Abstract
This paper examines the effects of inflation and real interest
rate uncertainty on the performance and solvency of banks in Pakistan. It
also examines whether the effect of both types of uncertainty differs for
conventional and Islamic banks. Annual data covering the period 2008-
2015 for a sample of 25 banks are used to carry out the empirical analysis.
Generalized Least Square (GLS) estimator is applied to overcome the problem of heteroscedasticity. The results indicate that several bank-specific
variables are important in determining the performance and solvency of
banks operating in Pakistan. The results also show that these variables
have considerable differential impacts on the financial performance and
solvency of both conventional and Islamic banks. With regard to the effects
of macroeconomic variables, the results show that the rate of inflation,
the interest rate, and their volatility also have quite different effects on the
performance and solvency of conventional and Islamic banks. We find
that although neither inflation nor interest rate uncertainty significantly
affect the solvency of conventional banks, the solvency of Islamic banks is
significantly affected by both types of uncertainty. Specifically, we find that
inflation uncertainty has a negative, whereas, the uncertainty associated
with the real interest rate has a significant positive impact on the solvency
of Islamic banks. However, both types of uncertainty have a statistically
insignificant effect on the financial performance of both conventional
and Islamic banks in Pakistan. Providing significance evidence on the
bank-specific empirical determinants, our analysis helps bank managers
to improve their banks’ financial performance and solvency. Further, our
findings are helpful for understanding how the financial performance and
financial soundness of conventional and Islamic banks are determined
during periods of heightened inflation and real interest rate uncertainty
Abdul Rashid, Samia Khalid. (2017) Impacts of Inflation and Interest Rate Uncertainty on Performance and Solvency of Conventional and Islamic Banks in Pakistan, Journal of Islamic Business and Management, Volume 7, Issue 2.
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