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In case of Liquid liabilities as indicator of banking sector development, it is clear that Real GDP and Financial liberalization have the significant impact on the development of banking sector of Pakistan. This result is according to the findings of (Yu & Gan, 2010) and (Attaullah et al, 2004) which show that Real GDP and Financial Liberalization significantly impact the banking sector development. It means that increase in Real GDP and Financial Liberalization will lead the banking sector of Pakistan towards prosperity.

In case of Private sector credit as the indicator of banking sector development, it is found that discount rate is statistically significant to the banking sector development. It means that increase in discount rate will lead towards increase in private sector credit which will eventually results in financial sector development. However, financial liberalization was found inversely related to the banking sector development and Real GDP was not found significant which is against the findings of (Yu & Gan, 2010) which identifies that Real GDP has a significant impact on the development of financial sector of Pakistan when Private sector credit is taken as indicator of banking sector development.

In case of Domestic credit as indicator of development of banking sector, results shows that all four variables are statistically significant to the financial sector development which are according to the findings of (Rajan & Zingales, 1998), (Cetorelli & Gambera, 2001) which states that Financial Liberalization and Real GDP significantly impact the development of financial sector.

PRACTICAL IMPLEMENTATIONS FOR BANKING SECTOR

On the basis of the findings of this study, we can conclude that trade openness is having inverse relationship with the banking sector development. As a result of Trade openness, the less developed banking sector of Pakistan faces tough competition from the developed financial sector of other countries. Moreover, increase in trade openness increases the country’s exposure to international shocks i.e. if any economy faces will suffer a crisis, there will be more chance of transferring crisis in Pakistan.

Discount rate is also found significant in this study when Private sector credit and Domestic credit was used as an indicator of banking sector development. When the discount rate will be high, financial institutions will be encouraged to get loan from state bank of Pakistan. Banks usually uses discount rate as benchmark interest rate when they further lend the money to borrowers. So increasing the discount rate will eventually lead the banking sector to development.