The Impact of Cash Liquidity and Financial Leverage on The Performance of Iraqi Banks: A Comparative Study Between Islamic and Conventional Banks
DOI:
https://doi.org/10.33095/40xmbq39Keywords:
Financial leverage, Cash Liquidity, Banking Performance, Profitability, Panel Data, GMM.Abstract
Degree of financial leverage refers to the percentage of bank assets financed through debt, which banks must employ to achieve returns and cover costs, as well as the availability of cash at maturity. Therefore, the problem of the study arises in how the indicators of leverage and cash liquidity affect the indicators of financial performance in the Iraqi banking sector. That is why the study aims to use econometrics to demonstrate the impact of leverage and cash liquidity on the financial performance indicators represented by return on assets (ROA) and net profit margin (NPM) for a sample of 38 conventional and Islamic banks for the period 2010-2022. The Dynamic Panel Data methodology was used to determine the relationship between variables, which combines time series and cross-sectional, precisely the generalized moment method (GMM). Results show that financial leverage negatively and significantly impacts ROA and NPM indicators in the total sample and Islamic and conventional banks, except for the positive relationship with ROA in conventional banks. The results also showed the positive impact of cash liquidity on ROA and NPM indicators in the total sample and Islamic and conventional banks, except for its negative impact on ROA indicators in conventional banks. The results also showed the negative impact of the cash credit (cash credit to total assets ratio) on ROA and NPM indicators in the total sample and Islamic and conventional banks.
Paper type: Research paper
Downloads
References
AL-Habashneh, A. G. 2022. Impact of Financial Leverage and Return on Investment on the Profitability of Jordanian Commercial Banks. International Journal of Academic Research in Accounting Finance and Management Sciences. 12 (3), pp. 804–822. http://dx.doi.org/10.6007/IJARAFMS/v12-i3/15320
Ali Al-Khazraji, T. A. and Al-aaraji, S. T. 2020. Econometrics of the impact of financial inclusion on banking stability in Iraq. Journal of Economics and Administrative Sciences. university of Baghdad. 26 (119), pp. 323–344. https://doi.org/10.33095/jeas.v26i119.1886
Al-Imam, S. M. and Hassan, M. A. 2019. The effect of bank liquidity on performance - an analytical study in the Industrial Bank of Iraq. Journal of Management and Economics. Al-Mustansiriya University. 42 (122), pp 125-140.
Al-Waeli, R. K. and Al-Zubaidi, H. F. 2019. Financial Leverage and its Role in the Profitability Indicators of Islamic Banks in Iraq: A Case Study of the Islamic Cooperation Investment Bank for the Years 2015-2018. Journal of Accounting and Financial Studies. University of Baghdad. Higher Institute for Accounting and Financial Studies. No. Private, pp. 1-16. https://search.emarefa.net/detail/BIM-970391
Arhinful, R. and Radmehr, M. 2023. The effect of financial leverage on financial performance: evidence from non-financial institutions listed on the Tokyo stock market. Journal of Capital Markets Studies. 7 (1), pp. 53-71. https://doi.org/10.1108/JCMS-10-2022-0038
Ayadi, R. 2019. Banking Business Models: Definition, Analytical Framework and Financial Stability Assessment. The Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan Cham. United Kingdom. https://doi.org/10.1007/978-3-030-02248-8
Baltagi, B. H. 2015. The oxford handbook of panel data. Oxford University. United States of America.
Baltagi, B. H. 2021. Econometric Analysis of Panel Data. Springer Texts in Business and Economics. Sixth Edition. Springer. Switzerland. https://doi.org/10.1007/978-3-030-53953-5
BANKS E. 2005. Liquidity Risk: Managing Asset and Funding Risk. Palgrave Macmillan. First published. London.
Biørn, E. 2017. Econometrics of Panel Data: Methods and Applications. Oxford University. United Kingdom.
Bouwman, C. H.S. 2015. Liquidity: How Banks Create It and How It Should Be Regulated. The Oxford Handbook of Banking. 2nd edition. Oxford Academic. pp. 184-218. https://doi.org/10.1093/oxfordhb/9780199688500.013.0008
Chorafas, D. N. 2002. Liabilities, liquidity, and cash management: Balancing financial risks. John Wiley and Sons, Inc. 1st Edition. United Kingdom.
Dolgun, M. H., and Mirakhor, A. 2021. An Alternative Approach to Liquidity Risk Management of Islamic Banks. Berlin, Boston: De Gruyter Oldenbourg. https://doi.org/10.1515/9783110582901
Duttweiler R. 2009. Managing Liquidity in Banks: A Top-Down Approach. John Wiley and Sons Ltd. United Kingdom.
European Central Bank. 2010. Beyond ROE – how to measure bank performance. The Report on EU Banking Structures. pp 1- 43.
Evgeny, I. 2015. The impact of financial leverage on firm performance: evidence from Russia. Journal of Corporate Finance Research. 9 (2), pp. 24-36. https://doi.org/10.17323/j.jcfr.2073-0438.9.2.2015.24-36
Ferrouhi, E. M. 2014. Bank liquidity and financial performance: evidence from Moroccan banking industry. Business: Theory and Practice. 15 (4), pp. 351-361. https://doi.org/10.3846/btp.2014.443
Gujarati, D. N., and Porter, D. C. 2009. Basic Econometrics. 5th Edition. McGraw- Hill/Irwin. Americas, New York.
Hajer, C., and Anis, J. 2018. Analysis of the Impact of Governance on Bank Performance: Case of Commercial Tunisian Banks. Journal of the Knowledge Economy. 9 (3), pp. 871–895. https://doi.org/10.1007/s13132-016-0376-6
Hansen, B. E. 2018. ECONOMETRICS. University of Wisconsin. United State.
Howells, P., Bain, K. 2008. The Economics of Money, Banking and Finance, A European Text. Fourth edition. Pearson Education. United Kingdom.
IMF. 2010. Broadening Financial Indicators in the Special Data Dissemination Standard. the Statistics Department. February 22. Washington, D.C.
Iraq Stock Exchange, annual reports of banks for the period 2010-2022. http://www.isx-iq.net
Khasawneh, A. Y. 2021. Leverage and bank’s performance: do type and crises matter? Macroeconomics and Finance in Emerging Market Economies. 14 (2), pp. 1-15. https://doi.org/10.1080/17520843.2020.1830821
Maduwanthi, R. and Morawakage, P. 2019. Impact of liquidity risk on the performances of Sri Lankan commercial banks. Sri Lanka Journal of Social Sciences. 42 (1), pp.53-64. https://doi.org/10.4038/sljss.v42i1.7572
Majumder, M.T.H. and Li, X. 2018. Bank risk and performance in an emerging market setting: the case of Bangladesh. Journal of Economics, Finance and Administrative Science. 23 (46), pp. 199-229. https://doi.org/10.1108/JEFAS-07-2017-0084
McEachern, W. A. 2009. Macroeconomics: A Contemporary Introduction. Eighth Edition. South-Western College. United States of America.
Mennawi, A. N. A. 2020. The Impact of Liquidity, Credit, Financial Leverage Risks on Financial Performance of Islamic Banks: The Case of Sudanese Banking Sector. International Journal of Applied Economics, Finance and Accounting. 8 (2), pp. 73–83. https://doi.org/10.33094/8.2017.2020.82.73.83
Mishkin, F. S. 2004. The economics of money, banking, and financial markets. 7th Edition. Pearson Publications Company. Appendix 2 to Chapter 9. United States of America.
Mishkin, F. S., Serletis, A. 2020. The Economics of Money, Banking, and Financial Markets. SEVENTH CANADIAN EDITION. Pearson Canada Inc.
Omer, A. M. R., and Ali, D. S. 2023. The impact of financial leverage on banking profitability: An analytical study of a sample of private banks listed in the Iraq market for securities. Journal of Duhok University. 25 (2), pp. 619-640. https://doi.org/10.26682/hjuod.2022.25.2.34
Onyenwe, N. I. and Glory, l. 2017. Effect of Financial Leverage on firm’s Performance: A Study of Nigerian Banks (2006 -2015). International Journal of Recent Scientific Research. 8(7), pp. 18554-18564. http://dx.doi.org/10.24327/ijrsr.2017.0807.0530
Oyinloye, L., Olaniyan, T. O., and Agbadua, B. O. 2020. Effect of financial leverage on shareholder’s returns in a dynamic business environment. Corporate Governance and Organizational Behavior Review. 4 (2), pp. 40-49. https://doi.org/10.22495/cgobrv4i2p4
Roodman, D. 2009. How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal. 9(1), pp. 86–136.
Sathyamoorthi, C. R., Mapharing, M., and Dzimiri, M. 2020. Liquidity Management and Financial Performance: Evidence from Commercial Banks in Botswana. International Journal of Financial Research. 11 (5), pp. 399-413. https://doi.org/10.5430/ijfr.v11n5p399
Shaik, A and Sharma, R. 2021. Leverage, capital and profitability of the banks: Evidence from Saudi Arabia. Accounting. 7 (6), pp. 1363-1370. https://doi.org/10.5267/j.ac.2021.4.001
Sidhu, A. V., Rastogi, S., Gupte, R., and Bhimavarapu, V. M. 2022. Impact of Liquidity Coverage Ratio on Performance of Select Indian Banks. Journal of Risk and Financial Management. 15 (5), pp. 1-17. https://doi.org/10.3390/jrfm15050226
Studenmund, A. H. 2017. A practical guide to using econometrics. 7th Edition. Pearson Education Limited. United States of America.
Uddin, M. K. 2022. Effect of Leverage, Operating Efficiency, Non-Performing Loan, and Capital Adequacy Ratio on Profitability of Commercial Banks in Bangladesh. European Journal of Business and Management Research. 7 (3), pp. 289–295. https://doi.org/10.24018/ejbmr.2022.7.3.1463
Wieser C. 2022. Quantification of Structural Liquidity Risk in Banks. Springer Gabler Wiesbaden. Germany. https://link.springer.com/book/10.1007/978-3-658-39593-3
Published
Issue
Section
License
Copyright (c) 2024 Journal of Economics and Administrative Sciences
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
Articles submitted to the journal should not have been published before in their current or substantially similar form or be under consideration for publication with another journal. Please see JEAS originality guidelines for details. Use this in conjunction with the points below about references, before submission i.e. always attribute clearly using either indented text or quote marks as well as making use of the preferred Harvard style of formatting. Authors submitting articles for publication warrant that the work is not an infringement of any existing copyright and will indemnify the publisher against any breach of such warranty. For ease of dissemination and to ensure proper policing of use, papers and contributions become the legal copyright of the publisher unless otherwise agreed.
The editor may make use of Turnitin software for checking the originality of submissions received.
How to Cite
