Dynamic Modeling of Financial Health in Emerging Banking Systems: Evidence from Iraqi Banks Using GMM and Panel Data Techniques
Keywords:
Financial Health, Iraqi Banks, Dynamic Panel Data, GMM, Credit Risk, Emerging EconomiesAbstract
This study aimed to develop and empirically test a dynamic econometric model for evaluating the financial health of Iraqi banks by integrating bank-specific financial indicators and macroeconomic determinants within a panel data framework. The study employed a quantitative, applied, and longitudinal panel-data design using balanced annual data from Iraqi commercial banks over the period 2010–2024. Financial health was proxied primarily through credit-risk indicators, particularly the non-performing loan ratio. The explanatory variables included bank-level indicators such as capital adequacy, profitability, liquidity, and portfolio concentration, together with macroeconomic variables including inflation, GDP growth, and oil price volatility. To ensure robust estimation, the analysis applied Pooled Ordinary Least Squares, Fixed Effects, Random Effects, and Generalized Method of Moments models. The GMM approach was used to control for dynamic persistence, unobserved heterogeneity, simultaneity, and potential endogeneity in the relationship between banking indicators and financial health. The inferential results indicated that financial health in Iraqi banks is dynamically persistent, as the lagged dependent variable remained statistically significant in the GMM model. Non-performing loans had a significant negative effect on financial stability, confirming the central role of credit risk in weakening banking soundness. Capital adequacy and profitability showed significant positive effects, suggesting that better capitalization and stronger earnings capacity improve bank resilience. Macroeconomic variables, particularly oil price volatility, significantly improved the explanatory power of the model, demonstrating the vulnerability of Iraqi banks to external macroeconomic shocks. Overall, the dynamic GMM model provided stronger inferential performance than static panel models. The findings confirm that financial health in Iraqi banks cannot be adequately assessed through static accounting indicators alone. A dynamic panel-data approach provides a more accurate and forward-looking understanding of banking fragility in oil-dependent emerging economies. The results highlight the need for Iraqi regulators and bank managers to strengthen credit-risk monitoring, enhance capital buffers, improve profitability, and incorporate macroeconomic stress indicators into supervisory frameworks.
References
[1] P. S. Rose and S. C. Hudgins, Bank Management and Financial Services, 9th ed. New York: McGraw-Hill Education (in English), 2015.
[2] V. V. Acharya, L. H. Pedersen, T. Philippon, and M. Richardson, "Measuring Systemic Risk," (in English), Review of Financial Studies, vol. 23, no. 7, pp. 2685-2732, 2010, doi: 10.26509/frbc-wp-201002.
[3] P. P. Athanasoglou, S. N. Brissimis, and M. D. Delis, "Bank-Specific, Industry-Specific and Macroeconomic Determinants of Bank Profitability," (in English), Journal of International Financial Markets, Institutions and Money, vol. 18, no. 2, pp. 121-136, 2008, doi: 10.1016/j.intfin.2006.07.001.
[4] I. Love and R. Turk Ariss, "Macro-Financial Linkages in Egypt: A Panel Analysis of Economic Shocks and Loan Portfolio Quality," (in English), Journal of International Financial Markets, Institutions and Money, vol. 28, no. 1, pp. 158-181, 2014, doi: 10.1016/j.intfin.2013.10.006.
[5] R. La Porta, F. Lopez-de-Silanes, A. Shleifer, and R. Vishny, "Law and Finance," (in English), Journal of Political Economy, vol. 106, no. 6, pp. 1113-1155, 1998, doi: 10.1086/250042.
[6] A. Demirguc-Kunt and E. Detragiache, "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," (in English), Journal of Monetary Economics, vol. 49, no. 7, pp. 1373-1406, 2002, doi: 10.1016/S0304-3932(02)00171-X.
[7] R. S. Barr, L. M. Seiford, and T. F. Siems, "Forecasting Bank Failure: A Non-Parametric Frontier Estimation Approach," (in English), Journal of Economics and Business, vol. 54, no. 3, pp. 275-291, 2002.
[8] M. J. Flannery, "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," (in English), Journal of Money, Credit and Banking, vol. 30, no. 3, pp. 273-305, 1998, doi: 10.2307/2601102.
[9] A. Aidi, T. W. Setiawan, A. Junaidi, A. Budiwaluyo, and R. Agoestyowati, "Analysis of Financial Health Level Using the Z-Score (Altman) Method in Transportation Companies Listed on the Indonesia Stock Exchange for the 2019-2021 Period," Ilomata International Journal of Tax and Accounting, vol. 3, no. 4, pp. 461-473, 2022, doi: 10.52728/ijtc.v3i4.605.
[10] K. A. Fachrudin, "Insolvency and Financial Health Prediction Model for the Listed Companies on the Indonesia Stock Exchange," Jurnal Akuntansi & Auditing Indonesia, vol. 25, no. 1, pp. 24-32, 2021, doi: 10.20885/jaai.vol25.iss1.art3.
[11] D. Karpac and V. Bartošová, "Prediction of Financial Health of Business Entities of Selected Sector Using Balance Analysis II. By Rudolf Doucha and Verification of Its Predictive Ability Through ROC," SHS Web of Conferences, vol. 91, p. 01006, 2021, doi: 10.1051/shsconf/20219101006.
[12] R. Vavrek, I. Kravčáková Vozárová, and R. Kotulič, "Evaluating the financial health of agricultural enterprises in the conditions of the Slovak Republic using bankruptcy models," Agriculture, vol. 11, no. 3, p. 242, 2021. [Online]. Available: https://doi.org/10.3390/agriculture11030242.
[13] B. G. Clarkson, D. Plumley, and R. Wilson, "Money troubles and problems ahead? The financial health of professional women's football clubs in England," Sport, Business and Management: An International Journal, vol. 13, no. 5, pp. 563-585, 2023, doi: 10.1108/SBM-10-2022-0088.
[14] S. Parker, N. Castillo, T. Garon, and R. Levy, Eight ways to measure financial health. Chicago: Center for Financial Services Innovation, 2016.
[15] B. Klontz, R. Kahler, and T. Klontz, Facilitating Financial Health: Tools for Financial Planners, Coaches, and Therapists, 2nd ed. The National Underwriter Company (in English), 2016.
[16] B. Pinder-Ayres, "Planning the Financial Health of the Practice," pp. 21-29, 2019, doi: 10.4324/9780429346576-3.
[17] M. Barati, M. T. Qandahari, and M. Mohtari, "Identifying financial health indicators based on good governance in government organizations," Accounting and Management Perspectives, vol. 7, no. 89, pp. 130-139, 2024. [Online]. Available: https://www.jamv.ir/article_198075.html.
[18] M. Papík and L. Papíková, "Impact of Gender Diversity Boards on Financial Health SMEs," in International Conference on Applied Economics: Cham: Springer Nature Switzerland, 2023, pp. 729-740.
[19] Y. Zhang, K. Li, and J. Huang, "Do Female-Headed Households Have Poorer Financial Health Compared to Male-Headed Households? Evidence From China," International Journal of Population Studies, vol. 11, no. 2, p. 95, 2024, doi: 10.36922/ijps.4403.
[20] R. Mom and N. T. P. Linh, "The Role of Financial Health in Predicting Long-Term Performance in Selected Industries in Thailand," Hum. Behav. Dev. Soc., vol. 26, no. 2, pp. 329-343, 2025, doi: 10.62370/hbds.v26i2.281509.
[21] R. Aggarwal, L. Klapper, and P. D. Wysocki, "Portfolio Preferences of Foreign Institutional Investors," (in English), Journal of Banking & Finance, vol. 33, no. 3, pp. 497-510, 2009.
[22] T. Beck, H. Degryse, and C. Kneer, "Is More Finance Better? Disentangling Intermediation and Size Effects of Financial Systems," (in English), Journal of Financial Stability, vol. 10, no. 1, pp. 50-64, 2013, doi: 10.1016/j.jfs.2013.03.005.
Downloads
Published
Submitted
Revised
Accepted
Issue
Section
License
Copyright (c) 2025 Hussein Kamel Hussein, Ezatollah Abbasian, Islam Fakher (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
