Factors Affecting Total Risk in Banking Sector of Pakistan: Empirical Evidence from Panel Data Analysis (original) (raw)
Related papers
What Determines risk? Evidence from Banking Sector of Pakistan
2020
If a financial organization flops it can impose an externality nationwide as a whole. A bank's financial health is a matter of considerable interest to both depositors and investors. Augmented globalization along with deregulation of financial organizations has not only given rise to competition, but it has also amplified the need for powerful policies to manage risk for the industry. Global financial crisis made these requirements more critical. Being cautious of elements which might direct to failure of banking organization defiantly support in future for evading losses by introducing preemptive initiatives in order to minimize damage caused by risk. This research study explores the association amongst level of total risk which a banking organization may have to consider due to variants in a typical economic situation and accounting indicators of banks by using data sample from 2006 to 2013.In this analysis, size of bank, financial leverage, liquidity, loan to asset ratio, growth in real GDP, supply of money and spread of interest rates all seem to be statistically significant with total risk faced by bank. However, the ratio of loan losses remained statistically insignificant. This study stresses the insertion of macroeconomic factor as a probable determining factor for total risk.
Risk Management & Financial Performance of Commercial Banks in Pakistan
The main objective of this study is to find out how, the two different types of risks, i.e. Liquidity Risk & Credit Risk, affect the overall profitability/financial performance of commercial banks in Pakistan. We used methods that were applicable on a panel data for long run and short run time specifications. Thirty-three scheduled banks listed with the SBP, as of December 2018 have been used for the purpose of the data analysis. The panel data that is used for this study stretches across a period of 10 years, with 33 cross sections. The findings of this current study revealed that the financial performance of the banks present in Pakistan is negatively, and significantly influenced by the credit risk. In addition to this, it was revealed that the lesser the non-performing loans, the lower the risk factor that is experienced. The financial risk comprising of credit risk and liquidity risk tends to have a significantly robust impact on the overall enactment of the commercial banks in...
Credit Risk Exposure and Performance of Banking Sector of Pakistan
Basic objective of financial institution is to channel funds from the savors to the investors and other fund seekers. In this process of mediation it is likely that some of the loan extended to borrowers may not perform well and borrowers may default to pay their obligations of interest and principal payment. This risk is termed as credit risk and adversely affects performance of banks. Hence, it is crucial for banks to effectively manage the risk faced by these transactions. This research has taken into account the impact of credit risk on the performance of banking system of Pakistan. Results of fixed effect regression analysis on panel data for period of 2006-2011 has revealed that credit risk measured by ratio of Nonperforming loans to total loan and loan loss provision to non performing loan negatively affect performance variables of ROA and ROE. Hence the more a bank is facing credit risk the more deterioration in performance it experiences. The effect of increase in ratio of ...
Impact of the Market Risk Factors on the Consumer Banking in Pakistan in the Financial Crisis 2008
Journal of Poverty, Investment and Development, 2016
Global financial crisis 2008 has severely impacted on banks and their risk profile. Huge losses were incurred due to systematic risk factors. However severity of these losses differs from one region to another region and from one country to another country. In Pakistan, consumer banking is the most affected banking business that has faced considerable losses during and after the financial crisis of 2008, because of the unexpected rise in the nonperforming loans. This study explores the factors of market risk, especially systematic part. It is noticed through studying the literature review that in 2008, when the financial crisis started influencing the banking system in Pakistan, the SBP had substantially increased the interest rate to control the hyperinflation in the country. Literature also indicates that financial crisis of 2008 has also impacted the GDP growth rate of Pakistan. Unemployment rate is another relevant variable in this context. This study assesses the significance o...
The Impact of Risk Management Factors on Banks Performance of Pakistan
NICE Research Journal, 2020
Risks usually affect the overall profitability/financial performance of any corporate sector. Various techniques of risk mitigation are important in dealing with downturns in the Pakistani economy regarding pandemic, unstable political situations in Pakistan, and different time-to-time policies of state banks regulation which consist of BASEL amendments. Data of fifteen banks had been selected for the period 2012-2018 and analyzed by using certain statistical techniques which are descriptive statistics, correlation, anal regression analysis. As from analysis, we found that Credit risk and Liquidity risk has a positive significant effect on the financial performance of the bank, which is measured by ROA, ROE, Tobin’s Q. Further, one of the risk factors which is operational risk diverts from a hypothesis which shows significant negative effect on the financial outcome of Pakistani banks. The results of this study will help the management of banks to find better solutions to enhance pe...
Determinants of Credit Risk and Operational Risk in Banking Sector Evidence from Pakistani Banking Sector, 2023
Risk management is what kind of strategies should be adopted to reduce all kinds of risk. Risk the difference between the actual return and the expected return. And credit risks the potential that borrower will fail to meet the obligation. The banking industry of Pakistan is faced with several challenges among them are determinants of credit risk and operational risk. Determinants of credit risk are defined as the factors that may affect the credit risk and determinants of operational risk are defined as the factors that affect the operation of business. Many banks in Pakistan have created credit risk management departments that are responsible for managing the credit risk associated with banking operation. The objective of this study is to evaluate the determinants of credit risk in Pakistani banking sector. The collected data consists of secondary data. Financial data was collected from three banks of Pakistan listed at Karachi stock exchange (KSE) over the period of 17 years from 2000 to 2016. Panel Regression Model was applied to find the cause and effect relationship for the under-consideration issue. The result has shown that credit risk and operational risk have a significant and positive relationship with NPLs, Gearing Ratio, and Operating Efficiency. And Credit Risk and operational risk have positive but insignificant relationship with Liquid Assets (LA). The recommendation of this study is if we pursue proper bank regulations, then the regulation should be backed up by sound credit analysis, and provision for suitable situation of credit loans.
Determinants of Systematic Risk in Commercial Banks of Pakistan
2020
Various efforts are made to quantify and explain risk taking behavior including systematic risk with in financial institutions. This study is about determining various factors affecting commercial banks systematic risk in Pakistan. Sample included in the study consisted of twelve commercial banks listed in PSX (Pakistan Stock Exchange), these banks hold 81.3% market share of customer deposits. Data was collected from 2010 to 2016. The systematic risk for this study was calculated through stock beta (SB) and value at risk (VaR). To determine systematic risk the independent variables used are liquidity, firm size, asset quality, firm growth, return on assets, business mix, operating efficiency and loan growth. The result shows that liquidity, asset quality, return on assets and firm size have significant impact on systematic risk of banks in Pakistan.
American Journal of Industrial and Business Management, 2016
The regulatory outcomes and how the various banks are operating in the economy have their significant impact on the overall banking system and in determining the firmness of financial structure. In the current study analysis, we have conducted this work to examine the relationship between the financial market development, bank risks with key indicators and their ultimate impact on financial performance in the banking sector of Pakistan from 2003 to 2011. For this purpose, panel data analysis has been performed and both the firm specific and country specific factors have been considered. The bank risk is analyzed in two dimensions of bank risk: first is capitalization ratio that measures the total amount of debt in company's capital structure (banks behavior) and second one is TEIR-I capital ratio which is the proxy used to compare the present level of risk based assets in firm's balance sheet. A conceptual model has been developed for this purpose and key findings being made. Stock market development and banking sector development is used to measure the financial market development of the economy. Core findings of the study stated that there exists significant relationship between financial market development in banking sector and financial performance with key indicators.
Determinant of credit risk of Islamic banks in Pakistan
Future Business Journal, 2024
This study aims to investigate the influence of macroeconomic variables and bank-specific factors on the credit risk of Islamic banking in Pakistan, through the panel data regression tools. The statistical tool which is applied to the research is ordinary least square (OLS) regression model. All the assumption to be fulfilled before using OLS. The secondary data have been taken from four (04) full-fledged Islamic banks in Pakistan, from 2007 to 2021. The focus of the research is to find the impact of macroeconomic variables like Gross domestic product, inflation, and growth in the interest rate and bank-specific factors like size, return on assets, loan loss provision, capital Adequacy ratio, and Asset quality to determine the credit risk (non-performing loans) of Islamic banks in Pakistan. The result of the ordinary least square (OLS) regression model is that loan loss provisions (LLP) have a positive and significant impact on credit risk (CR) and size of bank (S), and Capital adequacy ratio (CAR) have a negative and significant impact on credit risk (CR) of Islamic Bank of Pakistan. Inflation (INF) and Gross domestic product (GDP) have a positive and insignificant impact on credit risk (CR), and growth in interest rate (INT), return on assets (ROA), and asset quality (AQ) has a negative and insignificant impact on Credit risk (CR) of Islamic Bank of Pakistan. Therefore, Islamic banks should carefully examine their specific factors, i.e. LLP, S, and CAR to manage their credit risk, particularly in monitoring loans.
Journal of Asian Finance, Economics and Business, 2022
The implications of bank-specific risks and macroeconomic risks on the growth, profitability, and stability of Islamic and conventional banks are examined and compared in this article. The study also investigates whether corporate governance mitigates the effects of both bank-specific and macroeconomic risks on Islamic and conventional banks' development, profitability, and stability. For the period 2007-2019, we examined a panel data set of 22 banks in Pakistan, including both Islamic and conventional banks. We discovered considerable evidence that both bank-specific risks and macroeconomic risks have negative effects on the growth, profitability, and stability of Pakistani banks using a dynamic panel data estimator, the two-step Generalized Method of Moments (GMM) approach. Furthermore, the findings show that bank-specific and macroeconomic risks have different consequences in both types of banking. The impacts of liquidity risk, operational risk, capital risk, inflation risk, and exchange rate risk are higher for Islamic banks than for conventional banks. Conventional banks, on the other hand, are more vulnerable to credit risk and interest rate risk. Finally, the findings show that good corporate governance reduces the negative consequences of both categories of risks on bank development, profitability, and stability. This is true for Islamic and conventional banks alike.