Abstract
This article assesses the effects of internal and external factors on the profitability of Jordanian commercial banks. A panel data set of thirteen commercial banks between 2000 and 2018 was used. Pooled ordinary least squares, random and fixed models were applied. Moreover, a Hausman test was performed to confirm the suitability of models, which was preferred on the random effect model. Also, a Wooldridge test for serial correlation and a modified Wald test for groupwise Heteroskedasticity were used and both of their null hypotheses were rejected. However, to deal with these problems, a robustness analysis was performed using feasible generalized least square. The findings suggested that internal factors and in particular, bank size and diversification, had positive effects on bank profitability, while credit risk, operational risk and leverage risk were negatively related to bank performance. However, capital risk had a positive but insignificant impact on bank profitability. As for the effect of external factors, the results suggested that financial development and inflation had a positive and significant impact on bank profitability, while market concentration and stock market volatility had a significant negative effect on bank profitability. Further, a negative and insignificant impact were found for GDP and refugee crisis on bank profitability in Jordan. The findings would help managers of commercial banks, investors, government, policy makers and shareholders to make better decisions and improve performance by highlighting areas of weaknesses. In general, policy makers should become more aware with these insights on profit determinants in Jordanian commercial banks.
Highlights
Over the past decades, it was argued that the stability and profitability of banks is a growing concern of policy makers, regulators and bank supervisors
The main goal of this study was to examine the impact of bank specific, industry specific, macroeconomic, and refugee crisis factors on the profitability of commercial banks listed on the Amman Stock Exchange
The estimation results stressed that commercial bank profitability in Jordan is affected positively by diversification and bank size, while negatively affected by credit risk, operational risk, capital risk and leverage risk as internal factors
Summary
It was argued that the stability and profitability of banks is a growing concern of policy makers, regulators and bank supervisors. Such concerns gained importance after the world financial crises of 2007/2008 (Ali & Puah, 2018). To be more efficient and profitable, banks need to know which types of factors have a greater effect on their performance. The studies on internal and external factors affecting bank profitability have grown rapidly, especially those concentrating on developed country economies (Iskandar, Che-Yahya & Wahid, 2019; Öhman & Yazdanfar, 2018; Fidanoski et al, 2018; Bongini et al, 2018; Garcia & Guerreiro, 2016). According to Ariyadasa, Selvanathan, Siddique & Selvanathan, (2017) not many studies have been conducted on developing countries and one of these countries is Jordan
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