Abstract
<p>The purpose of this study is to examine the impact of loan loss provision on the profitability of Jordanian commercial banks. While the impact of loan loss provision on the profitability of banks has been examined by prior research, this study is the first to examine this relationship using Jordanian data. By examining a Jordanian sample of 13 banks that listed on Amman Stock Exchange (ASE) over the period 2004-2014, this study provides the first evidence that loan loss provision has a negative impact on the profitability of Jordanian commercial banks. This evidence suggests that Jordan banks adjust their loan loss provision due to several motives and, this in turn, leads to negative consequences for their profitability. Return on assets (ROA) and return on equity (ROE) are employed as a proxy of the profitability in this study. </p>
Highlights
Commercial banks play an important role in the economic development and growth, due to their contribution to the financial system through providing financial facilities to all economic enterprises and individuals
The results show that one unit increase of Loan Loss Provision (LLP) lead to decrease of bank profitability proxied by return on assets (ROA) by 55.8, other things being constant
The value of (R2) reveals that 0.187 of the change in ROA is explained by the independent variables (LLP, DEP, LIAB, SIZ), while the value and significant of F indicate the model is accepted to explain the relationship between dependent variable and independents variable
Summary
Commercial banks play an important role in the economic development and growth, due to their contribution to the financial system through providing financial facilities to all economic enterprises and individuals. Nowadays banks have become more exposed to the risk of failure due to the huge amounts of money that are provided to the customers through loans, which may threat the stability and growth of the banks. One of the solutions that was introduced to the banking section in order to reduce such risk was by sitting aside some amount of money known as loan loss provision. Loan loss provision is considered to be an important tool that has been employed to reduce the risk of customers’ failure to pay their liabilities to the bank
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