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

Abstract

The purpose of this study is to examine the impact of loan loss provision on the profitability of Jordanian commercial banks. While the impact of loan loss provision on the profitability of banks has been examined by prior research, this study is the first to examine this relationship using Jordanian data. By examining a Jordanian sample of 13 banks that listed on Amman Stock Exchange (ASE) over the period 2004-2014, this study provides the first evidence that loan loss provision has a negative impact on the profitability of Jordanian commercial banks. This evidence suggests that Jordan banks adjust their loan loss provision due to several motives and, this in turn, leads to negative consequences for their profitability. Return on assets (ROA) and return on equity (ROE) are employed as a proxy of the profitability in this study.