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Title of assignment
The impact of macro economics factors on the probability
of Pakistan commercial banks

Course title: Business research method

Course Code: MBF-560

Student Name: Muhammad usman

Student signature

Roll number: 12534

Class: MBA

Semester: 2nd

Submitted to: Muhammad Sajid

Government college university Faisalabad

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THE IMPACT OF MACROECONOMICS FACTORS ON THE PROFTABILITY OF

PAKISTAN COMMERCIAL BANKS .

Abstract:
This paper is about the impact of macroeconomic factors on the
profitability of commercial banks of Pakistan. In this paper last 5 years Data
is used of commercial banks of Pakistan. This data is panel data. This Data is
from 2010 to 2014 . There are a lot of competition in all over the World .With
this competition it is much important tat know about the commercial banks
of Pakistan .Their are many factors which put impact on the profitability of
commercial banks . There are many tests apply in this paper . With the help
of these tests we can know that profitability of Pakistan commercial banks .
With the help of these tests in this paper there are no positive impact on the
profitability of commercial banks.ROA are decrease in last 5 years. WE can
see these ROA on following graph. Regression , coerrelation, Destriptive
statistics , Haushman Random coefficient tests are apply in this paper.

Keywords: Macroeconomics factors, commercial banks,

profitability, Pakistan,

1. INTRODUCTION:
Financial instituations play a very important role in the economy of the any country. This
research paper show the profitability of Pakistan commercial banks . In Pakistan there are many
commercial bank. These bank play very important role in Pakistan. There are 24 commercial
bank in Pakistan accourding to the stock exchange of Pakistan . In this research paper we take 24
commercial bank of Pakistan. With the passage of time in all over the world all the commercial
bank make progress with very quickly and play very important role in economy of the
countries. In this situation this paper is very important. In this paper use 5 years last data from

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2010 to2014.This paper shows the impact of macro factors on the profitability of Pakistan
commercial bank. These macro factors are capital stock,dividend,GDP,payout ratio and
inflaction.ROA is also macro factor.ROA is dependent variable. Total asset and income of the
commercial banks of pakistan also increase. These commercial banks of Pakistan also increase
GDP. Return on assets also increase in last 5 years.

After the introduction this paper shows literature review theories. Review few theories in
this paper and also show some work which is done in some other countries and also in Pakistan.
After this section empirical study and empirical results are shows last section present the
conclusions.

2. OBJECTIVE OF STUDY:
Objective of this study is to determine the impact of macro economics factors on the profitability
of commercial bank of Pakistan. Their are variable which impact on the profitability of
commercial bank of Pakistan. In this study 24 commercial bank are taken . All these commercial
bank are listed in Karachi stock exchange of Pakistan. Return on asset, inflation, gdp ,money
supply study are variables in this study.ROA is dependent variable and other are independent
variable.

3. Literature Review:

Kanwal and Nadeem (2013) , they analyze the impact macroeconomic variable of profitability
of commercial banks in Pakistan. From 2001 to 2011 they take data for analysis.They use three
factors ,Inflation, GDP,ROA, . Kanwal and Nadeem (2013) use the POLS regression. They use
variable ROA,ROE,EM,INF,,INT and GDP.10 years data of 18 banks which are listed in
KSE.10 years data of 18 banks(2002-2011).The main aim of this research paper is to find
relationship between macroeconomic variable on the profitability of all commercial Banks in
Pakistan. Secondary annual balanced panel data is select for ten years (2002-2011) is used in this
study.Macroeconomic data is selected from World Bank publication.

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; Roman&Danuletiu(2013),the main purpose of this research paper is to know about the

influence on profitability of Romania commercial banks. They analyze data from 2013 to 2015
years.For best economy and financial stability the banking sector has much importance .For
investigation they take fifteen banks of Romania. According to Roman and Danuletiu(2013)the
quality of management and the liquid asset ratio to total assets has impact on profitability of
Bank. They use four variable in this paper. But GDP impact on the Bank profitability .According
to Roman & Danuletiu , Romania bank can improve profitability with the increase in the quality
of assets, bank can improve the quality of management.

; Vejzagic and Zarafat(2014) in this research paper identify for the time (1995-2011)of
profitability of Malaysia commercial banks.Identifying the macroeconomic determinant of
commercial banks profitability in Malaysia.This research paper examine how macroeconomic
factors take part to variation in commercial bank profitability on the time in Malaysia.In this
research paper also shows that some banks ,profitability effected by variation in macroeconomic
factors which are no in the control of bank management .RGDP,RINT,EPI independent variable
are use in this study.In this paper 7 banks is taken for the time 1995 to 2011.The purpose of this
paper is to find nature of relation between profitability of commercial banks in Malaysia with the
help of Return on Asset (ROA) and three main macroeconomic variable ,Real Gross Domestic
Product, Growth Rate, Inflation with consumer Price index,and real ,Interest rate.
Weersaing and Perera(2013) .their
research paper on determinents of profitibility of commercial banks in the Srilanka .This paper
shows that how few factors effect on the Srilanka commercial banks profitability for the period
2001 to 2011.The performance of the commercial banks of Srilanka is measure by (ROA)and
(ROE) show strong in the past as compare to other SARRs countries .This paper carried out a lot
of regressions. After the empirical result it is shows that the large banks record more profit due to
economic of scale as compare the bank which are well sound .this study use Quarterly data
during 2001 to 2011 .the main objective of this paper is to know the impact of bank specific
determinant capital,size,liquidity,credit risk and opertional efficiency of profitability of LCBs in
Srilanka for the period 2001 to 2011 (size), (IR), (GDP), (CAR) are variable use in this paper.
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4. Data and Mathodology :

ALL the commercial banks of Pakistan which are listed in the
Karachi stock exchange of Pakistan take as sample in this research paper. In the stock exchange
of Karachi there are 24 commercial banks banks. In this paper data is take from the years 2010 to
2014 as sample. This is annual panel data of 5 years.

All data which is taken from annual reports of all the commercial banks. All annual reports
keep last 5 year data. GDP , capital stock ,inflation ,And money supply which are variables is
taken from the annual reports of banks.

5.1 Model:

GDP of Pakistan, use logerthim gdp,M1, money supply , inflation rates, Capital stock
all these have Return on Assets. For show the impact of macro factor of profitability on
commercial banks of Pakistan the following model is use

ROAk s = Xo + X1LNGDPs + X2INFs +X3M1 + X4LNSTOCK s

k=Different banks

s=Different years

ROAk s= dependent variables

X= concent

After this others indipendent variables which is use in paper. This paper used 24 commercial
banks data from 2010 to 2014.all the commercial and industrial banks are included in this paper.

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For example HBL Bank, MCB Bank, NBP Bank, ZTBL Bank,etc like that 24 banks are
include.

With the help of theoretical analysis There are no positive coefficient of GDP .Coefficient of
M1 is nigative and coefficient of LNSTOCK is positive.

5.2 Descriptive analysis :

In the Graph 1 we can see that the ROA , return o assets, are
decreasing from year to year . ROA of Pakistan commercial banks is get from the annual reports
and banks.

Table 1 . Definations

Categries SYMBOL Definations

Bank profitibility ROA ROA=net income/ total

assets

Economics growth LNgdp ln(gdp)

Inflation INF inflation

Capital stock lnSTOCK ln(market capitalization )

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 0
120
160

-40
40
80
1 - 10
1 - 14

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2 - 13
3 - 12
4 - 11
5 - 10
5 - 14
6 - 13
7 - 12
8 - 11
9 - 10
9 - 14
10 - 13
11 - 12
12 - 11
13 - 10
ROA

13 - 14

so with help of this graph dependent variables

14 - 13
15 - 12
16 - 11
17 - 10
17 - 14
18 - 13
19 - 12
20 - 11
21 - 10
21 - 14
22 - 13
23 - 12
24 - 11

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Empirical results;

This paper is is the determine the impact of macro economic variables

on the profitability Pakistan commercials banks . To know this profitability there are few tested
applied in this paper. Eviews software is use in this paper. To determine coefficient between the
variables there are regression model is use

Regression Test table 1

Dependent Variable: ROA

Method: Panel Least Squares
Date: 06/02/16 Time: 00:05
Sample: 2010 2014
Periods included: 5
Cross-sections included: 24
Total panel (balanced) observations: 120

Variable Coeffici Std. Error t-Statistic Prob.

ent

C 0.34973 16.65872 0.020994 0.9833

4
M1 - 0.003793 -0.618540 0.5374
0.00234
6
LNSTOCK 0.38174 0.677640 0.563346 0.5743
6
LNGDP - 9.678163 -0.030048 0.9761
0.29080
7
INF - 3.408328 -0.683989 0.4954
2.33125
8

Sign of GDP rate show that the coefficient is nagitave . Which shows that decrease in GDP of
commercial banks of Pakistan . Sign of money supply is also nagitive which shows that decrease
in money supply of commercial banks .Sign of inflation is also nagitive which shows that
decrease in inflation rate of commercial banks of Pakistan .and the sign of capital stock is
positive which shows that increase in capital stock of banks .

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Table:2 Correlation test

After the the Regression test another test is apply in the table 2.Correlation
test show the relationship with dependent variable ROA.

ROA M1 LNSTOCK LNGDP INF

ROA 1.000000 -0.052047 0.041471 -0.006907 -0.062529

M1 -0.052047 1.000000 0.143468 0.065105 0.021142
LNSTOCK 0.041471 0.143468 1.000000 0.054806 0.046787
LNGDP -0.006907 0.065105 0.054806 1.000000 0.050653
INF -0.062529 0.021142 0.046787 0.050653 1.000000

This table show the relationship with other variables. M1 money supply has nagitive relationship
with dependent variable ROA and Natural logerthim of capital stock has positive relationship
with ROA . Natural logertahim of GDP has nagitive relation with return on assets. Inflation has
also nagitive relation with return on asset .

TABLE 3,Descriptive Statistics :

In the descriptive statistics table it is shows that ,Mean ,

Median of the variables. Maximum and minimum

ROA M1 LNSTOCK LNGDP INF

Mean 4.507815 91.11608 18.36913 1.176960 0.985833

Median 0.028729 2.125896 18.01621 1.163151 1.000000
Maximum 151.4892 2958.990 25.58719 1.386294 1.900000
Minimum -12.59871 -0.122805 14.02433 0.741937 0.100000
Std. Dev. 17.78488 440.5501 2.466340 0.171305 0.485469
Skewness 6.357070 5.438878 0.649980 -0.407945 -0.114224

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Kurtosis 47.85825 32.02714 3.504202 2.013395 2.021603

Jarque-Bera 10869.56 4804.503 9.720567 8.195319 5.047239

Probability 0.000000 0.000000 0.007748 0.016612 0.080169

Sum 540.9378 10933.93 2204.296 141.2352 118.3000

Sum Sq. Dev. 37639.95 23096037 723.8569 3.492114 28.04592

Table 4 show that mean , median and standard daviation of variables which is use in this paper .
ROA maximum Mean is 151.48 and minimum is -12.59 and the SD is 17.78. Money supply
,Maximum is 2958.99 and minimum is -0.122805 the SD is 440.55 . LNstock Mean maximum is
25.58 and minimum is 14.02 the Standard daviation is 2.46. LnGDP maximum Mean is 1.386
and minimum is 0.7419 and SD is 0.17 . Inflation maximum Mean is 1.90 and minimum Mean
is 0.10000 and the SD is 0.4854.

Table 5 ,, Correlated Random Effects - Hausman Test

Correlated Random Effects - Hausman Test

Equation: Untitled
Test cross-section random effects

Chi-Sq.
Test Summary Statistic Chi-Sq. d.f. Prob.

Cross-section random 5.170260 4 0.2703

Cross-section random effects test comparisons:

Variable Fixed Random Var(Diff.) Prob.

M1 -0.001558 -0.001989 0.000001 0.6644

LNSTOCK 1.974095 0.944352 0.304752 0.0621
LNGDP -5.896061 -2.658743 9.611446 0.2964
INF 0.450214 -0.942458 1.257039 0.2142

Cross-section random effects test equation:

Dependent Variable: ROA
Method: Panel Least Squares
Date: 06/02/16 Time: 00:10
Sample: 2010 2014
Periods included: 5

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Cross-sections included: 24
Total panel (balanced) observations: 120

Variable Coefficient Std. Error t-Statistic Prob.

C -25.11704 19.30741 -1.300902 0.1965

M1 -0.001558 0.003676 -0.423893 0.6726
LNSTOCK 1.974095 0.916948 2.152897 0.0339
LNGDP -5.896061 9.677536 -0.609252 0.5439
INF 0.450214 3.432286 0.131170 0.8959

Effects Specification

Cross-section fixed (dummy variables)

R-squared 0.369969 Mean dependent var 4.507815

Adjusted R-squared 0.185068 S.D. dependent var 17.78488
S.E. of regression 16.05505 Akaike info criterion 8.590887
Sum squared resid 23714.34 Schwarz criterion 9.241302
Log likelihood -487.4532 Hannan-Quinn criter. 8.855024
F-statistic 2.000909 Durbin-Watson stat 3.669939
Prob(F-statistic) 0.007834

In the Correlation Random Effect test , Show the Coefficient with the variables . Money supply
has negative coefficient with ROA . LNSTOCK has positive coefficient with ROA .INF has
positive coefficient with ROA and LNGDP has negative Coefficient with ROA . At the end can
saw that their are no positive impact on the profitability on the commercial banks of Pakistan .
Accourding to the tests which are applied in this paper shows these result which are explain in
the above.

Conclusion:
In this research paper their are use 24 commercial banks of Pakistan .All
these commercial banks are listed Karachi stock exchange . In this paper use panel Data . This
panel Data is From 2010 to 2014 . All the Data is from the annual reports of Pakistan
commercial banks. In this Paper there are 4 tests are apply for to know the impact of
macroeconomics factors on the profitability of banks. ROA is dependent variables and inflation,
capital stock , GDP. There are no positive impact on the profitability of commercial banks of
Pakistan. Because IN the graph ROA is decreasing . and other variables has negative coefficient

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with ROA. And these results prove that profitability of Pakistan commercial banks did not
increase in last 5 years .

References :
{1} Weersainghi and Perara (2013) vol 2,No 10 Determinent of
profitability of srilanka commercial banks .

{2} Vigzagic and Zarafat (2014) vol 4 analysis of macroeconomics

determinant of profitability commercial banks of Malaysia .

{3}Kanwal and Nadeem 2013 vol 2 No 9 The impact of macroeconomics variable on

the profitibility of Pakistan commercial banks .

{4}Karachi stock exchange . Annual reports of commercial banks of Pakistan .

{5} Onuonga 2014 vol 3, nub 5 Profitibility of Kenya commercial banks .Internal
Factors

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