Financial Leverage and its Relationship to Prediction of Financial Failure an Experimental Analytical Study of a Sample of Iraqi Private Banking Sector Banks for the Period 2014-2022

Abstract

The survival, continuity and growth of business organizations, whether they are productive or service, such as financial institutions, including (banks) in their environments, is attributed to the extent of their success or failure in their commercial activities due to the dynamic and evolving environment produced by globalization, as well as the policies related to financial liberalization and openness, so it has become imperative for the managements of those banks to It works to face these financial challenges and risks, represented by the increase in its fixed costs in its productive activities, as well as the lack of funds necessary to meet its obligations towards its creditors, which forces it to take the right decisions to enhance its financial position, including the use of financial leverage to rely on public debt funds in its business to achieve its successes by entering investment projects and generating Profits for their owners to cover their fixed costs and pay their dues to creditors, and it is no secret that the process of expanding the debt without well-studied plans will lead to bankruptcy and then to its financial failure soon, and the process of predicting the financial failure of financial institutions is necessary due to the benefits it achieves that make benefiting from these effects The negative and economic effects of these challenges as a warning bell for the work of the departments of those banks.Among those methods and means taken by its departments is the use of the Altman (1968) model, which adopted the mathematical formula (z-score) through its application to some financial ratios. The study relied on conducting two processes of analysis and testing on the Bank of Baghdad of the Iraqi private banking sector for the purpose of determining the extent of its success, survival, growth and continuity in its work environment or failure. It included the financial and statistical analyzes of its data for the period from (2014-2022). After completing the two analyzes and testing, a number of conclusions were drawn up, the most prominent of which was the existence of a good significant relationship between the two variables (financial leverage and prediction of financial failure). The study came out with it, perhaps the most important of which are two basic aspects: the first is the need for banks to adopt plans that work to cover their credit activities in an efficient manner that works to make the most of their assets and that they do not use financial leverage except within certain limits (when exposed to financial hardship) that would reduce their fixed costs and generate It has profits to cover the resulting interests of loans and advances and to obtain profits for its permanence and growth in the work environment, and if it expands in the public debt, it will lead to failure, and the second is that its plans include using the aforementioned model to know the strength or weakness of its credit position to be remedied.