Investigating the impact of green banking initiatives on bank performance: empirical evidence from emerging economy

This paper aims to contribute to the existing literature by investigating how green banking determinants including control variables such as bank-specific and macroeconomic determinants affect the performance of conventional banks estimated with profitability measures such as return on assets (ROA), return on equity (ROE), and net interest margin (NIM) considering both static and dynamic models depending on the data set spanning from 2013 to 2022 for 13 banks in emerging economies like Bangladesh. We have adopted various econometric models such as pooled OLS, fixed effect, random effect, generalized least squares (GLS) method, and one-step-system GMM to estimate both static and dynamic nexus between green banking initiatives and bank performance followed by testing the validity of the models using different diagnostic tests such as multi-collinearity test, heteroscedasticity test, model specification bias test, and autocorrelation test. Moreover, the Hausman test and B/P LM test have been executed to make a comparison between the models. The key findings of our empirical section reveal that among green banking factors, only the board risk management committee has a significant negative impact on ROA whereas ATM has a significant positive impact on ROE. The green finance ratio and the board risk management committee have a significant positive impact on NIM, while employee green banking training, ATMs, and online banking branches have a negative impact. Credit risk, bank size, and non-interest income (for ROA and NIM) are significant control variables that adversely affect profitability, as are credit risk and the cost-to-income ratio (for ROE). Besides, the loan-to-deposit ratio and cost-to-income ratio have been found statistically significant in negatively influencing the NIM and ROA respectively. In the GMM model, one year-lagged ROE and NIM inversely affect current ROE and NIM, respectively, while lagged ROA is insignificant for current ROA. These findings infer that determinants of green banking initiatives significantly affect banks’ profitability while fostering environmental sustainability. Moreover, this paper emphasizes the need to manage credit risk and the cost-to-income ratio to secure financial reliability followed by providing significant insights to policymakers about how banking practices can be aligned with global sustainability through specific incentives and regulations. However, this study is only limited to quantitative data due to the absence of judgmental factors from bank officials, so the estimation is focused on the homogenous sample which may lessen the generalizability.