INCOME DIVERSIFICATION AND BANK PERFORMANCE: THE JORDANIAN CASE

Year 2019, , 28 - 37, 30.03.2019

Ghassan Omet

https://doi.org/10.17261/Pressacademia.2019.1013

Abstract

Purpose - The purpose of this paper is to examine Jordanian banks in terms of the impact of income diversification on their performance (profitability and net interest margin).

Methodology - Based on the period 2009-2017 and all thirteen Jordanian commercial banks, the econometric models are estimated using the Seemingly Unrelated Regression (SUR). Bank performance is measured by return on assets and net interest margin. As far as banks’ income diversification is concerned, we use a myriad of measures including net commission income to total assets, proportion of bank credit to individuals, SME sector, corporate sector to total credit, and the real estate sector.

Findings - Based on the statistical analyses, we conclude that that income diversification impacts bank profitability in a positive manner. However, this impact (positive) comes only at the expense of widening net interest margins.

Conclusion - It is in the interest of the banking system in Jordan to promote financial inclusion at the national level. Indeed, this aspect is important to, not only the concerned individuals, but also to their (banks) performance. Moreover, with greater levels of financial inclusion, net interest margin might also narrow.

Keywords

Financial development, dollarization, net-interest margin, return on assets, financial inclusion

References

• Adzobu, L., Elipkimi, A., Agbloyor, K., Aboagye. (2017). The effect of loan portfolio diversification on banks’ risks and return: Evidence from an emerging market. Managerial Finance. 43: 1274-1291.
• Allen, L. (1988). The determinants of bank interest margins: A note. Journal of Financial and Quantitative Analysis. 23(2): pp. 231–235.
• Almarzoqi, R., Naceur, S. B. (2015). Determinants of bank interest margins in the Caucasus and Central Asia. IMF Working Paper No. 15/87.
• Angbazo, L. (1997). Commercial bank net interest margins, default risk, interest rate risk and off balance sheet banking. Journal of Banking and Finance. 21: 55–87.
• Bagehot, W. (1873). Lombard Street, Homewood, IL: R. Irwin 1962 edition.
• Berger, A., Hasan, I., Zhou, M. (2010). The effects of focus versus diversification on bank performance: Evidence from Chinese banks. Journal of Banking and Finance. 34: 1417–35.
• Boyd, J., Graham, S., Hewitt, R. (1993). Bank holding company mergers with nonbank financial firms: Effects on the risk of failure. Journal of Banking and Finance. 17: 43–63.
• Catao, L., Terrones. (2016). Financial de-dollarization: A global perspective and the Peruvian experience. IMF Working Paper 16/97.
• Chiorazzo, V., Milani, C., Salvini, F. (2008). Income diversification and bank performance: Evidence from Italian banks. Journal of Financial Services Research. 33: 181–203.
• Adzobu, L., Agbloyor, E., Aboagye, A. (2017). The effect of loan portfolio diversification on banks’ risks and return: evidence from an emerging market. Managerial Finance. 1-23.
• Elsas, R., Hackethal, A., Holzhäuser, M. (2010). The anatomy of bank diversification. Journal of Banking and Finance. 34: 1274–87.
• Hashem, H. (2016). Determinants of Egyptian banking sector profitability: Time series analysis from 2004-2014. International Journal of Business and Economic Sciences Applied Research. 9: 73-78.
• Helhel, Y. (2015). Evaluating the performance of the commercial banks in Georgia. Research Journal of Finance and Accounting. 5: 146-156.
• Ho, T., Saunders, A. (1981). The determinants of bank interest margins: Theory and empirical evidence. Journal of Financial Quantitative Analysis. 16: 581–600.
• Jima, M. (2018). Determinants of net interest margin in the Ethiopian banking industry. Journal of Finance and Economics. 5: 96-104.
• Klein, P., Saidenberg, M. (1997). Diversification, organization and efficiency: Evidence from bank holding companies. Working Paper No. 97/27, Philadelphia: Wharton School Center for Financial Institutions.
• Kohlscheen, E., Murcia, A., Contreras, J. (2018). Determinants of bank profitability in emerging markets. Bank for International Settlements Working Paper No. 686.
• Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature. XXXV: 688-726.
• Lucas, R. (1988). On the mechanics of economic development. Journal of Monetary Economics. 22: 3- 42.
• Maudos, J. (2017). Income structure, profitability and risk in the European banking sector: The impact of the crisis. Research in International Business and Finance .39: 85–101.
• Nassar, K., Martinez, E., Pineda, A. (2015). Determinants of banks’ net interest margins in Honduras. IMF Working Paper No. 14/163.
• Nisar, S., Peng, K., Wang, S., Ashraf, B. (2018). The impact of revenue diversification on bank profitability and stability: Empirical evidence from South Asian countries. Internal Journal of Financial Studies. 6: 1-25.
• Olarewaju, O., Migiro, S., Sibanda, M. (2017). Operational diversification and financial performance of Sub-Saharan Africa commercial banks: Static and dynamic approach. Economica. 13: 84-106.
• Robinson, J. (1952). The generalization of the general theory, in the rate of interest and other essays. MacMillan, London, UK.