The Moderating Effect of Management Efficiency in the Relationship between IFRS 9 and CRM in Commercial Banks in East Africa
DOI:
https://doi.org/10.53819/81018102t2415Abstract
The adoption of IFRS 9 has ignited a debate among academics about its impact on credit risk management (CRM) in commercial banks. This study sought to evaluate the moderating effect of management efficiency in the relationship between IFRS 9 and CRM in commercial banks in East Africa. The study used quantitative methods, specifically panel data analysis, and is anchored the Problem Loans and Cost Efficiency Hypothesis. The study used data from 2015 to 2021, covering financial years before and after the adoption of International Financial Reporting Standard No. 9. Secondary data was gathered from the annual financial statements of commercial banks in four East African countries chosen for this study. The data was processed using the statistical software STATA version 14 to generate descriptive and inferential statistics to determine the trend underlying the connection between the dependent and independent variables. The results indicated that management efficiency had a significant moderating effect on the relationship between IFRS 9 and CRM. The model coefficient values were all positive, and the p-values were all less than 0.05. After the interaction, the coefficient of determination increased from 58.02% to 74.61% before and after moderation models, respectively. This implies that credit risk management is significantly related to the interaction term of the independent variables; expected credit losses (p=0.0130), credit loss volatility (p=0.000), and the change in the method of computing interest on NPLs (p=0.037). This implies that management efficiency has significant effects on credit risk management in the long run. The study concludes that efficient management practices are essential for identifying, measuring, mitigating, pricing, and controlling credit risks, enhancing overall bank performance. The study recommends that commercial banks in East Africa prioritize and enhance management efficiency by building strong governance structures, developing a risk-management culture, providing employee training, and implementing robust performance management for credit risk management teams.
References
Abdesslem, R., B., Chkir, I., & Dabbou, H. (2022). Is managerial ability a moderator? The effect of credit risk and liquidity risk on the likelihood of bank default. International Review of Financial Analysis, 80, 102044. Accessed on March 2, 2022, from https://doi.org/10.1016/j.irfa.2022.102044
African Development Bank (2015). The Banking System in Africa: Main facts and challenges. Africa Economic Brief, 6(5). Accessed on May 17, 2022, from https://www.afdb.org/fileadmin/uploads/afdb/Documents/Knowledge/AEB_Vol_6_Issue_5_2015
Ahmadyan, A. (2018). Measuring credit risk management and its impact on bank performance in Iran. Marketing and Branding Research 5(2018) 168-183. Accessed on June 9, 2022, from https://mbr.cikd.ca/pdf_60427_3457d88f2719f28116b0664a8e9be03d.html.
Amachree, R., M. & Iheanyi, I., H. (2020). Management Efficiency and Bank Performance. International Journal of Innovative Finance and Economics Research 8(4):13-20. Accessed on May 4, 2024, from http://www.seahipaj.org/
Bhattarai, Y. R. (2016). Effect of credit risk on the performance of Nepalese commercial banks. Journal of Balkumari College Vol. 10 No. 1 (2021). Accessed on June 17, 2022, from https://doi.org/10.3126/jbkc.v10i1.42088
Boateng, K. (2020). Credit risk management and profitability in select savings and loans companies in Ghana. International Journal of Advanced Research (2020). Accessed on October 31, 2021, from http://dx.doi.org/10.13140/RG.2.2.18284.51845
Bratanovic, S. B., & Greuning, V. H. (2009). Analyzing banking risk: A framework for assessing corporate governance and risk management, Third Edition. World Bank. Accessed on June 2, 2022, from https://doi.org/10.1596/978-0-8213-7728-4
Central Bank of Kenya (2021). Quarterly economic review. Accessed on January 8, 2022, from https://www.centralbank.go.ke/uploads/quarterly_economic_review/129999459_QER%20April-June%202021.pdf
Clarke, P., Crawford, C.,Steele, F., & Vignoles, A. (2015). Revisiting fixed-and random-effects models: some considerations for policy-relevant education research. Education Economics, 23 (3). Accessed on May 3, 2021, from https://doi.org/10.1080/09645292.2013.855705
Clarke, G., Cull, R., & Shirley, M. (2005). Bank privatization in developing countries: A summary of lessons and findings. Journal of Banking & Finance, 29 (8), 1905–1930. Accessed on May 17, 2022, from http://www20.tok2.com/home/oohamak/asai/4.pdf
Crespi, F., & Aliano, M. (2017). Incapability or bad luck? Testing the “bad management” hypothesis in the Italian banking system. The Business of Banking pp 55–78. Accessed on July 13, 2022, from DOI:10.1007/978-3-319-54894-4_4
Das, A. & Ghosh, S. (2007). Determinants of credit risk in Indian state-owned banks: An empirical investigation. Economic Issues, Volume 12(2), 27-46,. Accessed on February23, 2022 from https://mpra.ub.uni-muenchen.de/id/eprint/17301
Darayseh, M., Gence, I., AlFoul, B., A., & Abdallah, W. (2010). The accuracy of the annual financial report data: An empirical analysis of GCC firms. International Business & Economics Research Journal, 9(8). Accessed on March 5, 2022, from file:///C:/Users/HomePC/Downloads/The_Accuracy_Of_The_Annual_Financial_Report_Data_A.pdf
Deloitte, (2019). IFRS 9 - Summary, Requirements & Changes. Accessed on August 18, 2021, from https://www.iasplus.com/en-ca/toolkit/ifrs-9
Detragiache, E., T. Tressel, and P. Gupta (2008). Foreign banks in poor countries: theory and evidence. The Journal of Finance, 63 (5), 2123–2160. Accessed on May 17, 2022, from https://doi.org/10.1111/j.1540-6261.2008.01392.x
Dobler, M. (2008). Incentives for risk reporting – A discretionary disclosure and cheap talk approach. The International Journal of Accounting. 2008, 43(2), 184–206. Accessed June 9. 2022 from DOI: https://doi.org/10.1016/j.intacc.2008.04.005
European Investment Bank (2020). Banking in Africa: financing transformation amid uncertainty. European Investment Bank. Accessed May on 18, 2022 from https://www.eib.org/attachments/efs/economic_report_banking_africa_2020_en.pdf
Ewanchuk, L. & Frei, C. (2018). Recent regulation in credit risk management: A statistical framework. Risks, 7(2), 40. Retrieved on May 27, 2020, from https://doi.org/10.3390/risks7020040
Grier, W., A. (2007). Credit Analysis of Financial Institutions. 2nd Edition. Euromoney Institution Investor PLC.
Huizinga, H. & Laeven, L. (2018). The Procyclicality of banking: evidence from the Euro Area. ECB Working Paper Series No 2288. Retrieved on June 22, 2020 from DOI:10.1057/s41308-019-00081-5
Jubouri, M. (2018). The impact of credit risk management in financial market indicators—Analytical study in the Iraqi Market for Securities. Journal of Financial Risk Management, 7, 254-277. Accessed July 6, 2022, from doi: 10.4236/jfrm.2018.73017.
Kangogo, N., J., & Asienga, I., C. (2014). Factors affecting non-performance of personal loans in banking industry: Case study of tier one banks in Kenya Conference Proceedings, 4th Annual Conference Kabarak University. Accessed on July 17, 2022, from http://ir.kabarak.ac.ke/handle/123456789/1048
Kauko, K. (2012). External deficits and non-performing loans in the recent financial crisis. Economics Letters, 115(2), 196–199. Accessed on May 28, 2022, from https://doi.org/10.1016/j.econlet.2011.12.018
Kumai G., B., & Bala H. (2015). Equity formation and financial performance of listed deposit money banks in Nigeria. European Journal of Accounting Auditing and Finance Research. 3(8), pp.25-39. Accessed on July 14, 2022, from http://www.eajournals.org/wp-content/uploads/Equity-Formation-and-Financial-Performance-of-Listed-Deposit-Money-Banks-In-Nigeria.pdf
Lie, P. & Sumirat, E. (2018). Implementation of IFRS 9 for banking in Indonesia. 11th International Conference on Management, Law, Economics and Interdisciplinary Studies (MLEIS-18). Retrieved on July 6, 2020, from https://doi.org/10.15242/DiRPUB.DIRH0118207
Magalhaes, R., Urtiaga, M., & Tribo, J. (2010). Banks' ownership structure, risk and performance. SSRN Electronic Journal · May 2010. Accessed on July 15, 2022, from DOI:10.2139/ssrn.1102390
Mamonov, M. (2013). Bad management, skimping, or both? The relationship between cost efficiency and loan quality in Russian banks. Higher School of Economics Research Paper No. WP BRP 19/FE/2013. Accesses on July 5 2022 from https://dx.doi.org/10.2139/ssrn.2344685
Mburu, I., Mwangi, L., & Muathe, A. (202O). Credit management practices and loan performance: empirical evidence from Commercial Banks in Kenya. International Journal of Current Aspects in Finance, Banking and Accounting, 2(1), 51-63. Accessed on February 23, 2022, from DOI:10.35942/ijcfa.v2i1.105
Mecagni, M., Marchettini, D., & Maino, R. (2019). Evolving banking trends in sub-Saharan Africa: key features and challenges. Washington, DC: IMF. Accessed on May 3, 2021 from https://www.imf.org/external/pubs/ft/dp/2015/afr1508.pdf
Orbán, I., & Tamimi, O. (2020). Accounting model for impairment under IFRS 9 and its impact on loss allowance. European Research Studies Journal, 0(4), pp 1259-1277. Accessed on May 10, 2021, from https://ideas.repec.org/a/ers/journl/vxxiiiy2020i4p1259-1277.html
Ozili, P., K., & Outa, E. (2017). Bank loan loss provisions research: A review. Borsa Istanbul Review, 17(3). Accessed on March 2, 2022, from https://www.sciencedirect.com/journal/borsa-istanbul-review/2214-8450
Podpiera, J. & Weill, L. (2008). Bad luck or bad management? Emerging banking market experience. Journal of Financial Stability, 4(2), 135-148. Accessed on February 20, 2022, from https://doi.org/10.1016/j.jfs.2008.01.005
Quadt, V., & Nguyen, T. (2016). The relation between efficiency, non-performing loans and capitalization in the Nordic banking sector. Lund University School of Economics and Management Accessed on July 13, 2022, from https://www.lunduniversity.lu.se/lup/publication/8877802
Rehman, Z., U., Muhammad, N., Sarwar, B., & Raz, M., A. (2019). Impact of risk management strategies on the credit risk faced by commercial banks of Balochistan. Balochistan University of Information Technology Engineering & Management Sciences. Accessed on May 25, 2022, from https://doi.org/10.1186/s40854-019-0159-8
Schutte, W., Verster, T., Doody, D., Raubenheimer H., & Coetzee, P. (2019). A proposed benchmark model using a modularized approach to calculate IFRS 9 expected credit loss. Cogent Economics & Finance, 8(1). Retrieved on June 2, 2020, from https://doi.org/10.1080/23322039.2020.1735681
Setiawan, C., & Hasan, M. (2017). Non-performing loans and bank efficiency of conventional and Islamic banks in the Organization of Islamic Cooperation (OIC) Countries. Journal of Islamic Economics Banking and Finance 13(4)18-43. Accessed on July 17, 2022, from DOI:10.12816/0051000