Capital Adequacy and Its Determinants in Jordanian Islamic and Traditional Banks
DOI:
https://doi.org/10.35516/jjes.v11i2.2216Keywords:
Capital Adequacy, Jordanian Banks, Return on Assets, Financing Losses Provision, Operating EfficiencyAbstract
Objectives: The study aims to analyze capital adequacy in the Jordanian Islamic and traditional banks and determine the factors affecting capital adequacy during the period 2012-2022.
Methodology: The study adopted the descriptive analytical approach. It generated cross-sectional data for 15 banks, including 3 Islamic banks, based on the banks’ published financial statements. It applied the random effects model to analyze the collected data.
Results: The study revealed a high capital adequacy ratio among Jordanian banks. It identified a negative impact of Return on Assets, Operating Efficiency, and Size, and a positive impact of Provision for Financing Losses and Economic Growth on the capital adequacy ratio. Additionally, it found no significant impact on the capital adequacy ratio from Financing to Deposits Ratio, Non-Performing Finance, and Inflation. The study also highlighted differences between Islamic and conventional banks regarding the capital adequacy ratio and its determinants.
Conclusion: To effectively manage the capital adequacy ratio, it is recommended to leverage the inverse relationship between profitability and the capital adequacy ratio to enhance bank profitability. This can be achieved by strategically reducing the capital adequacy to near the minimum required levels, increasing the volume of invested funds, and improving operational efficiency. Moreover, efforts should focus on minimizing non-performing financing, enhancing asset quality, and reducing provisions for financing losses to subsequently lower capital adequacy requirements.
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