THE ROLE OF CORPORATE GOVERNANCE, CAPITAL ADEQUACY AND FINANCIAL DERIVATIVES IN CREDIT RISK MANAGEMENT: EVIDENCE FROM COMMERCIAL BANKS IN PAKISTAN

Abstract

Purpose
This study examines the impact of risk management strategies on the credit risk faced by commercial banks of Pakistan. Specifically, it investigates the role of Derivatives, risk management, capital adequacy ratio and corporate governance practices in minimizing credit risk in the banking sector.

Design/methodology/approach
Primary data were collected through a structured questionnaire administered to 250 employees of commercial banks in Pakistan. Descriptive statistics, reliability tests and multiple regression analysis were conducted using SPSS to assess the relationship between risk management strategies and credit risk.

Findings
The results indicate that all four risk management strategies have a significant association with credit risk. Derivatives demonstrates the strongest influence, followed by corporate governance, then risk management and capital adequacy ratio. Banks that adopt transparent governance practices, diversify their portfolios for risk management effectiveness and maintain adequate capital levels are more effective in managing credit risk.

Practical implications

The findings suggest that bank managers and regulators should prioritize strengthening corporate governance frameworks, developing effective risk management policies and enforcing capital adequacy requirements. These strategies can collectively reduce default risk and enhance the operational stability and performance of commercial banks.

Originality/value
This study provides empirical evidence from Pakistan, an under-researched region, on how multiple risk management strategies jointly shape credit risk in commercial banks. It offers practical insights for policymakers and practitioners aiming to improve risk management practices in emerging banking markets.