Green Finance and Banking Sector Performance: Empirical Evidence from Pakistan

Abstract

As the problems like, climate change, environmental degradation, pollution, carbon dioxide emission, global warming and many more caused due to some hazardous industrial activities has led to intimidating position for the humanity. Besides the industrial development, it is the responsibility of the businesses to use green practices in their business activities for the sustainability of the environment. Green finance is the green growth gained through embracing of green practices into the business activities. This study has examined the empirical relationship between the green finance and banking sector performance of Pakistan. Performance of the banks was determined through the ratios including ROA, ROE, ROD and AUR. In context of green finance, the amount financed to green activities are not clearly mentioned in the annual and sustainable reports by most of the sample banks therefore green finance taken as the dummy variable. Panel Least Squares and Panel EGLS techniques applied on the data of 20 major banks of Pakistan from 2011 to 2019. According to the findings, negative relationship found between green finance and banking sector performance of Pakistan. For this, three reasons identified that might be behind this negative association. First, due to novelty of the concept of green finance, banks in Pakistan still needs awareness about the appropriate application of this concept in order to meet the challenges and reap benefits of green initiatives. Second, banks needs to make the initial investments for green initiatives that requires huge amount for becoming green bank. Consequently, initial costs reduces the bank’s profitability. Third, screening of the projects that have the least environment risk. Therefore, for achieving the green growth, the banks avoid to deal in the big projects that are detrimental to environment, which in turn cut the bank’s profits. Moreover, practical implications also suggested for businesses, government bodies, investors, practitioners and policymakers for achieving the sustainable growth that will ultimately lead to the overall country’s economy growth.