Exploring the role of risk and
corruption on bank stability:
evidence from Pakistan
Muhammad Ali, Amna Sohail and Lubna Khan
Department of Business Administration, Iqra University, Karachi, Pakistan, and
Chin-Hong Puah
Department of Economics, Faculty of Economics and Business,
Universiti Malaysia Sarawak, Kota Samarahan, Malaysia
Abstract
Purpose – This paper aims to explore the impact of liquidity risk, credit risk, funding risk and corruption on
bank stability of the banking system in Pakistan.
Design/methodology/approach – The empirical analysis is confined to 24 retail banks, which include 5
Islamic and 19 conventional banks during the period of 2007-2015.
Findings – The findings of this study suggest that bank size, liquidity risk, funding risk and corruption
exert a positive impact on bank stability. Additionally, the authors find a negative relationship between credit
risk and bank stability.
Originality/value – As per the knowledge of the authors, the present research is the first attempt that
discusses the issues of bank stability related to risk and corruption faced by the banking system.
Keywords Liquidity risk, Corruption, Credit risk, Bank stability, Funding risk
Paper type Research paper
1. Introduction
Bank stability relates as a situation where the financial intermediation offered by the
banking sector works efficiently and continues without any disturbance despite any internal
or external shock. According to the State Bank of Pakistan (SBP), financial stability is a
gradual process, and it depends on the ability of the banking sector to understand the needs
of the economy. A stable banking system has several implications such as, enhancement of
economic growth, efficient financial intermediation, public well-being, investment patterns,
competition and others. Banking sector stability also stems the confidence of economic
agents in the financial system. In general, the state bank of a country primarily administers
the soundness of financial sector that ultimately plays a significant role in determining the
growth and development of the banking sector.
Moreover, commercial banks are closely associated with business models, consumer
operations and other economic activities. It includes monthly salaries, deposit mobilization,
consumer finance and borrowing money for consumption or investment purpose. In this
context, past studies have highlighted the role of the banking sector to predict efficient
business environment (
Beck and Levine, 2004; Wilhelm, 2002). Similarly, an efficient banking
system is also necessary for the businesses due to their involvement in banking transactions.
On the same vein, Da Rin and Hellmann (2002) state that the banking sector has key role to
strengthen industrialization in the developing economies. However, the instability in the
banking sector can cause large disruption in the society and economic growth.
JMLC
22,2
270
Journal of Money Laundering
Control
Vol. 22 No. 2, 2019
pp. 270-288
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-03-2018-0019
The current issue and full text archive of this journal is available on Emerald Insight at:
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