The mediating effect of risk management for Palestinian Islamic banks’ strategic planning and profitability performance

This paper examined the mediating effect of risk management for strategic planning and profitability of Islamic banks in Palestine. The questionnaires were distributed randomly among 97 directors who have experience in strategic and risk management. A structural equation model was employed to test the research hypotheses. The result revealed that strategic planning and risk management have a significant positive effect on profitability, while strategic planning has a significant positive effect on risk management. In addition, risk management was evidenced to partially mediate the linkage between strategic planning and profitability. The current study yielded support for the claim that risk management played a significant mediating role in the relationship between strategic planning and profitability. Bank directors having good strategic planning and effective risk control tend to get a higher level of profitability. Therefore, Islamic banks should construct a proper strategy in line with their risk management practices and provide a robust risk assessment to protect their financial resources. Ultimately, they can attain superior profitability.


INTRODUCTION
Business organization as well as the banking sector has been facing challenges of high intensity of competition and diversity of customers' desires due to the rapid growth in financial products and services. Therefore, banks require adopting new strategic planning to improve their performance. Especially it is crucial after the lockdown was imposed in serving financial services worldwide and in Palestine as well due to the Covid-19 pandemic. Thus, strategic planning (SP) is one of the most important instruments used to improve the performance of financial institutions. Alosani Greenley (1994), and Beard and Dess (1981) found a significant impact of strategic planning on business performance.
Consequently, strategic planning is a combination of both strategy and planning (Leslie, 2008). Johnson and Scholes (2004) argued that strategic planning is a special kind of decision-making process with some distinctive features. This concept effectively assists organizations in responding to their environmental change (Lunenburg, 2011). Furthermore, Hunjra et al. (2014) stated that strategic planning is a reaction to the internal environment represented by strong and weak performance, and the external environment represented by the opportunities and challenges. Strategic planning in business is an instrument that was used to achieve a balance between both external environment and internal competencies (Harris & Ogbonna, 2006). It plays a vital role in increasing productivity and improving the quality of services (Abu-Jarad et al., 2010). Fossen et al. (2006) argued that strategic planning can successfully help businesses in dealing with the future challenges by providing the ability to monitor resources, enabling them to effectively respond to their environmental change. Raviv et al. (2009) and Aram and Cowen (1990) have examined the direct relationship between strategic planning and banks' profitability. Hunjra et al. (2014) argued that innovative strategies can efficiently improve the earnings quality of business entities. Consequently, the strategic direction has a vital role in improving profitability performance. Especially, Islamic banks should apply a strategy that aligns enough with vision, mission, strategic objectives, and complies with Islamic rules (Lodhi & Kalim, 2005).
Risk management (RM) is considered an important element that can appropriately identify the potential risks for any business entity (Moeller, 2007). Abdul Rahman et al. (2016) argued that risk management is considered a core element of Islamic banks strategy and enables the banks to improve their operational efficiency and boost their earnings. However, Wahyudi et al. (2015) stated that Islamic banks have unique risks from real assets contracts, equity participation contracts, and complicated sales contracts. Therefore, it requires an appropriate risk management environment, as well as a specific strategic plan that includes risk identification, measurement, and control. Hence, prior studies have confirmed that Islamic banks are efficient in risk management practices to gain more profit (Akther, 2015;Abdul Rahman et al., 2013;Khalid & Amjad, 2012). However, none of them has investigated the influence of risk management on the relationship between these two concepts. In this sense, this study focuses on the mediating of RM because it is considered a monitoring instrument since it reduces the potential losses and is perceived to be effective in protecting bank financial resources. Hence, the problem statement resulting from the earlier discussion is defining the impact of the mediating effect on the relationship between corporate strategy and profitability of Palestinian Islamic banks.
Alternatively, this study delineates the mediating role of risk management on the relationship between strategic planning and profitability of Islamic banks. No previous studies have provided a synthesis of knowledge on this issue in the context of the Islamic banking system. Therefore, bank managers must enhance their internal operational environment (i.e. strategic goals and risk control). Hence, the expected results from this analysis enable Islamic banks to identify their capabilities, control their risk, and attain a high level of profitability.

LITERATURE REVIEW AND HYPOTHESES
Strategic planning is one of the key effective approaches to earnings growth for any business entity (Hunjra et al., 2014). Strategic planning aims to describe the vision, mission, and corporate goal of an entity and identify the available resources used to achieve them. Therefore, the main task of strategic planning is to understand the core objectives of organizations and identify methods that were used to achieve those objectives (Hill & Jones, 2012). In this regard, Hopkins and Hopkins (1997) defined strategic planning as a process of formulating, implementing, and controlling strategy and formally documenting the business's future. Aldehayyat and Twaissi (2011) mentioned that strategic planning enables businesses to deal with fluctuation and threats in the internal and external environment. Lodhi and Kalim (2005) argued that strategic planning assists Islamic banks in compliance with Islamic principles as well as achieving their corporate goals. Permana (2017) confirmed that successful strategic implementation aligning with vision and strategy helps the Islamic banking system achieve financial stability. In this sense, many prior studies asserted that strategy is considered an important factor for improving business profitability ( The main purpose of risk management is to control various risks facing Islamic banks and increase their investment opportunities. However, Islamic banks required a constructive strategy that helps them in risk control. Rehman and Anwar (2019) argued that risk management should be directly involved in SMEs' strategy. Therefore, business strategy and risk management are associated with each other to accomplish corporate goals. Moreover, Greuning and Iqbal (2008) mentioned that there was high integration between strategic planning and risk management in the context of Islamic banks. highlighted the direct impact of strategic planning on profitability. However, no prior studies have examined the mediating role of risk management on the association between strategic planning and profitability. Therefore, the current study aims to examine how strategic planning directly influences profitability and find out how risk management mediates this relationship. More specifically, this study sets out to answer the following questions: 1. Does strategic planning influence the profitability of Islamic banks?
2. Does strategic planning influence risk management in Islamic banks?
3. Does risk management influence the profitability of Islamic banks?
banks. Therefore, the argument leads to formulating the following hypotheses:

Measurements
The survey instrument consisted of three main domains; the first domain included strategic planning items, the second domain asked questions regarding risk management practices in Islamic banks, and the third domain included items of profitability. The final section covers demographic details (gender, qualifications, job title, and job experience). Participants were asked to indicate their level of agreement based on a fivepoint scale ranging from 1 (strongly disagree) to 5 (strongly agree).
The questionnaire items were constructed based on previous studies. Therefore, strategic planning items were taken from Jayawarna (2019) rectors were asked about services growth over the last 3 years compared with conventional ones. In addition, they were asked about an increase in demand for financial products, market growth, and return on Islamic modes of investments, etc.

Validity and reliability test
Research hypotheses testing was done using a structural equation model. Therefore, a measurement model should be performed to endorse convergent validity, reliability, and internal consistency before running the structural model (Hair et al., 2013). For this purpose, Confirmatory Factor Analysis (CFA) was tested to detect validity and reliability of structural model including different methods: standardized factor loading (λ), Average Variance Extracted (AVE), Cronbach's alpha (α), and Composite Reliability (CR).
According to the results in Table 1, λ values of factor loading showed that all indicators were above 0.6 and significantly loaded on the structural model. All indicators showed higher value of factor loadings that ranged between 0.941 and 0.606. This affirms the convergent validity of each construct in the estimated model. Furthermore, com-posite reliability values were found above 0.6 and indicated an acceptable value (Hu & Bentler, 1999

Common method bias and outlier test
This study detects the potential common method bias after primary data were collected. In this regard, Harman's single factor was tested to assess the influence of Common Method Bias (CMB) using component factor analysis (Podsakoff et al., 2003). The result showed that only 5 factors with eigenvalues are greater than 1 and the first factor explained 28.06% of the variance, which is less than a threshold value of 0.5 (Hulland et al., 2018).
Therefore, none of the latent variables explained a majority of variation and this confirmed the absence of CMB.
Mahalanobis distance test was also performed to detect the existence of multivariate outliers in data of structural model using SPSS v.23. Mahalanobis distance value of each item was compared with chi-square distribution to the same degree of freedom. Therefore, any value that less than the cut-off point 0.001 is considered an outlier (Pollet & Meij, 2017). The result showed that only three outliers were below p-value of 0.001. The three outliers were deleted before further tests. Thus, a total of 97 valid questionnaire was used for further analysis.

Measurement model
The measurement model ( Figure 1) indicated a good model fit (

Structural equation models
The first estimated model (Figure 2) was tested to examine the direct impact of strategic planning on the profitability of Islamic banks. The direct model has fitness indicators ( The second structural model (Figure 3) was performed to test the direct impact of strategic planning on risk management of Islamic banks. The goodness fit model was tested (  Hu and Bentler (1999). Therefore, the result of the estimated model (Table 3) indicated that strategic planning has a significant direct effect on risk management (β = 0.571, and p-value = 0.048). Thus, this result supported H 2 and the second step of mediation effect is also achieved.
The third estimated model (Figure 4) examines the impact of risk management on the profitability of Islamic banks. The goodness fit model was tested (Table 2) using CMIN/DF = 1.017, CFI = 98%, GFI = 94.8%, TLI = 99.8%, RMR = 2.1%, and RMSEA = 1.3%. The result indicated that goodness fit values were achieved and met the accepted range as recommended by Hu and Bentler (1999). The structural model (Table 3) concludes that risk management has a significant direct effect on the profitability of Islamic banks (β = 0.890, and p < 0.01). In this regard, the finding supported H 3 and indicated that the third step of mediation is achieved. Therefore, the result of H 1 , H 2 , and H 3 testing confirmed that RM mediates the relationship between SP and PROF. The mediation effect model was performed to examine whether risk management mediates the relationship between strategic planning and profitability of Islamic banks ( Figure 5). The goodness fit model (Table 2) was checked through goodness fit methods; CMIN/DF = 1.528, CFI = 90.5%, GFI = 79.8%%, TLI = 88.9%, all values were acceptable as recommended by Hu and Bentler (1999). Meanwhile, RMR = 3% and RMSEA = 7.3%; these values were also below 8% and indicated a goodness fit model. Table 3 shows that strategic planning has a significant direct effect on the profitability of Islamic banks (β = 0.336, and p < 0.05) and the indirect effect of SP on profitability also remained significant (β = 0.416, and p < 0.05). This indicates that RM partially mediated the relationship between strategic planning and profitability. Hence, this finding partially supports H 4 . Moreover, SP has direct significant effect on risk management (β = 0.496, and p < 0.05) and the direct impact of RM on profitability of Islamic banks is also significant (β = 0.496, and p < 0.05). Thus, R-squared implies that strategic planning through risk management brings 56.3% of the variation in profitability of Islamic banks. This result provides evidence that strategic planning plays a vital role in improving profitability through RM.

DISCUSSION
The contribution of prior studies cannot be underestimated in terms of the relationship between strategic planning, risk management, and profitability. However, this paper helps to understand the mediating role played by risk management between strategic planning and profitability. This study examined the structural model by obtaining primary data from directors that work in Islamic banks of Palestine. Nevertheless, the influence of risk management on Islamic banks' strategy and profitability has been rarely examined. In particular, the mediating role of risk management between business strategy and profitability in Islamic banks has been remained unanswered. This study extends the scope of previous literature by examining the impact of strategic planning on risk management and profitability and highlighting the mediation effect of risk management between strategic planning and profitability.
The results indicated that strategic planning has a significant positive influence on profitability, accepting H 1 . This aligns with George et al. This study also found that strategic planning has a significant positive effect on risk management, supporting H 2 . Similar results were found by Rehman and Anwar (2019) and Greuning and Iqbal (2008) who indicated that risk management is considered an integral part of strategic planning. The current study argues that it is strongly recommended for Islamic banks to formulate strategic goals to implement effective risk management practices.
The results revealed that risk management has a significant positive effect on profitability, supporting H 3 . This argument is in line with Kisman (2020), Abdul Rahman et al. (2016), and Akther (2015) who indicated that good risk management practices lead to a higher level of profitability in Islamic banks. The current study argues that effective risk management achieves better profitability performance for Islamic banks in Palestine.  Note: p-value is less than a significant level of 5%.
The research findings indicate that risk management plays a mediating effect for strategic planning and profitability, confirming H 4 . Though more preciously, the result endorses that RM is a partial mediator. Thus, strategic planning does not always directly af-fect profitability, but risk management mediates this relationship. In this sense, risk management practices in Islamic banks need a specific strategy to protect their financial resources, which in turn can lead to a higher profitability in the marketplace.

CONCLUSION
The study aimed to examine the mediating role of risk management for strategic planning and profitability of Palestinian Islamic banks. The paper found a significant positive relationship between strategic planning, risk management, and profitability performance. The result also reported that risk management partially mediates the relationship between strategic planning and profitability. These conclusions lead to emphasize that risk management practices are a priority issue that Islamic banks have to deal with recently. This would require risk management to be integrated with corporate strategy, as this will endorse strategic planning and profitability in long term and protect Islamic banks' assets from potential crises.
Bank managers in Islamic banks are recommended to apply unique strategic plans and precision of risk control to attain more profit. Some practical implications for stakeholders engaged in the strategic and risk management of Islamic banks are suggested. Hence, the finding concludes that Islamic banks should build a proper strategy to gain more profit. Therefore, the strategy should be constructed for innovative financial products and efficient RM practices. For proper knowledge, Islamic banks' strategy should be utilized in compliance with bank credit policy and risk control to avoid any potential crises and to gain more financial stability. Therefore, bank managers are suggested to configure the internal process and to attenuate the potential causes of risk to attain a robust risk management plan. Risk management needs a specific strategy to mitigate and manage the source of unique risks that potentially faces the portfolio investment of Islamic banks.
Finally, this paper has some limitations that can be addressed by future studies. Firstly, since the sample only includes Islamic banks of Palestine, the research model cannot be replicated in other different cases or different geographic areas. Thus, more valid tests and dynamic data analysis could be used to generalize the results. Secondly, the current study examined strategic planning as a whole instead of classifying it into specific components (vision, mission, and strategic goals). Thus, it is critical to examine how each component affects risk management and profitability. Future studies could examine the connection between each component, profitability, and risk management.