Financial Performance and Credit Risk in the Islamic Banking Sector in Pakistan: A Panel Model Method
Keywords:
Financial Performance, Pakistan, Islamic Banking Sector and Panel Model MethodAbstract
This study aims to assess the financial performance of the Islamic banking sector in Pakistan by analyzing the impact of credit risk over a ten-year period (2012–2022) using a panel model approach. The study utilizes data from annual reports and records of five selected Islamic banks, combining cross-sectional and time-series data. Panel data regression analysis is employed to examine the relationship between credit risk indicators (credit risk default, non-performing loans, credit spread risk, and classified loans) and the dependent variable, return on assets (ROA). The study finds significant and positive impacts (p < 0.005) of credit risk default and non-performing loans on ROA, indicating that increases in these credit risks negatively affect profitability. The findings underscore the importance of effective credit risk management in enhancing financial performance in Islamic banking. Limitations include the availability and accuracy of data from the selected banks. Future research could expand the dataset and consider additional variables to further refine the analysis. The study suggests that Islamic banks in Pakistan should strengthen their credit analysis capabilities and improve organizational structures to mitigate credit risks and enhance profitability. Effective risk management practices in Islamic banks can contribute to financial stability and resilience in the economy, benefiting stakeholders and society at large. This study contributes to the literature by applying a panel model method to examine credit risk impacts on financial performance specifically within the context of Islamic banking in Pakistan.
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