The Role of Banking Sector Stability in Promoting Economic Growth: Evidence from Pakistan
Article Sidebar
Main Article Content
Abstract
This study investigates the influence of stability in the banking sector on Pakistan on the economic growth, through yearly time-series data, 1990-2023. Banking stability is measured by capital adequacy, non-performing loans and liquidity ratios whereas economic growth is measured by real GDP growth. Using the Autoregressive Distributed Lag (ARDL) exogenous framework of bounds testing, the test is carried out to examine the immediate and long-term relationships among the variables. The mixed orders of integration under unit root results of the Augmented Dickey-Fuller tests are indicative of the appropriateness of the ARDL approach. The results affirm that there is a long-run cointegrating relationship between the stability of the banking sector and economic growth. Capital adequacy has a positive statistically significant impact on the growth of GDP, which corresponds to the contribution to the resilience and continuous economic performance of well-capitalized banks. Conversely, non-performing loans have an adverse impact on growth and the importance of emphasizing the idea of worsening quality of assets limiting economic performance. Liquidity is also positively correlated with growth, which is another way of noting the relevance of liquidity buffers to positive financial intermediation. The error correction mechanism shows that close to 42 percent of the short-run disequilibrium is being fixed every year, which implies that there is a moderate adjustment rate of the long-run equilibrium. The soundness of the model is verified by diagnostic and stability tests, such as CUSUM and CUSUMSQ. Comprehensively, these findings spell out the relevance of the policy of enhancing capital positions, enhancing credit risk management, and ensuring sufficient liquidity to facilitate sustainable economic growth in Pakistan and other emerging economies.
Downloads
Article Details
Section
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
How to Cite
References
Adem, M. (2022). Impact of Diversification on Bank Stability: Evidence from Emerging and Developing Countries. Discrete Dynamics in Nature and Society, 2022(1), 7200725.
Agama, D. E. (2024). Banking Sector Stability Effect on Economic Growth in Nigeria. SSRN Electronic Journal.
Ahmad, M., Farhan, M., & Fareed, M. (2019). Service continuance intention in the health insurance setting: a pls-sem approach. Pakistan Journal of Humanities & Social Sciences Research, 2(01), 83-108. https://www.researchgate.net/publication/336317811
Andersen, H., & Juelsrud, R. E. (2024). Optimal capital adequacy ratios for banks. Latin American Journal of Central Banking, 5(2), 100107.
Ashikuzzaman, N. M. (2022). Does growth of nonperforming loan ratio have a temporal impact on private credit growth in Bangladesh economy? Asian Journal of Economics and Banking, 6(3), 404-412.
Atichasari, A. S., Ratnasari, A., Kulsum, U., Kahpi, H. S., Wulandari, S. S., & Marfu, A. (2023). Examining non-performing loans on corporate financial sustainability: Evidence from Indonesia. Sustainable Futures, 6, 100137.
Bawuah, I. (2024). Bank stability and economic growth in Sub-Saharan Africa: trade-offs or opportunities? And how do institutions and bank capital affect this trade-off? Cogent Economics & Finance, 12(1), 2381695.
Beck, T., Döttling, R., Lambert, T., & van Dijk, M. (2023). Liquidity creation, investment, and growth. Journal of Economic Growth, 28(2), 297-336.
Bischof, J., Rudolf, N., & Schmundt, W. (2022). How Do Non-Performing Loans Evolve Along the Economic Cycle? The Role of Macroeconomic Conditions and Legal Efficiency. European Accounting Review, 31(5), 1149-1174.
Boachie, C., & Adu-Darko, E. A. (2022). Ghana: Susu, Village Savings and Loans, Credit Union, Rotating Savings System. In Transforming Africa: How Savings Groups Foster Financial Inclusion, Resilience and Economic Development (pp. 0). Emerald Publishing Limited.
Boachie, R., Aawaar, G., & Domeher, D. (2021). Relationship between financial inclusion, banking stability and economic growth: a dynamic panel approach. Journal of Economic and Administrative Sciences, 39(3), 655-670.
Bredl, S. (2022). The Role of Non-performing Loans for Bank Lending Rates. Jahrbücher für Nationalökonomie und Statistik, 242(2), 223-276.
Britchenko, I. (2023). Innovative approaches to business management in conditions of economic instability. Prace Komisji Geografii Przemysłu Polskiego Towarzystwa Geograficznego, 37(4), 41-49. https://www.ceeol.com/search/article-detail?id=1254206
Brown, R. L., Durbin, J., & Evans, J. M. (1975). Techniques for Testing the Constancy of Regression Relationships over Time. Journal of the Royal Statistical Society: Series B (Methodological), 37(2), 149-163.
Brunner, E. J., & Schwegman, D. J. (2022). Commercial wind energy installations and local economic development: Evidence from U.S. counties. Energy Policy, 165, 112993.
Chinoda, T., & Mingiri Kapingura, F. (2024). Fintech-based financial inclusion and banks' risk-taking: the role of regulation in Sub-Saharan Africa. Journal of Economic and Administrative Sciences.
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74(366a), 427-431.
Faizulayev, A., & Wada, I. (2019). Spillover Effect of Interest Rate Volatility on Banking Sector Development in Nigeria: Dynamic ARDL Bound Test Approach. In N. Ozatac & K. K. Gokmenoglu (Eds.), Global Issues in Banking and Finance (pp. 111-125). Springer International Publishing.
Garg, M., Kryzanowski, L., & Zhang, J. (2024). Canadian Bank Capital and Liquidity Creation. Asia‐Pacific Journal of Financial Studies, 53(5), 626-663.
Hamza, A. (2024). The impacts of the Ethiopian developmental state model on the competition, efficiency and profitability of banks. African Journal of Economic and Management Studies, 15(4), 764-780.
Haruna, M. A., Hassan, S. B., & Ahmad, H. S. (2022). How responsive is the poverty to the foreign direct investment inflows in Nigeria? Evidence from linear and non-linear ARDL. International Journal of Social Economics, 50(1), 73-96.
Hu, B., Schclarek, A., Xu, J., & Yan, J. (2022). Long-term finance provision: National development banks vs commercial banks. World Development, 158, 105973.
Idris, S. M., Bahari, Z., & Ahmad, F. A. (2022). Short-Run and Long-Run Relationship of Islamic Home Financing in Malaysia: Analysis on Islamic Banks. Jurnal Ekonomi dan Bisnis Islam (Journal of Islamic Economics and Business), 8(2), 237-250.
Kartal, M. T., Kirikkaleli, D., & Ayhan, F. (2023). Nexus between non-performing loans and economic growth in emerging countries: Evidence from Turkey with wavelet coherence approach. International Journal of Finance & Economics, 28(2), 1250-1260.
Khan, M. A., Siddique, A., & Sarwar, Z. (2020). Determinants of Non-Performing Loans in the Banking Sector in Developing State. Asian Journal of Accounting Research, 5(1), 135-145.
Linggadjaya, R. I. T., Atahau, A. D. R., Ugut, G. S. S., & Suk, K. S. (2025). The Moderating Role of Capital Adequacy on Bank Specific Characteristics to Sustainable Growth: Evidence From Commercial Banks in Indonesia. Sage Open, 15(3), 21582440251353042.
MacKinnon, J. G. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11(6), 601-618.
Magazzino, C., & Santeramo, F. G. (2023). Financial development, growth and productivity. Journal of Economic Studies, 51(9), 1-20.
Makhoba, B. P., Kaseeram, I., & Greyling, L. (2021). Asymmetric and threshold effects of public debt on economic growth in SADC: a panel smooth transition regression analysis. African Journal of Economic and Management Studies, 13(2), 165-176.
Mazengia, T., Bezabih, M., & Chekol, F. (2023). Financial development and export diversification in Ethiopia: ARDL approach. Cogent Economics & Finance, 11(1), 2163079.
Mlambo, C. (2024). Financial Development and Economic Growth: Evidence from Low-Income Nations in the SADC Region. International Journal of Financial Studies, 12(3), 62.
Mohindru, P. (2023). Development of liquid level measurement technology: A review. Flow Measurement and Instrumentation, 89, 102295.
Montenegro, A. (2019). The Ardl Bounds Cointegration Test: Tips for Application and Pretesting. SSRN Electronic Journal.
Murrar, A., Asfour, B., & Paz, V. (2024). Banking sector and economic growth in the digital transformation era: insights from maximum likelihood and Bayesian structural equation modeling. Asian Journal of Economics and Banking, 8(3), 335-353.
Natsiopoulos, K., & Tzeremes, N. G. (2022). ARDL bounds test for cointegration: Replicating the Pesaran et al. (2001) results for the UK earnings equation using R. Journal of Applied Econometrics, 37(5), 1079-1090.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16(3), 289-326.
Peykani, P., Sargolzaei, M., Takaloo, A., & Valizadeh, S. (2023). The Effects of Monetary Policy on Macroeconomic Variables through Credit and Balance Sheet Channels: A Dynamic Stochastic General Equilibrium Approach. Sustainability, 15(5), 4409.
Poi, A. W. H., Law, T. H., Hamid, H., Jakarni, F. M., Ishak, S. Z., & Ng, C. P. (2023). Examining the Effects of Relative Advances in Higher Mobility Roads over Higher Accessibility Roads and Income Inequality on the Relationship between Car Ownership and Economic Growth. Transportation Research Record, 2677(10), 360-374.
Saadaoui, Z., & Mokdadi, S. (2023). Capital buffers, business models and the probability of bank distress: a dynamic panel investigation. Journal of Financial Regulation and Compliance, 31(5), 663-695.
Saliba, C., Farmanesh, P., & Athari, S. A. (2023). Does country risk impact the banking sectors’ non-performing loans? Evidence from BRICS emerging economies. Financial Innovation, 9(1), 86.
Saoula, O., Abid, M. F., Ahmad, M. J., & Shamim, A. (2024). What drives entrepreneurial intentions? Interplay between entrepreneurial education, financial support, role models and attitude towards entrepreneurship. Asia Pacific Journal of Innovation and Entrepreneurship, 19(2),
Singh, B. P., & Pradhan, K. C. (2022). Institutional quality and economic performance in South Asia. Journal of Public Affairs, 22(1), e2401.
State Bank of Pakistan. (2024). Guidelines - Non-Performing Loans (NPLs) Management Strategy (BPRD Circular No. 03 of 2024). https://www.sbp.org.pk/bprd/2024/C3.htm
Syed, A. A., & Aidyngul, Y. (2022). Macro economical and bank-specific vulnerabilities of nonperforming loans: A comparative analysis of developed and developing countries. Journal of Public Affairs, 22(2), e2414.
Syed, A. A., Kamal, M. A., Grima, S., & Ullah, A. (2022). The Impact of Financial Development and Macroeconomic Fundamentals on Nonperforming Loans among Emerging Countries: An Assessment Using the NARDL Approach. Computation, 10(10), 182.
Tran, T. N. (2024). Exploring Influencing Factors on Capital Adequacy in Commercial Banks. Emerging Science Journal, 8(2), 527-538.
Tubik, D., & Herberger, T. A. (2024). How endogeneity problems are addressed in analyzing the relationship between diversity in top management teams and company financial performance—a systematic literature review. Management Review Quarterly.
Uddin, I., Usman, M., Saqib, N., & Makhdum, M. S. A. (2023). The impact of geopolitical risk, governance, technological innovations, energy use, and foreign direct investment on CO2 emissions in the BRICS region. Environmental Science and Pollution Research, 30(29), 73714-73729.
Ullah, A., Pinglu, C., Ullah, S., Qian, N., & Zaman, M. (2023). Impact of intellectual capital efficiency on financial stability in banks: Insights from an emerging economy. International Journal of Finance & Economics, 28(2), 1858-1871.
Xu, G. (2025). The role of banking development in economic growth: Quantity versus quality. Economic Affairs, 45(2), 261-276.