Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

The Effect of Credit Risk and Capital Adequacy on the Profitability of Rural Banks in the Philippines

The Effect of Credit Risk and Capital Adequacy on the Profitability of Rural Banks in the... This paper examines the credit risk and capital adequacy of the 567 rural banks in the Philippines to investigate how both variables affect bank profitability. Using the Arellano-Bond estimator, we found out that credit risk has a negative and statistically significant relationship with profitability. However, empirical analysis showed that capital adequacy has no significant impact on the profitability of rural banks in the Philippines. It is therefore necessary for the rural banks to examine more deeply if capital infusion would result in higher profitability than increasing debts. The study also implies that it is imperative for the banks to understand which risk factors have greater impact on their financial performance and use better risk-adjusted performance measurement to support their strategies. Rural banks should establish credit risk management that defines the process from initiation to approval of loans, taking into consideration the sound credit risk management practices issued by regulatory bodies. Moreover, rural banks need to enhance internal control measures to ensure the strict implementation of internal processes on lending operations. Keywords: credit risk, capital adequacy, profitability, return on assets, return on equity JEL classification: G00, G2, G21, G210 1. INTRODUCTION Banking is a business of risk taking. Banks generally http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Annals of the Alexandru Ioan Cuza University - Economics de Gruyter

The Effect of Credit Risk and Capital Adequacy on the Profitability of Rural Banks in the Philippines

Loading next page...
 
/lp/de-gruyter/the-effect-of-credit-risk-and-capital-adequacy-on-the-profitability-of-sLyAYki6rs

References

References for this paper are not available at this time. We will be adding them shortly, thank you for your patience.

Publisher
de Gruyter
Copyright
Sciendo is a De Gruyter company © 2018. ALL RIGHTS RESERVED Powered by PubFactory
ISSN
2068-8717
eISSN
2068-8717
DOI
10.1515/aicue-2017-0006
Publisher site
See Article on Publisher Site

Abstract

This paper examines the credit risk and capital adequacy of the 567 rural banks in the Philippines to investigate how both variables affect bank profitability. Using the Arellano-Bond estimator, we found out that credit risk has a negative and statistically significant relationship with profitability. However, empirical analysis showed that capital adequacy has no significant impact on the profitability of rural banks in the Philippines. It is therefore necessary for the rural banks to examine more deeply if capital infusion would result in higher profitability than increasing debts. The study also implies that it is imperative for the banks to understand which risk factors have greater impact on their financial performance and use better risk-adjusted performance measurement to support their strategies. Rural banks should establish credit risk management that defines the process from initiation to approval of loans, taking into consideration the sound credit risk management practices issued by regulatory bodies. Moreover, rural banks need to enhance internal control measures to ensure the strict implementation of internal processes on lending operations. Keywords: credit risk, capital adequacy, profitability, return on assets, return on equity JEL classification: G00, G2, G21, G210 1. INTRODUCTION Banking is a business of risk taking. Banks generally

Journal

Annals of the Alexandru Ioan Cuza University - Economicsde Gruyter

Published: Mar 1, 2017

Keywords: Business and Economics; Political Economics; Political Economics, other

References