Historical Analysis of Bank Profitability Using CAMEL Parameters: Role of Ownership and Political Regimes in Pakistan

In first sixty years of its existence financial sector of Pakistan has experienced two prominent episodes. One, there was an experimentation with the ownership structure of financial institutions which started with promotion of ownership by the private sector and then in 1970s they were nationalized. Subsequently the process was reversed in the 1990s transferring most of the banking assets back to the private sector. Two, on the political front, for long 33 years autocrat have interrupted the democratic order many times. The objective of this study is to take stock of the performance of banking industry when it was in private hands vis-à-vis when banks were nationalized, and, as a supplement, to evaluate the impact of dictatorship versus democracy on the performance of banking industry. Using historical dataset this study offers analysis of banking sector performance by using CAMEL parameters. Our main findings are that when banks are in private hands their profitability is positively related to quality of their assets and management, and it has negative relation with capital adequacy and liquidity. However when banks are under government ownership asset quality and liquidity become irrelevant in determining the profitability whereas capital adequacy, management quality continue to impact bank profitability. This implies that government ownership works like implicit guarantee for banks (a) that they would remain solvent in the short run], and (b) that it would absorb losses emanating from deterioration of bad assets. As regards political regimes the study finds that there is no noticeable difference in the impact of bank specific parameters whether a democratic government is in place or dictatorship is imposed in the country. These findings have implications for bank regulations, monetary policy and for instituting legal reforms in the financial sector.