Impact of Credit Risk on Financial Performance: Mediating Role of Operational Efficiency in Banking Sector of Emerging Economy
Abstract
Purpose: Financial performance of banks is an estimation of how better a company can use its assets for generating profits. Mostly the performance of banks is affected by modernization of financial system, technological advancements and deregulation. The aim of this study is to examine the mediating role of operational efficiency in relationship between credit risk and financial performance of banks.
Design/Methodology/Approach: The research sample is 29 banks of Pakistan. Data for the study is collected from the published financial statements of banks ranges from 2011 to 2018. The data analysis technique used in this study is simple mediation analysis in structure equation modeling.
Findings: The results reflect that operational efficiency partially significantly and inversely mediates the relationship of credit risk with financial performance.
Implications/Originality/Value: One the basis of results it can be suggested that managers need to utilize their deposits carefully and should take more precautionary measures while granting loans. Managers and employees should maintain a better relationship and align their goals with the banks.
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