Abstract
This study investigated the profitability of the banking sector in Pakistan. It evaluated the effects of both internal (bank-specific) and external (macroeconomic) factors on bank’s profitability from 2006 to 2013 period. The data of 34 commercial banks operating in Pakistan has collected. The data was balanced panel data and analyzed by random effect panel data regression analysis. Results confirmed that bank size and non-interest income had positive significant relationship on banking profitability. Deposit had negative significant relationship with banking profitability because of maintaining high liquidity, which increased cost of holding asset that ultimately, decrease profitability. As major participant, banks of Pakistan banking sector were small size banks so most important factor out of significant factors were income from non-interest facilities provided by these commercial banks. By increasing such facilities increased the bank’s customer base, which ultimately increased bank’s profitability. Macro-economic factors showed no significant effect on bank’s profitability.
Highlights
Financial sector provided roadmap for global economic growth and development
Discussion clearly showed a wide gap that banking profitability determinant studies in Pakistan were focused only on internal factors. This paper filled this gap by focusing on definition of GÜNGÖR (2007), so incorporated both bank specific factor and macro-economic factors that were used by Naceur (2003) like GDP in addition to that inflation and real interest rates because both affected firm profitability
Banks are positioned as the backbone of financial system in any country
Summary
Financial sector provided roadmap for global economic growth and development. In Pakistan commercial banks, microfinance banks, leasing companies, investment banks, house finance companies, development finance institutions, Islamic banks, insurance companies, stock exchanges and mutual funds were the main parties that contributed and constituted in financial sector formation. All the studies on profitability determinants of Pakistani banking sector included only firm specific sectors while in this study bank specific factors along with some macroeconomic factors were used for research. Reason behind including these macroeconomic factors was financial liberalization because of which many macroeconomic factors directly affecting bank’s profitability. All those bank specific factors which were used in this study were historically used by different researchers which were discussed in section of literature review. Along with that major macroeconomic factor like GDP, inflation and real interest rate were considered because of direct relation of these factors on banking operations
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