Impact of Credit Risk on the Relationship between the Liquidity Risk and the Financial Performance in Islamic and Conventional Banks

Abstract

Background: Bank failures are caused by credit risk and liquidity risk. Banks need to paly crucial role in addressing these risks which cause fragility. This study looks into how liquidity risk affects banks' financial performance. It also finds the moderating impact of credit risk on the relationship between liquidity and financial performance.

Methodology: This study selects banks of Asia Pacific region from year 2017-2022 and the data is analyzed through two step system GMM analysis.

Results: The results indicate that liquidity risk is significantly and negatively moderates the financial performance of Islamic and conventional and the situation is even worse in the presence of credit risk.

Conclusion: The study's value lies in the fact that it tackles the most important categories of risks i.e., liquidity
and credit risk that banks of Asia Pacific region in comparison of Islamic and conventional banks. Effective
risk management techniques enable the banks to cater the liquidity and credit risk.