An Empirical Investigation on Relationship between Risk, Capital and Efficiency in Banking Sector of Pakistan

Abstract

In this study, data set of annual figures of 35 Pakistani banks is used over the period 2005-2014 with total 350 observations. Data set composed of four public sector banks fully owned by the state. Twenty three privately owned commercial banks incorporated in Pakistan, six commercial banks incorporated outside the country and four specialized banks. Information for all years of some banks was not available, for this study used an unbalanced panel to make the sample taken reasonable for the investigation. Information regarding banks is taken from Financial Statement Analysis presented by state bank of Pakistan for the period 2005-2009 and 2010-2014. The empirical findings proposed positive association between Z-score and capital level of Pakistani banks. Moreover, other risk indicators provided evidence of significant negative association. The link between risk levels (Loan Loss Provisions to total loans) and “technical efficiencies” found significantly positive. In case of banking factors, large Pakistani banks on the basis of total assets are technically more efficient, on the other hand technical and pure technical efficiencies declines in case of higher liquidity, moreover, liquidity influences level of capitalization positively.

Keywords: Risk, Efficiency, Capital, Three stage Least squares, Pakistani banking sector