The Impact of Climate Induced Agricultural Loan Recovery on Financial Stability; Evidence from the Emerging Economy Pakistan

Abstract

Abstract

Financial stability acts as a backbone for economic stability and sustainable growth. The flow and allocation of the financial resources to the most demanding economic sectors by ensuring the loans against their collateral values, but the loans to the agriculture sectors are sensitive to the climatic uncertain factors. The climate change crisis motivates us to explore the impacts of the climate change induced agricultural loan recovery on financial stability. In particular, we study whether a decline in agricultural loan recovery has any impact on financial stability. We use a panel of 82 districts over a period of 21 years i.e., 2000-2020 to estimate the impact of climate change induced agricultural loan recovery on financial stability. We apply Autoregressive Distributed lag (ARDL), Regression to estimate the impacts of climate change induced agricultural recovery on financial stability across the sampled districts. We find that the impact of climate induced agricultural loan recoveries and equities to liabilities ratio negatively impact the financial stability of Pakistani banks; profitability and non-performing loan (NPLs) positively impact the financial stability in the short run. In the long-run, NPLs significantly negatively impact the financial stability, return on assets is insignificant and other model variables loan recoveries, the retained earnings to assets ratio, and equities to liabilities ratio positively impact the financial stability