Financial Risks and Financial Performance of Commercial Banks in South Sudan

Abstract

The banking sector in South Sudan has experienced more than a decade of significant financial risks since gaining independence from Sudan. Such risks that pose financial instability are characterized by internal and external factors like COVID-19 Pandemic and geopolitical tension both inside and outside the country. The industry comprises of both local, Joint Venture and foreign commercial banks characterized by poor financial performance. Consequently, the number of banks is reported undercapitalized and non-compliance with statutory requirement of 20% reserve with the Central Bank. This has led to the collapse of 14 domestic commercial banks as reported by both Bank of South Sudan and IMF. The financial sector is remaining vulnerable to risks that pose a threat to sustainability and financial viability, including liquidity, credit, exchange rate and interest rate risks. The study sought to establish the effect of financial risk on the financial performance of South Sudanese commercial banks. The objectives were to determine the effect of liquidity, credit, exchange rate and interest rate risks on the financial performance of commercial banks in South Sudan. The study adopted the theories of Liquidity Preference Theory, Interest Rate Parity, International Fisher Effect and Agency theories. Financial performance of commercial banks is to be assessed through ROA using data from 33 banks. The study used a longitudinal research design that observed data series over a period of time in which the target population is 33 commercial banks from 2014 to 2023. The researcher relied on secondary data and that were collected from audited financial statements of commercial banks and data obtained from Central Bank website. The study employed descriptive and inferential statistics within the multiple regression model frameworks to analyze the data using EVIEWS version. Diagnostic tests such as normality, multicollinearity, heteroscedasticity, and Stationarity tests were performed to eliminate unbiasedness. The study findings indicated that credit risk (Coef=3.2201,p=0.0323) had a statistically significant and positive effect on the financial performance while interest rate risk (Coef= -0.5005, p=0.0211) found to have a statistically significant and negative effect on the financial performance of commercial banks. In addition, the research results found that exchange rate risk (Coef=0.0035, p=0.1362) and liquidity risk (Coef=0.0051, p=0.4135) had a statistically insignificant effect on the financial performance of commercial banks in South Sudan. The study recommended that banks should employ the use of swaps, spot, forward market, and bilateral agreement to reduce risk associated with exchange rates. Also study recommended banks to build trust and confidence with the public in order to reduce NPLs ratios, hence increase customers’ apathy to take loans that bring funds to the banks. Central bank to impose strict regulation on commercial banks to keep liquidity problems at bay that causing banks collapsed.