Impact of government ownership on banks' profitability: Empirical evidence from commercial banks in Uzbekistan

Abstract

The banking system of a country plays a pivotal role in achieving sustainable economic growth in a country. Recent transformations and reforms in the economic policies of the Republic of Uzbekistan have led to significant changes in the banking sector. Studying the key factors which contribute to the profitability of commercial banks in Uzbekistan is becoming increasingly important. Thus, this research paper examines the main determinants of banking profitability in the Republic of Uzbekistan. For this, various indicators of the bank's effectiveness, such as specific banking characteristics, as well as macroeconomic determinants, were considered to investigate their influence on the profitability of Uzbek banks. To be more accurate liquidity, capital, size, government ownership, operational expenses, inflation, and gross domestic product (GDP), were included as explanatory variables. In turn, the return on assets (ROA) and the return on equity (ROE) were used as proxy indices of profitability for Uzbek banks. Panel data for the period from 2017 to 2021 have been employed on 32 commercial banks of Uzbekistan. Empirical conclusions have shown that the profit of the bank is largely determined by specific factors affecting its activities. The regression results have shown that government ownership and operating costs have negative and statistically significant relationship with the profitability of a bank. Surprisingly, GDP growth rate is negatively associated with ROE and ROA of commercial banks in Uzbekistan. Inflation and liquidity rates were found to have positive relationship with ROE. Other internal determinants, such as capital, and size have shown statistically insignificant impact on the bank's profitability.