The non-linear effect of liquidity and debt repayment on banks profitability in Iraq

Subject Areas : Monetary Economics

Kiumars Shahbazi ¹ , Mohammad Ali Mahdi Abed ²

1 - Professor, Faculty of Economics and Management, Urmia University, Urmia, Iran, e-mail (Corresponding Author): [e-mail]
2 - Ph.D. Student in Financial Economics, Faculty of Economics and Management, Urmia University, Urmia, Iran, e-mail: [e-mail]

Received: 2023-09-30 Accepted : 2024-01-06 Published : 2024-02-10

Keywords: profitability, Liquidity, G21, G32, Solvency, Economic Institutions JEL Classification: E44,

Abstract :

This paper seeks to explore the nonlinear association between liquidity indicators and debt repayment capacity in relation to asset returns. For this purpose, the Panel Smooth Transition Regression (PSTR) method was employed to examine the nonlinear impact of liquidity indicators (including the ratios of current assets to total deposits, total loans granted to total deposits, and total loans granted to total assets and debt payment capacity indicators (such as the debt ratio and interest coverage ratio) on asset returns from 2011 to 2020. The findings revealed a nonlinear effect of all calculated indicators on asset returns. The magnitude and manner of the independent variables' influence on asset returns varied at different levels, with noticeable distinctions in the effect before and after the threshold value of 1.0586. In light of these results, bank policymakers can strategically select an optimal liquidity level to enhance bank profitability based on asset returns.

References:

- پاشازده، لیلا، اصغرپور، حسین، سجودی، سکینه و کریمی تکانلو، زهرا. (1402). اثرات تعاملی سیاست‌های پولی و احتیاطی کلان بر ثبات سیستم بانکی (شواهدی از اقتصاد ایران). فصلنامه علمی مدلسازی اقتصادی، 17(61)، 26-1
- خادمی، سیدرضا، فلیحی، نعمت، دالمن¬پور، محمد و نقی¬لو، احمد. (1399). بررسی اثرات متغیرهای خاص بانکی و کلان اقتصادی بر سودآوری بانک‌ها (مقایسه مکاتب نئوکلاسیک و پست کینزین). اقتصاد مالی، 14(53)، 252-213.
- رحمانی، زهرا، محمد پورزرندی، محمدابراهیم و کرامتی، محمدعلی. (1402). تبیین اثرات زیان پرداخت وام و هزینه سپرده بر رشد سودآوری بانک. دانش سرمایه‌گذاری، 12(48)، 328-311.
- صادقی، سمیه. (1401). تأثیر خلق نقدینگی بر ریسک سیستمی بانک‌ها در ایران با تمرکز بر ساختار ترازنامه‌ای. فصلنامه علمی مدلسازی اقتصادی، 16(60)، 86-69.
- عرفانی، علیرضا و حیدری، محمد امین (1401). نقش مدیریت نقدینگی بر سودآوری بانک‌ها . مدلسازی اقتصادسنجی، 7(4)، 64-37.
- Abdillah, R., Hosen, M. N., & Muhari, S. (2016). The determinants factor of Islamic bank's profitability and liquidity In Indonesia. Knowledge Horizons Economics, 8(2), 140. [in Persion]
- Ahmed, R., Hudson, R., & Gregoriou, A. (2020). The implications of liquidity ratios: Evidence from Pakistan stock exchange limited. The Quarterly Review of Economics and Finance, 87(C), 235-243.
- Al-Husainy, N. H. M., & Jadah, H. M. (2021). The effect of liquidity risk and credit risk on the bank performance: Empirical Evidence from Iraq. IRASD Journal of economics, 3(1), 58-67.
- Bakoush, M., Gerding, E., Mishra, T., & Wolfe, S. (2022). An integrated macroprudential stress test of bank liquidity and solvency. Journal of Financial Stability, 60 (c), 1-18.‏
- Berger, A. N., Miller, N. H., Petersen, M. A., Rajan, R. G., & Stein, J. C. (2005). Does function follow organizational form? Evidence from the lending practices of large and small banks. Journal of Financial economics, 76(2), 237-269.‏
- Boukhatem, J., & Djelassi, M. (2020). Liquidity risk in the Saudi banking system: Is there any Islamic banking specificity. The Quarterly Review of Economics and Finance, 77, 206-219.
- Canlas, R. Y. S., Coronado, J. E., Gianan, J. R. S., & Hu, S. M. C. (2022). The effect of credit and liquidity risk management practices on the profitability ratios of selected Philippine thrift banks.‏ International Journal of Novel Research and Development, 699-709.
- Charmler, R., Musah, A., Akomeah, E., & Gakpetor, E. D. (2018). The impact of liquidity on performance of commercial banks in Ghana. Academic journal of economic studies, 4(4), 78-90.‏
- Chawwa, T. (2021). Impact of reserve requirement and Liquidity Coverage Ratio: A DSGE model for Indonesia. Economic Analysis and Policy, 71, 321-341.
- Colletaz, G., & Hurlin, C. (2006). Threshold effects of the public capital productivity: an international panel smooth transition approach. Working Paper, Université d’Orléans, Preprint submitted on 20 Jan 2006.
- Dahiyat, A. (2016). Does liquidity and solvency affect banks profitability? Evidence from listed banks in Jordan. International Journal of Academic Research in Accounting, Finance and Management Sciences, 6(1), 35-40.‏
- De Hoyos, R. E., & Sarafidis, V. (2006). Testing for cross-sectional dependence in panel-data models. The stata journal, 6(4), 482-496.‏
- Dezfouli, M. H. K., Hasanzadeh, A., & Shahchera, M. (2014). Assessing the profitability of the Iranian banking system's non-linear relationship with liquidity risk. Kuwait Chapter of the Arabian Journal of Business and Management Review, 3(9), 226.‏
- Dijk, D.V., Terӓsvirta, T. and Franses, P.H. (2002). Smooth transition autoregressive models—a survey of recent developments. Econometric Reviews, 21(1), 1-47.
- Egesse, T. S., & Guo, H. (2020). Does firm efficiency matter for debt financing decisions? Evidence from the biggest manufacturing countries. Journal of Applied Economics, 23(1), 106-128
- Eggoh, J.C. and Khan, M. (2014). On the nonlinear relationship between inflation and economic growth. Research in Economics, 68(2), 133-143.
- Ehiedu, V. C. (2014). The Impact of Liquidity on Profitability of Some Selected Companies: The Financial Statement Analysis (FSA) Approach. Research Journal of Finance and Accounting, 5(5), 2222-2847.
- Erfani, A., & Heydari, M. A. (2023). The Role of Liquidity Management on Profitability of the Banks. Journal of Econometric Modelling, 7(4), 37-64. [in persion]
- Fang, G., Chen, G., Yang, K., Yin, W., & Tian, L. (2023). Can green tax policy promote China's energy transformation?—A nonlinear analysis from production and consumption perspectives. Energy, 269(c), 1-13.‏
- Farhang, A. A., Esna Ashari, A., Abolhasani, A., Ranjbar Fallah, M. R., & Biabani, J. (2016). Non-Interest Income, Profitability and Risk in Banking Industry. Economic Modeling, 10(35), 47-70.
- Ghosh, P. K., Khatun, M., & Tarafdar, P. (2018). Bankruptcy via earning volatility: Does it integrate in financial institutions. Asian Economic and Financial Review, 8(1), 52-62.‏
- Gonzalez, A.; Terasvirta, T. and Van Dijk, D. (2017). Panel Smooth Transition Regression Models, SEE/EFI Working Paper Series in Economics and Finance, 604 Stockholm School of Economics, revised 11 Oct. 2017.
- Gonzalez, A., Terӓsvirta, T. and DIJK, D.V. (2005). Panel smooth transition
regression models, The Economic Research Institute, Stockholm School of
Economics, Working Paper Series in Economics and Finance, No. 604.
- Grundke, P., & Kühn, A. (2020). The impact of the Basel III liquidity ratios on banks: Evidence from a simulation study. The Quarterly Review of Economics and Finance, 75, 167-190.
- Hakimi, A. (2017). On the nonlinear relationship between bank financing and firm performance: a PSTR model for Tunisian companies. International Journal of Accounting and Financial Reporting, 7(2), 2162-3082.‏
- Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of econometrics, 93(2), 345-368.‏
- Harb, N. M. A. (2017). A Study on the Non-Linearity Hypothesis between Various Macroeconomic Variables and Economic Growth in Developing Countries [Doctoral dissertation, University of Leicester].‏
- Hausman, J.A. (1978). Specification tests in econometrics. Econometrica: Journal of
the Econometric Society, 46 (6), 1251-1271.
- Huang, G. Y., Shen, C. H. H., & Wu, Z. X. (2023). Firm-level political risk and debt choice. Journal of Corporate Finance, 78, 1-25.
- ‏Hussein, E. H. N., & Al-Dulaimi, H. D. D. (2022). Evaluating the financial performance of commercial banks in Iraq under the corona pandemic using the CAMELS criterion, AgBioForum. 24(2), 31-38.‏
- Igan, D., Mirzaei, A., & Moore, T. (2023). A shot in the arm: Economic support packages and firm performance during COVID-19. Journal of Corporate Finance, 78, 1-20.
- Jadah, H. M., Hameed, T. M., & Al-Husainy, N. H. M. (2020). The impact of the capital structure on Iraqi banks’ performance. Investment Management & Financial Innovations, 17(3), 122.‏
- Jain, M. J., & Jain, R. (2021). Impact of Solvency, Liquidity and Efficiency on profitability: A Case Study of Coal India Ltd. July 2020.‏
- Ji, P., & Wei, L. (2023). Hedging with derivatives to increase firm value. Finance Research Letters, 55(PB), 1-5.
- Jihadi, M., Vilantika, E., Hashemi, S. M., Arifin, Z., Bachtiar, Y., & Sholichah, F. (2021). The effect of liquidity, leverage, and profitability on firm value: Empirical evidence from Indonesia. The Journal of Asian Finance, Economics and Business, 8(3), 423-431.‏
- Khan, R. A., & Ali, M. (2016). Impact of Liquidity on Profitability of Commercial Banks in Pakistan: An Analysis on Banking Sector in Pakistan. Global Journal of Management and Business Research, 16(1), 52-60.
- Khadami, S. R., Pirbast, N. F., Naghiloo, A. (2021). Investigating the effects of specific banking and macroeconomic variables on banks' profitability (comparing neoclassical and post-Keynesian schools). Financial Economics, 14(53), 213-252. [in Persion]
- Khemiri, M. A. (2023). Searching for a Threshold effect in the Diversification-profitability Relationship. Evidence from the MENA Banks. International Journal of Economics and Financial Issues, 13(6), 85.‏
- Khidmat, W. B., & Rehman, M. (2014). Impact of liquidity & solvency on profitability chemical sector of Pakistan. Economics management innovation, 6(3), 34-67.‏
- Kyule, J. M. (2015). Impact of liquidity and solvency on financial performance of firms listed at the Nairobi securities exchange [Doctoral dissertation, University of Nairobi].‏
- Lee, C. and Chiu, Y. (2011). Electricity demand elasticities and temperature:
Evidence from panel smooth transition regression with instrumental variable
approach. Energy Economics, 33(5), 896-902.
- Lungkang, G. O., & Rusgowanto, F. H. (2023). the effect of return on assets (ROA), debt to assets (dar), earnings per share (eps), growth, and size on company value in manufacturing companies. Applied accounting and management review (AAMAR), 1(2), 01-11.‏
- Luukkonen, R., Saikkonen, P. and Terӓsvirta, T. (1988). Testing linearity against
smooth transition autoregressive models. Biometrika, 75(3), 491-499.
- Mosikari, T. J., & Eita, J. H. (2020). CO2 emissions, urban population, energy consumption and economic growth in selected African countries: A Panel Smooth Transition Regression (PSTR). OPEC Energy Review, 44(3), 319-333.‏
- Muthike, S. W. (2017). Relationship between corporate liquidity risk and solvency of Commercial Banks in Kenya [Doctoral dissertation, University of Nairobi].
- Mwangi, M. N. (2014). The effects of liquidity on financial performance of deposit taking microfinance institutions in Kenya. MBA Research Project, University of Nairobi.
- Obamuyi, T. M. (2013). Determinants of banks’ profitability in a developing economy: Evidence from Nigeria. Organizations and markets in emerging economies, 4(2), 97-111.‏
- Pashazadeh, L., Asgharpur, H., Sojoodi, S., & Karimi Takanlou, Z. (2023). Investigating the Interactive Effects of Monetary and Macroprudential Policies on the Stability of the Banking System: Evidence from Iranian Economy. Economic Modeling, 17(61), 1-26. [in Persion]
- Phan, D. H. B., Tran, V. T., & Iyke, B. N. (2022). Geopolitical risk and bank stability. Finance Research Letters, 46 (B), 1-9.‏ ‏
- Rahmani, Z., Mohammad Pourzarandi, M. E., & Karamati, M. A. (2023). Explain the Effects of Loan Losses and Deposit Costs on the Growth of Bank Profitability. Journal of Investment Knowledge, 12(48), 311-328. [in Persion]
- Reghezza, A., Altunbas, Y., Marques-Ibanez, D., d’Acri, C. R., & Spaggiari, M. (2022). Do banks fuel climate change? Journal of Financial Stability, 62 (C), 1-48.
- Rengasamy, D. (2014). Impact of loan deposit ratio (LDR) on profitability: Panel evidence from commercial banks in Malaysia. In International Conference on Global Economics, Finance and Social Sciences.‏
- sadeghi, S. (2023). The Effects of Liquidity Creation on Systemic Risk: by Concentration on Banks Balance Sheet Structure. Economic Modeling, 16(60), 69-86.[In Persion]
- Sakouvogui, K. (2020). Impact of liquidity and solvency risk factors on variations in efficiency of US banks. Managerial Finance, 46(7), 883-895.‏
- Seleteng, M., Bittencourt, M. and Van Eyden, R. (2013). Nonlinearities in inflation growth nexus in the SADC region: A panel smooth transition regression approach. Economic Modelling, 30, 149-156.
- Suriyanti, S., Priadana, S., & Astuty, P. (2022). Analysis Of Liquidity Ratio, Solvency Ratio, And Profitability Ratio To Bond Ratings In Food And Beverages Companies Listed On The Indonesia Stock. Jurnal Pendidikan Nusantara, 2(2), 57-63.‏
- Tabash, M. I., & Hassan, H. I. (2017). Liquidity, profitability and solvency of UAE Banks: A comparative study of commercial and Islamic Banks. Academy of Accounting and Financial Studies Journal, 21(2), 1-15.‏
- Taha, S., & Top, C. (2022). Factors affecting firm performance in commercial Iraqi banks. International Journal of Social Science Research and Review, 5(9), 1-15.
- Terӓsvirta, T. (1998). Modelling economic relationships with smooth transition
regressions. In: Handbook of Applied Economic Studies. Marcel Dekker: New York, 507-552.
- Ullah, A., Zhang, Q., Raza, S. A., & Ali, S. (2021). Renewable energy: Is it a global challenge or opportunity? Focusing on different income level countries through Panel Smooth Transition Regression Model. Renewable Energy, 177, 689-699.‏
- Xu, N., Gao, Y., Du, L., & You, L. (2023). Does Administrative Monopoly Regulation Affect Corporate Financialization? From the Perspective of Vertical Industrial Chain Competition in China. Finance Research Letters, 59,1-9.
- Yenni, Y., Arifin, A., Gunawan, E., Pakpahan, L., & Siregar, H. (2021). The Impact of Solvency and Working Capital on Profitability. Journal of Industrial Engineering & Management Research, 2(4), 15-38.‏‏
- Zaidan, H., Hijleh, H. A., Mawali, H. A., Natour, A. R. A., & Al-Okaily, M. (2021). Influence of Liquidity, Solvency on Banks’ Profitability: The Moderating Role of Net Revenues. The International Conference on Global Economic Revolutions (149-164). Springer, Cham.‏