THE EFFECTS OF CREDIT RISK AND LIQUIDITY RISK ON THE FINANCIAL PERFORMANCE OF THE BANKS OF PAKISTAN

Abstract

Purpose The purpose is to find ifthe credit risk and liquidity risk affect the financialperformance of the banks ofPakistan. Methodology & Design To conduct this research the data oftwelves banks that are operating in Pakistan are used. The data was collected through the annual reports ofthe banks. E-view software is used to test the data. Findings The researcher was able to find the effects of credit and liquidity risk on the financial performance (ROA) of the banks of Pakistan, statistically significant. Advance-to-deposit, loan loss coverage, the level ofnon-performing loans harm the profitability ofthe banks of Pakistan, where else, asset-to-advance, gross spread, capital adequacy positively affects the profitability of the banks operating in Pakistan. Further, it was found that the size of the bank does not affect the profitability of the banks. Limitations and Recommendations The variables were found to have no relation with the return on equity (ROA) other than the grossspread ratio, it is suggestedforfuture studies to select different indicators ofcredit risk and liquidity risk of the banks of Pakistan. The banks need more appropriate credit risk and liquidity risk management to reduce the level of non-performing loans to establish a lower loan coverage ratio, while they are earning well through interest and have strong capital adequacy. Where else, the banks seem to be relying on deposits to finance the advances which might cause liquidity issues when in need