As the toxic asset of the bank increases, the bank's profitability decreases. Since toxic asset has an inverse relationship with capital, the sensitivity to change the capital of the bank positively affects the bank’s profitability (Roman & Danuletiu, 2013). Lowering the bank’s impaired asset, specialising in service quality and increasing liquidity helped to maintain bank performance. AIRCABS causes the bank not to hold customer’s fund as an asset on its balance sheet and avoids bank toxic asset by rendering its services as an agent of the fund provider after the loan has been disbursed to an entrepreneur. So, toxic asset does not have a relationship with capital and profitability of an agent bank.
The bank faces a solvency problem as a result of holding toxic or impaired asset, which was the source of the financial crisis. As toxic asset of the bank increases, bank profitability
decreases and distorts bank competition among financial institutions. Kadioglu, Telceken and Ocal (2017) found a significant relationship between non-performing loans and bank
profitability. The higher the non-performing loan the lower is the bank profitability and return on equity. The problem of banks holding toxic or impaired asset that lead to insolvency and
liquidity problems has not yet been solved. AIRCABS enables banks to transfer credit risk to an investor and entrepreneur without considering the fund disbursed as an asset to avoid the impact of bank toxic asset or impaired asset on the agent bank’s profitability and sustainability in the market.
In a traditional bank, non-performing asset has a negative effect on the bank’s profitability and capital (Olalekan & Adeyinka, 2013). As the bank's exposure to non-performing asset increased the bank capital and profitability decreased. Since IRCABS administers investor loan funding to the entrepreneur, the bank does not hold disbursed funds and interest rate commission of the agent bank is not affected by impaired or toxic asset, which indirectly enhances the bank’s capital inadequacy.
Low credit demand, higher capitalisation and a significant increased share of non-performing loans pressure banks’ interest rate margin down, which in turn decrease bank profitability (Dumicic & Ridzak, 2013). Non-performing asset negatively affected the bank's profitability. An interest rate commission agent collected sustainable interest rate commission, which indirectly
increased the agent bank profitability and capital. Saksonova (2014) found that net interest margin (NIM) is the most appropriate criterion for evaluating the effectiveness and stability of banks’ operations and is one of the most important criteria for asset structure optimisation. The net interest rate margin of AIRCABS is interest rate commission, which can be an appropriate criterion for evaluating the effectiveness and stability of banks’ operations and for asset structure optimisation.
To maintain sustainability of the bank, banks must manage their disbursed loan to their borrower to avoid non-performing asset. The major factors that led borrowers to default loans were external factors such as natural disasters, government policy and internal factors such as the borrower’s character. Ogeisia, Alala, Musiega and Manase (2014) found that borrowers’ character greatly influenced bank loan repayment. Diversification of disbursed loans outside the intended purpose stated in a loan contract by debtor led the loan to get into non-performing asset. However, an interest rate commission agent bank manages entrepreneur risk related to credit and liquidity using cutting edge risk predicting staff who indirectly enable the agent bank to manage the entrepreneurial character to collect loan repayment consistently. Keeping other factors constant, unless banks and government follow a new policy to avoid problems related to impaired asset, the bank’s credit risk and liquidity crunch are enhanced in the short or long run. To remove toxic asset from a bank’s balance sheet AIRCABS administers investor’s loan funding without holding loans as an asset on the balance sheet. This helps to solve banks' chronic problems, credit risk and liquidity crunch.
In order to refill the liquidity gap, banks lend funds to similar financial institutions to develop an interbank market without considering their counterparty losses and credit worthiness and exposure to toxic asset. Asset contagion can be avoided by adopting AIRCABS, which avoids inter-bank loans market by mobilising loan and deposit directly from the society by dealing investor’s fund to entrepreneurs and administering the fund after disbursement on behalf of an investor.
The bank faces a solvency problem as a result of holding toxic or impaired asset because it can be the source of a financial crisis. Asset contagion that can be transferred to countries across borders can be created by lending and borrowing among financial institutions without in-depth study of counterparty risks. Dungey and Gajurel (2015) found that banking crisis shocks are
transmitted from a foreign jurisdiction via idiosyncratic contagion, which increases the likelihood of a systemic crisis in the domestic banking system by almost 37 per cent, whereas increased exposure via systematic contagion does not necessarily destabilise the domestic banking system. As the toxic asset of the bank increases the bank's profitability decreases. Since toxic asset has an inverse relationship with capital, the sensitivity to change the capital of the bank will positively affect the bank’s profitability. Applying AIRCABS therefore helps to stabilise the domestic banking system.
Proper management of the bank loans and deposits from conception to repayment leads to profit maximisation and reduces bank toxic asset as aimed for earlier. According to traditional banking theory, a bank collects deposits from customers to disburse it to entrepreneurs to get a lucrative interest and holds the disbursed loan as its own asset on its balance sheet. This increases credit risk and liquidity risk. The source of the bank credit crunch is that the bank bears the risk associated with credit and liquidity problems. To solve these banking problems the bank should work as a financier and commission agent bank, which will avoid bank toxic asset and liquidity problem. Applying AIRCABS increases bank profitability and avoids bank toxic asset. This increases bank solvency by managing customer funds for customer benefit and mobilising deposit incentivising deposit accounts with an interest rate.
An interest rate commission agent bank is a system a bank can adopt to manage the investor loan funding to an entrepreneur by collecting reasonable interest rate commission from investor credit price. Therefore, the bank as an agent holds the disbursed loan from investor deposit to the entrepreneur deposit account on the liability side of the balance sheet and the net effect of the loan transaction on the balance sheet will be nil. Since the agent bank works for the mutual benefit of the bank, investor and entrepreneur and transfers credit and liquidity risks to investors and entrepreneurs, the bank toxic asset will be alleviated.
Banks can avoid bank toxic or non-performing asset or contagion and liquidity problem permanently by transferring credit risk to an investor and entrepreneur and by mobilising loan and deposit using investor’s loan funding and discrete market interest rate incentive for deposit mobilisation respectively. The selected commission agent bank can disburse loans to entrepreneurs directly using stable fund if the individual depositor’s interest is to get credit price instead of discrete market deposit interest rate incentive.