UNIVERSITY OF GUJRAT

Department of Commerce
BS 8th Accounting & Finance

“Risk And Financial Stability In Banking Sector Of Pakistan”

By

Authors: Muhammad Hamza Butt (18221554-006)

Muhammad Haris Khan (18221554-017)

Supervisor: Mr. Asif Ali Bhatti (Faculty of Commerce, University of Gujrat, Pakistan)
Emails: 18221554-006@uog.edu.pk
18221554-017@uog.edu.pk

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 “RISK AND FINANCIAL STABILITY IN BANKING
SECTOR OF PAKISTAN”

The Research Project is submitted as a partial requirement for

The completion of Degree (BS Accounting & Finance)

By

Authors: Muhammad Hamza Butt (18221554-006)

Muhammad Haris Khan (18221554-017)

Supervisor: Mr. Asif Ali Bhatti (Faculty of Commerce, University of Gujrat, Pakistan)

BS ACCOUNTING & FINANCE

2018-2022

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 ACKNOWLEDGEMENT
First and first, all worship is due to Allah Almighty for his grace, without which we
would not have been able to conduct this research. He is the source of strength we turn to in
times of stress, and he has spiritually guided us during the entire period of our studies.
We'd want to take this opportunity to express our gratitude to everyone who helped me through
my graduate studies and research. We are very grateful to our supervisor, Mr. Asif Ali Bhatti,
for his invaluable direction, patience, and assistance in getting this research to its current
state. We would not have been able to finish our study and degree on time without his
dedication and support. Furthermore, we would like to express our gratitude to them once
more for their consistent and kind worries during the difficult times we faced in the last stages
of our research.

We dedicated our research to our adoring parents. we would not be capable to do this without
their precious prayers and their tremendous effort

Last but not least, we'd like to thank Dr. Usman (HOD) and the entire Department of
Commerce faculty at the University of Gujrat in Pakistan.

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 DECLARATION
We, Muhammad Hamza Butt, Muhammad Haris Khan students of BS Accounting &
Finance semester 8th at Department of Commerce, University of Gujrat, declare that the title
quoted in this research paper, “Risk and Financially Stability in Banking Sector of Pakistan”
is our original work and has not been submitted or published elsewhere for the same purpose.
We further state that the current study project will not be used in the future to get a degree from
any other university.

Name: Muhammad Hamza Butt Signature: _____________ Date: _____________

Name: Muhammad Haris Khan Signature: _______________ Date: _____________

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 Supervisor’s Certification
I solemnly declare that these students, Muhammad Hamza Butt (1st Student) and Muhammad
Haris Khan (2nd Student) of the Department of Commerce, have the roll numbers 18221554-
006, 18221554-017 for the BS Accounting & Finance Semester 8th.

The project at the University of Gujrat in Pakistan was done under my direction and
supervision, and the overhead statement is true to the best of my knowledge.

Supervisor’s Complete Name: Mr. Asif Ali Bhatti

Signature: _______________ Dated: _____________

Supervisor’s Designation: ____________________

Supervisor’s e-mail-id: asif@uog.edu.pk

Department of Commerce, University of Gujrat

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 Department Certification
The Department of Commerce, University of Gujrat certifies that the students Muhammad
Hamza Butt (1st Student) and Muhammad Haris Khan (2nd Student) of BS A&F semester 8th
at the Department of Commerce, University of Gujrat have completed their research paper
project with the title “Risk and Financially Stability in Banking Sector of Pakistan” as well
as all of the requirements set for this purpose, including Viva Voce under the sui generis of
Mr. Asif Ali

Dr. Muhammad Usman

(Signatures) ______________

Head of Department,
Department of Commerce,
University of Gujrat, Pakistan.
Dated: _____________________

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 TABLE OF CONTENT

1. Introduction ---------------------------------------------------------------------------------------------
Abstract -------------------------------------------------------------------------------------------------- 08
Research Background----------------------------------------------------------------------------------- 09
1.1 Research problem----------------------------------------------------------------------------------- 09
1.2 Research Objective--------------------------------------------------------------------------------- 09
1.3 Research Questions--------------------------------------------------------------------------------- 10
1.4 Research Significance------------------------------------------------------------------------------ 10
2. Literature Review--------------------------------------------------------------------------------------
2.1 Conceptual Review----------------------------------------------------------------------------------10
2.2 Theoretical Review -------------------------------------------------------------------------------- 11
2.3 Critical Theoretical Review ----------------------------------------------------------------------- 11
2.4 Hypothesis ----------------------------------------------------------------------------------------------
2.5 Research Gap --------------------------------------------------------------------------------------- 14
2.6 Research Frame work------------------------------------------------------------------------------ 15
3. Data and Methodology---------------------------------------------------------------------------------
3.1 Research Design ------------------------------------------------------------------------------------ 15
3.2 Population & Sample ------------------------------------------------------------------------------ 15
3.3 Variable Measurement ----------------------------------------------------------------------------- 16
3.4 Modeling -------------------------------------------------------------------------------------------- 17
4. Data Analysis -------------------------------------------------------------------------------------------
4.1 Descriptive Statistics ------------------------------------------------------------------------------- 18
4.2 Pearson Correlation Matrix ----------------------------------------------------------------------- 20
4.3 Regression Model ---------------------------------------------------------------------------------- 22
5. Conclusion ------------------------------------------------------------------------------------------ 24

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 Risk and Financial Stability in Banking Sector of Pakistani
Abstract
The objective of present research investigation was to explore the impact of risk and financial
stability on banks determining the banking sectors of Pakistan. For achieving the research aims,
the present research study uses secondary data approach based on quantitative method. The
data for this purpose was collected from the financial statement of banking sectors listed in
Pakistan. These financial statements were obtained from the websites of the targeted sampled
firms. The study considered the banking sectors listed in Pakistan during the period 2016-2021.
However, the final sample of listed banking sectors includes 7 banks. The dependent variable
of the study was Bank Stability, while the independent variable was the Liquidity Risk, Credit
Risk, FRISK Additionally, Firm Size, liquidity, Economic growth. The data was analysed using
STATA software. It is concluded from the findings of the study that bank stability strongly
enhances by increasing the level of liquidity risk, credit risk, economic growth and financial
depth in case of banking sector in Pakistan. Additionally, bank stability strongly declines due
to the usage of frisk, market competition in the financing structure of banking sectors along
with the usage of governance and regulation. It is recommended for the policymaker’s/decision
makers/managerial employees of banking sectors in Pakistan to carefully analyze the
significant factors of bank stability in order to make efficient decision regarding the bank
stability in this sector. The policy makers are recommended to consider liquidity risk, credit
risk, economic growth and financial depth in order to enhance the bank stability in the banking
sector. This study adds the existing literature with the usage of bank stability in the Banking
sectors and their performance in Banking sectors of Pakistan. The finding of the study is
generalized in the banking sectors only. The future research may include the similar model for
the banking sectors in comparative mode. Additionally, future research may also include more
bank sectors to get greater sample size for possible influence of bank stability.

Keywords: Bank Stability, Liquidity Risk, Credit Risk, FRISK, Economic growth, Economic
condition, Firm Size.

JEL Classification: L14, L21, G15, G21, G23, G24, G32, G33, G41,

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 1. Introduction
1.1 Research Background:
Brunner Meier et al, (2009) described the bank stability as “the absence of banking crises,
which is accomplished when all banks in a banking system or sector are stable.” Similarly,
Deutsche Bundesbank (2003) defined the bank stability as the financial system is in a steady
condition in which it is performing its key economic functions efficiently, such as distributing
resources and dispersing risk, as well as settling.

Bank stability is necessary not only for price stability, the central bank's policy goal, but also
for the economy's healthy development. This is because bank instability has a high cost to an
economy since price volatility in financial markets rises, and financial institutions or firms may
go bankrupt. Furthermore, economic development may be hindered at this time because
economic agents find it difficult to make reasonable judgments, and resource allocation
efficiency suffers. Bank stability is also significant because it reflects a strong financial system,
which is vital since it encourages trust in the system and prevents destabilizing occurrences
like bank runs.

1.2 Research Problem:

According to Djebali and Zaghdoudi (2020), they deeply reform their financial systems and
develop the legal framework relating to new techniques of external management of banking
risks including securitization and defeasance. Through this liquidity risk show positive effect
and become detrimental to bank stability in high regime. However, if they do not improve their
techniques, they won’t be able to develop their legal framework. According to Ferhi (2018),
conventional model has a higher credit risk than the Islamic one. The results also showed that
the larger an Islamic bank is, the higher its credit risk will be to get closer to that of conventional
banks. However, if the findings between the Islamic banking and conventional banking are not
accurately measured that showed up with negative impact on banks stability. According to Kim
et al. (2016), it shows that a rise in large banks, market power, accompanying an increase in
their market share , lowers the capital adequacy of small banks. However, our larger banks
incline to have lower capital adequacy ratios, liquidity ratios, and distance to default ratios.
Market competition strongly moderates the bank stability.

1.3 Research Objectives: The present investigation aims to determine the impact of liquidity
risk, credit risk and market competition on bank stability. Additionally, the study also

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 focuses on determining the moderating of bank stability. The specific objectives of the
study are as follows:
1. To examine the impact of liquidity risk on bank stability.
2. To investigate the impact of credit risk on bank stability.
3. To assess the influence of Firm risk on bank stability.
4. To estimate the effect of firm size on the bank Stability
5. To examine the impact of Economic Growth on bank stability
1.4 Research Questions:
The objective of the study analyzes through the following questions:
i. How can we examine the impact of liquidity risk on bank stability?
ii. By whom we investigate the impact of credit risk on bank stability?
iii. Is the firm risk Effect on bank stability?
iv. Are the Firm Size and Economic Growth effecting the bank stability?
1.5 Research Significance:
This research provides insights into variable impacting the bank stability. Specifically, this
research will benefit will benefit the analyst to measure, examine or investigate the stability of
the banks. risks and bank stability put a-great significance on the banking sectors in Pakistan.
As the liquidity risk has negative relationship while credit risk and market competition have a
positive impact on bank stability in Pakistan. Furthermore, a detailed study is presented that
will covey valuable information for future research that will explore the various variables
impacting stability of banks in Pakistan.

2. Literature Review
2.1 Conceptual Review:
 According to (Adusei, 2015)The definition of financial stability is "a state in which the
financial system is not unstable." It may also refer to a state of stability among the three
elements of the financial system, namely the infrastructure, markets, and institutions.
 According to (Orazalin et al., 2019)The term "stability of financial institutions" refers to
a situation in which individual financial institutions are strong enough to successfully carry
out their role as financial intermediaries without aid from outside organisations, such as the
government.
 According to (Muhindi & Ngaba, 2018)"Stability of financial markets" refers to the
absence of large market disruptions and the consistency of financial asset values with

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 economic fundamentals, which enables economic agents to confidently raise and manage
capital.
2.2 Theoretical Review:
According to trade off theory Myers (1984), Axelson et al. (2013) Because more investment
prospects raise the risk of agency difficulties between managers/owners and creditors,
organizations with greater development opportunities have a lower amount of debt. As per
trade-off approach, a firm's capital structure should be adjusted to the characteristics of its
assets. According to DePamphilis (2022) demonstrate the pecking theory that, According to
the pecking order idea, corporations priorities their financing sources (from internal to external)
and reserve Liquidity Risk as a last option. Internal funds are used initially, then debt is issued
if they are spent. When issuing more debt isn't a good idea, equity is issued instead The
argument might be rephrased to say that the composition of a company's capital structure has
no bearing on its value, and therefore it is pointless to analyses the volume of the company's
internal and external sources. Therefore, trade-off theory and pecking theory approach is
presumed to be tested in present research.
2.3 Critical Literature Review:
Ross formulated a balanced model called Arbitrage Pricing Theory (APT) in 1976. “An asset
that has the same characteristics if sold at various prices, then there will be an opportunity to
arbitrage by buying a low-priced asset and at the same time selling it at a higher price to earn
the profit without risk (Hausman & Fernández 2000)”. However, according to Contagion effect
theory “A significant increase in cross-market relationships after shock in a country as
measured by the asset price ratio or the joint movement of financial flows in the market against
co-movement in a stable period”. The cause of contagion consists of several causes such as
fundamentals and investor behaviour (Dornbusch et al., 2000).

. 2.3.1 Impact of liquidity risk on bank stability

According to Ghenimi et al. (2017), which finds that liquidity risk do not have an economically
important reciprocal contemporaneous. Moreover, these findings give positive relationship
between the liquidity risk and bank stability. They argue that liquidity risk have different
impact on bank stability, and their interaction contributes to bank instability (Ghenimi et al.,
2017). Furthermore, Ali et al. (2019), evaluate the positive impact of liquidity risk on bank
stability(Ali et al., 2019).

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On the other hand, Tan and Floros (2018), found that liquidity risk was significantly negative
related to stability of bank (Tan & Floros, 2018). Moreover, Hassan et al. (2019), it
demonstrates the negative relationship between liquidity risk and bank stability(Hassan et al.,
2019). Another author also state the negative relationship between liquidity risk and bank
stability(Abdelaziz et al., 2020). Withal, The results of this study imply that corruption, funding
risk, liquidity risk, and bank size all contribute to bank stability. The authors also discover a
conflict between credit risk and bank soundness (Ali et al., 2019).

𝑯𝟏: Liquidity risk has a negative impact on the bank stability.

2.3.2 Impact of credit risk on bank stability

According the Ferhi (2018), it shows that the conventional approach has a higher credit risk
than the Islamic model, according to the findings. Moreover, these findings also revealed that
as an Islamic bank grows in size, its credit risk increases, approaching that of conventional
banks (Ferhi, 2018). Furthermore, Lassoued (2018), was demonstrate that the causes for
Islamic banks' greater level of credit risk, as well as to provide further insights and enhance
existing cross-country research on Islamic bank stability. He also evaluates the factors that
contribute to Islamic banks' increased credit risk, in particular to add to and supplement existing
cross-country research on Islamic bank stability (Lassoued, 2018). Furthermore, Tan and
Floros (2018), was examined that Chinese commercial bank has high credit risk which
increases their stability. Moreover, credit risk was significantly positively related to the
stability of bank(Tan & Floros, 2018).Furthermore, he demonstrate the positive relation
between credit risk and bank stability(Djebali & Zaghdoudi, 2020). Moreover, Abbas and Ali
(2021), shows that credit risk significantly influence the bank stability(Abbas & Ali,
2021).Another researcher Priyadi et al. (2021) also founds that credit risk increases the bank
stability(Priyadi et al., 2021).

On the other hand, Ghenimi et al. (2017), credit risk do not have an economically important
reciprocal contemporaneous or time-lagged relationship, according to his findings. Moreover,
these findings give bank executives a better knowledge of bank risk and serve as a foundation
for recent regulatory efforts to improve joint risk management of credit issues. They argue that
credit risk have different impact on bank stability, and their interaction contributes to bank
instability (Ghenimi et al., 2017). Furthermore, Ali et al. (2019), demonstrate the negative
relationship between credit risk and bank stability(Ali et al., 2019). Moreover Hassan et al.
(2019) also illustrate that credit risk significantly decreases the bank stability(Hassan et al.,

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2019). Another author also state negative relationship between credit risk and bank
stability(Abdelaziz et al., 2020).

𝑯𝟐: Credit risk positively influences the bank stability.

2.3.3 Impact of Firm Risk on Bank Stability.

According to Menicucci and Paolucci (2022) the data show that banks led by women are less
hazardous. Higher capital adequacy does not result from lower asset quality because it is
correlated with the higher risk aversion of female directors and top management. Credit risk in
female-led banks is identical to that in male-led ones. Furthermore, Adusei (2015) The findings
indicate that a rural bank's stability rises as its growth does, based on the findings. The findings
also demonstrate that firm risk has a favorable impact on bank stability. According to Asteriou
et al. (2021) We discover that bank stability and profitability are negatively impacted by
corruption and transparency of Firm Risk. Moreover, the findings imply that Corporate Social
Responsibility, together with age and size, has a favorable effect on all three parameters. High
levels of borrowing, however, undermine financial stability and inclusion, and the tangible
nature of assets is also inversely correlated with financial inclusion and firm Risk (Ramzan et
al., 2021). Additionally, Bank Stability, risk-based capital, efficiency ratios, and bank size all
have a favorable short-term effect. Risk-based capital and Bank Stability exhibit a distinctly
positive influence over time, whereas bank size and efficiency ratio exhibit a negative influence
(Ullah et al., 2021). According to Ali and Puah (2018) The results indicate that, when stability
is judged using the risk-adjusted Liquidity(RAROA) and risk-adjusted equity-to-asset ratio,
bank size has a negative impact on stability under the Z-score model (RAEA). Additionally,
all three stability models show a positive correlation between financing risk and bank stability.

H3: Firm Risk is Positively influences the Bank Stability.

2.3.4 Impact of Firm Size On Bank Stability

According to Ali and Puah (2018) The results indicate that, when stability is judged using the
risk-adjusted Liquidity(RAROA) and risk-adjusted equity-to-asset ratio, bank size has a
negative impact on stability under the Z-score model (RAEA). Additionally, all three stability
models show a positive correlation between financing risk and bank stability. Additionally,
The findings also demonstrate that funding risk has a favorable impact on bank stability. The
discussion currently taking place on whether or not to limit bank size in order to protect the
financial system from future crises is significantly impacted by the finding that size and bank

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stability are positively correlated (Adusei, 2015). Furthermore, Muhindi and Ngaba (2018)
Profitability is inversely correlated with business size. Profitability was assessed using return
on assets. Additionally, the Firm size has positive association with the Bank stability (Orazalin
et al., 2019). Withal, The results of this study imply that corruption, funding risk, liquidity risk,
and bank size all contribute to bank stability. The authors also discover a conflict between
credit risk and bank soundness (Ali et al., 2019).

H4: Firm Size has Positive effect on bank Stability

2.3.5 Impact of Economic Growth on bank stability:

According to, Jayakumar et al. (2018) Our empirical findings demonstrate that key long-term
drivers of economic growth in the European countries include both banking competitiveness
and banking stability. Additionally, indicate both a short-term and long-term positive and
statistically significant association between economic growth and the finance provided by
Islamic banks. Additionally, it was discovered that long-term relationships are more robust
than short-term ones. (Gudarzi Farahani & Dastan, 2013). Withal, The results of this study
imply that corruption, funding risk, liquidity risk, and bank size all contribute to bank stability.
The authors also discover a conflict between credit risk and bank soundness (Ali et al., 2019).
Furthermore, Rakshit and Bardhan (2019) This research suggests that in South Asian nations,
both banking competitiveness and banking stability are important long-term predictors of
economic growth. Additionally, Boachie et al. (2021) The findings support a one-way causal
relationship between gross domestic product and banking stability, demonstrating that
economic growth determines banking stability rather than the other way around.

H5: Economic growth impact positively with the bank stability.

2.4 Research Gap:

The previous research studies lacking the fresh evidence for bank stability and its determining
factors, especially liquidity risk, credit risk, FRISK and market competition in Pakistan. For
example, Tan and Floros (2018) examined the impact of credit risk in China, Albolite et. al
(2019) and Abdel Aziz, Rim et al. (2020) considered banking sector in MENA region, Priyadi
et al. (2021) examined in Indonesia, Lassoed (2018), examined in the Malaysia Moreover, the
previous research could not investigate any impact of FRISK on the bank stability thorough
out.

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Therefore, the present research aims to investigate the impact of credit risk, liquidity risk,
FRISK and market competition on the stability of banks in Pakistan.

2.5 Theoretical Model:

3 Data and Methodology

3.1 Research Design:
This study requires to approximation the impact of credit Risk, Liquidity Risk, Firm Risk, Firm
Size, Economic Growth and Liquidity on the Bank Stability. Furthermore, all these variables
of study are the financial variables which are measured from financial statements of Islamic
and commercial banks in Pakistan therefore, the present study is quantitative in nature.
Additionally, as these financial statements are prepared by Islamic and commercial banks in
Pakistan and their primarily managed and collected by target population itself. However, the
researchers are using this collected information for their study, therefore, the present study is
secondary in nature due to data collection approach.

3.2 Population and Sample:

The population of study is the Islamic and commercial banks in Pakistan for the period of study.
As there are a number of studies available for different sectors and different regions, but not a
single study is available that represents the Risk and Financial Stability in Banking Sector of
Pakistan Therefore, the present study aimed to investigates the banks in Pakistan. In Pakistan,
there are more than 30 banks (Both Islamic and Commercial). However, the leading Islamic
and conventional banks in Pakistan are used as a sample by the researcher. The data ranges
from 2016 to 2021 and the final sample consists of 7 banks.

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3.3 Variable Measurement:
The outcome variable of the study is bank stability, while the explanatory variables are liquidity risk, credit risk and FRISK.
Variable Type Variable Title Measurement
1. Bank Stability  STAB = Liquidity Ratio of bank ‘i’ at time's’ + Liquidity Ratio of bank ‘i’ at
Dependent Variable time's’ is divided by Standard Deviation of the Liquidity of bank ‘i’ across
sample period ‘p’.
1. Liquidity Risk
1. BLRISK = Measured as the ratio of total loans to total deposits of bank ‘i’ at
2. Credit Risk years.
2. BCRISK = Computed as the ratio of total loans to total assets of bank ‘i’ at
3. Firm Risk year's’.
Independent Variable 2.1 is calculated as the sum of deposit-to-total asset (DEP/TA) ratio and the equity
4. Economic growth
3. Calculated by Total Deposits to Total Assets of the Firm
5. Liquidity 4. = Growth of GDP
5. Current assets divided by current liabilities.
6. Firm Size 6. Natural Logarithm of Total Assets

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3.4 Modelling:
As per the requirements of the study the research objectives, the Bank Stability and Liquidity
Risk is the function of independent variables as follows:
Bank Stability = f (Liquidity Risk) (Credit Risk) (Liquidity) (Firm Risk) (Firm Size) (Economic Growth).

The study requires to estimate the impact of Liquidity Risk (LQRISK), Credit Risk (CRRISK),
Liquidity (LQD), Firm Risk(FRISK), Firm Size (FSIZ), Economic Growth (ECGRW) on Bank
Stability as variables explained in Table 1.1. the first econometrics model for this study is
given below.
Bank Stability = 𝜷𝟎 + 𝜷𝟏 (LQRISK) + 𝜷𝟐 (CRRISK) + 𝜷𝟑 (LQD) + 𝜷𝟒 (FRISK) + 𝜷𝟓 (FSIZ)+ 𝜷𝟔 (𝑬𝑪𝑮𝑹𝑾) +𝝐…………
EQ.1

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 4.0 Data Analysis
4.1 Descriptive Statistics
The summarized result of the data in the form of central tendency; mean, and measure of dispersion; S.D is given in Table 2.

Variables Mean Standard Dev Kurtosis Skewness Minimum Maximum

BS 5.80 0.35 0.24 -0.74 5.14 6.30
LQRISK 1.18 0.33 4.59 -1.72 0.04 1.85
CRRISK 0.91 0.06 10.43 -2.75 0.64 0.96
FRISK 0.76 0.11 -0.06 0.40 0.49 0.97
ECGRW 4.33 1.85 -1.31 -0.58 1.33 6.15
LQD 0.68 0.21 -0.45 0.44 0.23 1.17
FSIZ 9.07 0.62 0.59 -0.57 7.46 10.14

Where BS = Bank Stability, LQRISK = Liquidity Risk, CRRISK = Credit Risk, FRISK = Firm Risk, ECGRW = Economic Growth, LQD = Liquidity, FSIZ
= Firm Size.

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Interpretation:

Table 2 indicates the summarized results of the dataset used for the current study. It indicates
that the Bank Stability contributes on average in the current study by 5.80 while this value can
deviate from its mean by 0.35 with a minimum Bank Stability of 5.14 while the maximum
value for it is 6.30. The Liquidity Risk indicates that the average in the current study by 1.18
while this value can deviate from its mean by 0.33 with a minimum value of 0.04 while the
maximum value for it is 1.85. The Credit Risk indicates that the average in the current study
by 0.91 while this value can deviate from its mean by 0.06 with a minimum value of 0.64 while
the maximum value for it is 0.96. The Firm Risk indicates that the average in the current study
by 0.76 while this value can deviate from its mean by 0.11 with a minimum value of 0.49 while
the maximum value for it is 0.97. The Economic Growth indicates that the average in the
current study by 4.33 while this value can deviate from its mean by 1.85 with a minimum
liquidity of 1.33 while the maximum value for it is 6.15. The Liquidity indicates that the
average in the current study by 0.68 while this value can deviate from its mean by 0.21 with a
minimum Liquidity of -0.21 while the maximum value for it is 1.17. The firm size indicates
that the average in the current study by 9.07 while this value can deviate from its mean by 0.62
with a minimum firm size of 7.46 while the maximum value for it is 10.14.

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 4.2CORRELATION MATRIX
BS LQRISK CRRISK FRISK ECGRW LQD FSIZ
BS 1
LQRISK -0.2046 1
0.1937
CRRISK -0.2626* 0.4781*** 1
0.093 0.0014
FRISK 0.0384 -0.6985*** -0.5003*** 1
0.8092 0 0.0007
ECGRW -0.1837 0.0339 -0.1172 0.0017 1
0.2442 0.8313 0.4599 0.9914
LQD -0.1428 -0.3038** -0.6978*** 0.5531*** 0.0351 1
0.3671 0.0505 0 0.0001 0.8253
FSIZ -0.0961 -0.2989** 0.1033 0.5365*** -0.0171 -0.0068 1
0.5451 0.0545 0.5151 0.0002 0.9143 0.9659

Significant = *** at 0.01 or 1% , ** at 0.05 or 5% , * at 0.1 or 10% Level

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(Table III) indicates that there is a negative association between the Liquidity Risk and Bank
Stability with the value of the coefficient as -0.2046. This association is Non-significant. The
relationship of Credit Risk with the Bank Stability is Negative and Liquidity Risk is positive
with the coefficient value of -0.2626 and positive with the coefficient value of 0.4781 in
respective pattern, and the relation between Credit Risk with Bank Stability is non-significant
and with liquidity risk is Highly Significant. After that the correlation table shows the Firm
Risk positive 0.0348 and non-significant with Bank Stability, negative -0.6985 and highly
significant with Liquidity Risk and negative -0.5003 with highly significant with Credit Risk.
Afterwards, study shows that relationship of Economic growth is negative with the Bank
Stability (-0.1837) and non-significant, positive with the Liquidity Risk (0.0339) with non-
significant and negative with Credit Risk (-0.1172) with the non-significant with the Credit
Risk and Positive with Firm Risk 0.5531 which is highly significant. Moreover, the relationship
of Liquidity with the Bank Stability (-0.1428), negative with Liquidity Risk (-0.3038), negative
with Credit Risk (-0.6978) with highly significant and positive with Firm Risk (0.3561)
negative with liquidity (-0.1922) with the highly significant with Firm Risk, and non-
significant with the remaining levels. The relationship of Firm size with the Bank Stability is
negative -0.0961 negative with Liquidity Risk (-0.2989), positive with Credit Risk 0.1033
positive with Firm Risk (0.5365), negative with Economic Growth (-0.0171), and negative with
Liquidity (-0.0068), with the highly significance with firm Risk significant with liquidity risk
and remaining non-significant on all levels.

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 4.3REGRESSION TABLE

BS VIF
VARIABLES Model 1 Model 1
Liquidity Risk LQRISK -0.0436 2.33
(0.0881)
Credit Risk CRRISK -4.350*** 2.63
(1.049)
Firm Risk FRISK 0.0353 2.28
(0.520)
Economic Growth ECGRW -0.0458* 1.03
(0.0246)
Liquidity LQD -1.075*** 2.57
(0.325)
Constant 10.71***
(1.133)
Prob > F 0.0003
Observations 42
R-squared 0.639
Regression Diagnostics
 Normality (Jarque-Bera) chi2(1) = 12.52
 Hetrocidesticity (Breusch-Pagan) chi2(1) = 6.04
 Model Specification Prob > |t| = 0.393
 Variable Omission Prob > F = 0.7785
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

Discussion On Model 1

The table indicated the statistical significance of the model (Prob > F = 0.0003) (For 1st
Dependent Variable “BS”), which means that the model is statistically fit. The value of R-
square is 0.639 which indicates that approximately 64% of variation in BS is explained by
Liquidity Risk, Credit Risk, Firm Risk, Economic growth and Liquidity. The remaining 36%
variation in the BS is due to the variation of unobserved factors which were not included in
model. The regression diagnostics indicates that the Jarque-Bera test is not significant which
confirm that the BS has the normality in residuals. Additionally, the Breusch-Pagan test was
used to access the Hetrocidesticity indicates that there is not hetrocidesticity in the model as
the p-value of test was greater than 0.05. however, the model specification bias test indicates
that the model is correctly specified as the p-value is > 0.05. finally, the variable omission
biasness test indicates that the no violation as its p-value is > 0.05. Moreover, the
Multicollinerity test as accessed by the VIF indicated the absence of Multicollinerity (VIF <
10).

The Liquidity Risk indicates 0.0436 value as the coefficient with a negative sign, and which is

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non-significant (p-value is > 0.1) at 10% level. It indicates that there is a negative and non-
significance relationship between Liquidity Risk and Bank Stability. The findings accepted the
hypothesis which indicates the similar negative relationship between Liquidity Risk and Bank
Stability. According to pecking theory the liquidity risk should have a negative role in
determining the Bank stability. This negative impact of liquidity risk is also found in previous
research studies. According to Das et al. (2021) the results shows that there was a negative
effect of liquidity risk on firm’s performance of the Bank Stability.

The Credit Risk indicates 4.350 value as the coefficient with a Negative sign, and which is
significant (p-value is < 0.01) at 1% level. It indicates that there is a Negative and highly
significant relationship between Credit Risk and Bank Stability. The findings Rejected the
second hypothesis which indicates the similar positive relationship between Credit Risk and
Bank Stability. According to pecking theory and Trade off theory the Credit Risk should have
a positive role in determining the Bank Stability.

The Firm Risk indicates 0.0353 value as the coefficient with a positive sign, and which is Non-
significant (p-value is > 0.10) at 10% level. It indicates that there is a positive relationship
between Firm Risk and Capital Structure. The findings accepted the hypothesis which indicates
the similar Positive relationship between Firm risk and Stability of Banking Sector.

The Economic Growth indicates 0.0458 value as the coefficient with a Negative sign, and
which is significant (p-value is > 0.01) at 5% level. It indicates that there is a Negative
relationship between Economic Growth and Bank Stability. The findings Rejected the
hypothesis which indicates the similar positive relationship between Economic Growth and
Bank Stability.

The Liquidity indicates 1.075 value as the coefficient with a Negative sign, and which is highly
significant (p-value is < 0.01) at 1% level. It indicates that there is a Negative relationship
between Liquidity and Bank Stability. As the liquidity is the dummy variable so we concluded
that the hypothesis which indicates the similar negative relationship between Liquidity and
Bank Stability.

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Conclusion

The study aimed to investigate the Risk and financial Stability in Banking Sector of Pakistan.
The data for this purpose was collected from the financial statements of banking sector in
Pakistan. These financial statements were obtained from websites of targeted sampled firm. As
the variables of the study was measureable in term of ratio therefore, it was the quantitative
nature of study. the present study aimed to investigates the Islamic and commercial banks in
Pakistan. There are more than 30 banks (Islamic & Commercial) in Pakistan. However, the
researcher uses the top Islamic and commercial banks in Pakistan as sample. The final sample
includes 7 banks with the data rang 2016 – 2021.

The study analyses the pooled data for achieving the research objective through descriptive
statistics, Pearson Correlation matrix and regression for hypothesis testing. The Descriptive
Statistics indicates that the mean value for Bank Stability, Liquidity Risk, Credit Risk, Firm
Risk, Economic Growth, Liquidity and firm size 5.80, 1.18, 0.91, 0.76, 4.33, 0.68 and 9.07
respectively. The Pearson Correlation indicates that there is negative association of Liquidity
risk, Credit Risk, liquidity, Firm size and Economic Growth with Bank Stability, and positive
association of Firm risk with Bank Stability.
The Regression estimations indicates that positive and statistically significant impact of Risk
on Bank Stability. It is concluded from the findings of the study that risk enhances by increasing
the level of risks in case of banking sector in Pakistan. It is recommended for the policy makers/
decision makers or Employees of banking sector in Pakistan to carefully analyse the significant
factors of capital structure in order to make efficient decision regarding the capital structure in
this sector. This study adds the fresh evidence in support of Bank Stability decision in the
banking sector of Pakistan for the period of 2016-2021. The Study uses the data from 2016-
2021 but did ‘not considered the impact of Covid-19. Additionally, the study did ‘not
considered the macro economic variables like, Inflation. This study only considered the
banking sector, and ignores the cross sector analysis. Therefore, the findings of the study are
applicable on banking sector only.

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