Abstract
Islamic banks in Africa have been trying to grow and compete with their conventional counterparts in Africa for more than 20 years considering the large number of Muslim population (47%) in the region. However, Africa has major issues and challenges peculiar to the region which have affected the Islamic banking industry over the years. The issues and challenges influence the major risks faced by Islamic banks. Thus, bringing a different dynamic into how Islamic banks in Africa manage these risks as compared to Islamic banks in other regions.
As liquidity risk and credit risk are two of the most important risks faced by Islamic banks, this research examines the influence both risks have on the profitability of these banks. The research investigates the factors that influence liquidity risks and credit risks in Islamic banks in Africa before examining the impact of both risks on the financial performance of Islamic banks in Africa between 2014 to 2019. The research is conducted using 34 Islamic banks in 11 African countries, developing four empirical models through fixed effects regression model with respect to the identified research aims and objectives.
The first empirical model is linked to the second objective of the study which aims to determine the factors that influence liquidity risk in Islamic banks in Africa. The result indicates that liquidity risk has a significant positive relationship with non-performing loans and bank size, while it has a negative significant relationship with asset quality ratio, unemployment rates and GDP growth rate. Thus, indicating the major determinants of liquidity risks in Islamic banks are asset quality ratio, bank size, non-performing loans, unemployment, and GDP growth. The second empirical model is linked to the third objective of the study which aims to determine the factors that influence credit risk in Islamic banks in Africa. The result indicates that Islamic bank rates, capital adequacy, GDP growth and unemployment rates in African countries significantly influence liquidity risk in Islamic banks in Africa.
The third empirical model is linked to the fourth objective of the study which aims to understand the impact of liquidity risk on the financial performance of the Islamic banks in Africa. The result indicates that liquidity proxied with liquidity ratio has a positive relationship with financial performance in Islamic banks in Africa. The fourth empirical model is linked to the fifth objective of the study which aims to understand the impact of credit risk on the financial performance of the Islamic banks in Africa. The result indicates that credit risk as proxied with loan loss provision, and non-performing loans have a negative relationship with the profitability of Islamic banks in Africa.
Based on the findings, recommendations were further inferred for Islamic banks in Africa, the governments, and for future research.