Green Finance and Profitability of Banks: an Empirical Study of Banks in Pakistan

Abstract

In the last two decades, green banking and sustainability of banks have emerged as important concepts in response to dealing with climate change and nations are expected to respond responsibly. However, developing countries are still far behind the expectations. The fundamental reason behind this low compliance is the financial matrices of banks, such as the profitability of banks. Most of the management of the banks believe that green banking and financing for sustainable projects might not lead to profitable banking; however, the picture might be different. Therefore, this study investigates the relationship between green finance and the profitability of banks in Pakistan. To get more accurate responses, this study focused on those banks that have already practiced these concepts in their systems. A sample of 460 employees working in 14 different banks was selected through cluster sampling from the main branches of Islamabad and Rawalpindi regions. SmartPLS 4.0 was used to assess the relationship between two latent constructs. Findings revealed that green financing has a strong positive influence on financial performance of these banks. These findings support the assumption that investing in sustainable projects can enhance the long-term profitability of banks. This study can motivate those banks that are still thinking about the adoption of these concepts in their system due to misconceptions about these inevitable changes to overcome the issue of climate change and ultimately get financial stability.   

Keywords: Climate change, Green banking, Green finance, Profitability of banks, Scale validation