Determinants of Financial Performance of Jordan Islamic Bank

Abstract

The ever-increasing importance of financial performance to companies in coupled with global and domestic competitions, increasing cost and decreasing profitability was the impetus for this study. Despite the copious number of statistical failure prediction models described in the literature, testing of whether such methodologies work in practice are lacking.

This Study examines the determinants of financial performance of Jordan Islamic Bank (JIB) during the period 2000-2012. The financial performance (Dependent variable) is measured by Return on Assets (ROA), Return on Equity (ROE), and Return on Unrestricted Investment Accounts (ROUIA). On the other hand, the Independent variables are divided to two categories which are macroeconomic variables and bank specificfactors. Macroeconomic variables are inflation rate, Gross Domestic Product (GDP), and Unemployment rate. Bank specific factors are total income divided by total assets, equity ratio, debt ratio, bank size, and liquidity ratio.

Firstly, the researchers  found that there is significance level and positive relationship between ROA on one hand. Inflation, equity ratio, and bank size on the other hand. Also, there is not significant but positive relationship between ROA and GDP. On the other hand, there is significance level and negative relationship between ROA and unemployment rate, and Debt ratio. Moreover, there is insignificance level and negative relationship between ROA and total income to total assets, and liquidity ratio.

Secondly, the analysis revealed that there is significance level and positive relationship between ROE on one hand. Inflation and bank size on the other hand. Moreover, there is not significance level but positive relationship between ROE and GDP, equity ratio, and liquidity ratio. We noticed significance level and negative relationship between ROE and unemployment rate, but ROE is insignificant and negative relationship with total income to total assets, and debt ratio.

Finally, the analysis revealed that there is significance level and positive relationship between ROUIA and GDP. Moreover, we noticed that there is insignificance level and positive relationship between ROUIA and inflation rate, total income to total assets, equity ratio, and bank size. On the other hand, there is significance level but negative relationship between ROUIA and unemployment rate. Also, there is insignificance level and negative relationship between ROUIA and debt ratio, and liquidity ratio.