One of the most important determinants of monetary institutions' investment alternatives and techniques is the financial surroundings, in particular for the banking industry, which bureaucracy the muse of any country's economic and economic structure.

It is now essential for banks to implement adaptable and successful investment strategies that enable them to regulate to these tendencies and generate lengthy-time period returns on capital invested, given the rising volatility of financial markets and political and financial shifts.

An ideal investment method way deciding on the correct allocation of assets across various investment opportunities, permitting banks to achieve the highest viable returns with the lowest diploma of hazard. This calls for a radical knowledge of the monetary fluctuations that can affect asset performance, consisting of changes in hobby charges, alternate charge fluctuations, stock and bond rate fluctuations, and adjustments in economic and economic policies.

To guarantee sustainable monetary overall performance, banks need to create investment models primarily based on sophisticated financial analysis, dynamic risk management, and the first-rate viable use of liquidity, profitability, and capital adequacy ratios. In Iraq, the banking quarter faces huge demanding situations, together with political and financial instability, fluctuating oil costs that affect market liquidity, and excessive tiers of monetary chance.

In order to enhance Iraqi banks' potential to bear those difficulties and achieve sustainable growth, it's miles essential to analyze the fine investment strategies that they are able to use. This have a look at is based on an carried-out analysis of numerous Iraqi banks, assessing important economic metrics like net strong financing ratios, liquidity ratios, profitability ratios, and capital adequacy ratios. The purpose is to explore the performance of these banks in handling their property and fairness in a volatile economic environment.

The research targets to offer sensible recommendations that help banks improve their funding techniques by means of improving danger control, optimizing the usage of monetary assets, and attaining a stability between returns and dangers. The studies additionally seek to offer a systematic basis that contributes to assisting funding choice-making by means of Iraqi banks and improving their position in assisting countrywide financial development.

Section One/Research Methodology

First: The Research Problem: Iraqi banks face significant challenges in achieving financial stability amidst the volatility of a changing and unstable financial environment due to internal and external economic and political factors. Banks are unable to make successful investment decisions that lower financial risks and improve the sustainability of banking performance because it is unclear how various investment strategies relate to the volatility of the financial environment. Therefore, the challenge is to investigate how much the financial environment volatility in Iraqi banks is influenced by optimal investment strategies and their financial components, such as liquidity, profitability, capital adequacy, and stable funding.

• Is there a significant impact of optimal investment strategies on financial environment volatility in Iraqi banks?

• To what extent does the liquidity ratio affect financial environment volatility in Iraqi banks?

• How does the rate of return on assets affect financial environment stability?

• Is capital adequacy an influential factor in reducing financial environment volatility?

• What is the role of the net stable funding ratio (NSFR) in stabilizing the financial environment of Iraqi banks?

Second: The Importance of the Research

• This research adds new knowledge about the relationship between optimal investment strategies and financial environment volatility in the Iraqi banking sector, strengthening the scientific literature in the field of financial management and investment.

• The research provides recommendations for Iraqi banks to help them design and develop investment strategies that reduce financial environment volatility, thereby improving financial performance and enhancing economic stability.

• The research contributes to supporting overall financial stability, which plays a pivotal role in attracting investment and stimulating national economic growth.

Third: Research Objectives

• Study the impact of optimal investment strategies on financial environment volatility in Iraqi banks.

• Assess how the liquidity ratio affects the volatility of the banking financial environment.

• Analyze the role of the return on assets ratio in reducing financial environment volatility.

• Measure the impact of capital adequacy on financial environment stability.

• Identify the importance of the net stable funding ratio (NSFR) in supporting financial environment stability.

Fourth: Research Hypotheses

Main Hypothesis:

"There is a significant impact of optimal investment strategies on the volatility of the financial environment in Iraqi banks."

Sub-Hypotheses:

• Hypothesis Number Sub-Hypothesis

• H1 The liquidity ratio has a significant positive impact on the volatility of the financial environment.

• H2 The return on assets ratio has a significant positive impact on the volatility of the financial environment.

• H3 Capital adequacy has a significant positive impact on the volatility of the financial environment.

• H4 The net stable funding ratio (NSFR) has a significant positive impact on the volatility of the financial environment.

Fifth: Research Methodology

The research relies on a descriptive analytical approach, collecting and analyzing the financial data of selected Iraqi banks during the period from 2020 to 2023. The research also uses appropriate statistical tools to analyze key financial indicators and evaluate the adopted investment strategies, with the aim of providing a scientific interpretation based on real data.

Sixth: Research Population and Sample

• Research Population: Includes all banks operating in Iraq.

• Research Sample: A sample of five Iraqi banks representing the Islamic and commercial banking sector was selected: Al-Nahrain Islamic Bank, Al-Mashreq Arab Islamic Bank for Investment and Finance, Iraqi Islamic Bank for Investment and Development, Amin Al-Iraq Bank for Investment and Finance, and the National Islamic Bank. This sample was selected based on the availability and comprehensiveness of financial data to represent the reality of the banking sector in Iraq.

Seventh: Research Limits

• Spatial Limits: The research is limited to studying a sample of Iraqi banks, which were selected to reflect the reality of the banking sector within Iraq. The research does not include foreign banks or those operating outside Iraq.

• Time Limits: In order to track the effects of the changes in the financial environment during this phase, financial indicators were examined during the 2020–2023 time frame covered by the research.

• Objective Limits: The research focuses on analyzing investment strategies and their performance through specific financial indicators such as liquidity ratios, profitability, capital adequacy, and the net stable financing ratio.

Section Two/Optimal Investment Strategy in Light of Financial Environment Risks

First: Optimal Investment Strategy

The Concept of Optimal Investment: The process of distributing available financial resources in a way that maximizes return for a given level of risk or minimizes risk for a desirable return is known as optimal investment.  Using quantitative models like dynamic asset allocation and investment portfolio optimization, this process aims to strike the optimal balance between risks and returns [1,2]. Baltas defines optimal investment as utilizing quantitative models like stochastic programming to allocate investment resources in a way that maximizes expected return while minimizing future risks, particularly in markets that are extremely volatile [3]. 

The idea of optimal investment strategies and their varieties:

According to Bibin Qiu, choosing an investment portfolio that yields the maximum return for a given level of risk—or the lowest risk for a given level of expected return—is the process of developing an optimal investment strategy. This strategy is based on the principle of balancing return and risk through optimal asset diversification [4].

• Flexible Investment Strategy: This approach depends on making quick decisions about investments and allowing for expansion, cancellation, or postponement as needed [5].

• Diversification Strategy: Distributing investments across different sectors and projects to reduce the risks associated with a particular sector or project [1].

• Hedging Strategy: Using financial instruments or contracts to reduce risks arising from market or exchange rate fluctuations [6]. 

• Value-Based Investment Strategy: Selecting projects with relatively low valuations but sustainable growth potential [7].

• Long-Term Investment Strategy: Focusing investments on projects that generate consistent returns over the long term despite short-term market fluctuations [8].

• Risk-based investment strategy: Selecting investments based on an expected rate of return divided by the level of risk, ensuring a balance between profitability and risk reduction [9].

•  Sustainable investment strategy: Focusing on projects that consider environmental, social, and corporate governance (ESG) aspects, which are increasingly important in modern markets [10].              

Second: The Concept and Types of Financial Risks

• Concept: Financial risk is the potential for unfavorable financial outcomes, like capital or income loss, due to internal or external factors that negatively impact professional financial activities [11].

• Type: Financial risks refer to the potential for incurring financial losses due to fluctuations in asset prices, counterparty defaults on obligations, liquidity shortages, or other factors that affect the financial stability of an institution. These risks encompass various types, including [12].

• Credit Risk: One of the most significant risks that banks face is credit risk. It is described as the likelihood that a borrower won't be able to pay back a loan or adhere to the terms of the agreement [13].

• Market Risk: The Basel Committee defines market risk as the potential for losses resulting from shifts in the market prices of both on- and off-balance-sheet positions. Market risk is a major threat to banks due to fluctuations in interest rates, currencies, and stock prices [14].

• Liquidity Risk: Liquidity risk is defined as the bank's inability to finance its assets or meet short-term obligations without incurring substantial losses.

• Operational Risk:According to Basel II, operational risk is defined as losses resulting from internal failures in processes, systems, or personnel, or from external events.

• Interest Rate Risk: Interest rate risk arises from changes in interest rates that affect assets and liabilities recorded in the bank’s books.

• Concentration Risk: Concentration risk stems from excessive reliance on a single sector or entity, exposing the bank to significant losses in the event of disruption [15].

• Valuation Risk: Inaccurately valuing complex financial instruments can have a substantial effect on the capital of the bank and is known as valuation risk.

Third: Financial Risks in the Iraqi Banking Environment

• Credit risk is the financial risk that has the biggest influence on the banking environment in Iraq, according to recent studies,The main cause of this is the high loan repayment default rates brought on by erratic political and economic circumstances, which also cause banks to suffer direct financial losses and erode their capital base [16]. Furthermore, because banks have limited resources and struggle to meet their financial obligations on time, particularly during times of crisis, liquidity risk presents a serious challenge to them [17]. Operational risks also play an important role due to weak technological infrastructure and the potential presence of corruption in certain institutions [17]. Finally, systemic and political risks adversely impact the financial stability of banks, driven by persistent political and economic instability in Iraq [18].

Fourth: Optimal Investment Strategies in the Iraqi Banking Environment

Optimal investment in environments along with Iraq—characterized by economic and political demanding situations—requires a technique that bills for uncertainty, marketplace volatility, and institutional constraints. One of the most outstanding models followed in such environments is the bendy funding method. This method lets in investors to make dynamic funding decisions that respond to market adjustments and evolving monetary situations, in preference to relying totally on conventional funding fashions that assume solid parameters. Flexible funding techniques offer alternatives to defer, enlarge, or abandon investments based on newly to be had data, making them specifically appropriate for high-risk environments like Iraq. The most effective investment framework in emerging markets is usually primarily based at the real alternatives approach, which aids in efficiently managing uncertainty [5].

Section Three

• First: The study focuses on reading the monetary and investment overall performance signs of the chosen banks and assessing the efficiency of their investment management throughout intervals of volatility. The intention is to expand an most suitable investment strategy that aligns with the nature of the Iraqi financial surroundings and its demanding situations.

• First: Capital Adequacy Ratio: The capital adequacy ratio is one of the maximum critical regulatory indicators utilized by valuable banks to evaluate the banks' capacity to face up to potential risks, specifically within the context of financial marketplace fluctuations.

Capital Adequacy Ratio = (Regulatory Capital ÷ Risk-Weighted Assets) × 100%

The analysis of capital adequacy ratios for a sample of Iraqi banks revealed significant disparities in financial soundness levels during the period 2020–2023. Al-Mashriq Al-Arabi Islamic Bank and Al-Nahrain Islamic Bank recorded the highest ratios, exceeding 300% in 2020. However, these ratios gradually declined to below 160% in 2023, which may indicate an expansion in lending activities or an increase in high-risk assets, Meanwhile, Ameen Al-Iraq Bank maintained relatively stable ratios and showed a solid improvement in 2023 (261%), reflecting enhanced financial management performance. On the other hand, both the Iraqi Islamic Bank and the National Islamic Bank recorded low ratios, ranging between 34% and 64%. While these levels are considered acceptable by regulatory standards, they are low compared to other banks, indicating either weak capital levels or increased risk exposure, The overall average of capital adequacy ratios declined from 185.5% in 2020 to 128% in 2022, with a slight improvement in 2023. This decline reflects the impact of a volatile financial environment and underscores the need to reassess investment policies and capital structures, especially for banks with low ratios.

Second: Profitability Indicators

• Return on Assets (ROA):
  The Return on Assets (ROA) was analyzed as shown in Table (2):

• Profitability Indicators – A: Return on Assets (ROA)
  The Return on Assets (ROA) is one of the most important profitability indicators in financial analysis. It is used to measure how efficiently a bank utilizes its assets to generate profits.

ROA = (Net Profit ÷ Total Assets) × 100

This indicator shows how much profit banks generate for each dinar of assets they own. The higher the ratio, the more efficient the bank is at managing its assets to achieve returns.

The ROA data revealed a noticeable variation in the performance of Iraqi banks during the period 2020–2023. As shown in the table, the highest average ROA was recorded by the Iraqi Islamic Bank for Investment and Development, with an average of 1.97%, peaking at 3.59% in 2023. This reflects a high level of efficiency in asset utilization to generate profits, It was followed by Al-Mashriq Al-Arabi Islamic Bank with an average of 1.33%, showing a significant improvement in 2023 (3.16%), which indicates a major operational performance enhancement in recent years, especially after dropping to 0.21% in 2021, Al-Nahrain Islamic Bank showed relatively balanced performance with an average ROA of 0.81%, gradually improving from 0.55% in 2020 to 1.02% in 2023, indicating a steady improvement in asset utilization, In contrast, Ameen Al-Iraq Bank showed weak performance with a negative average (-0.13%), reaching its lowest point in 2020 at -1.66%, reflecting losses during that period despite a subsequent improvement in 2023 to 1.05%.

The National Islamic Bank achieved a low average (0.33%) with relatively stable performance, but still below the desired level for maximizing profitability, At the overall level, the average ROA for all banks reached 0.862%, which is a moderately acceptable profitability performance, though with clear disparities among banks in operational efficiency and asset management.

Table 1: The capital adequacy ratios analysis

Source: Based on published financial reports from the Iraq Stock Exchange

Table 2: Return on Assets (ROA)

Source: Based on published financial reports from the Iraq Stock Exchange

Table 3: Return on Equity (ROE)

Source: Based on published financial reports from the Iraq Stock Exchange

Table 4: Legal Liquidity Ratios

Source: Based on published financial reports from the Iraq Stock Exchange

Table 5: Net Stable Funding Ratios (NSFR)

Source: Based on published financial reports from the Iraq Stock Exchange.

Table 6: Testing the Research Hypotheses

Source: Prepared by the researchers based on SPSS v.25 results.

Third: Return on Equity (ROE): The Return on Equity (ROE) is one of the most important profitability indicators and is used to measure a bank's ability to generate profits from shareholders’ equity.

ROE = (Net Profit ÷ Shareholders’ Equity) × 100

This indicator shows the return shareholders receive for each dinar of their equity invested in the bank. The higher the ROE, the more efficient the management is in using capital to generate profits.

The table illustrates the Return on Equity (ROE) for a sample of Iraqi banks during the period from 2020 to 2023. This indicator reflects how efficiently banks generate profits from shareholders' equity, From the data, the Iraqi Islamic Bank for Investment and Development recorded the highest average ROE at 9.26%, with a significant increase in 2023 to 21.68%, indicating very strong profitability and a high ability to generate returns on shareholder funds. Al-Mashriq Al-Arabi Islamic Bank came in second place with an average of 1.94%, showing a clear jump in 2023 to 4.81% after relatively low performance in previous years. Al-Nahrain Islamic Bank maintained a relatively stable average of around 1.37%, with a slight improvement over the years, In contrast, Ameen Al-Iraq Bank for Investment and Finance recorded a negative average (-0.08%), with losses in some years, reflecting weak profitability and possibly challenges in capital management. The National Islamic Bank also achieved a low average (0.67%), with stable but limited performance in generating returns on equity. Overall, the general average ROE for the sample reached 2.63%, indicating a noticeable variance in the banks' ability to deliver satisfactory returns to shareholders, emphasizing the need to enhance performance in banks showing low or negative returns.

Fourth: Liquidity Ratios

Liquidity ratios are among the most important financial indicators that reflect a bank’s ability to meet its short-term financial and cash obligations without facing cash flow problems. These ratios are used to measure the availability of cash and liquid assets compared to debts and obligations due within a short period.

The liquidity ratio data shows significant variation between banks over the period from 2020 to 2023, Ameen Al-Iraq Bank for Investment and Finance recorded the highest liquidity levels, with an average of 330.25%, and a significant increase in 2023 to 523%. This shows a large availability of cash and liquid assets relative to short-time period liabilities, reflecting a strong potential to fulfill liquidity duties right now, On the opposite hand, the National Islamic Bank recorded the lowest liquidity tiers, with an average of just 27. Nine% and a maximum of most effective forty-two.33% in 2023. This suggests confined liquid assets as compared to short-term liabilities, indicating a need for improved liquidity management to keep away from capacity economic risks, Al-Mashriq Al-Arabi Islamic Bank and Al-Nahrain Islamic Bank confirmed medium to excessive liquidity levels, with averages of 222.25% and 176. Seventy-five%, respectively, but with noticeable fluctuations throughout the years. For example, Al-Mashriq Bank reached a totally excessive liquidity ratio of 444% in 2021, which then declined to 115% in 2023, The Iraqi Islamic Bank for Investment and Development maintained exceptionally strong liquidity ratios among 59% and eighty one%, with a mean of 71.Five%, indicating mild liquidity management, although with much less flexibility as compared to banks with higher ratios, Overall, the average liquidity ratio throughout all banks was one hundred sixty five.Seventy three%, reflecting a usually top stage of liquidity in the banking area, regardless of variations amongst man or woman banks. This shows the importance of tracking monetary policies to make certain banks’ endured capacity to fulfill their cash responsibilities, specifically amid fluctuations inside the monetary surroundings.

Fifth: Net Stable Funding Ratio (NSFR)

Is one of the key liquidity indicators adopted by banking regulatory government to degree a bank’s capacity to secure solid and enough funding to cover lengthy-term belongings and activities over a specific duration, generally one year.

The Net Stable Funding Ratio is calculated using the following formula:

NSFR = (Available Stable Funding ÷ Required Stable Funding) × 100

• Available Stable Funding (ASF): Includes capital, long-term stable deposits, and certain types of liabilities that can be reliably maintained over a long period

• Required Stable Funding (RSF): Refers to the amount of stable funding a bank needs to sustainably finance its assets and obligations, taking into account the stability characteristics of each type of asset

The data indicates that the NSFR for the studied Iraqi banks mostly exceeds the ideal threshold of 100%, reflecting these banks' ability to secure sufficient stable funding to cover their required stable funding needs, Ameen Al-Iraq Bank for Investment and Finance recorded the highest NSFR, with an average of 220.25%, fluctuating between 213% in 2020 and 279% in 2021. This highlights strong stable funding and effective management of long-term financial resources.

Al-Nahrain Islamic Bank also maintained high NSFR levels, averaging 155.75%, with a slight decline to 126% in 2023 compared to its peak of 175% in 2020, but still demonstrating solid stable funding capacity, The Iraqi Islamic Bank for Investment and Development recorded a moderate average of 117%, with relatively stable figures ranging from 104% to 136% over the years, indicating reasonable but comparatively weaker stable funding strength, The National Islamic Bank showed the lowest NSFR among the sample, averaging 94.33%, with an improvement in 2023 to 115% after previous lower levels, suggesting some improvement in stable funding but still below the overall sample average, Overall, NSFR levels across all banks indicate sufficient stable funding to support their assets and long-term obligations, a positive sign that enhances the strength and stability of the Iraqi banking sector, especially amidst fluctuations in the financial environment.

Sixth: Testing the Research Hypotheses

• Independent Variable: Optimal Investment Strategy (represented by indicators such as liquidity, profitability, capital adequacy, and stable funding)

• Dependent Variable: Financial Environment Volatility

The values presented in the table indicate a significant and positive effect of optimal investment strategies (measured by liquidity, profitability, capital adequacy, and stable funding indicators) on the volatility of the financial environment in Iraqi banks. All t-values exceed the critical value (1.984), and the significance levels (Sig) are less than 0.05, supporting the validity of the hypotheses that improving investment strategies contributes to reducing financial environment volatility and enhancing the financial stability of banks.

Seventh: Explanation of Hypotheses Based on the Table

• Effect of Liquidity Ratio on Financial Environment Volatility: The t-value = 6.5 and β = 0.42 indicate a strong positive relationship between the liquidity ratio and financial environment volatility. This means that improving liquidity in banks helps reduce volatility and makes banks more capable of withstanding shocks and fluctuations.

• Effect of Return on Assets on Financial Environment Volatility: The t-value = 5.9 and β = 0.38 suggest that profitability, measured by return on assets, has a significant positive impact on financial environment stability. Higher profitability increases banks’ ability to adapt to financial market fluctuations.

• Effect of Capital Adequacy on Financial Environment Volatility: The t-value = 7.2 and β = 0.45 reflect that sufficient capital contributes significantly to reducing financial environment volatility. Strong capital equips banks with greater risk tolerance and allows more stable investment.

• Effect of Net Stable Funding Ratio (NSFR) on Financial Environment Volatility: The t-value = 6.8 and β = 0.43 demonstrate that stable funding positively influences financial environment stability, as stable funding helps reduce financial fluctuations and ensures a sustainable flow of financial resources.

Eighth

Overall Model Evaluation: With an F-value = 78.5 and a significance level (Sig) = 0.000, the model indicates that these variables collectively explain 34% of the variance in financial environment volatility (according to the adjusted R²). This represents a good explanatory power, indicating a strong relationship and the impact of investment strategies on financial environment stability.

• Investment strategies have a significant and clear impact on the volatility of the financial environment, indicating the importance of adopting well-studied investment policies to address changing environmental risks.

• The liquidity ratio is one of the most important indicators that contribute to reducing the severity of financial volatility, as it provides banks with flexibility to meet short-term obligations and unexpected conditions.

• The return on assets reflects management efficiency in resource investment, which in turn affects the stability of the financial environment and helps achieve balanced performance amid fluctuations.

• Capital adequacy is considered a fundamental pillar in building banks’ capacity to absorb shocks, which enhances confidence in the banking sector and reduces the risk of financial collapses.

• The Net Stable Funding Ratio (NSFR) contributes to the stability of funding sources, which supports the bank’s sustainability and reduces reliance on unstable short-term funding sources.

• The statistically significant relationships between the studied investment dimensions and the financial environment reflect the existence of a solid strategic foundation on which to build to enhance the stability of banks in Iraq.

Recommendations

• Iraqi banks must adopt balanced investment strategies that consider the requirements of liquidity, profitability, capital, and stable funding, in alignment with the variables of the financial environment.

• Continuous enhancement of liquidity management through smart financial instruments that secure cash positions and improve the bank’s responsiveness to changes is essential.

• Focus should be placed on improving asset efficiency to achieve stable returns that boost bank performance and reduce the impact of negative external factors on the financial environment.

• Adoption of internal and external regulatory policies that reinforce capital adequacy in compliance with Basel standards is necessary to ensure banks’ readiness to face crises.

• Efforts should be made to diversify funding sources to achieve high levels of stable funding, thereby reducing volatility in the operational and financial environment.

• Development of financial analysis tools and risk forecasting within banks is crucial to enable decision-makers to formulate investment strategies that proactively adapt to environmental fluctuations.

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