THE IMPACT OF BANK SPECIFIC AND MACROECONOMIC VARIABLES ON THE PROFITABILITY OF COMMERCIAL BANKS IN PAKISTAN

Abstract

Purpose: The sector of banking plays an important role in economic progress of any country therefore for long-term economic growth, the system ofstrong and stable banking is very much essential. The objective of this research thesis is to examine the impact of bank related and macroeconomic variables on the profitability of Pakistani commercial banks. Methodology & Design: This study uses six factors as independent variables which are split into two groups i.e. bank related and macroeconomic factors. Size, Deposits, Loan and Capital are used as bank related variables while inflation and GDP are taken as macroeconomic variables. ROA and ROE which are the major common profitability indicators are used as dependent variables in this research thesis. The data ofthis study is panel data set with a sample consists oftop five commercial banks (HBL, NBP, UBL, MCB, and ABL) with 10 years period from 2009 to 2018. Purposive sampling technique which is one of the types of (non-probability sampling technique), is being put into use here to form sample for this study. As the data is secondary in nature, the data ofbank related variables has been attained from annual financial statements of respective banks while macroeconomic factors’ data is taken from the website of World Bank. Panel unit root test, Granger causality test, descriptive statistics, correlation analysis and Pooled ordinary least square (POLS) regression method is being used to obtain the empirical results ofthis research thesis. Findings: The empirical results reveal that only one independent bank related variable (SIZE) has positive significant effect on the measures of profitability (ROA and ROE) in higher profitability. While other bank related variables variables of macroeconomic (GDP and of Pakistani commercial , which concludes that larger commercial banks attain (DEPOSITS, LOAN and CAPITAL) and INFLATION) have not impacted significantly on the profitability banks. Conclusion: Longer time period and more independent variables should be included for future research to get more accurate and realistic results. This study is very much useful for the policymakers, bank management and investors because it will help them to understand which factors are important that influence the profitability of Pakistani commercial banks.