Bank Profit Rate - Term Paper Example

From this report, it is clear that that the determinants of banking profitability are into categories which are internal and external. Internal determinants include the management of expenses, liquidity, and capital reserves while external ones are size of the firm, economic environment and ownership basis. Proper management of expenses was identified as the most important factor enhancing high profitability in banks. Conversely, high-interest rates occasioned by ownership strategies were identified as the main factor to low profitability.

The research is valid since misappropriation in handling expenses will definitely lead to more expenditure and fewer profits in any sector. Similarly, imposing customers to high-interest rates on loans is also a factor that makes customers lose faith with the bank.This research highlights that Molyneux and Thornton elucidated on these variables as well as revealing that liquidity affects profitability negatively. This research explains that industry-specific variables are the factors that affect a bank within the banking industry such competition arising from the homogeneity of goods and services.

Whereas macro-economic variables simply entail the environment of the economy that banks operate. In terms of liquidity, a bank can be affected if it does not have the proper appropriation of funds and hence using it in unproductive ventures such as imposing exorbitant loan interest rates, hence creating losses to the bank.