The Impact of Accounting Measurement of Credit Asset Quality on the Financial Performance of the Libyan Banking Sector: An Analytical Study for the Period (2008–2024)

Abstract

This study aims to analyze the impact of the accounting measurement of credit asset quality on financial performance in the Libyan banking sector over the period 2008–2024, in light of the economic and institutional challenges faced by the sector. The study is based on annual time-series data derived from the official reports of the Central Bank of Libya. Credit asset quality is measured using two indicators: the ratio of loan loss provisions to total loans (LLP/TL) and the ratio of loan loss provisions to non-performing loans (LLP/NPL). Financial performance is measured by return on assets (ROA) and return on equity (ROE). To achieve the study’s objectives, the autoregressive distributed lag (ARDL) model and the nonlinear ARDL (NARDL) model are employed to examine both short- and long-run relationships and to identify asymmetric responses of financial performance to changes in asset quality. The results reveal the existence of a long-run equilibrium relationship between asset quality and financial performance, with a positive and statistically significant effect of asset quality on return on equity, compared to a weak and unstable effect on return on assets. Furthermore, the nonlinear model results indicate significant asymmetry in the impact, as positive shocks to asset quality exert a stronger effect than negative shocks, particularly on ROE. The study recommends strengthening accounting measurement policies for loan loss provisions and improving the management of non-performing loans in order to enhance financial stability and efficiency in the Libyan banking sector.