EFFECTIVENESS OF GREEN PROJECT SCREENING FOR BANK LENDING: EVIDENCE FROM PAKISTAN

Abstract

The banking sector is under huge pressure from its different shareholders to carry out its business in ethical ways. Globally greening banking policies are being introduced to encourage green lending. Central bank regulation and policy guidelines positively impact the bankers’ intention to adopt green banking.   This study investigates the impact of green banking policy on the lending of Pakistani banks.  Using an unbalanced panel of bank-level quarterly data of listed banks in the PSX from 2016 to 2021, a System Generalized Method of Moments (GMM) analysis is carried out. Two sample t-statistic suggest that noninterest expenses significantly fell after the policy was introduced and loan ratios improved. However, the profitability as a ratio of bank size is found to be lower. The GMM analysis finds that the green finance policy has positively affected bank lending in Pakistan. We find evidence of the long-run convergence of bank loans. Additionally, we find that bank lending was negatively impacted during the Covid-19 period and the green policy impact on lending was significantly reduced during this period.  Green banking is a fairly new direction for banks. We find that the green banking policy positively impacted Islamic bank lending, but the magnitude was lower. This study is significant in showing the benefits of adopting socially responsible green investing for banks in developing countries.