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The Determinants of Capital Adequacy in the Jordanian Banking Sector: An Autoregressive Distributed Lag-Bound Testing Approach

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  • Ahmad Mohammad Obeid Gharaibeh

    (Department of Accounting and Financial Sciences, College of Administrative and Financial Sciences, Gulf University, Sanad 26489, Bahrain)

Abstract

The current study aims to examine the determinants of the capital adequacy ratio (CAR) in the context of Jordanian banks through a literature review and analysis of empirical evidence. The aggregate data were obtained from Globaleconomy.com, the Financial Soundness Indicators, the Central Bank of Jordan, and World Bank Data covering the period from 2003 to 2021. The aggregate data were analyzed using autoregressive distributed lag (ARDL), utilizing Econometric Views (EViews) software. The empirical results suggest a short-run causality relationship running from banks’ credit-to-deposits ratio, banks’ leverage ratio, banks’ liquidity ratio, and one-year-lagged ROE to the CAR. The results also suggest the existence of short-run causality running from the capital-to-assets ratio, one-year-lagged capital-to-asset ratio, liquid-assets-to-deposits ratio, and coverage ratio to CAR. In addition, the results show the leverage ratio and liquidity ratio as having positive long-run associations with CAR. A positive and significant long-run association was also found between CAR, on the one hand, and the capital-to-assets ratio and the liquid assets to deposits ratio; the coverage ratio, on the other hand, showed a negative and statistically significant long-run association with CAR. The pairwise Granger causality test results reveal that liquid asset to deposits, money supply, profitability, and the capital-to-assets ratio Granger cause CAR. The study findings emphasize the importance of understanding the factors impacting CAR, the direction of the influence, the magnitude of the influence of the determinants of CAR in emerging economies such as Jordan and taking appropriate measures to safeguard the stability and resilience of the banking industry.

Suggested Citation

  • Ahmad Mohammad Obeid Gharaibeh, 2023. "The Determinants of Capital Adequacy in the Jordanian Banking Sector: An Autoregressive Distributed Lag-Bound Testing Approach," IJFS, MDPI, vol. 11(2), pages 1-22, June.
    • Handle: RePEc:gam:jijfss:v:11:y:2023:i:2:p:75-:d:1165641
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    References listed on IDEAS

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    1. Rafet Aktas & Suleyman AÇIKALIN & Bilge Bakin & Gokhan Celik, 2015. "The Determinants of Banks’ Capital Adequacy Ratio: Some Evidence from South Eastern European Countries," Journal of Economics and Behavioral Studies, AMH International, vol. 7(1), pages 79-88.
    2. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
    3. Hassan Kablay & Victor Gumbo, 2021. "Determinants of Capital Adequacy Ratio of Banks in Botswana," Journal of Mathematics Research, Canadian Center of Science and Education, vol. 13(6), pages 1-38, December.
    4. Jarita Duasa, 2007. "Determinants of Malaysian Trade Balance: An ARDL Bound Testing Approach," Global Economic Review, Taylor & Francis Journals, vol. 36(1), pages 89-102.
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