Threshold Effects of Income Diversification, Sukuk, and Banking Risks on Banking System Performance with Emphasis on the Global Health Crisis: Evidence from Banks Listed on the Tehran Stock Exchange

Abstract

Sustainable growth and development constitute one of the principal economic aspirations of every country. Economists have consistently considered it their responsibility to examine the conditions that encourage economic agents to undertake investment across different times and places. Capital is one of the principal inputs of production. In the past, capital was primarily conceptualized in terms of tools and equipment used in human labor. Today, however, capital is also regarded as the accumulation of liquidity required to initiate or continue an economic activity. Governments and business enterprises require capital to initiate or sustain economic activities. Such capital may be provided through government assets and owners’ equity or obtained through the financing process. Financing is one of the major topics in financial economics. Various financing methods and instruments are available, each possessing its own characteristics and properties. Depending on financing needs, financial capacity, the circumstances of economic enterprises, and differences in individuals’ investment behavior and risk exposure, these instruments and methods are developed and employed. One important financing method is asset securitization. This study investigates the threshold effects of income diversification, Sukuk, and banking risks on banking system performance, with emphasis on the global health crisis, using banks listed on the Tehran Stock Exchange as the case study. In terms of purpose, the study is applied research, while in terms of nature, it is descriptive-analytical and falls within the category of ex post facto research. The statistical population consists of banks listed on the Tehran Stock Exchange, from which a number of banks were selected for analysis using the Panel Smooth Transition Regression (PSTR) threshold model. The study period is annual and covers 2013–2024 for listed banks. The estimation results for the linear component of the banking performance function based on return on assets (ROA), corresponding to the first regime, indicate that the global financial crisis, liquidity risk, and credit risk negatively affect banking performance. The estimation results for the nonlinear component of the model, corresponding to the second regime, indicate that Sukuk, income diversification, and capital adequacy affect banking performance. The relationships are modeled using a PSTR model in which income diversification serves as the transition variable. The estimation results for the nonlinear component of the banking performance function based on return on equity (ROE), corresponding to the second regime, show that Sukuk, income diversification, and the capital adequacy ratio have positive and statistically significant effects on banking performance. In contrast, the global health crisis, liquidity risk, and credit risk negatively affect banking performance and have contributed to a decline in the performance of the selected banks.