The Effect of Financial Performance Indicators on the Degree of Credit Risk in Jordanian Islamic Banks
DOI:
https://doi.org/10.56294/dm2025923Keywords:
financial performance, liquidity risk, pricing risk, collateral erosion risk, non-performing loan (NPL) ratio relative to total loans and degree of credit riskAbstract
Background: Credit risk management has become a critical concept that defines the survival, growth, and profitability of banks, and more recently, financial institutions and banks have played an essential role in the economic growth and development of any country.
Objective: This study examines the impact of financial performance indicators on the degree of credit risk in Jordanian Islamic banks. Utilizing a dataset spanning from 2018 to 2022, the research focuses on key independent variables: liquidity risk, pricing risk, collateral erosion risk, and the non-performing loan (NPL) ratio relative to total loans. The dependent variable is the degree of credit risk, measured through a composite risk score.
Method: The study employs a quantitative approach, collecting data from annual reports of Jordanian Islamic banks and publications by the Central Bank of Jordan. Descriptive statistics, correlation analysis, and multiple regression models are utilized to analyze the relationships between the independent variables and credit risk.
Results: The findings reveal that liquidity risk and NPL ratio have a significant positive impact on credit risk, indicating that higher liquidity issues and a greater proportion of non-performing loans elevate credit risk levels.
Conclusion: Effective pricing strategies and robust collateral management are associated with reduced credit risk. These results underscore the importance of comprehensive risk management practices in enhancing the financial stability of Jordanian Islamic banks.
References
1. Afolabi TS, Obamuyi TM, Egbetunde T. Credit risk and financial performance: Evidence from microfinance banks in Nigeria. IOSR Journal of Economics and Finance. 2020; 11(1):8-15.
2. Jarah BA, Alzubi EA, Khwaileh KM, Ebbini MM, Alqudah MM, Jaradat MS. The Impact of Legal Auditors on Financial Reports Quality in Jordanian Companies. International Review of Management and Marketing. 2025 Feb 15; 15(2):60-70.
3. Alazzam FA, Al-zoubi TM, Rafat A, Al-Maagbeh MM, Bani-Meqdad MA, Shakhatreh HJ. Legal responsibility for negative effects of the vaccine: Nature and financial compensation. Edelweiss Applied Science and Technology. 2024; 8(5):1997-2006.
4. Qahman, AIA, Al-Zaqeba, MAA, Jarah, BAF, Al-Kharbsheh, A, Assaf, N. An improving of green supply chain performance using green digital learning and artificial intelligence integration. International Journal of Innovative Research and Scientific Studies. 2025; 8(1), 1874-1889.
5. Samorodov BV, Azarenkova GM, Golovko OG, Miroshnik OY, Babenko MV. Credit risk management in the bank’s financial stability system. Financial and credit activity problems of theory and practice. 2019; 4(31):301-10.
6. Chaudhary P, Kumar A. Impact of credit risk on the performance of Indian banks. Journal of Commerce & Accounting Research. 2023 Jan 1; 12(1):29-38.
7. Abdellahi SA, Mashkani AJ, Hosseini SH. The effect of credit risk, market risk, and liquidity risk on financial performance indicators of the listed banks on Tehran Stock Exchange. American Journal of Finance and Accounting. 2017; 5(1):20-30.
8. Nurfitria N, Putri AA, Lestari HS, Leon FM. The Effect of Credit Risk Management on Financial Performance in Indonesian Banking. International Journal of Social Science And Human Research. 2023; 6(2):785-93.
9. Ekinci R, Poyraz G. The effect of credit risk on financial performance of deposit banks in Turkey. Procedia computer science. 2019 Jan 1;158:979-87.
10. Yeasin HM. Impact of credit risk management on financial performance: A study of commercial banks in Bangladesh. Interdisciplinary Journal of Applied and Basic Subjects. 2022; 2(1):14-22.
11. Al-Eitan GN, Bani-Khalid TO. Credit risk and financial performance of the Jordanian commercial banks: A panel data analysis. Academy of Accounting and Financial Studies Journal. 2019;23(5):1-3.
12. Alshehadeha AR, Al-Batainehb FA, Ababnehc AM, Falah BA. The role of project management in achieving the sustainable development of smart cities. Journal of Project Management. Journal of Project Management. 2025; 10:151-8.
13. Dube H, Kwenda F. Credit Risk Management and the Financial Performance of Microfinance Institutions in Southern Africa. The Journal of Developing Areas. 2023; 57(2):145-57.
14. Bahari S, Sarita B. The Effect Of Credit Risk Management On The Financial Performance Of Foreign Exchange Banks. Journal of Positive School Psychology. 2022 Jul 2:4036-51.
15. Naili M, Lahrichi Y. The determinants of banks' credit risk: Review of the literature and future research agenda. International Journal of Finance & Economics. 2022 Jan; 27(1):334-60.
16. Fadun OS, Silwimba P. Does credit risk management impact the financial performance of commercial banks?. International Journal of Business Ecosystem & Strategy (2687-2293). 2023 May 15; 5(2):55-66.
17. Kadima A, Sindani MN, Maingi M. Credit risk management on financial performance of selected microfinance institutions. African Journal of Empirical Research. 2023 Nov 4; 4(2):778-84.
18. Almatarneh ZE, Alslihat NI, Ineizeh NI, Hussein OJ, Jarah BA. Literature review related to the accounting information system and performance in Jordanian Companies. WSEAS Transactions on Business and Economics. 2024;21:2389-98.
19. Khasawneh AJ, Alazzam FA, Bani-Meqdad MA, Khalina O. A brief history of financial crime in comparative perspective. The case of the European Union EU and Jordan in the 21st century. Clío. Revista de Historia, Ciencias Humanas y Pensamiento Crítico.. 2024 Dec 29(9):1018-43.
20. Kwashie AA, Baidoo ST, Ayesu EK. Investigating the impact of credit risk on financial performance of commercial banks in Ghana. Cogent Economics & Finance. 2022 Dec 31; 10(1):2109281.
21. Putri EM, Febrianto HG, Fitriana AI. The Effect of Internet Banking, Credit Risk and Company Size on Financial Performance at Conventional Commercial Banks Listed on the IDX for the Period 2018-2022. International Social Sciences and Humanities. 2023 Sep 25; 2(3):879-91.
22. Musyoki D, Kadubo AS. The impact of credit risk management on the financial performance of banks in Kenya for the period. International Journal of Business and Public Management. 2012 Apr; 2(2):72-80.
23. Jarah BA, Zaqeeba N, Al-Jarrah MF, Al Badarin AM, Almatarneh Z. The mediating effect of the internal control system on the relationship between the accounting information system and employee performance in Jordan Islamic banks. Economies. 2023 Feb 27; 11(3):77.
24. Jackson EA, Tamuke E. Credit risk management and the financial performance of domiciled banks in Sierra Leone: an empirical analysis. Journal of Economic Policy Researches. 2022; 9(1):139-64.
25. Otieno S, Nyagol M, Onditi A. Relationship between Credit risk management and financial performance: empirical evidence from microfinance banks in Kenya. Research journal of finance and accounting. 2016; 7(6):2222-847.
26. Ijaiya MA, Jimoh AT, Attah JA, Abdulmumin BA, Nafiu AI. Murabaha-related credit risk and financial performance of Islamic banks in Africa. International Journal of Islamic Banking and Finance Research. 2021; 5(1):60-9.
27. Folajimi AF, Dare OE. Credit risk and financial performance: an empirical study of deposit money banks in Nigeria. European journal of accounting, auditing and finance research. 2020; 8(2):38-58.
28. Chaudhary P, Kumar A. Impact of credit risk on the performance of Indian banks. Journal of Commerce & Accounting Research. 2023 Jan 1; 12(1):29-38.
29. Ardelia SE, Lubis AW. THE EFFECT OF CREDIT RISK, BANK CAPITAL, INDEPENDENT COMMISSIONER, AND AUDIT COMMITTEE ON BANKING FINANCIAL PERFORMANCE IN INDONESIA FOR THE 2017-2021 PERIOD. Jurnal Scientia. 2023 May 16; 12(02):1623-30.
30. Shahid MS, Gul F, Naheed K. Credit risk and financial performance of banks: Evidence from Pakistan. NUML International Journal of Business & Management. 2019 Jun 1; 14(1):144-55.
31. Ahmed HM, El-Halaby SI, Soliman HA. The consequence of the credit risk on the financial performance in light of COVID-19: Evidence from Islamic versus conventional banks across MEA region. Future Business Journal. 2022 Jul 22; 8(1):21.
32. Orichom G, Omeke M. Capital structure, credit risk management and financial performance of microfinance institutions in Uganda. Journal of Economics and International finance. 2021 Jan 31; 13(1):24-31.
33. Natufe OK, Evbayiro-Osagie EI. Credit risk management and the financial performance of deposit money banks: some new evidence. Journal of Risk and Financial Management. 2023 Jun 21; 16(7):302.
34. Harb E, El Khoury R, Mansour N, Daou R. Risk management and bank performance: evidence from the MENA region. Journal of Financial Reporting and Accounting. 2023 Nov 20; 21(5):974-98.
35. Dunyoh M, Ankamah ET, Kosipa SJ. The impact of credit risk on financial performance: Evidence from rural and community banks in Ghana. Hybrid Journal of Business and Finance. 2022; 3(1).
36. Jarah BA, Al Jarrah MA, Al-Zaqeba MA, Al-Jarrah MF. The role of internal audit to reduce the effects of creative accounting on the reliability of financial statements in the Jordanian islamic banks. International Journal of Financial Studies. 2022 Jul 26; 10(3):60.
37. Gharaibeh ZI, Alazzam FA, Salih AJ, Aldrou KK. Examining Challenges and Prospects Associated with Implementing Legal Protections for Electronic Governances: A Generic Perspective from Developing Country. BBR. Brazilian Business Review. 2024 Aug 2; 21(5):e20231773.
38. Jarah BA, Zaqeeba N, Al-Jarrah MF, Al Badarin AM, Almatarneh Z. The mediating effect of the internal control system on the relationship between the accounting information system and employee performance in Jordan Islamic banks. Economies. 2023 Feb 27; 11(3):77.
Downloads
Published
Issue
Section
License
Copyright (c) 2025 Ahmad Mohammad Ali AlJabali (Author)
This work is licensed under a Creative Commons Attribution 4.0 International License.
The article is distributed under the Creative Commons Attribution 4.0 License. Unless otherwise stated, associated published material is distributed under the same licence.
