DefinePK

Abstract

In this study, we investigate the dynamics of financial performance on credit risk management in Islamic banks. It focuses on the ripple effect and the dynamics involved. Islamic banks (IBs) recognize deposits and provide financing for both financing and utilization purposes. This research analyzed five (5) primary Islamic banks in Pakistan. It investigated the influence of credit risk management on Islamic banks' financial performance. To conduct an analysis, we examined Islamic banks' annual reports over five years (2019-2023). We focused on five primary data points at the first level of analysis. Each Islamic bank is a Deposit Funds Bank (DFB) that trades publicly on the Pakistan Stock Exchange (PSE). This study employed return on assets (ROA) as the metric for assessing financial performance, while non-performing financing (NPF) and assumed financial risk (AFR) restrictions provisions were used as indicators for credit risk management. The outcomes of the long-term co-integration analysis suggest that AFR has a strong and statistically significant effect on ROA in Pakistan. Additionally, NPF has a negative and statistically significant impact on ROE in Pakistan. The results indicate that credit risk has a significant impact on Islamic banks' ability to secure funds. The investigation indicates that Islamic banks conduct comprehensive credit risk assessments prior to helping in order to assure positive credit risk outcomes, protect contributors' equity, mitigate challenges encountered by Islamic banks, and enhance their financial performance. In conclusion