Determinants of bank credit in Jordan and Palestine: a comparative analysis

Abstract

Purpose- This paper analyzes the determinants of the annual changes in conventional banks’ credit in Jordan and Palestine. In addition, the paper examines whether the differences in the determinants of bank credit in both economies are due to country or bank-specific factors. As one might expect, the argument behind this paper rests on the fact that the Israeli occupation of Palestine makes the political and economic environments of the two countries very different. Methodology- A panel of data of all thirteen (13) Jordanian conventional banks and 12 Palestinian conventional banks are used in the econometric analyses (2010 – 2021). For each set of banks, the annual percentage changes in credit are regresed on the percentage annual change in bank deposits, equity is equity capital, bank size, and bank income diversification level. Following this exercise, the differences in of both sets of coefficients are examined using the F-test. If different, one can argue that the difference can be due to the differential effects of either bank-level differences or country-level differences. To examine this issue, we re-estimate tha main model by controlling for the presence of fixed effects in the bank credit relationship and re-estimate the F-test. If the F test is significant, this implies that the differences in the magnitude of the relationshisp are due to country factors and not to bank-specific factors. Findings- Based on the estimated results, several interesting observations are noted. First, there are differences in the determinants of the annual change in bank credit between banks in Jordan and in Palestinian in terms of the signs of the independent variables and their values. Second, the significant differences in the determinants of the annual change in bank credit between banks in Jordan and in Palestinian are due to country-specific factors and not the bank-specific factors. Finally, given the differences in the political and economic environments in which banks in Jordan and Palestine operate, one should not be surprised of the main finding of this thesis. Conclusion- It would be informative to examine the performance of both sets of banks in terms of other issue including the determinants of cost of intermediation, stability, bank discipline, and bank competition. Keywords: Jordan, Palestine, banks, credit growth, equity capital, seemingly-unrelated regression. JEL Codes: G20, G21, G24