Unveiling the Ripple Effect: Exploring the Dynamics of Financial Performance on Credit Risk Management in Islamic Banking
Keywords:
Islamic Banking; Deposit Funds Bank (DFB); Assumed Financial Risk (AFR); Return on Equity (ROE); Long-term Co-integration Analysis JEL Code: O5, E11, G22, L45.Abstract
Purpose: This study aims to investigate how credit risk management practices affect Islamic banks' financial performance, with a focus on identifying key variables such as AFR and NPF. This study investigates how financial performance influences credit risk management in Islamic banks, emphasizing ripple effects.
Design/Methodology/Approach: The research employs a quantitative approach, utilizing longitudinal data (2019-2023) from annual reports of five major Islamic banks in Pakistan. Key variables such as ROA, NPF, and AFR are analyzed using long-term co-integration analysis to assess their impact on financial performance.
Findings: The study finds that AFR has a significant positive effect on ROA, indicating its crucial role in enhancing financial performance in Islamic banks. Conversely, NPF negatively impacts ROE, highlighting the challenges posed by credit risk in Islamic banking operations.
Research Limitations/Implications: Limitations include the reliance on financial data from annual reports, which may not fully capture real-time dynamics. Future research could incorporate qualitative methods to deepen understanding of managerial practices in credit risk management.
Social Implications: The findings underscore the importance of robust credit risk management practices in Islamic banks to maintain stakeholder trust and stability in financial markets, contributing to broader economic resilience.
Practical Implications: Practically, the study informs Islamic banking practitioners and regulators about the critical role of AFR in enhancing financial performance and the need for effective NPF management to mitigate risks and sustain profitability.
Originality/Value: This research contributes to the literature by providing empirical evidence on the dynamics between credit risk management and financial performance specifically in Islamic banking contexts, offering insights relevant to stakeholders, policymakers, and researchers.
