A cross-country investigation on core capital efficiency of private commercial banks: Evidence from Bangladesh and Nepal

Abstract

Type of the article: Research ArticleAbstractCore capital efficiency plays a central role in safeguarding banking sector resilience in emerging economies characterized by high credit risk, regulatory constraints, and limited access to external capital. This paper aims to examine the bank-specific, macroeconomic, and institutional determinants of core capital efficiency in the banking sector of emerging economies, using a comparative analysis between Bangladesh and Nepal as representative markets. Considering a balanced panel dataset of 200 observations from 10 banks in each country, spanning from 2014 to 2023, this investigation adopts pooled OLS, fixed effects, random effects, and GLS estimators with Tier 1 capital ratio as a proxy for core capital efficiency. Empirical results show that bank size and profitability exert a strong and positive influence on core capital efficiency, while non-performing loan ratios and cost-to-income ratios significantly erode capital efficiency across models. In contrast, GDP growth and fintech adoption show no significant impact, reflecting the dominance of bank-specific factors over macroeconomic or technological influences. Overall, Bangladeshi banks demonstrate higher core capital efficiency despite elevated credit risk, reflecting stronger asset bases and regulatory adjustments. The findings highlight the need for targeted reforms focusing on asset quality and cost efficiency to enhance banking sector resilience in emerging markets.AcknowledgmentThe authors would like to express their heartfelt thanks to all participants in this study, especially the bankers who assisted in providing their banks' datasets for the analysis presented in this paper.