Analysing Factors Driving Pakistan’s Commercial Banking Credit Risk
An Empirical Investigation
DOI:
https://doi.org/10.48112/bms.v1i4.963Abstract
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Credit risk, commonly measured by non-performing loans (NPLs), is a key indicator of commercial banks' financial stability. This empirical study scrutinises selected factors influencing credit risk, measured through NPLs in Pakistani commercial banks. Examining a balanced panel of 18 banks spanning 15 years (2006-2020), totalling 270 observations, the study employs the feasible generalized least square (FGLS) method to address panel data issues. Multiple linear regression analysis with random and fixed effects, facilitated by STATA 17, reveals that, except for the unemployment rate, all identified factors significantly impact NPLs. Particularly noteworthy are inflation and management efficiency, identified as novel contributors to NPL variability. The study advocates for autonomous and responsible regulatory policies to adeptly control credit risk, emphasizing the necessity for commercial banks to adopt robust screening and control methods in lending. It further recommends a proactive role for the Pakistani government in fostering a conducive environment through attractive interest rates and inflation control, anticipating these measures to play a pivotal role in facilitating lending, mitigating credit risk, and indirectly enhancing the country's economic growth.
Keywords:
Commercial banking, Credit risk, Interest rate, Management efficiency, Non-performing loansReferences
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