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

Author

Listed:
  • Mendoza Rufo

    (Finance and Accounting Department, Asian Institute of Management, Philippines)

  • Rivera John Paolo R.

    (Dr. Andrew Tan Center for Tourism, Asian Institute of Management, Philippines)

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.

Suggested Citation

  • Mendoza Rufo & Rivera John Paolo R., 2017. "The Effect of Credit Risk and Capital Adequacy on the Profitability of Rural Banks in the Philippines," Scientific Annals of Economics and Business, Sciendo, vol. 64(1), pages 83-96, March.
    • Handle: RePEc:vrs:aicuec:v:64:y:2017:i:1:p:83-96:n:6
    DOI: 10.1515/saeb-2017-0006
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    Citations

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    Cited by:

    1. Abdelbary, Amr, 2019. "Changing The Game; New Frame Work Of Capital Adequacy Ratio," MPRA Paper 93388, University Library of Munich, Germany.
    2. Kellen Kiambati, 2020. "Influence of credit risk on shareholder market value of commercial banks listed in Nairobi Securities Exchange," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 9(2), pages 107-117, March.
    3. Andreas G. Koutoupis & Theodore Malisiovas, 2023. "The effects of the internal control system on the risk, profitability, and compliance of the U.S. banking sector: A quantitative approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1638-1652, April.
    4. Oritsegbubemi Kehinde Natufe & Esther Ikavbo Evbayiro-Osagie, 2023. "Credit Risk Management and the Financial Performance of Deposit Money Banks: Some New Evidence," JRFM, MDPI, vol. 16(7), pages 1-23, June.
    5. Ghazi Zouari & Imen Abdelmalek, 2020. "Financial Innovation, Risk Management, And Bank Performance," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 9(1), pages 77-100.
    6. Abdelbary, Amr, 2019. "Changing The Game; New Framework Of Capital Adequacy Ratio," MPRA Paper 93072, University Library of Munich, Germany.

    More about this item

    Keywords

    credit risk; capital adequacy; profitability; return on assets; return on equity;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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