Evidence of Non-Linear Relationship between Non-Interest Income and Profitability of Commercial Banks in Pakistan

Noor, I. and Siddiqui, D. A. (2019). Evidence of Non-Linear Relationship Between Non-Interest Income and Profitability of Commercial Banks in Pakistan. Asian Journal of Economic Modelling, 7(1), 14-26

21 Pages Posted: 9 Jun 2019

See all articles by Iraj Noor

Iraj Noor

Karachi University Business School

Danish Ahmed Siddiqui

University of Karachi - Business School

Date Written: May 31, 2019

Abstract

Pakistan's commercial banks are lately facing hindrance in earning substantial profits due to low-interest rates and low-interest margins on Government Securities which is evidently reflected in the low Earning per Share and low share prices of commercial banks. To confronting this, the banks are forced to diversify their income. The past studies show the mixed inferences about the reliance on non-interest income can be profitable for commercial banks in Pakistan's case. This research fills the gap for the existence of a non-linear relationship between the non-interest income and profitability of banks in Pakistan. Threshold Regression Model is applied on a panel data of 13 commercial for the period 2007-2017. The results have shown that optimal diversification benefit can be attained by reaching to a certain level of non-interest income proportion. The findings of the study are: (1) there exist a single threshold, confirming the non-linear relationship between the Non-Interest Income ratio (NIR) and profitability (ROE). (2) The NIR impacts positively on profitability (ROE) when NIR (≤61.1%) and beyond this value i.e. NIR (>61.12%) the relationship is negative. The study can help the Pakistani banks in exploiting their maximum level of diversification and in earning large profits in unfavorable times.

Keywords: Non-interest income Banks’ profitability, Threshold regression model, Non-linearity Income diversification, Panel data Threshold effect

JEL Classification: G21, C24, C10

Suggested Citation

Noor, Iraj and Siddiqui, Danish Ahmed, Evidence of Non-Linear Relationship between Non-Interest Income and Profitability of Commercial Banks in Pakistan (May 31, 2019). Noor, I. and Siddiqui, D. A. (2019). Evidence of Non-Linear Relationship Between Non-Interest Income and Profitability of Commercial Banks in Pakistan. Asian Journal of Economic Modelling, 7(1), 14-26. Available at SSRN: https://ssrn.com/abstract=3397241

Iraj Noor

Karachi University Business School ( email )

Karachi
Pakistan

Danish Ahmed Siddiqui (Contact Author)

University of Karachi - Business School ( email )

University Road
Karachi, Sindh 75270
Pakistan
3333485884 (Phone)

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