UNDERGRADUATE FINAL YEAR DEPARTMENTAL PROJECT REPORT

DEPARTMENT OF ECONOMIC AND MANAGEMENT SCIENCE

NED UNIVERSITY OF ENGINEERING & TECHNOLOGY, KARACHI, SINDH.

ANALYSIS OF DETERMINATS OF
PROFATIBILITY IN BANKING SECTOR OF
PAKISTAN
GROUP NUMBER: 8 BATCH 2020

Group Member Names

Akash Kumar EC-20016

Mirza Imad Baig EC-20043

Abdul Raheem Saim EC-20033

Syed Zeghum Abass Rizvi EC-20030

APPROVED BY:

DR. SHAHID IQBAL

ASSISTANT PROFESSOR
PROJECT SUPERVISOR

© NED UNIVERSITY OF ENGINEERING & TECHNOLOGY. ALL RIGHTS RESERVED – OCTOBER

2024

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 CERTIFICATE:

This is to certify that the following students of Batch 2020 have successfully completed
the final year project in partial fulfillment of requirements for Bachelor’s degree in Economic
and Finance from Department of Economic and Management Science, NED University of
Engineering and Technology, Karachi.

GROUP NUMBER: 8 BATCH 2020

Group Member Names

Akash Kumar EC-20016

Mirza Imad Baig EC-20043

Abdul Raheem Saim EC-20033

Syed Zeghum Abass Rizvi EC-20030

PROJECT ADVISOR CHAIRPERSON

_
Dr. Shahid Iqbal Prof. Dr. Raza Ali Khan
Assistant Professor Chairperson
Department of Economic Department of Economic
and Management Science and Management Science

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 AUTHOR’S DECLARATION:
We declare that we are the sole authors of this project. It is the actual copy of the
project that was accepted by our advisor(s) including any necessary revisions. We also
grant NED University of Engineering and Technology permission to reproduce and
distribute electronic or paper copies of this project.

Signature & Date Signature & Date Signature & Date Signature & Date

…………………… ……………………… …………………… …………………

…

Akash Kuamr Mirza Imad Baig Abdel Raheem Saim Syed Zeghum Abass
Rizvi
EC-20016 EC-20043 EC-20033 EC-20030

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 STATEMENT OF CONTRIBUTION:
⮚ Akash Kuamr (EC-20016)

⮚ Mirza Imad Baig ( EC-20043)

⮚ Abdul Raheem Saim (EC-20033)

⮚ Syed Zeghum Abass Rizvi (EC-20030)

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 EXECUTIVE SUMMARY:
The introduction provides a comprehensive overview of Pakistan's banking sector and highlights
its central role in the country and economy. The historical background traces the development of
the banking sector from post-independence challenges to subsequent reforms and technological
developments in the 21st century. Two banking sectors, conventional and Islamic, are
highlighted, focusing on their contribution to capital, mobilization and financial growth. The
problems identified in the banking sector are market concentration, excess profits and
technological unemployment. Market concentration is viewed based on its effect on competition
and the overall competitiveness of the industry. Windfall, defined as unexpectedly large profits,
was identified as a major problem that prompted research into cause and effect. Technological
unemployment resulting from automation and high technology has been recognized as a
significant factor affecting employment in industry. Research questions and objectives are
clearly defined, focusing on the causes of excess profitability, differences in profitability before
and after the ICT era, internal and external factors affecting profitability, and the consequences
of excess profitability. The importance of the project is emphasized, highlighting its value to
various stakeholders, including depositors, lenders, government agencies, international investors,
banking professionals and senior executives. The scope of the project extends beyond the
immediate stakeholders and aims to be a valuable resource for universities, researchers and
researchers seeking a comprehensive understanding of the profitability of the banking sector. The
literature review examines the role of the banking sector, factors affecting bank profitability,
measures of profitability and the effects of information and communication technology (ICT) in
the banking sector. Methodology unifies research design, sample selection, data collection
techniques and data analysis models. Two quantitative models are proposed to analyze the effect
of internal and external factors on profitability, and Altman's Z-score and Z-score formula for
banking concentration measure financial condition and banking industry concentration.

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 ACKNOWLEDGMENTS:

We are first and foremost thankful to Allah Almighty, upon whom we rely for sustenance
and guidance. We would like to acknowledge the NED University of Engineering and
Technology, Karachi for their support in helping us complete the project. We extend our sincere
gratitude to all those who played a part in making this project a success. We want to say thank
you to our project supervisor for all of their support. We would like to express our gratitude to
Assistant Professor, Dr. Shahid Iqbal from the Department of Economic and Management
Science at NED University of Engineering and Technology for his valuable mentorship, advices,
guidance, and tremendous patience during the develop of this study. I also appreciate his
constant attention he develops to this project.

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 DEDICATION:
We dedicate this project to our parents for their constant love and support. The
unwavering faith they have in us has constantly fueled our determination to reach greater
heights. We want to express our sincere gratitude to our teachers and mentors for their valuable
contributions. We would like to thank Dr. Shahid Iqbal for his invaluable guidance during this
journey. The guidance he has provided has been essential in molding our comprehension and
accomplishments. His mentorship has been instrumental in shaping our understanding and
achievements. We are deeply grateful and present this project as a token of our appreciation to
our parents and Dr. Shahid Iqbal.

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 TABLE OF CONTENTS:

CERTIFICATE........................................................................................................................................................................................ ii
AUTHOR’S DECLARATION............................................................................................................................................................. iii
STATEMENT OF CONTRIBUTION................................................................................................................................................... iv
EXECUTIVE SUMMARY..................................................................................................................................................................... v
ACKNOWLEDGMENTS...................................................................................................................................................................... vi
DEDICATION...................................................................................................................................................................................... vii
TABLE OF CONTENTS.................................................................................................................................................................... viii
LIST OF TABLES.................................................................................................................................................................................. x
LIST OF FIGURES............................................................................................................................................................................... xi
LIST OF EQUATIONS........................................................................................................................................................................ xii
UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS................................................................................................. xiii
CHAPTER NO. 01:................................................................................................................................................1
INTRODUCTION OF FINAL YEAR PROJECT REPORT............................................................................................1
1.1) BACKGROUND.........................................................................................................................................1
1.2) PROBLEM IDENTIFICATION......................................................................................................................2
1.2.1) MARKET CONCENTRATION..............................................................................................................2
1.2.2) WINDFALL PROFIT...........................................................................................................................2
1.2.3) TECHNOLOGICAL UNEMPLOYMENT.................................................................................................2
1.3) RESEARCH QUESTIONS............................................................................................................................2
1.4) OBJECTIVE...............................................................................................................................................3
1.5) SIGNIFICANCE..........................................................................................................................................3
1.6) SCOPE............................................................................................................................................................................................ 4
CHAPTER NO. 02:................................................................................................................................................4
LITERATURE REVIEW..........................................................................................................................................4
2.1) REVIEWS OF BANING SECTOR ROLE.........................................................................................................4
2.2) REVIEWS OF FACTORS EFFECTING BANK’S PROFITABILITY.....................................................................5
2.3) REVIEWS OF PROFITABILITY MEASURES..................................................................................................6
2.4) REVIEWS OF ICT IN BANKING SECTOR....................................................................................................7
2.5) SUMMARY................................................................................................................................................7

CHAPTER NO. 03:................................................................................................................................................8

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METHODOLOGY..................................................................................................................................................8
3.1) INTRODUCTION........................................................................................................................................8
3.2) RESEARCH FRAMEWORK.........................................................................................................................8
3.3) RESEARCH DESIGN................................................................................................................................10
3.4) RESEARCH QUESTIONS..........................................................................................................................10
3.5) RESEARCH POPULATION........................................................................................................................10
3.6) SAMPLING TECHNIQUE..........................................................................................................................10
3.7) SAMPLE SLECTION.................................................................................................................................10
3.8) RESEARCH HYPOTHESIS........................................................................................................................11
3.9) DATA COLLECTION TECHNIQUE............................................................................................................11
3.10) DATA ANALYSIS..................................................................................................................................12
REFERENCES.....................................................................................................................................................13

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 LIST OF TABLES:

CHAPTER 1 INTRODUCTION

CHAPTER 2 LITERATURE REVIEW

CHAPTER 3 METHODOLOGY

TABLE 3.10.1

TABLE 3.10.2

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 LIST OF FIGURES:
CHAPTER 1 INTRODUCTION

CHAPTER 2 LITERATURE REVIEW

CHAPTER 3
METHODOLOGY

3.2.1 (RESEARCH FRAMEWORK)

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 LIST OF EQUATIONS:
CHAPTER 1

INTRODUCTION

CHAPTER 2

LITERATURE REVIEW

CHAPTER 3

METHODOLOGY

EQUATION 3.10.1

EQUATION 3.10.2

EQUATION 3.10.3

EQUATION 3.10.4

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 UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS
The Sustainable Development Goals (SDGs) provide a comprehensive road map
towards creating a world that is equitable and sustainable. These objectives address crucial
global challenges such as poverty, inequality, climate change, environmental degradation,
peace, and justice. Our project aligns with and contributes to three specific SDGs out of the
17 SDGs. By supporting these goals, we aim to play our part in achieving a better and more
sustainable future for all, recognizing the interconnectedness of various issues and the need
for collaborative action on a global scale.

The UN Sustainable Goals in accordance to our research work are as follows:

□ No Poverty
□ Zero Hunger
□ Good Health and Well being
□ Quality Education
□ Gender Equality
□ Clean Water and Sanitation
□ Affordable and Clean Energy
□ Decent Work and Economic Growth
□ Industry, Innovation and Infrastructure
□ Reduced Inequalities
□ Sustainable Cities and Communities
□ Responsible Consumption and Production
□ Climate Action
□ Life Below Water
□ Life on Land
□ Peace and Justice and Strong Institutions
□ Partnerships to Achieve the Goals

xiii
 "ANALYSIS OF DETERMINATS OF
PROFATIBILITY IN BANKING SECTOR OF
PAKISTAN”

Chapter 1
INTRODUCTION
1.1 Background:
The banking sector has experienced worldwide major transformations in its operating
environment and that’s the reason that now the banking sector is considered as the back bone of
any economy. The role of banking sector is very much important in order to perform the
financial activities of an economy. The banks basically dealt with financial instruments, payment
mechanism, transfer and management of risk, assurance of financial market transparency and
activities which evaluate the behavior of banks. The banking sector is playing an efficient role in
the mobilization of capital and the strengthening of financial resources System to deal with the
adverse effects on the economy. In developing countries, the performance and the structure of
the banks are affected by the both internal and as well as external factors. In the case of Pakistan,
the banking sector perform an important role in the financial and as well as on the economic
growth of the country. State Bank of Pakistan was the first central bank formed in 1948 after the
independence. The banking industry of Pakistan had to face the deficiency of capital due to the
political and some other reason just after the independence but then gradually there were number
of measures taken place in Pakistan banking sector to enhance its financial performance . After
the State bank of Pakistan Act 1956, SBP encouraged private sector to form banks . The private
sector created some illegal and unhealthy competition in banking sector of Pakistan so that why
in 1974 by the nationalization policy all the private banks are nationalized and that become the
reason further reduce the strength of the banking sector due to the deprived quality of services
and the product of the banking sector at that time but then in 1990 there were under the reforms
policy of banking sector there were some banks that was privatized in that. Now in 21 st century
in the era of technology the banking sector also feels the requirement of the usage of technology
and that’s why in the early two thousands the banking sector move toward the usage of the
technology and which shows in the society as the usage of the ATM’S introduced at that time
and then gradually now with the usage of the technology the banking sector now move toward
the online banking which is beneficial for the customers as the perform banking transaction
without reaching at there and also beneficial for the banks as it gives them the help to provide
their services in the more convenient way which helps him to improve their profitability. The
banking sector of Pakistan is basically consisting of on local and as well as on the foreign banks
which are providing their services in the country and also in the Muslim Countries like Pakistan,
we have basically two kinds of banking sector that perform their activities and provide their
services to their customers. These two kinds of banking sector are basically consisting on the

1
conventional banking sector that can perform that can perform their conventional banking
activities and similarly on the other hand we have also an Islamic Banking sector who can
perform their banking services as per the rules of Islamic Shariah both of these banking sectors
providing their services to their customers in order to generate or to earn the profits or in order to
increase their profitability.

1.2 Problems Identification:

1.2.1) Market Concentration:

The issue of market concentration in Pakistan's banking sector is an important factor for
profitability. Market concentration is the extent to which a few large banks dominate a market,
which can limit competition. Our analysis examines how this concentration affects bank
behavior, pricing strategies, and overall industry competitiveness. High market concentration
limits consumer choice and can affect interest rates, fees, and quality of service. Studying this
factor is important to understand its impact on the earnings dynamics of individual banks and the
sector as a whole.

1.2.2) Windfall profits:

Windfall profits, or unexpectedly high profits, are a central concern in our projects. Our objective
is to identify the causes and consequences of such windfall gains in Pakistan's banking sector.
This includes examining the economic, regulatory, and market factors that contribute to the
windfall. By analyzing the windfall phenomenon, we seek to understand its impact on the
stability of the banking sector and its possible impact on market dynamics. Examining whether
these windfalls are sustainable or temporary will contribute to a comprehensive understanding of
the banking sector's earnings picture.

1.2.3) Technological unemployment:

Technological unemployment resulting from the increased use of automation and advanced
technologies in the banking sector is a relevant factor in our fiscal year plans. As banks embrace
technological innovation, traditional jobs may become automated, impacting employment in the
industry. Examine how advances in technology, such as online banking and the introduction of
artificial intelligence, are impacting the structure of the workforce and whether this is
contributing to unemployment. This analysis is very important to understand the social and
economic aspects of technological change and its impact on the profitability and sustainability of
Pakistan's banking sector.

1.3 Research Question

1. What are the causes of the windfall profitability of the banking sector in Pakistan?
2. What is difference in the profitability of the banking sector of Pakistan in pre and post
ICT era?

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 3. What are the internal factors that can affect the profitability of the Pakistan
Banking sector?
4. What are the external factors that affect the Pakistan banking sector profitability?
5. What are the consequences of the Pakistan banking sector windfall profitability?

1.4 Objective
The main objective of our project is to analyze windfalls in the banking sector of Pakistan. Our
goal is to uncover the underlying causes that contribute to such unexpectedly large increases in
profits. This requires a thorough analysis of the economic, regulatory, and market factors that
create favorable conditions for generating windfall profits. Understanding the impact of such
windfalls is equally important as it provides insight into the stability and resilience of the
banking sector. This research forms the basis of strategic recommendations to maintain a
balanced and sustainable revenue situation. Our project also focuses on a comparative analysis of
bank profitability, particularly examining the transition from the pre-Information and
Communication Technology (ICT) era to the present. I'm guessing. By examining historical data
and trends, we aim to understand how advances in ICT have affected banks' financial
performance. This comparative study helps determine the transformative impact of technology
on banking operations, customer interactions, and overall profitability. The insights gained from
this analysis are critical to adapting your strategy to the evolving technology landscape. Another
important aspect of the current financial year plan is the impact on credit rating ratios, which are
key determinants of bank profitability. It is to investigate internal and external factors. Internal
factors include a bank's operational efficiency, risk management practices, and lending policies,
while external factors include economic conditions, regulatory changes, and market trends. By
identifying these factors, our analysis aims to provide a nuanced understanding of the
complexities that impact banks' ability to effectively evaluate loans. This knowledge will be
incorporated into strategies to optimize credit rating ratios there by increasing the overall
profitability of Pakistan's banking sector.

1.5 Significance
This project holds significant value by serving as a comprehensive guide to navigate the complex
and dynamic landscape of the banking industry amid constant financial revolutions and evolving
market conditions. Its primary objective is to meticulously identify both opportunities and threats
within this ever-changing environment. The implications of this analysis are far-reaching and
extend to various stakeholders, including depositors, lenders, government entities, international
investors, banking professionals, and the top management of the banking sector. For depositors
and lenders, the insights can contribute to a more secure and stable financial environment,
fostering confidence in banking services. Governments can leverage the findings to formulate
effective regulatory policies that ensure financial stability and stimulate economic growth.
International investors gain valuable information for making informed decisions, promoting
transparency and attracting investments. Banking professionals can enhance their skills and
contribute to the growth of their organizations. Meanwhile, top management can utilize the
project's insights to formulate strategic plans, allocate resources efficiently, and navigate
challenges adeptly. In essence, this project serves as a holistic resource, aligning the interests of
diverse stakeholders and fostering a resilient and forward-thinking banking industry.
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1.6 Scope
The scope of this project extends to providing a valuable resource for academia, research
professionals, and research scholars seeking a comprehensive understanding of the profitability
positions within the banking industry. By delving into the intricate dynamics of financial
revolutions and market conditions, the project aims to offer insights that go beyond surface-level
analyses. For academia, it becomes a foundational source for teaching and research, fostering a
deeper understanding of the factors influencing the profitability of banks. Research professionals
can leverage the project's findings to enhance their work, gaining nuanced insights into the
intricacies of the banking sector's financial performance. Research scholars benefit by having a
robust reference point for their studies, facilitating the development of in-depth analyses and
contributing to the scholarly discourse on banking industry profitability. The project's scope,
therefore, transcends the immediate stakeholders, reaching into the realms of education,
professional research, and scholarly pursuits to advance knowledge and comprehension of the
complex financial landscape within the banking sector.

Chapter 2
Literature Review
2.1 Review of Banking Sector Role

(Shahid et al., 2015) said that an efficient banking sector works an important role in mobilizing
capital resources and strengthening financing to mitigate the negative shocks of the system in the
economy. The banking system is the most important resource and resource distribution channels
any economy. The share of Islamic banking has increased recently Muslim countries in particular
and worldwide.

(Raza et al., 2013) said that the efficiency, profitability and as well the competiveness are the
factor on which the Pakistan banking sector is depend and also said crucial element that can back
the Pakistan banking sector competiveness are ability to maximize risk adjusted returns on
investment and sustaining stable and competitive returns.

(Phulpoto et al., 2012) said that Islamic banking industry have the slow growth and the cause of it is the
unwariness of it in the clients but on the other hand the due to longer history and the experience as well
the conventional banks doing their operation in more dominant position in the banking industry of the
Pakistan.

(Farooq et al., 2021) said that the banking sector of Pakistan plays a very crucial role in its
financial and as well as its economic growth of the country and also said several reforms were
made in order to improve the financial efficiency in the banking sector of Pakistan.

4
2.2 Reviews of Factors Effecting Bank Profitability
(Dawood, 2014) said that internal factors such as management policy, capital ratio and the
management of risk and also the external factors like inflation an policies by the government can
become a cause that can affect the profitability of the banking sector and they also find that cost
efficiency, liquidity etc. are the factors that can decide the commercial bank profitability that can
do their operation in Pakistan.

(Raza et al., 2019) said that in the banking industry the profitability is very important role to
analyze its financial performance. The profitability is negatively but significantly affected by the
size of asset while the loan and the profitability having the positive relation.

According to the (Kanwal & Nadeem., 2013) there were so many internal and as well as external
factors become a cause of influence on the profitability of commercial banks and also said that to
maximize the risk-adjusted returns banks have to focus more on other external factors or devise
policies to improve the internal factors as well.

(Siddique et al., 2016) said that the determinants that can significantly create the impact on the
profitability are size of bank, management of their expenses, rate of interest, employment ratio of
capital and also the liquidity as well and also said that the profitability of bank will improve by
done their operation efficiently.

(Naseem et al., 2012) said that Banks that have more equity, Total Assets, Loans, Deposits, and
also the macro factors i.e. stock market capitalization, economic growth, inflation, and other
factors are thought to be safer which can be a cause of the higher profitability of the banking
sector and for this reason, there were six speculations have been produced for investigating
bank's benefit.

(Waleed et al., 2016) said that growth in the accounts payable can become a cause of increase in
the profitability of the banking sector and also the profitability of the banks can increase when
they hold sufficient liquid assets.

(Yaqoob et al., 2021) said that nature of the bank does not create the influence on the
profitability of the banks so that shows that there is not significant relation that between banks
profitability and their nature i.e. private or public.

(Sarwar et al., 2018) said that size of bank is significant factor of their profitability so that’s why
the banks having larger bank size can acquire better position of the profitability as compared it
with the bank having small bank size and the profitability also have the positive impact with the
management quality on the other hand GDP and interest rate also the factor that impact its
profitability as the external factors.

5
 (Javaid et al., 2011) said that the profitability is impacted by equity and deposits on the wide
scale and the banks that can have larger levels of equity capital, total assets, loans, and deposits
are thought to be safer, and this is the perception that can lead to increased profitability.

According to the (Kamran et at., 2016) size, leverage ratio and the GDP are the factors that can
impact the profitability of the banks significantly and that shows the external macroeconomic
environment can create their influence on the profitability of the banking sector.

(Gul et al., 2011) said the microeconomic factors are cause of profitability impacting on the
large degree and also said that external factors are also create impact on the profitability on the
large scale.

(Mujahid et al., 2014) said that the privatization of the banks can also positively create effect on the
profitability that can privatize but also on the profitability of the Pakistan banking sector.

(Ali & Pauh., 2018) said that profitability is not significantly affected by the liquidity risk but it
is significantly impacted by the bank size, credit risk, funding risk and stability and the credit
risk have not the significant effect on profitability and the bank size, liquidity risk, funding risk
and profitability have the significant impact on the profitability.

2.3 Review of profitability measure

(Ali, 2015) said that financial risk has a positive relationship with return on assets (ROA) but on
the other hand it have negative relationship with return equity (ROE) and also said that the \
economic growth can contributes insignificant impact on profitability but it is negatively
associated with asset side and on the other hand it is positively associated on the equity side. And
the inflation has a positive impact on return on asset (ROA) and having the negative impact on
return on equity (ROE) but the impact is insignificant on profitability.

(Akhtar et al., 2011) said that return of assets (ROA) is used as proxy for measuring bank’s profitability
and insignificant relation where return on equity (ROE) is used as proxy to measure the profitability of
commercial banks and they also said ratios like capital adequacy and having the negative relationship
while they are not affected significantly by the (ROE).

(Siddique et al., 2016) said that Hypothesis of economies of scale makes sense of the negative
relation between the bank size and the return on asset (ROA) that can infers that more prominent
the size of bank and lesser the benefits it acquires.

(Javaid et al., 2011) said that overall store to add up to resources and all out value to add up to
resources showed a positive and large amount of relationship with benefit marker ROA and also
said that the effect of deposits, loans, equity, and assets on return on asset (ROA), a key
profitability metric and there is strong proof that these variables have a significant impact on
profitability that has been revealed by the empirical data.

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According to (Abbas at el., 2012) Indicators such as Return on operating fixed asset (ROFA) is
used to analyze the financial performance because it help to understand that in which way the
banks are using its operating fixed assets and also show the contribution of it in the banking
performance.
According to the (Rauf et al., 2014) online banking has a long-term, favorable, and also the huge
impact on the return on equity (ROE) and return on assets (ROA) of Pakistan's banking industry.
All explanatory variables having the liner relation with return on asset (ROA) and the same in
context of return on equity (ROE).

According to the (Ali et al., 2011) effective asset management and economic expansion provide
a strong, positive correlation with profitability (as determined by ROA and ROE) while the
lower profitability as determined by return on assets (ROA) that is the result of the high credit
risk and the capitalization.

2.4 Review of ICT in Banking Sector

According to (Kamboh & Leghari, 2016) the banking without cash is an innovation in providing
the services of banks but the ATMs have a negative and important impact on the profitability of
the banking sector in Pakistan. Also, so many problems about the ATM the card is stuck in the
machines and the machines do not give money due to the server connection problem is also
displeases customers.

(Rauf et al., 2014) said that there is important and also the positive impact of the internet banking
on the return on asset (ROA) and the return on equity (ROE) of the banking sector of Pakistan.

(Sumra et al., 2011) said that for the banking sector the internet provides a new medium to provide its
services by the medium of E- banking. It includes the services like ATM, credit card and fund transfer
etc. It can increase the efficiency of the banks and also helps to reduce its labor cost and the E-banking
can create positive impact on banking sector profitability.

2.5 Summary
The literature review gives the important role of a strong and sustainable financial system in
achieving economic and financial growth, with the banking sector playing a crucial part in
mobilizing capital resources and facilitating financing. Notably, the share of Islamic banking has
seen an increase in Muslim countries and globally. In the context of Pakistan, the banking sector
is acknowledged as a significant contributor to financial and economic growth, with ongoing
reforms aimed at enhancing financial efficiency. The State Bank of Pakistan is emphasized as a
key regulator in creating a level playing field for both local and foreign banks. The factors
influencing bank profitability are explored, including internal and external elements such as
client satisfaction, loyalty, critical determinants of productivity, and macroeconomic factors like

7
equity capital, total assets, and inflation. Various profitability measures, including return on
assets (ROA) and return on equity (ROE), are discussed, with considerations for financial risk,
bank size, economic growth, and inflation. Additionally, the impact of information and
communication technology (ICT), particularly ATMs, on the profitability of the banking sector
in Pakistan is highlighted, with challenges such as server connectivity issues affecting customer
satisfaction.

Chapter 3

Methodology

3.1 Introduction
This chapter of the study is based on the addressing the problem statement by using the proposed
models, tools, theories and techniques. The research methodology is to investigate that how the
different determinates affect the profitability of the banking sector. The methodology outlines
the specific research design, sample selection, data collection methods and the data analysis
techniques. This study is basically based on the quantitative method in which the data is gathered
from the annual financial reports of the banks and financial firms. By analyzing the collected
data, the basic aim of the study is to analyze the profitability of the banking sector of Pakistan
that can inform in future decision making for the different stockholders and the policy makers.

3.2 Research Framework

The study used the quantitative approach of research in which the data is used is the secondary
data that is collected from the annual financial reports of the Banks and financial reports of the
other financial firms then the descriptive statistics and regression analysis and the ratio analysis
is used to find the results from that data.

8
Quantitative
Data
Method

Secondary

Annual Financial Reports of the banks

and financial firms

Descriptive statistics & Regression Ratio Analysis

Analysis

Result

Figure 3.2.1 (Research frame work)

9
3.3 Research Design
This research will follow the quantitative method of research design. In this study the research
design will be based on the quantitative research methods. In this quantitative method data will
be gathered from the large sample size to do the in-depth analysis of windfall profitability of the
Banking sector of Pakistan.

3.4 Research Question

1. What are the causes of the windfall profitability of the banking sector in Pakistan?
2. What is difference in the profitability of the banking sector of Pakistan in pre and post
ICT era?
3. What are the internal factors that can affect the profitability of the Pakistan
Banking sector?
4. What are the external factors that affect the Pakistan banking sector profitability?
5. What are the consequences of the Pakistan banking sector windfall profitability?

3.5 Research Population

In this study the schedule banks of the Pakistan as per the SBP are considered as the population
of the study and that are used a population of the study.

3.6 Sampling Technique

This study uses the non-probability random sampling in which the sample size selected from the
population is selected non – randomly which represent the whole population. The convenience
sampling helps in study to select the sample size non randomly according to the convenience so
in this study the sample size is based on the annual reports of the banks and the financial firms
that are easily available online and that can give the best possible answer of the research
question.

3.7 Sample Selection

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In this study the sample population is consists on the all the schedule banks under the State bank
of Pakistan. The sample include public, private and as well as on foreign banks

3.8 Research Hypothesis:

Ho1: The banking industry of Pakistan does not have windfall profits

Ho2: There is no difference in the banking sector profitability of Pakistan in pre & post ICT era

Ho3: The change in internal and external factors can not affect the Pakistan banking sector
profitability

Ho4: The Pakistan’s banking sector is not fall under the safe zone.

3.9 Data Collection Technique

● Quantitative Data

In this study the quantitative data is consist on the secondary data that was collected through the
annual financial reports of Banks and the financial firms. The annual financial reports include
the balance sheet and the Income statement of the banks. The panel data of the reports is
collected for the previous twenty years. The data is collected to achieve the research objective to
analyze the windfall profitability of the Pakistan banking sector and to compare the profitability
of the pre and post ICT era.

● Secondary Data

In this study as mentioned above the data is collected through the annual financial reports of the
banks of last year that is basically a secondary source of the data.

● Annual Financial Reports

The annual financial report is basically used to inform the business community such as
stakeholders and the customers about the performance of the firm and many organizations are

11
published their financial reports on quarterly and yearly basis. In these financial reports they

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show their assets, liabilities, sales, performance and their profitability. In this study w1e cover the
balance sheet and income statement from annual financial reports to analyze the profitability of
the banking sector which used to fulfill the objective of the research.

3.10 Data Analysis:

Model 1:

ROA= α0 + β1FA + β2BOR +β3 INF + B4GDP + µ

Equation 3.10.1

In model 1 the return on asset (ROA) is considered as the profitability measure and act as a
dependent variable while the fixed asset (FA), borrowing (BOR) is considered as the internal
variables that can affect the profitability and the Inflation (INF) and GDP is considered as the
external factor affects profitability and they all are treated as the independent variables in this
study.

This model is sued to analyze that how these factors can affect the profitability of the banking
sector.

Model 2:

ROE = α0 + β1FA + β2BOR +β3 INF + B4GDP + µ

Equation 3.10.2

In model 2 the return on equity (ROE) is considered as the profitability measure and act as a
dependent variable while the fixed asset (FA), borrowing (BOR) is considered as the internal
variables that can affect the profitability and the Inflation (INF) and GDP is considered as the
external factor affects profitability and they all are treated as the independent variables in this
study.

This model is sued to analyze that how these factors can affect the profitability of the banking
sector.

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On both of the above two models we can apply the fixed method and random method in order to
estimate the variables that are used in the above models.

Model 3:
ALTMAN Z-SCORE FORMULA

Edward Altman in 1968 give this formula checks out the company’s financial health and condition.

Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Equation 3.10.3

Z = zeta

A = Working capital/Total Assets

B = Retained earnings /Total Assets

C = EBIT/Total Assets

D = Market value of equity/Total Assets

E = Sales/Total Assets

This model is used in this study in order to measure financial health of the banking sector of the
country.

Benchmarks of Altman z-score:

Distress Zone Grey Zone Safe zone

High Risk Uncertain results No results

Less than 1.8 to 2.9 Above 2.9

Table 3.10.1

Z-SCORE FORMULA OF Banking Concentration

It is used as the buffer of a country's banking system with the volatility of those returns. It is
estimated by this formula

Z-SCORE = (ROA + (Equity/Assets))/s.d(ROA)

Equation 3.10.4

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 This model is used in this study in order to measure the concentration of the country Banking
sector.

ROA RETURN ON ASSETS Profitability Dependent variables

ROE Return on equity measures
FA Fixed assets Internal factors Independent variables
BOR Borrowing
INF Inflation External factors Independent variables
GDP Gross domestic product
Z Financial health Financial Health measures
A working capital/Total assets Variables that effecting financial health
B Retained earnings/Total assets
C EBIT/Total assets
D Market value of equity/Total
liability
E Sales/total assets
Table 3.10.2 (Variable and its Characteristics)

This table can show the variables and also the nature or the role of it in the models that we used in this
study in order to test the hypothesis that we test in the study with the help of that models.

15
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