The Impact of Liquidity, Credit, Financial Leverage Risks on Financial Performance of Islamic Banks: The Case of Sudanese Banking Sector

This study empirically investigates the impact of liquidity and credit risks plus financial leverage on the financial performance of Islam banks in Sudan during the period from 2008 to 2018. The study uses panel dataset of (143) observations from (13) Islamic banks. Two models of ROA and NPM have been constructed using robust random effects (GLS) estimates for testing the study hypotheses. The independent variables consist of credit risk that measured by non-performance of loans (financing) and provision of loans (financing) loss ratios; and the liquidity risk is measured by three ratios that include cash to total deposits, liquid assets to total assets and total loans (financing) to total deposits; plus, the financial leverage ratio. The financial performance of Islamic banks in Sudan is measured by the ratios of return on assets and net profit margin. The results reveal that the credit risk and financial leverage have a significant and negative impact on the financial performance of Islamic banks in Sudan, whereas the liquidity risk generally found to be insignificant. However, the liquidity risk in term of liquid assets to total assets ratio provides a significant and positive influence on the financial performance of Sudanese banks. The importance of this study is that it touches the most significant financial risks that Sudanese Islamic banks face during their operational and long-term cycles. Moreover, the study can provide insights to policy and decision makers in banking sector in Sudan toward managing aforementioned risks.