Comparative Analysis of Banking Institutions: A Study from Perspective of Financial Sector of Pakistan

Abstract

This study has focused on identifying the impact of CAMEL ratios on return on assets in Pakistan. This study has considered capital adequacy ratio, asset quality, management efficiency, earning ability and liquidity as independent variables. Meanwhile, return on asset is considered as the dependent variable. However, this study has finalized financial sector of Pakistan to testify the relationship between variables mentioned above. The major emphasis in this study is on assessing the relationship between capital adequacy ratio, asset quality, management efficiency, earning ability and liquidity (independent variables) and return on assets (dependent variable) in financial sector in Pakistan. Secondary sources of data (annual financial statements) are used for data collection regarding variables of this study from the period of 2015 – 2020 (6 years). A sample size of 10 financial firms is finalized to represent the entire population (financial sector of Pakistan). Annual financial statements of 10 financial firms of Pakistan are used to collect data regarding CAMEL ratios and return on asset from the period of 2015 – 2020 (6 years). Data collected for these financial firms of Pakistan is then analyzed through statistical tests (correlation and regression) by using Strata. Based on the findings, it is concluded that capital adequacy ratio, asset quality, management efficiency and earning ability have significant positive impact and liquidity have significant negative impact on return on assets in financial sector of Pakistan. Both correlation and regression analysis have proved the relationship between CAMEL ratios and return on assets. Conclusively, it is proved that change in CAMEL ratios (capital adequacy ratio, asset quality, management efficiency, earning ability and liquidity) brings a definite change in return on assets in financial sector of Pakistan.