The impact of credit risk management on the financial performance of United Arab Emirates commercial banks

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.

Effect of Credit Risk on Profitability of Nepalese Commercial Banks

“…It means that the profitability of Nepalese commercial banks declines when the ratio of nonperforming loans to total loans rises. The negative impact of NPL/TL on profitability is well-matched with the findings of Almekhlafi, (2016), Isanzu (2017), Shahid et al, (2019), Munangi and Bongani (2020) and Al Zaidanin and Al Zaidanin (2021).…”

“…Likewise, the significant influence of credit risk on profitability of banks in United Arab Emirates was verified by Al Zaidanin and Al Zaidanin (2021). The study was based on panel data of sixteen commercial banks that conducted business in the United Arab Emirates between 2013 and 2019.…”

Pengaruh Credit Risk Management Pada Financial Performance Bank Konvensional Yang Terdaftar di BEI

“…(Alshatti, 2015) risiko kredit sebagai salah satu risiko yang paling banyak dihadapi oleh bank mengingat aktivitas pemberian kredit merupakan salah satu sumber pendapatan utama dalam bank, maka credit risk management yang baik akan mempengaruhi profitabilitas. (Al Zaidanin dan Al Zaidanin, 2021) lemahnya credit risk management dalam menganalisa kemampuan penerima credit untuk membayar kembali pinjamannya kepada bank dapat menempatkan financial performance bank bermasalah, sehingga pemangku kepentingan bank dan pemerintah terus bekerja keras mengembangkan kebijakan kepada para penerima pinjaman agar dapat meningkatkan kualitas kredit dan menurunkan masalah kredit macet. Karena dengan meningkatnya risiko kredit di perbankan maka semakin besar kemungkinan untuk terjadi krisis keuangan.…”

“…(Al Zaidanin and Al Zaidanin, 2021) dalam penelitiannya mengukur financial performance dengan menggunakan proksi return on assets. Faktor credit risk management yang akan mempengaruhi financial performance bank adalah capital adequacy ratio, non performing loans ratio, cost to income ratio, liquidity ratio, dan loans to deposit ratio.…”

Determinants of Banks’ Credit Risk: Evidence from Jordanian Banks Listed on Amman Stock Exchange

“…Credit losses can have severe consequences for banks that fail to effectively identify and manage their exposure to credit risk. Because most of a bank's income comes from financing activities, the ability of the bank to evaluate and monitor credit risk is necessary for its survival (Al Zaidanin and Al Zaidanin, 2021). In addition, banks can enhance their profitability and the stability of their businesses by reducing their credit losses through the effective management of credit risk.…”