Jordan’s Banks’ Profitability: A Closer Look at Foreign and Domestic Banks
This paper examines the influence of bank-specific and macroeconomic variables on the profitability of banks in Jordan, focusing on the differences between domestic and foreign banks. The hypothesis of whether higher profits are associated with different bank types operating in the country is tested. Return on Assets (ROA) and Return on Equity (ROE) are utilized as proxies for bank profitability, regressed on both macroeconomic variables and bank-specific variables, in a multiple regression setting for both foreign and domestic banks in Jordan, during the period 2001 - 2015. Ten domestic and six foreign banks operating in Jordan were included in the chosen sample. Results prove that credit risk, funding cost, and management efficiency are essential factors for the profitability of Jordan's domestic banks. High domestic bank profitability is associated with lower funding costs, lower credit risk, and management efficiency. The other key finding indicates that bank size, liquidity, and inflation, are essential determinants for the profitability of foreign banks. Domestic banks must focus on upgrading their human capital, investing more in advanced technology, taking advantage of economies of scale through mergers, improving cost management efficiency, and monitoring credit risks.
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