Effect of Liquidity and Credit Risk on Bank Financial Performance: A Case of Afghanistan’s Commercial Banks
DOI:
https://doi.org/10.58425/ajfbm.v2i1.227Keywords:
Liquidity risk, credit risk, financial performance, commercial banksAbstract
Aim: The aim of this study was to examine the impacts of liquidity risk and credit risk on financial performance of commercial banks in Afghanistan.
Methods: Panel data from six commercial banks was collected from their official website for the period 2010 – 2014. The data was analyzed by Gretel software using Ordinary Least Square (OLS) model. Dependent variable (financial performance) was measured by return on assets (ROA) while independent variables liquidity and credit risks were measured by current and leverage ratios respectively.
Results: It was found that liquidity risk and credit risk have negative impact on financial performance of selected commercial banks in Afghanistan. The impact of credit risk on financial performance was less than the impact of the liquidity risk on financial performance. The correlation between return on asset and leverage ratio was weak (23 percent) and the correlation of current ratio with leverage ratio and return on asset is as low as minus 6 percent and minus 37 percent respectively.
Conclusion: This study detected the negative relationship between commercial banks’ financial performance and liquidity and credit risks. So there is a negative significant impact of liquidity and credit risks on selected commercial banks’ financial performance in Afghanistan
Recommendations: The Study recommend that CBs in Afghanistan should not unnecessarily keep cash amount in idle form because it decrease return in asset. Cash is a valuable asset which should be invested for fruitful investment results. In addition, CBs should not refrain from advancing loans since it has minor effects on return on asset and reduces unfavorable liquidity.
References
Aloys Jared Oganda, V. A. (2018). Effect of Cash Reserves on Performance of Commercial Banks in Kenya. http://hrmars.com/index.php/pages/detail/IJARBSS.
Ameni Ghenimi, H. C. (2017). The effects of liquidity risk and credit risk on bank stability: Evidence from the Mena reginion. www.siencedirect.com.
Arif, A. (2012). Liquidity Risk and Performance of Banking System. www.emeraldinsight.com/1358-1988.htm.
Asare, O. (2015). The imact of Credit Risk on Profitability of some Selcted Banks in Ghana. Ghana.
Athanasoglou, P.P., Sophocles, N.B., Matthaios, D.D. (2005) Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Working paper, Bank of Greece.
Al-Tamimi, H., Hassan, A. (2010) Factors Infuluncing Performance of the UAE Islamic and Conventional National Banks. Department of Accounting, Finance and Economics, College of Business Administration, University of Sharjah.
Basel Committee on Bnking Supervision. (2014). BIS, https://www.bis.org/bcbs/publ/d424.htm.
Bibow, J. (2005). Liquidity Performance. The Levy economics institute. Working paper No. 427
Chijoriga M. M. 1(1997). An Application of Credit Scoring and Financial Distress prediction Models to Commercial Bank Lending: The Case of Tanzania. Ph.D. Dissertation Wirtschaftsuniversitatwien (WU) Viena.
Coyle, B. (2000): Framework for Credit Risk Management; Chartered Institute of
Bankers, United Kingdom.
Diamond, D.W., Raghuram, A. (200). A Theory of Bank Capital
Dang, Uyen. (2011) The CAMEL Rating System in Banking Supervision: A Case Study
of Arcada University of Applied Sciences, International Business.
Farue, A. (2013). Banking: An Introduction . Quoin Institute.
Flamini, C., Valentina C., McDonald, G., Liliana, S. (2009). The Determinants of
Commercial Bank Profitability in Sub-Saharan Africa. IMF Working Paper.
Gestel (2009). Bank Risk Management, Credit Risk Management Basic Concept:
financial Risk Components, rating analysis, models, economic and regulatory capital, New York: Oxford University Press.
Govori, F. (2013). The performance of commercial banks and the determinants of profitability. http://mpra.ub.uni-muenchen.de/46824/.
Graham, E. B. (2010). The Impact of Liquidity on Bank Profitability. Bank of Canada Working paper.
Graham, N. A. (2013). The Effect of Liquidity Risk on the Performance of Commercial
Banks: International Research Journal of Applied and Basic Sciences.
Gul, S., Faiza, I., Khalid, Z. (2011) Factors Affecting Bank Profitability in Pakistan. The
Romanian Economic Journal.
Khrawish, H.A. (2011) Determinants of Commercial Banks Performance: Evidence from
Jordan.International Research Journal of Finance and Economics. Zarqa University.
Mohamoud Al-Rdaydeh, A. M. (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.
Morris, T (2006). Social Research Methods. Four Alternative Paradigms. Thousand
Oaks, CA: Sage. Raghavan R. S (2003). Risk Management in Banking. http://icai.org/resource_file/11490p841-85.pdf
Mwangi, F. M. (2014). The Effect of Liquidity Risk Management on Financial Performance of Commercial Banks in Kenya.
Mwanzia, G., & Makori, D. (2023). Asset and Liability Structure on Investment Performance of Deposit Taking Savings and Credit Cooperatives in Nairobi City County, Kenya. American Journal of Finance and Business Management, 2(1), 1–15. https://doi.org/10.58425/ajfbm.v2i1.161
Murthy, Y., Sree R. (2003). A Study on Financial Ratio of major Commercial Banks. Research studies, College of Banking & Finance Studies, Sultan of Oman.
Naser Ail Yadollahzadeh Tabari, M. A. (2013). The Effect of Liquidity Risk on the performance of Commercial Banks. Internatioanl Research Journal of Applied and Basic Sciences.
Nayabichan, O. O. (2017, july). Effect of credit risk management on financial performance of commercial banks listed at the nairobi securities exchange, kenya
Ndegwa, S. M. (2017). The Effict of credit Risk on the Financial Performance of Commercial Banks Listed at the Nairobi Securities Exchange.
Nyabicha, O. O. (2017). Effect of Credit Risk Management on Financial performance of Commercial Banks Listed at the Nairobi Securities Exchange. Kenya.
Nzoka, F. K. (2015). The effect of Assets Quality on the Financial Performance of Commercial Banks in Kenya.
Nwaezeaku, N. C. (2006). Theories and Practice of Financial Management.Owerri. Ever
Standard Publishing.
Ogilo Fredrick, p. (2012). The Impact of Crdit Risk Management on Financial performance of Commercial Banks in Kenya. DBA Africa Management Review.
Okaro, C. A. (2017). Effect of Liquidity on Performance of Deposit Money Banks. Research Journal of Finance and Accounting.
Omarzai, S. A. (2018). Determinats of Banks profitability: A case study of Afghan Commercial Banks. Journal of Economics and Management Sciences.
Ombaba K.B Mwengei, (2013). Assessing the Factors Contributing to Non- Performance Loan in Kenya Banks, European Journal of Business and Management
Ongore, V.O & Kusa, G.B. (2013). Determinants of Financial Performance of Commercial Banks in Kenya. International Journal of Economics and Financial Issues.
Osborn, M., Fuertes, A. & Milner, A. (2012). Capital and Profitability in Banking: Evidence from US Banks. Business journal.
Oke, M.O., Ayeni, R.K and Kolapo, T.F (2012): Credit risk and commercial bank`s performance in Nigeria: A panel model approach. Australian journal of Business and Management research.
Ongore, V.O. (2011) The relationship between ownership structure and firm performance: An empirical analysis of listed companies in Kenya. African Journal of Business Management.
Pastory, I. K. (2013). Credit Risk and Commercial Banks Performance in Tanzania. Research Jounal of Finance and Accounting.
poudel, R. P. (2012). The impact of credit risk management on financial performance of commercial banks in Nepal. International Journal of Arts and Xommerce.
Rauch, B. I. (2013). The Relationship between Liquidity Risk and Credit Risk in Banks.
Santomero M. A (1997). Commercial Bank Risk Management: An analysis of the Process, Wharton.
Sekoni, A. (2015). The Basic Concepts and Feature of Bank Liquidity and Its Risk. Personal Archive, https://mpra.ub.uni-muenchen.de/67389/.
Sheeba.J, J. (2017). A study on the impact of credit risk on the profitability of state bank of india. Jeslin sheeba j A study on the impact of credit risk on the profitability of stateb ank of India.
Shrestha, D. R. (2016). Impact of liquidity on bank profitability in Nepalese commercial banks. SSRN.
Smith, C. W., Stulz, R. M. (1985), “The Determinants of Firm’s Hedging Policies”. Journal of Finance and Quantitative Analysis.
Steen, M. and Raberts, T. (2011). The Handbook of Midwifery Research, Wiley- Blackwell.
Schmidt, M. (2015). Financial Matrix Explained. Business Case analysis .
Sangmi, M., Tabassum, N. (2010). Analyzing Financial Performance of Commercial Banks in India: Application of CAMEL Model. Pakistan Journal Commercial Social Sciences.
Taqipor, J. (2017). Challenges of and proposals for developing a commercial banking system in Afghanistan. www.afghaneconomicsociety.org.
Tisset, n. B. (2006). Bank liquidity and financial stability. Institute for Money Technology.
Tovstopyat, N. (2004). Credit Risk and Liquidity Risk. Ukraine National University Kyiv Mohila academy.
Tsi, A. P. (2018). MANAGING LIQUIDITY RISK IN BANKS. Finland.
Tursoy, T. (2018). Risk management process in banking industry. Munick personal RePEc Archiv, https://ub.-muenchen.de/86427/.
Vossen, B.V.D & Ness R.V.2010. Bank Liquidity Management, University of Albany.
Waweru, J. G. (2017). Liquidity Ris and Financial Performance of Commercial Banks in Kenya. International Journal of Economics and Finance.
