Jo-Ann Rolle

TL;DR: In this article, the authors developed a moderated mediated model to analyze the impact of organizational error management culture and organizational performance by extending error management and share cognition theory, and the newly developed model was tested in the service industry of Pakistan.

Abstract: Financial sector is the key player to enhance sustainable economic growth. Commercial banks play an important role to improve the performance of the financial sector of the economy and their profitability is intricately connected to the soundness of the entire economy. The purpose of this study is to determine the internal determinants (bank specific) and external determinants (macroeconomic) of profitability. In this regard, the study adopted quantitative research design by using the panel data of 17 commercial banks of Pakistan over the period of 2014-2018. Internal factors analyzed in this study were Liquidity, Size and Capital Adequacy. While external factors were Gross Domestic Product (GDP) and Inflation. The data was analyzed by using simple OLS regression and Tobin’s Q ratio. The analysis showed that GDP has significant impact on profitability. However, inflation has no impact on the profitability. Tobin’s Q ratio of most of the banks are increasing which depicted their equilibrium position. Based on the findings, the study recommended some policies that will encourage banks to reduce credit risk and minimize their liquidity holdings. Moreover, Government should take the proper initiatives to enhance the confidence of investors towards stock market. Introduction Banks contribute significantly to the growth and development of the economy. Banks provide assistance in the financial development of the country as well as provide various opportunities to people to make investment and saving plans through verified and guaranteed methods of investments (Sufian & Habibullah, 2009). Profitability of banking sector contribute not only in economic growth, but also helps to bear the external and negative financial shocks (Athanasoglou, Brissimis, & Delis, 2008). Rose (1999) described Profitability as the after-tax net income usually measured by return on assets and return on equity. Profitability is the capability of the company to produce earnings. There are many macroeconomic factors that affect profitability including real interest rate, inflation rate, real gross domestic product, and imports and exports of a country. Therefore, it seems very crucial to investigate the determinants of the profitability. The major concern is profitability and there are numerous external and internal factors that have some effects on the profitability of the banks. Internal factors they mostly consist of liquidity, capitalization, bank size, and operating efficiency. Conversely, external factors include Inflation and GDP. Banks perform the duties of intermediary between the investors and end users and facilitate them in different business activities. Banking sector represented as the hub of financial sector with 88% share in last 10 years in Pakistan. Currently, there are 24 scheduled and cooperative banks (commercial banks) in Pakistan. Out of which, 17 conventional banks are listed in Pakistan Stock Exchange. Banking sector of Pakistan remained under the implementation of constant reforms and structural changes. Since 1947, several commercial banks have been merged to implement the structural reforms. Commercial banks showed remarkable growth in 1970. The maximum share of total assets around 90% of banks were hold The Business and Management Review, Volume 11 Number 1 August 2020 Conference proceedings of the Centre for Business & Economic Research, ICBED-2020, 20-22 August 141 by financially unproductive public banks in the period of 1980 to 1990. As a result, the profits decreased and ultimately, banking sector reforms were indulged in addressing these issues like lending rates and privatization etc. (Anwar, 2011). After the registration of banks in stock exchange and with the beginning of Islamic banking in 2002, the banks started to perform effectively and earned huge profits even in global financial crisis of 2008-2009. Commercial banks played very considerable role in the growth and development of economy. But, they are also badly affected due to the bad macroeconomic conditions in past decade (Ahmad, Nafees, & Khan, 2012). Pakistani banks faced the challenges of financial instability due to the adjustments in the economic indicators. Pakistan is dominated by commercial banks. Hence, it is necessary to analyze the association of their profitability with the development of Pakistan. Financial reports presented the financial results and related information to different stakeholders including investors, customers, and regulators. Financial reports also explain how company performed over a specific time and helpful to make investment decisions. The relevant information is provided by such financial reporting activity for making important business decisions (Dubelaar, Sohal, & Savic, 2005). Therefore, this study is conducted to identify the most important external and internal factors on the profitability of conventional banks and also analyze the current market situation of banks for investors that would be able to add the strategies to enhance the development of the banks. 1.1 Research Questions 1.1.1 Does macroeconomic factor GDP affect the bank’s performance significantly? 1.1.2 Does macroeconomic factor Inflation affect the bank’s performance significantly? 1.1.3 Does macroeconomic factor Liquidity affect the bank’s performance significantly? 1.1.4 Does macroeconomic factor Size affect the bank’s performance significantly? 1.1.5 Does macroeconomic factor Capital Adequacy affect the bank’s performance significantly? Research Objectives 1.2.1 To determine the impact of GDP on Return on Assets. 1.2.2 To determine the impact of Inflation on Return on Assets 1.2.3 To determine the impact of Liquidity on Return on Assets. 1.2.4 To determine the impact of Size on Return on Assets. 1.2.5 To determine the impact of Capital Adequacy on Return on Assets. 1.3 Scope of the study The banking sector is a speedily growing industry of Pakistan. Abidi and Lodhi (2015) stated that commercial banks play an important role in the economic development of Pakistan. There is much competition in occupying a superior position in financial system that every bank is trying to improve the overall performance along with profitability (Rashid & Jabeen, 2016). There is a significant contribution of several industry-specific, bank-specific financial and macroeconomic factors in banking structure and performance. Therefore, this study aims to determine the impact of bank specific factors and macroeconomic factors on Return on Assets. 24 commercial banks are working in Pakistan. we have selected 17 listed conventional banks over the period of 2013-2017. Literature Review 2.1 Theoretical Background The profitability of a bank may be affected due to different variables. A portion of these variables can positively influence the profitability of banks, while others have negative affect. Some of these factors that influence the productivity of a bank may be under the control of the banks administration and the others may be out of control. Mostly internal factors are under the control of bank’s administration. These are also called bank specific factors and they can be treated as positive or negative based on their specific effect on the profitability of the bank. These variables may identify as credit risk, capital structure, loan portfolio management, liquidity management, expense management and diversification of the products/ services of the bank. The external variables which are out of control by the management may incorporate components identified with the dimension of rivalry in the business to which the bank has a place (concentration), boundaries identified with passage to and exit from the business, the pace of economic The Business and Management Review, Volume 11 Number 1 August 2020 Conference proceedings of the Centre for Business & Economic Research, ICBED-2020, 20-22 August 142 development, the nature of the guidelines and supervision of the banks, inflation, money related extending, and fiscal policies and monetary policies (Rao & Lakew, 2012). 2.2 Variables This study designs the equation to measure the determinants of the profitability. To measure the influential determinants of conventional banks, the hypothesis of the research is as under: 2.2.1 Relationship of GDP and bank’s Performance GDP is one of the essential macroeconomic indicators which is used to measure the strength of the economy of a nation, and it is a proportion of the general financial yield inside a nation's fringes over a specific time, more often a year. Economic development and financial segment performance are significantly positively connected (Levine, Loayza, & Beck, 2000). The real GDP development is relied upon to positively affect the bank's productivity. Fani, Khan, Kumar, and Kumar (2018) analyzed the effect of external and internal factors on the performance of banks and found that liquidity, capital adequacy, asset quality, and inflation have insignificant positive correlation with banks’ performance. However, GDP, management efficiency, earning quality and stock market performance have significant positive correlation with bank’s performance. Furthermore, Kamran, Johnson and Sammer (2016) have analysed the determinants of the bank’s profitability in Pakistan and found that the GDP, Size and leverage ratio have significant effect on bank’s profitability. Moreover, GDP was found to have significant positive affect on ROA and ROE (Bilal, Saeed, Gull, & Akram, 2013). Another study conducted in Turkey by Anbar & Alper (2011) by using the panel data analysis over the period 2002 to 2010, and found that Asset size, Non-interest income/assets and Real interest rate have Positive impact on ROA. However, Inflation, Capital ratio, Deposits/assets, Net interest margin and GDP have no significant effect on the profitability. So, we propose that H1= GDP has impact on ROA of Conventional Banks 2.2.2 Relationship of Inflation and bank’s performance Zopounidis and Kosmidou (20