Risk management and bank performance : evidence from the MENA region

Abstract

Purpose – This paper investigates the impact of liquidity risk management and credit risk management on the accounting and market performances of banks operating in the MENA region. It also studies the effect of the interaction between both types of risk management, mentioned above, on the accounting and market performances of the same sample of commercial banks. Design/methodology/approach – Panel Data regression analysis is performed on a sample of 51 commercial banks in the countries of MENA region during the period 2010-2018. Data is retrieved from Thomson Reuters Eikon data stream and annual reports of our sample’s commercial banks. Findings – Our empirical results reveal that risk management significantly affects accounting and market performances of commercial banks operating in the MENA region. Credit risk management doesn’t affect the accounting performance of banks, but rather has a significant impact on the market performance. Non-performing loans ratio, as a proxy for credit risk management, is found to have an inverse non-linear U-shaped relationship with the market performance indicating that the higher the credit risk management efforts, the lower the profitability of banks and vice versa. Surprisingly, liquidity risk management is not significant on both performances of MENA region banks. However, when a bank combines credit risk and liquidity risk management efforts, the latter (when measured by the financial gap) returns a significant impact on both performances, illustrated by a U-shaped relationship. Also other factors seem to influence bank performance when banks manage both credit risk and liquidity risk, as shown by our regression models testing for interaction between both risk management types. On one hand, the effect of the interaction between loan loss provision ratio and financial gap ratio is found to be negative and highly significant on both the return on assets and return on stock, showing that banks with lower credit risk management have higher accounting performance as far as their liquidity risk management is low. On the other hand, the combined risk management effort focusing on the loan loss provision ratio and the liquid assets to total assets shows a positive and highly significant relationship with the accounting performance as well as the market performance. The latter stipulates that for high levels of liquid assets to total assets representing an increased effort of liquidity risk management, combined to high levels of loan loss provision ratios, the interaction improves the accounting performance as well as the market performance. Hence, the accounting and market performances are differently affected by joint risk management efforts, and the impact depends on the combination of risk management types the bank opts for or focuses its efforts on. Research limitations/Implications – The sample of the study suffers from missing data. It was particularly reduced due to the unavailability of data in some countries of the MENA region where the stock market is under-developed or for political instability or war. As a result, we have unbalanced panel data, which might reduce the scope of our findings but do not impair their quality. Practical implications – Our results may be of great help for investors and policy makers in the decision-making process. From policy-making perspective, this research proposes that policymakers must be aware of the trade-off between immunity to liquidity disturbances and the opportunity cost of keeping low-yielding liquid assets. From the investor’s perspective, our results are relevant for investors to guide them in their investment decision-making. We show that they mostly have to observe the combined risk management efforts deployed by banks since the impact of interaction between these types of risk management is proved to be significant on bank performance, and mainly market performance. Originality/value – Despite the considerable number of studies that addressed the impact of risk management on bank performance, very few examined this impact on banks operating in the MENA region. Moreover, to the best of our knowledge, there are no studies that examine the joint impact of credit risk management and liquidity risk management on bank performance. Additionally, while most of the studies use typical liquidity ratios for measuring liquidity risk, we are the first to examine the impact of liquidity risk management on bank performance in the MENA region using the financial gap, in line with Poorman and Blake (2005) recommendations. Finally, we classify countries into two types of financial systems: bank-based and market-based financial systems, in order to account for the difference in risk management between countries belonging to these two different financial systems.