Amin M.A.M., Sanusi N.A., Kusairi S., Abdallah Z.M.
Amin, M.A.M., Malaysia; Sanusi, N.A., Malaysia; Kusairi, S., Malaysia; Abdallah, Z.M., Tanzania
Studies on the financial risks and financial performance of banks are very limited, especially in Tanzania. This study aims to examine the simultaneous influence of the financial risks and financial performance of commercial banks in Tanzania. The financial performance under consideration is return on assets and return on equity, while financial risk is the average of financial risks. The study employs the instrumental variable regression of fixed effect to solve simultaneous equations by two-stage least squares. By using unbalanced panel data of 21 banks from 2003 to 2012, the results show that by applying both ROA and ROE in the performance equation, financial risk is significant. Furthermore, by considering financial performance in the risk equation as endogenous, both ROA and ROE are significant. The implication of this result is that the inverse relation of financial risk and performance cannot be avoided; hence, the commercial banks together with the bank supervisors should make a trade-off between risk and performance. © Mohamad Anuar Md Amin, Nur Azura Sanusi, Suhal Kusairi, Zuhura Mohamed Abdallah, 2014.