Financial Structure and Bank Performance

This study investigates whether the Jordanian economy is considered as a bank or more a market based economy, reflecting the level of the relative reliance on banks vs. market finance. As further concern, this study tests whether financial structure (levels of bank and stock market developments), together with bank characteristics have zero impact on bank performance, typified by the banks’ accounting profits and interest rate margins. The evidence revealed that banks’ performance measures responded significantly to the increase in capital and loan ratios, reflecting the fact that adequate capital ratios and loan portfolios have empirical evidence in explaining performance measures. The results showed that well capitalized banks achieved higher net interest rate margins and more profitability, implying that banks with higher capital ratios tend to face lower funding costs due to lower probability of bankruptcy costs. The financial structure results indicated that with more competitive banking industry, in which total banks assets constitute a larger proportion of GDP, lower interest rate margins and profitability have been reached. This indicated that more bank development creates tougher competition, causing higher efficiency, and hence lowers profits, and in turn, lower interest rate margins, in addition to the implication of possible complementary between equity and debt financing. On sub-sample basis, the results indicated that non-major banks have experienced, on average terms, lower performance measures, reflecting lower operating costs, lower overhead costs and lower pre-tax profitability. This result indicated more reliance from non-major banks toward deposits as main funding costs, leading to the conclusion under which major banks tend to profit more in inflationary and high-tax environments. This indicates also that major banks are more able to pass on at least part of their taxes and overhead expenses to their clients, in the form of lower deposit rates and/or higher loan rates. However, all implies the need to adjust interest rate margins as response to the fact that banks which charge high interest rates may experience equally high loan default rates.