Risk-driven profitability: the role of bank capital, liquidity and credit in frontier banking markets

Muhammad M. Ma’aji, Casey Barnett, Saeed Awadh Bin-Nashwan, Nur Hafizah Roslan and Rahima Abas Ali

Journal of Financial Regulation and Compliance, 2025, vol. 34, issue 1, 60-80

Abstract: PurposeCambodia’s banking sector has grown into an important part of the economy over the past 15 years, with growth in total assets, deposits, credit, capital and profitability. The sector’s 55 % profitability decline and 230bps NPL spike in 2023 indicate its challenges, despite its strong metrics. This study aims to investigate the influence of credit risk, liquidity risk and bank capital on the profitability of Cambodian commercial banks.Design/methodology/approachThis study uses econometric panel data analysis and the generalized method of moments to explore the impact of bank capital, liquidity and credit risks on the profitability of Cambodian commercial banks from 2016 to 2023.FindingsThe authors find that return on average assets (ROAA) is increased by bank capital while using the net interest margin (NIM) does not show a significant influence. In addition, liquidity risk has an asymmetric effect, positively correlated with ROAA and negatively correlated with NIM. The impact of liquidity risk on Cambodia’s banking system seems to be influenced by profitability indicators. ROAA and NIM are hardly influenced by credit risk. Operational efficiency and bank size reduce profitability. To boost profits, bank management should emphasize capital buffers. Banks must balance liquidity management: higher liquidity prevents insolvency but lowers profitability, as NIM shows.Practical implicationsPolicymakers should enforce capital adequacy standards and guide liquidity optimization without sacrificing profit. While highlighting the impact of liquidity and capital on profitability in frontier markets – an under-researched area – future research could explore these dynamics in other emerging markets.Originality/valueTo the best of the authors’ knowledge, this attempt is likely the first of its kind to delve into the dynamics driving banking profitability in a frontier banking market, such as Cambodia.

Keywords: Bank profitability; Liquidity risk; Credit risk; Bank capital; Emerging market (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-01-2025-0008

DOI: 10.1108/JFRC-01-2025-0008

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