CREDIT RISK AND FINANCIAL PERFORMANCE IN COMMERCIAL BANKS: THE MEDIATING ROLE OF FINANCIAL SOUNDNESS
- 1. Faculty of Commerce, Al-Azhar University, Dakahlia, Egypt Department of Finance and Banking, Imam Abdulrahman bin Faisal University Financial Sciences Department, Applied College, Imam Abdulrahman Bin Faisal University Department of Finance and Banking, Imam Abdulrahman bin Faisal University Department of Finance and Banking, Imam Abdulrahman bin Faisal University Faculty of Commerce, Zagazig University, Sharkia, Egypt
Description
The study examines both the direct impact of credit risk on financial performance and the indirect impact mediated by financial soundness in Egyptian banks over the period from 2013 to 2023. Methodology: This research examines the mediating role of financial soundness in the relationship between credit risk and banks' financial performance. The independent variable, credit risk, is measured by the ratio of loan loss provisions to total loans. The dependent variable, financial performance, is measured by Return on Assets (ROA), calculated as net profit after tax divided by total assets. The mediating variable is financial soundness, measured using the Z-Score index, alongside three control variables. The study population comprises all Egyptian banks. Data spanning the period from 2013 to 2023 were analyzed using multiple linear regression via SPSS (version 26). Findings: The results reveal that credit risk has a significant negative impact on financial performance due to deteriorating asset quality and liquidity, which adversely affects bank ratings and increases financing costs. Additionally, the study finds a significant impact of credit risk on the financial soundness of commercial banks; banks with high credit risk are more vulnerable to economic shocks, which undermines their stability. Furthermore, the results demonstrate a significant mediating effect of financial soundness on the relationship between credit risk and financial performance, suggesting that weak financial soundness exacerbates the negative impact of credit risk on overall performance. Originality: While numerous studies have explored the impact of credit risk on the financial performance of banks, this research distinguishes itself by examining the mediating role of financial soundness within this relationship in Egyptian banks listed on the stock exchange.