The Extent to which the Financial Performance of Banks is affected by Economic Indicators (Applied Study on Palestinian Banks)

Dr. Akram Rahal^1*,Dr. Orobah A. R. Mahmoud²

¹LASMO Accounting Department, Faculty of Economics and Business Al-Quds University, Palestine

²Banking & Finance Department, Faculty of Economics and Business Al-Quds University, Palestine

*Corresponding Author:

Dr. Akram Rahal
LASMO Accounting Department, Faculty of Economics and Business Al-Quds University, Palestine
E-mail:Arahal@staff.alquds.edu

Received date: 27-12-2021, Manuscript No. jibc-22-55088;

Editor assigned date: 29-12-2021, Pre QC No. jibc-22-55088(PQ);

Reviewed date: 14-01-2022, QC No. jibc-22-55088;

Revision date: 20-01-2022, Manuscript No: jibc-22-55088(Q);

Published date: 27-01-2022

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Introduction

This study aims to investigate the extent to which the financial performance of Palestinian banks is affected by economic indicators, banks registered with the Palestinian Monetary Authority during the time period from the beginning of 2015 until the end of 2019. The impact of the independent variable in the study was measured based on the following economic indicators: (Inflation, GDP, unemployment, public debt, and per capita GDP) on the dependent variable, which was determined by the following financial indicators: (deposits volume, net profit, Credit facilities, and bad debts). A quantitative analysis was used as a method that is based on referring to cross-sectional time series data (Panel Data) for the banks included in the study. The study results showed that there is a statistically significant impact of the economic indicators on the financial performance of the banks that is measured by net profits, the volume of deposits, the credit facilities, and the bad debts in the Palestinian banks. The results showed a high ability of economic indicators to explain the variance for both bad debts and credit facilities, where the explanation rate was 59% for bad debts and 49.26% for credit facilities. The results also showed that there is a medium ability for economic indicators to explain the variance for both the volume of deposits and the net profit, where the explanation ratio was 37.68% for the volume of deposits and 29.42% for the net profit.

Financial System Affected by Changes in Macroeconomic Changes

Financial sector is a lifeblood of economic development and banks represent the main aspect of financial system of countries, at a meanwhile financial system has been affected by changes in macroeconomic changes, therefore, macroeconomic indicators and banks performance indicators have a mutual effect. Banks also operate in the industry and national environment. This environment is often turbulent and volatile as a result of interaction between and among various forces, among them macroeconomic indicators. Governments often enact legislation desired to achieve certain socioeconomic goals; these legislative enactments and other government intermediations in the market influence the macroeconomic environment (Osam wonji and Chijuka, 2014). In Palestine, responding to instability in political conditions, macroeconomic indicators and banks performance indicators are changed continuously. Many studies investigated the effects of changes in banks performance indicators to macroeconomic indicators, while this study is designed to explore the effects of macroeconomic indicators to financial performance of banks in Palestine. Meher and Dewudu in 2020 studied the determinants of firm's internal and macroeconomic factors on financial performance of Ethiopian insurers, their findings shows that GDP per capita and size of the companies demonstrate a positive and significant relationship while liquidity and underwriting risk are negative relationship with return on assets of insurance companies (Maher and Zewudu, 2020). Rumler and Waschiczek in 2010 examines the impact of macroeconomic changes on bank profits in Austrain, their finding summarized that bank profits are positively influenced by the spread between long-term and short-term interest rates (Rumler and Waschiczek, 2010). Cliff and Willy in 2014 tested the effects of macro-economic factors on the financial performance of the companies listed at Nairobi Stock Exchange Market in various sector, their findings indicate that interest rate and inflation rate have significant effects on performance of firms in construction and manufacturing sectors while they have insignificant effects on agriculture sector (Cliff and Willy, 2014). Dewi, Soei and surjoko in 2019 studied the influence of macroeconomic factors which are: inflation rate, unemployment level, Gross Domestic Product (GDP), and exchange rate on firm profitability which is reflected by Return on Asset (ROA) ratio. Their findings showed that all studied economic factors have influence on ROA ratio (firm profitability) and partial t-test result showed that only Gross Domestic Product (GDP) level has influenced significantly on firm profitability, while other three macroeconomic factors have no significant influence (Dewi, Soei and surjoko, 2019). Zhengge in 2016 The paper is purposively designed to study the linkages between organizational factors, including liquidity, leverage, asset utilization, market share position and firm size on financial performance in service firms illustrated the importance of financial performance in terms of ROE and ROA for company's development, and growth. The factors conducive to higher firm performance should be empirically tested on financial performance indicators. Above all the important factors discussed in this article is the effective and efficient management and the organization of processes by managers to drive the business firm towards its goals and objectives i.e. financial performance. (Zhengge, 2016) Ongore and Kusa (2013) argue that during periods of declining GDP growth the demand for credit falls which in turn negatively affects the profitability of a bank. Olweny and omondi (2011) sought to find out the impact of macto economic factors on the performance of the stock market. The results showed evidence that Foreign exchange rate, Interest rate and Inflation rate, affect stock return volatility. Inflation is the measurement of price rise of goods and merchandises for a particular period of a country. Meher K. and Getaneh H., (2019) argued that the performance of the firm is insulated from the effect of macroeconomic factors like GDP per capita and inflation. Vong and Chan (2009) examined the impact of bank characteristics as well as macroeconomic and inancial structure indicators on the performance of the Macao banking industry. The result proved that the rate of inflation and banks' performance has a significant correlation. Kosmidou et al. (2005) did research on 32 commercial banks in UK within the period of 1995 to 2002. The study established that macro-economic factors that are inflation positively influenced the following banks' profitability which was reflected on their ROA and NIM (Net Interest Margin). Economic factor such as financial crises could affect the unemployment rate. Tanveer et al. (2012) proved that financial crisis in 2007‐2008 has impact on unemployment rate in different group of country. Increasing unemployment has an impact on the decrease of income per capita.Decreasing in GDP has a negative impact on consumer purchasing power furthermore can diminish the demand products which ultimately can reduce the profitability of the company.