DETERMINANTS OF BANK PROFITABILITY IN PAKISTAN

Abstract

Financial institutions play a significant role in the stable growth of a country’s economy. In developing countries like Pakistan, sound and efficient performance of banking institutions can guarantee significant improvement in country’s economic statistics. Lending and borrowing ofmoney among clients, converting deposits into profitable investments, providing rapid and effective services to customers, and funding the governmental agencies for various initiatives are few major roles performed by the banks. Banks, therefore, are partially responsible for well-being of all other institutions in the country. For the smooth running of banicing institutions, managers and policy makers must take into consideration various micro and macro determinates which can leave adverse effects on the profitability ofbanks. This research study is an effort to determine the positive and negative impact of internal determinants of banks over their profitability outcomes. Banking institutions of Pakistan has been selected to evaluate how these factors leave positive or negative impact on the sound performance of banks. Deposits concentration, Advances concentration, Credit risk, Liquidity, Bank size and Capital adequacy ratio are the selected internal factors. Return on Assets, Return on Equity and Net interest margin are the selected dependent factorsto measure the bank’s performance. Regression analysis, Fixed, and Random effect model has been tested along with performing Hausman test. The statistical results obtained from the research study are clearly an indication that these internal variables need to be controlled due to their varying effects on the profitability ofbanks measured by ROA, ROE and NIM.