Saint mary’s university

External Factors/ Macroeconomic Factors
The macroeconomic policy stability, Gross Domestic Product, Inflation, Interest Rate and Political instability are also other macroeconomic variables that affect the performances of banks. For instance, the trend of GDP affects the demand for banks asset. During the declining GDP growth the demand for credit falls which in turn negatively affect the profitability of banks. On the contrary, in a growing economy as expressed by positive GDP growth, the demand for credit is high due to the nature of business cycle. During boom the demand for credit is high compared to recession (Athanasoglou et al., 2005). The same authors state in relation to the Greek situation that the relationship between inflation level and banks profitability is remained to be debatable. The direction of the relationship is not clear (Vong and Chan, 2009).

We use three proxies for macro-economic environment: inflation (INF), financial sector development (M2GDP) and GDP per capita growth. Previous studies have reported a positive association between inflation and bank profitability. High inflation rates are generally associated with high loan interest rates, and therefore, high incomes. However, if inflation is not anticipated and banks are sluggish in adjusting their interest rates, there is a possibility that bank costs may increase faster than bank revenues and hence adversely affect bank profitability. The GDP per capital growth is expected to have a positive impact on bank's performance according to the well-documented literature on the association between economic growth and financial sector performance.

Financial development indicators (FD): We also examine the impact of the level of financial development (FD) on the performance of the banking sector. Following Demirg .- Kunt and Detragiache (1998, 2002),We use a proxy for the level of financial development measured by the liquid liabilities / GDP.

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