Effect of Investments on Banking Sector Profitability during Global Financial Crisis: Evidence from an Emerging Market

This research paper empirically supports the fact that profitability of the Pakistani banking sector was reduced during 2008-2009 and this reduction was primarily attributed to global financial crisis and increased proportion of investments in the total assets. We have used annual financial data of all Pakistani scheduled banks from 2005-2012. The control variables include capital adequacy, bank size, funding cost, credit risk, and liquidity. Results of the fixed effects regression model confirm that the reduction in the profitability of the Pakistani banking sector in 2008 and 2009 was because of global financial crises and increased proportion of investments in the total assets. These empirical results of negative relation of investments with profitability in context of global financial crises (2008-2009) have important policy implication for the management of banks in Pakistan and other developing countries.