Determinants of Credit Risk: A Study of Pakistan’s Banking Sector
The significant problem faced by banking sector during the global financial crises was of critical importance and measurement of credit risk. After August 2007, the environment of world trade has worsened. Banking sector faced many risks as a result of dynamics and rapid changes in global financial landscape. The risk exposure in banking sector has also increased due to market flexibility, changes in socio-economic pattern and foreign exchange business. These developments and innovations create various types of risks in banking sector. Credit risk is one of major risks faced by the banking sector. This study examines the bank specific, banking industry specific and macroeconomic determinants of credit risk. For the analysis of unbalance panel data Random Effect Model has been used and for 21 banks, 15 years’ annually data is analysed in this study. Results of this study indicate that bank ownership has negative and insignificant relationship with credit risk. Efficiency of management has negative and significant relationship with credit risk in CR1 models but insignificant relationship in CR2 models. Financial sector development has positive and significant impact on credit risk in CR1 models but insignificant impact in CR2 models. Competition and GDP growth rate variables have negative and insignificant impact on credit risk in CR1 models and positive and significant in CR2 models. Inflation rate has positive and significant relationship with credit risk in both CR1 and CR2 models.