The cost of financial intermediation in the banking sector of Jordan

Abstract

This study investigates the cost of financial intermediation in the banking sector of Jordan over the 2001-2008 period. It assesses to what extent the relatively high and escalating bank interest margins, in this sector, can be attributed to low efficiency or noncompetitive market conditions, controlling for the bank specific and macroeconomic environment factors. Based on a sample consists of all the banks operating in Jordan over the study period, a variety of widely used econometric models are estimated to discern the determinants of net interest margins. The results indicate that the banking sector in Jordan is on a virtuous path as the high and increasing levels of interest margins are derived mainly from increasing efficiency levels and not related to monopolistic or market powers. The results also show that the bank specific variables, mainly the capital adequacy ratio and the loans to total asset ratio are among the factors that reinforce the observed levels of interest margins. Therefore, the policymakers should expand the ongoing deregulation efforts aiming to enhance the levels of operating efficiency and promote the market competitiveness. In particular, new policies should be directed at encouraging market entry and abolishing the legal and regulatory obstacles to competition. © EuroJournals Publishing, Inc. 2010.