power corporation (ntpc) 1,59,995 electricity public 2. power grid corporation ltd (pgcl) 1,48,263 electricity public 3. adani transmission ltd (adani trans) 3,38,708 electricity private 4. adani green energy ltd (adani green) 3,22,113 electricity private 5. oil and natural gas corporation ltd (ongc) 1,60,524 petroleum public 6. indian oil corporation ltd (iocl) 93,694 petroleum public 7. reliance industries ltd (reliance) 16,04,217 petroleum private 8. adani total gas ltd (adani gas) 3,36,932 petroleum private source: author’s compilation based on selection criteria data collection & research method the period of five fys, 2017-18, 2018-19, 2019-20, 2020-21, and 2021-22 have been considered for study purposes. as suggested by iirc, sebi circulars on ir and ir framework have been collected from respective organizations' websites. the ars or iars of select indian energy companies have been collected from the respective company's website. content disclosure index by using a checklist is followed to check the adoption level of ir in select indian energy companies as it is recommended by (iona & adriana, 2014; romolini et al., 2017), and the same was adopted by (kaya & utku, 2020; sofian & dumitru, 2019; bal & bal, 2019; ghosh, 2019; dave, 2019; kiran & karunasri, 2017; mauro et al., 2020; cooray et al., 2020; hassan et al., 2019; nistor et al., 2019; pathiraja & priyadarshinie, 2019; nakib & dey, 2018; toit et al., 2017). results and discussions after understanding the ir framework and examination of ars of select energy companies from fy 2017-18 to 2021-22, () is assigned; when a company adopted ir practices but did not disclose particular content of ir, () is assigned, when the company adopted ir practices and disclosed particular content of ir and (—) is assigned when a company did not adopt ir practices. a checklist of 21 contents based on the ir framework has been developed to check the ir adoption level in select energy companies. ir disclosure practices of public sector electricity companies ntpc did not adopt ir practices in fy 2017-18 and 2018-19. ntpc presented most ir disclosures under the sustainability reporting heading of iar in fy 2019-20. as per table 2, ntpc reported 17 contents out of 21, which is 81%, from fy 2019-20 to 2021-22 by introducing subheadings such as stakeholders and materiality assessment, risk management, value creation model, disclosure on six capitals, and independent assurance on sustainability disclosures. out of 17 contents, ntpc reported some contents of ir, such as stakeholders' relationship and organization overview, etc., at different places of iar. ntpc disclosed six capitals as required by the ir framework in a detailed and understandable manner and also disclosed the business model in such a way, which reflects about value creation process to various stakeholders. ntpc did not improve the ir practices from its first adoption in fy 2019-20 to 2021-22, as it scored 17 in all fys. pgcl started to follow ir practices as and when suggested by sebi in fy 2017-18 and consistently followed them till fy 2021-22. as per table 2, pgcl reported 11 contents out of 21, which is 52% in fy 2017-18, 2018-19, and 2019-20, 12 contents in fy 2020-21, and 13 contents in fy 2021-22. pgcl followed ir practices for formality purposes in fy 2017-18, 2018-19, and 2019-20 because pgcl added two pages in ar by the name of ir and showed six capitals in quantitative figures, and balanced five contents found at different places of ar in an unorganized way. pgcl improved its ir practices in fy 2020-21 by providing outlook information and in fy 2021-22 by providing detailed information related to value creation for various stakeholders. however, till fy 2021-22, pgcl kept the name of ar the same as iar. key disclosures like materiality, business model, and risks and opportunities are the most important core content of the ir framework but did not disclose by pgcl. table 2. ir practices of public sector electricity generation companies s. no. content elements of ir ntpc ltd pgc ltd fy18 fy19 fy20 fy21 fy22 fy18 fy19 fy20 fy21 fy22 1 stakeholders relationship — —         2 materiality assessment — —         3 risk and opportunities — —         4 connectivity of information — —         5 value creation — —         6 financial capital — —         agnihotri et al., indian journal of finance and banking 13(1) (2023), 1-11 5 7 manufacturing capital — —         8 natural capital — —         9 human capital — —         10 social and relationship capital — —         11 intellectual capital — —         12 organizational overview — —         13 governance — —         14 business model — —         15 basis of preparation and presentation — —         16 strategy and resource allocation — —         17 performance — —         18 outlook — —         19 conciseness — —         20 reliability and completeness — —         21 consistency and comparability — —         total (21) — — 16 16 16 11 11 11 12 13 percentage (%) — — 76% 76% 76% 52% 52% 52% 57% 62% source: authors’ compilation based on annual reports or integrated annual reports of respective companies. ir disclosure practices of private sector electricity companies adani trans started to follow ir practices in fy 2018-19 and changed the name of ar to iar. as per table 3, adani trans scored 86% by reporting 18 contents out of 21, consistently in all fys from 2018-19 to 2021-22. it disclosed how six capitals create value for various stakeholders according to the ir framework in a detailed and understandable manner. however, connectivity of information, conciseness and, reliability & completeness are core values of the ir framework, which did not disclose by adani trans. adani green started to follow ir practices in fy 2019-20 and changed the name of ar to iar. as per table 3, adani green also scored 86% by reporting 18 contents out of a total of 21, consistently in all fys from 2019-20 to 202122, and disclosed how six capitals create value for various stakeholders according to ir framework in a detailed and understandable manner. same as adani trans, adani green did not disclose the connectivity of information, conciseness and, reliability & completeness. it is pertinent to mention that both companies, adani trans and adani green, are subsidiaries of the adani group and work in the electricity sector. however, adani trans adopted ir practices in fy 201819, and adani green adopted ir practices in fy 2019-20. table 3. ir practices of private sector electricity generation companies s. no. content elements of ir adani tans ltd adani green ltd fy18 fy19 fy20 fy21 fy22 fy18 fy19 fy20 fy21 fy22 1 stakeholders relationship —     — —    2 materiality assessment —     — —    3 risk and opportunities —     — —    4 connectivity of information —     — —    5 value creation —     — —    6 financial capital —     — —    7 manufacturing capital —     — —    8 natural capital —     — —    9 human capital —     — —    10 social and relationship capital —     — —    11 intellectual capital —     — —    12 organizational overview —     — —    13 governance —     — —    14 business model —     — —    15 basis of preparation and presentation —     — —    16 strategy and resource allocation —     — —    17 performance —     — —    18 outlook —     — —    19 conciseness —     — —    20 reliability and completeness —     — —    21 consistency and comparability —     — —    total — 18 18 18 18 — — 18 18 18 percentage (%) — 86% 86% 86% 86% — — 86% 86% 86% source: authors’ compilation based on annual reports or integrated annual reports of respective companies. ir disclosure practices of public sector petroleum companies ongc started to follow ir practices in fy 2021-22 and changed the name of ar to iar. as per table 4, ongc scored 90% by reporting 19 contents out of 21 as per the ir framework. ongc created a different section in its iar called 'about ir' and presented ir disclosures in one place concisely. ongc addressed important disclosures such as information connectivity, reliability, completeness, conciseness, etc. however, ongc should have disclosed two important contents: business model and outlook. because iirc, in its ir framework, suggested that ir may be presented as a separate report and ongc presented a separate section on ir in its iar, stakeholders may need help understandably accessing ir. iocl started to follow ir practices initially as and when suggested by sebi from fy 2017-18 and changed the name of its ar to iar. as per table 4, iocl scored 100% by reporting all 21 contents per the ir framework. the content agnihotri et al., indian journal of finance and banking 13(1) (2023), 1-11 6 element of ir was disclosed by iocl initially at the beginning of iar in all selected fys in a detailed and understandable manner. iocl disclosed six capitals two times in iar, initially in brief and later in a very detailed manner in all selected fys from 2017-18 to 2021-22. iocl devoted approx. 60 to 65 pages in every selected fy for disclosing the ir contents, therefore reporting on the value creation process and connectivity of information, etc., found appropriate as expected by the ir framework. table 4. ir practices of public sector petroleum companies s. no. content elements of ir ongc ltd iocl ltd fy18 fy19 fy20 fy21 fy22 fy18 fy19 fy20 fy21 fy22 1 stakeholders relationship — — — —       2 materiality assessment — — — —       3 risk and opportunities — — — —       4 connectivity of information — — — —       5 value creation — — — —       6 financial capital — — — —       7 manufacturing capital — — — —       8 natural capital — — — —       9 human capital — — — —       10 social and relationship capital — — — —       11 intellectual capital — — — —       12 organizational overview — — — —       13 governance — — — —       14 business model — — — —       15 basis of preparation and presentation — — — —       16 strategy and resource allocation — — — —       17 performance — — — —       18 outlook — — — —       19 conciseness — — — —       20 reliability and completeness — — — —       21 consistency and comparability — — — —       total — — — — 19 21 21 21 21 21 percentage (%) — — — — 90% 100% 100% 100% 100% 100% source: authors’ compilation based on annual reports or integrated annual reports of respective companies. ir disclosure practices of private sector petroleum companies reliance started to follow ir practices initially as and when suggested by sebi from fy 2017-18 and changed the name of ar to iar. as per table 5, reliance scored 95% by reporting 20 contents out of 21 as per the ir framework in all selected fys from 2017-18 to 2021-22. a lack of connectivity of information is found because reliance disclosed six capitals at one place and other contents at different places in iar. however, reliance disclosed value creation to stakeholders, organizational overview and governance, etc., in a detailed and understandable manner. adani gas started to follow ir practices from fy 2020-21 and changed the name of ar to iar. as per table 5, adani gas scored 81% in both fys 2020-21 and 2021-22 by reporting 17 contents out of 21 as per the ir framework. iar of adani gas found a need for conciseness, reliability, completeness, and information connectivity. however, it is good to see that in both fys, adani gas presented major ir contents in a separate section, namely 'our integrated value creation report' of its iar. this separate section in both fys includes value creation, risk management, strategic priorities, commitments, governance, and corporate social responsibility. table 5. ir practices of private sector petroleum companies s. no. content elements of ir reliance ltd adani gas ltd fy18 fy19 fy20 fy21 fy22 fy18 fy19 fy20 fy21 fy2 2 1 stakeholders relationship      — — —   2 materiality assessment      — — —   3 risk and opportunities      — — —   4 connectivity of information      — — —   5 value creation      — — —   6 financial capital      — — —   7 manufacturing capital      — — —   8 natural capital      — — —   9 human capital      — — —   10 social and relationship capital      — — —   11 intellectual capital      — — —   12 organizational overview      — — —   13 governance      — — —   14 business model      — — —   15 basis of preparation and presentation      — — —   16 strategy and resource allocation      — — —   agnihotri et al., indian journal of finance and banking 13(1) (2023), 1-11 7 17 performance      — — —   18 outlook      — — —   19 conciseness      — — —   20 reliability and completeness      — — —   21 consistency and comparability      — — —   total 20 20 20 20 20 — — — 17 17 percentage (%) 95% 95% 95% 95% 95% — — — 81% 81% source: authors’ compilation based on annual reports or integrated annual reports of respective companies comparative analysis of ir disclosure practices comparative analysis between public and private sector energy companies as per table 6, iocl is the only public sector company among all energy companies, whose ir practices fully complied according to the ir framework. two public sectors and one private sector energy company started to follow ir practices in fy 2017-18. two from the public and three from the private sector followed ir practices in fy 2018-19 and 2019-20, respectively. three companies from the public sector and all four select companies from the private sector followed ir practices in fy 2020-21. all eight select energy companies followed ir practices in fy 2021-22. lack of connectivity of information found in all energy companies except iocl. table 6. ir disclosures of energy companies based on ownership financial year public sector companies private sector companies ntpc pgcl ongc iocl adani trans adani green reliance adani gas 2021-22 16 13 19 21 18 18 20 17 2020-21 16 12 — 21 18 18 20 17 2019-20 16 11 — 21 18 18 20 — 2018-19 — 11 — 21 18 — 20 — 2017-18 — 11 — 21 — — 20 — source: authors' compilation based on tables 2, 3, 4, and 5 of this research paper different levels of ir adoption and disclosures are found in adani trans, adani green, and adani gas, even though all three are subsidiaries of the adani group. all select energy companies disclosed six capitals of the ir framework in one place. all other contents of ir except six capitals are disclosed by all select companies according to their convenience, like under separate sections in iar or at different places of iar. as earlier concluded (havlova, 2015), low reporting trends were found in public sector companies compared to private sector companies. this study also concludes that private-sector energy companies report more than public-sector companies, except for iocl. however, high quick adoption of ir is found in public sector companies. comparative analysis between electricity and petroleum companies iocl is the only petroleum company among all select energy companies whose ir practices comply with the ir framework. two petroleum companies and one electricity company adopted ir in fy 2017-18. two petroleum companies and two electricity companies followed ir practices in fy 2018-19. all electricity companies followed ir practices from fy 201920 to 2021-22; two followed ir practices in fy 2019-20, three in fy 2020-21, and all followed ir practices in fy 202122. petroleum companies presented more quality disclosures of ir as compared to electricity companies. table 7. ir disclosures of electricity and petroleum companies financial year electricity companies petroleum companies ntpc pgcl adani trans adani green ongc iocl reliance adani gas 2021-22 16 13 18 18 19 21 20 17 2020-21 16 12 18 18 — 21 20 17 2019-20 16 11 18 18 — 21 20 — 2018-19 — 11 18 — — 21 20 — 2017-18 — 11 — — — 21 20 — source: authors' compilation based on tables 2, 3, 4, and 5 of this research paper the content elements such as connectivity of information, conciseness, reliability, and & completeness are the core values of the ir framework, which did not reflect in the ir practices of electricity companies. as stated earlier, the ir practices of one petroleum company, iocl, fully complied with the ir framework, and connectivity of information is the main requirement that is only reflected in other petroleum companies except for iocl. petroleum companies disclosed more contents of ir in one place in a separate section of iar; however, many ir contents were disclosed at a different place in iar by almost all electricity companies. in conclusion, more reporting trends are found in petroleum companies compared to electricity companies. conclusions all public and private sector companies should have adopted ir practices as and when suggested by sebi on a voluntary basis. out of the total of eight companies, three adopted ir in fy 2017-18, one other company adopted ir in fy 2018-19, agnihotri et al., indian journal of finance and banking 13(1) (2023), 1-11 8 two more companies adopted ir in fy 2019-20, one more company adopted ir in fy 2020-21, and all eight select energy companies followed ir practices in fy 2021-22. connectivity of information, conciseness, and reliability & completeness are core values of the ir framework. these values were not reflected in the ir practices of almost all energy companies except iocl. different reporting trends are found in all select energy companies due to ir as a voluntary practice. one public sector petroleum company iocl disclosed ir according to the ir framework at one place of iar, another side one public sector electricity company, pgcl followed ir practices throughout the select period just for formality purposes by introducing two/three pages in its ar and also did not change the name of its ar by iar. all the key content elements of the ir framework did not follow by select indian energy companies except iocl, which reflects the lack of proper understanding of the spirit of the ir framework. the low level of adoption and different level of reporting trends across all select energy companies except iocl sector-wise as well functional area-wise found in indian perspective due to the nonavailability of proper guidelines and regulations on ir, and the same was concluded by (serafeim, 2016; bananuka et al., 2019). as earlier concluded by (garcia-sanchez et al., 2020), companies should disclose internal pandemic prevention and action strategy for covid 19, etc., so that the pandemic would not adversely affect the organization's performance. this internal pandemic prevention and action strategy could be part of risk and opportunities, strategy and resource allocation, and business model contents of ir. however, energy companies did not disclose it as part of ir in fy 2020-21 and 202122, when the entire world faced covid 19 pandemic. managerial and policy implications as we know that ir practices are followed in india voluntarily, therefore it should be followed as a mark of compulsion; if it is not possible to issue mandatory guidelines on ir, then it should become mandatory for public sector companies, as already suggested by (bananuka et al., 2019) because, in these companies, the public are substantially interested. although sebi, in its circular, stated that the top five hundred companies might follow ir practices as suggested by iirc, but did not suggest any clear-cut guidelines in the indian scenario that companies should follow; therefore, the sebi should prepare detailed and clear guidelines on ir in indian perspective. as far as the electricity sector is concerned, central electricity authority, an organization constituted by electricity supply act 1948 and superseded by electricity act 2003, should make and advise a policy for ir disclosures that electricity companies should follow in india voluntarily or as a mark of compulsion as per preparedness of electricity companies. the provisions or guidance notes related to an audit of ir practices and non-financial information in ir should be introduced by professional bodies like the institute of chartered accountants of india etc., to conduct an audit of ir practices as already suggested by (oprisor, 2015; yildirim et al., 2017; goicoechea et al., 2019). to effectively implement and monitor ir practices in companies, separate personnel should be recruited by companies who are solely responsible for ir practices in companies. various types of workshops and seminars etc. should be conducted to spread awareness regarding ir practices (adhariani & villiers, 2018). future scope of study this study is conducted on select energy companies. as ir is a new phenomenon, it is huge scope to examine the ir practices of other sector companies and compare them on the basis of ownership and cross-sector comparative analysis. to make a sound knowledge base for ir, comparative analysis can also be done between companies operating in developing and developed countries. there is scope to obtain a perception of various stakeholders regarding ir and to make suggestions and specific guidelines for ir practices in the indian scenario based on the perception obtained from various stakeholders. author contributions: conceptualization, s.a., and p.k.; methodology, s.a., and p.k.; investigation, s.a., k.h., and d.b.; supervision, p.k.; data curation, s.a., and d.b.; visualization, s.a., k.h.; validation, s.a., and p.k.; software, k.h., and d.b.; resources, s.a., and p.k.; writingoriginal draft preparation, s.a., d.b., and k.h.; writingreview & editing, p.k., and s.a.; project administration, p.k.; funding acquisition, k.h., and d.b.; formal analysis, s.a., and k.h. 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. 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 abhishek, n., acharya, p., divyashree, m. s., & ashok, m. l. 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