Statistical Analysis of the Macro-economic Variables Affecting the Profitability of Commercial Banks of Pakistan

Muhammad Zubair Khan, Muhammad Iqbal

Abstract


This paper aims to examine the level of influence of some external factors (macro-economic variables) have on the profitability of commercial banks in Pakistan. The study covers the period from 2005 to 2009. The period under analysis (2005-2009) was selected mainly because during the said period, the world banking industry showed a huge declining trend in profitability due to global economic recession with many renowned banks filing for liquidation and this affected the Pakistani banking scenario as well, and the local banks both public and private showed a declining trend. The data used in the study is panel data. Panel data refers to pooling of observations on a cross-section of firms (say banks) over several time periods. Four variables including interest rate, exports, imports and inflation rate are used as independent variables (external factors). All the analysis of this study is carried out using the statistical package “Eviews”. The stationarity of data is tested by applying the individual unit root test. To test the multicollinearity in the data the correlation matrix is made. Durbin-Watson statistic is used to detect auto correlation. To measure the individual impact of each of these independent variables on ROA as well as their pair wise impact on ROA and further joint impact of three variables on ROA, the technique of “all possible regression” is used to reach the best panel regression model. The results obtained from the regression models show that interest rate and imports have significant affect on the bank’s profitability. The best regression model is consisting of the macro-economic variables, imports, inflation rate and interest rate

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