Assessment of Financial Distress Risk Using the Kida and Sherrod Models: An Applied Study of Al-Yaqeen Bank During the Period 2020–2024

Abstract

This study aimed to assess the level of financial distress risk at Al-Yaqeen Bank—a private commercial bank operating in Libya—for the period 2020–2024, using the Kida and Sherrod models. The study employed a descriptive-analytical approach, utilizing secondary data extracted from the bank’s financial statements to calculate the financial indicators required for both models, thereby determining the bank's level of financial distress risk.

The results from the Kida model yielded negative values throughout the study period, ranging from -0.202 to -0.239, which indicates a high level of financial distress risk according to this model’s criteria. Conversely, the Z-score values derived from the Sherrod model ranged between 12.318 and 11.133—a range classified as the "third category," where predicting financial distress or bankruptcy is difficult. This discrepancy between the two models is primarily attributable to differences in the number of variables, the relative weights assigned within each model’s equation, and the specific Z-score thresholds used for classification.

The study recommends that the management of Al-Yaqeen Bank intensify periodic monitoring of financial performance indicators—specifically profitability, liquidity, asset utilization efficiency, and financial leverage—rather than relying solely on the annual net profit or loss figure when evaluating the bank's financial position. It also recommends taking the warning signs indicated by the results of the two models seriously, by conducting in-depth analytical studies and employing additional quantitative models; this would help provide an accurate and honest picture of Al-Yaqeen Bank’s financial situation.