Determinants of profitability in Libyan commercial banks

This research employed the Statistical Cost Accounting Method on a sample of 4 public and 12 private banks operating in Libya during the period 1997-2008, in order to investigate the relationship between portfolio profits and (1) the effect of assets and liability composition, (2) and macro environmental variables, namely: bank-specific; industry- related; (3) and with macroeconomic variables. The sample was initially divided into three groups; the first group consisted of all Libyan commercial banks, the second group of public and private banks ( a split necessitated by different forms of ownership), and the third group comprised high and low profit banks ( a division created by comparing the average profit within the sector with the individual operating profit of banks). Also, the research analysis as to multiple regression analysis will be differentiated by three groups: (1) The first group incorporates all Libyan commercial banks; (2) The second group considers public and private banks separately; and (3) The third group incorporates high and low profitable banks separately. It was deemed necessary and helpful by the researcher to also use the qualitative method in the explanatory research in the second part of the analysis in order to triangulate, and, therefore, gain a fuller and deeper understanding of the research topic, in addition to eliciting more determinants of the profitability of the portfolios of Libyan commercial banks. The variables investigated through the collection of secondary data were subjected to quantitative analysis, while those examined by the interview phase were subjected to qualitative analysis. The conclusions of the research indicate that the relationship between profitability and assets and liabilities management have a significant effect on bank profitability. Thus, the higher returns on these assets are sufficient to create profitability differences between the banks. The government ownership was found to be an important factor having an influence on profitability in Libyan commercial banks, whereby the impact is found to be negative on bank profits. In addition, the unstable environment in terms of factors such as banking regulations, awareness by individuals about the role and importance of deposits banking, application of socialism, and the influence of religion are barriers to commercial banks expanding into investments in order to improve their portfolios to maximise their profits. The Central Bank of Libya was found to have a significant and negative on the portfolio behaviour of banks. In addition, it must be concluded that banking services and technology affect bank profitability negatively as well. Conversely, it is expected that the restructure of the banking sector will affect bank profitability positively, due to the improvement in the efficiency of indirect monetary policy tools. Furthermore, it is concluded that capital is important in accounting for bank profits, and that an increased exposure to credit risk tends to reduce profits and financial stability