Impact of Credit Risk Management on Bank.docx - Impact of...

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Impact of Credit Risk Management on Bank’s Profitability (Evidence From Pakistan) Introduction: Banks are considered to be the strongest and the largest leading financial institutes in the present age. It cannot be denied that banks play an important role in Pakistan’s economy and as well the services they render,Due to the widespread of the branches like the commercial banks and Islamic banks working on large scale are exposed to different types of risks which affect the banks performance and activites. Credit risk is considered as one of the most significant risks that banks face, considering that granting credit is one of the major sources of income in commercial banks. Therefore, the management of the risk related to that credit affects the profitability of the banks (Li and Zou, 2014). So it can be said that the risk affecting directly the banks profit is credit risk. Due to this importance of the credit risk, this study is conducted to provide the exact situation about the credit risk to the stock holders regarding the relation of this risk with the profit of the commercial banks and Islamic Banks. Banks differentiate from each other in different aspects even the operations and the services provided by them are not related to each other and work in their own (Howells & Bain 2008). But in rules and regulations they are subject to follow the same way (Hull 2012). Credit risk is defined by the Basel committee as “the possibility of losing the outstanding loan partially or totally, due to credit events (default risk)”. As the banks’ credit risk exposure increases its tendency to go through a financial crisis also increases. Secondly significant portion of bank earning is resultant of the interest gained on loan extended to clients. So, managing credit risk is requisite for bank survival and profitability. The main objective of this study is to investigate is there an important relation existing between the management of the credit risk and profit of the firm. The study also finds that whether the performance is stable or fluctuating. To follow the study credit risk management is measured through the Capital Adequacy Ratio (CAR) as well as non performing loan. Similarly for the finding of the performance of the bank return on assets (ROA) and return on equity (ROE) are used as variables. The banking sector is perhaps the most important financial intermediary in an economy because of the role it plays as a provider of liquidity in monitoring services and as producers of information (Diamond and Dybvig, 1983).In other words, banking system will be able to contribute to the economic development if the collected resources are used in an appropriate manner. This requires accurate assessment of hazards and risks, and recognition methods to deal

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