The Impact of Internal and External Factors on Commercial Bank Profitability in Jordan

Jamil J Jaber,Abdullah A Al-Khawaldeh

doi:10.5539/ijbm.v9n4p22

Abstract

The primary focus of this paper is to address the determinants of profitability on commercial banks in Jordanand to examine to what extent the performance of commercial banks operating in Jordan are affected by internaland external factors of companies listed on the Amman Stock Exchange for Jordanian Banks between 2007 and2012. Previous studies focused only on internal factors, namely, the banks’ specific characteristics in Jordan.This study includes not only the internal factors, but also external factors, namely, macroeconomic and financialmarket structures. The question is whether there are significant impacts that can be gained from internal andexternal factors on ROAA. The internal factors of capital adequacy, liquidity ratio, and size are found to besignificant as well as all the external factors in these models. A third multivariate model which includes bothinternal and external factors is included in this study but not in previous studies. This model is found to besignificant.As a result, this research gives deeper insights into determinants influencing the profitability of Jordaniancommercial banks within the Jordanian environment.

Highlights

Over the last years a number of factors have contributed to increasing competition in the Jordan banking sector
ASSGDP is the ratio total assets of the deposit money banks divided by the GDP (ASSGDP)
We found that the mean of aggregate external variables is 0.56, the maximum value is 1.99, and the minimum is 0.22and standard deviation is 0.38

Summary

Introduction

Over the last years a number of factors have contributed to increasing competition in the Jordan banking sector. The aim of this paper is to extend earlier works on the determinants of profitability of banks in Jordan. It examines to what extent the performance of commercial banks operating in Jordan market is affected by internal factors and external factors. Molyneux and Thorton (1992) examined the determinants of European banks profitability over the period 1986–1989 They found negative relationship between profitability and liquidity. Pasiouras and Kosmidou (2007) considered European banks from fifteen countries over the period 1995–2001 They found that profitability was positive relationship associated with real GDP.

Literature Review

Data Sources and Methodological Issues

Multivariate Regression Analysis

Findings

Conclusion