Bank-Specific and Macroeconomic Determinants of Profitability: A Revisit of Pakistani Banking Sector under Dynamic Panel Data Approach

Abstract

<jats:p>This study aims to examine the effect of the bank-specific and macroeconomic determinants of profitability for the banking sector of Pakistan. To incorporate the issues of endogeneity, unobserved heterogeneity, and profit persistence, we apply a generalised method of moments (GMM) technique under the Arellano–Bond framework to a panel of Pakistani banks that covers the period 2003–2017. The results of a dynamic panel data approach reveal that capital adequacy accelerates the profitability of the banking sector in Pakistan. Capital adequacy helps the financial system to absorb any negative shock by reducing the number of bank failures and losses. Conversely, our empirical investigation reveals that the liquidity ratio, business mix indicators, interest rates, and industrial production deteriorates the bank profitability. Liquidity risks enhance the probability of default risks and transmit into the unpaid loans and hence the lower return. Our empirical evidence further reveals that Pakistani banks are not getting any benefit of the economies of scale in terms of financial performance.</jats:p>

Determinants of Banking Industry Profitability: an Empirical Research of Indonesia Financial Institutions

“…Liquidity ratio, business mix indicators, interest rates, and industrial production deteriorates bank profitability. Liquidity risks enhance the probability of default risks and transmit into the unpaid loans and lower returns (Rahman et al, 2020). This study shows unusual results, namely that interest rates and business mix reduce bank profitability.…”

Corporate performance volatility: a micro-level perspective

“…Rezina et al (2020) found the GDP growth and real interest rate to have a positive effect on profitability (ROA), whilst inflation was found to exert a negative impact on profitability. Focusing on the banking industry in Pakistan, Rahman et al (2020) employed the GMM estimation technique in verifying the determinants of profitability from 2003 to 2017. The study revealed that macroeconomic variables such as the interest rate and industrial production exert negative influence on profitability.…”

“…Further review of related empirical studies examining factors or conditions responsible for variability in corporate/firm performance, suggests that most of such studies are dominated by how aggregate macroeconomic variables or conditions, and firm-specific or industry-specific factors influence corporate/firm performance. (see Adams et al, 2005;Asimakopoulos et al, 2009;Apadore and Zainol, 2014;Palaniappan, 2017;Mahadalle and Kaplan, 2017;Doruk, 2019;Rahman et al, 2020). For instance, an in-depth review of the extant literature on corporate or firm performance suggests that most studies examining the relationship in question focus primarily on the role of aggregate macroeconomic conditions or variables such as the gross domestic product (GDP) growth, inflation, exchange rate, etc., and firm-specific factors such as size, form of leadership, etc.…”

“…Unlike most reviewed studies (most of which have been cited above) , this study adopts a different approach in its inquiry focusing on the mechanics of corporate performance. In this proposed approach, instead of focusing on corporate or firm performance as the core variable of interest (dependent variable) as done in most existing studies (see Asimakopoulos et al, 2009;Aras et al, 2010;Baños-Caballero et al, 2014;Palaniappan, 2017;Rahman et al, 2020), we rather focus on the volatility associated with corporate performance and not the performance indicator itself. This approach stems from the presumption that although performance indicators are of interest to both shareholders and potential investors, JMB these economic agents may be much more interested in the extent of variability associated with such a performance indicator since such a condition ultimately influences returns.…”

Role of ICT Investment and Diffusion in the Economic Growth: A Threshold Approach for the Empirical Evidence from Pakistan

“…See Chakane, Chaskar, Patil, Shelar and Godse (Chakane et al 2017) for the further details on the nexus between automated information system and the crop management. Also see Rahman, Yousaf and Tabassum (Rahman et al 2020) for the discussion on industrial production.] In this mechanism, the labour efficiency reduces the labour cost (Blanchard 2017), which is a critical component of the per-unit cost.…”