Critical Role of Risk Management and its Impact on Bank Performance in Pakistan

Abstract

Risk management is most important factor to exist and survive for the financial industry. The major bankruptcies which incurred of ERON and Lehman-Brothers this arises the awareness about the appropriate risk management procedure in banking sectors. Our study analyze the various risk which can affect on banking operation in Pakistan and this study also include the effect of risk management on the performance of the large banking sector as well as small banking sectors in Pakistan. This study uses capital adequacy ratio, non performing loans, interest rate risk, liquidity risk and operational risk for the risk management. The data is taken from the published annual report of the commercial banks from 2005 to 2015. Descriptive statistics, correlation matrix and regression analysis use to analyze the data. This study leads to conclusion is that the better risk management system leads to the better performance of the banks. It’s also conclude that capital adequacy ratio, non performing loans, interest rate risk, liquidity risk and operational risk that are key drivers of the profitability for the large banking sector of Pakistan. It’s also tell us that only capital adequacy ratio and non performing loans are the key drivers of small banking sectors in Pakistan.