An-Najah National University 

 

Faculty of Graduate Studies 
 
 
 
 
 

 
 

DOMESTIC VERSUS FOREIGN BANKS 
PROFITABILITY: EVIDENCE FROM 

PALESTINE AND JORDAN 
 
 

 
 
 

By 

Haya Fawzi Abu-ALrub 
 
 
 
 
 

Supervisor 

Dr. Shatha Qamhieh 
 
 
 
 
 
This Thesis is submitted in Partial Fulfillment of the Requirements for the Degree 
of Master of Finance, Faculty of Graduate Studies, An-Najah National University, 

Nablus-Palestine. 
 

2023 



 

 

 

 

DOMESTIC VERSUS 
PROFITABILITY: EVIDENCE FROM 

PALESTINE AND JORDAN

This Thesis was Defended Successfully on 

Dr. Shatha Qamhieh 
Supervisor 

 Dr.Majeed Mansour 
External Examiner 

Dr. Doha Tanbou 
Internal Examiner 

ii 

 
 
 
 
 
 
 
 
 

 

 
DOMESTIC VERSUS FOREIGN BANKS 

PROFITABILITY: EVIDENCE FROM 
PALESTINE AND JORDAN

 
 
 
 
 

By 

Haya Fawzi Abu-ALrub 
 
 
 

This Thesis was Defended Successfully on 05/06/2023 and approved by

 

  
 

  
Signature

 
 

FOREIGN BANKS 
PROFITABILITY: EVIDENCE FROM 

PALESTINE AND JORDAN 

 and approved by 

Signature 



iii 

Dedication 

We dedicate this great work to the martyrs, the prisoners and the fighters in this life. 

“I dedicate this work to Palestine.” 

To my mothers and Fathers were the only people who believed in me and gave me 

many happy moments that ease the stress of this life. 

"May Allah protect you." 

To my brothers and sisters, the sparking gems. Who stood by me in the darkest 

moments. 

"Always in hearts." 

To our real friends, the greatest gifts of life, they are always there when I need them. 

"Much love" 

 

  



iv 

Acknowledgment 

First and foremost, I want to give a big thank you to Allah, the Merciful, and the 

Beneficent, who blessed me with knowledge, thoughts, and cooperative people to 

enable me to achieve this thesis. 

I could never have accomplished this study without the encouragement, perseverance, 

assistance, and direct input from many academic lecturers and friends. I deeply express 

my special gratitude to my supervisor, Dr. Shatha Qamhieh, who has been a great 

support for my research from the beginning and has provided critical and constructive 

comments and suggestions throughout every step of our study. 

We are especially indebted to my dear mothers and fathers, who have provided me with 

much encouragement, support, and patience during the hard times. 

Finally, we are most grateful to Al-Najah University for giving me the experience and 

opportunity to do such research. 

 

  



v 

Declaration 

I, the undersigned, declare that I submitted the thesis entitled: 

DOMESTIC VERSUS FOREIGN BANKS 
PROFITABILITY: EVIDENCE FROM 

PALESTINE AND JORDAN 
 

I declare that the work provided in this thesis, unless otherwise referenced, is the 

researcher’s own work, and has not been submitted elsewhere for any other degree or 

qualification. 

 

 

  



vi 

Table of Contents 
 

Dedication ........................................................................................................................ iii 

Acknowledgment ............................................................................................................. iv 

Declaration ........................................................................................................................ v 

Table of Contents ............................................................................................................. vi 

List of Tables ................................................................................................................... ix 

List of Appendices ............................................................................................................ x 

Abstract ............................................................................................................................ xi 

Chapter One: Introduction and Theoretical Background .......................................... 1 

1.1 Profitability Determinants ........................................................................................... 1 

1.2 Purpose Statement ....................................................................................................... 3 

1.3 Problem Statement ...................................................................................................... 3 

1.4 Research Questions ..................................................................................................... 4 

1.5 Research Hypothesis ................................................................................................... 4 

1.6 Research Terminology ................................................................................................ 5 

Chapter Two: Theoretical Framework ......................................................................... 6 

2.1 The Banking System: .................................................................................................. 6 

2.2 The Tasks and Purposes of Banks in General: ........................................................... 6 

2.2.1 Purpose of the Banking Sector ................................................................................. 8 

2.3 Section One: Characteristics of the Banking System ................................................. 9 

2.4 Section Two: Commercial Banks ............................................................................. 10 

2.4.1 Definition of commercial banks ............................................................................ 10 

2.4.2 The Emergence and Development of Commercial Banks ..................................... 11 

2.4.3 The Importance of Commercial Banks .................................................................. 11 

2.4.4 Types of Commercial Banks .................................................................................. 12 

2.5 The Banking System in Palestine ............................................................................. 13 

2.6 Development of the Banking System ....................................................................... 14 

2.6.1 The First Stage ....................................................................................................... 14 

2.6.2 The Second Stage ................................................................................................... 14 

2.6.3 The Third Stage ..................................................................................................... 14 

2.7 Crises Impact on Palestinian Banks in Palestine ...................................................... 15 

2.8 The Monetary Authority in Palestine ........................................................................ 16 

2.9 The Banking System in Jordan ................................................................................. 18 

2.10 Central Bank Law ................................................................................................... 18 



vii 

2.11 Statistical Comparison between Banks Operating in the Palestinian and Jordanian 
Banking Sector in 2019 ................................................................................................... 18 

2.12 Section Three: Measuring Banking Performance ................................................... 19 

2.12.1 Bank Performance Concept ................................................................................. 19 

2.12.2 The Importance of Performance Measurement ................................................... 20 

2.12.3 Measuring the performance of banks ................................................................... 20 

2.13 Section Four: Profitability of Banks ....................................................................... 20 

2.13.1 Introduction .......................................................................................................... 20 

2.13.2 Bank Profitability ................................................................................................. 21 

2.13.3 Profit and Profitability ......................................................................................... 22 

2.13.4 Profitability Metrics ............................................................................................. 23 

2.14 Capital Adequacy .................................................................................................... 24 

2.15 Basel 3 and Capital Adequacy ................................................................................ 24 

2.16 Asset Quality Ratio ................................................................................................. 25 

2.17 Liquidity .................................................................................................................. 25 

2.17.1 Concept of Liquidity in Banks ............................................................................. 26 

2.17.2 Liquidity Ratio ..................................................................................................... 27 

2.17.3 Liquidity Management Theories: ......................................................................... 27 

2.18 Section Five: Comparison between Local and Foreign Banks in Palestine ........... 27 

2.19 Literature Review ................................................................................................... 28 

2.20 Related Studies ....................................................................................................... 30 

Chapter Three: Methodology ...................................................................................... 33 

3.1 Research Sample ....................................................................................................... 33 

3.2 Panel Data ................................................................................................................. 33 

3.3 Regression Model Specification: .............................................................................. 34 

3.4 Research Variables ................................................................................................... 35 

3.4.1 Variable’s Definition: ............................................................................................ 35 

3.4.2 Dependent Variables .............................................................................................. 35 

3.4.3 Independent Variables: .......................................................................................... 36 

3.4.4 External Factors-Control Variable: ........................................................................ 37 

3.5 Empirical Results ...................................................................................................... 39 

Chapter Four: Conclusion and Recommendations ......................................................... 53 

4.1 Conclusion ................................................................................................................ 53 

4.2 Limitation .................................................................................................................. 54 

4.3 Recommendations ..................................................................................................... 54 



viii 

References ...................................................................................................................... 56 

Appendices ..................................................................................................................... 66 

>?@ABب  ................................................................................................................................ ا 

 

  



ix 

List of Tables 

 

Table (1): Measuring Main Variables ............................................................................ 38 

Table (2): Summary Statistics ........................................................................................ 39 

Table (3): Descriptive Statistic ....................................................................................... 40 

Table (4): Correlation Matrix ......................................................................................... 41 

Table (5): The Difference between Local and Foreign Banks Profitability in Palestine 
and Jordan ......................................................................................................... 42 

Table (6): The Association between Country Macroeconomic Factors and Profitability42 

Table (7) Regression Model For All Bank ..................................................................... 43 

Table (8): Regression Analysis Domestic and Foreign Bank ......................................... 48 

 

 

 

 

 

  



x 

List of Appendices  

 

Appendix (A): Statistical Testing Details ....................................................................... 66 

 

 

 

 
  



xi 

DOMESTIC VERSUS FOREIGN BANKS PROFITABILITY:  
EVIDENCE FROM PALESTINE AND JORDAN 

By 
Haya Fawzi Abu-ALrub 

Supervisor 
Dr. Shatha Qamhieh 

Abstract 

This study compares the profitability of Palestinian and Jordanian foreign and domestic 

banks from 2008 to 2019. In this study, the researcher used specific bank data to 

determine the difference between domestic and foreign banks operating in Palestine and 

Jordan. The data was collected from the individual banks' financial statements. 

Moreover, the researcher used a set of control variables that include macroeconomic 

data for the two countries, which the researcher collected from the World Bank 

database. The sample consists of 7 local and 7 foreign Palestinian banks and another 16 

local and 8 foreign Jordanian banks. For the analysis, the researcher applied the panel 

data model. Return on assets, return on equity, and net interest margin are used to 

approximate banks' profitability. Our results are important to investors, creditors, 

decision-makers, regulators, and boards of directors as they are interested in the 

performance of the banking institutions. The researcher measured the profitability of 

banks using three distinct dependent variables: return on assets (ROA), return on equity 

(ROE), and net interest margin (NIM). The independent variables include bank specific 

factors and control variables. Bank specific factors include profitability, liquidity and 

risk. Control variables include macroeconomic indicators such as growth in gross 

domestic product (GDP), and inflation. After analyzing the 35 local and foreign banks 

in Palestine and Jordan from 2008 to 2019, and assessing their profitability with return 

on assets, return on equity, and net interest margin, the results showed higher liquidity 

and profitability for foreign banks. In addition, the bank specific internal factors 

significantly affected the banks’ profitability measured by return on assets (ROA) and 

return on equity (ROE), except for Assets Quality Ratio (AQ) and liquidity (LIQ) for 

local and foreign banks. Furthermore, liquidity (LIQ) had a significant impact only on 

Net Interest Margin (NIM), as it explained 3.9% of its variability.  

Keyword: bank profitability, domestic banks, foreign banks, internal & external 

factors. 



1 

Chapter One 

Introduction and Theoretical Background 

1.1 Profitability Determinants 

Through competition, foreign and domestic banks within a specific country compete 

against each other. This competition has increased as a result of globalization and 

financial market deregulation. It is a logical expectation that banking services, 

efficiency, and profitability will change under increased competition. Schaeck, K., and 

Cihák, M. (2014) note that an increase in the competition level leads to an increase in 

bank capital and profitability. Bouzgarrou et al. (2018) note that foreign banks are more 

experienced in managing banking businesses and have more resources available for 

financing than local banks, which may affect the profitability of local banks. Several 

studies compared foreign and local banks, in which local banks. They were found to 

have lower profitability and non-interest income relative to foreign banks (Claessens et 

al., 2001). increased cost margins within countries of low economic development 

(Lensink and Hermes, 2004). Less experience in trade finance and foreign exchange 

business but increased spending on banking technology and loan loss reserves (Xu, 

2011). Its higher contagion risk during the financial crisis as a result of the increased 

presence of foreign banks (Chen et al., 2009); During the crisis period, non-performing 

loans had a negative impact while capitalization had a positive impact on domestic 

banks (Efthyvoulou and Yildirim, 2014). 

In a study conducted within the MENA region by Moudud-Ul-Huq et al. (2020), 

competition negatively affected banks' profitability. The researchers recommend that 

banks improve the monitoring process of loans to decrease their credit risk level and 

thus improve their profitability. Muda et al. (2013) compared Malaysia's profitability 

determinants and recommended domestic and international Islamic banks. Their 

findings revealed a distinction between the profitability determinants of domestic and 

international Islamic banks. In addition, local Islamic banks are found to be more 

profitable than their international counterparts. The researchers suggest that local banks 

strengthen their Islamic banking system by enhancing their risk management practices. 

A similar study performed by Azzam and Siddiqui (2012) in Pakistan found domestic 

and foreign banks to have different profitability determinants. The study results show 



2 

that foreign banks have higher domestic banks but are less affected by the host country's 

macroeconomic factors.  

Almazari (2014) compared the impact of bank-level data on the profitability of Saudi 

Arabia and Jordan banks. He found that Jordanian banks are less profitable than Saudi 

banks. The level of liquidity risk, net credit facilities to total assets, total equity to total 

assets, and net credit facilities to total deposits all positively affect their profitability. 

Khaza'lah & Khazu'le (2018) studied the relationship between bank ownership and 

profitability in Jordan. They found that foreign ownership harmed bank profitability.  

Twairesh (2013) investigated the impact of foreign bank entry on Jordanian banks. The 

results indicate a negative effect for foreign banks on the accounting profit of local 

banks Alrguibat (2015) analyzed the profitability and competitiveness factors of 

Jordanian commercial banks. The results indicated that the level of competitiveness is 

related to bank size, in which large and medium-sized banks have almost full monopoly 

power, but small banks have monopolistic competition. The results also pointed out that 

the higher cost of capital is associated with higher competition and the positive effect of 

the cost of capital on banks' profitability. 

In Palestine, Ayyash & Jawad (2020) described the Palestinian banking sector as a 

monopolistic competition system, within which foreign and domestic banks determine 

together the rates that allow them to realize higher profits. They pointed out that large 

banks achieve greater profits because of economies of scale and thus, lower production 

costs. On the other hand, they find that small banks can also increase their earnings 

based on lower operating costs, large deposits, and lending. Another study by Al Haj 

(2004) used a questionnaire to determine the effect of foreign banks on the activities 

and profitability of local Palestinian banks. The study results showed that foreign banks 

negatively affected the return on investment of local Palestinian banks. 

Even though there are a limited number of studies comparing the profitability of 

domestic and foreign banks in Jordan, Palestinian researchers need to address this topic 

directly. This is the first study comparing the profitability of domestic and foreign banks 

operating in Palestine and Jordan from 2008 to 2019. The significance of this study 

stems from its inclusion of the 2008–2009 global financial crisis.  



3 

Also, the peak of the government debt crisis in Greece and its effect on Europe in 2010-

2012; and finally, the Corona pandemic starting period was by the end of 2019. This 

study's results could benefit decision-makers, customers, investors, and banking 

institutions. Both local and foreign banks can utilize the outcomes of this study to 

understand the varied sources of their profitability in Palestine and Jordan. 

1.2 Purpose Statement 

This aims of this study are in twofold: first, the study allows to compare the profitability 

level of domestic and foreign banks operating in Palestine and Jordan using a set of 

internal and external factors that are expected to affect banks' profitability. Hence, the 

study will highlight the factors affecting banks' profitability under different banking 

ownership types. Second, the study will allow to determine the difference between the 

two banking types under different crisis periods (global financial crisis, government 

debt crisis, and Corona Pandemic crisis). Hence, the study will allow us to determine 

how the different crisis periods affected the profitability of those banking types in 

Palestine and Jordan. 

For this purpose, the researcher used a set of bank-level data to determine the difference 

between local and foreign banks operating in Palestine and Jordan. The Palestinian 

banking market includes 14 banks, 7 of which are local, and 7 are foreign banks, 

indicating a 50% distribution for each bank type within the Palestinian market. The 

Jordanian banking market consists of 24 banks, 16 of them are local and 8 are foreign 

banks, indicating that 67% are local banks, while 33% are foreign banks. The researcher 

also used a set of control variables that includes macroeconomic data from the two 

countries. 

1.3 Problem Statement 

In Palestine and Jordan, the available literature is mainly concerned with banking 

profitability without clearly distinguishing the difference in profitability due to the 

difference in bank ownership type. Thus, this study mainly compares local and foreign 

banks' profitability in Palestine and Jordan. Palestine includes seven local banks and 

seven foreign banks. Jordan includes 16 local banks and seven foreign banks.  

  



4 

Return on assets (ROA) (see, e.g., Pasiouras & Kosmidou, 2007; Samad, 2015; 

Chantapong, 2005), as well as return on equity (ROE) and net interest margin (NIM), 

are used to measure the profitability of banks (see, e.g., Dietrich and Wanzenried, 2014; 

Bozgaro et al., 2018). The application of ROA disregards the impact of financial 

leverage and associated risks (Dietrich & Wanzenried, 2014; Bozgaro et al., 2018). 

Bouzgarrou (2018) stated that internal and external factors influence banks' profitability. 

Internal factors are bank-specific and depend on the bank's liquidity, and risk profile. 

We follow Bouzgarrou et al., 2018 in selecting the bank-specific factors to compare the 

profitability of local and foreign banks in Palestine and Jordan1. External factors include 

macroeconomic indicators as growth in Gross Domestic Product (GDP) and inflation, 

which bank management cannot control.  

1.4 Research Questions 

The researcher will use the Panel data model to answer our main research question: 

Is there a difference between domestic and foreign banks’ profitability in Palestine and 

Jordan? 

From the main question, the researcher elicits two sub-questions: 

1. Do domestic banks' internal factors affect their profitability differently from foreign 

banks? 

2. Do country macroeconomic factors affect domestic banks' profitability differently 

from foreign banks? 

1.5 Research Hypothesis 

Based on the main research question, the researcher derives the main hypothesis as in 

the following: 

H0: There is no significant difference between domestic and foreign banks’ profitability 

in Palestine and Jordan. 

From the main hypothesis, the researcher derives the following two sub hypothesis: 

                                                      
1 Independent variables include return on assets, return on equity, and net interest margin. Banks’ internal 

factors include capital adequacy ratio, liquidity ratio, assets quality ratio, off-balance sheet engagements 
ratio, overhead to total assets, bank type, and bank size. Table 1 provides a list of the variables and their 
measurement. 



5 

H01: Domestic banks' internal factors do not affect their profitability differently from 

foreign banks. 

H02: Country macroeconomic factors do not affect domestic banks profitability 

differently from foreign banks. 

1.6 Research Terminology 

Banking System: The banking system refers to the network of financial institutions, 

including commercial banks, savings and loan associations, credit unions, and central 

banks, that provide various financial services, such as accepting deposits, facilitating 

loans, and managing monetary policy within an economy (Freixas & Rochet, 2008). 

Domestic Banks' Profitability: pertains to the financial performance of banks that 

operate primarily within their home country. It reflects the ability of these banks to 

generate profits from their core banking activities, including lending, investments, and 

other financial services (Berger & Bouwman, 2013). 

Foreign Banks' Profitability: refers to the financial performance of banks that operate 

in a foreign country or jurisdiction. It assesses the ability of these banks to generate 

profits within a host country, taking into account factors such as local market 

conditions, regulations, and competition (Claessens & Horen, 2014). 

Internal Factors (Dependent and Independent): Internal factors in research refer to 

variables or elements that originate from within the system being studied. Dependent 

internal factors are variables that are influenced by other factors and are the outcomes of 

interest in a study, while independent internal factors are variables that are manipulated 

or controlled to observe their impact on the dependent variables (Trochim, 2006). 

Macroeconomic Factors: Macroeconomic factors are large-scale economic variables 

or conditions that affect the overall performance and behavior of an economy. These 

factors include indicators like inflation rates, unemployment rates, gross domestic 

product (GDP) growth, interest rates, and exchange rates, among others. 

Macroeconomic factors provide insights into the health and stability of an economy and 

can have a significant impact on businesses, financial markets, and policymaking 

(Mankiw, 2016). 



6 

Chapter Two 

Theoretical Framework 

2.1 The Banking System: 

The banking system is a crucial component of any modern economy, encompassing a 

complex network of financial institutions responsible for facilitating economic 

transactions and channeling funds between savers and borrowers. It plays a pivotal role 

in the financial intermediation process, which is essential for the efficient allocation of 

resources in an economy (Freixas & Rochet, 2008). This system comprises a diverse 

array of institutions, including commercial banks, savings and loan associations, credit 

unions, and central banks, each with its own distinct functions and roles. Commercial 

banks, for instance, serve as intermediaries that accept deposits from individuals and 

entities while providing loans and credit to borrowers, fostering economic growth and 

stability. Central banks, on the other hand, wield significant influence over monetary 

policy, regulating the money supply and interest rates to control inflation and ensure the 

stability of the financial system (Mishkin & Eakins, 2015). Thus, the banking system 

serves as the cornerstone of modern economies, facilitating economic activities and 

maintaining financial stability. 

2.2 The Tasks and Purposes of Banks in General: 

Wright (2012) states that financial intermediaries within the financial system's 

framework facilitate technological and economic development. Entrepreneurs in need of 

financing are linked to loan-providing financial intermediaries. The business 

relationship benefits entrepreneurs and loan providers, and loans benefit the economy 

because they are typically used to finance large investments such as real estate or 

automobiles. Various financial intermediaries exist, including venture capitalists, 

insurance companies, and banks (Hillier, Grinblatt, & Titman, 2011). It is linked to 

other financial institutions and markets in a financial system in order for the system to 

share risks, facilitate trading, and distribute funds (Wright, 2012). 

A bank's general business model may be described as follows: Banks generate income 

by extending credit to customers, who must pay interest in order to submit a loan 

application. Banks administer depositors' funds. The bank pays interest on medium- and 



7 

long-term deposits, but the interest paid is less than the interest earned on loans 

(Deutsche Bundesbank, 2015). 

This is reflected in the balance sheet, with the assets side listing cash reserves and loans 

granted to individuals, companies, and banks, and the liabilities side listing loans 

obtained from banks and liabilities owed to individuals and companies in addition to 

stocks and reserves (Deutsche Bundesbank, 2015). These obligations may be current or 

demand deposits that the customer can withdraw at any time, such as the savings 

account that pays varying interest rates, but money can be withdrawn without incurring 

a financial penalty, whereas term deposits cannot be withdrawn prior to a 

predetermined, agreed-upon date. Customers with term deposits receive a higher, fixed 

rate of interest than those with savings accounts (Wright, 2012). 

Converting deposits into loans, typically short-term deposits at commercial banks, and 

converting them into long-term loans requires the bank's employees to manage assets 

and liabilities for three reasons (Wright, 2012). There is often a minimum level of 

reserves that exceeds this limit, which are referred to as "excess reserves." Since loans 

and reserves are major revenue sources for banks but do not generate interest, banks 

avoid having a large amount of cash on hand (Wright, 2012). The second reason for 

profit is that assets must be managed profitably and liabilities must be acquired at the 

lowest possible cost. Banks must evaluate credit risks, and they can levy higher interest 

rates on loans with greater risk (Wright, 2012). The third reason is the management of 

capital adequacy. This indicates that banks have a certain amount of equity to continue 

operations during times of financial difficulty (Wright, 2012). 

Banks perform many important and basic functions that enhance the confidence of 

customers on the one hand and enhance the financial position of the bank on the other 

hand. The functions performed by banks can be summarized as follows: 

Traditional jobs that were associated with the emergence of banks include accepting 

deposits, granting loans. 

Accepting deposits and savings from institutions and individuals are in the form of 

current accounts or term deposits, and then lending a portion of these funds to projects 

and individuals in the form of short-term loans to earn a reasonable return (   ،عبـد البـاقي



8 

2016). Granting credit facilities, one of the most important means used by the 

commercial bank to employ what it has of money to obtain returns, is linked to 

accepting deposits as the bank works to use the funds available to it in the best way 

possible ( 2006زعيتر،  ). 

Modern jobs that arose with the development of banks to maintain the continuity of the 

bank’s work and achieve profits Includes financing foreign operations, collecting 

checks, and issuing credit cards (Eman, 2017). 

1. Trading in foreign currencies, letters of guarantee, issuing guarantees and making 

money transfers ) ،2006زعيتر( . 

2. Creating modern means to displace money, such as bank checks, bills of collection, 

and other means of modern cash dealing ) ،2006زعيتر( . 

3. Providing advisory services to clients by conducting financial studies for clients to 

determine the optimal amount of financing, The payment mechanism and its 

agreement with the project’s policy of purchase, sale, production and collection .

) 2015خالف، (  

2.2.1 Purpose of the Banking Sector  

The most important reforms in continuing the banking sector’s work depend on 

developing the payment system and following accounting standards in addition to the 

deposit insurance system. Each structure will be explained separately: 

• Commitment to accounting standards adopted at the global level 

So that the regulatory systems in the Arab countries impose the provision of unified 

accounts for all their banking branches, so that the financial data on the items registered 

outside the balance sheet must be published and made available to the regulatory 

authorities and the public, and the banks are responsible for the validity of these data in 

the event of fraud or forgery, banks shall bear full responsibility and penalties shall be 

imposed. 

  



9 

• Payment and settlement systems 

Most central banks have developed payment systems and processes in line with global 

trends as a result of the technical and technological advancements in the use of 

electronic means in the field of payment systems within a single country and between 

countries. Jordanian banks have worked on a check clearing system to speed up the 

checks exchange process by sending copies of checks and other information 

electronically. 

• Credit Bureaus 

Regulatory authorities work to provide information about borrowers in order to take 

precaution and caution in granting them credit, which contributes to reducing credit 

risks. The reports providing information are divided into two parts: First, there are 

inquiry offices for borrowers, and this requires opening special offices that collect 

information in return for a commission. Secondly, the borrowing record This section is 

managed by the Central Bank with the aim of supervising information about lending 

and borrowers. This record is available in Jordan and Egypt. No one has access to the 

data except in special cases. 

• Deposit Insurance System 

Commercial banks remain exposed to the risk of bankruptcy, and the weaker side 

remains depositors, so their savings must be secured so that they are not affected in 

cases of bankruptcy. Work has been done to establish systems to secure deposits. In 

2002, the International Deposit Insurers Association was launched in Switzerland, and 

Jordan and Lebanon joined its membership, aiming to achieve the stability of financial 

systems. 

2.3 Section One: Characteristics of the Banking System 

A stable and resilient banking system is the backbone of the economy, as it increases 

confidence among stakeholders in the banking system by efficiently and effectively 

managing the flow of money from lenders to borrowers. The stability of banks depends 

mainly on their lending and financing structures. Banks in general have a mixture of 

retail deposits and non-deposit financing; after the liberalization of interest rates and the 

development of other financial products, deposit products became a cost to banks, so the 



10 

focus of banks shifted to wholesale financing, which led to a relaxation of liquidity 

constraints and highly liquid wholesale markets to accelerate the lending activities of 

banks. The banks lent money for the long term, and they financed it from short-term 

sources, believing that they could get money from the wholesale markets whenever they 

needed it. It led to the creation of the liquidity crisis, which was one of the main factors 

behind the emergence of the global financial crisis between 2007 and 2009. The global 

financial crisis forced the banking industry to concentrate on its core competencies: 

accepting deposits and lending to entrepreneurs or borrowers, as well as determining the 

factors. They affect bank deposits through such factors as deposit rates, bank stability, 

service quality, and access to the bank, as well as the impact of other social and 

economic factors on deposits such as education, health, income, and markets finance 

(Srivastava, 2020) 

In any society, the banking system mainly contains banking units represented by the 

central bank, commercial banks, investment banks, and specialized development banks. 

In some countries, it also contains Islamic banks and comprehensive banks, as well as 

exchange institutions, lending institutions, investment and development institutions, and 

other institutions that practice any business that is considered a banking business. In 

addition, it contains the legislation, regulations, and laws governing banking in any 

society ) ،2003عاشور( . 

2.4 Section Two: Commercial Banks 

2.4.1 Definition of commercial banks 

It is a type of financial institution whose activity is to accept deposits and grant credit, 

as it is an intermediary between people who have surplus funds and those who have a 

deficit in funds. It is an institution whose goal is to trade in money by obtaining it in the 

form of deposits and loans and using it in a variety of investment fields ( 2016عبدالباقي،  ). 

and one of the most important features that distinguish banks from other institutions is 

their acceptance of deposits, which depositors can withdraw at any time, meaning on-

demand deposits ( 2006زعيتر،  ). 

According to Eman (2017) Bank: It is a financial institution whose operations focus on 

collecting money in excess of the needs of its owners and lending it according to certain 



11 

principles or investing it. Its operations are distinguished by dealing with short-term 

credit.  

2.4.2 The Emergence and Development of Commercial Banks  

The origin of the banks is due to the process of merchants, moneylenders, and 

goldsmiths depositing money in exchange for issuing receipts and certificates of deposit 

for the amount of the deposit. The money changers have noticed that the depositors do 

not withdraw their money all at once; they withdraw part of the amount and part of the 

money remains frozen, which encouraged the cashier to lend this money. Hence, 

interest became paid to depositors to encourage depositors to deposit their money, and 

with this, the bank’s activity developed in the field of receiving deposits in return for 

interest and also granting loans against interest (Eman, 2017). 

The first bank was established in Venice, Italy, in 1517, then the Bank of Amsterdam in 

1609, with the primary purpose of keeping deposits and transferring them upon request. 

The number of banks gradually increased, and most of them belonged to institutions and 

individuals. As long as laws protected depositors, if banks were bankrupt, depositors 

could return to the private funds of the owners of these banks. And the resultant 

industrial revolution in European countries led to growth and expansion of corporate 

activity, which called for the need for large banks that could finance these companies, 

hence A number of banks were established that expanded their business and established 

branches for them everywhere (Eman, 2017).  

2.4.3 The Importance of Commercial Banks 

Banks play an important role in economic activity by directly affecting the size of the 

facilities provided, which affects the money supply in the economy. Also, banks are 

considered one of the monetary policy tools that affect the economic situation, such as 

recession or inflation, through the central bank’s control of debit and credit or interest 

rates. The discount rate and the rates imposed on the mandatory reserves and the 

financial regulatory ratios, also for banks, are important in achieving economic growth 

through the interaction of commercial financial institutions on the one hand and their 

dealers on the other, by facilitating the transactions of traders and investors and the 

employment of large numbers of employees in them, and by increasing its profitability 



12 

and production, which increase the country's gross national product and increase the 

market value of its owners' shares. ) ،2006زعيتر( .  

2.4.4 Types of Commercial Banks 

The type of bank depends on the relationship between deposits and the manner in which 

they are invested, i.e., the relationship between the credit that is granted and the credit 

that is obtained. In most countries, the banking system consists of three main types of 

banks, which can be described as follows: commercial banks, savings banks, and 

investment banks: 

1. Central Bank 

The central bank is at the head of the apparatus, the bank, and its names differed 

between countries as it was known in the United States as the Federal Reserve System, 

and in India, it was known as the Reserve Bank, while France called it the Bank of 

France. Despite the different names, most countries call it by the same name: The 

central bank was defined as the bank that determines the monetary and banking 

structure to achieve the greatest benefit to the economy by performing many functions, 

such as managing financial operations ) 2013الدوري والسامرائي، . (  

2. Commercial banks 

It is one of the oldest types of banks in terms of its origin, the most numerous, and the 

most important. Commercial banks, in their contemporary form, are considered the 

legitimate descendants of money changers and goldsmiths, and they are defined as the 

banks that have been given a license to engage in banking business, including providing 

banking services and accepting deposits of all kinds. 

It is also known as a deposit bank, and the most important characteristic of it is the 

acceptance of demand deposits and current accounts. This type of bank engages in 

external and internal financing operations in order to achieve development goals and 

support the national economy, in addition to its contribution to the establishment of 

projects as decided by the Central Bank ) ،2015خالف( . 

  



13 

3. Specialized Banks 

They are the financial institutions that are established to serve a specific sector, and they 

are development banks, some of which accept deposits and some of which do not, based 

on the law and the bank's main sources. The financing of these banks focuses on the 

long term, and they carry out specialized development operations, whose financing 

requires specialized expertise and knowledge of the nature of production operations 

)2013الحاج وفالح، ( . 

2.5 The Banking System in Palestine 

Several laws and regulations have succeeded in the Palestinian territories that have had 

an impact on the banking sector, starting with the British Mandate rule until 1948, then 

the Jordanian rule in the West Bank, and the Egyptian rule in the Gaza Strip, and then 

the Israeli rule between 1967 and 1994, and at the end of the Palestinian Authority’s 

legislation after 1994 to the present. Therefore, these periods affected the performance 

of the banking sector in general, according to the prevailing political situation and the 

provisions that apply to the financial sector in general and the banking sector in 

particular ( 2014ماس،  ). 

As a result of these political events, the banking system and sector were subjected to 

weakness and destruction at times, and they were not formed regularly until after 1994, 

after the signing of the peace agreement between the Palestinian Authority and Israel. 

As a result, the Palestinian Monetary Authority was established in 1994, which worked 

to open many Islamic and commercial banks. The Arab and local banks, the Palestine 

Stock Exchange and many of its affiliated brokerage companies, and the Monetary 

Authority work on managing the Palestinian banking system and financial institutions in 

terms of supervision and control ( 2016أبو عيدة،  ). 

  



14 

2.6 Development of the Banking System 

The Palestinian banking system is characterized by going through three stages, which 

are the following: 

2.6.1 The First Stage 

During this period, the West Bank was under the control of Jordan, while the Gaza Strip 

was under the control of Egypt. The issuance of the Palestinian pound was halted at this 

point, and the Palestine Monetary Council was dissolved, and the Jordanian dinar was 

issued in 1950, while the Palestinian currency was replaced by the Egyptian pound 

( 2014ماس،  ). in the Gaza Strip. The number of banks in this period was eight banks with 

32 branches in the West Bank, and six banks with seven branches in the Gaza Strip, 

including the Bank of Palestine and the Arab Bank ( 2016أبو عيدة،  ). 

2.6.2 The Second Stage 

This period stretched from 1967 until 1994, as Israel occupied the West Bank and Gaza 

Strip, and consequently, a separation from Jordan and Egypt occurred, and it came 

under the rule of Israel. Accordingly, all banks operating in the West Bank and Gaza 

were closed by military order. This continued until the occupation agreed to open 

branches belonging to some Arab and local banks, including Cairo Amman Bank, and 

this continued until the signing of an agreement between the Palestinian and Israeli 

sides ( 2016أبو عيدة،  ). 

2.6.3 The Third Stage 

This period began from 1994 to the present, when it witnessed the birth of the 

Palestinian banking system with the issuance of instructions and laws regulated by the 

National Authority, which took control of matters in its hands with regard to banks with 

the presence of the Paris Agreement, which lays down the general framework for the 

banking system, the most important of which was stipulated in the establishment of the 

Palestinian Monetary Authority. This stage was marked by the occurrence of major and 

significant developments on the banking system, as well as the impact on banks in terms 

of increasing their number and number of services. ( 2014ماس،  ). 



15 

2.7 Crises Impact on Palestinian Banks in Palestine 

The Palestinian banking sector differs from others in its response to crises because it is 

subject to Israeli occupation and its environment is characterized by local instability; 

there is complex liquidity management in the sense of cash movement between banks 

and their branches due to military restrictions and the absence of a national currency; 

despite this, it is distinguished by its resilience to shocks as a result of the occupation. 

For the PMA's use of precautionary tools, methodologies, and building holistic 

scenarios, as well as the adoption of the early warning system and one of the most 

significant experiences of the Palestinian banking sector in the face of disasters during 

the Gaza War in 2014, the Monetary Authority worked to ensure the effectiveness of 

business continuity and reduce risks, as banks were provided with the necessary cash 

and strengthened the implementation of banking services over the course of the year. 

Financial Crises  

The history of financial crises dates back to the late nineteenth century, which centered 

on the Great Global Depression during the period 1929-1933. and the 1979 exchange 

rate crisis. 

Banking crises also prevailed, which led to the intervention of governments to support 

and rescue banks during the period 1975-1986. The global financial crisis during the 

period 2007-2009. 

The global financial crisis was caused by the mortgage crisis, which began to appear in 

2007 and whose big bubble exploded in the second half of 2008, due to the failure of 

millions of borrowers to pay their debts to banks in order to buy housing and real estate 

in the United States, which led to the occurrence of this crisis in the American economy 

and had effects on the economies of Europe and Asia. Despite the hundreds of billions 

of dollars that were pumped into the global financial markets to put an end to the 

mortgage crisis, it developed into a global financial crisis ) ،2009علي( . 

Currency crisis: The “foreign exchange crisis” occurs as a result of speculative attacks 

on the currency of a country. These attacks lead to its depreciation or force the central 

bank to defend the currency by raising the interest rate to a large percentage, which 

leads to the collapse of the currency, as happened in Thailand in 1997 ) ،2012البستنجي( . 



16 

Banking crises: When the tendency withdraw deposits from a bank, forcing the 

government to intervene by providing large-scale financial support to banks to prevent 

large-scale negative effects in the country, banking crises are represented in several 

forms (2012 )،البستنجي : 

1. Liquidity crisis: In the event that the bank lends and operates most of the deposits in 

long-term investments in return for maintaining a certain liquidity ratio to meet the 

daily withdrawals, and in the event that the daily withdrawals are higher than the 

minimum the bank finds itself facing a lack of liquidity and makes it unable to 

respond to depositors’ requests. 

2. Credit crisis: Banks' refusal to give customers credit as a result of fear of failure to 

meet the payment due to unfavorable economic conditions. 

3. Debt crisis: This crisis occurs either when borrowers stop paying or when lenders 

believe that a default may happen, which leads them not to grant new loans and try to 

liquidate old loans.  

2.8 The Monetary Authority in Palestine 

The Monetary Authority was established in 1995, and in 1997, the Legislative Council 

issued a law confirming and supporting the existence of the Monetary Authority and 

helping it to ensure banking work and maintain monetary stability and economic 

growth. The Monetary Authority seeks to become the central bank in Palestine, to have 

an integrated banking system capable of advancing the national economy and 

contributing to the process of economic development, and to have access to an 

environment conducive to the issuance of a Palestinian currency (PMA, 2021). 

In the absence of a central bank in Palestine, the Monetary Authority was established as 

an independent institution with full powers from the Israeli side as a supervisory body 

responsible for all banks operating in Palestine, opening the door for many banks to 

enter the Palestinian market and engage in banking activity, with the number of banks 

increasing from 2 to 13 branches in the West Bank and 21 banks in the Gaza Strip by 

the end of 2002 ( 2004الخليل،  ). 

The Palestinian banking sector has suffered since its inception, since Israel's decision to 

prohibit all banks from operating in Palestine in 1967, and during a period when Israel 



17 

allowed Israeli banks to operate and open branches in the West Bank and Gaza, but they 

did not perform the normal functions of banks. Normally, development assistance is 

limited because it works to serve the occupation, which seeks to destroy the Palestinian 

economy and weaken its sectors, but in the early 1990s, with the start of the peace 

process and the convening of the peace conference in Madrid in 1991, a new banking 

policy began in the Palestinian areas, and the banking system underwent a 

transformation. The Monetary Authority was established for the first time in Palestine, 

carrying out central bank functions and entrusting it with the authority to license and 

monitor banks; thus, the Monetary Authority was established in accordance with the 

protocol of the Palestinian economic agreement signed in Paris in 1994 between the 

Palestine Liberation Organization and the Israeli occupation authority (The Palestinian 

Monetary Authority, 2013). 

The Palestinian Monetary Authority was established by a presidential decree in 1995 as 

an independent institution, and it was established to achieve many of the tasks contained 

in the Paris Economic Protocol, as it performs most of the traditional functions of 

central banks and also works as a financial advisor and agent for the Palestinian 

Authority. As a result of the absence of cash, the Palestinian Monetary Authority lacks 

the tools necessary to carry out some of the essential functions performed by the central 

bank, such as the function of lender, the function of controlling the volume of credit and 

its assignment, and the adoption of an exchange rate system (Agha, 2013). 

The banking sector in Palestine is one of the important sectors that affect the economy 

in general, and the role of the banking sector varies from one country to another. In 

Palestine, it depends directly on the banking system for financing development and 

providing the liquidity necessary for financing. Since its establishment, it has been 

interested in reactivating the banking role by reopening and licensing Arab banks that 

were operating in Palestine before the June 1967 war, in addition to establishing and 

licensing new local banks (Awda, 2011). 

  



18 

2.9 The Banking System in Jordan 

The Jordanian banking system contains the Central Bank of Jordan, which was initially 

the Jordanian Monetary Council in 1949 and was the only authority authorized to issue 

money in Jordan. With Jordan's desire to enhance economic independence, the 

government saw that the Monetary Council would be unable to keep pace with 

development requirements in the coming period, which prompted the Jordanian 

government to establish the Central Bank of Jordan, one of whose most important 

objectives is to maintain monetary stability in Jordan, encourage economic growth, and 

maintain the Kingdom's gold reserves. monitoring banks as well as providing advice to 

the government in drawing up financial policies ( 2009الغالبي و عطشان،  ). 

2.10 Central Bank Law 

The existence of a central bank is regarded as one of the most important financial 

institutions in a nation due to its effective role in supporting and stabilizing the financial 

system and regulating the level of local liquidity to ensure the attainment of the targeted 

economic growth rates. Therefore, the central bank must have the practical 

independence necessary to withstand any external pressures. the researcher mean the 

concept that the central bank has the freedom to choose and use the appropriate tools to 

manage monetary policy. Central banks in most Arab countries are responsible for 

supervising the supervisory system. as it is one of the most important factors to achieve 

financial stability because it follows up and audits the performance of the banking 

sector through the main indicators and the capabilities available to the supervisory body, 

which led to reducing non-performing loans and raising capital adequacy ratios )  تطـور

)األداء واإلصالحات في القطاع المصرفي في الدول العربية . 

2.11 Statistical Comparison between Banks Operating in the Palestinian and 

Jordanian Banking Sector in 2019 

In 2019, there were 14 licensed banks in Palestine, including 4 local banks, 3 Islamic 

banks, and 7 foreign commercial banks, with a total of 370 branches distributed among 

239 local banks and 131 foreign bank branches. The number of licensed banks in Jordan 

has reached 24. The number of bank branches has reached 938, comprised of 862 

domestic banks and 76 foreign banks )   ،2019جمعية البنوك فـي فلسـطين( . The total assets of 



19 

banks operating in Palestine amounted to 17.107 million dollars in 2019, the total assets 

of banks operating in Jordan reached 75.659 million dollars, and the total customer 

deposits with banks operating in Palestine in 2019 amounted to 14.495 million dollars. 

Jordanian banks $49.796 million. As for the banking facilities granted by the Palestinian 

banking sector to its customers, they amounted to 88.14 million dollars in 2019. The 

total value of the direct facilities granted by local commercial banks amounted to 

$54.32 million in 2019, while the branches of foreign banks collectively provided direct 

financing with a value of $32.09 million. The credit facilities granted to customers in 

Jordan amounted to 38.198 million dollars. The net profit of banks operating in 

Palestine is $159 million, a decrease of 9.2% compared to 2018. It should be noted that 

the combined profits of the local commercial banks in 2019 were $72.80 million. And 

the foreign banks have together achieved profits of $90.57 million in 2019. The profit 

rate for banks operating in Jordan is $827 million. As for the total equity of the 

Palestinian banking sector, it increased by 3% to reach $1,787 million in 2019 

compared to $17.34 million in 2018. The proportion of equity held by banks operating 

in Jordan amounted to $89.24 million ) ،2019جمعية البنوك في فلسطين.(  

2.12 Section Three: Measuring Banking Performance  

2.12.1 Bank Performance Concept 

Despite the large number of research studies on the performance of banks, there was no 

consensus on a unified concept of performance. The reason for the dispute is the 

multiplicity of criteria and standards that the researcher adopts in studying and 

measuring performance, as Kherakhem defined it as doing an action or activity to reach 

certain goals. Performance is defined as a set of practices and activities that lead to the 

achievement of goals ( 2010الـداوي،   ). While Zahra and Bromily defined it as the results 

achieved as a result of the interaction of internal factors of all kinds with external 

influences to reach the goals of the institution ( 2016آسبة،  ). 

  



20 

2.12.2 The Importance of Performance Measurement 

Performance measurement provides many benefits, the most important of which is 

focusing on what must be accomplished to achieve the goals while saving the necessary 

time and energies. It also contributes to improving the management of services and the 

process of their delivery to customers, giving clarifications about the implementation of 

programs and the costs of these programs, and enhancing accountability. In addition, 

there can be no improvement. Without measurement, goals cannot be reached without 

knowing the reality of operations )  ،2018سـعودي( , providing important information for 

various administrative levels and contributing to the process of economic and social 

development, discovering deviations and knowing their causes to take appropriate 

measures to correct them and prevent their recurrence, achieving the integrity of the 

financial position of banks and the extent of the consistency of the distribution of 

available funds on the various aspects of investment and the efficiency of their 

utilization of those funds ) ،2015تربعة(  

2.12.3 Measuring the performance of banks 

Measuring performance means that it is a comprehensive process that is used to collect 

accounting and other data, to find out the banking situation of banks, and to determine 

the mechanism for managing resources during a certain period ( 2000قريشي،  ). There are 

those who believe that this process is a set of procedures whose main objective is to 

compare the actual results with the established objectives, to determine the extent to 

which the results are consistent with the specific objectives, and to assess the level of 

performance efficiency ( 2016آسبة،  ). 

2.13 Section Four: Profitability of Banks 

2.13.1 Introduction 

Achieving profit is one of the most important goals that banks seek, as it is necessary 

for their continuity and survival. It is also considered one of the basic requirements for 

each of the depositors, lenders, shareholders, supervisory authorities, and management, 

as lenders, depositors, and shareholders look to it as a source of confidence and as an 

important indicator for the bank’s management to measure its efficiency in using 



21 

existing resources (2006 ،زعيتـر), And in the following, the researcher will explain the 

concept of profitability and the profitability of banks, in addition to profitability 

measures. 

Any investment project whose main objective is to achieve profit is just a number that 

represents the difference between the revenues and returns achieved and the costs and 

expenses that it incurs. Subsequently, the profit increases as the revenues increase and 

the expenses decrease ) ،2017حمد وناجي( . Profitability is an indicator of the efficiency of 

the project and its management in the use of existing resources. It represents the net 

results of a large number of policies and decisions, and therefore it is considered an 

indicator of project performance ) ،2006زعيتر( . 

2.13.2 Bank Profitability 

It is the relationship between the profits achieved by banks and the investments that 

contributed to achieving these profits, and because of the contradiction between the 

profitability of the banks and their liquidity, the banks must not focus on profitability 

only but also take into account the risks of credit and investment projects, so their goal 

is to maximize the value of the bank and the wealth of its owners. Increasing this 

profitability depends on increasing returns, reducing costs, or both, and ensuring that the 

returns of any investment or credit project are higher than their costs ) ،2017حمد وناجي( . 

This refers to the capacity of banks to generate revenues that exceed expenses, and it is 

related to the capital of the bank. If the banking sector is robust and profitable, it will be 

better able to withstand negative shocks and contribute to the financial system's stability 

(Alshatti, 2015). 

Profitability is, in general, the relationship between the institution's profits and the 

investments that contributed to those profits. Profitability is regarded as an 

organization's objective and a performance metric. Profitability is determined by the 

relationship between profits and sales or profits and the investments that contributed to 

their achievement. Since current liabilities are paid from current assets within one year, 

liquidity measures help ensure that a bank can pay its operating expenses and other 

short-term or current liabilities (Alshatti, 2015). 



22 

Eman (2017) stated that one goal of the basic is to achieve the maximum possible profit 

for the bank, which is the result of the difference between the total revenues and the 

total expenditures of the bank. The profit is achieved for the bank through the lending 

and investment operations carried out by the bank, in addition to the capital gains that 

occur as a result of the increase in market values of the bank’s assets. As for its 

expenditures, it includes administrative and operational expenses, interest paid by the 

bank on deposits, and losses incurred by loans that the bank is unable to recover. 

Abdulrahman & Alfarsi (2020) said that profitability is the bank's ability to earn and 

achieve profits over a specified period of time while taking the fewest possible risks. It 

is expressed through the profits it earns and the investments that contributed to earning 

these profits. Profitability is one of the primary objectives of banks, and it indicates the 

extent to which financial institutions are able to utilize their resources with high 

efficiency in order to achieve profitability. 

2.13.3 Profit and Profitability 

Profit is defined as the remaining part (surplus) after deducting the total costs from the 

total revenue and is the basis for calculating the tax and paying the distributed profits. It 

is considered the best measure of knowing the success of the institution from its failure. 

Profit reflects a decrease in liabilities, an increase in assets, and an increase in equity, 

which provides resources for investment; without it, it may lead to the extinction of the 

company. 

Profitability refers to the financial success of the project. This may be done before 

entering the business or used to analyze an existing project. There may not be a 

necessary need to abandon the project in cases where there are a set of factors that 

indicate the failure of the project. Some of these factors can be changed operationally, 

such as pricing or costs. There are basic cases that describe the financial position of the 

project: it may be profitable or operate at a loss, and the goal of any organization is 

usually to make a profit (Tiisekwa, 2013). 

  



23 

2.13.4 Profitability Metrics 

Profitability ratios reflect the overall performance of the facility, so that they examine 

its ability to generate profit from its sales. It is one of the most important measures to 

measure the effectiveness of the facility’s management, and there are several measures 

of profitability that can be clarified as follows: 

1. Rate of Return on Assets 

Profitability is, in general, the relationship between the institution's profits and the 

investments that contributed to those profits. Profitability is regarded as an 

organization's objective and a performance metric. Profitability is determined by the 

relationship between profits and sales or profits and the investments that contributed to 

their achievement. Since current liabilities are paid from current assets within one year, 

liquidity measures help ensure that a bank can pay its operating expenses and other 

short-term or current liabilities ).2020شحادة، (   

Return on assets: This ratio measures the profitability achieved by the bank by investing 

its assets in different activities, and it is calculated by dividing the net profit after tax by 

the total assets (Alshatti, 2015) 

2. Rate of return on equity 

This indicator measures the rate of return achieved from investing the owners’ funds, 

and the high return is an indication of the efficiency of the management, while its low 

value indicates conservative financing from loans )   ،2017حمـد ونـاجي( . This ratio is 

considered one of the most important indicators of profitability for investors, as it shows 

the percentage of profits as a result of their investment in the company, and it gives 

investors a vision to choose between companies because they prefer those in which the 

return on equity is high ) ،2020شحادة( . 

Return on Equity: This ratio is calculated by dividing the net income (net profit after 

taxes) by the equity. It measures the efficiency with which the management uses the 

bank's funds to generate a profit (Alshatti, 2015). 

  



24 

3. Net interest margin 

This indicator measures the extent of the bank's ability to exploit operating assets to 

generate revenues and is calculated by dividing net revenues by operating assets. This 

percentage contributes to the performance between different banks operating in the 

same market )  ،2012الربيعي وراضـي( . It is one of the most important factors that measure 

the operational efficiency of any bank through its role of managing savings and 

allocating loans, and the increase in the interest margin may discourage investment, thus 

resulting in a slowdown in economic growth ) ،2019عبيد( . 

2.14 Capital Adequacy 

The bank's capital is the amount of money that secures the bank as part of its liquidity to 

face potential future losses, and capital adequacy reflects financial stability and safety 

by providing the liquidity necessary to face future events. Furthermore, it increases 

banks' capacity to expand their banking operations and activities, as well as to provide 

and develop new services (2020  ،مشـكور وفلـيح), and he defined capital adequacy as the 

amount of capital suitable for the bank so that it can perform all of its functions and 

activities without being exposed to risks or liquidation, and from capital adequacy 

comes the bank's solvency and ability to bear risks and face cases of insolvency 

 and the by Law No. 9 of 2010, banks must maintain a specified capital ,(محمـد، 2021)

adequacy ratio according to the Monetary Authority, and in the event that a particular 

bank falls below the minimum, the Monetary Authority has the right to ask for a capital 

increase. 

2.15 Basel 3 and Capital Adequacy 

The Basel agreement seeks to enhance quality and expand the bank's equity base. This 

contract includes three measures of capital needs: 

1. Capital Adequacy Ratio: It is the ratio that requires a minimum of 8% of the capital 

to the risk-weighted assets (Bitar, Pukthuanthong, & Walker, 2018). 

2. Capital ratio tier 1: which requires a minimum of 6% of Tier 1 capital to risk 

weighted assets (Bitar et al., 2018). 



25 

3. Tier 1 common equity to risk, which requires at least 4.5 percent of common stock 

to risk-weighted assets (Bitar et al., 2018). 

4. Maintaining higher capital leads to weak economic growth, increased bank risks, 

and reduced profitability and efficiency (Bitar et al., 2018). 

2.16 Asset Quality Ratio 

It is regarded as one of the most important ratios for evaluating the quality of a bank's 

assets, as it determines the bank's ability to generate income and provides a more 

accurate assessment of liquidity, management, and capital ( 2008الفرا،  ). 

2.17 Liquidity  

The theory of financial intermediation is considered the basis for the establishment of 

banks and the continuation of their work, so that they work to transfer money from 

lenders and borrowers between requesting deposits and granting loans, and banks try to 

synchronize due dates between assets and liabilities and avoid the process of 

reinvestment. This function constitutes a state of uncertainty and increases the cost that 

arises from the fact that cash flows differ so that operations are either short-term or 

long-term (Ho & Saunders, 1981). Abu Zir (2016) showed that banks divide their 

business into short-term borrowing to get fewer costs and long-term borrowing to 

achieve higher returns to maintain the bank's profitability. 

Liquidity and profitability are two genial aspects of commercial life and the survival of 

companies and financial institutions in work because the goal of any institution is 

continuity and achieving profits. However, the absence of maintaining a liquidity ratio 

for the continuation of work threatens the institution's survival and may expose it to 

collapse. If they are not able to achieve profits that do not affect the survival of the 

institution, so the companies contact them so that they can work to improve their 

performance and achieve profits. These institutions are named during the period of non-

achievement of profits as sick institutions (Bavaria, 2004). 

Gordijenkait÷ & Keršys (2015) require increasing the ratio of liquid assets to cover 

short-term liabilities, such as short-term deposits to banks. This may limit the bank's 

ability to invest its money to make a profit, such as lending, so its income may decrease 

due to the opportunity cost. 



26 

Gordijenkait÷ & Keršys (2015) indicated that capital adequacy depends on the bank's 

risk-weighted assets and affects the equity requirements. The higher the risk-weighted 

assets (representing the bank’s business) is, the greater the equity required. According 

to the theory of the trade-off between return and risk, the higher the risk, the higher 

return, as the bank imposed a margin for loans according to the percentage of risk it is 

exposed to by granting the loan to clients. It requires higher capital to bear higher risks. 

Consequently, the expectation of a positive or negative coefficient of the ratio of 

property rights to assets is evidence of the management's effectiveness or 

ineffectiveness in management capital (Staikouras & Wood, 2004). 

Ho & Saunders (1981) found that the net interest margin consists of two basic elements: 

the grade of rivalry in the market and interest rate risk. The model suggests that the 

structure of assets and liabilities should be analyzed because of their mutual 

relationships. Saunders & Schumacher (2000) developed the model and indicated the 

importance of the trade-off between the bank's solvency and reducing the cost of 

financial services to clients, meaning that high protection against credit risk tends to 

reduce profitability. 

2.17.1 Concept of Liquidity in Banks 

Liquidity means the ability of banks to meet their financial obligations when they fall 

due. Liquidity in a commercial bank means the bank's ability to finance all its 

contractual obligations when they fall due. These obligations can include lending, 

investing, withdrawing deposits, and accruing liabilities (Alshatti, 2015). 

The concept of liquidity in commercial banks is referred to as the bank’s ability to meet 

the demands of depositors to withdraw deposits and meet the demands of borrowers to 

meet the needs of the customer and the community. Liquidity is of great importance to 

banks because it affects the relationship between depositors and the bank when they 

want to withdraw an amount, and if it is not available, it will lead to a loss of 

confidence. but in commercial establishments, the management of the facility can 

negotiate with the customer to give a deadline to provide the amount without affecting 

the financial position (Abdulrahman, 2020). 

  



27 

Liquidity in commercial banks can be divided according to the degree of liquidity into 

two parts: Cash balances (primary reserves) are the most liquid asset items in 

commercial banks and consist of liquid assets from cash, balances with other banks, and 

balances deposited with the Central Bank. Secondary reserves: They are assets that can 

be converted into cash when needed and consist of securities and commercial papers 

discounted. This type promotes cash balances while earning some profits for the bank 

and providing liquidity. The first objective of this account is to achieve profits and then 

appropriate liquidity for the bank when necessary (Abdulrahman, 2020). 

2.17.2 Liquidity Ratio 

Liquidity is defined as the ability of a bank to meet the withdrawal requests of 

depositors and the needs of lenders in a timely manner without selling securities at large 

losses or borrowing at a high cost, in addition to the adequacy of cash and semi-cash 

balances, especially legal and secondary reserves ( 2021محمد،  ).  

2.17.3 Liquidity Management Theories: 

Expected Income Theory: According to this theory, a bank can manage liquidity 

through proper loan guidance, the ability to collect loans when they are due, and the 

reduction of the risk of late loan repayment (Alshatti, 2015). 

Transfer theory: "Transferability" is a strategy for maintaining the liquidity of a bank by 

facilitating the transfer of assets. When the bank is in need of funds, it can sell its assets 

to a more liquid institution. In accordance with the transfer theory, the banking system 

attempts to avoid liquidity crises by permitting banks to sell or repurchase assets at 

favorable prices (Alshatti, 2015). 

2.18 Section Five: Comparison between Local and Foreign Banks in Palestine  

The banking sector is one of the most significant components of Palestine's financial 

system and is most influenced by financial stability. It is considered the main financing 

channel, whether in the public or private sector. Therefore, the changes that this sector 

is witnessing directly affect economic activity (PMA, 2010). The banking system 

represents an important pillar in the national economy of any society. That is why most 

countries have been interested in organizing and setting laws and legislation related to 

all types of banks. 



28 

2.19 Literature Review 

According to the previous studies that will be discussed in this research, determinants 

that affect the bank’s profitability have been divided into external and internal 

determinants. These variables form part of the environment in which banks work. 

Internal determinants are the factors that are affected by the bank’s management 

decisions and policy measures and affect profitability. 

Exposure to credit risk is usually correlated with lower profitability for banks, and 

therefore the quality of the loans granted is more important than the size of the loans 

(Abu Zir, 2016). In cases where the bank is exposed to high risks, it will witness an 

increase in the percentage of bad loans, which will lead to a decrease in profitability 

(Allen, 1988). 

Several research studies pointed out that loans provide a higher return compared to 

other banks' assets (see e.g., Sufian & Habibullah, 2009; Sufian, 2011; Abu Zir, 2016; 

Abugamea, 2018; Gul, Irshad, & Zaman, 2011). It is considered that there is a positive 

profitability indicator in the event that the banks have a low risk of default (Sufian & 

Habibullah, 2009). 

There is a link between the amount of bank deposits and the liquidity of the banks. The 

greater the ratio of loans to deposits, the lower the liquidity. The bank will be 

insufficiently liquid to meet the unpredictable demands of depositors and borrowers. In 

order to achieve higher interest margins, banks incur higher costs as a result of 

increased competition, as they require more deposits. Inadequate liquidity and excessive 

liquidity may result in subpar performance by banks. And if the bank lacks sufficient 

funds, it could fail. Studies indicate that there is both a positive and a negative 

relationship between liquidity and a bank's profitability. If it has too much cash on hand, 

it will operate less efficiently. (Ali, 2022, Albulescu, 2015, Salike, 2017, and Samad, 

2015) discovered a correlation between bank liquidity and bank profitability, while 

(Naifar, 2010 & Tan, 2012) reported an insignificant relationship. (Kosmidou, 2005, 

Mirzaei, 2011, Islam, 2016, Al-Jafari, 2014, and Derbali, 2018) all found that liquidity 

and bank profits are not related. 

Empirical evidence indicates that a bank's size takes into account the differences in cost 

and diversification of risk and that size positively affects a bank's profitability (see e.g. 



29 

Abu Sir, 2016; Gul et al., 2011; Abugamea, 2018; Samad, 2015; Bouzgarrou et al., 

2018); (Al-Jafari, 2014; Athanasoglou, 2006; Sufian, 2009; Petria, 2015), (Menicucci, 

2016; Petria, 2015, Chen, 2018; Kosmidou, 2008 and Bougatef, 2017). On the other 

hand, Dietrich & Wanzenried (2014) did not find an effect of bank size on profitability 

as indicated by return on assets; however, a positive effect was found for bank size on 

both return on equity and net interest margin. 

Larger sized banks that have well diversified bank portfolios are expected to have lower 

risk levels as a result of their portfolio diversification, leading to lower expected returns 

for banks as a result (see e.g. Tan, 2012, Abdullah, 2014, Kosmidou, 2005), (Ali, 2022), 

(Sarpong-Kumankoma, 2018), (Sufian, 2008), (Mirzaei, 2011). 

Capital adequacy is an indicator of risk aversion. The traditional assumption of risk and 

return implies a negative relationship between the bank's capital and its earnings. The 

bank's avoidance of risk indicates a decrease in financial leverage and thus lower 

profitability. A well-known capital adequacy indicator is the equity to total assets ratio, 

which was found to have a positive effect on bank profitability as represented by return 

on assets by some research studies (see, e.g., Abugamea, 2018; Ramadan et al., 2011; 

Pasiouras & Kosmidou, 2007; Bouzgarrou et al., 2018; Dietrich & Wanzenried, 2014; 

Samad, 2015), but was found to have a negative effect on return on equity by others 

(Abugamea, 2018; Bouzgarrou et al., 2018; Dietrich & Wanzenried, 2014; Dietrich & 

Wanzenried, 2018). These results were discussed in terms of how financial leverage 

affects them. Return on assets doesn't take financial leverage into account, but return on 

equity and net interest margin do (Abugamea, 2018; Bouzgarrou et al., 2018; Dietrich & 

Wanzenried, 2014). 

Samad (2015) remarked that when banks have higher operating expenses, their 

profitability will decrease, but when operating costs are used for loan recovery, loan 

default, and asset management, it is completely possible that the increase in the 

OPEXTA will increase the profitability of a bank. The significant relationship between 

OPEXTA and profitability at the bank provides information on the efficiency of 

management with expenditures related to the revenues it generates, indicating a 

negative association with profitability (Bouzgarrou et al., 2018; Pasiouras & Kosmidou, 

2007; Dietrich & Wanzenried, 2014). Several previous studies, including those by 

Kosmidou (2008), Mirzaei (2011), Sarpong-Kumankoma (2018), Athanasoglou (2006), 



30 

Ali (2022), Petraria (2015), Rahman (2015), Curak (2012), Naifar (2010), and Sameta 

(2017), have been conducted. 

Economic development impacts the profitability of banks. The development of the 

economy requires financing more loans and thus expects profitability to be higher, 

hence showing a positive relationship between GDP and profitability (Derbali, 2020), 

An economy that is relatively stable and expanding fosters investment and bank 

profitability. Many studies like (Alhassan, 2016), (Curak, 2012), (Reddy, 2011), 

(Kosmidou, 2005), (Kosmidou, 2008), (Chen, 2018), (Yüksel, 2018), (Majumder, 

2018), (Salike, 2017). However, some studies such as (Rahman, 2015), (Ali, 2022), 

(Petria, 2015), (Mirzaei, 2011) found no significant correlation between the variables, 

whereas studies such as (Brahmaiah, 2018), (Bouzgarrou, 2018), (Al-Jafari, 2014), 

(Tan, 2012), (Islam, 2016) reported negative relationship. 

Most economic variables and the interest rate are affected by inflation, so the higher the 

inflation rate, the higher the interest rate, which increases profitability. Profit correlates 

positively with inflation. In the existing literature, the relationship between the inflation 

rate and bank profitability is inconsistent. Many previous studies, including those, 

reported a positive correlation (Yüksel, 2018), (Kosmidou, 2005), (Athanasoglou, 

2006), (Tan, 2012), (Islam, 2016), (Al-Jafari, 2014), (Bouzgarrou, 2018), (Brahmaiah, 

2018), (Abdullah, 2014), (Rahman, 2015), reported positive relationship. (Sufian, 

2009); (Sufian, 2012); (Ali, 2022); (Petria, 2015) indicated an insignificant relationship 

in their study, while (Alhassan, 2016); (Mirzaei, 2011); (Kosmidou, 2008); (Salike, 

2017) a negative relationship existed. Inflation may cause an increase in bank operating 

expenses, but a rise in productive activity may be beneficial to bank profitability (Ali, 

2022). 

2.20 Related Studies 

In a study (Kadioglu, Telceken, & Ocal, 2017) that examined the impact of the asset 

quality ratio on profitability, it was found that there was a significant direct relationship 

between the ratio of asset quality and profitability, as it was emphasized that the more 

non-performing loans increased significantly, the more this led to a decrease in the 

quality of assets and, consequently, a decrease in profitability, which was measured by 

the return on assets and the return on equity. In addition, it confirmed that liquidity 



31 

management and bank size have a substantial impact on the profitability of banks. In 

addition, a study (Mahmoud, 2019) confirmed that the ratio of asset quality to 

profitability is positively correlated. 

The impact of capital structure ratios on profitability was examined by Addae, Baasi, 

and Hughes (2013), who discovered a positive relationship between profitability and 

short-term debt and a negative relationship between profitability and long-term debt. 

Moreover, it demonstrated a negative correlation between profitability and total debt. 

The study (Gill, 2011) emphasized, however, that the relationship between capital 

structure and profitability cannot be disregarded because enhancing profitability is 

essential for the company's long-term survival. This study revealed a positive 

correlation between short-term debt, total assets, and profitability, as well as between 

total debt, total assets, and profitability. 

In addition, the study (Naima and Karima, 2021) that confirmed the effect of the capital 

structure on profitability found that the capital structure, as measured by the ratio of 

liabilities to assets, affects profitability as measured by the return on assets, the return 

on equity, and the reduced share return. Additionally, the capital structure, as measured 

by total deposits, is detrimental to profitability. The study (Al-Zahraa and Al-Hafeez, 

2020) confirmed that the capital structure has an effect on profitability. 

In other studies that confirmed the impact of off-balance sheet items on profitability, 

such as the study (Al-Abed, 2006) that highlighted the growing interest of banks in off-

budget items, the investment of Jordanian commercial banks in these items increased by 

more than fourfold during the study period. During the study period, the statistical 

analysis revealed that there was no correlation between off-balance sheet items and the 

profitability of commercial banks. As for how off-balance sheet items affect the interest 

rate margin, this study shows that there is a positive correlation between off-balance 

sheet items and the interest rate margin. This means that off-balance sheet items should 

be added to the list of factors that affect the interest rate margin. 

In the study (Sumaya, 2021) conducted on seven Algerian banks from 2012 to 2018, 

where the independent variable represented the percentage of off-balance sheet items to 

total assets and the dependent variables were profitability ratios represented in the rate 

of return on assets and rate of return on equity, the results of the simple regression 



32 

analysis indicated that there was no effect of off-balance sheet items on the return on 

assets as measured by the rate of return on assets. The effect of non-balance-sheet items 

on the return on assets of private banks is under study. 

  



33 

Chapter Three 

Methodology 

3.1 Research Sample 

Using panel data, our study examines the profitability of local and foreign banks in both 

commercial and Islamic banks operating in Palestine and Jordan. Return on assets is 

calculated net by dividing income by total assets; return on equity is calculated by 

dividing net income by total equity; and net interest margin is the difference between 

interest income and interest expense. The researcher discusses, among the bank 

determining factors, each of the following: capital adequacy ratio, liquidity ratio, asset 

quality ratio, and off-balance sheet cost ratio, bank size, and take into account the 

macroeconomic factors represented in GDP and inflation. And controlling factors were 

added as "dummy variables": the global financial crisis from 2008–2010; the Greek 

crisis from 2010–2012; and the Corona crisis from 2019. 

Data on the variables specified for the banks is collected from the financial statements 

represented in the balance sheet and the income statement's list from the websites of the 

Palestinian Banks Association, the Jordan Stock Exchange, and the main websites of 

Jordanian banks not listed on the stock exchange, and annual reports from 2008–2019. 

These macroeconomic factor data were obtained from the World Bank's publicly 

available data. Data for the year 2020 was omitted because it was unavailable when data 

collection commenced. 

Our database consists of a data set of 38 banks, divided into 14 Palestinian banks, 7 

local banks, and 7 foreign banks. There are 24 Jordanian banks, 16 of which are local 

and 8 are foreign. 

3.2 Panel Data 

According to Greene (2003), panel data is a technique that uses cross-data to predict 

economic relations. Wooldridge (2002) also covers broad and complex problems and 

allows the study of dynamic phenomena; this is what distinguishes it from time series 

and cross sections, which use time effects. 

Thus, it uses data that has a time dimension and a cross-sectional dimension. As a 

result, the results obtained are more accurate. This analysis differs from the analysis of 



time series and cross-section in that the

reduces the number of multiple linear problems and the interaction between parameters, 

so the results are more reliable and the degree of significance increases (Bayrakdaroğlu, 

Ege, & Yazıcı, 2013). 

3.3 Regression Model Specification:

To study the bank specifications and country specifications that affect the profitability 

of Palestinian and Jordanian banks, we follow Bouzgarrou et al., 

model as in the following formula:

                                                                                                           

• Where ��� measured bank profitability i at time t, using return on assets (ROA), 

return on equity (ROE), and net interest margin (NIM).

• C fixed constant term across all banks and all time.

• �� is the scalar product of constant coefficients across banks.

• �� is the vector of causal variables. 

specific individual effect (The bank i has a single er

the interplay of unobserved individual and temporal sources of variation.

The individual specific effect 

model to explicitly account for heterogeneity bias among b

model, the dependent variable measuring bank profitability of the bank (i) at time t, 

�	
��, ��
��, �	���, will be of a mixed type and will be determined by exogenous 

explanatory variables that vary over time and acro

permit, at the same time, individual antinomy to be taken into account by αi a

particular constant term in each bank that does not change over time.

The literature on continuing bank profits indicates the adoption of 

assess the profitability determinants of banks, based on a comparison between local 

banks and foreign banks operating in Palestine and Jordan. In fact, bank earnings show 

a continuous trend through time. Continuing variables in bank p

referred to as market structure, reflect barriers to sensitivity, and reflect competitiveness 

to macroeconomic shocks. 

34 

section in that there is no problem of lack of observation, and it 

reduces the number of multiple linear problems and the interaction between parameters, 

so the results are more reliable and the degree of significance increases (Bayrakdaroğlu, 

ssion Model Specification: 

To study the bank specifications and country specifications that affect the profitability 

of Palestinian and Jordanian banks, we follow Bouzgarrou et al., 2018

model as in the following formula: 

                                                                                            ………(

measured bank profitability i at time t, using return on assets (ROA), 

return on equity (ROE), and net interest margin (NIM). 

term across all banks and all time. 

is the scalar product of constant coefficients across banks. 

is the vector of causal variables. ��� = �� + ��� with �� signifies the unobservable 

specific individual effect (The bank i has a single error component) and 

the interplay of unobserved individual and temporal sources of variation.

The individual specific effect �� incorporated into the bank profitability explanation 

model to explicitly account for heterogeneity bias among banks. According to this 

model, the dependent variable measuring bank profitability of the bank (i) at time t, 

, will be of a mixed type and will be determined by exogenous 

explanatory variables that vary over time and across banks, as well as variables that 

permit, at the same time, individual antinomy to be taken into account by αi a

particular constant term in each bank that does not change over time. 

The literature on continuing bank profits indicates the adoption of a panel data model to 

assess the profitability determinants of banks, based on a comparison between local 

banks and foreign banks operating in Palestine and Jordan. In fact, bank earnings show 

a continuous trend through time. Continuing variables in bank p

referred to as market structure, reflect barriers to sensitivity, and reflect competitiveness 

to macroeconomic shocks.  

re is no problem of lack of observation, and it 

reduces the number of multiple linear problems and the interaction between parameters, 

so the results are more reliable and the degree of significance increases (Bayrakdaroğlu, 

To study the bank specifications and country specifications that affect the profitability 

2018 in specifying the 

………(1) 

measured bank profitability i at time t, using return on assets (ROA), 

signifies the unobservable 

ror component) and ��� reflects 

the interplay of unobserved individual and temporal sources of variation. 

incorporated into the bank profitability explanation 

anks. According to this 

model, the dependent variable measuring bank profitability of the bank (i) at time t, 

, will be of a mixed type and will be determined by exogenous 

ss banks, as well as variables that 

permit, at the same time, individual antinomy to be taken into account by αi a- A 

 

a panel data model to 

assess the profitability determinants of banks, based on a comparison between local 

banks and foreign banks operating in Palestine and Jordan. In fact, bank earnings show 

a continuous trend through time. Continuing variables in bank profitability can be 

referred to as market structure, reflect barriers to sensitivity, and reflect competitiveness 



35 

3.4 Research Variables 

3.4.1 Variable’s Definition: 

We follow Bouzgarrou et al., 2018 in selecting the dependent and the independent 

variables to compare the profitability of local and foreign banks in Palestine and Jordan. 

In this section, we define each variable and provide the expected effect that the variable 

may have on bank profitability proxies. 

3.4.2 Dependent Variables 

In this study, the researcher measures the profitability of banks using three distinct 

variables: return on assets (ROA), return on equity (ROE), and net interest margin 

(NIM) (NIM). 

In this study, the researcher has chosen to measure the profitability of banks using three 

distinct variables: return on assets (ROA), return on equity (ROE), and net interest 

margin (NIM). The selection of these three variables may be based on their relevance 

and significance in assessing a bank's financial performance and profitability. ROA 

measures the bank's ability to generate profits from its total assets, ROE assesses the 

profitability from shareholders' equity, and NIM reflects the difference between interest 

income and interest expenses, indicating how efficiently the bank is managing its 

interest-bearing assets and liabilities. By employing these three variables, the researcher 

aims to provide a comprehensive and multifaceted analysis of bank profitability, which 

can offer valuable insights into different aspects of their financial health and operational 

efficiency (the researcher). 

Return on assets is defined as a profit before tax divided by total assets. It gives an 

indication of the efficiency of bank management in using its assets to achieve profits. 

The ratio is calculated by dividing the profit before tax on the total assets (Bouzgarrou 

et al., 2018). 

Return on equity: is an indicator of how lucrative banks are in relation to shareholder 

equity. This ratio is calculated by split the net income by the shareholders' equity 

(Bouzgarrou et al., 2018). 

Dependent variables are a fundamental component of experimental research, playing a 

crucial role in the scientific method. They represent the outcomes or results that 



36 

researchers aim to measure, observe, or analyze in an experiment. These variables are 

dependent on the independent variable, which is the factor that researchers manipulate 

to determine its effect on the dependent variable. In other words, changes in the 

independent variable are believed to cause changes in the dependent variable, allowing 

researchers to test hypotheses and draw conclusions about cause-and-effect 

relationships (Trochim, 2006). Dependent variables can take various forms, including 

numerical data like height or weight, categorical data such as survey responses, or even 

physiological measurements like blood pressure or brain activity (Rosnow & Rosenthal, 

2008). Accurate identification and careful measurement of dependent variables are 

essential to ensure the validity and reliability of research findings. 

3.4.3 Independent Variables: 

The researcher uses bank specific factors and control variables. Bank specific factors 

include profitability, liquidity and risk. Control variables include macroeconomic 

indicators as growth in gross domestic product (GDP), inflation.  

Internal factors are subject to the control of bank management as they are bank- specific 

factors that depend on the bank financial performance foreign Banks (FB) dummy 

variable equals to 1 if the bank is foreign and 0 otherwise. 

Capital Adequacy: Equity to Total Assets Ratio (EQTA): This ratio is calculated by 

dividing equity by total assets. The higher the ratio of capital to assets indicates a 

decrease in financial leverage and thus lower risk (Pasiouras & Kosmidou, 2007). 

Liquidity ratio: Loans to Customers and Short-Term Funding (LCSTF): The ratio of net 

loans to clients and short-term financing is used to illustrate the relationship between 

illiquid assets (loans) and stable sources of financing (deposits and short-term 

financing). The lower this ratio is the greater the bank’s liquidity (Pasiouras & 

Kosmidou, 2007). 

SIZE (Bank’s total assets) is an important determinant of bank profitability and is 

calculated by taking the logarithm of total assets (Pasiouras & Kosmidou, 2007). 

Asset quality ratio: Loan Loss Provisions to Total Assets Ratio (LLPTA): The 

uncollected loan loss allowance is used to cover bad loans and customer bankruptcy. 

This percentage indicates the quality of the assets and is considered an indicator of 



37 

credit risk. The higher this percentage gives the higher the credit rate. It can be 

measured by taking a loan loss allowance in relation to total assets or total loans 

(Bouzgarrou et al., 2018). 

Off Balance Sheet to (Off Balance Sheet + Total Assets) Ratio (OBSOBSTA): This 

ratio measures the importance of unbalanced engagements on the bank’s entire activities 

(Bouzgarrou, Jouida, & Louhichi, 2018). 

Overhead to Total Assets (OVTA): This ratio measures the importance of employee and 

other non-financial expenses to a bank's total assets (Bouzgarrou et al., 2018). 

3.4.4 External Factors-Control Variable: 

INF: Inflation expresses the decrease in the purchase potential of a country's currency 

over a period of time (Pasiouras & Kosmidou, 2007). 

GDP: The gross domestic product expresses the total monetary value of goods and 

services created internal the country borders during a period of time and this indicator 

indicates the health of the country's economy in this year. (Pasiouras & Kosmidou, 

2007) 

  



38 

Table (1)  

Measuring Main Variables 

Dependent Variables - DV: 

Symbol Name Measurement 

ROA Return on assets Net income / total assets 

ROE Return on equity Net income / stockholders’ equity 

NIM Net interest margin 
(Interest income/loans) –(interest 

expense/deposit) 

Independent Variabl