Impact of Green Finance on the Country’s Sustainable Development: A Case Study of Pakistan in the Banking Sector

Abstract

The increasing effect of environmental degradation and climate change has emphasized the importance of sustainable financial channels, and therefore green finance emerged (Khan et al., 2024). This research investigates the role of green finance in sustainable development in Pakistan's banking industry, with emphasis on its influence on financial performance and credit risk. Through a qualitative research methodology, this research examines how green finance strategies, such as green loans, green bonds, and sustainability-linked investments, are executed by financial institutions to reduce environmental risk and promote financial stability (Yameen et al., 2024). The research identifies the significance of Pakistan's regulatory environment, specifically the State Bank of Pakistan's (SBP) Green Banking Guidelines (GBG, 2017), in advocating for sustainable banking policies (SBP, 2017).The results uncover that green finance programs have strong positive impacts on financial performance based on return on assets (ROA) and return on equity (ROE), while non-performing loans (NPLs) fall, thus bringing down credit risk (Irfan & Ullah, n.d). Capital structure acts as a mediator, with higher equity-to-debt ratio holding banks showing high financial resilience after implementing green finance strategies (Rehman et al., 2021). Nevertheless, the research reveals that the Break-Even Point (BEP) rate has little effect on financial performance or credit risk mitigation in Pakistan's banking industry. This indicates that institutional commitments and regulatory incentives could be more powerful than conventional financial viability analysis in green finance implementation (Pindyck, 2013).This study adds to existing knowledge of sustainable finance through its empirical analysis of the challenges and opportunities in green finance implementation within emerging economies. The research is keen on drawing policymakers' attention to enhancing the regulatory framework, providing financial incentives, and bolstering awareness campaigns to promote a faster take-off of green finance. The results have real-world implications for financial institutions, investors, and regulators looking to bring Pakistan's banking industry in line with international sustainability objectives and the United Nations' Sustainable Development Goals (SDGs) (Falcone & Sica, 2019).