The The Impact of Liquidity, Credit, and Financial Leverage Risks on Financial Performance of Islamic Banks: A Case of Sudanese Banking Sector
Keywords:
credit, liquidity, financial leverage, islamic banks, risk management, Sudan
Abstract
This study aims to investigate the impact of liquidity, credit, and financial leverage risks on the financial performance of Islam banks in Sudan during the period of 2008 - 2018. Panel dataset of 143 observations from (13) banks has been used in this study. Two models of ROA and NPM have been constructed using robust random effects estimates for testing the study hypotheses. The independent variables consist of liquidity and credit risks plus the financial Leverage ratio. Credit risk that measured by nonperformance of loan (financing) and provision of loan (financing) loss ratios; while the liquidity risk measured by cash to deposits ratio, liquid assets to total assets ratio and total loan (financing) to total deposits ratio. The financial performance of Islamic banks in Sudan measured by the ratios of return on assets and net profit margin. The results reveal that the credit risk and financial leverage have significant and negative impact on the financial performance of Islamic banks in Sudan, whereas the liquidity risk generally found to be insignificant. Despite that, the liquidity risk in term of liquid assets to total assets ratio provides a significant and positive influence on the financial performance of Sudanese banks. Finally, the importance of this study is that it touches the most significant types of risks that Sudanese Islamic banks face during their operational cycles.
References
Abbas. F., Iqbal. S., & Aziz. B. (2019). The Impact of Bank Capital, Bank liquidity and Credit Risk on Profitability in Postcrisis Period: A Comparative Study of US and Asia. Cogent Economics & Finance, 7(1), 1-18. https://doi.org/10.1080/23322039.2019.1605683
Abdo. M. M., & Onour. I. A. (2020). Liquidity Risk Management in Full-fledged Islamic Banking system. Management and Economics Research Journal, 6(2), 1-7. https://doi.org/10.18639/MERJ.2020.990012
Ahmadyan, A. (2018). Measuring Credit Risk Management and its Impact on Bank Performance in Iran. Marketing and Branding Research, 5(2018), 168-183. Retrieved from https://ssrn.com/abstract=3347026
Ahmed E. A. Y. (2016). Credit Risk Management in Islamic Banks: With Special Reference to Non-performing Finance in the Sudanese Banks, 2002-2014. A Thesis Submitted to the University of Gezira in Fulfilment of the Requirements for the Award of the Degree of Doctor of Philosophy in Islamic Banking and Finance. The Institute for Islamization of Knowledge. February.2016 (unpublished)
Ahmed, H., & Khan. T. (2007). Risk Management in Islamic Banking. In Hassan. M. Kabir & Lewis. K. Mervyn (Eds.), Handbook of Islamic Banking. Edward Elgar Publishing: UK.
Akhtar. M., Ali. K., & Sadaqat. S. (2011). Liquidity Risk Management: A Comparative Study Between Conventional and Islamic Banks of Pakistan. Interdisciplinary Journal of Research in Business, 1(1), 35-44.
Al Rahahleh, N., Bhatti. M. I., & Misman. F. N. (2019). Developments in Risk Management in Islamic Finance: A Review. Journal of Risk and Financial Management, 12(37), 1-22. DOI: http://dx.doi.org/10.3390/jrfm12010037
Al-Rdaydeh, M., Matar, A., & Alghzwai. O. (2017). Analyzing the Effect of Credit and Liquidity Risks on Profitability of Conventional and Islamic Jordanian”, International Journal of Academic Research in Business and Social Sciences, 7(12), 1145-1155. http://dx.doi.org/10.6007/IJARBSS/v7-i12/3745
Alshatti. A. S. (2015). The effect of credit risk management on financial performance of the Jordanian commercial banks”. Investment Management and Financial Innovations, 12(1), 338-345. Retrieved from www.businessperspectives.org
Alzoubi. T. (2017). Determinants of liquidity risk in Islamic banks. Journal of Banks and Bank Systems, 12(3), 142-147. http://dx.doi.org/10.21511/bbs.12(3).2017.10
Amaliah. S. R., & Hassan. H. H. (2019). The Relationship between Bank’s Credit Risk, Liquidity, and Capital Adequacy towards its Profitability in Indonesia. International Journal of Recent Technology and Engineering (IJRTE), 7(5S), 225-237
Ariffin. N. M., Archer. S., & Abdel Karim, R. A. (2008). Risks in Islamic banks: Evidence from empirical research”. Journal of Banking Regulation, 10(2),153–163. http://dx.doi.org/10.1057/jbr.2008.27
Bace. E. (2016). Bank Profitability: Liquidity, Capital and Asset Quality. Journal of Risk Management in Financial Institutions, 9(4), 327–331.
Baltagi. B. H. (2005). Econometric Analysis of Panel Data”, (3rd edition), John Wiley &Sons Ltd, Chichester, West Sussex. England. Retrieved from www.wileyeurope.com
Ben Jedidia, K., & Hamza. H. (2015). Determinants of Liquidity Risk in Islamic Banks: A Panel Study. EJBM-Special Issue: Islamic Management and Business, 7(16), 137-146.
Breusch T. S., & Pagan A. R. (1979). A Simple Test for Heteroscedasticity and Random Coefficient Variation. Journal of Econometrica, 47(5), 1287-1294. Published by: The Econometric Society Stable. Retrieved from http://www.jstor.com/stable/1911963
Brooks. C. (2008). Introductory Econometrics for Finance (2nd ed). Cambridge University Press. New York. USA. Retrieved from www.cambridge.org/9780521873062
Brooks. C. (2014). Introductory Econometrics for Finance (3rd ed). Cambridge University Press, New York. USA. Retrieved from www.cambridge.org/9781107661455
Burger, J. (2018). The Financial Services Sector in Sudan”, How We Made it in Africa. Africa Business Insight. Retrieved from https://www.howwemadeitinafrica.com/the-financial-services-sector-in-sudan/61452
Cameron. A. C., & Trivedi. P. K. (2005). Microeconometrics Methods and Applications. Cambridge University Press, New York. USA. Retrieved from www.cambridge.org/9780521848053
Chowdhury M. M., Zaman. S., & Alam. M. A. (2019). Liquidity Risk Management of Islamic Banks in Bangladesh. International Journal of Business and Technopreneurship, 9(1), 37-48
Effendi K. A., & Disman. D. (2017). Liquidity Risk: Comparison between Islamic and Conventional Banking. European Research Studies Journal, XX(2A), 308-318.
Elgadi, E. M. (2016). Assessing the Financial Performance of Islamic Banking: The case of Sudanese banks. A Thesis Submitted in Partial Fulfilment of the Requirements of the University of East London for the Degree of PhD, School of Business and Law. April.2016 (Unpublished).
Gafrej, O., & Abbes, M. B. (2017). Liquidity Determinants of Islamic and Conventional Banks” Journal of Islamic Banking and Finance – Global Perspective of Islamic Finance, 34(2), 44-61.
Hair, J. J. F., Black, W. C., B. B. J., & Anderson, R. E. (2014). Multivariate Data Analysis. (7th edition) Pearson Education Limited, Edinburgh. UK. Retrieved from www.pearsoned.co.uk
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53–74. http://dx.doi.org/10.1016/s0304-4076(03)00092-7
İncekara, A., & Çetinkaya, H. (2019). Liquidity Risk Management: A Comparative Analysis of Panel Data Between Islamic and Conventional Banking in Turkey. Procedia Computer Science, 158(2019), 955-963. http://dx.doi.org/10.1016/j.procs.2019.09.136
Iqbal. A. (2012). Liquidity Risk Management: A Comparative Study between Conventional and Islamic of Pakistan. Global Journal of Management and Business Research, 12(5), 54-64.
Ishtiaq, M. (2015). Risk Management in Banks: Determination of Practices and Relationship with Performance. A Thesis Submitted in Partial Fulfilment of the Requirements for the Degree of PhD. (March.2015), University of Bedfordshire. UK.
Islam, A., & Amir, S. (2016). Liquidity Problems in Islamic Banks; Reasons, Impacts and Solutions. COMSATS Journal of Islamic Finance, 1(2016), 1-9.
Islam, A., Farooq, M., & Ahmad, A. (2017). Factors Affecting Liquidity Position of Islamic Banks. City University Research Journal, Special Issue: AIC, Malaysia (2017), 27-36.
Islamic Financial Services Board – IFSB. (2018). Islamic Financial Services Industry Stability Report (2018). Kuala Lumpur, Malaysia. Rederived from https://www.ifsb.org
Issa, S. (2020). Life after Debt: The Effects of Overleveraging on Conventional and Islamic Banks. Journal of Risk Financial Managemen, 13(137), 1-44. http://dx.doi.org/10.3390/jrfm13060137
Kao, S. (1999). Spurious Regression and Residual-based Tests for Cointegration in Panel data. Journal of Econometrics, 90(1999), 1-44.
Khalil, R., & Khalil, M. A (2017). Does Bank Size and Operational Efficiency Matters? An Impact of Financial Gearing and Asset Management on Islamic Bank’s Performance in Pakistan. Journal of Accounting and Finance in Emerging Economies, 3(1), 63-77.
Levin, A., Lin, C., & Chu, C. S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108(2002), 1–24. https://doi.org/10.1016/S0304-4076(01)00098-7
Menacer, A., Saif-Alyousfi, A. Y. H., & Ahmad, N. H. (2019). The Effect of Financial Leverage on the Islamic Banks’ Performance in the Gulf Cooperation Council (GCC) Countries. International Journal of Financial Research, 11(1), 13-24. https://doi.org/10.5430/ijfr.v11n1p13
Mennawi, A. N. A., & Ahmed, A. A (2020). The Determinants of Liquidity Risk in Islamic Banks: A Case of Sudanese Banking Sector. International Journal of Islamic Banking and Finance Research, 4(1), 38-49. Rederived from www.cribfb.com/journal/index.php/ijibfr
Misman, F. N., & Bhatti, M. I. (2020). The Determinants of Credit Risk: An Evidence from ASEAN and GCC Islamic Banks. Journal of Risk and Financial Management, 13(89), 1-22. http://dx.doi.org/10.3390/jrfm13050089
Muharam. H. (2013). The Influence of Fundamental Factors to Liquidity Risk on Banking Industry: Comparative Study between Islamic Bank and Conventional Bank in Indonesia” UNISSULA, SEMARANG, (October 12, 2013). Conference in Business, Accounting and Management, 1(2), 359-368. http://dx.doi.org/10.2139/ssrn.2339598
Mustafa, O. A. O. (2019). Assessment of the Financial Performance of Islamic Commercial Banks in Sudan under Credit Risk and Inflation Pressures (1995-2017). Journal of Islamic Banking and Finance, 7(1), 14-26. https://doi.org/10.15640/jibf.v7n1a2
Mustafa, O. A. O. (2020). Impact of liquidity shortage risk on financial performance of Sudanese Islamic banks. International Journal of Islamic Economics and Finance, 3(2), 251-280. https://doi.org/10.18196/ijief.3229
Park. H. M. (2011). Practical Guides to Panel Data Modeling: A Step-by-step Analysis Using Stata. Tutorial Working Paper. Graduate School of International Relations, International University of Japan. Niigata. Japan. Rederived from http://www.iuj.ac.jp/faculty/kucc625
Pedroni, P. (1995). Panel Cointegration; Asymptotic and Finite Sample Prosperities of Pooled Time Series Tests with An Application of PPP Hypothesis. Revised Working Paper. Presented at the North American and European Econometric Society Meetings. Quebec and Maastricht Respectively During the Summer of 1994. Rederived from https://web.williams.edu/Economics/pedroni/WP-95-13.pdf
Rosman, R., & Abdul Rahman, A. (2015). The practice of IFSB guiding principles of risk management by Islamic banks International evidence. Journal of Islamic Accounting and Business Research, 6(2), 150-172. https://doi.org/10.1108/JIABR-09-2012-0058
Sarwar, M. F. (2018). Impact of Profitability on Market Size of Islamic Banking of Pakistan. International Journal of Accounting Research, 6(2.181), 1-5.
Tafri, F. H., Hamid, Z., Meera, A. K. M., & Omar, M. A. (2009). The Impact of Financial Risks on Profitability of Malaysian Commercial Banks: 1996-2005. World Academy of Science, Engineering and Technology, 30(2009), 1668-1682.
Thomson Reuters (2018). Islamic Finance Development Report 2018 – Building Momentum Report. Rederived from https://ceif.iba.edu.pk/pdf/Reuters-Islamic-finance-development-report2018.pdf
Abdo. M. M., & Onour. I. A. (2020). Liquidity Risk Management in Full-fledged Islamic Banking system. Management and Economics Research Journal, 6(2), 1-7. https://doi.org/10.18639/MERJ.2020.990012
Ahmadyan, A. (2018). Measuring Credit Risk Management and its Impact on Bank Performance in Iran. Marketing and Branding Research, 5(2018), 168-183. Retrieved from https://ssrn.com/abstract=3347026
Ahmed E. A. Y. (2016). Credit Risk Management in Islamic Banks: With Special Reference to Non-performing Finance in the Sudanese Banks, 2002-2014. A Thesis Submitted to the University of Gezira in Fulfilment of the Requirements for the Award of the Degree of Doctor of Philosophy in Islamic Banking and Finance. The Institute for Islamization of Knowledge. February.2016 (unpublished)
Ahmed, H., & Khan. T. (2007). Risk Management in Islamic Banking. In Hassan. M. Kabir & Lewis. K. Mervyn (Eds.), Handbook of Islamic Banking. Edward Elgar Publishing: UK.
Akhtar. M., Ali. K., & Sadaqat. S. (2011). Liquidity Risk Management: A Comparative Study Between Conventional and Islamic Banks of Pakistan. Interdisciplinary Journal of Research in Business, 1(1), 35-44.
Al Rahahleh, N., Bhatti. M. I., & Misman. F. N. (2019). Developments in Risk Management in Islamic Finance: A Review. Journal of Risk and Financial Management, 12(37), 1-22. DOI: http://dx.doi.org/10.3390/jrfm12010037
Al-Rdaydeh, M., Matar, A., & Alghzwai. O. (2017). Analyzing the Effect of Credit and Liquidity Risks on Profitability of Conventional and Islamic Jordanian”, International Journal of Academic Research in Business and Social Sciences, 7(12), 1145-1155. http://dx.doi.org/10.6007/IJARBSS/v7-i12/3745
Alshatti. A. S. (2015). The effect of credit risk management on financial performance of the Jordanian commercial banks”. Investment Management and Financial Innovations, 12(1), 338-345. Retrieved from www.businessperspectives.org
Alzoubi. T. (2017). Determinants of liquidity risk in Islamic banks. Journal of Banks and Bank Systems, 12(3), 142-147. http://dx.doi.org/10.21511/bbs.12(3).2017.10
Amaliah. S. R., & Hassan. H. H. (2019). The Relationship between Bank’s Credit Risk, Liquidity, and Capital Adequacy towards its Profitability in Indonesia. International Journal of Recent Technology and Engineering (IJRTE), 7(5S), 225-237
Ariffin. N. M., Archer. S., & Abdel Karim, R. A. (2008). Risks in Islamic banks: Evidence from empirical research”. Journal of Banking Regulation, 10(2),153–163. http://dx.doi.org/10.1057/jbr.2008.27
Bace. E. (2016). Bank Profitability: Liquidity, Capital and Asset Quality. Journal of Risk Management in Financial Institutions, 9(4), 327–331.
Baltagi. B. H. (2005). Econometric Analysis of Panel Data”, (3rd edition), John Wiley &Sons Ltd, Chichester, West Sussex. England. Retrieved from www.wileyeurope.com
Ben Jedidia, K., & Hamza. H. (2015). Determinants of Liquidity Risk in Islamic Banks: A Panel Study. EJBM-Special Issue: Islamic Management and Business, 7(16), 137-146.
Breusch T. S., & Pagan A. R. (1979). A Simple Test for Heteroscedasticity and Random Coefficient Variation. Journal of Econometrica, 47(5), 1287-1294. Published by: The Econometric Society Stable. Retrieved from http://www.jstor.com/stable/1911963
Brooks. C. (2008). Introductory Econometrics for Finance (2nd ed). Cambridge University Press. New York. USA. Retrieved from www.cambridge.org/9780521873062
Brooks. C. (2014). Introductory Econometrics for Finance (3rd ed). Cambridge University Press, New York. USA. Retrieved from www.cambridge.org/9781107661455
Burger, J. (2018). The Financial Services Sector in Sudan”, How We Made it in Africa. Africa Business Insight. Retrieved from https://www.howwemadeitinafrica.com/the-financial-services-sector-in-sudan/61452
Cameron. A. C., & Trivedi. P. K. (2005). Microeconometrics Methods and Applications. Cambridge University Press, New York. USA. Retrieved from www.cambridge.org/9780521848053
Chowdhury M. M., Zaman. S., & Alam. M. A. (2019). Liquidity Risk Management of Islamic Banks in Bangladesh. International Journal of Business and Technopreneurship, 9(1), 37-48
Effendi K. A., & Disman. D. (2017). Liquidity Risk: Comparison between Islamic and Conventional Banking. European Research Studies Journal, XX(2A), 308-318.
Elgadi, E. M. (2016). Assessing the Financial Performance of Islamic Banking: The case of Sudanese banks. A Thesis Submitted in Partial Fulfilment of the Requirements of the University of East London for the Degree of PhD, School of Business and Law. April.2016 (Unpublished).
Gafrej, O., & Abbes, M. B. (2017). Liquidity Determinants of Islamic and Conventional Banks” Journal of Islamic Banking and Finance – Global Perspective of Islamic Finance, 34(2), 44-61.
Hair, J. J. F., Black, W. C., B. B. J., & Anderson, R. E. (2014). Multivariate Data Analysis. (7th edition) Pearson Education Limited, Edinburgh. UK. Retrieved from www.pearsoned.co.uk
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1), 53–74. http://dx.doi.org/10.1016/s0304-4076(03)00092-7
İncekara, A., & Çetinkaya, H. (2019). Liquidity Risk Management: A Comparative Analysis of Panel Data Between Islamic and Conventional Banking in Turkey. Procedia Computer Science, 158(2019), 955-963. http://dx.doi.org/10.1016/j.procs.2019.09.136
Iqbal. A. (2012). Liquidity Risk Management: A Comparative Study between Conventional and Islamic of Pakistan. Global Journal of Management and Business Research, 12(5), 54-64.
Ishtiaq, M. (2015). Risk Management in Banks: Determination of Practices and Relationship with Performance. A Thesis Submitted in Partial Fulfilment of the Requirements for the Degree of PhD. (March.2015), University of Bedfordshire. UK.
Islam, A., & Amir, S. (2016). Liquidity Problems in Islamic Banks; Reasons, Impacts and Solutions. COMSATS Journal of Islamic Finance, 1(2016), 1-9.
Islam, A., Farooq, M., & Ahmad, A. (2017). Factors Affecting Liquidity Position of Islamic Banks. City University Research Journal, Special Issue: AIC, Malaysia (2017), 27-36.
Islamic Financial Services Board – IFSB. (2018). Islamic Financial Services Industry Stability Report (2018). Kuala Lumpur, Malaysia. Rederived from https://www.ifsb.org
Issa, S. (2020). Life after Debt: The Effects of Overleveraging on Conventional and Islamic Banks. Journal of Risk Financial Managemen, 13(137), 1-44. http://dx.doi.org/10.3390/jrfm13060137
Kao, S. (1999). Spurious Regression and Residual-based Tests for Cointegration in Panel data. Journal of Econometrics, 90(1999), 1-44.
Khalil, R., & Khalil, M. A (2017). Does Bank Size and Operational Efficiency Matters? An Impact of Financial Gearing and Asset Management on Islamic Bank’s Performance in Pakistan. Journal of Accounting and Finance in Emerging Economies, 3(1), 63-77.
Levin, A., Lin, C., & Chu, C. S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108(2002), 1–24. https://doi.org/10.1016/S0304-4076(01)00098-7
Menacer, A., Saif-Alyousfi, A. Y. H., & Ahmad, N. H. (2019). The Effect of Financial Leverage on the Islamic Banks’ Performance in the Gulf Cooperation Council (GCC) Countries. International Journal of Financial Research, 11(1), 13-24. https://doi.org/10.5430/ijfr.v11n1p13
Mennawi, A. N. A., & Ahmed, A. A (2020). The Determinants of Liquidity Risk in Islamic Banks: A Case of Sudanese Banking Sector. International Journal of Islamic Banking and Finance Research, 4(1), 38-49. Rederived from www.cribfb.com/journal/index.php/ijibfr
Misman, F. N., & Bhatti, M. I. (2020). The Determinants of Credit Risk: An Evidence from ASEAN and GCC Islamic Banks. Journal of Risk and Financial Management, 13(89), 1-22. http://dx.doi.org/10.3390/jrfm13050089
Muharam. H. (2013). The Influence of Fundamental Factors to Liquidity Risk on Banking Industry: Comparative Study between Islamic Bank and Conventional Bank in Indonesia” UNISSULA, SEMARANG, (October 12, 2013). Conference in Business, Accounting and Management, 1(2), 359-368. http://dx.doi.org/10.2139/ssrn.2339598
Mustafa, O. A. O. (2019). Assessment of the Financial Performance of Islamic Commercial Banks in Sudan under Credit Risk and Inflation Pressures (1995-2017). Journal of Islamic Banking and Finance, 7(1), 14-26. https://doi.org/10.15640/jibf.v7n1a2
Mustafa, O. A. O. (2020). Impact of liquidity shortage risk on financial performance of Sudanese Islamic banks. International Journal of Islamic Economics and Finance, 3(2), 251-280. https://doi.org/10.18196/ijief.3229
Park. H. M. (2011). Practical Guides to Panel Data Modeling: A Step-by-step Analysis Using Stata. Tutorial Working Paper. Graduate School of International Relations, International University of Japan. Niigata. Japan. Rederived from http://www.iuj.ac.jp/faculty/kucc625
Pedroni, P. (1995). Panel Cointegration; Asymptotic and Finite Sample Prosperities of Pooled Time Series Tests with An Application of PPP Hypothesis. Revised Working Paper. Presented at the North American and European Econometric Society Meetings. Quebec and Maastricht Respectively During the Summer of 1994. Rederived from https://web.williams.edu/Economics/pedroni/WP-95-13.pdf
Rosman, R., & Abdul Rahman, A. (2015). The practice of IFSB guiding principles of risk management by Islamic banks International evidence. Journal of Islamic Accounting and Business Research, 6(2), 150-172. https://doi.org/10.1108/JIABR-09-2012-0058
Sarwar, M. F. (2018). Impact of Profitability on Market Size of Islamic Banking of Pakistan. International Journal of Accounting Research, 6(2.181), 1-5.
Tafri, F. H., Hamid, Z., Meera, A. K. M., & Omar, M. A. (2009). The Impact of Financial Risks on Profitability of Malaysian Commercial Banks: 1996-2005. World Academy of Science, Engineering and Technology, 30(2009), 1668-1682.
Thomson Reuters (2018). Islamic Finance Development Report 2018 – Building Momentum Report. Rederived from https://ceif.iba.edu.pk/pdf/Reuters-Islamic-finance-development-report2018.pdf
Published
2020-12-26
Issue
Section
Articles
This work is licensed under a Creative Commons Attribution 4.0 International License.
Copyright for this article is retained by the author(s), with first publication rights granted to the journal.
This is an open-access article distributed under the terms and conditions of the Creative Commons Attribution license (http://creativecommons.org/licenses/by/4.0/).
