Impact of Credit Risk on Banks Profitability in Pakistan: Study of Conventional Banks
Author(s)
Afaque Ahmed , Shah Muhammad Kamran ,
Download Full PDF Pages: 22-30 | Views: 549 | Downloads: 148 | DOI: 10.5281/zenodo.4678368
Abstract
Credit risk (CR) management has become a crucial factor for banks in order to stay competitive and maximize profitability. Some of the most severe financial crises that the world has faced have been due to CR's ineffective management. According to the statistics for the Banking System in Pakistan (SBP, 2018), the CR for banking is on the rise, which poses a severe threat to the banks' financial health in Pakistan. This study's main objective is to determine how the CR of the commercial banks operating in Pakistan can influence their profitability. For this purpose, the study used a secondary research method and collected data from the official websites of 22 commercial banks. In addition, a sample size of 10 banks has been selected to ensure accuracy. Based on the market capitalization, ten banks with the most excellent market capitalization among all the commercial banks were selected. Risk management factors considered were the Non-performing Loan Ratio (NLPR) and Capital Adequacy Ratio (CAR), while Return on Equity (ROE) and Return on Assets (ROA) were selected as the indicators of the banks' profitability. The study found that NLPR and CAR directly affect and assess the profitability of Pakistan's major commercial banks.
Keywords
Commercial banks, credit risk, panel data regression performance, profitability.
References
i. Abbas, A., Zaidi, S.A.H., Ahmad, W.& Ashraf, R.U., (2014) Credit Risk Exposure and Performance of Banking Sector of Pakistan. Journal of Basic and Applied Scientific Research. pp. 240-245
ii. Abdelrahim, K.E. (2013). Effectiveness of Credit Risk Management of Saudi Banks in the Light of Global Financial Crisis: A Qualitative Study, Asian Transactions on Basic and Applied Sciences, 3 (2), pp. 73-91. Available at: http://asian-transactions.org.
iii. Abiola, I. &Olausi, A. S. (2014) The Impact of Credit Risk Management On The Commercial Banks Performance In Nigeria. International Journal of Management and Sustainability, pp 295-306.
iv. Addo, Mary &Eboh, Winifred.(2014). Qualitative and Quantitative Research Methods.
v. Adeusi, S.O., Akeke, N.I., Adebisi, O.S. and Oladunjoye, O. (2013). Risk Management and Financial Performance of Banks in Nigeria, Journal of Business and Management, 14 (6), pp. 52-56. Available at: http://iosrjournals.org.
vi. Adil, F., & Hashmi, S. M (2014). Credit Risk Assessment of Banking Sector Of Pakistan A Macro Linked-Micro Crisis Exploration Approach.
vii. Aduda, J. and Gitonga, J. (2011). The Relationship between Credit Risk Management and Profitability Among the Commercial Banks in Kenya, Journal of Modern Accounting and Auditing, 7 (9), pp. 934-946. Available at: file:///C:/Users/alial_000.
viii. Ahmed, S. F., & Malik, Q. A. (2015). Credit Risk Management and Loan Performance: Empirical Investigation of Micro Finance Banks of Pakistan. International Journal of Economics and Financial Issues, 5(2), 574-579.
ix. Ajayi, V. (2017).Primary Sources of Data and Secondary Sources of Data.Benue State University.
x. Akhtar, M. F., Ali, K. &Sadaqat, S. (2011) Factors Influencing the Profitability of Conventional Banks of Pakistan. International Research Journal of Finance and Economics. Issue 66, pp 117-124.
xi. Ali, D. N., Bagram, D. M. M. M., & Ali, H. (2018). Critical Role of Risk Management and its Impact on Bank Performance in Pakistan.
xii. Alshatti, A. S. (2015). The effect of credit risk management on financial performance of the Jordanian commercial banks.Investment Management and Financial Innovations. Vol 12 No. 1, pp 338-345.
xiii. Altman, E. I., & Saunders, A. (1997). Credit risk measurement: Developments over the last 20 years. Journal of banking & finance, 21(11-12), 1721-1742.
xiv. Alvi, M. (2016).A manual for selecting sampling techniques in research.
xv. Aruwa, S.A. and Musa, O.A. (2014). Risk components and the financial performance of deposit money in Nigeria, International Journal of Social Sciences and Entrepreneurship, 1 (11), pp. 1-8. Available at: http://www.ijsse.org.
xvi. Berríos, M. R. (2013). The relationship between bank credit risk and profitability and liquidity. The International Journal of Business and Finance Research, 7(3), 105-118.
xvii. Bewick, V., Cheek, L., & Ball, J. (2003). Statistics review 7: Correlation and regression. Critical care, 7(6), 451.
xviii. Boahene, S.H., Dasah, J. and Agyei, S.K. (2012). Credit Risk and Profitability of Selected Banks in Ghana, Research Journal of Finance and Accounting, 3 (7), pp. 6-15. Available at: file:///C:/Users/alial_000/Downloads/2628- 4635-1-PB.pdf. 9.
xix. Burney, S.M.Aqil. (2008). INDUCTIVE & DEDUCTIVE RESEARCH APPROACH 06032008.
xx. Chijoriga, M.M. (2011), Application of multiple discriminant analysis (MDA) as a credit scoring and risk assessment model. International Journal of Emerging Markets, 6(2), 132-147.
xxi. Crawford, S. L. (2006). Correlation and regression. Circulation, 114(19), 2083-2088.
xxii. E.W. Chirwa, "Determinants of Commercial Banks Profitability in Malawi: A Cointegration Approach", Applied Financial Economics, Vol. 13, No. 8, pp. 565-571, 2010.
xxiii. Elkatawneh, Hassan. (2016). Comparing Qualitative and Quantitative Approaches. SSRN Electronic Journal. 10.2139/ssrn.2742779.
xxiv. Fan Li and Yijun Zou (2014) The Impact of Credit Risk Management on Profitability of Commercial Banks: A Study of Europe.
xxv. Fan, L. and Yijun, Z. (2014). The impact of credit risk management Woosley, L. (2001).The effect of credit scoring on small-business lending. Journal of money, credit and banking, 813-825.
xxvi. Gakure, R. W., Ngugi, J. K., Ndwiga, P. M., &Waithaka, S. M. (2012). Effect 0f Credit Risk Management Techniques 0n The Performance 0f Unsecured Bank Loans Employed Commercial Banks In Kenya. International journal of business and social research, 2(4), 221-236.
xxvii. García, F., Giménez, F., Guijarro, F. (2013), Credit risk management: a multicriteria approach to assess creditworthiness. Mathematical and Computer Modelling, 57, 2009-2015.
xxviii. Garr, D. K. (2013).Determinants of Credit Risk in the Banking Industry of Ghana.Developing Countires Studies. Vol. 3 No. 11, pp 64-77.
xxix. Gizaw, M., Matewos, K. &Selvaraj, S. (2015). The impact of credit risk on profitability performance of commercial banks in Ethiopia. African Journal of Business Management, 9(2), 59-66.
xxx. Gogtay, N. J., Deshpande, S. P., &Thatte, U. M. (2017).Principles of regression analysis.Journal of the Association of Physicians of India, 65, 48.
xxxi. Habib, S., Masood, H., Hassan, T., Mubin, M., &Baig, U. (2014).Operational risk management in corporate and banking sector of Pakistan.In Information and Knowledge Management (Vol. 4, No. 5).
xxxii. Hamza, S. M. (2017) Impact of Credit Risk Management on Banks Performance: A Case Study in Pakistan Banks. European Journal of Business & Management.Vol. 9 No. 1, pp 57-64.
xxxiii. Han, P. (2015). Credit risk management of commercial banks.Journal of Business Administration Research, 4(1), 8.
xxxiv. Haneef, S., Riaz, T., Ramzan, M., Rana, M. A., Hafiz, M. I., & Karim, Y. (2012).Impact of risk management on non-performing loans and profitability of banking sector of Pakistan.International Journal of Business and Social Science, 3(7).
xxxv. Hassan, A. (2009). Risk management practices of Islamic banks of Brunei Darussalam. Journal of Risk Finance, The, 10(1), 23-37.
xxxvi. Hosna, A., Manzura, B., &Juanjuan, S. (2009). Credit risk management and profitability in commercial banks in Sweden.rapportnr.: Master Degree Project 2009: 36.
xxxvii. IdowuAbiola and Awoyemi Samuel Olausi, "The Impact of Credit Risk Management on the Commercial Banks Performance in Nigeria", International Journal of Management and Sustainability, Vol. 3, No. 5, pp. 295-306, 2014.
xxxviii. J. Aduda and J. G. Muthee (2011) The Relationship between Credit Risk Management and Profitability: A Study of Commercial Banks in Kenya
xxxix. K. Chen and C. Pan, ".An Empirical Study of Credit Risk Efficiency of Banking Industry in Taiwan", Web Journal of Chinese Management Review, Vol. 15, No. 1, pp. 1-16, 2012.
xl. Kaaya, I., &Pastory, D. (2013). Credit risk and commercial banks performance in Tanzania: A panel data analysis.
xli. Khalid, S., & Amjad, S. (2012). Risk management practices in Islamic banks of Pakistan. Journal of Risk Finance, The, 13(2), 148-159.
xlii. Koziol, C., & Lawrenz, J. (2009). What makes a bank risky? Insights from the optimal capital structure of banks. Journal of Banking & Finance, 33(5), 861-873.
xliii. Kurawa, J. M., & Garba, S. (2014). An evaluation of the effect of credit risk management (CRM) on the profitability of Nigerian banks.Journal of Modern Accounting and Auditing, 10(1), 104.
xliv. Langkos, S. (2014). Research Methodology: Data collection method and research tools. Derby, England: University of Derby. doi, 10(2.1), 3023-1369.
xlv. Levine, R., & Barth, J. (2001). Bank regulation and supervision: what works best?.The World Bank.
xlvi. Luo, N., Yang, J., Zhu, Y., & Zhang, Y. (2016). The Risk Management of Commercial Banks——Credit-Risk Assessment of Enterprises. International Journal of Economics and Finance, 8(9), 69.
xlvii. M. Bayyoud and N. Sayyad, "The Relationship between Credit Risk Management and Profitability between Investment and Commercial Banks in Palestine", International Journal of Economics and Finance, Vol. 7, No. 11, pp. 163-170, 2015.
xlviii. Marks, M. L., &Mirvis, P. H. (2001). Making mergers and acquisitions work: Strategic and psychological preparation. Academy of Management Perspectives, 15(2), 80-92.
xlix. Million Gizaw, MatewosKebede and Sujata Selvaraj, "The Impact of Credit Risk on Profitability Performance of Commercial Banks in Ethiopia", African Journal of Business Management, Vol. 9, No. 2, pp. 59-66, 2015
l. Moti H., Masinde J., Mugenda N., Sindani M. (2012), Effectiveness of credit management system on loan performance: empirical evidence from micro finance sector in Kenya. International Journal of Business, Humanities and Technology, 2, 99-108
li. Mugo, F. W. (2002). Sampling in research.
lii. Nazir, M. S., Daniel, A., & Nawaz, M. M. (2012). Risk management practices: A comparison of conventional and Islamic banks in Pakistan. American Journal of Scientific Research, 68(1), 14-122.
liii. Nikolaidou E., Vogiazas S. (2014), Credit risk determinants for the Bulgaria banking system. International Advance Economics Research, 20, 87-102.
liv. Niskanen, J., &Niskanen, M. (2006). The determinants of corporate trade credit policies in a bank‐dominated financial environment: the case of Finnish small firms. European Financial Management, 12(1), 81-102.
lv. Ogboi, C., &Unuafe, O. K. (2013).Impact of credit risk management and capital adequacy on the financial performance of commercial banks in Nigeria.Journal of emerging issues in economics, finance and banking, 2(3), 703-717.
lvi. Oino, I. (2016). A comparison of credit risk Management in Private and Public banks in India. Global Journal of Business Research, 10(1), 95-108.
lvii. Poudel, R. P. S. (2012). The impact of credit risk management on financial performance of commercial banks in Nepal. International Journal of arts and commerce, 1(5), 9-15.
lviii. Psillaki, M., Tsolas, I. E., &Margaritis, D. (2010).Evaluation of credit risk based on firm performance. European Journal of Operational Research, 201(3), 873-881.
lix. Richard, E., Chijoriga, M., Kaijage, E., Peterson, C., &Bohman, H. (2008).Credit risk management system of a commercial bank in Tanzania.International Journal of Emerging Markets, 3(3), 323-332.
Cite this Article: