The Statistical Association between Macroeconomic Indicators and the Performance of Commercial Banks in Pakistan

Abstract

The banking industry of Pakistan is growing over years and it is playing a dynamic role in enabling the business environment in the country. The idea is Constructed on the fact, that there is a substantial impact of commercial banks (CB) on the economic advancement of the country. in response, the macro dynamics of an economy also influence the very existence of Banking and its footprints on the economy. Banks are operating to smooth out the transaction process in the economy to cause ease for doing daily life business. It is important to investigate that the changes in the macroeconomic factors of a country can have serious implications for the profitability dynamics of these banks. This paper examines the cost-effectiveness of CBs in Pakistan for the duration of (2006 to 2018), against the variations in the macroeconomy. The study is based on Panel data assessment methods, to examine the effects of foremost external factors i.e. Exchange rate, GDP, Interest rate, and Money supply on the profitability of CBS in Pakistan. This study uses Return on Assets (ROA) and Return on Equity (ROE) to measure the profitability of banks in Pakistan. The study uses a random effect model and the outcomes of this study demonstrate that, in the case of Pakistani CBS, the impact of selected macroeconomic factors is almost negligible to determine a bank's profitability except for only one factor, that is the money supply, which expresses a progressive influence on banks’ profitability in Pakistan.