IMPACT OF MACROECONOMIC VARIABLES ON BANKS’ PROFITABILITY: EMPIRIACL EVIDENCE FROM BANKING SECTOR OF PAKISTAN

Muhammad Waqas Chughtai, Nadeem Ayaz, Khalid Mahmood

Abstract


Commercial banks play an important role in the development of the country and provide services to the customers in order to make the overall economy more efficient. The bank performance can be measured with the help of balance sheet of the bank, so commercial banks contribute more in the development of the economy. Economic development can be measured with the help of Gross domestic product, gross national product the per capita income level etc. The banking institutions contribute more in the performance of the economy; financial sector is the back bone of the sustainable economic growth. So it is very important and necessary to assess the negative shows in order to maintain the financial stability in Pakistan.  The purpose of this research is to examine the relationship between macro-economic characteristics and bank profitability by using data of top banks including Allied Bank, Al-Habib Bank, Faysal Bank located in Islamabad over the period 2009-2013. This paper uses the pooled Ordinary Least Square (POLS) method to investigate the impact of assets, loans, equity, deposits, economic growth, inflation and market capitalization on major profitability indicators i.e., return on asset (ROA), return on equity (ROE), return on capital employed (ROCE) and net interest margin (NIM) separately. The empirical results have found strong evidence that both internal and external factors have a strong influence on the profitability. The results of the study are of value to both academics and policy makers.

Keywords: Inflation, Economic Growth, Bank’s Profitability, Pakistan


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ISSN : 2251-1547