IMPACT OF FISCAL PRESSURE ON FINANCIAL PERFORMANCE OF BANKING SECTOR IN PAKISTAN: MODERATING ROLE OF FINANCIAL LEVERAGE

Abstract

Banking institutions are facing increasingly fiscal constraints that impact their profitability and stability. However, there is limited research on this issue in developing economies like Pakistan. To fill this gap, this study examines the effect of fiscal pressure on the financial performance of banks in Pakistan, considering the moderating role of financial leverage. The analysis uses panel data from 20 banks listed on the Pakistan Stock Exchange (PSX) from 2013 to 2022, employing random effects regression methods. Results indicate that both the sales ratio (β = 1.262, p < 0.05) and expenditure ratio (β = 1.115, p < 0.10) have a positively effects on the return on assets, enhancing operational efficiency. Financial leverage significantly moderates the relationship between fiscal pressure and profitability negatively (interaction term β = –1.380, p < 0.10 and β = –1.440, p < 0.05), suggesting that higher debt levels increase risks and reduce profitability. The overall model explains a substantial portion of the variation in profitability (Adj. R² = 0.46). Based on these findings, the study recommends that banks diversify income sources, improve cost management, and optimize leverage levels. Policymakers should also implement strong fiscal frameworks to maintain economic stability.