Risk Management & Financial Performance of Commercial Banks in Pakistan

Abstract

The main objective of this study is to find out how, the two different types of risks, i.e. Liquidity Risk & Credit Risk, affect the overall profitability/financial performance of commercial banks in Pakistan. We used methods that were applicable on a panel data for long run and short run time specifications. Thirty-three scheduled banks listed with the SBP, as of December 2018 have been used for the purpose of the data analysis. The panel data that is used for this study stretches across a period of 10 years, with 33 cross sections. The findings of this current study revealed that the financial performance of the banks present in Pakistan is negatively, and significantly influenced by the credit risk. In addition to this, it was revealed that the lesser the non-performing loans, the lower the risk factor that is experienced. The financial risk comprising of credit risk and liquidity risk tends to have a significantly robust impact on the overall enactment of the commercial banks in Pakistan. This study will prove beneficial for the top management of the financial institutions developing economies, as it will enhance their existing knowledge regarding the impact of financial risk, which will eventually infiltrate into the intensity and quality of the financial performance of the banks. This will also enable banks, and other financial institutions to involve all the relevant stakeholders, in order to determine how they can minimize the effects of the financial risk, so as to maximize the overall returns.