Credit risk management and profitability: Evidence from Palestinian banks
-
DOIhttp://dx.doi.org/10.21511/bbs.18(3).2023.03
-
Article InfoVolume 18 2023, Issue #3, pp. 25-34
- Cited by
- 771 Views
-
316 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Credit risk has gained considerable attention in most countries of the world intending to manage the efficiency of credit portfolios. This study attempts to examine the impact of credit risk management on bank profitability. The local Bank of Palestine provided secondary data over a ten-year period (2010–2020) collected from financial annual reports. The statistical analysis is carried out using the SPSS and E-views software, and the study hypotheses are verified using descriptive statistics, multicollinearity tests, and regression. Palestinian banks’ profitability was evaluated using return on assets, along with bank-specific metrics such as capital adequacy ratio (CAR), loan-to-deposit ratio (LDR), non-performing loans (NPLs), loan loss provision ratio (LLPR), bank size, and bank age, as signs of credit risk management. The study’s findings indicate that there are differences in how credit risk management affects bank profitability in the context of Palestine. CAR NPLs have a positive but insignificant effect on profitability using ROA. The regression found a significant positive effect of LLPR on profitability using ROA. Finally, with respect to LDR as an indicator of credit risk management, the regression found its negative but insignificant effect on profitability using ROA. The results demonstrate how the board’s structure influences the performance of a company, which is regarded important knowledge for decision makers.
- Keywords
-
JEL Classification (Paper profile tab)E51, G01, M40, M41
-
References45
-
Tables5
-
Figures0
-
- Table 1. Study variables
- Table 2. Descriptive statistics of study variables
- Table 3. Correlation matrix
- Table 4. Hausman test results
- Table 5. Fixed effect models’ results
-
- Abor, J. (2005). Managing Foreign Exchange Risk among Ghanaian Firms. Journal of Risk Finance, 6(4), 306-318.
- Achou, F. T., & Tegnuh, N. C. (2007). Bank Performance and Credit Risk Management (Master’s Thesis). School of Technology and Society, University of Skovde Press.
- Adebayo, A. O., & Oluwaremi, F. (2017). Relationship between credit risk management and the performance of money deposit banks in Nigeria. IOSR Journal of Economics and Finance, 8(2), 38-48.
- Agbeja, O., Adelakun, O. J., & Olufemi, F. I. (2019). Capital Adequacy Ratio and Bank Profitability in Nigeria: A Linear Approach. International Research Journal of Finance and Economics, 2(3), 91-99.
- Ahmad, N. H., & Ariff, M. (2007). Multi-Country Study of Bank Credit Risk Determinants. International Journal of Banking and Finance, 5(1), 135-152.
- Alhadab, M., & Alsahawneh, S. (2016). Loan Loss Provision and the Profitability of Commercial Banks: Evidence from Jordan. International Journal of Business and Management, 11(12), 242-248.
- Anderson, E. W., & Sullivan, M. W. (1993) The Antecedents and Consequences of Customer Satisfaction for Firms. Marketing Science, 12(2), 125-143.
- Barth, J. R., Caprio Jr, G., & Levine, R. (2000). Bank regulation and supervision: What works best? (Working Paper). World Bank.
- Beatty, A., & Liao, S. (2011). Do delays in expected loss recognition affect banks’ willingness to lend? Journal of Accounting and Economics, 52(1), 1-20.
- Bhattarai, B. P. (2020). Effects of Non-Performing Loan on Profitability of Commercial Banks in Nepal. European Business & Management, 6(6), 164-170.
- Boahene, S. H., Dasah, Dr. J., & Agyei, S. K. (2012). Credit risk and profitability of selected banks in Ghana. Research Journal of Finance and Accounting, 3(7).
- Chairani, C., & Siregar, S. V. (2021). The effect of enterprise risk management on financial performance and firm value: the role of environmental, social and governance performance. Meditari Accountancy Research, 29(3), 647-670.
- Coyle, B. (2000). Framework for: Credit Risk Management. Global Professional Publish.
- Do, H., Ngo, T., & Phung, Q. (2020). The effect of non-performing loans on profitability of commercial banks: Case of Vietnam. Accounting, 6(3), 373-386.
- Effiong, D. A., & Enya, E. F. (2020). Liquidity Risk Management and Financial Performance: Are Consumer Goods Companies Involved? International Journal of Recent Technology and Engineering, 9(1), 580-589.
- Faisal, M., & Challen, A. E. (2021). Enterprise Risk Management and Firm Value: The Role of Board Monitoring. Asia Pacific Fraud Journal, 6(1), 182-196.
- Fatemi, A., & Glaum, M. (2000). Risk management practices in German firms. Journal of Management Finance, 26(3), 1-17.
- Gill, A., Dana, L. P., & Obradovich, J. D. (2018). Financial risk management and financial performance of new small business ventures: evidence from Indian survey data. Journal for International Business and Entrepreneurship Development, 11(2), 75-95.
- Gizaw, M., Kebede, M., & Selvaraj, S. (2015). The impact of credit risk on profitability performance of commercial banks in Ethiopia. African Journal of Business Management, 9(2), 59-66.
- Hamza, S. M. (2017). Impact of credit risk management on banks performance: A case study in Pakistan banks. European Journal of Business and Management, 9(1), 57-64.
- Inggawati, V. R., Lusy, L., & Hermanto, Y. B. (2018). The Influence of Loan to Deposit Ratio, Loan Operational of Income Operational and NonPerforming Loan toward Profitability of Bank Perkreditan Rakyat in Sidoarjo Regency. International Journal of Scientific and Research Publications (IJSRP), 8(11), 510-519.
- Kamran, H. W., Omran, A., & Mohamed-Arshad, S. B. (2019). Risk management, capital adequacy and audit quality for financial stability: Assessment from commercial banks of Pakistan. Asian Economic and Financial Review, 9(6), 654-664.
- Kargi, H. S. (2011). Credit risk and performance of Nigerian banks (Unpublished Thesis). Ahmadu Bellu University, Zaria, Nigeria.
- Kidane, S. T. (2020). Credit risk management and profitability: empirical evidence on Ethiopian commercial banks. Jurnal Perspektif Pembiayaan dan Pembangunan Daerah, 8(4), 377-386.
- Kolapo, T. F., Ayeni, R. K., & Oke, M. O. (2012). Credit Risk and Commercial Banks’ Performance in Nigeria: A Panel Model Approach. Australian Journal of Business and Management Research, 2(2), 31-38.
- Madugu, A. H., Ibrahim, M., & Amoah, J. O. (2020). Differential effects of credit risk and capital adequacy ratio on the profitability of the domestic banking sector in Ghana. Transnational Corporations Review, 12(1), 37-52.
- Mendoza, R. R., & Rivera, J. P. R. (2017). The effect of credit risk and capital adequacy on the profitability of rural banks in the Philippines. Scientific Annals of Economics and Business, 64(1), 83-96.
- Mustafa, A. R., Ansari, R. H., & Younis, M. U. (2012). Does the loan loss provision affect the banking profitability in the case of Pakistan? Asian Economic and Financial Review, 2(7), 772-783.
- Nguyen, T. H. (2020). Impact of Bank Capital Adequacy on Bank Profitability under Basel Ii Accord: Evidence from Vietnam. Journal of Economic Development, 45(1), 31-46.
- Njanike, K. (2009). The Impact of Effective Credit Risk Management on Bank Survival. Annals of the University of Petroşani, Economics, 9(2), 173-184.
- Nurtayeva, A., Kayirgaliyeva, M., Kabdeshova, A., & Babash, D. (2021). Optimization of the Risk Management System to Improve the Financial Stability of the Enterprise. Statistika, Uchet i Audit, 2, 103-110.
- Olalekan, A., & Adeyinka, S. (2013). Capital adequacy and banks’ profitability: An empirical evidence from Nigeria. American International Journal of Contemporary Research, 3(10), 87-93.
- Pakurár, M., Haddad, H., Nagy, J., Popp, J., & Oláh, J. (2019). The service quality dimensions that affect customer satisfaction in the Jordanian banking sector. Sustainability, 11(4), 1113.
- Rejda, G. (2008). Principles of Risk Management and Insurance. Addison-Wesley Educational Publishers, Reading (Mass).
- Rengasamy, D. (2014). Impact of loan deposit ratio (LDR) on profitability: Panel evidence from commercial banks in Malaysia. In International Conference on Global Economics, Finance and Social Sciences.
- Richard, E., Chijoriga, M., Kaijage, E., Peterson, C., & Bohman, H. (2008). Credit risk management system of a commercial bank in Tanzania. International Journal of Emerging Markets, 3(3), 323-332.
- Serwadda, I. (2018). Impact of Credit Risk Management Systems on the Financial Performance of Commercial Banks in Uganda. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 66(6), 1627-1635.
- Shimpi, P. A. (2001). Integrating Corporate Risk Management. New York, NY: Texere.
- Shrestha, R. (2017). The Impact of Credit Risk Management on Profitability: Evidence from Nepalese Commercial Banks.
- Singh, S. K., Basuki, B., & Setiawan, R. (2021). The Effect of Non-Performing Loan on Profitability: Empirical Evidence from Nepalese Commercial Banks. The Journal of Asian Finance, Economics and Business, 8(4), 709-716.
- Sinkey, J. C. (1992). Commercial Bank Financial Management. New York: Macmillan Publishing Company.
- Spadaford, J. E. (1988). Credit Quality: Ceo’s Set the Tone. Magazine of Bank Administration, 1(5), 20-22.
- Syafrizal, A., Ilham, R. N., Darmawati, & Wardhiah. (2023). Effect of Capital Adequacy Ratio, Non Performing Financing, Financing to Deposit Ratio, Operating Expenses and Operational Income On Profitability at Pt. Bank Aceh Syariah. Journal of Accounting Research, Utility Finance and Digital Assets, 1(4), 312-322.
- Ul Mustafa, A. R., Ansari, R. H., & Younis, M. U. (2012). Does the loan loss provision affect the banking profitability in case of Pakistan? Asian Economic and Financial Review, 2(7), 772-783.
- Zou, Y., & Li, F. (2014). The impact of credit risk management on profitability of commercial banks: A study of Europe.