The Impact of Reforms on Commonwealth of Independent States’ Banking Profitability

Abstract

The main objective of the paper is to assess the impact of reforms on bank profitability in the eleven banking systems from the Commonwealth of Independent States (all current or former members): Armenia, Azerbaijan, Republic of Belarus, Georgia, Kazakhstan, Kyrgyzstan, Republic of Moldova, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, for the period between 2005 and 2011. We use as proxy for bank profitability the return on average equity (ROAE) and the return on average assets (ROAA). The estimations show that financial freedom and Banking sector reform indicators have a strong statistical significance and negatively impact the bank profitability. This could be explained by the fact that reforms increased competition with the consequence of diminishing profit margins and abnormal returns. However, the Regulatory quality indicator had no statistical significance, meaning that the laws are not enforced. Our secondary result is that Business Mix has a negative significant impact on ROAE, while management efficiency negatively influences both ROAA and ROAE.

Keywords

• bank profitability
• commonwealth of independent states
• reforms
• banking systems