The Effect of Market Risk and Credit Risk on Banking Profitability: A Conceptual Analysis

Abstract

This study aims to examine the impact of market risk and credit risk on banking profitability over the past five years. It applies a descriptive qualitative method using a literature review approach that analyzes various studies indexed in Google Scholar. Market risk is represented by the Net Interest Margin, while credit risk is measured using the Non-Performing Loan ratio. The findings reveal that Net Interest Margin positively influences Return on Assets, indicating the bank’s efficiency in managing productive assets to generate net interest income. Conversely, non-performing loans negatively affects profitability, as higher non-performing loans deteriorate asset quality and increase the burden of loss provisions. However, the strength of the relationship between these variables depends on economic conditions, monetary policy, and the financial structure of each bank. This study underscores the importance of integrating market and credit risk management as key strategies to maintain financial stability, enhance long-term profitability, and strengthen the banking sector’s resilience to economic fluctuations. Furthermore, the results offer both theoretical contributions and practical implications for policymakers and banking managers in optimizing effective and sustainable risk control systems.