An Assessment Of Banks Efficiency And Performance Of Banking Sector Of Pakistan By Using Camels Rating Framework

Abstract

A sound financial sector is considered essential for the economic development and prosperity of a country. The banking industry's ability to gather savings and distribute them through loans and other financial services is fundamental to the functioning of the financial sector and the broader economy. So, the main aim of this research study is to fulfill the research objective that is “To evaluate the Bank efficiency and performance of the banking sector in Pakistan by applying CAMELS approach”. To fulfill this research objective, researcher has employing two-pronged strategy: first, to analyze the soundness and financial strength of banking sector by using the CAMELS Rating framework and second, is to check the impact of CAMELS approach on banking sector performance in terms of Efficiency by formulating Regression equation. The Internationally accepted CAMELS framework is comprised of rating parameters used to access banking sector performance. It is used to evaluate the overall condition of the commercial banks operating in Pakistan and identify its financ[1]ial, managerial and operational strength and weaknesses. It includes six important components which includes; Capital, Assets, Management, Earnings, Liquidity, and Sensitivity to market risk — each components are rated on a scale from 1 to 5. These individual ratings serve as the basis for a composite rating, which also ranges from 1 to 5. This composite rating provides an overall assessment of the entity's financial health and risk profile, taking into account various aspects of its operations and financial stability. For this purpose, those banks are included which are listed on Karachi Stock Exchange.

The results shown that almost large banks typically outperform than smaller banks due to their advantages in scale, resources, diversified operations, regulatory compliance, access to capital markets and brand recognition. The top 5 Banks are Meezan Bank, NBP, MCB, HBL and UBL. These are nationalized banks of Pakistan except Meezan Bank. Only one small bank that is JS Bank is included in top 10 banks. Secondly, Pooled data of 15 sample banks during 2000-19 are employed. Both Random and Fixed effects models were estimated. Empirical results of the Generalized Least Square (GLS) method based on CAMELS ratios have shown that Asset quality, Liquidity and Earning have significant predictability.