Abstract

The monetary policy is aimed at achieving financial prosperity and plays a key role in the economic development of a country. Changes in monetary policy tools affect various sectors of the economy including the financial sector. Profitability is a crucial pillar for success, if profitability is not handled efficiently, a bank will fail. This research examined how Pakistani banks' profitability was affected by instruments of monetary policy. Banks that are currently in operation in Pakistan were included in the research investigation. The panel data of bank profitability indicators return on assets (ROA) and return on equity (ROE) was obtained from the annual reports of the 22 banks for the period 2008-2021. Descriptive statistics and panel data regression along with the cross-sectional dependence (CD) test, and Driscoll Kraay (DK) regression were employed to analyze collected data. The study found a statistically significant dependency in the panel data set indicating a long-run relationship among variables. Findings indicated the positive impact of the State Bank of Pakistan policy rate (PR) and the broad money growth rate (MG) on ROE and ROA. However, statutory liquidity ratio (SLR) negatively impacted ROE and ROA. This research used large number of banks as a novel component in Pakistan’s context and filled a gap in the country’s banking literature. This study could be helpful to regulators in formulating favorable policy rates that fulfill Pakistan’s economic targets. Findings can be useful to policymakers, bank managers, academicians, and financial sector stakeholders in formulating appropriate policies and strategies. Commercial banks can anticipate their profitability considering changes in monetary policy.