Academic journal article International Journal of Business and Society

Do Socio-Economic Factors Matter for the Financial Development of a Muslim Country? a Study in Bangladesh Banking Sector

Academic journal article International Journal of Business and Society

Do Socio-Economic Factors Matter for the Financial Development of a Muslim Country? a Study in Bangladesh Banking Sector

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1.INTRODUCTION

The relationship between socio-economic growth and economic development is indispensable. A country's economic growth and its institutional reform largely influence its population, culture, and its socio-economic perspective. Earlier researchers were inclined to study the relationship between socio-economic development and economic growth and found both sets of factors have influences on each other's (King and Levine 1993, Rousseau and Watchel 2005, Todaro 2003). However, researchers seldom focus on the impact of socio-economic factors on the financial institution. The remarkable absent of literature about the relationship between socio-economic factors and the performance of financial institution coupled with the earlier findings of the positive relationship between various socio-economic indicators and economic growth are the main reasons to conduct this study.

The intriguing features of social and economic indicators of Muslim countries make this relationship more interesting. Theoretically, Islamic principles should promote respect for human rights, freedom of choice, property rights, rule of law, good governance, and a fair economic system in a Muslim country. But in reality, so-called Islamic countries are far away from the adherence to these basic principles. None of the Muslim countries stand in first 30 in overall Islamicity index (Islamicity rankings 2017). Only two countries Qatar (39) and United Arab Emirates (40) are in the first 40 and Bangladesh is at 112th position in this index. Which is a decent improvement from 152nd in 2009 (Rehman and Askari 2010). This deviation of the Muslim countries from the basic Islamic principles and their impact on the institutional and financial development encouraged this study to be conducted in a Muslim country.

This study sought to investigate the impact of socio-economic factors such as corruption, property rights, and political stability on the financial performance of banks. The primary purpose of this study is to find out if there is any impact of socioeconomic development on banking industry (both Islamic and conventional) of the country. Although there is a common perception that Islamic banks are more likely to be influenced by its participant socio-economic perspective (Arshad & Rizvi 2013, Chowdhury et al. 2016), there is not much empirical evidence on how significant it is to the whole banking industry in a Muslim country.

Bangladesh, the fourth largest Muslim country in terms of the population consist most of the socio-economic features of other Muslim countries. Having notable economic growth in recent years, the socio-economic conditions and institutional reform of the country are yet to reach the desired level for the optimum business transaction. In last 10 years, despite political unrest and an average CPI of 23.10 the country's ability to maintain an average GDP growth rate of 6.201 (World Bank, 2015) make very interesting to study the heart of the country's economic system, its banking industry.

Finally, the presence of a robust Islamic banking sector also played a crucial role in selecting Bangladesh as the sample country. In Southeast Asia, Islamic banking first introduced by Bangladesh in 1983 (Kabir et al. 2012). Now there are 56 banks in Bangladesh, and from these 8 banks are operated as full-fledged Islamic banks and 16 other conventional banks using Islamic banking branch in order to avail Islamic banking service to their customers (Bangladesh Bank, 2015). The motivation for this research rises from a dearth in existing literature linking the effects of socio-economic factors with the performance of Islamic and conventional banks. In order to gather and contribute knowledge in this novel area, this study tries to identify the effect of socio-economic factors on the profitability of commercial banks in Bangladesh, while considering both bank-specific and macroeconomic determinants that affect banks' profitability. …

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