Evaluating Performance of Commercial Banks in Pakistan: An Application of Camel Model
Journal of Business & Financial Affairs
Banking sector plays a vital role in the economic growth. Sound financial well-being of a bank is the assurance not only to its investors, but is equally important for the owners, personnel and the whole economy as well. As a result efforts have been made from time to time, to gauge the money related position of every bank and oversee it proficiently and viably. In this paper, an effort has been made to assess the financial execution of the ten commercial banks working in Pakistan and the data
... istan and the data has been taken for seven years i.e. 2007-2013. Moreover, data were also assembled from articles, papers, the World Wide Web (Internet), Specialized International Journals, and relevant previous studies. In the present study an endeavor was made to evaluate the execution & financial accuracy of commercial banks using CAMEL approach. CAMEL is the supervisory and administrative framework implemented by State Bank of Pakistan. It consists of five critical indicators to assess the soundness and execution of the bank. These segments are Capital adequacy, Asset quality, Management, Earning and Liquidity. The Capital adequacy, Asset quality, Management efficiency, Earning and Liquidity are taken as independent variables (financial measures) with a view to study their impact on the firm's performance. Earnings per share (EPS) is used as a dependent variable. Measurable apparatuses like descriptive statistics, Correlation and regression analysis were used to gauge the execution of the banks. The results show that total deposit to equity, nonperforming loans to gross advances, non-performing loans to equity, Admin Exp to Interest Income Ratio, Gross Advances to Total Deposits Ratio were significantly but negative correlated with a bank's performance. The Return on Assets and Return on Equity were significantly and positively correlated with a bank's performance. The interest income to total assets ratio is statistically insignificant with bank's performance, whereas the regression result show that INT is statistically significant with bank's performance. The cash ratio is also showing insignificant correlated bank's performance, whereas the regression result shows that the cash ratio is statistically significant with a bank's performance. The research describes the financial performance of the banking segment by utilizing CAMEL model including Capital adequacy, Asset quality, Management efficiency, Earnings & Profitability and Liquidity to assess the financial performance. The significance of this study is valuable for helping business financiers to know the qualities and shortcomings for defining methodologies and polices that will push a successful and sound money framework. Regulators have enlarged bank supervision by utilizing CAMEL model to evaluate and assess the performance and financial soundness of the bank's activities (Misra and Aspal, 2013) . The CAMEL Model was developed in 1979. This model is recommended by the US Federal Reserve and the Uniform Financial Institutions Rating System (UFIRS). This model was employed in the US financial institutions and then all around the world. This model consists of five indicators that are Capital adequacy, Asset quality, Management efficiency, Earnings & Profitability and Liquidity. The CAMEL framework emphasizes on the five parameters of the banking system by looking at its profit and loss statement to assess financial performance and balance sheet to assess the financial position of the banks (TOM, 2012). CAMEL model is basically a methodology commonly used to measure the performance of banking segment in and outside India (Trivedi, 2011). The different researchers have analyzed the overall financial performance of major private sector banks in India through the application of CAMEL Model (Gupta and Verma, 2008). Aspal and Dhawan (2014) analyzed the performance of banks in India, Reserve Bank of India has prescribed two supervisory models (Capital Adequacy, Asset Quality, Management, Earning, Liquidity, Systems and Controls) and CACS (Capital Adequacy, Assets Quality, Compliance, Systems and Controls). The study focused on the CAMEL model to assess the performance of Old Private Sector Banks in India. The CAMEL model is very famous among controllers because of its effectiveness. This model is very good for the evaluation of the performance of the banks. CAMEL model was implemented by North America Bank regulators to judge the financial and administrative reliability of commercial loaning organizations. This model assesses the general condition of the bank, its qualities and shortcomings (Gaytan and Johnson, 2002) . Numerous researchers have conducted research to assess the performance of commercial banks by adopting the CAMEL model. Bodla and Verma (2006) , Gupta and Kaur (2008), Dash and Das (2009), Kaur (2010) have investigated the performance of Indian public sector banks, private sector banks and foreign banks by using the different ratios in CAMEL model. The time period of their studies was different, however the findings reached by them was more or less similar. Sushendra and Kumar (2013) used CAMEL framework and they have broken down the performance of the State bank of India group. They utilized different ratios to gauge the State bank group's performance under each of the CAMEL parameters and presumed that a State bank of Travancore secured first position in all classifications. The real disadvantage of the study was that it was restricted to the state bank group. CAMEL is a systematic methodology recommended by Moody's to evaluate a bank's general security, solidness and soundness. Banks are performing essential and a significant part in economic and capital development because of the inborn nature, in this way banks ought to be given more consideration than whatever other kind of the monetary unit in an economy. Assessment of financial performance of the banking sector is a powerful measure and pointer to check the soundness of economic activities of an economy. The five parameters of the CAMEL model used to evaluate the operating soundness, financial performance, financial condition and regulatory compliance of the banking organization (Gupta, 2014). CAMEL model is essentially a proportion based model utilized for assessing the performance of banks and is utilized for ranking or rating of the banks. CAMEL model is the instrument which is utilized in the critical investigation of the statement of financial position of banks and the presentation of such examination to provide the evaluation of the strength of the banks. In the present examination work, CAMEL model has been utilized as a measuring rod to gauge the Capital adequacy, Asset quality, Management efficiency, Earnings and Liquidity of five nationalized banks (Nag and Khatik, 2014).The performance of the banking segment under CAMELS model, which includes analysis and assessment of the five fundamental dimensions of banking operations. Thus the CAMEL model includes set of performance measures that provide a comprehensive view of the banks (Nimalathasan, 2008) . According to the Lakhtaria (2013) Ratio examination is the best tool for investigating the performance and productivity of the banking sector. The CAMEL indicators include Capital adequacy, Asset Quality, Management efficiency, Earnings and Liquidity. According to the previous studies, it is clear that there are many studies carried out on banks in different countries. However, a detailed study has not yet been carried out in Pakistan to assess the performance of the banks. The purpose of this research is to analyze the Financial Performance of the 10 Commercial Banks working in Pakistan by adopting the CAMEL Model. It is an appropriate and simple model to evaluate the financial and managerial assessment of institutions based on Capital adequacy, Asset quality, Management efficiency, Earnings and Liquidity (Kouser and Saba, 2012) . Controllers have enlarged bank supervision by utilizing CAMEL (Capital adequacy, Asset quality, Management competency, Earnings and Liquidity) model to evaluate and assess the performance and monetary soundness of the exercises of the bank. CAMEL is an acronym for a rating model through which banks are evaluated and given a rating focuses on the premise of different parameters (Babar and Zeb, 2011). 1.2 Gap Analysis: Banking sector acts as a backbone of the economy. The Financial resources of the country are allocated through banks. Moreover, banking sector acts as a heart through which money is injected into the economy. Therefore, it needs continuous performance evaluation. CAMEL model is a useful tool for performance evaluation and examining the soundness of banks. After 1980s noticeable loan losses occurred and banks collapsed, therefore, need of banking supervision has increased (Dang, 2011) . This model is used worldwide. In developed countries a lot of research has been carried out on the application and usefulness of camel model. In Pakistan there is no significant research carried out by utilizing Camel Model. Scholars in Pakistan used camel Model as ratio analysis by comparing one bank to another bank or one sector to another sector to find out the performance of the banks. They didn't find out the impact of the CAMEL model on bank performance. Alam, Raza and Akram, (2011) made comparison of public vs private commercial banks. Usman and Khan, (2012) evaluated the performance of Islamic and conventional banks. Shar, Shah and Jamali, (2010) evaluated bank performance pre and post nationalization of the banking sector in Pakistan by adopting the CAMEL model. Kouser, Aamir, Mehvish and Azeem (2011) adopt the CAMEL analysis of Islamic and Conventional Banks in Pakistan. In existing literature other researchers used one component of CAMEL model to measure the bank performance. Bokhari, Ali and Sultan, (2012) used one component of CAMEL model, i.e Capital adequacy to find out the impact on bank performance. The focus of this research is to analyze the impact of different components of the CAMEL Model on the performance of 10 commercial banks operating in Pakistan and data is taken from 2007 to 2013.