Analyzing the Effect of Credit and Liquidity Risks on Profitability of Conventional and Islamic Jordanian Banks

Abstract

The present paper investigates the influence of financial risks on the profitability of banks in Jordan (Islamic and conventional) for the period between 2006 and 2015.Profitability was measured in this study by return on assets (ROA) and return on equity (ROE), while the financial risks were reflected by liquidity and credit risks.The study has employed panel data regression to test the hypotheses.Results illustrated a substantial influence of credit risks on both ROA and ROE for the Islamic as well as the conventional banks.The association between liquidity risk and ROE were found to be insignificant for the Islamic and conventional banks.The influence of liquidity risk on ROA is significant for the Islamic and conventional banks.This result gives a clear indication to bank managers and the sector as a whole, that undertaking risks funding ventures will result in higher funding losses, with the consequence to banks, of considerable depletion of resources.

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