THE NEXUX BETWEEN FINANCIAL DEVELOPMENT, FOREIGN DEPOSITS, RETAIL BANKING AND FINANCIAL INCLUSION: THE JORDANIAN CASE

Abstract

As a major part of the Jordanian financial system, this paper examines the banking sector at both the macro and micro levels. Based on the time period 1982-2015, and time series methodologies (co-integration, Vector Error Correction Model, and Granger Causality), the macrolevel analysis examines the impact of foreign exchange deposits on financial development. Using the Seemingly-Unrelated Regression (SUR), the micro-level aspect examines the impact of foreign exchange deposits and retail banking on the performance of banks in terms of their net interest margin and accounting performance. Finally, the fact that greater financial inclusion promotes credit to the private sector, we estimate an Ordered Probit Model to examine the determinants of financial inclusion in Jordan. We conclude that foreign exchange deposits reflect weak evidence in explaining the variability of bank credit. In other words, foreign exchange deposits do not promote financial development. The micro-level analysis, on the other hand, reveals that foreign exchange deposits and retail banking impact bank profitability in a positive manner. However, this impact (positive) comes only at the expense of widening net interest margins. Finally, the results reveal that higher income, better education, being a man, and being older are associated with greater levels of financial inclusion. Naturally, based on the empirical results, the paper outlines a number of recommendations whose aim is to promote financial development as well as the performance of the banking system. 

Keywords

• Financial Development
• dollarization
• net-interest margin
• return on assets
• financial inclusion

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