Determinants of Profitability of Banking Industry in Pakistan

Abstract

Purpose: The relationship between bank profitability and bank-specific and macroeconomic factors has important implications for a host of public policy questions. In the current study, balanced panel data on all scheduled banks over a period of 2006 to 2017 has been used to provide novel estimates of bank profit and its influential factors. Research Methodology: Further this study modeled the structure-conduct-performance hypothesis (SCP); it reflects the setting of prices that are less favorable to consumers (lower deposit rates, higher loan rates) in more concentrated markets as a result of competitive imperfections in these markets and lead supernormal profits The results of the current study have been obtained by using regression analysis and unit root analysis which deals with stationary and non-stationary of time series data. . Results: The results of the current study are significant and supported by the previous literature. In bank-specific characteristics, lagged bank profitability, capital ratio, and size found to have a positive relationship with bank profits while Loans have a negative and significant relationship with bank profits deposits have a positive and insignificant relationship with banks profitability. In macroeconomic factors such as inflation, corporate tax rate, negative and insignificant relation has been found. Originality/Value: This study implies that the profitability of banks can be enhanced by increasing the capitalization of banks. Endeavors should be made by banks in order to increase and maintain the retained earnings and reserves Keywords: Profitability, Return on Assets, Macroeconomic, Bank-specific, Corporate tax