The Impact of Monetary Policy on Financial Performance: Evidence from Banking Sector of Pakistan

Abstract

Interest rate an important indicator of monetary policy always has major impact on financial sector performance. The purpose of this paper is to enlightened the monetary policy effect on banking sector stability and performance by investigating the casual relationship between interest rate imposed by state bank of Pakistan and bank financial performance taken as ROA and ROE. Highlighting the importance of monetary policy in banking sector, this study shall focus in depth over its impact on performance of banking industry of Pakistan by studying monetary transmission over the past five year (2007-2011), using interest rate as its measure. Using correlation analysis followed by ordinary Least Square regression carries the empirical analysis of the study. Firm size is taken as control variables for the study as firm size have significant impact on financial performance of banks. The finding of study reveal that interest rate taken as measure for monetary policy has significant inverse relationship on firm financial performance measured, which is measured by ROA and ROE.