Impact of Risk Management Practices on the Financial Performance of Sudanese Islamic Banks (2007 – 2018)

Abstract

This study examined the impact of risk management practices on the financial performance of Sudanese Islamic banks during the period from 2007 to 2018. The statement of problem is that, despite the existence of risk management departments and regulations, there are a limited role of risk management, absence of adequate controls and lack of proper risk management practice in Sudanese Islamic banks that most likely weaken their financial performance. Given that, the risk management is an important matter that can not be neglected by banking sector otherwise the results will be unpleasant. The research hypotheses articulated to examine the relationship between the independent variables that include liquidity, credit, operational and market risks plus bank’s capitalization; and the financial performance as dependent variable that measured by return on assets and return on equity ratios. The research design toke the form of quantitative approach and it followed the explanatory and descriptive methods. The researcher used a secondary data that gathered from the audited financial statements of (10) Islamic banks in Sudan, with (120) observations. Two models have been constructed using econometrics estimations of panel data; namely fixed effects and random effects models. The study results revealed that there is strong negative impact between liquidity and operational risks on the financial performance, while the market risk is shown to be positively significant. Additionally, the bank’s capitalization indicated its significance on the financial performance, as it has a positive sign to the return on assets and adverse direction with the return on equity. The results also found that credit risk has a negative impact on financial performance when it measured by the ratio of return of equity, however, it has no impact on the financial performance when it measured by the ratio of return on assets. The study concluded that the risk management practices is a significant determinant to the financial performance of Islamic banks in Sudan. Therefore, the management of banks and the policy makers shall carefully deal with the risk management matters in order to maximize the banks’ return and to maintain their financial soundness. The study results are consistent with many previous studies that conducted in Sudan context and at different regions.