An Evaluation of Credit Risk Management and its Impact on the Financial Performance: Evidence from the Banking Sector of Pakistan

Abstract

The purpose of the study is to examine the impact of credit risk on the financial performance of the banking sector and make a comparison among different banks in Pakistan. The study used panel regression as an underlying mechanism to determine the link between credit risk indicators and profitability determinants. The data of 23 banks for a period of 2006-2019 have collected from the annual report of the State Bank of Pakistan (SBP). The study mainly relies on the private vs. pubic and Islamic vs. conventional banking sector, the data were analyzed by using E-views software The results found that the independent variable capital adequacy has an insignificant impact on the financial performance of the baking sector. The other indicators of credit risk like the non-performing loan ratio, loan loss provision ratio, and leverage ratio have a significant relationship with the financial performance of banks in Pakistan. The study findings aim to contribute its part positively and it will surely help the bank managers, and investors to identify the risk and enhance the performance by paying more attention towards it and to generate improved policies to govern their institutions by mitigating the risk