Analyzing Dual Impact of Macroeconomic Factors & Climate Related Variables on Financial Performance of Banking Sector of Pakistan
DOI:
https://doi.org/10.54938/ijemdss.2026.05.2.671Keywords:
Banking Sector Profitability, Macroeconomic Indicators, Climate Related Risks, ROA, Pakistan, FMOLS and DOLS.Abstract
This study examines the joint impact of macroeconomic factors and climate related risks on the financial performance of Pakistan’s banking sector. Quarterly unbalanced panel data for 32 banks covering 2015–2024 are used, with Return on Assets (ROA) serving as the profitability measure. Consumer Price Index, real interest rate, Gross Domestic Product, temperature change, and flood occurrences are included as explanatory variables. While, bank size is incorporated as a control. Fully Modified Ordinary Least Squares and Dynamic Ordinary Least Squares estimators are applied to capture long run relationships. The results indicate that temperature change has a negative and statistically significant effect on bank profitability. GDP shows a positive and significant impact. Furthermore, flood occurrences also exhibit a positive and significant association with ROA. CPI demonstrates a mildly negative effect and the real interest rate remains insignificant. In brief, the findings emphasize the importance of integrating climate risk into financial regulation and indicate that larger banks are more resilient to macroeconomic and environmental shocks.
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