Academic journal article Academy of Accounting and Financial Studies Journal

Risks and Bank Performance in Jordan

Academic journal article Academy of Accounting and Financial Studies Journal

Risks and Bank Performance in Jordan

Article excerpt

INTRODUCTION

Risks and its impact on bank performance are very important to the banking industry. In addition, banks in Jordan are not able to avoid different types of risks (Grassa, 2012). Therefore, the purpose of the study is to investigate such types of risk with bank performance in Jordan. Further, the banking sector is the backbone and major component of the financial system. Thus, it will give impact to the stability of an economy. Any problem and interference that happens in the banking system will give implications for the economic conditions of a country. It means the good economic conditions have been resulted from good strategies and good management in handling and controlling any problems that occur around the country.

Since the bank is a very important component between surplus and deficit units in the economy, it needs to maintain and perform its services efficiently (Iqbal & Molyneux, 2016). Banks with efficient performance can attract many customers to maintain the economic condition in the country (Iqbal & Molyneux, 2016).

The financial system of Jordan is based on the banks, for which the economic activities are financed by the bank, therefore, banks play a great role in the Jordanian economy (Zeitun & Benjelloun, 2013). Jordan has a unique banking system because it is following two types of banking systems which included the Islamic banking system and conventional or commercial banking systems. Moreover, the Islamic banking system follows the Shari'a or Islamic laws for the services and financing.

The banking sector of Jordan is controlled by the central bank of Jordan; it handles both Islamic and conventional banks. Jordan established the central bank in 1964, it is an independent institution, and it works on behalf of the government for fiscal responsibilities. Moreover, the central bank is not only regulating the banks, but it also introduces and sponsors new financial institutions (Khamis, 2003).

Meanwhile, risk plays a vital role in the banking institutions. In running their services and financial activities, banks are also exposed to risks. Risk is one of the factors that affect the efficiency of the bank (Van Greuning & Iqbal, 2007). In addition, the bank also faces several risks in their operation such as operational risk, credit risk, and liquidity risk. All these risks will affect the efficiency of the banking sector. According to Abu Hussain & Al-Ajmi (2012), the most important risks facing both Islamic and conventional banks are operational risk, credit risk, and liquidity risk.

Additionally, the Arab Spring has shown an asymmetric effect. Some countries were obstructed very minimally or suffered zero impact while some others received severe waves. In Tunisia, the epicentre of the crisis, for example, a massive weakening in mining with 40% value added were reported. Oil production also experienced a decline. This was led by labour unrest. As a result, bank profitability was badly impacted seeing a decrease in the growth of credit, which resulted to an increase in inflation. Two popular destinations, often visited by tourists, Egypt and Tunisia were hot hard, witnessing a real falling in the GDP growth to a decade low, which was a total opposite from the previous years. The currencies in the region also received a substantial weakening with the total forex reserves of the oil-importing countries experienced a sink by a quarter between early 2011 and mid-2012. For instance, the reserves in Jordan was USD 7 billion at the end of December 2012, an obvious decrease from what it was in the early 2011, which was nearly halved from USD 12 billion. In fact, the stock market was also battered with Egypt, Tunisia, Morocco and Lebanon-the four giant countries in market capitalization in the region, underwent a lost in the range of 8-15% in the duration of the period (Ghosh, 2016).

Moreover, the Jordanian economy had been affected by many external and internal shocks such as crisis and regional instability risks such as the financial crisis of 1989, the first and second Gulf war's 1990-1991 and 2003 respectively. …

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