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

Year 2017, , 118 - 130, 30.06.2017

Ghassan Omet Morad Abdel-halim

https://doi.org/10.17261/Pressacademia.2017.398

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

References

• Allen, F., Demirgüc-Kunt, A., Klapper, L., Peria, M. (2016), “The Foundations of Financial Inclusion: Understanding Ownership and Use of Formal Accounts”, Journal of Financial Intermediation 27: 1-30.
• Almarzoqi, R. (2015), “What Matters for Financial Development and Stability?”, IMF Working Paper No. 15/173, Washington: International Monetary Fund.
• Arestis, P., P. Demetriades and K. Luintel (2001), “Financial Development and Economic Growth: The Role of Stock Markets”, Journal of Money, Credit and Banking 33: 16-41.
• Bagehot, W. (1873), Lombard Street, Homewood, IL: R. Irwin 1962 edition.
• Beck, T. (2016), “Finance, Institutions, and Economic Development: Literature Survey and Research Agenda”, Economic Development and Institutions Working Paper No. 16/7, Cass Business School.
• Berthelemy, J. and A. Varoudakis (1996), “Economic Growth, Convergence Clubs, and the Role of Financial Development”, Oxford Economic Papers 48: 300–28.
• Caporale, G., S. Lodh and M. Nandy (2015), “The Performance of Banks in the MENA Region During the Global Financial Crisis”, Discussion Paper 1580, DIW Berlin, German Institute for Economic Research, Berlin.
• Catao, L. and Terrones (2016), “Financial De-Dollarization: A Global Perspective and the Peruvian Experience”, IMF Working Paper No. 16/97, Washington: International Monetary Fund.
• Chandavarkar, A. (1992), “Of Finance and Development: Neglected and Unsettled Questions”, World Development 20: 133–42.
• Chang, R. and A. Velasco (2001). "Monetary Policy in a Dollarized Economy Where Balance Sheets Matter", Journal of Development Economics 66: 445-464.
• Cherif, M. and Dreger, C. (2016), “Institutional Determinants of Financial Development in MENA Countries”, Review of Development Economics 20: 670-680.
• Cihac, M. A. Demirguc-Kunt, E. Feyen and R. Levine (2012), “Benchmarking Financial Development Around the World”, World Bank Policy Research Working Paper 6175, World Bank, Washington, DC.
• Chortareas, G., J. Garza-Garcia G. Girardone (2011), “Banking Sector Performance in Latin America: Market Power Versus Efficiency”, Review of Development Economics 15: 307-325.
• Dabla-Norris, E. and N. Srivisal (2013), “Revisiting the Link Between Finance and Macroeconomic Volatility”, IMF Working Paper 13/29, Washington: International Monetary Fund.
• Dabla-Norris, E., Ji, Y., Towsend, R. and Unsal, F. (2015), “Identifying Constraints to Financial Inclusion and their Impact on GDP and Inequality: A Structural Framework for Policy’, IMF Working Paper No. 22.
• DeHan, Chase, Determinants of Financial Development: How Equality of Access Impacts Private Credit (June 9, 2016). Available at SSRN: https://ssrn.com/abstract=2792829
• Demirguc-Kunt, A. and H. Huizinga (1999), “Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence”, World Bank Economic Review 13: 379-408.
• Demirguc – Kunt, A. and H. Huizinga (2001), “Financial Structure and Bank Profitability”, in Financial Structure and Economic Growth: A Cross-Country Comparison of Banks, Markets, and Development. Cambridge and London: MIT Press.
• Fungacova, Z. and T. Poghosyan (2011), “Determinants of Bank interest Margins in Russia: Does Bank Ownership Matter?”, Economic Systems 3: 481-495.
• Fungacova, Z. and L. Weill (2014), “Understanding Financial Inclusion in China”, BOFIT Discussion Paper 10, Bank of Finland.
• Gurbuz, A., S. Yanik and Y. Ayturk (2013), “Income Diversification and Bank Performance: Evidence from Turkish Banking Sector”, Journal of BRSA Banking and Financial Markets 7: 9-29.
• Hamdi, K. (2015), “The Determinants of Financial Development: Empirical Evidence from Developed and Developing Countries”, Applied Economics and Finance 2: 1-9.
• Hashem, H. (2016), “Determinants of Egyptian Banking Sector Profitability: Time series Analysis from 2004-2014”, International Journal of Business and Economic Sciences Applied Research 9: 73-78.
• Helhel, Y. (2015), “Evaluating The Performance of the Commercial Banks In Georgia”, Research Journal of Finance and Accounting 5: 146156.
• Heng, D., A. Ivanova, R. Mariscla, U. Ramakrishnan, and J. Wong (2016), “Advancing Financial Development in Latin America and the Caribbean”, IMF Working Paper No. 16/81, Washington: International Monetary Fund.
• Kasman, A., G. Tung and G. Vardar (2014), “Consolidation and Commercial Bank Net Interest Margins: Evidence from the Old and New European Union Members and Candidate Countries”, Economic Modeling 12: 23-45.
• King, R. and R. Levine (1993), “Finance and Growth: Schumpeter Might be Right”, Quarterly Journal of Economics 108:717–37.
• Kubo, K. (2007), “Do Foreign Currency Deposits Promote or Deter Financial Development in Low-Income Countries? An Empirical Analysis of Cross-Country Data”, Institute of Developing Economies, Discussion Paper No. 87.
• Kutan, A., E. Rengifo, and E. Ozsoz(2010), “Evaluating the Effects of Deposit Dollarization in Bank Profitability", Fordham University, Discussion Paper No. 07.
• Law, S. and P. Demetriades (2004), “Capital Inflows, Trade Openness and Financial Development in Developing Countries”, Money Macro and Finance (MMF) Research Group Conference, Money Macro and Finance Research Group.
• Le, T., J. Kim and M. Lee (2016), “Institutional Quality, Trade Openness, and Financial Sector Development in Asia: An Empirical Investigation”, Emerging Markets Finance and Trade 52: 1047-1059.
• Levine, R. (2004), “Finance and Growth: Theory and Evidence”, NBER, Working Paper No. 10766.
• Lucas R. (1988), “On the Mechanics of Economic Development”, Journal of Monetary Economics 22: 3- 42.
• Marcelin, I. and I. Mathur (2016), “Financial Sector Development and Dollarization in Emerging Economies”, International Review of Financial Analysis 46: 20-32.
• McKinnon, R. (1973), Money and Capital in Economic Development, Washington: The Brookings Institution.
• Mehorata, A. and Yetman, J. (2015), “Financial Inclusion – Issues for Central Banks”, BIS Quarterly Review, March, p. 83-96.
• Naceur, S. and M. Omran (2011), “The Effects of Bank Regulations, Competition, and Financial Reforms on Banks' Performance”, Emerging Markets Review, 12, p. 1-20.
• Nassar, K., E. Martinez, and A. Pineda (2015), “Determinants of Banks’ Net Interest Margins in Honduras”, IMF Working Paper No. 14/163.
• Pagano, M. (1993), “Financial Markets and Growth: An Overview”, European Economic Review 37: 613–22.
• Park, C. and Mercado, R. (2015), “Financial Inclusion, Poverty, and Income Inequality in Developing Asia”, Asian Development Bank, Working Paper No. 426.
• Rajan, R. and L. Zingales, L. (2003), “The Great Reversals: The Politics of Financial Development in the Twentieth Century”, Journal of Financial Economics 69: 5-50.
• Rengifo, E., E. Court, and E. Ozsoz, E. (2010), “Deposit Dollarization and its Impact on Financial Deepening in the Developing World”, Fordham University Department of Economics Discussion Paper No. 2010-08.
• Robinson, J. (1952), The Generalization of the General Theory, in The Rate of Interest and Other Essays, MacMillan, London, UK.
• Schumpeter, J. (1934), The Theory of Economic Development, 1912, Translated by Redvers Opie. Harvard University Press, Cambridge, USA.
• Shaw, E. (1973), Financial Deepening in Economic Development, New York: Oxford University Press.
• Svirydzenka, K. (2016), “Introducing a New Broad-Based Index of Financial Development”, IMF Working Paper No. 16/5, Washington: International Monetary Fund.
• Trujillo-Ponce, A. (2013), “What Determines the Profitability of Banks? Evidence from Spain”, Accounting and Finance, 53, p. 561-586.
• Tuesta, D., G. Sorensen, A. Haring and N. Camara (2015), "Financial Inclusion and its Determinants: The Case of Argentina", BBVA Working Paper No. 15/03, Madrid.
• Vieira, F., M. Holland, and Resende, M. (2012). "Financial Dollarization and Systemic Risks: New Empirical Evidence", Journal of International Money and Finance 31: 1695-1714.
• Yaseen, H., G. Omet and F. Khamash (2015), “On the Entry of Foreign Banks: The Jordanian Experience”, International Journal of Economics and Finance 7: 278-282.
• Zigraiova, D. and T. Havranek (2015), “Bank Competition and Financial Stability: Much Ado About Nothing?”, Journal of Economic Surveys 30: 944-981.
• Zins, A. and L. Weill (2016), “The Determinants of Financial Inclusion in Africa”, Review of Development Finance 6: 46-57.