Investigating the Impact of Derivatives on Stability in the Financial Performance of the Banking Sector of Pakistan

Purpose: The aim of the paper is twofold, to contribute to the ongoing debate regarding highlighting the determinants of derivative usage by commercial banks specifically from a dual banking economy perspective, and to discuss the influence of derivatives usage on the value and stability in the financial performance of the banking sector of Pakistan. Design/Methodology/Approach: The study used the Z-Score and CAMELS Index to compare the stability analysis from different dimensions. Further, the impact of bank-controlled variables on the use of derivatives has also been analyzed. Findings: By conducting Panel regression models, the results revealed that derivatives used by banks reduce the profitability and ultimately stability of banking and increase the bank-specific risk. Implications/Originality/Value: These findings point towards serious intentions regarding using derivative instruments in an economy where dual banking is practiced