Assessing Financial Inclusion and Institutional Factors Impact on Banking Stability in Pakistan

Abstract

The purpose of this study is to investigate the various relationships that exist between bank stability, credit risk, financial inclusion and institutional factors in Pakistan. The study used 33 Pakistani Banks as a sample for the period 2013-2022. The samples were selected based on the availability of data for selected time period. The Data were collected from State Bank of Pakistan and World Bank Database for the analysis. The GMM estimation method was used for credit risk analysis, while the FE model was used for bank stability. The research findings indicate that financial inclusion, sound governance, and GDP growth rate adversely impacted the credit risk, whereas financial inclusion and world governance positively impacted the bank stability, while total assets negatively impacted the bank stability. In order to better inform policymakers on the likely trade-off between financial inclusion and the reliability of the banking industry, this study provides insights on how to balance the stability of banking sectors and help in reducing the credit risk. This study is expected to benefit not only Pakistani sectors but potentially all developing nations with similar institutional and economic environments.