Financial Risks in Banking Sector of Pakistan
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Date
2017-10-18
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UMT,Lahore
Abstract
Banking industry plays a vital role in economic performance of every country. Banks used to
generate its profit by taking loans from one party with the lower interest rates and lend it to the
other party with the higher interest rates, the difference between these interest rates are basically
the profit of banks but this process of generating income is not as smooth as it looks like. Banks
has to face lots of threats which are known as financial risks. This study covers all the financial
risk which includes market risk, credit risk, liquidity risk, rate of return risk, interest rate risk and
equity risk for Islamic banks and conventional banking sector prevailing in Pakistan. This
comparative study investigates the different determinants of all type of risks and the level of
financial risks prevailing in banking industry. Furthermore, it examines which banking sector
(Islamic or Conventional) is more sensitive to the underlined risks. The aim of this study is to
examine that up to what extent Pakistani banks are affected by financial risks and to compare the
all financial risks that what type of risks are more harmful for Islamic banks and what type of
risks are more hazardous for the conventional banks. Secondary data is being used in this study
and it is collected from annual reports, SBP web site and from different articles from 2002 to
2016. Total 10 banks are being undertaken in this study as a sample in which 5 banks are Islamic
and 5 are conventional. Regression model is used in this research and Descriptive Analysis,
Fixed and Random Effect, Hausman Test are the techniques which has been used with the help
of E-views and MS Excel. The results depict that Islamic banks are more sensitive to liquidity
risk and credit risk as compare to the conventional banks. In case of market risk, both sectors are
facing approximately the same level of risk. Conventional banks are more sensitive to equity
risk, interest rate risk and rate of return risk.