Credit Risk Management Practices and Banks’ Performance in Pakistan

Abstract

The main objective of this study is to investigate whether the credit risk management of Pakistan's commercial banks listed on the Pakistan Stock Exchange is linked to financial performance. For this purpose, the researchers have attempted to analyze the data trends of five major banks of Pakistan as a proxy representation of the entire banking sector of Pakistan. Five (5) years of panel data collected from the State Bank of Pakistan Annual publication and annual reports of respective banks was used to conduct the research. The study found that underperforming Credit Risk Management (CRM) loans and Capital Adjustment Ratios (CDRs) have an impact on the financial achievement of Pakistani commercial banks as measured by return on equity (ROE) and return on assets. For panel data analysis, inferential statistics (regression models) were used in this study. After analyzing the data, the researcher found that CRM has a significant impact on the financial performance of Commercial Banks of Pakistan. Furthermore, the researcher encourages the Pakistani banks to grow their profitability in terms of better CRM. Pakistan's banking sector must develop suitable CRM strategies and policies through a sound credit appraisal before lending to consumers and banks; an appropriate CRM mechanism must be developed, and the credit awards system must be thoroughly reviewed, properly informed and used to repay loans. Pakistani Banks would develop and implement strategies to improve their performance & competitiveness as well as limit their lending risk exposure.