THE IMPACT OF CREDIT RISK AND LIQUIDITY RISK ON THE BANK PROFITABILITY OF PAKISTAN

Abstract

The study aimed to assess how credit and liquidity risks influence the profitability of banks, focusing on 29 Pakistani banks from 2010 to 2022. Mismanagement of asset-backed securities led to the worldwide financial crisis of 2008, which had far-reaching consequences, especially for Pakistan, where the banking industry is vital to the country's economy. Panel regression was applied to assess the objective. In order to compare fixed and random effects, the study also used the Hausman Test, which finally favored fixed effect
models. The findings highlight how crucial it is to manage credit and liquidity risks in order to preserve Pakistani banks' stability and profitability. The findings of the study reveal a positive correlation between liquidity risk and Return on Assets (ROA), indicating
that as liquidity risk increases, ROA also tends to increase. Conversely, a negative relationship was observed between credit risk and ROA, suggesting that as credit risk rises, ROA tends to decline. The study benefits to managers, regulators, and investors, as they
highlight the need to manage liquidity and credit risks effectively to maintain profitability. This study contributes to the existing body of knowledge on the impact of credit risk and liquidity risk on bank profitability, providing a foundation for future research.