The Determinants of Banks' Credit Default at Jordanian Commercial Banks (Internal Perspective)

Abstract

In this study researchers will examine the factors affecting the default of banks' credit facilities; the reasons behind the defaulting of the bank debts in Jordan, from the internal perspective, and to identify the early indicators appearance of the default of credit facilities. Through a random sample from Jordanian banks, throughout the year 2012.

The research problem was specified to answer the following questions, firstly: What are the effect of (management efficiency, leverage, loan-loss provision, funding cost, and liquidity), factors at the default of credit facilities? Secondly: Which factors are considered to be important and should be monitored?

The data will be analyzed by a use the linear regression to predict the relationship between the dependent variable (ratio of non-performing loans to total loans as at the end of financial year of bank i in time t) and the independents variables (management efficiency, leverage, loan-loss provision, funding cost, liquidity). In order to ensure that all regression assumptions are met, each variable will be tested for homoscedastic, linearity and normality.

The results summaries show a negative relationship between the independents variables (management efficiency, loan-loss provision, funding cost, liquidity), and the dependent variable (ratio of non-performing loans to total loans.

There is positive relationship between the independent variable (leverage), and dependent variable (ratio of non-performing loans to total loans.

The R-squared figure (Explanatory Factor) equal to (0.935), this result is very high and emphasis the assumptions that researcher accept.

Durbin–Watson value was (1.682) which indicates no autocorrelation.

Researcher states the following recommendations:

-               Banks have to give more attention to credit risk management to improve bank competitive advantage.

-               Banks have to ease restrictions on borrowing process due to negative relation between liquidity and NLP, due to large amount of liquidity in Jordanian banks.

Keywords: Credit Default, Internal perspective, Management efficiency, Leverage, Loan-loss provision, Funding cost, Liquidity, Non-Performing loans.