INCOME DIVERSIFICATION AND BANK PERFORMANCE: THE JORDANIAN CASE

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.