Bank Performance and Capital Formation in Pakistan

Abstract

In Pakistan, during the last decade, the banking sector has experienced a reduction in the number of banks and their operations. This paper investigates the impact of banks' performance on capital formation in Pakistan. The country's investment level has been low, attributed to various factors. This study specifically examines the relationship between banks' performance and capital formation. Gross Fixed Capital Formation (GFCF) is the dependent variable, while major indicators of banks' performance serve as the independent variables. The study employs time series annual data from 1981 to 2023, comprising 43 observations. Auto Regressive Distributed Lag (ARDL) tests have been conducted to analyze the long-term and short-term relationships among the variables. The results reveal both long-term and short-term relationships between GFCF and the selected indicators of banks' performance. Total deposits, bank credit to the private sector, and banks' profitability show a positive relationship with capital formation. The study concludes that banks' performance in Pakistan significantly impacts capital formation. A robust banking system in Pakistan could facilitate efficient investment in the country.