Impact of competition and risks on the financial performance of Pakistani banks: An application of Panzar-Rosse H Statistic

https://doi.org/10.5281/zenodo.17624672

Abstract

This study investigates how competition influences the financial stability and profitability of Pakistani commercial banks within a dynamic and evolving financial environment. Using panel data of 26 banks operating from 2007 to 2024, the research employs the Panzar-Rosse H-statistic to assess competition levels and fixed-effects regression to explore the relationship between competition, risk-taking behavior, and performance indicators such as return on assets (ROA), return on equity (ROE), net interest margin (NIM), and profitability before taxation. The findings reveal that increased competition enhances banks’ profitability, supporting the Structure-Conduct-Performance (SCP) hypothesis, while excessive credit and liquidity risks undermine financial performance. Moreover, larger and well-capitalized banks demonstrate greater resilience and profitability compared to smaller ones. Among industry and macroeconomic factors, e-banking adoption and GDP growth positively contribute to profitability, whereas rapid sectoral expansion and technological substitution, such as mobile financial services, have mixed effects. The results highlight the importance of balanced competition, prudent risk management, and regulatory oversight in promoting sustainable banking performance and financial stability in Pakistan’s banking sector. The study offers valuable insights for policymakers and regulators aiming to strengthen market competitiveness without compromising stability.