Historical Analysis of Bank Profitability Using CAMEL Parameters: Role of Ownership and Political Regimes in Pakistan

Abstract

In first sixty years of its existence financial sector of Pakistan has experienced two prominent episodes. One, there was an experimentation with the ownership structure of financial institutions which started with promotion of ownership by the private sector and then in 1970s they were nationalized. Subsequently the process was reversed in the 1990s transferring most of the banking assets back to the private sector. Two, on the political front, for long 33 years autocrat have interrupted the democratic order many times. The objective of this study is to take stock of the performance of banking industry when it was in private hands vis-à-vis when banks were nationalized, and, as a supplement, to evaluate the impact of dictatorship versus democracy on the performance of banking industry. Using historical dataset this study offers analysis of banking sector performance by using CAMEL parameters. Our main findings are that when banks are in private hands their profitability is positively related to quality of their assets and management, and it has negative relation with capital adequacy and liquidity. However when banks are under government ownership asset quality and liquidity become irrelevant in determining the profitability whereas capital adequacy, management quality continue to impact bank profitability. This implies that government ownership works like implicit guarantee for banks (a) that they would remain solvent in the short run], and (b) that it would absorb losses emanating from deterioration of bad assets. As regards political regimes the study finds that there is no noticeable difference in the impact of bank specific parameters whether a democratic government is in place or dictatorship is imposed in the country. These findings have implications for bank regulations, monetary policy and for instituting legal reforms in the financial sector.

Evaluating Performance of Commercial Banks in Pakistan: An Application of Camel Model

“…Our findings (regression results for Admin Expenses to Interest Income and Bank's performance association) are consistent with the studies of Davydenko, Ongore, Sufian and Chong, and Aftab, Samad and Husain [110,115,117,118].…”

“…There is a very strong relationship between bank performance and the management efficiency through the expenses of management [117]. Management efficiency has a positive influence on the bank profitability; however the impact of only management efficiency is statically significant [118].…”

Determinants of Profitability in the Banking Sector: An Analysis of Post-Soviet Countries

“…Alshatti (2015) also determined that liquidity ratio is very significant for the banks in order to increase their profitability. In addition to these studies, Aftab et al (2015); Gyamerah and Amoah (2015); and Hu and Xie (2016) determined that effective risk management plays an important role with respect to the profitability of banks.…”

CAMELS-Based Supervision and Risk Management: What Works and What Does Not

“…For example, even though Bouheni (2013) finds positive impact of supervision on banks’ performance, the effect is limited when the macroeconomic variables are added in the model. Interestingly, Aftab, Samad, and Husain (2015) find the positive relationship of profitability with CAMELS ratings after controlling the effect of some of the macroeconomics variables like GDP and money supply. Further, their study shows positive relation of bank’s profitability with the quality of bank’s assets and management but negative relation with the liquidity and level of capital requirement.…”

“…By contrast, Alemu and Aweke (2017) do not find any significant relation in explaining performance of private commercial banks in Ethiopia. In regards to controlling the macroeconomics variables like GDP, Aftab et al (2015) find interesting results. After controlling GDP growth in their study, they found that the asset quality is important for the performance of the bank and contributes in minimizing the risk.…”