Credit risk and operational risk on financial performance of banks in South Asian countries: A partial least squared structural equation model (PLS SEM) approach

A B S T R A C T

The main purpose of the study is to assess the effect of credit and operational risk on the financial performance of the South Asian countries’ commercial banks in the context of the structural equation model (SEM). As it is an explanatory study, the partial least-squares structural equation modeling (PLS-SEM) method was used to explore how operational risk and credit risk affect banks' profits in a South Asian country. The study used a sample of 20 commercial banks from four countries in South Asia. A five-year data set from 2018 to 2022 was used for the study. The study found that a significant positive relationship exists between credit risk and the profitability of South Asian countries’ commercial banks. It is further explored an insignificant negative relationship between operational risk and profitability. Results also found an insignificant negative relationship between bank-specific variables and profitability. In addition, a significant but negative relationship between bank-specific variables and operational risk is found. Lastly, a significant positive relationship exists between bank-specific variables and credit risk. It is anticipated that the results of the study will be beneficial to the banking sector as well as the investor community.

Key words: Credit risk, operational risk, financial performance, South Asian, PLS-SEM.

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