Abstract
Financial Institutions work in a world full of risk and uncertainty.
Financial organizations operate in environments where the future is
insecure and uncertain. Risk management is all about managing
successfully in the capricious and speculative world. It gets substantial
responses due to recent financial catastrophe and the development of
Basel II accord. Therefore, managing risk persist a momentous and
challenging corporate function. This research aimed to investigate the
relationship between risk management and the profitability of
financial institutions working in Pakistan. Balanced longitudinal data
was collected from annual published financial statements of 33 Banks
over a period between 2006 to 2015. The data set was assessed through
descriptive statistics, Pearson’s correlation and panel data regression
model. As a result of the analysis, it became clear that risk
management affect the profitability of all banking institutions.The
impact of credit risk (NPLR) and Liquidity risk (LDR) revealed
significant, but negative on return on assets. It was found thatthe
relationships between Liquidity risk (cash & cash equivalent to total
assets) and profitability indicator (ROA) were ascertained
insignificant. The relationship among Operational risk (CAR) and
profitability indicator (ROA) was found significant and positive. The
overall finding of the analysis shows the significant impact of risk
management on profitability at a reasonable level.The study result
indicates that inadequate risk management practices have a negative
impact on the financial institution's performance, leading to failure and
bankruptcy. Thus, it is concluded that there is a strong correlation
between well-managed business and efficient risk management system.
Therefore, it is suggested for financial institutions working in Pakistan
to carefully manage risks and increase revenue levels.
Iftikhar Ahmad, Farzand Ali Jan. (2017) Risk Management: Impact on Financial Institutions in Pakistan , Journal of Managerial Sciences, Volume 11, Issue 3.
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