Determinants of Credit Risk and Operational Risk in Banking Sector Evidence from Pakistani Banking Sector

Abstract

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.