Effect of Cash Holdings and Market Structure on Bank’s Profitability and Stability in the Banking Sector of Pakistan

Abstract

This study aims at investigating the impacts of cash holdings by banks and market structure of banks on the profitability and stability of banks by analyzing the commercial banking sector of Pakistan. We have used return on average assets and return on average equity as two measures of profitability. Z-Score and Interest coverage ratio are used as two measures of stability. Cash and Cash equivalents, Market share and 3-bank concentration ratio are used as independent variables along with other bank specific variables. The results of this study show that higher Cash holdings and higher market share leads to better profitability but not stability. And highly concentrated banks do not contribute in the profitability of banks rather can be a threat to stability of banks.