The Effect of Financial Performance Indicators on the Degree of Credit Risk in Jordanian Islamic Banks

Background: Credit risk management has become a critical concept that defines the survival, growth, and profitability of banks, and more recently, financial institutions and banks have played an essential role in the economic growth and development of any country. Objective: This study examines the impact of financial performance indicators on the degree of credit risk in Jordanian Islamic banks. Utilizing a dataset spanning from 2018 to 2022, the research focuses on key independent variables: liquidity risk, pricing risk, collateral erosion risk, and the non-performing loan (NPL) ratio relative to total loans. The dependent variable is the degree of credit risk, measured through a composite risk score. Method: The study employs a quantitative approach, collecting data from annual reports of Jordanian Islamic banks and publications by the Central Bank of Jordan. Descriptive statistics, correlation analysis, and multiple regression models are utilized to analyze the relationships between the independent variables and credit risk. Results: The findings reveal that liquidity risk and NPL ratio have a significant positive impact on credit risk, indicating that higher liquidity issues and a greater proportion of non-performing loans elevate credit risk levels. Conclusion: Effective pricing strategies and robust collateral management are associated with reduced credit risk. These results underscore the importance of comprehensive risk management practices in enhancing the financial stability of Jordanian Islamic banks.