RISK MANAGEMENT AND ITS IMPACT ON BANK PROFITABILITY EVIDENCE FROM THE PAKISTAN BANKING SECTOR

Abstract

Risk management issues in the banking sector not only have a greater impact on bank profitability but also on national economic growth and general business development. The bank's motivation for risk management comes from those risks which can lead to underperformance. This study seeks to assess the impact ofrisk management on banks' profitability in Pakistan. To achieve this, the study covered 10 years ranging from 2012-2021. Also, ten commercial banks were chosen as samples from the whole ofPakistan. Audited annual financial statements ofthe selected banks for the years were used in obtaining data for this research. The independent variable which is Risk Management is proxied as Non-Performing Loan Ratio (NPL), Capital Adequacy Ratio (CAR), and Liquidity Risk (LR) while the dependent variable which is profitability was measured as return on assets (ROA) and return on equity (ROE). Using panel random effects regression, the results revealed that non-performing loans and, Liquidity risk ratio have a significant effect on banks' profitability, while capital adequacy ratio is also significant. The study concluded that risk management in terms ofnon-performing loan ratio and liquidity risk has a significant effect on banks' profitability. The study therefore recommended that the bank's management should do more in the area ofcontrolling the rate at which subprime loans are given out, to mitigate the risk offuture loss on non-performing loans. Also, banks should further implement more policies that support increased lending to customers, especially the more credit-worthy ones, to increase returns and performance.