Early Warning Signals of Bank Bankruptcy: A Ratio-based Approach

Abstract

The Study highlights the importance of bankruptcy prediction in maintaining financial stability, and when it comes to bankruptcy prediction, interventions can be made early enough in order to mitigate any losses and protect the interests of the stakeholders. This paper assesses the predictive capacity of the financial ratios in Pakistani commercial and Islamic banks' bankruptcy based on the z-score model of five facets, i.e., Altman. Findings suggest, the majority of commercial banks fall within the safe zone, while a few Islamic banks may be in the gray or distressed space, reflecting a distinction in financial resilience levels. The results are helpful to bank management, monitors, and investors, as they provide an early signal and indicate the necessary immediate improvement. The main contribution of the research material to the literature is the application of the well-established model of estimation to the Pakistani banking sector and its relevance to the risk management practice within the emerging market.