Determinants of the profitability of credit unions in Ecuador

Carlos Gabriel Parrales Choez, Fernando José Zambrano Farías, María del Carmen Valls Martínez

Article ID: 6287
Vol 8, Issue 8, 2024

VIEWS - 1739 (Abstract)

Abstract


This study analysed the behaviour of both economic and financial profitability of credit unions belonging to segment 1 in Ecuador, as well as its determinants. For this purpose, data from the financial statements of a sample of 30 credit unions between 2016 and 2022 were used by means of a multiple linear regression methodology using panel data with fixed effects after applying the Hausman test. The findings of this research showed that current liquidity and non-performing loans have a negative and significant effect on both economic and financial profitability while the past due portfolio has a positive and significant impact on the generation of profitability of the financial institutions under study. In addition, it was revealed that the rate of outflow absorption has a negative relationship with economic profitability but a positive relationship with financial profitability. Unlike previous research in the Ecuadorian context, this research is pioneering in presenting results that indicate that the determinants traditionally considered for nonfinancial institutions and banks are also valid for credit unions, even though they are organisations with different characteristics from the rest.


Keywords


economic profitability; financial profitability; liquidity; panel data; credit union

Full Text:

PDF


References

  1. Abdelmoneim, Z., & Yasser, M. (2023). The impact of bank performance and economic growth on bank profitability: CAMEL model application in middle-income countries. Banks and Bank Systems, 18(3), 205–220. https://doi.org/10.21511/bbs.18(3).2023.17
  2. Abdul Hasan, M. S., Haymans Manurung, A., & Usman, B. (2020). Determinants of Bank Profitability with Size as Moderating Variable. Journal of Applied Finance & Banking, 10(1), 153–166.
  3. Abou Elseoud, M. S., Yassin, M., & Ali, M. A. M. (2020). Using a panel data approach to determining the key factors of Islamic banks’ profitability in Bahrain. Cogent Business and Management, 7(1). https://doi.org/10.1080/23311975.2020.1831754
  4. Akaike, H. (1974). A new look at the statistical model identification. IEEE Transactions on Automatic Control, 19(6), 716–723. https://doi.org/10.1109/tac.1974.1100705
  5. Al-Jafari, M. K., & Alchami, M. (2014). Determinants of bank profitability: Evidence from Syria. Journal of Applied Finance & Banking, 4(1), 17–45.
  6. Alarussi, A. S., & Alhaderi, S. M. (2018). Factors affecting profitability in Malaysia. Journal of Economic Studies, 45(3), 442–458. https://doi.org/10.1108/jes-05-2017-0124
  7. Almaqtari, F. A., Al‐Homaidi, E. A., Tabash, M. I., et al. (2018). The determinants of profitability of Indian commercial banks: A panel data approach. International Journal of Finance & Economics, 24(1), 168–185. https://doi.org/10.1002/ijfe.1655
  8. Almehdawe, E., Khan, S., Lamsal, M., et al. (2020). Factors affecting Canadian credit unions’ financial performance. Agricultural Finance Review, 81(1), 51–75. https://doi.org/10.1108/afr-06-2019-0065
  9. Alshatti, A. S. (2014). The Effect of the Liquidity Management on Profitability in the Jordanian Commercial Banks. International Journal of Business and Management, 10(1), 62–71. https://doi.org/10.5539/ijbm.v10n1p62
  10. Amoah, B., Ohene-Asare, K., Bokpin, G. A., et al. (2018). Technical efficiency: The pathway to credit union cost efficiency in Ghana. Managerial Finance, 44(11), 1292–1310. https://doi.org/10.1108/mf-10-2017-0431
  11. Angbazo, L. (1997). Commercial bank net interest margins, default risk, interest-rate risk, and off-balance sheet banking. Journal of Banking and Finance, 21, 55–87.
  12. Arif, A., & Nauman Anees, A. (2012). Liquidity risk and performance of banking system. Journal of Financial Regulation and Compliance, 20(2), 182–195. https://doi.org/10.1108/13581981211218342
  13. Berger, A. N. (1995). The Relationship between Capital and Earnings in Banking. Journal of Money, Credit and Banking, 27(2), 432. https://doi.org/10.2307/2077877
  14. Bittencourt, W. R., Bressan, V. G. F., Goulart, C. P., et al. (2017). Profitability in Brazilian Multiple Banks and Credit Unions (Portuguese). Revista de Administração Contemporânea, 21, 22–40. https://doi.org/10.1590/1982-7849rac2017150349
  15. Brown, R. (2006). Mismanagement or mismeasurement? Pitfalls and protocols for DEA studies in the financial services sector. European Journal of Operational Research, 174(2), 1100–1116. https://doi.org/10.1016/j.ejor.2005.03.025
  16. Campoverde Campoverde, J. A., Romero Galarza, C. A., & Borenstein, D. (2018). Efficiency evaluation of credit unions in Ecuador: Application of the DEA Data Envelopment Analysis model (Spanish). Contaduría y Administración, 64(1), 87. https://doi.org/10.22201/fca.24488410e.2018.1449
  17. Da Silva, T. P., Leite, M., Guse, J. C., et al. (2017). Financial and economic performance of major Brazilian credit cooperatives. Contaduría y Administración, 62(5), 1442–1459. https://doi.org/10.1016/j.cya.2017.05.006
  18. de Leon, M. V. (2020). The impact of credit risk and macroeconomic factors on profitability: The case of the ASEAN banks. Banks and Bank Systems, 15(1), 21–29. https://doi.org/10.21511/bbs.15(1).2020.03
  19. Derbali, A. M. S. (2023). The factors determining the profitability of Tunisian banks. In: Smart Strategies and Societal Solutions for Sustainable International Business. Business Science Reference.
  20. Durrah, O., Rahman, A. A. A., Jamil, S. A., & Ghafeer, N. A. (2016). Exploring the relationship between liquidity ratios and indicators of financial performance: An analytical study on food industrial companies listed in Amman Bursa. International Journal of Economics and Financial Issues, 6(2), 435–441.
  21. Esokomi, E., & Mutua, M. (2018). Determinants of Financial Performance among savings and credit co-operative societies in Kakamega County Kenya. International Journal of Finance and Accounting, 3(1), 1–19. https://doi.org/10.47604/ijfa.583
  22. Frihardina, M., Adita, N., Marojahan, S. M., & Rosariandoko, W. (2023). Intellectual Capital and Performance in Indonesian Banking. E3S Web of Conferences, 426, 02103. https://doi.org/10.1051/e3sconf/202342602103
  23. Gaur, D., & Mohapatra, D. R. (2021). Non-performing Assets and Profitability: Case of Indian Banking Sector. Vision: The Journal of Business Perspective, 25(2), 180–191. https://doi.org/10.1177/0972262920914106
  24. Guallpa Guamán, A., & Urbina-Poveda, M. A. (2021). Determinants of financial performance of credit unions in Ecuador (Spanish). Revista Economía y Política, 34, 112–129.
  25. Hausman, J. A. (1978). Specification Test in Econometrics. Econometrica, 46(6), 1251–1271.
  26. Hersugondo, H., Anjani, N., & Pamungkas, I. D. (2021). The Role of Non-Performing Asset, Capital, Adequacy and Insolvency Risk on Bank Performance: A Case Study in Indonesia. Journal of Asian Finance, Economics and Business, 8(3), 319–329. https://doi.org/10.13106/jafeb.2021.vol8.no3.0319
  27. Jiunn, Y. P., Devinaga, R., Yen, Y. Y., et al. (2018). The macroeconomic determinants of foreign bank’s profitability in Malaysia. International Journal of Engineering and Technology (UAE), 7(3), 152–160. https://doi.org/10.14419/ijet.v7i3.21.17153
  28. Knezevic, A., & Dobromirov, D. (2016). The determinants of Serbian banking industry profitability. Economic Research-Ekonomska Istrazivanja, 29(1), 459–474. https://doi.org/10.1080/1331677X.2016.1174390
  29. Lal, T. (2018). Impact of financial inclusion on poverty alleviation through cooperative banks. International Journal of Social Economics, 45(5), 808–828. https://doi.org/10.1108/IJSE-05-2017-0194
  30. Madugu, A. H., Ibrahim, M., & Amoah, J. O. (2020). Differential effects of credit risk and capital adequacy ratio on profitability of the domestic banking sector in Ghana. Transnational Corporations Review, 12(1), 37–52. https://doi.org/10.1080/19186444.2019.1704582
  31. Maia, S. C., de Benedicto, G. C., do Prado, J. W., et al. (2016). Mapping the literature on credit unions: A bibliometric investigation grounded in Scopus and Web of Science. Annals of Public and Cooperative Economics, 18(2), 1–15. https://doi.org/10.1007/BF02717304
  32. Martínez-Campillo, A., Fernández-Santos, Y., & Sierra-Fernández, M. del P. (2017). Technical efficiency in Spanish credit unions: An approach to the impact of the crisis (Spanish). Revista Espanola de Financiacion y Contabilidad, 46(4), 484–506. https://doi.org/10.1080/02102412.2017.1288951
  33. Mckillop, D., & Wilson, J. O. S. (2011). Credit unions: A theoretical and empirical overview. Financial Markets, Institutions and Instruments, 20(3), 79–123. https://doi.org/10.1111/j.1468-0416.2011.00166.x
  34. Milojević, S., Milašinović, M., Mitrović, A., et al. (2023). Board Gender Diversity and Banks Profitability for Business Viability: Evidence from Serbia. Sustainability (Switzerland), 15(13). https://doi.org/10.3390/su151310501
  35. Mora Riofrío, J. (2017). Efficiency Study of the Private Banking System, Popular and Solidarity System of Ecuador: Year 2011–2016 (Spanish). Publicando, 4(13), 274–293.
  36. Muhammad, N., Alwi, S. F. S., & Muhammad, N. (2020). Credit management in full-fledged Islamic bank and Islamic banking window: Towards achieving Maqasid Al-Shariah. International Journal of Financial Research, 11(3), 92–99. https://doi.org/10.5430/ijfr.v11n3p92
  37. Neely, M. C., & Wheelock, D. C. (1997). Why Does Bank Performance Vary Across States? ICPSR - Interuniversity Consortium for Political and Social Research. https://doi.org/10.3886/ICPSR01174.V1
  38. Nimer, M. Al, Warrad, L., & Omari, R. Al. (2015). The Impact of Liquidity on Jordanian Banks Profitability through Return on Assets. European Journal of Business and Management, 7(7), 229–233.
  39. Obamuyi, T. M. (2013). Determinants of Banks’ Profitability in a Developing Economy: Evidence from Nigeria. Organizations and Markets in Emerging Economies, 4(2), 97–111. https://doi.org/10.15388/omee.2013.4.2.14251
  40. Park, C. Y., & Mercado, R. V. J. (2018). Financial Inclusion: New Measurement and Cross-Country Impact Assessment adb economics working paper series Financial Inclusion: New Measurement and Cross-Country. Asian Development Bank Working Paper Series, 539, 1–36.
  41. Parra, J. F. (2011). Determinants of the probability of new company closures in Bogota (Spanish). Revista Facultad de Ciencias Económicas, 19(1), 27–53. https://doi.org/10.18359/rfce.2259
  42. Parvin, S., Chowdhury, A. N. M. M. H., Siddiqua, A., et al. (2019). Effect of Liquidity and Bank Size on the Profitability of Commercial Banks in Bangladesh. Asian Business Review, 9(1), 7–10. https://doi.org/10.18034/abr.v9i1.219
  43. Pille, P., & Paradi, J. C. (2002). Financial performance analysis of Ontario (Canada) Credit Unions: An application of DEA in the regulatory environment. European Journal of Operational Research, 139(2), 339–350. https://doi.org/10.1016/S0377-2217(01)00359-9
  44. Priharta, A., & Gani, N. A. (2024). Determinants of bank profitability: Empirical evidence from Republic of Indonesia state-owned banks. Contaduría y Administración, 69(3), 49–65.
  45. Purmiyati, A., Handoyo, R. D., & Wisudanto. (2022). Technical efficiency analysis: Management factor as determinants of saving and credit cooperatives’ health. Journal of Co-Operative Organization and Management, 10(2), 100186. https://doi.org/10.1016/j.jcom.2022.100186
  46. Purohit, B. C., & Saravanan, S. (2018). Sustainability and Efficiency of Microfinance institutions in South Asia. Theoretical and Applied Economics, 25(4), 97–120.
  47. Qabajeh, M., Almajali, D., Natour, A. R. A., et al. (2023). The impact of operational risk on profitability: Evidence from banking sector in the MENA region. Uncertain Supply Chain Management, 11(4), 1459–1466. https://doi.org/10.5267/j.uscm.2023.7.023
  48. Qayyum, A., & Ahmed, M. (2018). Efficiency and Sustainability of Micro Finance Institutions in South Asia. Research Journal Social Science, 3(1), 1–34.
  49. Qehaja-Keka, V., Ahmeti, S., & Aliu, M. (2023). Bank Profitability Determinants: Evidence from Kosovo and Albania. Journal of Liberty and International Affairs, 9(2), 297–311.
  50. Radovanov, B., Milenković, N., Kalaš, B., et al. (2023). Do the Same Determinants Affect Banks’ Profitability and Liquidity? Evidence from West Balkan Countries Using a Panel Data Regression Analysis. Mathematics, 11(19), 4072. https://doi.org/10.3390/math11194072
  51. Rani, S., & Zergaw, N. (2017). Bank Specific, Industry Specific and macroeconomic determinants of bank profitability in Ethiopia. International Journal of Advanced research in Management and Social Science, 6(3), 74–96.
  52. Romero Espinosa, F. (2013). Financial variables determinants of business failure for small and medium-sized enterprises in Colombia: analysis under Logit model (Spanish). Pensamiento & Gestion, 34, 235–277.
  53. Saleh, B. A., & Paz, V. (2023). Credit risk management and profitability: Evidence from Palestinian banks. Banks and Bank Systems, 18(3), 25–34. https://doi.org/10.21511/bbs.18(3).2023.03
  54. Schwarz, G. (1978). Estimating the Dimension of a Model. The Annals of Statistics, 6(2), 461–464.
  55. Servin, R., Lensink, R., & van den Berg, M. (2012). Ownership and technical efficiency of microfinance institutions: Empirical evidence from Latin America. Journal of Banking and Finance, 36(7), 2136–2144. https://doi.org/10.1016/0965-8564(96)00006-7
  56. Shahnia, C., Purnamasari, E. D., Hakim, L., & Endri, E. (2020). Determinant of profitability: Evidence from trading, service and investment companies in Indonesia. Accounting, 6(5), 787–794. https://doi.org/10.5267/j.ac.2020.6.004
  57. Sheikhdon, A. A. (2016). Effect of Liquidity Management on Financial Perfomance of Commercial Banks in Mogadishu, Somalia Ali. International Journal for Research in Business, Management and Accounting, 6(2), 1–24.
  58. Sobol, I., Dopierala, L., & Wysinski, P. (2023). Is the profitability of Islamic and conventional banks driven by the same factors?—A study of banking in the Middle East. PloS one, 18(8), 1–32. https://doi.org/10.1371/journal.pone.0289264
  59. Subbarayan, A., Albert Antony Raj, S., & Jothikumar, J. (2017). Determinants of Public and Private Sector Bank’s in India: A discriminant model. International Journal of Applied Business and Economic Research, 15(21), 143–153.
  60. Takahashi, F. L., & Vasconcelos, M. R. (2024). Bank efficiency and undesirable output: An analysis of non-performing loans in the Brazilian banking sector. Finance Research Letters, 59, 104651. https://doi.org/10.1016/j.frl.2023.104651
  61. Teixeira Trindade, M., Ferreira Filho, F. de A., & Bialoskorski Neto, S. (2010). Brazilian credi cooperatives and financial banks: a ten years performance comparison. Journal of Cooperative Studies, 43(1), 14–22.
  62. Torres-Inga, C. S., Velasco-Heras, C., Juana, A. J. A., et al. (2022). Technical Efficiency’s Nonparametric Analysis of Ecuadorian Saving and Credit Cooperatives before and during the Pandemic. Economies, 10(4), 82. https://doi.org/10.3390/economies10040082
  63. Unda, L. A., Ahmed, K., & Mather, P. R. (2019). Board characteristics and credit‐union performance. Accounting & Finance, 59(4), 2735–2764. https://doi.org/10.1111/acfi.12308
  64. Zambrano Farías, F., Rivera Naranjo, C. I., & Sánchez Pacheco, M. E. (2023). Profitability of MSMEs in the real estate sector in Ecuador (Spanish). Revista Venezolana de Gerencia, 28(103), 1021–1036. https://doi.org/10.52080/rvgluz.28.103.7
  65. Zambrano Farías, F. J., Martínez, M. del C. V., & Martín-Cervantes, P. A. (2022). Profitability determinants of the natural stone industry: Evidence from Spain and Italy. PLOS ONE, 17(12), e0276885. https://doi.org/10.1371/journal.pone.0276885
  66. Zambrano Farías, F. J., Sánchez Pacheco, M. E., & Valls Martínez, M. del C. (2021). Factors Explaining the Business Survival of MSMEs in Ecuador (Spanish). Studies of Applied Economics, 39(8). https://doi.org/10.25115/eea.v39i8.4061
  67. Zancan, F., José Canassa, B., & Ribeiro do Valle, M. (2023). Capital structure in Brazilian credit unions: which factors are really determinants? Review of Business Management, 25(2), 199–214. https://doi.org/10.7819/rbgn.v25i2.4223
  68. Zheng, C., Rahman, M. A., Hossain, S., et al. (2023). Does Fintech-Driven Inclusive Finance Induce Bank Profitability? Empirical Evidence from Developing Countries. Journal of Risk and Financial Management, 16(10), 457. https://doi.org/10.3390/jrfm16100457


DOI: https://doi.org/10.24294/jipd.v8i8.6287

Refbacks

  • There are currently no refbacks.


Copyright (c) 2024 Carlos Gabriel Parrales Choez, Fernando José Zambrano Farías, María del Carmen Valls Martínez

License URL: https://creativecommons.org/licenses/by/4.0/

This site is licensed under a Creative Commons Attribution 4.0 International License.