Loan Loss Provision and the Profitability of Commercial Banks: Evidence from Jordan

Alhadab, Mohammad; Alsahawneh, Saba

doi:10.5539/ijbm.v11n12p242

Cited by 15 publications

(16 citation statements)

References 5 publications

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“…As documented in different studies (Leventis, Mitropoulos & Anandarajan, 2011;Alhadab & Alsahawneh, 2016), LLPs are used by banks as a mechanism for aggressive earnings management, mainly for stock market purposes. This motivates the researcher to ask, is LLP also be mechanism of income smoothing in the absence of stock market?…”

Section: Capital Management Hypothesismentioning

confidence: 99%

“…Bank loan loss provision is an amount set aside by banks to mitigate expected losses on the bank loan portfolio (Yang, 2001 as cited in Desta, 2017;Alhadab & Alsahawneh, 2016). Banks accept deposits and provide loans for borrowers with reasonable interest rates.…”

Section: Introductionmentioning

confidence: 99%

“…similarly, banks might even take negative provisions if riskiness were reversed. In other token, banks have discretionary power to vary loan loss provisions from negative to positive (max limited on the amount of total loan) for/by different motives (Desta, 2017;Alhadab & Alsahawneh, 2016, Laeven & Majnoni, 2003.…”

Section: Introductionmentioning

confidence: 99%

“…But, As documented in Othman & Mersni (2014), around the world, banks are found to manage their earnings to minimize the earnings volatility over time. Many of the current literatures also evidenced that banks use loan loss provision as an instrument for income smoothing (Fonseca & Gonzalez, 2008;Boudriga, Zouari & Taktak, 2010;Leventis, Dimitropoulos & Anandarajan, 2011;El Sood, 2012;Othman & Mersni, 2014;Pool, Haan, & Jacobs, 2015;Alhadab & Alsahawneh, 2016;Desta, 2017;Ozili, 2017;. However, most of the existing literatures focused on the provisioning system and income smoothing practice of banks in developed countries.…”

Section: Introductionmentioning

confidence: 99%

“…unsurprisingly, income smoothing may be to improve the risk perception of investors, regulators, and supervisors. Even though, there may be managerial self-interest to smooth earnings, it may also be the result of perceived bankruptcy concerns and/or can be intended to discourage market entrants from entering to market that could then be used to trade without strong competition (Fonseca, & Gonzalez, 2008;Desta, 2017;Alhadab & Alsahawneh, 2016).…”

Section: Literature Review and Hypothesis Formulation 21 Introductionmentioning

confidence: 99%

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The Cyclicality of Loan Loss Provision and Income Smoothing Behavior of Commercial Banks Pre and Post IFRS: Evidence from Ethiopia

2021

RJFA

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Loan loss provision is the significant accrual in the banking sector. This accrual is necessary to lessen the expected credit losses, but in some extent, these accruals would be used for earning management purpose. Thus, the main purpose of this paper is to examine the cyclicality of loan loss provisions and income smoothing behavior of Ethiopian commercial banks in comparison of pre and post IFRS.Method: Explanatory type of research design applied in this research. The paper used unbalanced panel of Ethiopian commercial banks for the period 2010-2019. In order to examine the income smoothing behavior and the cyclicality loan loss provisioning system, pooled panel data regression model has been used following the appropriate test and the complete specification of the model.Findings: The result of this paper revealed that loan loss provision of commercial banks in Ethiopia follows a dynamic provisioning system. There is also evidence that support the existence of income smoothing behavior after IFRS adoption but not before. Moreover, this paper supports the capital management hypothesis and the result shows that IFRS do not intervene for capital management behavior of Commercial banks. Thus, the paper concludes that IFRS adoption in Ethiopian commercial banks do not enhance the reporting quality of banks.Implication: These findings suggest that the regulatory body of commercial banks (National bank of Ethiopia) and the regulatory body (including councils) of financial reporting (Accounting and audit board of Ethiopia) should strictly follow-up the adoption of IFRS in the banking sector.

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Section: Capital Management Hypothesismentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Literature Review and Hypothesis Formulation 21 Introductionmentioning

confidence: 99%

See 3 more Smart Citations

The Cyclicality of Loan Loss Provision and Income Smoothing Behavior of Commercial Banks Pre and Post IFRS: Evidence from Ethiopia

2021

RJFA

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How do European banks portray the effect of policy interest rates and prudential behavior on profitability?

Campmas

2020

Research in International Business and Finance

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The impact of Covid‐19 on banking groups’ balance sheets in the euro area

Agoraki,

Kouretas,

Nadal De Simone

2024

Financial Market

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Most studies have found that the Covid‐19 pandemic did not negatively impact the euro area banking industry's performance at an aggregate level. This study explores whether this finding still holds using the return on assets of 16 banking groups operating in the euro area and considering bank‐specific factors, idiosyncrasies related to different exposures of their portfolios to the business cycle and weaknesses stemming from underlying structural vulnerabilities. The banking groups are classified into clusters using unsupervised learning techniques. This research contributes to the empirical literature on the determinants of banks’ performance by highlighting the importance of banks’ heterogeneity, notably controlling for differential performance due to asset quality, solvency and business model. In addition, this paper shows that the magnitude of return on assets’ exposure to the business cycle varies across banks and that inflation in the euro area matters only for a subset of them. Importantly, the study sheds some light on the possible reasons for the mixed results in the literature regarding the role of non‐interest income, the T1 capital ratio and inflation. Finally, no significant effects of the Covid‐19 variables on banks’ return on assets are found during the first seven quarters of the pandemic.

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Loan Loss Provision and the Profitability of Commercial Banks: Evidence from Jordan

Cited by 15 publications

References 5 publications

The Cyclicality of Loan Loss Provision and Income Smoothing Behavior of Commercial Banks Pre and Post IFRS: Evidence from Ethiopia

The Cyclicality of Loan Loss Provision and Income Smoothing Behavior of Commercial Banks Pre and Post IFRS: Evidence from Ethiopia

How do European banks portray the effect of policy interest rates and prudential behavior on profitability?

The impact of Covid‐19 on banking groups’ balance sheets in the euro area

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