Malaysian E Commerce Journal (MECJ) 3(3) (2019) 22-26
Malaysian E Commerce Journal (MECJ)
DOI : http://doi.org/10.26480/mecj.03.2019.22.26
ISSN: 2521-0505 (online)
CODEN : MECJBU
REVIEW ARTICLE
IMPACT OF RISK MANAGEMENT ON PROFITABILITY OF BANKS
Shahbaz Bhatti1*, Naveed Tariq2, Muhammad Rizwan2, Muhammad Ajmal2, Abdul Rehman Aslam2, Kamran Javed3
1Instituteof Agricultural and Resource Economics, University of Agriculture, Faisalabad.
2Department of Business Administration, UAF Sub-Campus Burewala-Vehari.
3Cotton Research Station, Vehari
*Corresponding author e-mail: bhattimphil@gmail.com
This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in
any medium, provided the original work is properly cited.
ARTICLE DETAILS ABSTRACT
Article History: Banks today are the biggest budgetary establishments around the globe, with branches and auxiliaries for an
amazing duration. In any case, business banks are confronting dangers when they are working. Credit hazard is one
Received 10 October 2019 of the most critical dangers that banks face, taking into account that conceding credit is one of the fundamental
Accepted 18 November 2019 wellsprings of pay in business banks. Subsequently, the administration of the hazard identified with that credit
Available Online 24 March 2020 influences the benefit of the banks. The point of the exploration is to furnish partners with precise data in regards
to the credit hazards the executives of business keeps money with its effect on benefit. The principle motivation
behind the exploration is to research if there is a connection between credit chance administration and productivity
of business banks in Europe. We additionally expect to examine if the relationship is steady or fluctuating. In the
examination model, ROE and ROA are characterized as intermediaries of gainfulness while NPLR and CAR are
characterized as intermediaries of credit chance administration. The exploration gathers information from the
biggest 3 commercial banks in Pakistan from 2016 to 2018 and formulate hypothesis which are identified with the
examination question. A progression of measurable tests are performed so as to test if the relationship exists. Other
measurable tests are performed to explore if the relationship is steady or not.
KEYWORDS
Risk management practice, profitability, Pakistan’s commercial banks.
Liquidity risk consider as the most significant factor influence consistency
1. INTRODUCTION and endurance of bank. Hence, if the bank had the option to deal with this
Banks speak to the monetary heart of any advanced society. Banks today risk, this mean he will have the option to execute the commitments
are the biggest monetary organizations around the globe, with branches towards the contributors, notwithstanding that, the liquidity in the bank
and backups for an amazing duration. They can be utilized as a center of will improve the benefit and afterwards lead to extend the wealth of its
reserve funds to numerous people or foundations, and it likewise can be investors. Additionally, credit dangers which results when the
utilized for ventures, loaning, and anticipating others. Banks attempted to counterparty disregards to meet its commitments appropriate and
facilitate the keep running of items and administrations between the completely as per the agreed terms, encouraging troubles because of this
individuals from the network by giving them straight forwardness and disappointment. Notwithstanding that operational risk speaks to the
advance installment techniques. In the seventies, Business banks went out misfortunes that outcome from the disappointment of internal
on a branch which were anything but difficult to control. In any case, after procedures, work force and frameworks. At long last, chances out of bank
the seventies of the only remaining century the financial market saw control are spoken to by market risk, which brought about by
numerous advancements and new practices, for example, changeability of macroeconomic factors, for example, a difference in financing costs,
the loan costs, scanning conversion scale, presentation of numerous items, swelling rate, instability of costs, money trade rates.
and spread of the banks all around and nearby. The new time of changes
in banks after the seventies, caused and expanded volume of work, wave The achievement and development of banks, connected to its skilled job
of deregulation, and accelerated competition. in the main request to decide changeable dangers and attempting to keep
away from them. This subject has turned into a region of worry of various
The new changes of banking practices after the seventies, kept on specialists and investigators in business and account condition locally and
manipulating the economic markets and constructed by banks, which globally, yet these examinations tended to this issue through anticipating
controlled them to press net revenues for the challenge, and consequently these dangers exclusively, particularly in the commercial condition. As it
prompted a decrease in banking benefit. Similarly those new practices is seen from the specialist, there is just one investigation which has been
particularly over the most recent two decades prompted the expansion of applied on the Islamic banks, While thinks about in business banks have
the dangers looked by these banks in all nations, where the financial managed the effect of risk the board trains on execution independently,
business risk is never again controlled to the dangers of borrowers, and Therefore, this examination endeavors to break down the effect of risk the
even past that to the experience of a few dangers, some of which result executives rehearses on the gainfulness of commercial business banks all
from the bank choices which will increase or decreasing the danger what’s in all and exclusively.
more, thus influence its gainfulness.
The banking sector had entered the crisis with too much leverage and
inadequate liquidity buffers. These defects were joined by poor
Cite The Article: Shahbaz Bhatti, Naveed Tariq, Muhammad Rizwan, Muhammad Ajmal,Abdul Rehman Aslam, Kamran Javed (2019). Impact Of Risk Management On
Profitability Of Banks. Malaysian E Commerce Journal, 3(3) : 22-26.
Malaysian E Commerce Journal (MECJ) 3(3) (2019) 22-26
administration and risk management, just as wrong motivation structures. due to the mismanagement of credit risk. In 2008 after financial crises the
The MCB was set up in November 1949 as an initial move towards making bank learned the lesson but still, they need to improve the credit risk
a national financial framework. A significant occasion throughout the management. Bank can improve it through tackling asymmetrical
entire existence of banking framework in the nation happened on January information flow and giving guarantee of loan repayment. The Author
first 1974, when all the 13 residential banks were nationalized and joined conclude that the bank size, leverage and growth are also positively
into five nationalized business banks. In this way, this investigation events interlinked with each other. Over the year bank learned how to tackle
of three Banks HBL, MCB and UBL bank all in all and entirely. credit risk and achieved profitability after financial crises. There is no
disclose relation between credit risk and profitability.
1.1 The objectives are as follow:
Sun and Chang had worked on the impact of credit risk on profitability of
1- The main objective is to explore the risk in commercial banks.
commercial Banks [4]. The ROE and ROA are dependent variables and CAR
2- To explore the effect of risk management practices as wholes and and NPLR are independent variables. Data resources is WADS. The author
separately on commercial banks. concludes the positive relationship between credit risks and profitability
from data. They find the negative relationship between NPLR and ROE and
3- How risk management affect profitability. NPLR and ROA. By combining the result, they conclude the positive
relationship between credit risk management and profitability. The
4- To find out the relation between risk management and profitability.
author conclude that bank managers should control the risk management
5- How the proportion of profitability can increase. to improve profitability. The significant relation is not present between
CAR and profitability.
2. REVIEW OF LITERATURE
A studied the relationship between risk management and profitability of
Alqisie and Ahmad examined the profitability of Jordanian commercial
commercial banks in Albania [5]. The author observed the negative
banks get affected by risk management practices [1]. independent
relationship between credit risk and profitability ROA and ROE. Capital
variables are liquidity, operational risk, credit risk and market risk which
adequacy has a positive relationship with two profitability variables with
are measured by CP, LQ, IC, EFFC, CICF, PRCF, INF and INT. ROA is used to
return on assets and return on equity. The return on equity is more
measure the dependent variables profitability of banks. Risk management
efficient profitability measurement than return on assets. There is strong
practices have significant role in profitability of JCB. Liquidity, credit risk
relationship between credit risk and profitability of commercial banks.
and market risk management does not affect significantly. While
operational risk management effect significantly.
Sayilgan examined the determinants of profitability in Turkish banking
sectors 2002 to 2007 [6]. The author observed regressions results for ROA
Fan li examined the impact of credit risk management on profitability of
which is dependent variable. The balance sheet in turkey become more
commercial bank [2]. ROE and ROA are dependent variables. CAR and
and stronger in 2002 to 2007. The author obtained the result related to
NPLR are independent variable. A relationship exists in credit risk
the micro independent variables the profitability of banking sectors seems
management and profitability. The result show that there is not a
to have increased along with declining inflation rate, consistently
significant relationship between CAR and ROE which is due to the
increasing industrial production index and improving budget balance.
controversy in theoretical predictions of the relationship between NPLR
and ROE and between NPLR and ROA. The higher the NPLR is less the
Abel observed the determinants of banking sectors profitability in
available capital for bank to invest. The interesting thing about result is ha
Zimbabwe [7]. The profitability of banking institutes is measured by ROE
although the relationship is not significant, the correlation, co-efficient of
and ROA. Independent variables are INF, CADEQ, credit risk, bank
CAR for both ROE and ROA is negative. CAR could negatively affect the
management an economic growth. The author observed the result which
bank profitability.
shows the banking sectors profitability in Zimbabwe is mostly driven by
bank specific factors. Profitability depends upon the bank level
The impact of risk management practices on financial performance of the
managements variables. Profitability is associated with bank that hold a
Islamic banks in Jordan. ROA and ROE are measures of the performance,
relatively high amount liquid assets high capital and low level NPLs
while, Liquidity risk, Operational risk, Credit risk and Market risk
together with efficient expense management. OEM should be enhanced by
represent risk management practices. The study concluded that the
the banking sectors. The study show positive relationship between
performance of Islamic banks in Jordan was affected negatively and
profitability and LIRISK. Profitability can be increased by increasing the
significantly by liquidity risk, credit risk and operational risk, while
liquidity.
performance was affected positively and significantly by market risk.
Kithinji credit risk management and profitability of commercial banks in
Alzorqan examined the relationship between bank liquidity risk and
Kenya [8]. The profit is not dependent on the amount of credit and
performance of the Jordanian commercial banks. Execution was estimated
nonperforming loans amount to Ks 2.676 billion. The author concludes
by (ROI and ROE), while current and credits to stores proportions speak
that there is no relationship between profit amount of credit and the level
to liquidity chance. The aftereffects of the investigation presumed that
of nonperforming loans. The result reveals that the bulk of the profit of
present and advances to stores proportions impact ROI and ROE
commercial banks is not by the amount of credit affected and
essentially. A studied the effect of credit risk management on financial
nonperforming loans suggesting that other variables other than credit and
performance of the Jordanian commercial banks. The dependent variable
nonperforming loans impact on profits.
represents profitability measured by ROA and ROE. The independent
variables represent the credit risk management indicators which include
Staikauras and wood had studied the determinant of European bank
the CAR, CI, CFR, LR, NPL/GL. Nonperforming loans/Gross loans ratio have
profitability. The result suggest that the profitability of European bank is
a positive effect. Capital adequacy ratio credit interest /credit facilities and
affected not only by factors related to their management decisions but also
the leverage ratio do not affect the profit of the bank measure by the ROE.
to the change in the external micro economics environment. The results
Leverage effect negatively on bank profitability. Credit risk is important in
are in contrast to studies that have examined structure performance
explaining profitability.
relationship for European banking and find a positive effect of
concentration and market share variables on bank profitability. The
Saeed and Zahid examined the impact of credit risk on profitability of the
limitation of the analysis may be related to the specification of the
commercial banks [3]. Dependent variables are measured by ROA and ROE
functional form of the estimating equation.
and independent variables are credit risk, bank size, growth and leverage.
The author observed that the credit risk is the most dangerous risk
Shijaku does concentration matter for bank stability? Evidences from the
especially from the bank that can put them into deep trouble. According to
Albanian banking sector [9]. The variable of capital structure as measured
the observation in 2008 several banks passed through the deep recessions
by LEVERAGE has the most important effect on bank stability among the
Cite The Article: Shahbaz Bhatti, Naveed Tariq, Muhammad Rizwan, Muhammad Ajmal,Abdul Rehman Aslam, Kamran Javed (2019). Impact Of Risk Management On
Profitability Of Banks. Malaysian E Commerce Journal, 3(3) : 22-26.
Malaysian E Commerce Journal (MECJ) 3(3) (2019) 22-26
internal variables. The author conclude that concentration is negatively independent variables are the factors that affect bank profitability
related to the bank stability. In term of other variables, the microeconomic including the credit risk.
variables seem to have a significant effect on bank stability small banks are
more sensitive to market concentration. 3.3 Hypothesis
There are two types of hypothesis.
Short investigated the relation between commercial bank profit rates and
banking concentration in Canada, Western Europe and Japan [10]. Some 3.3.1 Null Hypothesis
variable should be considered to take account of profit rates or capital
scarcity in these countries. The average discount rate is considered as Ho1= there is no significant relationship between ROA and CP.
independent variable. Profit rate are dependent variable. The result shows Ho2= there is no significant relationship between ROA and LQ.
that market size measured by total deposits or broadly defined money is Ho3= there is no significant relationship between ROA and IC.
able to explain over three fifth of the variation in concentration across Ho4= there is no significant relationship between ROA and INF.
twenty-three countries. Legal environment has small effects on Ho5= there is no significant relationship between ROA and INT.
concentration and bank profit rates. Ho6= there is no significant relationship between ROA and CICF.
3.3.2 Alternative Hypothesis
Goddard has worked on the profitability of European bank: A cross
sectional and dynamic panel analysis [11]. The result of empirical analysis Ho1= there is significant relationship between ROA and CP.
suggests that despite the growth in competition in European financial Ho2= there is significant relationship between ROA and LQ.
market, there is still significant persistence of profit from one year to the Ho3= there is significant relationship between ROA and IC.
next. The author also concludes the difference between countries in the Ho4= there is significant relationship between ROA and INF.
relationship between the importance of OBS business in a bank portfolio Ho5= there is significant relationship between ROA and INT.
and its profitability. The general conclusion of empirical analysis is that Ho6= there is significant relationship between ROA and CICF
the increasing integration of European banking market not withstanding
national factors still seem to play an important role among the 4. RESULTS AND DISCUSSION
determinant of bank performance.
Dependent Variable: ROA
3. METHODOLOGY Method: Panel Least Squares
Date: 10/16/19 Time: 15:27
The examination configuration grips the strategies on which the
Sample: 2016 2018
exploration work is established on Saunders et al. As it were, it tends to be
Periods included: 3
said that it is made out of the kind of the investigation which is utilized by
Cross-sections included: 3
the specialists to achieve the targets. The sort of study covers different
Total panel (balanced) observations: 9
perspectives, for example, theories, factors, techniques, and separate
structure. Revealing and exploratory research plans are the two key
classifications of research structure. The utilization and selection of both
Variable Coefficient Std. t-Statistic Prob.
research structures is basically founded on the nature and necessities of
the examination. The distinct research configuration is improper for this C -0.037475 0.106199 -0.352880 0.7579
examination due to logical need, for example, lab try. The exploratory
research configuration can more readily fit in this examination on account CP 0.001668 0.000745 2.240269 0.1544
of featuring the connections (critical or immaterial) between credit hazard
LQ -0.008694 0.005146 -1.689278 0.2332
and bank profitability. It is assumed that finding these connections will
help the Pakistani banks to stay away from credit hazards later on. What's IC 0.002391 0.001785 1.339331 0.3124
more, the investigation's preference is flexible and unmistakable in
responding to the examination questions. Consequently, the examination CICF -0.000498 0.000390 -1.275833 0.3302
targets can be practiced all the more unequivocally while receiving
exploratory research structure. Additionally, the after effects of this INF -0.298928 0.467016 -0.640081 0.5877
examination are to a great extent established in the quantitative
INT 0.421966 0.834540 0.505628 0.6633
information and subsequently cautious and intensive examination is
required which can be accomplished by embracing exploratory research.
Secondary data is used which work on E view and SPSS to find regression R-squared 0.959679
and correlation. Adjusted R-squared 0.838715
S.E. of regression 0.002594
3.1 Population
Sum squared reside 1.35E-05
The key aim of this research is to determine the links between bank
profitability and credit risks associated with banks. The numerical data for Log likelihood 47.58861
analyses is acquired from three big Pakistani commercial banks for the F-statistic 7.933610
period of eight years starting from 2016 to 2018. The big three Pakistani Prob (F-statistic) 0.116152
banks refer top three Pakistani commercial banks which include:
Mean dependent var 0.012856
1. HBL S.D. dependent var 0.006459
2. UBL Akaike info criterion -9.019691
3. MCB Schwarz criterion -8.866294
Hannan-Quinn criter. -9.350721
3.2 Data Collection
Durbin-Watson stat 3.250714
The empirical data about study variables for the period of three years
(2016-2018) is collected from Bank Scope database which contains the For relapse investigation 1 exhibit that the connection among CAR and
data of all commercial Pakistani banks. Two types of empirical data ROE is unimportant while the connection among NPLR and ROA is critical.
(dependent variables and independent variables) are collected based on With regards to the LNTA, the p-esteem more than 0.05 shows that we
the theoretical model of the study. The dependents variables are ROE can't dismiss that the connection between bank size and ROE isn't
(Return on Equity) and ROE (Return on Assets) and conversely the noteworthy.
Cite The Article: Shahbaz Bhatti, Naveed Tariq, Muhammad Rizwan, Muhammad Ajmal,Abdul Rehman Aslam, Kamran Javed (2019). Impact Of Risk Management On
Profitability Of Banks. Malaysian E Commerce Journal, 3(3) : 22-26.
Malaysian E Commerce Journal (MECJ) 3(3) (2019) 22-26
Correlations
CP LQ IC INT CICF INF ROA
Pearson Correlation 1 -.053 .580 -.734* -.220 -.564 .854**
CP Sig. (2-tailed) .893 .101 .024 .570 .114 .003
N 9 9 9 9 9 9 9
Pearson Correlation -.053 1 -.215 .413 -.290 .131 -.486
LQ Sig. (2-tailed) .893 .579 .270 .449 .736 .184
N 9 9 9 9 9 9 9
Pearson Correlation .580 -.215 1 -.388 .322 -.331 .663
IC Sig. (2-tailed) .101 .579 .303 .398 .384 .051
N 9 9 9 9 9 9 9
Pearson Correlation -.734* .413 -.388 1 .230 .784* -.823**
INT Sig. (2-tailed) .024 .270 .303 .552 .012 .006
N 9 9 9 9 9 9 9
Pearson Correlation -.220 -.290 .322 .230 1 -.075 -.158
CICF Sig. (2-tailed) .570 .449 .398 .552 .848 .684
N 9 9 9 9 9 9 9
Pearson Correlation -.564 .131 -.331 .784* -.075 1 -.525
INF Sig. (2-tailed) .114 .736 .384 .012 .848 .147
N 9 9 9 9 9 9 9
Pearson Correlation .854** -.486 .663 -.823** -.158 -.525 1
ROA Sig. (2-tailed) .003 .184 .051 .006 .684 .147
N 9 9 9 9 9 9 9
*. Correlation is significant at the 0.05 level (2-tailed).
**. Correlation is significant at the 0.01 level (2-tailed).
5. CONCLUSION 3. Market hazard the board practices don't have any huge impact on
the productivity of commercial bank during study period, which
The reason for this examination is to research the impact of hazard the implies that proposals banks don't experienced market chance or
executives rehearses on the productivity of commercial banks in the dealing with this sort of hazard.
period (2016 – 2018). For this reason, information from the yearly fiscal
summaries of 3 commercial banks have been utilized to test the theories 4. Contingent upon the discoveries the specialist would state, that
of the investigation. Benefit of banks was spoken to by Return on Commercial Banks have overseen liquidity, credit and market
resources (ROA), while chance administration practices were spoken to by hazards adequately during the investigation time frame, while
(liquidity hazard, operational hazard, credit hazard and market chance). these banks neglected to oversee operational dangers spoke to by
overheads, and yet they had the option to deal with the salary
Each hazard the executive’s practice was spoken to by two proportions as
chance emphatically.
found in tables. The investigation finishes up the accompanying outcomes:
Risk the board practices have fundamental job in clarifying an enormous RECOMMENDATIONS
variety of the benefit of commercial banks, consequently the clarifying
intensity of the models (FE and RE) R2 clarified about (82.69%, 79.94%) In view of our discoveries, we need to draw a few proposals for further
separately of variety in productivity as indicated by the hazard the board research. One of the proposals that should be possible to the exploration
rehearses. Liquidity hazard the executives practices have unimportant model is to incorporate more markers. As we referenced previously, our
impact on the productivity of commercial banks with negative model is referenced from different looks into with same point however
relationship, which prosecuted, that the commercial banks during the just determined in one nation. Our model has a very low R2 dependent on
investigation time frame had the option to oversee liquidity chance and in information from Pakistan, which shows that our model doesn't have a
a similar time doesn't experienced this kind of hazard. delightful by and large fit. Along these lines, we believe the model should
be improved. Including more factors could be one recommendation. In our
1. Operational chance the executives’ practices impact contrarily and exploration, we use CAR to speak to credit chance administration and use
fundamentally the gainfulness of commercial banks with respect
ROE and ROA as productivity pointers. But the markers we associated with
to just its proficiency in overseeing overheads, which implies that
the exploration, different measures can likewise show the productivity
commercial banks experienced this sort of hazard during the
and credit hazard the executives. In this way, if could be all the more
examination time frame. In opposite, commercial banks during
study period had the option to deal with the working pay chance; fascinating to incorporate more markers to test the relationship. In the
in light of the fact that the impact of salary on gainfulness was sure interim, it can assist scientists with enhancing the exactness of the
and critical, which implies that these banks don't experience the exploration model with the most reasonable factors. Also, we suggest
ill effects of dealing with this sort of hazard. including more organizations for this examination. In our examination, we
include 3 banks in Pakistan which we accept are the most agent. We at first
2. Credit chance the executive’s practices don't have any critical mean to cover many banks however at last we just gain admittance to the
impact on the gainfulness of JCBs during study period, which information of 3 banks. On the off chance that the time and assets are
implies that proposals banks don't experienced credit hazard or accessible, it could be all the more persuading to include more examples
dealing with this sort of hazard. in the investigation. Nonetheless, numerous commercial banks in Pakistan
are too little to even consider publishing their yearly reports or key
figures. Some of them just have impact to their nearby market however
Cite The Article: Shahbaz Bhatti, Naveed Tariq, Muhammad Rizwan, Muhammad Ajmal,Abdul Rehman Aslam, Kamran Javed (2019). Impact Of Risk Management On
Profitability Of Banks. Malaysian E Commerce Journal, 3(3) : 22-26.
Malaysian E Commerce Journal (MECJ) 3(3) (2019) 22-26
difficult to speak to the entire Pakistan. To gather more information, the Sector: 2002-2007determinants Of Profitability in Turkish Banking
association with the banks or specialists may be fundamental. Sector: 2002-2007. International Research Journal of Finance and
Economic.
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Cite The Article: Shahbaz Bhatti, Naveed Tariq, Muhammad Rizwan, Muhammad Ajmal,Abdul Rehman Aslam, Kamran Javed (2019). Impact Of Risk Management On
Profitability Of Banks. Malaysian E Commerce Journal, 3(3) : 22-26.
