Bank Specific and Macroeconomic Determinants of Bank Stability, Profitability and Efficiency in Pakistan

Hafiz, Bin Muhammad Ali (2018) Bank Specific and Macroeconomic Determinants of Bank Stability, Profitability and Efficiency in Pakistan. PhD thesis, University Malaysia Sarawak (UNIMAS).

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Abstract

The aim of this study is to investigate the determinants of bank stability, profitability and efficiency in the banking sector of Pakistan. This study mainly targets three separate analyses for bank stability, profitability and bank management efficiency to present a comprehensive analysis of overall commercial banks performance in Pakistan. The sample data is consists over 5 Islamic and 19 conventional banks over a sample period of 2007 to 2015. The study employed different panel data econometric techniques, namely, pooled ordinary least square (POLS), fixed effect (FE) model and random effect (RE) model using Hausman test specification. Additionally, a series of diagnostic was also perfonned namely, multicollinearity, heteroscedasticity and serial correlation test. For bank stability models, the results of this study indicate that bank size has a negative effect on stability under Z-score model while a positive relationship was found when stability measured through risk-adjusted return on asset (RAROA) and risk-adjusted equity to asset ratio (RAEA). Moreover, funding risk has a positive relationship with bank stability under an three models. On the other side, the panel least square regression with fixed effect model (FEM) suggests that bank profitability was significantly influenced by bank size, credit risk and bank stability, whereas bank efficiency is significantly predicted by liquidity risk, credit risk and funding risk. To my knowledge, limited work is available to analyze the bank stability, profitability and bank management efficiency together with the consistency of existing panel data techniques. The findings of this study have provided some new insights, which offer support to policy makers. Therefore, the implications of the results are manifold. First, the bank size, credit risk and bank stability should be given much attention to generate more profits. Similarly, liquidity risk, credit risk and funding risk needed extra vigilance from the bank managers for effective and efficient management of risks. Second, the credit worthiness of a borrower should analyze before lending them to mitigate the default risk. This will helps the banking sector to look for competitiveness and optimality. Lastly, efficient banking system also required changes both domestically and internationally.

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