Financial Performance of Pakistani Islamic banking Sector and Credit Risk: Panel Model Method
Keywords:
Financial Performance, Pakistan, Islamic Banking Sector and Panel Model MethodAbstract
The quantitative study was conducted to analyze the impact of credit risk on a representation of the Pakistani Islamic banking sector over a ten-year period (2012–2022). Five Islamic banking sectors were selected as samples for this study. Return on Asset (ROA), as an indicator of credit risk measurements for credit risk default (CRD), non-performing loan (NPL), credit spread risk (CSR) and classified loan (CL) to measure credit risk were variables of this study. ROA was the dependent variable while CRD, NPL, CSR, and CL was the independent variable of this study. Regression analysis was done to determine the financial performance of Islamic banks which was ROA. All mentioned factors were found positive and significant (p<.005) impacts on ROA. Moreover, it was also revealed that growth in credit risk default (CRD) and increase non-performing loans (NPL) increases profitability. Based study results, it is recommended that the Pakistani Islamic banking sector improve its capacity for credit analysis and advance its organizational structure. In addition, the government should pay closer attention to Islamic banks' implementation of key requirements in the State Bank of Pakistan (SBP; IBD 2022) and prudential regulations.
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