Impact of Bank Internal and Macroeconomic Factors on Bank Lending Behavior in Pakistan

Abstract

The research aim of this study is to find out the relationship of bank internal and macroeconomic variables on bank lending behavior. The study was conducted on commercial banks functioning in Pakistan including both conventional and Islamic Bank. The data was collected from reliable secondary sources. Bank specific data was extracted from published annual accounts available on data bases of State Bank of Pakistan, Pakistan Stock Exchange and banks own maintained websites. The macroeconomic data was taken from World Bank data Bank. The data of eleven years was taken from 2007 till 2017. Impact of Bank internal & Macroeconomic factors like Return on Assets (ROA), Return on Equity (ROE), Non-Performing Loans (NPL) and Gross Domestic Product (GDP) was checked on Bank Lending Behavior (BB). Interest Rate (IR) was taken as moderating variable. No multi-collinearity was found by Variance Inflation Factor test. But, autocorrelation and heteroskedasticity were present where were removed by using IR and white cross section tests respectively. Hausman test recommended random effect model as appropriate and same was applied. Findings revealed that NPL and ROA have negative and significant impact on bank lending behavior. Impact of ROE and GDP were found positive and significant. Whereas Interest rate (IR) were found having no moderating impact on any of said relationships. All above variables were not checked together in Pakistan environment previously and hence its study was unique in nature. Banks are recommended to diminish the NPL to avoid deterioration of loan growth and may take better advantage of lending during economic prosperity and also when return on equity is rising. They should also take into consideration the ROA for lending growth policies.