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Loan Loss Provision and the Profitability of Commercial Banks: Evidence from Jordan

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  • Mohammad Alhadab
  • Saba Alsahawneh

Abstract

The purpose of this study is to examine the impact of loan loss provision on the profitability of Jordanian commercial banks. While the impact of loan loss provision on the profitability of banks has been examined by prior research, this study is the first to examine this relationship using Jordanian data. By examining a Jordanian sample of 13 banks that listed on Amman Stock Exchange (ASE) over the period 2004-2014, this study provides the first evidence that loan loss provision has a negative impact on the profitability of Jordanian commercial banks. This evidence suggests that Jordan banks adjust their loan loss provision due to several motives and, this in turn, leads to negative consequences for their profitability. Return on assets (ROA) and return on equity (ROE) are employed as a proxy of the profitability in this study.

Suggested Citation

  • Mohammad Alhadab & Saba Alsahawneh, 2016. "Loan Loss Provision and the Profitability of Commercial Banks: Evidence from Jordan," International Journal of Business and Management, Canadian Center of Science and Education, vol. 11(12), pages 242-242, November.
    • Handle: RePEc:ibn:ijbmjn:v:11:y:2016:i:12:p:242
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    References listed on IDEAS

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    1. Ahmed Raza ul Mustafa & Riaz Hussain Ansari & Muhammad Umair Younis, 2012. "Does the Loan Loss Provision Affect the Banking Profitability in Case of Pakistan?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(7), pages 772-783, November.
    2. Ozili, Peterson K, 2015. "Loan Loss Provisioning, Income Smoothing, Signaling, Capital Management and Procyclicality: Does IFRS Matter? Empirical Evidence from Nigeria," MPRA Paper 68350, University Library of Munich, Germany.
    3. Fonseca, Ana Rosa & González, Francisco, 2008. "Cross-country determinants of bank income smoothing by managing loan-loss provisions," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 217-228, February.
    4. Ahmed Raza ul Mustafa & Riaz Hussain Ansari & Muhammad Umair Younis, 2012. "Does the Loan Loss Provision Affect the Banking Profitability in Case of Pakistan?," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(7), pages 772-783.
    5. Frank Packer & Haibin Zhu, 2012. "Loan loss provisioning practices of Asian banks," BIS Working Papers 375, Bank for International Settlements.
    6. Lars Norden & Anamaria Stoian, 2013. "Bank earnings management through loan loss provisions: a double-edged sword?," DNB Working Papers 404, Netherlands Central Bank, Research Department.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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