The Impact of Capital Adequacy and Credit Risk on Banks’ Profitability in Egypt

Abstract

The research aims to investigate the impact of capital adequacy and credit risk on banks’ profitability in Egypt. Also, we measure micro and macroeconomic variables that could have an influence on banks’ profitability such as liquidity risk, bank size, real GDP, and Inflation rate as control variables. While we measured the Banks’ profitability by two indicators, the ROA and ROE. Also, we utilized the sample size of 11 Banks in Egypt and used panel data for the period 2005 to 2015. The random effect regression model is employed as a statistical approach to define the most affected factors. We also examined the relationship between credit risk and capital adequacy on banks’ profitability. As Credit risk is one of the main obstacles in the banking sector, it found that Credit Risk has a significant negative effect on both ROA and ROE which means that the profitability of the banks significantly decreased by credit risk. While capital adequacy is an important predictor of a bank's financial stability and health, it is found that it has a significant positive impact on ROA, but it has a positive and insignificant effect the ROE. Furthermore, the banks’ profitability is greatly influenced by Micro and macroeconomic factors. The research findings suggest that capital adequacy and credit risk have a significant impact on banks' profitability in Egypt. Banks with higher capital adequacy ratios tend to have better profitability, while higher credit risk is associated with lower profitability. Therefore, bank managers should focus on maintaining adequate levels of capital to ensure financial stability and profitability. Furthermore, the study highlights the importance of considering micro and macroeconomic factors, such as liquidity risk, bank size, real GDP, and inflation rate when assessing banks' profitability. The findings suggest that bank managers should also pay attention to these factors and take them into account when making decisions about the bank's operations and investments. Overall, the study provides valuable insights into the factors that affect banks' profitability in Egypt, which can be used by policymakers, regulators, and bank managers to improve the performance and stability of the banking sector in Egypt.