Impact of Credit Risk Management on Bank Performance: An Empirical Study on Commercial Banks Listed at Pakistan Stock Exchange (PSX)
Abstract
Commercial banks are involved in uncontrolled credit risk management that negatively affects their sustainable banking performance. Many guidelines, strategies, and judgments have been made, such as the Basel Accords, to control these issues and adequately manage their lending and borrowing policies. This study aims to analyse the impact of credit risk management on the sustainable performance of commercial banks. For this purpose, secondary panel data was collected from the annual financial reports of 27 commercial banks out of the 31 listed on the Pakistan Stock Exchange (PSX) for the period 2017-2021. E-views 10 software was applied to perform descriptive correlation and multiple regression analyses. In the current study’s model, credit risk management proxies, return on assets (ROA), return on equity (ROE), and net interest margin (NIM) were employed as dependent variables. At the same time, capital adequacy ratio (CAR), loan and advances (LA), non-performing loans (NPL) ratio, market profit opportunity (MPO), and bank liquidity (BL) were employed as independent variables. The study concludes that bank liquidity has a significant positive relationship with bank performance. Comparably, capital adequacy ratio, non-performing loans, bank liquidity, market profit opportunity, and loan and advances harm the sustainable performance of commercial banks. The research suggests that implementing stricter policies and strategies, such as the regulation of customer loans, is required to control these issues.
Downloads
References
Abdesslem, R. B., Chkir, I., & Dabbou, H. (2022). Is managerial ability a moderator? The effect of credit risk and liquidity risk on the likelihood of bank default. International Review of Financial Analysis, 80, Article e102044. https://doi.org/10.1016/j.irfa.2022.102044
Akbar, M. (2023). Analysis of the effect of Capital Adequacy Ratio (Car), Non-Performing Loan (Npl), and Operating Cost Operating Income (Bopo), Net Interest Margin (Nim) to Loan to Deposit Ratio (LDR) of state-owned banks in Indonesia. Journal of Social Research, 2(5), 1591–1607. https://doi.org/10.55324/josr.v2i5.868
Akhter, N. (2023). Determinants of commercial bank's non-performing loans in Bangladesh: An empirical evidence. Cogent Economics & Finance, 11(1), Article e2194128. https://doi.org/10.1080/ 23322039.2023.2194128
Amissah, M., & Opoku, O. A. (2023). Effect of capital adequacy requirement on profitability of selected banks listed on Ghana stock exchange. Journal of Management Studies and Development, 2(1), 13– 25. https://doi.org/10.56741/jmsd.v2i01.174
Anees, Z., Iftikhar, K., & Rizvi, S. Z. A. (2023). Impact of Basel Accord on bank lending: A case study of Pakistani commercial banks. Pakistan Journal of Social Research, 5(1), 381–391.
Awaluddin, M. R., Haliah, H., & Kusumawati, A. (2023). The effects of non-performing loans and loan-to-deposit ratio toward return on asset. International Journal Of Humanities Education and Social
Sciences (IJHESS), 2(6), 2164–2168. https://doi.org/10.55227/ijhess.v2i6.501
Cao, Q., Giordani, P., Minetti, R., & Murro, P. (2023). Credit markets, relationship lending, and the dynamics of firm entry. Review of Economic Dynamics. Advanced online publication. https://doi.org/10. 1016/j.red.2023.02.001
Chike, C. B., & Ebere, C. C. (2023). The role of corporate heterogeneity in the relationship between credit risk management and bank performance. Central Asian Journal of Innovations on Tourism Management and Finance, 4(1), 72–85. https://doi.org/10. 17605/OSF.IO/FJX9C
Dimitrov, D., & van Wijnbergen, S. (2023). Macroprudential regulation: A risk management approach (DNB Working Paper No. 765). https://www.dnb.nl/media/yxwonyq1/working_paper_no-765.pdf
Duho, K. C. T., Duho, D. M., & Forson, J. A. (2023). Impact of income diversification strategy on credit risk and market risk among microfinance institutions. Journal of Economic and Administrative Sciences, 39(2), 523–546. https://doi.org/10.1108/JEAS-09-2020-0166
Emmanuel, A. O., Olaoye, A. F., & Afolabi, B. (2021). Impact of Credit Risk on Bank Performance in Nigeria. International Journal of Management, 12(3), 165–174. https://doi.org/10.34218/IJM.12.3.2021.015
Gjeçi, A., Marinč, M., & Rant, V. (2023). Non-performing loans and bank lending behaviour. Risk Management, 25, Article e7. https://doi.org/10. 1057/s41283-022-00111-z
Grzeta, I., Zikovic, S., & Tomas Zikovic, I. (2023). Size matters: Analysing bank profitability and efficiency under the Basel III framework. Financial Innovation, 9, Article e43. https://doi.org/10. 1186/s40854-022-00412-y
Gujarati, D. N., & Porter, D. C. (2009). Business & economics. McGraw- Hill Irwin.
Keqa, F. (2023). Testing capital adequacy ratio in western Balkan countries and it is compliance with Basel Accord III [Doctoral dissertation, EPOKA University]. EPOKA University Repository. http://dspace.epoka.edu.al/handle/1/2279
Khan, N., Ramzan, M., Kousar, T., & Shafiq, M. A. (2023). Impact of bank- specific factors on credit risk: Evidence from Islamic and conventional 98. Journal of Finance and Accounting Research banks of Pakistan. Pakistan Journal of Humanities and Social Sciences, 11(1), 580–592. https://doi.org/10.52131/pjhss.2023.1101.
Kolsi, M. C., Al-Hiyari, A., & Hussainey, K. (2023). Does environmental, social, and governance performance mitigate earnings management practices? Evidence from US commercial banks. Environmental Science and Pollution Research, 30(8), 20386–20401. https://doi.org/ 10.1007/s11356-022-23616-2
Musa, M. M., & Nasieku, D. T. (2019). Effects of credit risk management on loan performance of commercial banks in Kenya: A case of listed commercial banks in Kenya. International Journal of Recent Research in Social Sciences and Humanities (IJRRSSH), 6(2), 140–146.
Mushafiq, M., Sindhu, M. I., & Sohail, M. K. (2023). Financial performance under influence of credit risk in non-financial firms: evidence from Pakistan. Journal of Economic and Administrative Sciences, 39(1), 25– 42. https://doi.org/10.1108/JEAS-02-2021-0018
Naili, M., & Lahrichi, Y. (2022). The determinants of banks' credit risk: Review of the literature and future research agenda. International Journal of Finance & Economics, 27(1), 334–360. https://doi.org/10. 1002/ijfe.2156
Nazeer, N., Ali, S., & Rind, A. (2022). Using mixed-method to explore barriers and cues to action in the adoption of green banking practices in commercial banks of Pakistan. International Journal of Finance, Insurance and Risk Management, 12(4), 136–153.
Nguyen, D. T., Le, T. D., & Tran, S. H. (2023). The moderating role of income diversification on the relationship between intellectual capital and bank performance evidence from Vietnam. Cogent Business & Management, 10(1), Article e2182621. https://doi.org/10.1080/23311975.2023.2182621
Orden‐Cruz, C., Paule‐Vianez, J., & Lobão, J. (2023). The effect of economic policy uncertainty on the credit risk of US commercial banks. International Journal of Finance & Economics, 28(3), 3420– 3436. https://doi.org/10.1002/ijfe.2600
Proença, C., Augusto, M., & Murteira, J. (2023). The effect of earnings management on bank efficiency: Evidence from ECB-supervised banks. Finance Research Letters, 51, Article e103450. https://doi.org/10.1016/j.frl.2022.103450
Quaglia, L. (2023). The non‐reversal of delegation in international standard‐ setting in finance: The Basel Committee and the European Union. Governance, 36(1), 41–57. https://doi.org/10.1111/gove.12696
Rafique, Z. Z., Toor, K. N., & Bashir, Z. (2020). Capital adequacy and management quality for banking liquidity management decision in Pakistan. KASBIT Business Journal, 13(1), 25–42. http://dx.doi.org/10.2139/ssrn.3936408
Sharma, D. K., & Kaur, R. (2021). Relationship between credit risk management and profitability performance of Indian public sector banks. GE-International Journal of Management Research, 9(3), 2394– 4226.
Syafrizal, A., & Ilham, R. N. (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.
Uddin, M. M., Islam, M. T., & Al Farooque, O. (2023). Effects of politically controlled boards on bank loan performance: an emerging economy perspective. Journal of Accounting in Emerging Economies, 13(3), 566–588. https://doi.org/10.1108/JAEE-11-2021-0353
Wahyuni, P. D., Umam, D. C., No, J. M. S., & No, J. S. K (2023). The Effect of Credit Risk, Capital Adequacy and Operational Efficiency on Banking Financial Performance with a Profitability Approach. International Journal of Economics, Business and Management Research, 7(6), 12–28. https://doi.org/10.51505/IJEBMR.2023.7602
Zamore, S., Beisland, L. A., & Mersland, R. (2023). Excessive focus on risk? Non‐performing loans and efficiency of microfinance institutions. International Journal of Finance & Economics, 28(2), 1290–1307. https://doi.org/10.1002/ijfe.2477
Copyright (c) 2023 Ahsan Riaz, Shahid Mahmood, Nimra Riaz, Maryum Azad Khan, Muhammad Adnan Ali
This work is licensed under a Creative Commons Attribution 4.0 International License.
JFAR follows an open-access publishing policy and full text of all articles is available free, immediately upon acceptance. Articles are published and distributed under the terms of the Creative Commons Attribution 4.0 International License. Thus, work submitted to UMT Journals implies that it is original, unpublished work of the authors; neither published previously nor accepted/under consideration for publication elsewhere. On acceptance of a manuscript for publication, a corresponding author on the behalf of all co-authors of the manuscript will sign and submit a completed Author Consent, Copyright, and Declaration Form.
