Abstract
This study aimed to examine the determinants of lending interest rates of 13 Jordanian commercial banks listed on the Amman Stock Exchange for the period 2011-2018. The factors include liquidity, profitability (ROA), bank size, operating cost ratio, deposit interest rate and inflation rate. The fixed effects model was performed as suggested by Hausman test. The results of the fixed effects model show that ROA and bank size had negative significant impacts on lending interest rates. Liquidity had a negative insignificant impact. The results also show that deposit interest rate and inflation had a positive significant impact on lending interest rate of Jordanian commercial banks. Operating cost ratio also had a positive insignificant impact. Thus, the results indicate that ROA, bank size, deposit interest rate and inflation were good determinants of the lending interest rates of Jordanian listed commercial banks. The study suggests that banks should use profitability and the size of the bank as tools to reduce the lending interest rate, as it is one of the factors that can cause a further decrease in the lending interest rates.
Highlights
The banking sector plays a major and fundamental role in economic growth
The current study aims to examine the determinants (Inflation, return on assets (ROA), liquidity, bank size, and operating cost ratio and deposit interest rate) of (LIR) of 13 Jordanian listed commercial banks for the period 2011-2018.The definition of the variables is listed in Table (1)
The negative relationship between liquidity and the lending interest rate can be explained by the fact that banks with high liquid assets leads to a decrease in the liquidity risk of banks, and this leads to lower lending interest rates
Summary
The banking sector plays a major and fundamental role in economic growth. Since, it is the primary device for directing funds from depositors to borrowers, taking into account the redistribution of these funds to efficient and highly efficient economic activities (Andrew, 2004). It is the primary device for directing funds from depositors to borrowers, taking into account the redistribution of these funds to efficient and highly efficient economic activities (Andrew, 2004) It provides short, medium, and long-term loans, according to the desire of customers and the lending principles of banks, in order to enable borrowers to carry out their various economic activities that generate economic growth. The lending interest rate is defined as the interest that commercial banks charge when making loans to customers. Keynes (1936) defined the interest rate as the reward for giving up liquidity for a specified period of time
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