The purpose of the study is to find out empirically the interrelation among three main variables financial openness, efficiency and risk of commercial banks working in Pakistan while controlling for other country-specific variables. The study has been conducted to investigate the potential direct impact of financial openness and risk on the profit efficiency of commercial banks and to further check that whether the efficiency of domestic commercial banks is indirectly affected by financial openness through a change in bank risk. The efficiency of all commercial banks is separately calculated and analysed to find out which bank is the most efficient and which has the lowest efficiency score. The dataset consists of 13 private commercial banks working in Pakistan, covering the period from 2008 – 2018. System GMM is used along with the Auto Regressive Distributive Lagged model to find out the prevailing impact of financial openness and bank risk on the profit efficiency of domestic commercial banks of Pakistan. Efficiency score is calculated through Stochastic Frontier Approach using Battese and Coelli (1995) model. The main finding of the study reveals that financial openness has a direct negative impact on the profit efficiency of domestic commercial banks working in Pakistan. Risk has no direct impact on profit efficiency, however, financial openness has a positive association with risk, hence it can increase risk by lowering the profit efficiency indirectly. Further found that overall commercial banks are 53% efficient and they can improve their profit efficiency by up to 47%, the existing slum in profit gains.

Keywords: Financial Openness, Efficiency, Z-Score, Bank Risk.