Credit Risk Management and Commercial Banks’ Profitability in Pakistan

Abstract

Financial institutions are exposed to different types of risks i.e. liquidity, credit, operational, market risk, etc., and level of their impact on performance of financial institution also varies. Credit risk is one of the most important risks associated with commercial banking in the economy. In this paper, we assessed the impact of credit risk management on private commercial banks’ profitability in Pakistan. The sample consisted of 16 private commercial banks of Pakistan, and the data for 9-year period (2006-2014) was obtained from the annual reports of the sample banks. Credit risk was proxies with non-performing loan ratio and capital asset ratio. Least square dummy variable estimates show that bank profitability is positively associated with capital asset ratio and negatively related with non-performing loan ratio. Hence, the commercial banks that want to avoid credit risk have to reduce nonperforming loans and increase capital asset ratio in their balance sheets.