The impact of the use of derivative products on the financial performance of participation banks

Use of derivative products equaled the size of assets in the banking sector in 2019. Banks have been increasingly using derivative products to diversify the funding structures and establish new income sources. The dissertation is based on the premise that derivative products should be incentivized in order to increase the proportion of participation banks in the banking sector. This study investigates the impact of using derivative products on the performance of participation banks. The study builds a future perspective by analyzing the derivative products in the balance sheets of participation banks to inspect their impact on financial performance metrics such as asset quality, capital adequacy, profitability, and liquidity. The study revealed positive results on the CAMELS performance criteria involving asset quality, capital adequacy, profitability, and liquidity. We observe that the increase in use of derivative products correlates positively with the asset quality and capital adequacy of participation banks. Although derivative products do not have a positive impact on liquidity and profitability, we observe that use of derivative products triggers other treasury operations, especially by positively impacting the acquisition of international customers.