The Impact of Government Credits on Bank Risk and Profitability (Case study: Organization of Islamic Cooperation Countries)

Document Type : Original Article

Authors

• Marziyeh Rafiean Esfahani ¹
• Saeed Daei-Karimzadeh ²
• Mahshid Shahchera ³
• Sara Ghobadi ⁴

¹ Department of Economics, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran.

² Associate Professor, Department of Economics, Isfahan (Khorasgan) Branch, Islamic Azad University, Isfahan, Iran.

³ Monetary and Banking Research Institute, Tehran, Iran

⁴ Department of Economics, Isfahan (Khorasgan) Branch. Islamic Azad University, Isfahan, Iran

10.22067/ijaaf.2023.42608.1127

Abstract

Profitability and risk indicators are considered factors for evaluating financial and banking systems. A bank is considered stronger than another if it is stable and capable of absorbing risks. This research aims to investigate the influence of factors affecting the risk and profitability of banks, emphasizing the role of government credits. The study's statistical population is all banks in the central bank’s database between 2005 and 2019. In this study, to investigate the factors affecting profitability in the banking industry of the Organization of Islamic Cooperation, the emphasis was on the role of government credit. The Generalized Method of Moments System (GMM-SYS) was used. The results show that while previous government loans and credits have a negative and significant effect on banks’ profitability, current government loans and credits have a positive and significant effect on risk. The high level of government loans and credits, as an indicator of financial development, and the high level of domestic investment, indicate the development of a country’s financial systems. In countries where the financial system emphasizes public sector payments, transaction costs, risk control and management, and savings mobility are higher than in other countries. Specifically, the highest rates are in high-income countries, indicating the role of banks in the financial markets of those countries.

Keywords

• Profitability
• Risk Management
• Banking System
• Government Credits

Main Subjects

• Finance

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©2023 The author(s). This is an open access article distributed under Creative Commons Attribution 4.0 International License (CC BY 4.0).

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