Abstract:
This paper provides new empirical evidence with respect to the influence of banks´ long- and
short-term credit ratings and their volatility performance in the emerging market of Pakistan
covering 10-year analysis and a unique and comprehensive data set derived from a sample of
Islamic and conventional banks with Islamic windows. The purpose of this paper is to
examine the nature of the relationship between Islamic banks´ performance and banks´ credit
rating focusing on the emerging market of Pakistan over the period of 2010-2019. To achieve
the describing goal, researchers use various quantitative approaches, namely the ordinary
least square (OLS) and the Granger causality test. Sample consists of nine conventional
banks with Islamic windows and three fully-fledged Islamic banks listed on the Karachi Stock
Exchange with credit ratings assigned by the PACRA. Results reveal that banks with higher
financial performance have higher long- and short-term ratings, higher GDP growth rates,
lower equity to assets ratio, and are smaller in size. Results also array the existence of
bidirectional Granger causality between short- and long-term ratings and ROE and a
unidirectional Granger causality between trend ROE and trend short- and long-term ratings,
respectively.
