IMPACT OF FINANCING RISK ON PROFITABILITY OF ISLAMIC BANKS
Article Sidebar
Main Article Content
Abstract
Banks, as financial intermediaries, face a variety of risks that significantly affect their performance and stability. Islamic banks, like conventional banks, are particularly vulnerable to financing risk, which directly affects their profitability and, if not properly managed, can lead to severe financial distress or even bankruptcy. The purpose of this study is to investigate the relationship between financing risk and the profitability of Islamic banks operating in the MENA region. This research utilizes a panel dataset comprising 14 Islamic banks over ten years from 2013 to 2022. Profitability is measured through the return on assets (ROA), while financing risk is assessed using the nonperforming financing ratio, the financing-to-asset ratio, and the capital adequacy ratio. The study employs panel regression analysis to evaluate secondary data extracted from banks' financial reports. The results indicate that both the financing-to-asset ratio and the capital adequacy ratio have a positive impact on the return on assets, suggesting that a well-managed financing structure and robust capital adequacy contribute to enhancing bank profitability. Conversely, the findings reveal that the nonperforming financing ratio negatively impacts the return on assets, highlighting the detrimental effects of poor financing quality on overall bank performance. The significant findings of this study suggest that Islamic banks should place a greater emphasis on mitigating financing risk through maintaining a strong capital base, diversifying their portfolios, and implementing effective credit risk management practices. This approach would not only enhance profitability but also safeguard the banks against potential losses and financial crises.
JEL Classification Codes: G21, F65, C23.
Downloads
Article Details
Section
This work is licensed under a Creative Commons Attribution 4.0 International License.
How to Cite
References
Akbar, T. (2018). The impact of risk profile, capital adequacy ratio, and exemplary corporate governance implementation on Islamic bank financial performance. Research Journal of Finance and Accounting, 9(12), 127-135.
Ahmad, F., & Bashir, T. (2013). Explanatory power of macroeconomic variables as determinants of NPL: Evidence from Pakistan. World Applied Sciences Journal, 22(2), 243–255.
Ahmed, H. M., El-Halaby, S. I., & Soliman, H. A. (2022). The consequence of the credit risk on the financial performance in light of COVID-19: Evidence from Islamic versus conventional banks across MEA region. Future Business Journal, 8(1), 21. https://doi.org/10.1186/s43093-022-00122-y
Ali, A., Zulkhibri, M., & Kishwar, T. (2019). Credit risk, bank performance, and Islamic banking: Evidence from Pakistan. In Islamic Finance, Risk-Sharing and Macroeconomic Stability (pp. 171–189). https://doi.org/10.1007/978-3-030-05225-6_9
Ariffin, A. F., & Tafri, F. H. (2014, March). The impact of financial risks on Islamic banks profitability. In International Conference on Business, Sociology and Applied Sciences (ICBSAS’14) March (pp. 26-27).
Aver, B. (2008). An empirical analysis of credit risk factors of the Slovenian banking system. Managing Global Transitions, 6(3), 317–334.
Al-Husainy, N. H. M., & Jadah, H. M. (2021). The effect of liquidity risk and credit risk on the bank performance: Empirical Evidence from Iraq. IRASD Journal of economics, 3(1), 58-67.
Al-Rdaydeh, M., Matar, A., & Alghzwai, O. (2017). Analyzing the effect of credit and liquidity risks on profitability of conventional and Islamic Jordanian banks. International Journal of Academic Research in Business and Social Sciences, 7(12), 1145-1155. https://doi.org/10.6007/IJARBSS/v7-i12/3745
Boahene, S. H., Dasah, J., & Agyei, S. K. (2012). Credit risk and profitability of selected banks in Ghana. Research Journal of finance and accounting, 3(7), 6-14.
Castro, V. (2013). Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI. Economic modelling, 31, 672-683. https://doi.org/10.1016/j.econmod.2013.01.027
Dewi, N. K. C., & Badjra, I. B. (2020). The effect of NPL, LDR, and operational cost on operational income and ROA. American Journal of Humanities and Social Sciences Research, 4(7), 171-178.
Haryono, Y., Ariffin, N. M., & Hamat, M. (2016). Factors affecting credit risk in Indonesian Islamic banks. Journal of Islamic Finance, 5(1), 12–25. https://doi.org/10.31436/jif.v5i1.95
Kabir, H. M., & Lewis, M. K. (2007). Islamic banking: An introduction and overview. In M. Kabir Hassan & Mervyn K. Lewis (Eds.), Handbook of Islamic Banking (pp. 1–16). Edward Elgar Publishing.
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(3), 31-38.
Muawanah, E., & Imronudin, I. (2021). Analysis of the effect of capital adequacy ratio, non performing financing, and financing to deposit ratio on profitability: a case study on islamic commercial banks in Indonesia. Journal of Management and Islamic Finance, 1(1), 32-47.
Noman, A. H. M. (2017). Credit risk management of conventional banks and Islamic banks in Bangladesh. IIUC Business Review, 6, 25–42.
Sohail, A., Ali, M. H., & Raza, H. (2022). Credit Risk Management Practices and Pakistani Banks Financial Performance: The Comparison of Conventional and Islamic Banks. Journal of Excellence in Social Sciences, 1(2), 1-13.