The Effect of Credit Risk Management on Sinke Bank Profitability

Abstract

The purpose of the study was to examine the effect of credit risk management on Sinke Bank profitability. In the research model, ROE and ROA are defined as substitutes of profitability while NPL and CAR are defined as substitutes of credit risk management. The researcher collects data from the Sinke Bank for a period of six years from 2015 to 2020 and formulates empirical testing which are related to the research question. The findings reveal that credit risk management does have a positive effect on profitability of microfinance institutions. Between the two proxies of credit risk management, NPLS has a significant effect on the both ROE and ROA while CRA has an insignificant effect on both ROE and ROA. To determine the relationship between these set of critical indicators, credit-risk management ratios (CAR, NPLR, LTDR, and LNTA) as well as control variable and profitability ratios (ROE, ROA) were computed. The NPLR increased from 5% to 30% during the study period (2015–2020). The worsening NPLR situation in Sinke Bank enterprises had a ripple impact on their profitability, causing ROA and ROE to fluctuate, with ROA falling from .73 percent to 5.47 percent and ROE falling from 15 percent to -73 percent. Even while an increase in CAR leads to a proportional increase in ROE, the effect was found to be small, indicating that these companies' management should maintain a capital balance reservations. NPLR had a negative and statistically significant association with both ROA and ROE, according to the data (profitability). This demonstrates the seriousness of the impact of asset quality deterioration (NPL) on Sinke Bank company profitability. The negative link between NPL ratio and both ROA and ROE was expected since nonperforming assets come with costs like recovery and provisioning for bad debts, which eat into lending institutions' profits. The size of the bank (LNTA) exhibited a negative and insignificant association with ROA, but a positive and insignificant link with ROE. Because of economies of scale, as a bank extends its operational activities, it has a better chance of achieving higher profitability, which translates into an increase in shareholders' equity, resulting in a positive link between bank size measured by total assets and return on equity. Even though there was a negative association between bank size and return on assets, it had a minor impact. When banks expand, they invest in assets, but the return on those assets takes a few years to recuperate. The negative relationship found between nonperforming loans and the profitability indicators buttress the fact that if lending institutions intend to remain profitable and sustainable, then management of these institutions should be give credit-risk management prominence in their strategic policies. Despite the fact that Sinke Bank come across market and operational challenges from time to time, credit risk has a significant impact on their operations, and the ongoing deterioration and accumulation of NPLs by Sinke Bank over the research period indicates that recovery procedures should be reinforced.