The Determinants of the Jordanian’s Banks Profitability: A Cointegration Approach

Idries M. Al-Jarrah, Khalifeh N. Ziadat, Salaheddin Y. El-Rimawi

Abstract


This study aims to recognize the determinants of the Jordanian’s banks profitability over the period 2000-2006. Utilizing the cointegration and error correction models on all Jordanian’s banks over the study period, various potential internal and external determinants are examined to identify the most important determinants of profitability. Our findings reveal that the most important internal determinants of the banks’ profitability are the loans to total assets ratio, the operating expenditures ratio, the capital structure, the deposit ratio and non-operating expenditures ratio over the 2000-2006 period. On the other hand, money supply and inflation are the most important external determinants of profitability over the same period. This study also measured the speed of adjustment process towards the long-run equilibrium. Our results reveal that though the suggested determinants of profitability have a long run relationship with profitability, the coefficients of error correction term is quantitatively and in some cases statistically insignificant. This demonstrates a slow adjustment process for profitability measures towards a change in the equilibrium conditions. In other words, profitability of Jordanian’s banks does not respond speedily to changes in the explanatory variables in the short-run.


Keywords


Bank profitability, Jordan, Cointegration, Determinants of Profitability, JEL Classification: G21

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