Najah National University-An 
Faculty of Graduate Studies 

 

 

 

 

 

 

 

THE IMPACT OF CREDIT RISK ON BANKS FINANCIAL 

PERFORMANCE AND THE MODERATING ROLE OF 

GOVERNANCE LEVEL: A STUDY ON BANKS LISTED IN 

PALESTINE AND AMMAN STOCK EXCHANGE 

 

 

 

 

 

By 

Reem Mahmoud Shamasni 
 

 

 

 

 

Supervisors 

Prof. Dr. Abdul Naser Nour 

Dr. Sameh Atout 
 

 

 

This Thesis is Submitted in Partial Fulfillment of the Requirements for the Degree 

of Accounting, Faculty of Graduate Studies, An-Najah National University, 

Nablus, Palestine. 

2022 

 



ii 

 

 

 

 

 

 

 

 

 

THE IMPACT OF CREDIT RISK ON BANK FINANCIAL 

PERFORMANCE AND THE MODERATING ROLE OF 

GOVERNANCE LEVEL: A STUDY ON BANKS LISTED 

IN PALESTINE AND AMMAN STOCK EXCHANGE 

 

By 

Reem Mahmoud Shamasni 

 

This Thesis was Defended Successfully on 27/07/2022 and approved by 

 



iii 

Dedication 

I dedicate this thesis to my dear parents, who, with their prayers, illuminated the path of 

difficulties. My thanks to my husband, "Nazzal", who endured so much and eased my 

difficulties. Without him, I would not have reached this place. To my children 

Muhammad, Mu’min, Muthanna, and Mubin. To the people of credit, to my professors 

and doctors who enriched this thesis with their valuable guidance and advice. To all of 

them, I dedicate this work, asking God Almighty to benefit us with it. 

 

  



iv 

Acknowledgments 

"He who does not thank people does not thank God." 

Thank God, Lord of the Worlds, and peace be upon Muhammad bin Abdullah, 

mankind's first teacher. First of all, I have to thank God for giving me more than I 

deserve and for supporting me to complete my master's thesis in accounting. I would 

like to express my gratitude to this distinguished scientific and academic edifice, al- 

Najah National University, for allowing me to get a second degree for the second time, 

represented by all its administrative and academic cadres. In particular, the Head of 

Accounting Department, Prof. Abdel Nasser Nour, and Dr. Sameh Al-Attout, who 

enriched this thesis with their valuable advice and guidance until it came out in this 

form. I also thank Dr. Bahaa Awad and Dr. Gasan Daas the members of the Discussion 

Committee. I am grateful to you. Also, I am very thankful to Dr. Islam Abdul-Jawad, 

who was first credited with the scientific research from the beginning of the master's. 

All thanks and appreciation to Dr. Saleh Al-Khatib for his guidance and contribution to 

the completion of the statistical analysis, and thanks are extended to everyone who was 

credited and assisted in the preparation of this thesis. At last, God asked that this work 

be useful science and that it be in the balance of my pleasures on the Day of Religion. 

 

Reem Mahmoud Shamasni 

 

 

 

  



v 

Declaration 
 

I, the undersigned, declare that I submitted the thesis entitled: 

 

THE IMPACT OF CREDIT RISK ON BANK FINANCIAL 

PERFORMANCE AND THE MODERATING ROLE OF 

GOVERNANCE LEVEL: A STUDY ON BANKS LISTED 

IN PALESTINE AND AMMAN  STOCK EXCHANGE 

 

I declare that the work provided in this thesis, unless otherwise referenced, is the 

researcher’s own work, and has not been submitted elsewhere for any other degree or 

qualification. 

 

 

  



vi 

Table of Contents 

 

Dedication .......................................................................................................................... ii 

Acknowledgments ........................................................................................................... iv 

Declaration ........................................................................................................................ v 

Table of Contents ............................................................................................................. vi 

List of Tables ................................................................................................................. viii 

List of Figures .................................................................................................................. ix 

List of Appendices ............................................................................................................ x 

Abstract ............................................................................................................................ xi 

Chapter One: General Framework ............................................................................... 1 

1.1 Introduction ................................................................................................................. 1 

1.2 Research Problem ....................................................................................................... 2 

1.3 Research Objectives .................................................................................................... 4 

1.4 Research Importance ................................................................................................... 4 

1.5 Structure of Research .................................................................................................. 5 

Chapter Two: Literature Review and Hypotheses Development ............................... 6 

2.1 Introduction ................................................................................................................. 6 

2.2 Definition of Concepts ................................................................................................ 6 

2.2.1 Credit Risk ............................................................................................................... 6 

2.2.2 Financial Performance ............................................................................................. 7 

2.2.3 Corporate Governance ............................................................................................. 8 

2.2.5 Palestine Securities' Exchange ............................................................................... 12 

2.2.6 Amman Securities' Exchange ................................................................................ 13 

2.3 Credit risk and Financial Performance ..................................................................... 13 

2.4 Theories related to CG .............................................................................................. 15 

2.4.1 Agency Theory ...................................................................................................... 16 

2.4.2 Stakeholder Theory ................................................................................................ 17 

2.4.3 Stewardship Theory ............................................................................................... 18 

2.4.4 Resource-Dependence Theory ............................................................................... 19 

2.5 Corporate Governance, Financial Performance and Credit Risk .............................. 20 

2.6 Hypotheses Development ......................................................................................... 24 

2.6.1 The relationship between CRs and FP ................................................................... 24 

2.6.2 Interaction between CR, FP, and CG ..................................................................... 25 



vii 

2.7 Conceptual model of the study ................................................................................. 26 

Chapter Three: Research Methodology ..................................................................... 27 

3.1 Introduction ............................................................................................................... 27 

3.2 Research Sample ....................................................................................................... 27 

3.3 Data Collection ......................................................................................................... 28 

3.4 Variable Measurement .............................................................................................. 28 

3.4.1 Independent variable .............................................................................................. 29 

3.4.2 Dependent variable ................................................................................................ 29 

3.4.3 Moderating variable: CG ....................................................................................... 30 

3.4.4 Control variables .................................................................................................... 31 

3.5 Statistical methods used to analyze data ................................................................... 32 

3.6 Research models ....................................................................................................... 32 

Chapter Four: Results and Discussion ........................................................................ 34 

4.1 Introduction ............................................................................................................... 34 

4.2 Descriptive statistics of variables ............................................................................. 34 

4.3 Correlation Matrix .................................................................................................... 35 

4.4 Estimation Result ...................................................................................................... 37 

4.4 Testing of hypotheses and discussion of results ....................................................... 43 

Chapter Five: Conclusion and Recommendations .................................................... 47 

5.1 Overview ................................................................................................................... 47 

5.2 Conclusion ................................................................................................................ 47 

5.3 Recommendations ..................................................................................................... 48 

5.4 Limitations of the study ............................................................................................ 49 

5.5 Recommendations for future research ...................................................................... 49 

List of Abbreviations ...................................................................................................... 50 

References ....................................................................................................................... 51 

Appendices ...................................................................................................................... 69 

 ب ............................................................................................................................... الملخص 

 

  



viii 

List of Tables 

 

Table (1): Measurement of CRs indicators that were relied upon in the study .............. 29 

Table (2): Measurement of the control variables that were used in the study ................ 32 

Table (3): The study abbreviation and operational definition variables ......................... 33 

Table (4): Descriptive statistics of the study variables ................................................... 35 

Table (5): Pair wise correlation matrix between variables ............................................. 36 

Table (6): Multicollinearity test VIF .............................................................................. 37 

Table (7): Regression results (fixed effect estimation) for the model with TOBINS Q as 

a dependent variable ....................................................................................... 38 

Table (8): Regression results (fixed effect estimation) for the model with ROE as a 

dependent variable .......................................................................................... 38 

Table (9): Regression results (fixed effect estimation) for the model with ROA as a 

dependent variable .......................................................................................... 39 

Table (10): estimation results for the model with TOBINSQ as a dependent variable and 

CG as a moderator variable ............................................................................ 41 

Table (11): Estimation results for the model with ROE as a dependent variable and CG 

as a moderator variable .................................................................................. 72 

Table (12): Estimation results for the model with ROA as a dependent variable and CG 

as a moderator variable .................................................................................. 73 

Table (13): Summary of the relationships from the study findings ................................ 74 

 

 

 

 

 

  



ix 

List of Figures 

 

 

Figure (1): Agency theory framework ............................................................................ 16 

Figure (2): Stakeholder Theory framework .................................................................... 17 

Figure (3): Stewardship Theory framework ................................................................... 19 

Figure (4): Resource-Dependence Theory framework ................................................... 20 

Figure (5): The conceptual model of the study ............................................................... 26 

 

 

 

 

 

 

 

 

 

  



x 

List of Appendices 

 

Appendix (A): Sample 2009-2019 .................................................................................. 69 

Appendix (B): Corporate Governance Index .................................................................. 70 

Appendix (C): Tables ..................................................................................................... 72 

  



xi 

THE IMPACT OF CREDIT RISK ON BANK'S FINANCIAL 

PERFORMANCE AND THE MODERATING ROLE OF 

GOVERNANCE LEVEL: A STUDY ON BANKS LISTED IN 

PALESTINE AND AMMAN STOCK EXCHANGE 

By 

Reem Mahmoud Shamasni 

Supervisors 

Prof. Dr. Abdul Naser Nour 

Dr. Sameh Atout 

Abstract 

This study aims to investigate the moderating role of Corporate Governance (CG) on 

the relationship between Credit Risk (CRs) and Financial Performance (FP) of banks 

listed in the Palestine Securities' Exchange (PEX) and Amman Securities' Exchange 

(ASE) between 2009 and 2019.  

The study sample comprised twenty-one banks distributed between the two stock 

exchanges. Secondary data, annual reports, and disclosures were used to analyze and 

draw conclusions and recommendations. A multiple linear regression model was used 

to deduce the effect of CRs on the performance of banks. Tobin's Q, Return on Assets 

(ROA), and Return on Equity (ROE) were used to measure the performance of banks. 

The ratio of Non-Performing Loans to total loans (NPLs) and loans to total assets 

(LTA) were used to measure CRs. CG was measured using an index based on the 

extent of literature and prevailing circumstances in the Palestinian and Jordanian 

environments.  

The regression results showed mixed results regarding the impact of CRs on the FP of 

banks. LTA has a significant and positive effect on TOBINS Q and ROE, but an 

insignificant and positive effect on ROA. On the other hand, NPLs has a significant and 

negative effect on ROA, whereas NPLs has a significant and positive effect on 

TOBINS Q.  

The findings stated that NPLs has an insignificant and positive effect on ROE. 

Moreover, the results demonstrated that CG moderated the relationship between CRs 

and FP of banks.  



xii 

This means that the high competence of CG rules decreases the negative effect of CRs 

on FP. In light of these results, the study suggests the following set of 

recommendations: importance of paying attention to bank loans; implementing more 

effective credit processes and banking policies; assuring that the credit of the potential 

borrower is appropriately assessed; Deconcentration of credit in particular sector; 

constant reviewing of CG codes and learning from the experiences of developed 

countries in corporate and bank governance; directing companies to pay attention to CG 

practices through laws and legislation that require companies to follow CG practices; 

and conducting workshops on CG and its significance in the presence of company 

management and decision-makers. 

Keywords: Credit Risk, Financial Performance, Corporate Governance, Palestine 

Securities' Exchange, Amman Securities' Exchange 

 

 

 

 

 



1 

Chapter One 

General Framework 

1.1 Introduction 

The granting of credit is an important objective of banks. Loans constitute an important 

source of income for banks, but this activity entails high risks for both the lender and 

borrower (Kargi, 2011). The high Credit Risk and high percentage of Non-Performing 

Loans expose banks to the risk of bankruptcy. Thus, the phenomenon of (NLPs) has 

recently escalated, as a result of developments in countries, whether economic, 

political, or social, and this has increased the possibility of banks being exposed to a lot 

of risks (Hurk, 2017). 

Numerous efforts have joined forces at the local and international levels, especially after 

the Basel Committee issued its first draft in 1988; one of its most important objectives 

to issue a set of rules to enhance cooperation between countries to achieve control over 

the activities of various banks, especially concerning the effects of default and its effect 

on the Financial Performance of banks. Despite all the efforts, the countries continued 

to suffer from an imbalance in their banking systems, which led to the convening of the 

Basel Conference in 2001. Its most important recommendation was that banks have a 

certain level of capital to be able to face the possibility of CRs, (Basel, 2001). 

Palestinian Monetary Authority (2019) is a supervisory body in charge of bank credit 

although it does not have the authority to grant credit. Rather, it encourages banks to 

diversify repayment sources, such that the concentration of loans in a particular sector 

does not exceed 20% of the loan portion. On the other hand, banks were required to 

inform or operate their equivalents in those other currencies to maintain a capital 

adequacy ratio of at least 8%. It obliges banks to deduct 15% of their annual net profits, 

which is called cash fluctuation reserve, so that this deduction will continue until the 

balance of this reserve reaches 20% of the paid-up capital. The data issued by the PMA 

for the year 2019 indicates an increase in the net non-performing facilities after 

deducting the provisions to the core capital of 5.7%, compared to 2% for the year 

2018,which is an indicator that measures the ability of the capital to withstand expected 

losses. 



2 

The Palestinian banking sector data indicates that default rates reached 4% at the end of 

2019. CRs are considered a vital risk faced by the Palestinian banks, as they are one of 

the most important channels for financial granting in the Palestine due to their impact on 

the political and security conditions that affect the performance and profit of banks, 

(PMA, 2019). 

However, several banks in developing countries, such as Jordan, still view CRs as a 

secondary activity. A main reason for banking problems in Jordanian banks involves the 

lack of control of CRs management and credit requirements for banks (Al-Eitan & 

Bani-Khalid, 2019). These problems correlate to the deterioration in the credit situation 

of Jordanian banks, thus resulting in an increase in the percentage of non-performing 

loans and interest rates on loans given. Additionally, the Jordanian banking sector still 

faces multiple risks that affect its FP (The Central Bank of Jordan, 2017). The banks’ 

ability to grant credit approval significantly decreased between 2014 and2016 (Central 

Bank of Jordan, 2017). 

Given the importance of NLPs and banking profitability, this study was conducted to 

investigate the effects of CRs on the FP of banks listed on the Palestine Securities' 

Exchange and Amman Securities' Exchange between 2009 and 2019. 

1.2 Research Problem 

Non-performing loans are considered a significant challenge faced by banks (Tefera, 

2011).The banking sector, specifically banks, is crucial sector subject to risks, 

especially with regard to granting credit. Since deposits constitute about 85 percent of 

the bank’s liabilities, the bank uses these deposits to extend credit to borrowers. 

According to Saunders and Cornett (2009), CRs and liquidity have a negative effect on 

a bank’s profitability and performance. The amount of credit facilities increased from 

2009 to 2012, it reached to 30.9% in the Palestinian banking sector and 8.2% in the 

Jordanian banking sector in 2011 (Bayydon & Sayyed, 2015). PMA showed an increase 

of 4.7% in the amount of credit granted to public sector employees to reach about 1,607 

million dollars, thus comprising 17.8% of the total credit portfolio. For the credit 

granted to public sector employees, about 86.4% of the bill wages and salaries were due 

during the year 2019. As of the end of 2019, the credit granted to the government and 

public employees constituted about 35.0% of the total credit granted at the end of the 



3 

year 2019. This implies that more than a third of the credit granted by the banking 

sector is subject to aggressive developments in the government’s finances. Further, this 

proportion is higher if the credit granted to private sector companies that deal with the 

government is taken into account. Such a high level of exposure undoubtedly has 

repercussions on clearing revenues, grants, and external assistance. An important 

indicator that reflects the amount of public sector risks is the high percentage of credit 

granted to the government and public sector employees; this constitutes about 158.5% 

of banks’ equity, compared to 148.6% in 2018. As a result, the direct and indirect 

amount of government-related facilitation outweighs the banks’ total equity. 

In developing countries such as Palestine and Jordan, several banks still regard CR as a 

secondary activity. These issues directly relate to the poor credit conditions of Jordanian 

banks, which has resulted in an increase in the rate of non-performing loans and interest 

rates on loans granted (Central Bank of Jordan, 2017). However, the previous studies 

that examined the relationship between CRs and FP in Palestinian and Jordanian 

contexts failed to consider some of the variables such as age, ownership concentration, 

and the big four according to the researcher’s knowledge. This study fills the gap with 

respect of the variables considered in the study. 

In 1990, the Basel Committee on International Banking Supervision issued a set of rules 

and guidelines for Corporate Governance some of which are as follows: the creation of 

a system that ensures the functions of internal and external audits; dependency 

management; implementation of justice and equality; incentive distribution; and 

creation of a certain kind of control for risk centres, major shareholders, and senior 

management (Basel Committee on Banking Supervision, 1990). Banks listed in PEX 

and ASE have lacked the benefit of CG implementation. From this point, this study 

supposes that good CG reduces the negative effect of CRs on FP. 

Although several studies have examined the relationship between CRs and FP in 

developed and developing countries, the results have been mixed. On the other hand, 

few research examined the moderating role of CG in association with CRs and FP 

around the world (Ko et al., 2019). According to the researcher’s knowledge, till date, 

no study in the Palestinian and Jordanian context has examined the moderating role of 

CG in the relationship between CRs and FP. Against this background, the researcher 



4 

believes that it is necessary to conduct this study to bridge the existing gap. The 

implementation of CG in the banking sector can be said to reduce the negative impact of 

CRs on the performance of banks listed on the PEX and ASE. Based on the above, the 

following research questions can be formulated: 

Q1. Does CRs affect the FP of banks listed on the PEX and ASE for the period between 

2009 and 2019? 

Q2. Does CG affect the association between CRs and the FP of banks listed on the PEX 

and ASE for the period between 2009 and 2019? 

1.3 Research Objectives 

PMA and Central bank of Jordan (CBOJ), the supervisory body that regulates the work 

of Palestinian and Jordanian banks. The financial stability in Palestinian and Jordanian 

banks reflects the situation in which the flow of funds occurs in a yearly manner to all 

groups and segments of society, and consequently, the financial instability is reflected 

through the failure of the banks, as well as the indebtedness, credit growth, and lack of 

liquidity. 

The Palestinian Code of Governance Rules, issued in 2009, and the Jordanian 

Governance Rules Guide, issued in 2017, guarantee the rights of shareholders. 

Experience has shown that companies that implement CG rules attract a larger 

percentage of investors than those companies that do not apply CG rules (Brown 

&Cylor,2004). Its presence implies reaching high levels of performance and 

profitability (Black,2001). This study has two main objectives to follow: 

OB1: To investigate the impact of CRs on the FP of the banks listed on the PEX and the 

ASE. 

OB2: To investigate the moderating role of CG on the association between CRs and the 

FP of banks on the PEX and ASE. 

1.4 Research Importance 

The significance of the study arises from the subject itself, which is concerned with 

evaluating and analyzing the relationship between financial risks in banks and their 

profitability. The granting of credit is an essential financial decision in the banking 



5 

industry, as the banking industry is an important economic sector in Palestine and 

Jordan. This study is expected to enable the responsible authorities in these institutions 

make better decisions. Additionally, the empirical results would provide a general 

indicator of CG for the regulators and decision-makers, thus improving the FP of banks 

through the adoption of the results and recommendations of the study and increase the 

confidence of customers, investors, and shareholders in commercial banks.  

Additionally, this study is an extension of previous studies that demonstrate the role of 

CG in the relationship between CRs and FP, which hasn’t been investigated in the 

Palestinian and Jordanian contexts according the researcher knowledge. Thus, this study 

works to enrich the scientific library theoretically, such that other researchers and 

academics can depend on the findings of this study for developing future research. 

1.5 Structure of Research 

This study comprises five chapters, where the first chapter includes the study problem, 

questions, importance, and objectives, and the second chapter focuses on the theoretical 

framework and previous studies related to the subject of the study, in addition to 

developing the hypotheses. The third chapter focuses on the study methodology in terms 

of describing a community and a sample; the study, data sources, collection tools, study 

variables, and methods of measuring them, in addition to the statistical methods used in 

the study. The fourth chapter deals with the statistical analyses of the study, testing of 

the hypotheses, and discussing the results obtained. The fifth and final chapter focuses 

on the conclusions obtained by this study, the recommendations that it presents, the 

determinants of the study, and the proposed fields of research. 

  



6 

Chapter Two 

Literature Review and Hypotheses Development 

2.1 Introduction 

This chapter presents the theoretical and conceptual framework of the study and a 

review of previous studies correlated to the subject of the study, in addition to 

developing the hypotheses of the study on the relationship between CRs and FP of 

banks including agency theory, stakeholder theory, resource dependency theory, and 

supervision theory. Following which, the chapter reviews an explanation of the 

relationship addressed in this study in light of these theories. This is followed by a 

discussion of the previous studies related to the subject of the study. This chapter ends 

with the development of the study’s hypotheses. 

2.2 Definition of Concepts 

2.2.1 Credit Risk 

The Basel Committee on Supervision, 2001, defined CRs as the likelihood of total or 

partial loss of a loan owing to credit events. (Basel, 2001). Carma (2011) defined NPLs 

as the contracting party’s failure to commit to paying the due on the agreed-upon terms. 

While Crestel et al. (2009) defined it as a type of risk to which financial institutions in 

general and banks, in particular, are exposed, such that it results in their failure and 

effects the company's FP. Peter R. (2002) defines NPLs as loans that no longer generate 

interest or income for the bank, thus forcing the banks to reschedule them in accordance 

with the borrower’s existing situation. 

In 1997, Skimping Hypothesis was proposed by Berger and DeYoung ,that explains the 

relationship between FP and CRs and indicated that profitability is negatively affected 

when CRs increases. In this context, the risk-return hypothesis assumes that the CRs 

will rise if the loan-to-asset ratio is high; this implies that the bank is exposed to high 

CRs (Berger & DeYoung, 1997). CRs is a common risk faced by banks that leads to 

major problems associated with lost capital and interest (Coogan-Pushner, 2012). 

Inappropriate credit policies, interest rate variations, poor management, inadequate 

capital and liquidity ratios, inappropriate individual behaviors, inadequate control by the 



7 

central bank supervision, and high CRs are among the most important factors that cause 

CRs and lead to liquidity problems for management. These risks increase if the bank 

lends without adequate information and knowledge about the borrower’s situation 

(Taxxman, 2016). Additionally, non-diversification of the credit portfolio, the bank’s 

practice of lending in specified sectors or adoption of the credit concentration concept, 

and existence of significant CRs in the growth process are all factors that cause high 

CRs (Koch & McDonald, 2005). Thus, banks must recognize that CRs are one of the 

biggest threats they face, and that CRs affect the company’s value and performance. 

The issue of CRs is constantly increasing, and the resulting increase in the percentage of 

NPLs is a negative reflection on the performance of banks (Epure & Lafuent, 2015). 

Mekasha (2011) examined the relationship between CRs and profitability of banks in 

Ethiopia. The results indicated a negative impact of NPLs on the performance of banks 

in Ethiopia. 

Panel data was used to discuss the impact of CRs on the FP of Jordanian commercial 

banks, where the results indicated that CRs have a negative impact on the indicators of 

Return on Equity and Return on Assets a sample of sixteen banks considered between 

2008 and 2017 (Al-Eitan & Bani-Khalid, 2019). 

In 2011, significant results about the effect of CRs on the FP of banks in Nigeria were 

released, as profitability was negatively affected by the increase of percentage of NPLs, 

thus exposing the banks to liquidity and bankruptcy risks (Kargi, 2011). Takeeda and 

Shawn (1998) found that the loan loss provision has a positive impact on NPLs, and, 

consequently, the increase in loans leads to an increase in the provision and increases 

CRs, which, in turn, negatively affects the performance of banks. Similar results 

appeared in Tanzania for the impact of NPLs on the profitability of banks in Tanzania 

(Pastory & Kaya, 2013). 

2.2.2 Financial Performance 

FP refers to the degree to which the company’s financial stability is measured across 

time, as it includes a set of measurements used to measure the company’s financial 

results and operational activities in financial terms, as well as measure the company’s 

success through profit and financial position of companies (Ijaz & Naz, 2016). The 



8 

main purpose of FP is to provide information that helps shareholders and stakeholders. 

FP is often measured using accounting and market-based indicators, each with 

advantages and disadvantages when used for measurement. The advantages of adopting 

accounting indicators, for example, are that they are available in all companies and are 

relatively comparable. The benefit of market indicators is that they are current, i.e., they 

reflect the market developments and changes faster than accounting indicators. While 

(ROA), (ROE), and return on capital employed are examples of accounting metrics, 

(Stock return), (Market value of a company), or used a combination of the two, for 

instance, the (Tobin's Q index), which is calculated by dividing the market value of an 

asset and book value of debit by the book value of the asset. However, restrictions on 

the use of accounting indices are considered historical and biased when comparing firms 

using return on assets. For example, restrictions on market indices are employed on 

publicly listed companies only (Cadez & Galant, 2017). 

2.2.3 Corporate Governance 

There is no specific definition of CG. This may be because the concept overlaps with 

many organizational, economic, and social aspects of the corporation. Adam and 

Mahran (2003) have identified governance as the mechanism by which stakeholders 

(shareholders, creditors, employees, and the government) monitor management to 

protect themselves. CG is defined as a set of processes, habits, policies, and laws that 

affect the way the company is directed and controlled (Rouf, 2011). While the 

International Finance Organization (IFC) defined CG as the system through which the 

company is managed and its work is controlled, the Organization for Economic 

Cooperation and Development (OECD) defined CG as a set of processes that link those 

in charge of the company’s management, the board of directors, shareholders, and other 

stakeholders. 

The United States of America issued the Oxley Act in 2002 and included an important 

measure to criminalize officials who use their positions to achieve personal interests at 

the expense of other parties. Further, the Act highlighted the importance of the 

commitment of management and senior officials in providing good financial statements 

that accurately represent the company’s real position (El-Kharouf, 2004). 



9 

The fact that the legislation and laws related to transaction regulation remained 

unchanged, the weakness of the internal control system, and the increase in the number 

of legal cases against international auditing companies such as Arthur Anderson 

Company due to the manipulation of external auditors by the board of directors and the 

inaccuracy of the financial reports issued by the company, were among the most 

important motives for increasing interest in CG, according to (El-Kharouf, 2004). 

2.2.3.1 Principle of CG 

The OECD is an important organization that developed principles of CG, which became 

a reference for decision-makers, policy-makers, investors, and companies in the 

financial markets. 

According to OECD, the following six CG principles were applied in 2004 (Abu-

Tapanjeh, 2009): 

1- Establishing an effective framework for CG: an effective CG framework must be 

developed in line with the market rulings to clarify the distribution of 

responsibilities between the various supervisory, regulatory, and executive bodies 

and encourage transparency and market efficiency. 

2- Shareholder Rights Protection: The governance framework must protect the 

shareholders' rights and make it easier for them to exercise their rights. 

3- Fair treatment of all shareholders: The governance system must ensure that all 

shareholders, particularly minority and foreign shareholders, are treated fairly. 

4- The CG framework should respect the legal rights of stakeholders and enable 

effective collaboration between enterprises and stakeholders to achieve wealth. 

5- Disclosure and Transparency: The CG framework must ensure the accurate and 

timely disclosure of all important corporate issues. 

6- Responsibilities of the Board of Directors: the Board of Directors must ensure the 

strategic direction of the company, effective management oversight, and 

accountability to the company and shareholders. Furthermore, the framework must 

ensure effective management control over the boards of directors. 

  



10 

2.2.3.2 CG in Palestine and Jordan 

The Palestinian CG Code was issued in 2009. It was developed based on the principles 

of CG issued by OECD, which is a set of rules and laws that regulate the mechanisms 

and procedures within companies to address the main aspects of CG represented by the 

general assembly meeting and the rights of shareholders, company management, 

auditing, disclosure and transparency, and other stakeholders in the company. 

The Palestinian CG Code includes two sets of rules, namely: 

The first group is the legally binding rules of governance based on laws and regulations 

such as the Investment Law, Securities Law, Audit Profession Law, and Companies 

Law. While the second group includes guiding rules represented in a set of CG 

guidelines and directions, and since banks take the legal form of public shareholding 

companies, they are required to follow the directives and instructions contained in the 

Code of Governance, in addition to the governance requirements for banks issued by the 

PMA in 2009 (Palestinian CG Code, 2009) . 

Referring to the CG Code in Palestine, specifically in relation to the company’s board of 

directors, the code mandates that the board of directors include 5 to 11 members and 

that the members not be renewed more than three times. The members should be 

independent so that they do not have any relationship with the company and can 

maintain independence by not giving the members of the board of directors an executive 

position in the company, thus avoiding conflict of interests and facilitating monitoring 

and accountability ( Palestinian CG Code, 2009). With regard to executive management, 

it, emphasizes the need for the general manager of the company to have certain 

qualifications such as competence and objectivity and not have any relationship with the 

board of directors such that it affects the interests of the company. The board of 

directors determines the powers and responsibilities of the general manager in a way 

that contributes to achieving the interests of the company. 

According to CG in Jordan, the Companies Control Department, known as the 

Department, was established in early 2003 as an administratively and financially 

independent department from the Ministry of Industry and Trade, thus providing the 

companies’ registration services and implementing effective oversight to ensure the 

application of governance principles and maintain an investment environment to 



11 

enhance the national economy. Given the importance of governance and in line with the 

objectives of the Ministry of Industry and Trade, the Department decided to form a 

committee to formulate the rules of the CG guide, and this committee includes members 

from the public and private sectors. 

The CG Guide is divided into five parts: the Board of Directors and their roles and 

responsibilities; control environment; disclosure and transparency; and rights of 

shareholders and stakeholders. The main objective of this guide is to provide guidance 

for all types of companies to achieve a set of goals to increase the value of companies, 

improve the performance of companies, and facilitate opportunities to obtain financing 

at the lowest possible cost (Jordanian CG code, 2017). It is based on the principles of 

CG issued by OCED, which include several of principals such as, protection of 

shareholders’ rights and commitment to the principles of CG, the role of stakeholders, 

equal treatment of all shareholders, the role and responsibilities of the Board of 

Directors, and disclosure and transparency. 

With regard to the Board of Directors, the CG code states that each company has a 

board of directors that is elected by the owners by taking into account other 

stakeholders. At least half of the members of the board of directors should be non-

executive members, at least two of the members should be independent. The minimum 

number of board members is three, while the maximum is thirteen. The governance 

guide for the board of directors stresses the necessity for the formation of at least two 

committees, namely, the Audit Committee and Nomination and Remuneration 

Committee. For small businesses, it is sufficient to have one committee, the Audit 

Committee (Jordanian CG Guide, 2017). 

According to the Palestinian Code of Governance for Banks, the board of directors 

should include members from all specialties so that they have knowledge on financial, 

banking, economic, and administrative matters; constant review of the number of board 

members to make effective decisions; and at least two independent members, where one 

of them represents minority shareholders. When the bank has controlling shareholders, 

one-third of the board of directors must be independent, since the controlling 

shareholders must be knowledgeable of their specific responsibilities, such as the duty 

of loyalty to the corporation, conflicts of interest, and responsibilities to other 



12 

shareholders (PMA, 2014). According to the code of bank governance in Jordan, which 

focuses on the structure of the board of directors, the number of members must be not 

less than eleven, and unless the bank is owned by one shareholder, the members of the 

board of directors must not be executive members of the company, and the number of 

independent members should not be less than five. There must be four members on the 

board of directors unless the board of directors is owned by one shareholder. To achieve 

the independence of the board of directors, the following are ensured: the member of the 

board of directors must not have worked as an executive member on the board of 

directors, nor as an employee of the company or any of its affiliated companies in the 

three years preceding their election; they must not have had a second-degree 

relationship with any of the members of the board of directors or members of the 

executive management of the bank’s subsidiaries; be hired by the bank’s external 

auditor, or be prohibited from receiving loans from the bank as a member of the board 

of directors of the bank or a firm in which they are a member of the board of directors 

(International Central Bank, 2016). 

2.2.5 Palestine Securities' Exchange 

PEX was established in 1995 as a private, joint, stock company after the Palestinian 

National Authority agreed to start implementing the project of establishing the stock 

exchange and signing an operating agreement. The first trading session was held in 

1997. At the beginning of its work, the stock exchange provided a set of systems and 

instructions that organized the work of the securities sector, in addition to the latest 

electronic systems for control, trading, settlement, and transfer of securities to a public, 

joint, stock company in 2010 in response to the rules of governance. Despite the ability 

to trade in multiple financial investment tools, the shares are currently traded in the 

market with the possibility of trading in the future with other financial tools. The shares 

of companies listed on the stock exchange are traded in the currency of the Jordanian 

dinar, shekel, and the dollar, and the stock exchange operates under the supervision of 

the Securities Law No. (12) of 2004, whereby the stock exchange seeks to regulate 

trading in securities through laws and regulations that provide the basis for protection 

and safe trading. (PEX). 

  



13 

2.2.6 Amman Securities' Exchange 

The ASE was established in 1999 as an independent, “non-profit institution”, authorized 

to operate as an organized market for trading securities in Jordan. In 2017, the ASE was 

registered as a public shareholding company wholly owned by the government. The 

ASE is managed by a board of directors comprising seven members appointed by the 

Council of Ministers and a full-time CEO who manages and monitors the daily business 

of the stock exchange. It is based on the practice, operation, management, and 

development of all stock, commodity, and derivative markets, both inside and outside 

the Kingdom, and it provides the appropriate environment to ensure the interaction of 

the forces of supply and demand for securities according to principles of sound, clear, 

and fair trading. In accordance with best international practices (ASE). 

2.3 Credit risk and Financial Performance 

Borrowing is an important banking service provided by banks, and NPLs have become 

the focus of European regulators’ attention, especially after a series of financial crises in 

the global economy and the inability of banks to get out of the NPLs crisis (Ballotlu et 

al., 2020). During the 2008–2010 financial crisis, certain countries suffered large and 

unusual levels of NLPs, particularly in the euro area (Raradima & Louri, 2020). In 

1988, three of the largest banks in Benin collapsed, leading to the collapse of 80% of the 

loan portfolio. In 1993, the NPLs portfolio reached 70% in Cameroon. As a result, 

commercial banks were closed, and other banks were restructured (Ugoani, 2016). CRs 

is an important and common risk in the banking sector, and it is defined as the 

possibility of the borrowers not paying their obligations on the specified date (Mekasha, 

2011). According to Stuart (2005), one of the most important reasons for the rise in 

NPLs is the irregular and insufficient credit guarantee ratio, as well as the inefficient 

and ineffective risk management. All these factors have an adverse effect on bank 

profitability. So, to maintain the bank’s continuity, it must keep NPLs to a minimum, 

because exceeding this level would negatively affect the bank’s profitability (Jameel, 

2014). 

Several studies have addressed the impact of CRs on the profitability of banks, whether 

in developing or developed economies, whose results varied between negative and 

positive. Abbas et al. (2019) indicated that a negative relationship between NPLs and 



14 

bank profitability in the short-term. The study recommended the need for the 

government to take a set of appropriate measures and procedures to reduce the impact of 

these risks on the profitability of banks. The results showed that CRs negatively affect 

the profitability of banks in European, North American, and Australian countries. The 

level of NPLs can be attributed to quantitative economic conditions such as GDP, 

unemployment, inflation, and other factors, which indicate that the number of NPLs 

negatively affect the economic recovery of Central and Southeast Europe between 1998 

and 2011 (Klein, 2013). 

In 2016, panel data was used to measure the impact of CRs on profitability. Bank 

profitability was measured using the return on equity, while CRs was measured using 

the ratio of NPLs to total loans (NPLs), loans to total equity, and loans to total assets 

(LTA). The study found a significant inverse relationship between NPLs and return on 

equity (Ebenezer and Omar, 2016). 

The empirical evidence found that NPLs, loan loss allowance, and capital adequacy 

ratio were used to measure CRs, which had a significant impact on the profitability of 

eight Ethiopian banks between 2003 and 2014 (Gizaw, 2015). Consistently, Hosna et al. 

(2009) indicated that the rates of NPLs and capital adequacy negatively affected the 

profitability of banks. Boundel (2012) found similar results from previous studies, 

where the findings indicated that an inverse relationship between CRs measured by the 

capital adequacy ratio, NPLs ratio, and profitability of banks. Panel data was used to 

examine the relationship between the financial risks and profitability of Malaysian 

commercial banks using a sample comprising 35 banks from 1996 to 2005. The results 

revealed that CRs negatively correlated with profitability as measured by return on 

assets (ROA) and return on equity (ROE), while the risks of interest rate change directly 

correlated with profitability measured by return on assets and inversely correlated with 

profitability measured by return on equity. Further, the study concluded that no 

significant relationship between liquidity risk and profitability, measured by both ROE 

and ROA ratio, whether the bank was Islamic or traditional (Tarfri et al., 2009). 

It should be noted that the bank’s internal environmental factors significantly effects the 

determination of the level of CRs, thus justifying poor management practices such as 

high level of NPLs, as there are no cadres with the skills required to measure credit 



15 

ratings, evaluate collateral, and monitor customer behavior. Effective borrowers 

increase the probability of default due to the fewer effort the banks put into ensuring 

high-quality loans, and higher percentage of NPLs (Gani, 2014). Moreover, small banks 

are more exposed to CRs than large banks; this can be explained by the fact that large 

banks have more alternatives for diversification in their portfolio of loans due to the 

diversity of their resources (Abid et al., 2014). 

Although most prior studies and literature revealed negative association between CRs 

and FP, there is evidence and research that shows a positive effect of NPLs on bank 

performance. 

In view of Koahene’s study (2012), the performance of the six Chinese banks between 

2005 and 2009 was positively affected by CRs. The results from Kithirji’s study (2011) 

are in agreement with that of Koahene. It is agreed that CRs positively effects the FP of 

banks in Kenya. Hosna (2009) confirmed that CRs measured by NPLs positively 

affected profitability. Saaed and Zahed (2015) used impairment and NPLs to examine 

the effect of CRs on the banks' profitability as measured by return on assets and return 

on equity. The results revealed a positive relationship between the CRs variables and 

banks' profitability. Kulum (2017) revealed a positive effect of NPLs and CRs on the 

performance of banks listed on PEX for the period between 2010 and 2015. This is 

because the banks that were studied had a small percentage of non-performing loans. 

Although previous studies confirmed that CRs has a significant effect on performance, 

which may be negative or positive, literature and empirical evidence revealed an 

insignificant effect of CRs on FP (Islam & Nishiyama, 2016; Yong Tan et al., 2017; 

Bayyoud & Sayyad, 2015). 

2.4 Theories related to CG 

The study by Berle and Means (1933) is considered one of the first to shed light on CG 

in institutions. Numerous previous studies linked governance to a set of theories that 

explain the relationship between governance and FP, the most important of which is 

perhaps agency theory. 

  



16 

2.4.1 Agency Theory 

Agency theory examines the relationship between the principal providing the capital 

and the person managing this money, i.e., the agent. According to Jensen and Meckling 

(1976), a company is defined as a fictitious entity that acts as a link between the 

principal and agent to manage the capital on behalf of the principal. This theory 

assumes two things, namely that the agents always seek to achieve their interests and 

maximize their wealth, and the existence of a conflict of interest between the principals 

and their subjects. In theory, the agency theory should reflect the relationship between 

the principal and agent and the effective flow of information, but the situation differs on 

the ground. The agency theory is based on a set of assumptions such as self-interest, 

conflict of interests and goals, and information asymmetry between managers and 

stakeholders. The agency theory proposes a set of mechanisms to reduce the agency 

problem in the company, such as the mechanism of managerial incentives to 

compensate management for efforts made to serve the interests of the owners; and the 

profit distribution mechanism to reduce management’s intention to make investment 

decisions that are financed through free internal cash flow. Thus, there is an extension 

of the relationship between governance and agency theory. 

Figure (1) 

Agency theory framework 

  

 

 

 

  

   

Source: (Abdullah & Valentine, 2009). 

  

Principals 

Self-benefit 

Agents 

Self-benefit 

Hiring and Delegated 

Performance, tasks and responsibilities 

 



17 

2.4.2 Stakeholder Theory 

In contrast to the agency theory, which examines the relationship between the principal 

and agent and considers the stakeholders as the shareholders, the stakeholder theory 

includes a broader group of stakeholders (Fama, 1980). 

Stakeholder theory argues that the stakeholders are everyone who contributes to the 

company's achievements. Freeman (1984) argues that the purpose of a company is 

determined by the overall value creation of stakeholders, which must be managed such 

that it benefits all the stakeholders and not just those who have direct or indirect 

interests. 

This is considered crucial, especially when it comes to banks, as they deal with multiple 

stakeholders such as depositors and holders of shares and bonds (Donaldson & Preston, 

1995). The stakeholder theory has received a lot of support, as it contributes to the 

development of alternatives to CG and helps achieve a balance between different 

stakeholders. 

Figure (2) 

Stakeholder Theory framework 

 

 

 

 

 

 

 

 

 

Source: (Donaldson and Preston, 1995). 

Local 

community 

Political 

groups 
Government 

Organizations 

trades 

Organization 

Investors 

Employs 

Customers Suppliers 

 



18 

2.4.3 Stewardship Theory 

This theory emphasizes the fact that CEOs are the company agents who are responsible 

for preserving and increasing the shareholder wealth. The supervisors, based on this 

theory, are the executive management who work for the benefit of the company 

(Abdullah & Valentine, 2009). Contrasting the agency theory, the board of directors, 

according to this theory, do not monitor the performance of the executive management 

to a great extent, such that the role of the board of directors comprises supporting and 

assisting the executive directors to achieve optimal performance for the company 

(Shen, 2003). 

Thus, the managers will work according to collective interests rather than their interests; 

this implies that managers have an incentive to carry out the company’s business and 

achieve general goals. They are sincere in their work and do not have any bad intentions 

towards their work. This theory focuses on the existence of complete trust between the 

owners and management of the company.  

However, this theory was later criticized as giving managers full authority to do their 

jobs. As a result, the board of directors take a risk due to their full delegation of 

management, as they may have motivations that force them to execute their work in 

accordance with their interests or waste the company's resources (Keay, 2017). 

This theory involves the board of directors 'cooperation and engagement with the 

executive managers on the vision and goals of the company, as well as the involvement 

of the management in making strategic decisions. This contrasts the agency theory, 

which assumes different interests between the managers and owners (Idris, 2014). 

  



19 

Figure (3) 

Stewardship Theory framework 

 

 

 

 

 

 

Source: (Abdullah & Valentine, 2009). 

2.4.4 Resource-Dependence Theory 

This theory explains that the members of the Board of Directors play an important role 

in providing the organization with the various resources it needs owing to their external 

relations. Examples of these resources include information, expertise, financial and 

human resources, and access to human resources such as suppliers and buyers. These 

resources work to develop the performance of companies(Hillman et al., 2009). 

Additionally, the supporters of this theory focus on appointing independent board 

members as a means of providing the main resources to the company (Abdullah & 

Valentine, 2009). When a company appoints a new member of the board of directors, it 

expects them to bring new resources that support the company in emergencies, reduce 

uncertainty for companies, lower transaction costs, and, ultimately, help the company 

survive. 

  

Empowerment and confidence 

Preserving wealth and maximizing the wealth of stakeholders 

Shareholders 

Profits and retunes 
Stewards 

Internal and external motivations 

 



20 

Figure (4) 

Resource-Dependence Theory framework 

 

 

 

 

 

 

Source: (Hillman et al., 2009). 

2.5 Corporate Governance, Financial Performance and Credit Risk 

CG guarantees the protection of the rights of shareholders through an adherence to the 

rules of accountability, transparency, correctness of financial reports, and fair access to 

information from all shareholders, which enhance the value of the company, and thus 

maximize the wealth of owners (La Porta et al., 2000). The implementation of CG 

would ensure the reduction of the risks related to financial and administrative 

corruption, increase the competitiveness of national companies, and ensure 

transparency, accuracy, and clarity in the financial statements issued by companies. This 

would, in turn, increase the investors’ confidence in the company and dependence on 

the company for decision-making, improve the company’s management and 

development, raise the company’s value, and increase the company’s profits owing to 

investors' demand to buy its shares (Chey, 2013; Brown & Caylor, 2004). Furthermore, 

this maximizes the market value of the institution in the global financial markets, 

increases the profitability of these companies, and attracts investors, as they tend to 

invest in companies that have a high level of governance (Chung & Zhang, 2011). 

Moreover, companies with a high level of CG tend to distribute and pay more 

dividends, compared to other companies (Tang & Wang, 2011). Thus, CG is a 

mechanism and tool to achieve economic growth for any institution (Levine, 1997). 

There is no doubt that the main objective of any bank is to achieve high financial 

returns. On the other hand, achieving this goal comes with high risks. The return is 

Supply main resources 

Performance and survival 

Director Organization 

 



21 

directly related to the risks, and the researcher believes that applying the principles of 

good governance is one of the most important mechanisms and means that enable the 

bank to mitigate the negative impact of credit risks on bank profitability. Many of the 

previous studies and literature emphasized the role of governance in reducing credit 

risks. Luu (2015) found the application of the mechanisms of the principles of good 

corporate governance has a strong impact on the risks faced by banks, and the size of 

the board of directors is negatively related to the level of risk, and banks that have a 

CEO and a high level of ability and control tend to participate in less risky activities. 

The banking methods and mechanisms pursued by bank administrations have an 

important role in credit risk management (Tsorhe et al., 2016). The efficiency of bank 

executive management has an important role in credit risk management. Effective 

governance mechanisms can reduce or exacerbate the conflict between shareholders and 

managers (Agency Theory). Augustorel et al. (2018) aimed to identify the impact of 

governance mechanisms on bank risks in light of the financial crisis through the use of 

agency theory, which was Its most important results are that the mechanisms of 

corporate governance have a strong impact on credit risk. The banks’ boards of directors 

and senior management have a high tendency to apply the principles of governance in 

the banking sector. Al-Hewari (2016) recommended the need for risk management in 

banks to follow up on the policies and controls related to risk management and the 

responsibility of the supervisory authorities in banks to control those risks. In addition , 

governance helps reduce fraud risks and maintain the efficiency of internal operations. 

Abu-Aqleh (2018) concluded the need to issue a law obligating banks to implement 

banking governance. It was applied to banks listed on the Palestine Securities Exchange 

between 2009 and 2018, emphasizing the need to identify, measure, and report financial 

risks within governance mechanisms, as well as the need to adopt procedures and 

strategies to do so.  Abu- Rahama et al, Governance is of great importance in the 

banking sector due to its privacy, especially in light of the financial crisis. and the credit 

crisis in 2008, which confirms the need to implement effective governance mechanisms 

and their impact on the performance of banks Abu- Rahama et al., 2020. The companies 

that comply with the rules and mechanisms of governance can get a greater opportunity 

to finance their debts than those that do not comply with the rules of governance, so the 

ability to pay the dues and interest on time Javed, (2017). There are also companies with 

a high percentage of non-board of directors managers, as well as a higher concentration 



22 

of ownership. Credit risk was reduced as a result, the ratio of managers from outside the 

board of directors was used to measure governance Bohoraji and Sengupta (2003). 

Several previous studies examined the relationship between CG and FP by using 

individual variables to measure CG. By focusing on the characteristics of the board of 

directors, Mishra and Mohanty (2014) found a positive relationship between the 

company’s FP and efficiency of board members. Contrastingly, a negative relationship 

exists between the size and independence of the board of directors and the performance 

of Indian corporate finance. 

The remuneration granted to external auditors is a variable that can affect FP (Roudaki, 

2018). The results of the study found that the remuneration granted to external 

employees and the compensation and independence of the instrument board is unrelated 

to FP. On the other hand, the concentration of ownership in the board of directors 

negatively affected the performance of corporate finance in New Zealand. 

Weak CG, measured by the concentration of ownership, degree of independence 

between the board of directors and members of the board, and presence of the two 

financial disclosures, has a significant correlation with the FP of companies (Sabbaghi, 

2016). A sample of 333 American companies listed on the NYSE was used to examine 

the impact of governance and financial leverage on the value of American companies 

for a period of three years. The results revealed that the boards of directors of large 

companies negatively affected the value of American companies, while the duplication 

of CEOs, audit committees, financial leverage, company size, and returns positively 

correlated with the value of the company by increasing the returns on the company's 

assets (Obradovich, 2012). While good governance increases the market value of a 

company (Black, 2001; Klapper & Love, 2004), internal ownership increases the firm's 

value, which is measured by Tobin's Q (Pattanoyak, 2008). 

Shawwa’s (2007) study revealed that banks have a stronger commitment to CG 

principles, compared to industrial businesses. This is an important finding about the 

impact of governance implementation on performance indicators in Jordanian 

companies that focus on board size and the concentration of the presidency of the board 

of directors and senior executive management in one person. Many previous studies 

examined the impact of the size of the board of directors on the FP of companies from 



23 

two different points of view, namely the agency theory and resource-dependence theory. 

While the agency theory holds that the smaller the board of directors, the more effective 

it is, as it can make decisions in less time and reduce agency problems in the board of 

directors, and that the size of the board of directors correlates negatively with company 

performance, as well as the large board of directors leads to weak communication 

between members (Bae et al., 2018). On the contrary, the resource theory assumes that a 

larger board of directors leads to better decisions through diversity in expertise and 

competencies, and thus renders a positive relationship between board size and 

performance (Amaqtari, 2019). 

Matama (2005) examined the impact of CG on the FP of a group of select banks, and 

the results showed a positive relationship between CG and FP. In 2005, the existence of 

a direct and indirect positive correlation between the governance of the board of 

directors and FP of a group of state-owned companies listed on the Uganda Stock 

Exchange was revealed (Masibo, 2005). On the other hand, Pieses (2005) obtained 

different results regarding the impact of CG on corporate performance. 

Despite most previous studies around the world confirming that CG has a significant 

effect on FP, limited studies stated that there was no relationship between CG and the 

performance of the firm. Detthamrong et al. collected data on 493 non-financial firms in 

Thailand in 2017. The result showed that CG was not associated with the FP of the full 

sample, but when splitting the sample into subsamples (both small and large samples), 

some effect of CG on the performance was observed (Detthamrong et al., 2017). 

Another diminution of CG in the literature uses an index of CG; a limited number of 

studies used this diminution (Brown & Caylore, 2004; Compers et al., 2003; Core et al., 

2004; Bebchuk & Cohen, 2004; Chohen et al., 2004; Christoffersen et al., 2004). Brown 

and Caylore (2004) used the CG index composite measure of 51 factors divided into 

eight CG categories for 2327 firms. The results showed that the firms with good CG 

achieved more profit and were more valuable. In 2003, Compers et al. used the GIM 

index of the 1500 largest firms during the 1990s by classifying 24 CG factors into five 

categories. The results indicated an improvement in the performance and profitability of 

the firm that complies with CG rules, compared to other firms that don't, such that the 

firms with stronger shareholder rights had a higher firm value (Compers et al., 2003). 



24 

This study used the last diminution in aiming to measure the CG by using the Brown 

and Caylore (2004) index. It didn’t use all of the items that were included because they 

did not fit with the CG adapted in Palestine and Jordan 

2.6 Hypotheses Development 

This study intends to investigate the influence of CRs on FP and the moderating role of 

CG on the relationship between them. The study hypotheses illustrate the development 

of the study. 

2.6.1 The relationship between CRs and FP 

Based on previous studies that showed an association between CRs and FP and in line 

with previous studies, we assume a directional association between CRs and FP of 

companies. By referring to previous studies that confirm the existence of a significant 

impact of CRs on the FP of banks, we find a negative relationship between CRs and FP 

of banks. According to Al Etan and Bani-Khalid (2019), CRs are negatively associated 

with bank FP. The higher the CRs ratio of a bank, the lower the return on assets (ROA) 

and return on equity (ROE). The high percentage of NPLs in banks leads to a decline in 

the profitability of banks (Abbas et al., 2019). 

According to Hosna et al.(2009), the percentage of NPLs and rate of capital adequacy 

negatively affect the profitability of banks. Boundel (2012) found similar results from 

previous studies. The study indicated a negative association between CRs measured by 

the capital adequacy ratio, NPLs ratio, and profitability of banks. The ratio of loans to 

total deposits is inversely related to performance, and the credit policy adopted by banks 

affects the performance of these banks (Samual, 2014). This was corroborated by the 

study by Ketten & Morres (1987), which is one of the oldest to examine the effect of 

NPLs on the performance of banks. The study was conducted on 2,400 banks in the 

United States of America. Based on this, the first hypothesis of the study can be 

formulated as follows: 

H1: There is a statistically significant effect of CRs on the FP of banks listed on the 

PEX and ASE. 

  



25 

2.6.2 Interaction between CR, FP, and CG 

Shleifer and Vishny (1997) defined CG as a set of guidelines, structures, rules, and 

procedures that investors use to secure a return on investment and ensure that the 

managers do not misuse the funds of investors. According to Ko et al. (2019), there has 

been little research on examined the moderating role of CG in the relationship between 

CR and FP. Krause and Tse (2016) investigated the relationship between risk 

management and corporate value.  

The study found that better risk management procedures, as a substitute for CG, 

decreased cash flow volatility, improved FP, and improved the value of the company. 

According to Ko et al. (2019), a higher level of operational risk occurrences is 

associated with a greater likelihood of credit default and poor performance. The authors 

indicate that greater levels of CG are correlated with lower levels of operational risk 

occurrences, improved performance, and reduced chance of credit fault. Lin and Liu 

(2015) investigated the relationship between research and development (R & D) 

expenditure and business valuation using Taiwanese enterprises. A company's value 

was measured in terms of Tobin's Q and market-to-book ratio, such that a significant 

positive association was found between Tobin's Q and market-to-book ratio, i.e., the 

larger the R & D investment, the higher the business value. Furthermore, R & D growth 

was found to be positively associated with firm value.  

Moreover, the researchers discovered a “size” impact. Compared to smaller enterprises, 

the positive relationship between R & D and company value was strengthened for larger 

firms. Further, the relationship was impacted by the type of ownership. When the 

ownership was dominated by insiders, the correlation was weaker than when it was 

dominated by institutional owners. According to all the deliberations, the following 

research hypothesis has been developed: 

H2: The relationship between CR and FP is moderated by the level of CG for banks in 

PEX and the ASE. 

  



26 

2.7 Conceptual model of the study 

Based on the previous studies and theoretical perspective related to FP, the researcher 

developed this framework to explain the influence of CRs on FP and the moderating 

role of CG on the association between CRs and FP. 

Figure (5) 

The conceptual model of the study 

 

 

 

 

 

 

  

Corporate 

Governance 

Credit Risk Financial Performance 

 

Control 

Variables 
 

 



27 

Chapter Three 

Research Methodology 

3.1 Introduction 

The methodology is an important part of the study. Poole and Anderson (2019) define it 

as a set of rules and procedures or the methods on which the study path is based, and the 

organized steps that the researcher takes in the field to address the topics they study 

until they achieve a specific result. It describes the population and sample of the study, 

data sources and tools for collection, variables of the study and method of measuring 

each of them, model of the study, and statistical methods used in data analysis. 

3.2 Research Sample 

The study population comprises all banks listed on the PEX and ASE. All banks 

selected must fulfill the following conditions to form the study sample: 

1. It will be listed on the Palestine and ASEs during the study period 2009-2019. 

2. Access to yearly reports, as well as the data and information required to measure 

research variables during the study period 2009-2019. 

The study sample comprised 21 banks listed on the PEX and ASE. It includes all types 

of banks listed including commercial, investment, and Islamic banks during the period 

between 2009 and 2019. Appendix A, show the sample used in the study. 

The study chose the period between 2009 and 2019 for the following considerations: 

1. Due to mergers or acquisition operations in 2009, so new banks existed such as the 

National Bank (a merger between Al Rafah Bank for Small Business Finance and 

Arab Palestinian Investment Bank) and Safwa Islamic Bank. 

2. 2019 is the last year due to an exceptional event, which is the Corona virus, and, 

therefore, we removed 2020 and 2021 to exclude the effect of the Corona virus on 

the performance of banks. 

  



28 

3.3 Data Collection 

This study relied on a group of sources such as research, scientific articles, and master's 

and doctoral theses related to the subject of the study, in addition to websites. Further, 

this study relied on financial and non-financial data available through annual reports of 

banks and disclosures published on the websites of PEX (www.pex.ps) and ASE 

(www.ase.com.jo/ar) for the period from 2009 to 2019. In addition to relying on the 

Palestinian CG Code (2009), the Banking CG Code in Palestine (2014), the Jordanian 

CG Code (2017), and the PMA (2019), data was collected based on panel data. 

Panel data is defined as a data set that combines the characteristics of each of the cross-

sectional data and time series. Cross-sectional data describe the behavior of a number of 

items or cross-sectional units over a time period. Whenever time series data describe the 

behavior of a single individual during a given time period, it means cross-sectional 

observation panel data observed over a period of time. a specific time, that is, merging 

cross-sectional data with temporal data at the same time. Panel models have recently 

been able to gain great attention, especially in economic studies, due to the fact that they 

It takes into account both the effect of the change in time and the effect of the change in 

the cross-sectional units Frees, E. W. (2004). 

In this context, Hsiao (1986) shows that panel data is preferred over time series data or 

cross-sectional data. An advantage of using panel data is that it takes into account the 

individual variance, which may appear in the case of cross-sectional or time series data, 

leading to biased results. It also reduces the possibility of the emergence of the problem 

of neglected variables resulting from the characteristics of unobserved vocabulary, 

which usually leads to biased estimates and highlights the importance of using panel 

data in that it takes into account what is described as "heterogeneity or non-observable 

difference" of the sample vocabulary, whether cross-sectional or time series data, and 

gives data that is more useful, diverse, less correlated between variables, has a large 

number of degrees of freedom, and is more efficient than time series, which suffer from 

the problem of autocorrelation. 

3.4 Variable Measurement 

This section explains the variables being measured in the study. It describes the 

dependent variable, independent variable, moderating variable, and control variables. 



29 

3.4.1 Independent variable 

CR was used as an independent variable in this study, and there are multiple ways of 

measuring CRs. Two measures were used to measure CRs, namely, total loans to total 

assets (LTA) and non-performing loans to total loans (NPLs). These indicators were 

used with reference to previous studies. Table 1 indicates the measurement of indicators 

that were relied upon in the study. 

Table (1) 

Measurement of CRs indicators that were relied upon in the study 

Variable Measurement Reference 

LTA 
Total loans to total assets  

(TL/TA) 

Bourke (1989), Altunbas (2005), and Flamini 

et al.(2009) 

NPLs 

Total NPLs to total loans  

(NPL/TL) 

Al-Eitan and Bani-Khalid (2019), 

Kumbakhar et al. (2001), Zhao and Murinde 

(2011), and Saaed and Zahid (2016) 

3.4.2 Dependent variable 

The dependent variable in this study is FP. This study used combined measures based 

on accounting and the market. Many studies have been conducted on FP (Athanasoglou, 

2005; Angbazo, 1997; Chirwa, 2003; Sial et al., 2018; Herawaty, 2008; Flamini et al., 

2009; Egesa, 2010). 

ROA, which measures the amount of profit that a company earns by investing in its 

assets, is calculated by dividing net income after tax by the company’s total assets. It 

gives an indication of the management’s efficiency in using its assets to generate profits. 

While ROA is shown as a percentage, ROE is the ratio of net income divided by 

shareholders' equity. It is a common measurement of the company's profitability, and it 

indicates the amount of profit that the company achieves from the shareholders' 

investment. 

Tobin's Q is one of the most important indicators for measuring FP. It is a more detailed 

measure that indicates the effectiveness of the administration in managing its economic 

resources. If the value of Tobin's Q is greater than one, it implies that investing in assets 

generates a higher profit than investing in spending. Investing in investment is useless if 

the Tobin's Q value is less than one. (Herawaty, 2008; Mukhtaruddin et al., 2019). 



30 

Where; 

ROA is calculated using the following equation: 

ROA = NI/TA 

ROA: return on assets. 

NI: net income. 

TA: total assets 

ROE is calculated using the following equation: 

ROE: NI/SE 

ROE: return on equity. 

NI: net income. 

SE: shareholders' equity 

Tobin's Q: Market value of equity + Book value of debit/ Total assets 

Here, the difference between the two dependent variables, return on assets and return on 

equity, should be pointed out. This is due to the financial leverage, or doubling equity, 

where financial leverage refers to the amount of debt that the company uses to finance 

its assets, compared to the amount of equity used by the company. This implies that the 

difference between the two variables is debt. If there is no debt in the company, ROA is 

equal to ROE. If ROE of the company increases due to the increase in the profit margin 

or turnover rate of assets (Robin et al., 2018), this is a positive indicator for the 

company, as it implies that it is effective in using its assets and making profits through 

sales. If financial leverage is the cause for the rise in equity, it is a negative indicator 

that the company depends on financing its assets through external debt. (Bunea et al., 

2019; Robin et al., 2018). 

3.4.3 Moderating variable: CG 

Shleifer and Vishny (1997) defined CG as a set of guidelines, structures, rules, and 

procedures that investors use to secure a return on investment and ensure that the 

managers do not misuse the funds of investors. 

CG was viewed as a moderating variable in this study. It refers to the variables that 

impact the direction and/or strength of the relationship between the independent and 

dependent variables (Namazi & Namazi, 2016). CG was employed to modify the 

strength and direction of the association between CRs and FP. The study used a 



31 

checklist of 33 items to measure CG following a prior study (Brown & Caylor, 2004). 

The CG checklist was developed based on the Palestinian CG code issued in 2009 and 

the Jordanian code of CG issued in 2014. If an item on the checklist is discovered in the 

bank, it receives a one (1), otherwise, it receives zero (0). The CG index was estimated 

by computing the average of total items (Brown & Caylor, 2004). 

Appendix B, lists the items included in the checklist, which were categorized into the 

following six types: Audit, Board of Director, Charter Bylaws, Compensation, 

Ownership, and Progressive Practices 

3.4.4 Control variables 

Several studies (Mishra & Mohanty, 2014; Gurusamy, 2017; Islam & Nishiyama, 2016; 

Sail et al., 2018; Assenga, Aly & Hussainy, 2018) use control variables such as 

ownership concentration, firm size, and firm age, as all these variables were relied on as 

control variables in addition to the Big Four and the percentage of liquidity, and, 

therefore, all these variables will be used to deduce if there are other variables that may 

affect FP. Firstly, we assume that company size, which is represented by the natural 

logarithm of total assets, is positively associated with FP (Puni & Anlesinya, 2020). 

Secondly, the ownership concentration of the company is measured by the total 

percentage of shareholders who own more than 5% of the shares. The agency theory is 

considered to explain the relationship between profitability of banks and ownership. It 

deals with the relationship between owners and managers (Ongore, 2013). The concept 

of ownership concentration refers to the concentration of the percentage of shares in a 

company by a few shareholders. Puni & Anlesinya (2020) argue that ownership 

concentration is positively related to the FP. Thirdly, the age of the company is 

measured by the natural logarithm of the number of years the company has been listed 

on the stock exchange, which is positively related to FP (Gurusamy, 2017). Fourthly, 

liquidity refers to the bank's ability to meet its obligations, which can be measured by 

dividing the liquid assets into the total liabilities. Dang (2011) and Bessey & Moses 

(2015) argue that liquidity is negatively correlated with the bank's profitability. Finally, 

the Big Four are included as dummy variables that equal 1 if a listed firm is audited by 

one of the international Big 4 audit firms or zero otherwise. Sail et al. (2018) argue that 

FP will be increased when the bank is audited by one of the international big four. Table 

2 shows the measurement of the control variables that were used in the study. 



32 

Table (2) 

Measurement of the control variables that were used in the study 

Variable Measurement Reference 

Firm’s age 

The natural logarithm of the 

company's number of years from the 

date of its listing on the stock 

exchange 

Gurusamy (2017) 

Firm’s size 
The natural logarithm of total assets 

 

Puni & Anlesinya (2020) 

Liquidity 

Liquid assets / total liabilities Islam & Nishiyama (2016) 

Dang (2011) and Bessey & 

Moses (2015) 

Ownership 

concentration 

Total percentage of shareholders who 

own more than 5% 

Ongore, (2013) 

Big Four 

A dummy variable that is 1 if a listed 

firm is audited by one of the 

international Big 4 audit firms or zero 

otherwise 

Sail et al. (2018) 

 

3.5 Statistical methods used to analyze data 

Given the nature of the study variable, the study adapted panel multiple regression as a 

statistical method to examine the hypotheses. The researcher applied the following 

statistical techniques to analyze the data: 

• Descriptive statistics include measures to describe the mean, standard deviation, 

median, minimum value, maximum value, and how they have been used for each 

variable. 

• A pairwise correlation matrix is used to show the correlation coefficient between 

variables. 

• Regression analysis is used to examine the direction and strength of the relationship 

between the independent and dependent variables. 

3.6 Research models 

The main argument of this study is to investigate the relationship between CRs and FP 

and whether CG has an influence on the relationship between CRs and FP of Palestinian 

and Jordanian banks listed on PEX and ASE during the period 2009-2019. A regression 

model was developed to examine the hypotheses. 



33 

Y = β0 + β1(LTA) + β2(NPLs )+ β3(NPLs*CG) + β4(LTA*CG)+β4(BAGE) + 

β6(BSIZE) + β7(LIQUD) + β8(BF) + β9(OC) + εit 

Where: 

Y = Return on assets, Return on equity, and Tobin's Q 

εit: is the error term 

βi: are the regression coefficients 

and the remaining variables are as presented in Table 3. 

Table (3) 

The study abbreviation and operational definition variables 

Variables Abbreviations Operational definitions 

loans to total assets LTA Total loans to total assets (TL/TA) 

Non-performing loans NPLs Total NPLs to total loans (NPLs/TL) 

Corporate Governance CG A checklist to measure the level of CG 

Financial Performance 

ROA 
Net income after tax by dividing total 

assets 

ROE 
Net income after tax by dividing total 

shareholders' equity 

Tobin's Q 
Market value of equity + Book value of 

debt / total assets 

Ownership 

Concentration 
OC 

The total percentage of shareholders who 

own more than 5% of the shares 

Bank age BAGE 

The natural logarithm of the company's 

number of years from the date of its listing 

on the stock exchange 

Bank size BSIZE The natural logarithm of total assets 

Liquidity LIQUD Liquid assets / total liabilities 

Big four BF 

A dummy variable that is 1 if a listed firm 

is audited by one of the international Big 

Four audit firms or zero otherwise 

 

  



34 

Chapter Four 

Results and Discussion 

4.1 Introduction 

This chapter presents the results obtained from data analysis. The objective of this study 

is to investigate the relationship between CR and FP and the moderating role of CG on 

the relationship for the banks listed on PEX and ASE for the period from 2009 to 2019. 

The chapter reports the descriptive statistics for the variables in the second section. The 

third section presents the correlation analysis. The fourth section includes the estimation 

results, and the last section discusses the results and recommendations. 

4.2 Descriptive statistics of variables 

Table 4 presents the descriptive statistics (mean, standard deviation, median, minimum 

value, and maximum value), and how they have been used for each variable were taken 

into account in the study. The mean score of FP varies between different measures. The 

mean figures of performance indicators Tobin's Q, ROE, and ROA as a dependent 

variables are .959, .099, and .026 respectively. These results indicate a positive return 

for banks listed in PEX and ASE during 2009-2019. While the mean of ROA is 0.026 

for a 231 number of observations, it indicates that an investment of one dinar in assets 

generates only 0.026 of profits, while the maximum and minimum values are, 

respectively, 0.407 and -0.02, but the mean of ROE is 0.099, which indicates that the 

investment by shareholders of one dinar achieves 0.099 of profits, and the maximum 

and minimum value of ROE is 1 and -0.04, respectively. The CG mean score is 0.804, 

which means that these banks have a high commitment to CG. Further, LTA has a mean 

of 0.487, which implies loans composite of about 48% of total assets in banks listed in 

PEX and ASE. On the other hand, the mean of NPLs is 5.669. This percentage is 

considered lower compared with other countries, such as Lebanon, where the NPLs 

reached 15% in 2019 (PMA, 2019). these results indicate banks listed in PEX and ASE 

have acceptable level of NPLs. 

For control variables when considering the mean figures of FAGE of banks it, shows 

the average age of PEX and ASE banks is around 39 years. The average FSIZE of firms 

ranges from 7.689 to 10.42, with a mean of 9.164. Regarding LIGUD It has a minimum 



35 

value of 0.939 and a maximum value of 7.564, with a mean of 1.78. This means the 

banks listed in PEX and ASE have 1.78 dinner as liquid assets from its total assets and a 

standard deviation of 1.522. OWNERC has an average of 0.558, thus implying that 55% 

of the company's shares are owned by the largest five shareholders. Finally, with respect 

to the BIG4 the mean is 0.823. This means that 82% of banks are audited by one of the 

international "Big 4" audit firms.  

Table (4) 

Descriptive statistics of the study variables 

Variable Observations Mean Std. deviation Min Max 

Tobin's Q 231 .9590 .6980 .0640 9.568 

ROA 231 .0260 .0490 -0.02 .4070 

ROE 231 .0990 .1440 -0.04 1 

LTA 231 .4870 .0930 .1710 .7570 

NPLs 231 5.669 3.527 .030 18.2 

CG 231 .8040 .0610 .6250 .90 

FAGE 231 39.186 17.739 6 91 

FSIZE 231 9.164 .4810 7.689 10.42 

LIGUD 231 1.782 1.522 .9390 7.564 

OWNERC 231 0.558 0.232 0.065 0.88 

BIG 4 231 .8230 .3830 0 1 

4.3 Correlation Matrix 

The correlation coefficients were shown in table 5 to determine the multicollinearity 

problem between independent variables and to assess the relationship between 

independent and dependent variables in terms of strength and direction. Table 5 shows a 

negative and positive relationship between NPLs, LTA, and control variables with the 

three measurements of FP, namely Tobin's Q, ROA, and ROE. This means that when 

the NPLs and LTA increases or decreases, the Tobin's Q, ROA, and ROE will also 

increase or decrease. 

  



36 

Table (5) 

Pair wise correlation matrix between variables 

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) 

(1) TOBINSQ 1.000           

(2) ROA -0.052 1.000          

(3) ROE -0.110* -0.167** 1.000         

(4) LTA 0.017 0.020 0.067 1.000        

(5) (5 )NPLs  0.071 -0.316*** -0.169** -0.034 1.000       

(6) CG 0.003 0.154** 0.087 0.398*** -0.278*** 1.000      

(7) FAGE -0.016 -0.164** -0.052 0.089 0.106* 0.339*** 1.000     

(8) FSIZE -0.191*** -0.130** 0.065 0.033 0.205*** 0.276*** 0.694*** 1.000    

(9) LIGUD -0.150** -0.063 -0.061 0.363*** -0.064 -0.018 0.029 -0.105* 1.000   

(10) OWNERC -0.089 -0.184*** 0.193*** 0.046 -0.054 -0.082 -0.304*** -0.213*** 0.095 1.000  

(11) BIG4 0.022 0.079 -0.044 0.000 0.168** -0.041 0.056 0.068 -0.021 -0.245*** 1.000 

*** p<0.01, ** p<0.05, * p<0.1 



37 

Multicollinearity problem occurs when there is a high correlation between two or more 

variables of the study, such that it is difficult to determine the importance of each 

element separately and the extent of its impact on the dependent variable, and we can 

determine whether there is a linear correlation between the variables if the correlation 

coefficients between the study variables exceed 0.80 (Al Farooque et al., 2019). 

However, a test known as the variance inflation factor, or VIF, was employed to 

confirm these results. The table reveals that the VIF values vary from 1.094 to 2.193 

and the average of VIF value is which is 1.521 less than 5. That means that 

multicollinearity does not exist (Meeamol et al., 2011; Christensen et al.,2011) 

Table (6) 

Multicollinearity test VIF 

 VIF Tolerance (1/VIF) 

FAGE 2.193 0.456 

 FSIZE 2.086 0.479 

 CG 1.634 0.612 

 LTA 1.465 0.683 

LIQUD 1.255 0.797 

 NPLs 1.252 0.799 

 OWNERC 1.186 0.843 

 BIG 4 1.094 0.914 

 Mean VIF 1.521 0 

4.4 Estimation Result 

Two hypotheses were proposed by this study and investigated using three measurements 

for FP (Tobin's Q, ROA, and ROE). fixed effects regression was used to estimate the 

relationship between the dependent variables (Tobin's Q, ROA, and ROE), independent 

variables (LTA and NPLs), moderating variable (CG and its interaction with LTA and 

NPLs), and control variables (firm age, firm size, liquidity, ownership concentration, 

and the big four). 

The fixed effects model was used. It was used to test the impact of CRs on the FP of 

banks listed on the Palestine Securities Exchange and ASE, as measured by the return 

on assets , return on equity, and Tobin's Q. 

  



38 

Table (7) 

Regression results (fixed effect estimation) for the model with TOBINS Q as a 

dependent variable 

Dependent Variable: Tobin's Q 

Prob. t-Statistic Coefficient Variable 

0.000 4.837 2.823 LTA 

0.054 1.657 0.02 NPLs 

0.000 4.214 0.059 FAGE 

0.036 2.108 0.012 FSIZE 

0.356 -0.92 -0.072 LIGUD 

0.135 1.50 0.488 OWNERC 

0.042 2.00 0.241 BIG 4 

0 13.87 21.015 Constant 

  0.494 R-squared 

  0.511 Adjusted R-squared 

  28.340 F-statistic 

  0.000 Prob(F-statistic) 

Significant level 5% 

 

Table (8) 

Regression results (fixed effect estimation) for the model with ROE as a dependent 

variable 

Dependent Variable: ROE 

Prob. t-Statistic Coefficient Variable 

0.002 3.19 0.4 LTA 

0.924 0.10 0.023 NPLs 

0.035 2.12 -0.006 FAGE 

0.043 2.43 0.083 FSIZE 

0.027 2.22 0.050 LIGUD 

0.009 2.65 0.193 OWNERC 

0.166 -1.39 -0.037 BIG 4 

0.035 -2.12 -0.718 Constant 

  0.129 R-squared 

  0.135 Adjusted R-squared 

  4.297 F-statistic 

  0.000 Prob (F-statistic) 
Significant level 5% 

 

  



39 

Table (9) 

Regression results (fixed effect estimation) for the model with ROA as a dependent 

variable 

Dependent Variable: ROA 

Prob. t-Statistic Coefficient Variable 

0.679 0.41 0.015 LTA 

0.001 -3.21 -0.003 NPLs 

0.05 1.88 0.001 FAGE 

0.544 0.61 0.007 FSIZE 

0.629 0.48 0.001 LIGUD 

0.031 2.15 0.039 OWNERC 

0.132 1.51 0.013 BIG 4 

0.886 0.886 0.013 Constant 

  0.189 R-squared 

  0.56 Adjusted R-squared 

  19 F-statistic 

  0.008 Prob(F-statistic) 

Significant level 5% 

 

In the results of the previous statistical analysis, we notice differences in the impact of 

NPLs and LTA on the dependent variables, specifically the ROA and ROE. Owing to 

the debts, they may not always be affected in the same direction, which was explained 

in-detail when measuring the two variables . 

The estimated findings for the TOBINSQ, ROE, and ROA as dependent variables with 

no moderator variable are shown in tables 7, 8, and 9. LTA coefficients (B = 2.823, 0.4, 

and 0.015) have p-values of 0.000, 0.002, and 0.679, respectively, whereas NPLs 

coefficients (B = 0.02, 0.023, and-0.003) have p-values of 0.054, 0.924, and 0.001, 

respectively. As a result, it can be stated that LTA has a significant and positive effect 

on TOBINSQ and ROE, but an insignificant and positive effect on ROA. On the other 

hand, NPLs has a significant and negative effect on ROA, whereas NPLs has a weak 

and positive effect on TOBINSQ. However, there is an insignificant and positive effect 

of NPLs on ROE. 

Referring to the coefficient of determination (R-squared) in tables 7, 8, and 9, it is clear 

that the changes in TOBINSQ, ROE, and ROA, (dependent variables), are attributed to 

the change in the independent variables by .494, .129, and .189, respectively, as 



40 

indicated by the calculated (F) value in the first model, second model, and third model, 

with a significant level of 0.000 less than (5%), thus implying that it is statistically 

significant in all models. 

Here, it must be pointed out that the role of the control variables were used in the study 

to control the influences or variables, i.e., by balancing the characteristics of the 

companies and making them fixed . 

Referring to tables 7, 8, and 9, it was found that there is an insignificant positive effect 

of size on ROA at a level of significance 0.544, thus implying that the large size of the 

bank leads to a higher ROA, (P< 0.544, B = 0.007). On the other hand, there is a weak 

positive effect of size on ROE and TOBINSQ at the level of significance (P = 0.053, 

0.036, B = 0.083, 0.012). From tables 7, 8, and 9 a positive, statistically significant 

effect of the liquidity variable is observed on the ROE (B = 0.050, P > 0.027); an 

insignificant negative effect on TOBINSQ at a level of significance 0.356 (B  =  -0.072, 

P= 0.356); and an insignificant positive effect on ROA at the level of significance of 

0.629 (B = 0.001, P< 0.629). 

With regard to the ownership concentration of shareholders, and referring to tables 7, 8, 

and 9, it was found that there is a significant positive effect of the ownership 

concentration on the ROA at a level of significance of 0.031, which is less than the level 

of significance adopted in the study. (P > 0.031, B = 0.039). Moreover, the results show 

that a significant positive effect of the concentration of shareholders’ ownership on 

ROE at a level of significance 0.009 (B= 0.193, P= 0.009). This result can be explained 

by the fact that the presence of a concentration of shareholders helps strengthen the 

control procedures and increase the efficiency of the company's business, which will 

positively affect the ROE, but an insignificant relationship exists between Liquidity and 

TOBINSQ at a level of significance 0.135 (P< 0.135, B = 0.488). This result 

corroborates with studies (Lawa et al., 2018; Al Farooque et al., 2019), but it contradicts 

studies (Vintilă & Gherghinaa, 2014). Finally, big four had an insignificant negative 

effect on ROE at a level of significance 0.166, an insignificant positive effect on the 

ROA at a level of significance 0.132, and a positive and significant effect on TOBIN'S 

Q at a level of significance 0.04. 

 



41 

Table (10) 

Estimation results for the model with TOBINSQ as a dependent variable and CG as a 

moderator variable 

Dependant Variable: TOBINS Q 

Prob. t-Statistic Coefficient Variable 

.111 1.60 4.244 LTA 

0.065 -1.86 -0.319 NPLs 

1.527 0.000 3.427 CG 

0.046 2.01 0.441 NPL*CG 

0.15 -1.44 -4.329 LTA*CG 

0.028 2.20 0.008 FAGE 

0 -5.00 -0.656 FSIZE 

0.014 -2.47 -0.082 LIGUED 

0.682 -0.41 -0.049 BIG4 

0.173 -1.37 -0.279 OWNERC 

0 5.62 6.458 Constant 

0.959 Mean dependent var 0.144 R-squared 

0.698 SD dependent var 231 Number of observations  

472.064 Akaike crit. (AIC) 4.147 F-statistic 

506.488 Bayesian crit. (BIC) 0.000 Prob (F-statistic) 
Significant level 5%. 

Table 10 shows the results of regression models that used LTA and NPLs as 

measurements of CRs. The results show an insignificant and positive relationship 

between LTA and TOBINSQ (B = 4.244, P = 0.111). This result does not correspond 

with our expectations of the relationship between the LTA and TOBINSQ. However, 

there is a significant and negative relationship between LTA and ROA and ROE (B = -

0.44,-1.049, P = 0.014, 0.056). More specifically, one unit increase in LTA leads to a 

decrease of (-0.44, -1.049) in ROA and ROE, respectively. This result corresponds with 

our expectation of the relationship between the LTA with ROA and ROE. However, 

there is a negative and insignificant relationship between NPLs and TOBINSQ (B = -

0.319, P = 0.065), but a positive and insignificant relationship between NPL and ROA 

(B = 0.021, P = 0.071). This result does not correspond with our expectation of the 

association between NPLs of TOBINSQ and ROA. NPLs and ROE have a significant 

and positive relationship, according to the findings (B = 1, P = 0.005). This result 

corresponds with our expectations about the association between NPLs and ROE. 

Referring to the coefficient of determination (R-squared) in tables 10 and table 11, and 

12, (see appendix C) it is clear that the changes in TOBINSQ, ROE, and ROA, 



42 

(dependent