The Influence of Market Risk and Credit Risk on Financial Performance in the Banking Industry

Abstract

This study aims to analyze the influence of market risk and credit risk on the financial performance of banking institutions using a narrative study approach based on library research. The data were collected from Google Scholar–indexed journals and official financial reports published over the last five years. Market risk, measured by the Net Interest Margin, and credit risk, measured by the Non-Performing Loan ratio, are examined in relation to financial performance, proxied by the Return on Assets. The findings indicate that both market risk and credit risk negatively affect bank profitability, where financial performance decreases as interest rate fluctuations intensify and the volume of bad loans increases. Moreover, the interaction between these risks occurs simultaneously, suggesting that integrated risk management is essential to maintain bank stability and profitability. Theoretically, this study contributes to expanding the understanding of the interrelationship among key financial risks, while practically it offers valuable insights for banking practitioners and regulators to strengthen risk mitigation strategies, enhance asset management efficiency, and ensure long-term financial sustainability in a volatile economic environment