Credit risk and bank performance: The moderating effect of political instability in the Palestinian context

Abstract

Objectives: This study aims to examine the impact of credit risk on bank performance in the Palestinian banking sector and to investigate the moderating effect of political instability on the relationship between credit risk and bank performance.

Methodology: The study employed a balanced panel data approach using a sample of 10 Palestinian banks operating during the period 2012–2024, yielding 130 bank-year observations. Bank performance was measured using return on assets (ROA) and return on equity (ROE). Fixed effects regression models were applied, and the robustness of the findings was verified using alternative measures and the difference generalized method of moments (GMM).

Findings: The results indicate that credit risk has a significant negative effect on both ROA and ROE. Political instability was found to have no direct significant relationship with bank performance. However, it significantly and negatively moderates the relationship between credit risk and bank performance, intensifying the adverse impact of credit risk on profitability.

Implications: The findings suggest that banks and the Palestinian Monetary Authority should strengthen credit risk management practices by reviewing lending standards and implementing stricter monitoring and regulatory mechanisms to mitigate the negative effects of credit risk, particularly during periods of political instability.

Conclusions: This study contributes to the banking and finance literature by providing empirical evidence on the moderating role of political instability in the relationship between credit risk and bank performance within the Palestinian context, an area that has received limited scholarly attention.