The consequence of the credit risk on the financial performance in light of COVID-19: Evidence from Islamic versus conventional banks across MEA region

Abstract

Purpose The increased number of nonperforming loans (NPLs) during COVID-19 pandemic has interrogated the robustness of banks and stability of the whole banking segment. We examine the impact of credit risk (CR) on financial performance (FP) by comparing Islamic banks (IBs) to conventional banks (CBs). We also investigate the influence of COVID-19 on this association. Design/methodology/approach Our sample includes the largest 200 banks across 15 countries from the Middle East and the Africa (MEA) region over a four-year period (2018–2021). Panel ordinary least squares (OLS) with fixed and random effects were used. Findings We find a negative association between NPLs and FP for IBs and CBs. We reveal that COVID-19 is partially mediated the association between NPLs and FP in case of the whole sample and separated sample of CBs while not in case of IBs. Originality The evidence of CR and FP on samples of financial sector across MEA region has not been studied in the era of COVID-19 as far as we know. Research limitations/implications This study contributes to the knowledge of the risk and financial performance during the crisis nexus and provides information that is valued to bankers, academics, managers and regulators for policy formulation.

Credit risk management in small-scale farming by formal financial institutions during the COVID-19 era: Nigerian perspective

“…The financial institutions reduced the request or acceptance of immovable collateral during the COVID-19 era because of the likelihood of an increase in the number of defaults due to decreased productivity of farmers that will enable the repayment. Despite the legal force associated with immovable collateral, this kind of collateral has some risks associated with taking possession of the collateral due to the owner's social or political influence (Ahmed et al ., 2022). The moveable collateral can be easily converted to liquid cash in default.…”

“…Given the recent financial turbulence in the overall economy occasioned by the COVID-19 pandemic, it is not difficult to see the importance of managing credit risks. Credit risk management means increasing the likelihood of success, reducing the possibility of failure, limiting the uncertainty of overall financial performance and preventing an institution from suffering an unacceptable loss in the hands of borrowers (Ahmed et al ., 2022). The overall effect of risk factors on credit delivery to farmers is high loan delinquency, which results from poor production and productivity.…”

Financial intermediation through risk sharing vs non-risk sharing contracts, role of credit risk, and sustainable production: evidence from leading countries in Islamic finance

“…However, lending growth relies on financial liberalization and banking reforms, which at some point is negatively affected by the selection of subprime customers that gives rise to weaker asset quality (Aysan & Ozturk, 2018 ). Similarly, the higher non-performing assets (herein after NPA) negatively affect bank’s profitability (Epure & Lafuente, 2015 ; Das & Uppal, 2021 ; Hunjra et al, 2020 ; Musneh et al, 2021 ; Ahmed et al, 2022 ), which enhances the financing cost, and reduces the supply of future credits (Aiyar et al, 2015 ). The private sector predicts the future credit default of banking companies and uses it as a driving force to make decisions and gain confidence in expanding or contracting their credit exposure in future (Bordalo et al, 2018 ).…”

Credit Risk and financial performance banks: a panel data analysis

“…The ROA is determined by asset quality which is impacted by the percentage of (NPA) non-performing assets (Das & Ghosh, 2007). The ratio of NPA to total assets, capital requirement as the proxy of credit risk (Bayyoud & Sayyad, 2015), and ROE as the measure of a bank's performance (Ahmed et al, 2022) was used in a study that concluded that capital requirement has a positive impact on bank's performance.…”

“…Risk can be defined as the probability of default, loss, damage, or threat caused by external and internal factors (Gabriel et al, 2022;Inegbedion et al, 2020). This risk may cause the problem of bank failure (Ahmed et al, 2022).…”