Risk Management Practices and Financial Performance in Jordan: Empirical Evidence from Islamic Banks

Abstract

This study aims to determine the impact of risk management practices on Jordanian Islamic banks’ performance. For this purpose the current study selects credit risk (debt and risk), operational risk (efficiency, income and cost ) liquidity risk (liquidity, capital) and market risks (inflation, interest rates and financial crisis) as explanatory variables while return (ROA) on assets and return on equity (ROE) , are utilized as dependent variables for the period of fifteen years from 1998 to 2012. The pooled least square method with fixed effect is used to analyze and test the study hypotheses. The results reveal that: First, Liquidity, credit and operational risk management practices have a negative and significant statistical impact on Islamic banks’ performance, and these banks failed at the same time in managing these risks. Second, market risk management practices have a positive and significant statistical impact on banks’ performance which, means that these banks don’t suffer neither from the operational risk during the study period nor from managing this type of risk. The researcher recommends that: - The Islamic banks would establish a separate entity that regulate and supervise the Islamic banks, to be responsible for regulating the banks in terms of Shariah compliance principles. - Governments should open the door to scholars for more financial innovations comply with Islamic Shariah.