The Role of Risk Management on Banking Profitabilitythrough ROA

Abstract

The banking sector plays a strategic role in the economy through its intermediation function, which connects surplus units with deficit units. Nevertheless, banking activities are continuously exposed to various risks, such as credit, liquidity, operational, and market risks, all of which can significantly influence financial performance. This study aims to analyze the relationship between risk management and bank profitability, particularly Return on Assets (ROA), by conducting a literature review of the most recent empirical research. The findings highlight that the effectiveness of risk management has a significant impact on bank profitability. Uncontrolled risks may reduce ROA through an increase in Non-Performing Loans (NPLs), operational expenses, and reputational losses. Conversely, sound risk governance practices strengthen financial stability, enhance customer trust, and improve the bank’s competitive position in the market. These results emphasize the importance of implementing integrated risk management that aligns with business strategies to ensure sustainability and to improve banking performance.