Abstract
The main purpose of this study is to measure up to what extent the independent factors defined by capital adequacy ratio, non-performing loans ratio, cost-income ratio, liquidity ratio, and loans-to-deposits ratio impact the financial performance of sixteen commercial banks operating in the United Arab Emirates using panel data for the period of 2013-2019. The secondary data was collected from banks and examined by applying standard descriptive statistics and the random effect model for hypothesis testing. It is concluded from the regression outcomes that non-performing loans ratio and cost-income ratio have a significant negative impact on commercial banks profitability in the United Arab Emirates, while capital adequacy ratio, liquidity ratio, and loans -to-deposits ratio all have a very weak positive relationship on the return on assets but they are not determinants of bank’s profitability due to the insignificant statistical impact on it. It is therefore suggested that to enhance financial performance and minimize the risk of non-performing loans in the future, banks must watch very carefully the loans’ performance and analyze thoroughly the clients’ credit history and ability to pay back their debts prior to any approval of loan applications. Furthermore, banks should continuously improve their assets utilization, liquidity, and techniques of managing operating costs, improve the impact of capital adequacy, and the use of deposits for lending activities from a weak positive impact to a significant positive impact on their profitability. The researchers recommend that future studies on credit risk management influence on banks’ financial performance should consider more independent variables and longer periods of study such as twenty or thirty years to have more accuracy and generalized results.
Highlights
Commercial banks are the key player in economic development through effective financing of economic activities, and contribute to the stability of their countries' financial systems, as they are the institutions that are able to withstand economic shocks and are the most capable of directing available savings and funds to areas where liquidity deficits and demand for these savings are made through the practice of credit activity (Bessis, 2010), which is one of the main sources of a bank’s income, and on the other hand, credit activity involves many risks facing the lender and borrower such as liquidity risk, Market risk, credit risk, capital risk, interest rate risk, exchange rate risk, political risk, and other types of risks
The current study investigated the impact of credit risk management on the financial performance of sixteen commercial banks operating in the United Arab Emirates (UAE) for the period of 2013-2019 by applying the Random Effects Model (REM)
The Capital Adequacy Ratio, Non-Performing Loans Ratio, Cost-Income Ratio, Liquidity Ratio, and Loans-to-deposits Ratio are used in the current study as financial credit risk measures and Return on Assets is used as a financial performance indicator
Summary
Commercial banks are the key player in economic development through effective financing of economic activities, and contribute to the stability of their countries' financial systems, as they are the institutions that are able to withstand economic shocks and are the most capable of directing available savings and funds to areas where liquidity deficits and demand for these savings are made through the practice of credit activity (Bessis, 2010), which is one of the main sources of a bank’s income, and on the other hand, credit activity involves many risks facing the lender and borrower such as liquidity risk, Market risk, credit risk, capital risk, interest rate risk, exchange rate risk, political risk, and other types of risks. The current study will focus on credit risk as one of the most important types of risk faced by banks This type of risk is one of the risks that lenders face because of the weak ability of borrowers to pay back their loans which puts the money of savers at risk and banks will face significant losses that may lead to financial distress that negatively affects the economic growth and development. The bank’s ability to manage credit risk is of important for the bank business performance, continuity, and survival since the banks’ major source of income is the interest margin gained from lending activities
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