BS Economics (2021-2025)

Course Title:
Econometrics: Theory and Application II
Submitted to:
Dr.Bushra Pervaiz
Submitted by:
Adeeba Jabbar
(BSF2102056)
Semester:
(7th)

Topic:
Impacts of Green banking on Economic growth of Pakistan
 Impact of Green banking on Economic growth of Pakistan

1.Introduction
The notion of green banking emerged from the growing consciousness of environmental
sustainability. It is a financial approach that endeavours to encourage environmental
preservation by means of conscientious banking practices. In addition to being vital for
reducing the negative environmental effects of economic activity, green banking is also
critical for long-term, steady economic expansion. This paradigm shift is currently being
embraced by the global financial system, and nations like Pakistan are progressively putting
green banking plans into action. Green finance is a possible avenue for sustainable
development in Pakistan, where environmental degradation and climate change are major
risks. Nevertheless, the extent to which green banking contributes to economic growth is still
poorly understood, calling for more research on the subject.
In order to better comprehend the role that green banking plays in promoting economic
growth in Pakistan, this thesis will first identify important areas of impact and then look at
how the environmentally friendly practices of financial institutions affect the overall state of
the economy. In order to shed light on how sustainable banking practices might support
longterm economic stability, the research aims to close the gap between green banking
practices and their macroeconomic effects.

1.1 Background of Study:

The term "green banking" describes the financial services and goods that banks provide with
the goal of lowering carbon emissions and promoting environmental sustainability. It entails
lending money to initiatives that reduce environmental hazards, assisting green companies,
and motivating customers and borrowers to embrace eco-friendly behaviours. By
incorporating environmental, social, and governance (ESG) considerations into financial
choices, the banking industry is progressively aligning itself with the Sustainable
Development Goals (SDGs) on a global scale. The focus is on minimizing the environmental
impact of banking operations, green financing, and responsible investment. Pakistan is an
emerging economy that faces a number of difficulties, such as a growing trade imbalance,
increasing inflation, and energy shortages. At the same time, the nation is battling
environmental problems like air pollution, deforestation, water scarcity, and the negative
consequences of climate change. The State Bank of Pakistan (SBP) launched the Green
Banking Guidelines in 2017 in response to these issues with the goal of enticing financial
institutions to incorporate environmental factors into their lending and operational
procedures. Green banking is still in its infancy in Pakistan, and many banks are only slowly
implementing sustainable banking practices, despite these attempts. Data regarding the
effectiveness of these programs and their impact on economic growth are few. Furthermore,
because of perceived dangers and a lack of experience with green products, many institutions
in Pakistan's financial sector are still reluctant to fund green projects. This leaves a large
study vacuum regarding how green banking contributes to the nation's economic expansion.

1.2 Problem Statement:

Pakistan's prosperity depends on economic expansion, but environmental sustainability must

be balanced with it. Traditional banking methods frequently prioritize immediate financial
gains over environmental effects, which leads to unsustainable growth. The influence of
green banking on Pakistan's economy is still unknown, despite the fact that it has the ability
to support sustainable economic growth by funding environmentally friendly projects and
encouraging green enterprises.
Understanding how green banking projects may effectively spur economic growth is the main
difficulty, particularly in a nation like Pakistan that is under pressure from both the
environment and the economy. There are concerns about the regulatory framework's
sufficiency, the demand for green financial products, and the preparedness of financial
institutions to adopt green banking practices. Furthermore, there is little actual data regarding
the potential contribution of green banking to important macroeconomic indices, including
such as GDP growth, employment generation, and foreign investment inflows. By examining
the connection between green banking practices and economic growth in Pakistan, this study
seeks to answer these issues. It will examine how banks' participation in green finance affects
economic activity and evaluate the prospects and difficulties of putting green banking
principles into effect nationally.

1.3 Objectives:
 To evaluate the extent to which Pakistani financial institutions have embraced
green banking practices.
 To look into how green banking practices, relate to important macroeconomic
metrics like employment and GDP growth.
 To investigate the difficulties and impediments banks have when putting
green banking policies into practice.
  To assess how government policies and regulatory frameworks support green
banking in Pakistan.

1.4 Significance of the study:

This study is important from an academic and practical standpoint. It adds to the small
amount of scholarly work on green banking in developing nations, especially Pakistan. Since
financial institutions in developed economies are comparatively more advanced in
implementing sustainable practices, the majority of research on green banking has been
carried out there. By concentrating on Pakistan, this study closes a significant gap in the
literature by shedding light on the opportunities and difficulties of green banking in a
developing nation with unique socioeconomic and environmental traits.
The results of this study will be useful to regulators, financial institutions, and policymakers
from a practical standpoint. The study will assist banks in identifying areas for development
and comprehending how their green activities support economic growth. Additionally, it will
help other regulatory agencies, including the State Bank of Pakistan, create more efficient
green banking regulations. The findings can be used by policymakers to create rules and
incentives that promote investments in green initiatives from the public and private sectors.
Businesses and investors will also gain from this study's emphasis on the financial prospects
connected to green finance. The findings can help businesses and entrepreneurs who want to
implement sustainable practices more efficiently obtain funding. Furthermore, by
encouraging sustainable development through the financial sector, the study supports
Pakistan's adherence to international accords like the Paris Climate Accord and the
Sustainable Development Goals of the UN. The results of this study will eventually support a
healthy financial ecosystem by motivating banks to actively contribute to environmental
preservation and economic expansion. Additionally, it will raise public and financial
institution knowledge of the significance of sustainable finance in attaining both
environmental and economic stability.

.2. Literature Review:

Sustainable Economic Growth and Green Finance

By encouraging environmentally friendly investments and reducing environmental hazards,
research shows that green finance is essential to promoting sustainable economic
development. Green finance allocates funds to carbon emission reduction projects, like
renewable energy infrastructure and green technology, which support economic resilience
and environmental sustainability (Mohsin et al., 2021. Recent studies highlight the
importance of aligning banking operations with environmental goals.F. Wang, Yang, Reisner,
and Liu's literary work on "A Green Financial Contribution to Economic Growth" (2019)
looks at how financial service companies started creating green credits. According to this
report, banks and other financial institutions are focusing more on making green
improvements to their credit policies so that they can satisfy the demands of the general
public, clients, and government authorities about environmental issues. The use of green
materials in credit cards and credit documentation, the granting of credits for environmentally
friendly initiatives, and the eco-friendly requirements for credit issuance are some of the
environmentally friendly provisions included to the credit regulations. According to Sun et al.
(2020), investments in solar projects and electrification products are necessary for
sustainability, both for the economy and the environment. Financial institutions play a
significant role in supporting green enterprises, which in turn, generate employment
opportunities, increase energy efficiency, and improve the overall resilience of the economy.

Global experiences and Regional comparisons

A number of nations, such as Bangladesh and India, have achieved notable progress in the
field of green banking. The Reserve Bank of India (RBI) in India has implemented green
banking programs to incentivize financial institutions to conform to environmental
sustainability goals. Bangladesh has also created legal frameworks to support green finance,
with an emphasis on waste management and renewable energy initiatives (Islam & Das,
2013).
It is clear by contrasting Pakistan's development with those of these countries that the
country's green banking industry is still in its infancy. In order to include environmental
concerns into banking operations, the State Bank of Pakistan (SBP) introduced Green
Banking Guidelines in 2017 (SBP, 2017). Pakistan's adoption, in contrast to India, has been
delayed because of weak market demand and regulatory enforcement.

Role of Green finance on Green Pakistan’s Economic Growth

Research indicates that through reducing environmental hazards and supporting eco-friendly
projects, green financing can stimulate economic growth. Using ARDL models, Tariq, Zeb,
and Hassan (2024) showed how Pakistan's GDP growth has benefited from green financial
development. They contend that by lessening Pakistan's reliance on fossil fuels, green
investments in eco-loans and renewable energy will improve economic resilience.
By avoiding ecologically hazardous initiatives, green banking also assists financial
institutions in lowering credit risks (Shair et al., 2021). These procedures lessen the risk of
regulatory fines, which boosts stakeholder confidence and promotes long-term profitability.
Shair et al. (2021) also discovered that banks using green finance had better economic
performance, which was fueled by increased stakeholder trust and less problems with
compliance. Shair et al. (2021) also note that banks in Pakistan need to overcome operational
obstacles such inadequate employee training and a lack of green product offers. Financial
institutions must work with international organizations and regulators to create rules that
promote green banking activities and increase their capability in order to overcome these
obstacles. Promoting sustainable financial practices and stimulating economic growth can
also be achieved by providing incentives for green investments and growing digital banking
platforms.

The role of ESG frameworks in Financial Development

Ecological, social, and governance (ESG) concepts that are integrated into banking
procedures reinforce the relationship between sustainable finance and economic expansion.
Long-term gains are given priority in ESG-driven investments, which also bring financial
institutions into line with the Sustainable Development Goals (SDGs) of the UN. A meta-
analysis by Friede et al. (2015) showed that, especially in emerging countries, businesses
with strong ESG performance have better financial results.
Although Pakistan's banking industry has started to acknowledge ESG concepts, there is still
uneven application. Adoption of green finance would accelerate if government incentives and
ESG policies were more aligned. In order to achieve sustained development and economic
growth in Pakistan, this integration is necessary.
The Function of Green Insurance and Foreign Direct Investment

Developing nations like Pakistan have the chance to embrace cutting-edge technologies and
sustainable practices through foreign direct investment (FDI) linked to green initiatives.
According to research by Moore and Manring (2009), green FDIs boost employment and
encourage innovation in host nations, promoting economic expansion and minimizing
environmental damage8. These investments, which raise industry productivity and
competitiveness, frequently concentrate on waste management initiatives, pollution control
technologies, and renewable energy.

Another new facet of green finance is green insurance, which promotes ecologically
conscious behavior by providing incentives for eco-friendly assets like energy-efficient
buildings and hybrid cars. By reducing the financial burden of climate-related disasters, this
lowers environmental risks and builds a more resilient economic system7. Such activities,
according to Sörensen and Emilsson (2019), foster the creation of green marketplaces,
encourage sustainable consumer behavior, and propel long-term economic progress.

Difficulties in Pakistan's Green Banking Implementation

Notwithstanding its promise, Pakistan's green banking industry has a number of challenges,
such as low institutional capacity, a lack of knowledge, and insufficient legislative
frameworks. Businesses in underdeveloped nations frequently reluctant to implement green
finance because of high upfront costs and budgetary constraints, according to research by
Mumtaz and Smith (2019). The broad adoption of green banking practices is further
hampered by the lack of comprehensive regulatory frameworks.
GB implementation is fraught with difficulties. Many banks lack the resources and technical
know-how necessary to create financial products that are sustainable. Furthermore, the
adoption of green finance may be impeded by businesses' and customers' lack of awareness
about it. Government assistance is essential, but many developing nations face challenges
with inadequate GB incentives and regulatory frameworks, which hinders economic progress
(Usman & Amran, 2015; Khairunnessa et al., 2021).
Shair et al. (2021) also note that banks in Pakistan need to overcome operational obstacles
such inadequate employee training and a lack of green product offers. Financial institutions
must work with international organizations and regulators to create rules that promote green
banking activities and increase their capability in order to overcome these obstacles.
Promoting sustainable financial practices and stimulating economic growth can also be
achieved by providing incentives for green investments and growing digital banking
platforms. .

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