Influence on Banks' Credit Risk Through Monetary Policy Instruments: A Study of Listed Commercial Banks in Pakistan

Authors

  • Rimsha Shahid Visiting Lecturer, Institute of Business Management Sciences, University of Agriculture, Faisalabad, Pakistan Author
  • Rimsha Shahid Visiting Lecturer, Institute of Business Management Sciences, University of Agriculture, Faisalabad, Pakistan Author
  • Hammad Badar Associate Professor, Institute of Business Management Sciences, University of Agriculture, Faisalabad, Pakistan Author
  • Aqsa Iftikhar Visiting Lecturer, Department of Business Administration, Thal University Bhakkar, Pakistan Author
  • Sidra Ghulam Muhammad Visiting Lecturer, Institute of Business Management Sciences, University of Agriculture, Faisalabad, Pakistan Author
  • Dr. Muhammad Navid Iqbal Lecturer, Department of Business Administration, Faisalabad Business School, National Textile University, Faisalabad, Pakistan Author
  • Zulfiqar Hussain Awan Lecturer Department of Economics, University of Sargodha, Pakistan Author
  • Faisal Nadeem Shah Lecturer Department of Economics, University of Sargodha, Pakistan Author

DOI:

https://doi.org/10.61506/01.00324

Keywords:

credit risk, monetary policy, commercial banks

Abstract

Monetary policy goals in any country are to accomplish economic and social goals to achieve financial prosperity. The study determined the impact of monetary policy tools on bank’s Credit Risk, which was previously unexplored. The analytical and econometrical design was adopted in this study. Descriptive statistics, correlation matrix, CD test, and DK regression were employed to determine the impact of monetary policy instruments on the bank’s Credit Risk. Multivariate statistical techniques were used to evaluate balanced panel data from 22 banks currently operating in Pakistan cover the span of 2009-2021. Banks were declared cross-sectionally dependent. ROE was positively associated with MG, ROA was negatively linked with INF in the Correlation Matrix. The overall research explored that PR and MG had a positive impact on ROE and ROA, but SLR showed an inverse impact on Credit Risk. This research used a large number of banks as a novel component in Pakistan’s context and filled a gap in the country’s banking literature. The paper will assist the government, managers of the banking industry, monetarists, stakeholders, investors, academicians, and researchers. This study could be extremely helpful to regulators in formulating favorable policy rates that fulfill Pakistan’s economic targets.

References

Abbas, M. A., and I. Hussain. (2021). Effect of monetary policy and selected macroeconomic variables on risk-taking appetite and performance of banking sector of Pakistan. Glob. Mgmt. J. Acad. Corp. Stud. 11(1), 1-18.

Adams, R.M. and D.F. Amel. (2005). The effects of local banking market structure on the bank-lending channel of monetary policy. J. Soc. Sci. Res. Ntwk, 716349, 1-35.

Allen, F., K. Jackowicz, O. Kowalewski and Ł. Kozłowski. (2017). Bank lending, crises, and changing ownership structure in Central and Eastern European countries. J. Corp. Fin. 42, 494-515.

Altavilla, C., M. Boucinha and J.-L. Peydró. (2018). Monetary policy and bank profitability in a low interest rate environment. J. Econ. Poli. 33(96), 531-586.

Amidu, M. and S. Wolfe. (2013). The effect of banking market structure on the lending channel: Evidence from emerging markets. Rev. Fin. Econ, 22:146-157.

Angeloni, I., E. Faia and M. Lo Duca. (2015). Monetary policy and risk taking. J. Econ. Dyn. Cntrl. 52, 285-307.

Asiama, R.K. and A. Amoah. (2018). Non-performing loans and monetary policy dynamics in Ghana. African J. Econ. Mgmt. Stud. 10(2), 169-184.

Athanasoglou, P.P., S.N. Brissimis and M.D. Delis. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. J. Int. Fin. Mark. Inst. Mon. 18, 121-136.

Ayodele, J. C. (2014). Effects of monetary policy on the commercial banks lending in Nigeria. Rev. Pub. Adm. Mgmt. 400 (3614), 1-13.

Baglioni, A. (2007). Monetary policy transmission under different banking structures: The role of capital and heterogeneity. Int. Rev. Econ. Fin. 16, 78–100.

Baloch, M.A., J. Zhang, K. Iqbal and Z. Iqbal. (2019). The effect of financial development on ecological footprint in BRI countries: evidence from panel data estimation. Envr. Sci. Pollut. Res. 26(6), 6199-6208.

Bayazit, Z. and E.G. Genc. (2019). An analysis of reciprocal influence between advertising expenditures and Gross Domestic Product. Int. J. Econ. Fin. Issu. 9, 34-41.

Belás, J., L. Smrcka, B. Gavurova and J. Dvorsky. (2018). The impact of social and economic factors in the credit risk management of SME. Tech. Econ. Dev. Econ. 24(3), 1215-1230.

Bonfim, D. and C. Soares. (2018). The risk‐taking channel of monetary policy: Exploring all avenues. J. Money. Cr. Bnk. 50(7), 1507-1541.

Borio and H. Zhu. (2012). Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism? J. Fin. Stab. 8, 236 -251.

Borio, C., & Gambacorta, L. (2017). Monetary policy and bank lending in a low-interest rate environment: diminishing effectiveness? J. of Macro. Econ. 54, 217-231.

Brana, S., A. Campmas and I. Lapteacru. (2019). Unconventional monetary policy and bank risk-taking: A nonlinear relationship. Econ. Mdl. 81, 576-593.

Brei, M. and A. Schclarek. (2015). A theoretical model of bank lending: Does ownership matter in times of crisis? J. Bnk. Fin. 50, 298-307.

Bülbül, D., H. Hakenes and C. Lambert. (2019). What influences banks’ choice of credit risk management practices? Theory and evidence. J. Fin. Stab. 40, 1-14.

Central Bank of Nigeria (CBN) (2011). Understanding monetary policy. CBN series 1(1), 1 - 10.

Chakravarty, R. (2020). The new monetary policy framework: What it means. J. Quant. Econ. 18, 457–470.

Colletaz, G., G. Levieuge and A. Popescu. (2018). Monetary policy and long-run systemic risk-taking. J. Econ. Dyn. Cntrl. 86, 165-184.

Cucinelli, D., M.L. Di Battista, M. Marchese and L. Nieri. (2018). Credit risk in European banks: The bright side of the internal ratings-based approach. J. Bnk. Fin. 93, 213–229.

De Menna, B. (2021). Monetary Policy, Credit Risk, and Profitability: The Influence of Relationship Lending on Cooperative Banks’ Performance. Credit Risk, Prft. Infl. Relp. Lend. Coop. Bnk. Perf. 3783735, 1-21.

Ehrmann, M., L. Gambacorta, J. Martinez‐Pagés, P. Sevestre and A. Worms. (2003). The effects of monetary policy in the euro area. Oxford Rev. Econ. Plcy. 19, 58-72.

Farooq, O. and I. Jabbouri. (2015). Cost of debt and dividend policy: Evidence from the MENA region. J. App. Bus. Res. 31, 1637-1644.

Genay, H. and R. Podjasek. (2014). What is the impact of a low interest rate environment on bank profitability? J. Chicago. Fed. Lett. 324, 1-4.

Geng, Z. and X. Zhai. (2015). Effects of the interest rate and reserve requirement ratio on bank risk in China: A panel smooth transition regression approach. Disc. Dyn. Nat. Soc. 571384, 1-12.

Ghosh, A. (2015). Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states. J. Fin. Stab. 20, 93–104.

Gunji, H., K. Miura and Y. Yuan. (2009). Bank competition and monetary policy. Jp. Wld. Econ. 21, 105-115.

Hamza, S.M. (2017). Impact of credit risk management on banks performance: A case study in Pakistan banks. Eur. J. Bus. Mgmt. 9, 57–64.

Hasan, T., & Sadat, A. (2023). Dynamics of Job Satisfaction in Bangladesh's Banking Sector Implications for Employee Engagement and Organizational Success. Journal of Business and Economic Options, 6(4), 33-39.

Jabbouri, I. and M. Naili. (2019). Determinants of nonperforming loans in emerging markets: evidence from the MENA region. Rev. Pacific Basin. Fin. Mark. Pol. 22(4), 1950026.

Kabundi, A. and F.N. De Simone. (2020). Monetary policy and systemic risk-taking in the euro area banking sector. J.Econ. Mdl. 91, 736-758.

Laryea, E., M. Ntow-Gyamfi and A.A. Alu. (2016). Nonperforming loans and bank profitability: evidence from an emerging market. African J. Econ. Mgmt. Stud. 7, 462- 481.

López, M., F. Tenjo and H. Zárate. (2011). The risk-taking channel and monetary transmission mechanism in Colombia. Ensys. sobre. Pltc. Econ. 29(64), 212-234.

Maddaloni, A. and J.-L. Peydró. (2011). Bank risk-taking, securitization, supervision, and low interest rates: Evidence from the Euro-area and the US lending standards. Rev. Fin. Stud. 24, 2121-2165.

Mahrous, S.N., N. Samak and M.A.M. Abdelsalam. (2020). The effect of monetary policy on credit risk: Evidence from the MENA region countries. Rev. Econ. Poli. Sci. 5(4), 289-304.

Modugu, K.P. and J. Dempere. (2022). Monetary policies and bank lending in developing countries: evidence from Sub-Sahara Africa. J. Econ. Dev. 18, 1-13.

Mpofu, T.R. and E. Nikolaidou. (2018). Determinants of credit risk in the banking system in Sub-Saharan Africa. Rev. Dev. Fin. 8, 141-153.

Muhammad, O., J. de Haan and B. Scholtens. (2014). An Empirical Analysis of Excess Interbank Liquidity: A Case Study of Pakistan. SBP Work. Pap. Ser. 69, 1-42.

Naili, M. and Y. Lahrichi. (2022a). The determinants of banks’ credit risk: Review of the literature and future research agenda. Int. J. Fin. Econ. 27, 334-360.

Naili, M., and Y. Lahrichi. (2022b). Banks’ credit risk, systematic determinants and specific factors: recent evidence from emerging markets. J. sci. Dc. Heliyon. e08960. 8(2), 1-16.

Namadi, S. (2023). Strategic Management of Outsourcing Balancing Profitability and Cost Control in Corporate Operations. Journal of Business and Economic Options, 6(4), 26-32.

Nudzor, H. (2023). From Flames to Fortune Improving Fire Risk Management in the Case of Ghana. Journal of Business and Economic Options, 6(4), 7-11.

Ogunmuyiwa, M.S. and A.F. Ekone. (2010). Money supply-economic growth nexus in Nigeria. J. Soc. Sci, 22:199-204.

Pakistan Economic Survey (2020-21) published in Govt of Pakistan finance division.

Pakistan Economic Survey report (2019-20) published in Govt of Pakistan finance division.

Paligorova, T. and J.A.C. Santos. (2017). Monetary policy and bank risk-taking: Evidence from the corporate loan market. J. Fin. Intrmd. 30, 35-49.

Partovi, E. and R. Matousek. (2019). Bank efficiency and non-performing loans: Evidence from Turkey. Res. Int. Biz. Fin. 48, 287–309.

Patiño, O.A. and L.M.P. Gutiérrez. (2019). Financial education and inclusion: The role of banks. Int. J. Sust. Entr. Corp. Soc. Resp, 4 (1), 57–72.

Pesaran, T. Schuermann and S.M. Weiner. (2004). Modeling regional interdependencies using a global error-correcting macroeconometric model. J. Bus. Econ. Stat. 22(2), 129–162.

Precious, C. and P. Makhetha-Kosi. (2014). Impact of monetary policy on economic growth: A case study of South Africa. Mediterr. J. Soc. Sci. 5(15), 76-84.

Rezende, M., M.-F. Styczynski and C.M. Vojtech. (2021. The effects of liquidity regulation on bank demand in monetary policy operations. J. Fin. Intrm. 46, 1-22.

Sayvaya, I., & Phommason, S. (2023). Discussion on Rainy Season Access and Poverty Alleviation in Laos. Journal of Business and Economic Options, 6(4), 1-6.

Tobal, M. and L. Menna. (2020). Monetary policy and financial stability in emerging market economies. Lat. Am. J. Cent. Bank 1, 1-4.

Twinoburyo, E.N. and N.M. Odhiambo. (2018). Monetary policy and economic growth: A review of international literature. J. Cent. Bnk. Theor. Pract. 7(2), 123-137.

Ullah, S., S. Khan, M. Shah and S.A. Khan. (2013). Assessment of key determinants for economic growth in Pakistan (1980-2009). Wld. Appl. Sci. J. 26(10), 1357-1363.

Ustaoglu, M., & Yildiz, B. (2023). Balancing Tradition and Modernity in Turkey's Islamic Finance Landscape. Journal of Business and Economic Options, 6(4), 12-18.

Vouldis, A.T. and D.P. Louzis. (2018). Leading indicators of non-performing loans in Greece: the information content of macro-, micro-and bank-specific variables. Empir. Econ. 54(3), 1187-1214.

Westerlund, J. (2007). Testing for error correction in panel data. Oxf. Bull. Econ. Stat. 69(6), 709-748.

Downloads

Published

2024-06-01

Issue

Section

Articles

How to Cite

Shahid, R. ., Shahid, R. ., Badar, H. ., Iftikhar, A. ., Muhammad, S. G. ., Iqbal, M. N. ., Awan, Z. H. ., & Shah, F. N. . (2024). Influence on Banks’ Credit Risk Through Monetary Policy Instruments: A Study of Listed Commercial Banks in Pakistan. Bulletin of Business and Economics (BBE), 13(2), 255-265. https://doi.org/10.61506/01.00324

Similar Articles

1-10 of 177

You may also start an advanced similarity search for this article.

Most read articles by the same author(s)