Journal of Governance and Regulation / Volume 13, Issue 1, Special Issue, 2024

THE IMPACT OF IFRS 9, LIQUIDITY RISK,

CREDIT RISK, AND CAPITAL ON
BANKS’ PERFORMANCE
Sajedah Eyalsalman *, Khaled Alzubi **, Zyad Marashdeh *
* Department of Banking and Financial Sciences, The Hashemite University, Zarqa, Jordan
** Corresponding author, Department of Banking and Financial Sciences, The Hashemite University, Zarqa, Jordan
Contact details: Department of Banking and Financial Sciences, The Hashemite University, P.O. Box 330127, Zarqa 13133, Jordan

Abstract
How to cite this paper: Eyalsalman, S., This study investigates the impact of International Financial
Alzubi, K., & Marashdeh, Z. (2024).
The impact of IFRS 9, liquidity risk, credit
Reporting Standard (IFRS) 9, liquidity risk, credit risk, and capital
risk, and capital on banks’ performance on Jordanian banks’ performance. Aiming to mitigate liquidity and
[Special issue]. Journal of Governance & credit risks while ensuring adequate capital ratios to prevent
Regulation, 13(1), 396–404. bankruptcy. The study aligns with the findings of Abbas et al.
https://doi.org/10.22495/jgrv13i1siart13
(2019) and Abdelaziz et al. (2022), highlighting the influence of
Copyright © 2024 The Authors these factors on profitability in the Middle East and North Africa
(MENA) region. Data from annual reports of 13 banks listed on the
This work is licensed under a Creative Amman Stock Exchange from 2012 to 2021 was analysed
Commons Attribution 4.0 International
License (CC BY 4.0).
quantitatively, focusing on profitability metrics like return on
https://creativecommons.org/licenses/by/ assets (ROA) and equity (ROE). The results indicate a significant
4.0/ impact of IFRS 9 implementation and a negligible effect of liquidity
risk. Notably, an increase in credit risk detrimentally impacts both
ISSN Online: 2306-6784
ISSN Print: 2220-9352 ROA and ROE. The study also discovers a positive link between
bank capital and ROA but a negative association with ROE,
Received: 30.07.2023 underscoring the nuanced interplay between risk management and
Accepted: 08.03.2024 financial performance in banking.
JEL Classification: G21, G32, G33
DOI: 10.22495/jgrv13i1siart13 Keywords: IFRS 9, Liquidity Risk, Credit Risk, Bank Capital, Bank
Performance

Authors’ individual contribution: Conceptualization — K.A.;

Methodology — S.E.; Software — S.E.; Validation — Z.M.; Formal
Analysis — S.E.; Investigation — S.E.; Resources — Z.M.; Data
Curation — Z.M.; Writing — Original Draft — S.E.; Writing —
Review & Editing — K.A.; Supervision — K.A.; Project
Administration — Z.M.; Funding Acquisition — K.A.

Declaration of conflicting interests: The Authors declare that there is no

conflict of interest.

1. INTRODUCTION below a certain threshold, thus strengthening their

financial footing (Engelmann, 2021). Liquidity risks,
The financial systems in Jordan are crucial to associated with fluctuations in deposit flows, pose
the country’s economic growth, with banks playing a significant threat to banking operations. Banks are
a significant role through their various services. therefore encouraged to implement efficient risk
In these banks, loan issuance is a primary source of management practices to safeguard investor
income, drawing new customers and generating interests and ensure sustainability (Harb et al.,
interest revenue. Making informed decisions, such as 2022). Credit risk, defined as the debtor’s failure to
maintaining capital ratios above the minimum fulfil obligations leading to an increase in non-
requirement, preserving deposits, and judicious loan performing loans, can precipitate a banking crisis
granting, contributes to higher profit margins. (Ahmed et al., 2022). Banks with higher capital levels
The adoption of reporting standards like can engage in diverse business activities and achieve
the International Financial Reporting Standard (IFRS) greater profitability (Abbas et al., 2019).
9, effective from January 1, 2018, has been The 2008 global financial crisis underscored
instrumental in enhancing financial stability. It the interplay between liquidity and credit risks,
obliges banks to accumulate loss reserves if they fall leading to the collapse of numerous banks due to

396
 Journal of Governance and Regulation / Volume 13, Issue 1, Special Issue, 2024

an imbalance between these risks (Harb et al., 2022; The implementation of IFRS 9 requires banks to
Reitgruber, 2016). This crisis was characterized by continuously recognize and update anticipated
sudden, large-scale withdrawals by depositors, credit loss values, which vary according to the
impacting banks’ ability to sustain operations and financial tool and available information (Du et al.,
finance loans, thereby reducing their profitability 2022; Gebhardt, 2016). Managing liquidity risks, such
(Rokhim & Min, 2020; Ibe, 2013). as the conversion of assets into cash or obtaining
IFRS 9, a successor to International Accounting central bank loans, is crucial for banks to mitigate
Standard (IAS) 39, incorporates prior requirements borrower defaults (Fayman et al., 2022; Mdaghri,
with additional amendments to address issues 2021). Furthermore, elevated levels of non-performing
surfaced during the 2007–2008 global financial loans can severely impact a bank’s balance sheet,
crisis (Madah Marzuki et al., 2021; Stander, 2021). potentially leading to failure (Riahi, 2019).
It enhances depositor confidence by recognizing Various studies have investigated the interplay
expected credit losses early, in contrast to the earlier between liquidity risk, credit risk, and bank
practice of allocating funds only after incurring performance. Alim et al. (2021) demonstrated that in
Pakistan (2006–2009), higher liquidity ratios
losses (Reitgruber, 2016).
positively influenced bank performance. Altarawneh
Credit risks fluctuate with economic
and Shafie (2018) found a marginal positive link
conditions, typically easing during recessions and
between liquidity risk and performance but
tightening in booms (Kesraoui et al., 2022). They are
a negative correlation between operating and credit
pivotal in the financial sector, often leading to
risk in banks listed on the Amman Stock Exchange.
serious banking issues due to customer non- Chowdhury and Zaman (2018) concluded that
performance (Madugu et al., 2020). Poorly managed liquidity risk adversely affected bank performance,
credit risks can precipitate bank failures and using a sample of six banks (2012–2016). Similarly,
economic stagnation (Rehman et al., 2019). Chen et al. (2018) noted that liquidity risks
This study underscores the importance of negatively impacted bank profitability due to
balancing liquidity and risk in banking to generate increased financing costs and net interest margins.
profits. Future profitability hinges on maintaining an In contrast, Abdelaziz et al. (2022) observed that
optimal balance between these factors and adhering heightened credit risk intensified liquidity risk,
to international financial reporting standards, such adversely affecting profitability in Middle Eastern
as IFRS 9, which is viewed as a means to improve and North African banks (2004–2015). Moreover,
bank profitability through the recognition of losses Ekinci and Poyraz (2019) reported an inverse
(Mitoi et al., 2020). The challenge lies in balancing relationship between credit risk and bank
banks to mitigate liquidity and credit risks, maintain performance in Turkish banks (2005–2017).
capital ratios to avert bankruptcy, and implement Interestingly, some studies like that of Boahene
IFRS 9 to assess its impact on bank performance. et al. (2012) found a positive correlation between
The remainder of the paper is structured as credit risk and bank profitability in Ghana (2005–2009).
follows. Section 2 presents relevant theories and Post-crisis, Basel III was proposed to boost banking
empirical studies. Section 3 introduces the research capital requirements and decrease financial leverage
methodology. Section 4 describes the results and (Obadire et al., 2022). Noman et al. (2015) emphasized
discussion. Section 5 presents conclusions and some the importance of capital adequacy in safeguarding
recommendations. banks against insolvency and its role in promoting
financial stability (Mendoza & Rivera, 2017).
The relationship between bank capital and
2. LITERATURE REVIEW
profitability has been the subject of mixed findings
in various studies. Ayaydin and Karakaya (2014)
The 2008 global financial crisis not only triggered
identified both positive and negative effects in
a significant critique of the banking sector’s collapse
Turkish banks (2003–2011). Akhmedjonov and Balci
but also highlighted the contrasting aims of Izgi (2015) found a positive relationship in Turkish
regulators and standard setters. Regulators were banks, both pre- and during the 2008–2009 crisis.
mainly concerned with diminishing the risk levels Conversely, Saleh and Abu Afifa (2020) reported
for bankers, while standard-setters focused on a positive correlation (2010–2018), while Rifqah
ensuring that investors had access to useful Amaliah and Hassan (2019) observed a negative
information for informed decision-making (Madah relationship in Indonesian banks (2007–2016),
Marzuki et al., 2021). In an effort to address these attributing it to the trade-off between higher profits
concerns, the International Accounting Standards and maintaining liquidity.
Board (IASB) introduced IFRS 9, adopted by banks to Prasetyo and Darmayanti (2015) discovered
improve the recognition and estimation of loan that while credit risk adversely affected profitability,
losses, thereby enhancing both risk management liquidity risk had a positive impact, and capital
and the accuracy of financial reporting (Oberson, adequacy negatively influenced profitability. This
2021; Stander, 2021). literature review underscores the complexity and
Despite its benefits, the transition to IFRS 9 was context-dependence of the relationship between
not without challenges, as it led to reduced bank bank capital and profitability, highlighting the
values and equity (Groff & Mörec, 2021). However, it significance of capital adequacy in ensuring
brought about increased transparency in investor sustainable and profitable banking operations.
and creditor information, facilitating better decision-
making (Schaap, 2020). IFRS 9’s approach to expected 3. RESEARCH METHODOLOGY
credit loss — losses resulting from customer default —
aids in reducing loss accumulation, bolstering This research utilizes panel data to analyze
financial stability, and fulfilling disclosure the impact of IFRS 9, liquidity risk, credit risk, and
requirements (Novotny-Farkas, 2016). capital risk on the performance of Jordanian banks.
Data has been sourced from the annual reports of

397
 Journal of Governance and Regulation / Volume 13, Issue 1, Special Issue, 2024

13 banks listed on the Amman Stock Exchange, mandatory IFRS adoption date from 2018 to 2021,
spanning the years 2012 to 2021. and 0 for the years 2012 to 2017 (Santos Garcia &
The methodology is grounded in an analytical Lopes Lucena, 2022).
quantitative research approach. To accomplish Liquidity risk (LR): An indicator of a bank’s
the research objectives, statistical analysis of management efficiency and its ability to fulfill
the panel data will be employed. This includes three obligations. It is calculated by comparing deposits to
primary models: 1) the fixed effect model, assets, with the LR ratio being deposits divided by
2) the random effect model, and 3) the pooled total assets (Al Zaidanin & Al Zaidanin, 2021; Das &
ordinary least squares (OLS) regression. Rout, 2020).
In addition to these primary methods, Credit risk (CR): This reflects the likelihood of
alternative methodologies include time-series a borrower failing to meet obligations or pay off
analysis, which could provide insights into trends debts and is used to predict the risk of bad debts.
over time, and cross-sectional analysis, offering It is measured by the ratio of non-performing loans
a snapshot view of data at a single point in time. to gross loans (Harb et al., 2022).
Another viable method is the use of structural Bank capital (B-Cap): In this research, it refers
equation modeling (SEM), which could help in to “Bank Capital Adequacy”, measured as total
understanding the complex relationships between equity to total assets (Abbas & Masood, 2020).
observed and latent variables. Each of these
alternative methods has its own set of advantages
and limitations, and their applicability depends on
3.1.3. Control variables
the specific research questions and the nature of
the available data. Bank size: Measured as the logarithm of the total
assets. Larger banks, offering more extensive
financial services, typically have a greater number of
3.1. Data
clients and assets, leading to higher profits and
reduced risk exposure (Al-Tarawneh et al., 2017;
In this study, IFRS 9, liquidity risk, credit risk, and
Sinha & Sharma, 2016; Rahaman & Akhter, 2015).
capital risk are assumed as independent variables,
while the profitability of banks is considered Loan growth: The capacity to raise new funds
a dependent variable. This section presents in relation to the expansion of the loan business,
the schedule of variables along with their measured as the year-to-year difference in loan
definitions. growth compared to the bank’s total loans in
the previous year (Saleh & Abu Afifa, 2020).
Non-interest expense: Part of a bank’s operating
3.1.1. Dependent variables
expenses, this is calculated by dividing non-interest
expenditures by total average assets. It includes
Return on assets (ROA): An essential measure of
profitability, ROA refers to returns generated by costs like employee training, rent, workplace
a company’s owned assets. It is defined as net expenses, information technology, data processing,
income divided by total assets (Brealey et al., 2014). and other expenses (Sullivan, 2000).
Return on equity (ROE): Another profitability
metric, ROE assesses how effectively a bank uses 3.2. Empirical model
shareholder funds to generate income. ROE is
defined as net income divided by total equity In this study, standard estimation techniques
(Brealey et al., 2014). utilizing the constant effect regression model of
panel data were applied to analyze the impact of
3.1.2. Independent variables IFRS 9, liquidity risk, credit risk, and capital on
the performance of Jordanian banks. The equation
IFRS 9: Treated as a dummy variable. A value of 1 is used in the analysis is detailed as follows:
assigned for the company year ending after the local

𝑃𝑟𝑜𝑓𝑖𝑡 = 𝛼0 + 𝛽1 𝐼𝐹𝑅𝑆 9𝑖𝑡 + 𝛽2 𝐿𝑅𝑖𝑡 + 𝛽3 𝐶𝑅𝑖𝑡 + 𝛽4 𝐵_𝐶𝑎𝑝𝑖𝑡 + 𝛽5 𝑆𝑖𝑧𝑒𝑖𝑡 + 𝛽6 𝐺𝑟𝑜𝑤𝑡ℎ𝑖𝑡 + 𝛽7 𝑁𝐼𝑋𝑖𝑡 + 𝜀𝑖𝑡 (1)

where, approach aims to provide a comprehensive

• 𝛼0 represents a constant term. understanding of how various financial factors
• 𝛽1 to 𝛽7 are the coefficients of the respective affect the profitability of banks in Jordan.
variables.
• I denotes a specific bank. 3.3. Data analysis
• t indicates the time period.
• IFRS 9 is a dummy variable assigned a value This section offers an analysis and findings related
of 1 for the company years ending after the local to the risks affecting bank performance, organized
mandatory IFRS adoption date, and 0 otherwise. into several key parts. Initially, it presents
• LR signifies the liquidity risk. a summary of the descriptive statistics for all study
• CR denotes the credit risk. variables, showcased in Table 1. This is followed by
• B-Cap represents bank capital. an exposition of the results derived from the primary
• Size refers to the size of the bank. model used to investigate the relationship between
• Growth signifies loan growth. bank risk variables and bank performance.
• NIX stands for non-interest expense. Additionally, the section includes the results of
• 𝜀𝑖𝑡 symbolizes the error term. the correlations among the study variables, which
In this model, Profit is understood as are detailed in Table 2. After these presentations,
profitability, measured using ROA and ROE. This further analysis will be conducted to determine
the most suitable model for the study. The panel

398
 Journal of Governance and Regulation / Volume 13, Issue 1, Special Issue, 2024

data is to be scrutinized through one of three between bank risk variables and bank performance,
models: the fixed effect model, the random effect providing a comprehensive understanding of
model, or the Pooled model. These models are the dynamics at play.
essential in examining the intricate relationship

Table 1. Descriptive analysis

Variables Mean Std. Dev. Median Max Min

ROA 0.011 0.005 0.011 0.020 -0.002
ROE 0.078 0.033 0.083 0.156 -0.010
IFRS 9 0.400 0.492 0.000 1.000 0.000
LR 0.746 0.050 0.748 0.837 0.589
CR 0.074 0.031 0.074 0.200 0.002
B-Cap 0.136 0.027 0.136 0.220 0.075
Size 9.174 0.572 9.305 9.926 7.379
Growth 0.081 0.128 0.056 0.860 -0.092
NIX 0.009 0.007 0.009 0.084 0.005
Source: Authors’ calculations.

Table 1 presents the descriptive statistics for • B-Cap: The mean B-Cap was 0.136 with
the study: a standard deviation of 0.027. The median was
• ROA: The mean ROA was 0.011 with 0.136. Bank capital ranged from a high of 0.220
a standard deviation of 0.005, suggesting values (SGBJ in 2012) to a low of 0.075 (SGBJ in 2018).
close to the mean. The median was 0.011, with • Size: The mean size was 9.174 with
a maximum of 0.020 and a minimum of -0.002. a standard deviation of 0.572. The median was
The variation in ROA can be attributed to the Bank 9.305, indicating significant variations in bank asset
of Jordan’s high returns in 2014 and the low returns values. The size varied from a maximum of 9.926
of Jordan Kuwait Bank in 2020, influenced by (Housing Bank for Trade and Finance (HBTF) in
the COVID-19 pandemic. 2019) to a minimum of 7.379 (Arab Bank in 2012).
• ROE: The mean ROE was 0.078 with • Growth: The mean growth was 0.081 with
a standard deviation of 0.033. The median stood at a standard deviation of 0.128. The median was
0.083, with the highest value at 0.156 and the lowest 0.056. Growth ranged from a high of 0.860 (AJIB in
at -0.010. These differences can be linked to Capital 2014) to a low of -0.092 (Jordan Commercial Bank
Bank of Jordan’s high returns in 2021 and Jordan in 2019).
Kuwait Bank’s low returns in 2020 due to • NIX: The mean was 0.009 with a standard
the pandemic. deviation of 0.007. The median was also 0.009. NIX
• IFRS 9: The average score for IFRS 9 was varied from a high of 0.084 (Bank al Etihad in 2019)
0.400 with a standard deviation of 0.492. The to a low of 0.005 (Bank al Etihad in 2012).
median was 0.000, with values ranging from 0.000 to
1.000, reflecting the period before and after 3.4. Correlation matrix test
the implementation of the IFRS 9 (2012–2017 and
2018–2021, respectively). Table 2 presents the correlations between the
• LR: The mean liquidity risk was 0.746 with variables studied, utilizing Pearson’s correlation
a standard deviation of 0.050, and a median of coefficient as the method of analysis. This
0.748, indicating high liquidity risks among coefficient, as explained by Ly et al. (2018), is used
Jordanian banks during 2012–2021. The highest risk to assess the strength and direction of relationships
was recorded by Arab Jordan Investment Bank (AJIB) between variables, with values ranging from +1 to -1.
in 2017 (0.837), and the lowest by Jordan Ahli Bank A correlation coefficient of +1 indicates
in 2013 (0.589). a strong positive relationship between variables,
• CR: The average credit risk was 0.074 with meaning that as one variable increases, the other
a standard deviation of 0.031. The median value was also increases. Conversely, a coefficient of -1
also 0.074. The introduction of IFRS 9 in 2018, which signifies a strong negative relationship, where
necessitates faster recognition of expected credit an increase in one variable is associated with
losses, contributed to more accurate credit lending a decrease in the other. A coefficient of zero, on
and a reduction in non-performing loans. Credit risk the other hand, indicates no correlation, implying
varied from a maximum of 0.200 (Societe Generale that the variables do not exhibit any linear
De Banque Jordan [SGBJ] in 2012) to a minimum of relationship.
0.002 (Jordan Commercial Bank in 2021).

Table 2. Correlations matrix

Variables ROA ROE IFRS 9 LR CR B-Cap Size Growth NIX

ROA 1
ROE 0.902 1
IFRS 9 -0.404 -0.346 1
LR -0.064 0.144 -0.095 1
CR -0.096 -0.274 -0.141 -0.355 1
B-Cap 0.501 0.121 -0.272 -0.487 0.332 1
Size 0.067 0.192 0.100 0.153 -0.117 -0.185 1
Growth 0.026 0.125 -0.173 0.115 -0.146 -0.109 0.092 1
NIX -0.054 -0.018 0.137 0.085 -0.101 -0.070 0.117 0.032 1
Source: Authors’ calculations.

399
 Journal of Governance and Regulation / Volume 13, Issue 1, Special Issue, 2024

The analysis results indicate that most Table 4. Hausman test

correlations in the study are weak to moderate.
The strength of the associations varies, with Chi-square Degree of
Variables Probability
statistic freedom (DF)
the strongest positive correlation being 0.902
ROA 22.56 6 0.0010
between ROA and ROE. Conversely, the most ROE 20.64 6 0.0021
substantial negative correlation is -0.487, observed Source: Authors’ calculations.
between liquidity risk (LR) and bank capital (B-Cap).
The analysis reveals no concerning linear issues Table 4 presents the results of the Hausman
among the study variables, suggesting that test, indicating that the null hypothesis should be
the correlations are within acceptable ranges for this rejected in favor of the alternative hypothesis. This
type of research. conclusion is based on the probability values of ROA
(0.0010 < 0.05) and ROE (0.0021 < 0.05), suggesting
3.5. Model specification tests that the fixed effect model is the most suitable for
our analysis.
Selecting an appropriate functional model is crucial In this section, the study’s results are analyzed
for examining the hypotheses in panel data analysis. using the EViews program.
This analysis typically involves estimating time
cross-sectional data using three methods: 4. RESULTS
1. Pooled OLS regression.
2. Fixed-effects model Table 5 presents the effects of implementing IFRS 9
3. Random-effects model on liquidity risk, credit risk, and bank capital in
In this study, two specific tests are employed to Jordanian banks from 2012 to 2021. The impact of
determine the most suitable model. The first test, IFRS-9 is measured using a dummy variable. Key
the Breusch-Pagan Lagrange multiplier (LM) test, indicators include liquidity risk (calculated as
helps decide between the pooled OLS regression and deposits/total assets), credit risk (non-performing
the random-effects model. The second test, loans/gross loans), and bank capital (equity/total
the Hausman test, is used to choose between the assets), along with control variables such as size,
fixed-effects model and the random-effects model. growth, and non-interest expense, in relation to
The pooled OLS regression is considered the dependent variable (net income/total assets).
the appropriate model when its p-values are higher
than 0.05. Conversely, if the p-values are lower than Table 5. Regression analysis for ROA
0.05, the random-effects model is accepted as
Fixed-effects model
the alternative. Variables Coefficient Std. Error T-statistic Prob.
Const. 0.103 0.038 2.739 0.007
Table 3. Test Breusch-Pagan of ROA and ROE IFRS 9 -0.003 0.001 -4.306 0.000
LR 0.014 0.008 1.785 0.077
Breusch-Pagan test for ROA CR -0.032 0.010 -3.258 0.002
F-statistic 0.98 Probability 0.45 B-Cap 0.017 0.017 0.960 0.339
Obs* R-squared 6.92 Probability 0.44 Size -0.011 0.004 -2.720 0.008
Breusch-Pagan test for ROE Growth 0.000 0.002 0.249 0.804
F-statistic 1.10 Probability 0.37 NIX 0.016 0.025 0.635 0.527
Adjusted R-squared 0.81
Obs* R-squared 7.74 Probability 0.36
F-statistic 29.34
Prob. (F-statistic) 0.000
From the data presented in Table 3, it is Source: Authors’ calculations.
evident that the random-effects model should be
accepted, while the pooled OLS regression model is The analysis involved two tests. The first,
to be rejected. the Breusch-Pagan LM test, was used to determine
the more appropriate model between pooled OLS
3.6. Hausman test regression and the random effect model. The second
test, the Hausman test, helped in selecting the best
The Hausman test, a commonly used method in model between the fixed effect model and
panel data analysis, assists in choosing the best the random effect model. Ultimately, the fixed effect
model by comparing the fixed effect model with the model was chosen as the most suitable for
random effect model (Amini et al., 2012). This test is addressing the study’s issue.
crucial for accepting or rejecting the null hypothesis, The adjusted R-squared of the fixed effect
which is centered on determining if there is a model proved to be the most effective for this study.
correlation between the unique errors and the This model, which followed generalized least
regression factors within the model. Essentially, the squares (GLS) cross-section weights, showed that
null hypothesis posits that there is no such independent variables (IFRS 9, LR, CR, B-CAP) and
correlation. control variables (Size, Growth, NIX) explained 81%
If the p-value of the Hausman test is greater of the variation in return on assets (ROA). Notably,
than 0.05, the null hypothesis is accepted, indicating the F-statistic value was higher for this model,
that the random effect model is the appropriate confirming its significance.
choice. Conversely, if the p-value is less than 0.05, Regarding the impact of each independent
the alternative hypothesis is accepted, and the fixed variable on ROA:
effect model is deemed suitable for use. • IFRS 9: Exhibited a negative, albeit very weak,
impact on ROA (coefficient: -0.003). T-statistic
of -4.306 and a probability of less than 0.05 indicate

400
 Journal of Governance and Regulation / Volume 13, Issue 1, Special Issue, 2024

a statistically significant negative effect of IFRS 9 on • IFRS 9: The coefficient was -0.018, indicating
ROA in Jordanian commercial banks from 2012 a negative and weak effect on ROE. The t-statistic
to 2021. of -3.644 and a probability of less than 0.000, below
• LR: Showed a positive but weak effect on ROA the significance level of 0.05, highlight a statistically
(coefficient: 0.014). T-statistic of 1.785 and significant negative impact of IFRS 9 on ROE in
a probability higher than 0.05 suggest a statistically Jordanian commercial banks during 2012–2021.
significant positive impact of LR on ROA in the same • LR: With a coefficient of 0.126, there was
period. This indicates that increased bank liquidity a positive and strong effect on ROE. T-statistic was
leads to higher returns from lending operations, 2.056 and the probability of 0.042, under the 0.05
aligning with findings by Warsa and Mustanda (2016). significance level, suggesting a statistically
• CR: Had a negative and weak effect on ROA significant positive impact of LR on ROE during
(coefficient: -0.032), with a t-statistic of -3.258 and the same period.
probability less than 0.05, indicating a statistically • CR: The coefficient of -0.225 indicates
significant negative impact on ROA in Jordanian a negative and strong effect on ROE. T-statistic
banks’ commercial activities from 2012 to 2021. of -2.754 and probability of 0.007, also below
Poor credit risk management, leading to increased the 0.05 significance level, confirm a statistically
unsecured assets, contributed to this decline in ROA. significant negative impact of CR on ROE in
This finding is consistent with Ekinci and Jordanian commercial banks from 2012 to 2021.
Poyraz (2019). • B-Cap: A coefficient of -0.356 shows
• B-Cap: The coefficient of 0.017 suggests a negative and strong effect on ROE. With a t-statistic
a positive but weak effect on ROA. However, with of -2.578 and a probability of 0.011, this indicates
a t-statistic of 0.96 and probability of 0.339, there’s a statistically significant negative impact of B-Cap on
no statistically significant impact of B-Cap on ROA ROE from 2012 to 2021. An increase in capital tends
in Jordanian commercial banks during this period, in to reduce ROE.
line with Saleh and Abu Afifa (2020). • Size: The coefficient of -0.090 reveals
• Size: A negative and very weak effect on ROA a negative and weak effect on ROE. The t-statistic
was observed (coefficient: -0.011). T-statistic of -2.72 of -2.786 and a probability of 0.006, below the 0.05
and probability less than 0.05 indicate a statistically significance level, indicate a statistically significant
significant negative effect of Size on ROA from 2012 negative effect of Size on ROE in Jordanian
to 2021 in Jordanian commercial banks. Larger commercial banks during 2012–2021.
banks tend to have lower ROA, possibly due to asset • Growth: The coefficient of 0.009 suggests
diversification or accounting practices aimed at a positive but not statistically significant effect on
audit-related profit reduction, as discussed by ROE, with a t-statistic of 0.734 and a probability of
Golubeva et al. (2019). 0.465, which is above the 0.05 significance level.
• Growth: Displayed a neutral impact on ROA • NIX: The coefficient of 0.149 shows a positive
(coefficient: 0), with a t-statistic of 0.249 and effect on ROE. However, with a t-statistic of 0.739
probability of 0.804, suggesting no statistically and a probability of 0.461, this effect is not
significant effect of growth on ROA in the same statistically significant, as it exceeds the 0.05
period. significance threshold. This indicates a non-
• NIX: Showed a positive but not statistically significant positive impact of NIX on ROE in
significant effect on ROA (coefficient: 0.016), with Jordanian commercial banks during 2012–2021.
a t-statistic of 0.635, and a probability of 0.527,
indicating a non-significant impact of NIX on ROA in 5. CONCLUSION
Jordanian commercial banks from 2012 to 2021.
The statistical analysis conducted in this study
Table 6. Regression analysis for ROE revealed several key findings regarding the impact
of various factors on the performance of Jordanian
Fixed-effects model banks from 2012 to 2021. The implementation of
Variables Coefficient Std. Error T-statistic Prob. IFRS 9 exhibited a negative effect on both ROA and
Const. 0.883 0.300 2.946 0.004 ROE. This outcome suggests that the adoption of
IFRS 9 -0.018 0.005 -3.644 0.000 the expected loss approach under IFRS 9 increases
LR 0.126 0.061 2.056 0.042
impairment provisions, enhancing transparency but
CR -0.225 0.082 -2.754 0.007
B-Cap -0.356 0.138 -2.578 0.011 potentially reducing bank lending operations and
Size -0.090 0.032 -2.786 0.006 profitability, as supported by the study of Chan and
Growth 0.009 0.012 0.734 0.465 Phua (2022).
NIX 0.149 0.201 0.739 0.461 Liquidity risk showed a positive impact on both
Adjusted R-squared 0.61 ROA and ROE, indicating that Jordanian banks
F-statistic 11.59
possessed high liquid assets during this period,
Prob. (F-statistic) 0.000
Source: Authors’ calculations.
which mitigated liquidity risks and reduced the need
for external financing. This scenario likely led to
The adjusted R-squared of the fixed effect increased economic activity and profitability.
model, which employed GLS cross-section weights, Credit risk had a negative impact on the banks’
emerged as the most suitable for this study, performance, attributable to inadequate credit risk
explaining 61% of the variation in return on equity management and a challenging economic climate
(ROE). The higher value of the F-statistic for this marked by increased unemployment and default
model underscores its significance. rates. The results underscore the need for Jordanian
The impacts of each independent variable on banks to implement stringent regulations and
ROE in the fixed effect model are detailed as follows: efficient credit policies to control credit risk, thereby
minimizing non-performing loans and losses.

401
 Journal of Governance and Regulation / Volume 13, Issue 1, Special Issue, 2024

The effect of bank capital on bank performance approach would provide comprehensive insights for
was mixed, with positive implications for ROA and banks to mitigate and control these risks.
negative implications for ROE. An increase in capital Additionally, extending the sample period for
seems to enhance bank performance and profitability, applying IFRS 9 could yield more robust and
enabling banks to better manage risks and enjoy insightful results.
lower financing costs. The research encountered some challenges.
The study recommends enhancing the procedures The recent implementation of IFRS 9 limited
for IFRS 9 application and advises banks to maintain the sample period to four years, potentially
sufficient liquid assets. Emphasis should also be introducing bias in the estimations. Additionally,
placed on employing effective credit risk difficulties in data collection from annual reports for
management policies. Future research should 2012–2021 were encountered, primarily due to the
explore each risk category in detail, particularly scanning of documents in black and white, which
focusing on liquidity, credit, and capital risks. This complicated the readability of these reports.

REFERENCES
Abbas, F., Iqbal, S., & Aziz, B. (2019). The impact of bank capital, bank liquidity and credit risk on profitability in
postcrisis period: A comparative study of US and Asia. Cogent Economics & Finance, 7(1), Article 1605683.
https://doi.org/10.1080/23322039.2019.1605683
Abbas, F., & Masood, O. (2020). How do large commercial banks adjust capital ratios: empirical evidence from the
US? Economic Research-Ekonomska Istraživanja, 33(1), 1849–1866. https://www.tandfonline.com/doi/full
/10.1080/1331677X.2020.1763823
Abdelaziz, H., Rim, B., & Helmi, H. (2022). The interactional relationships between credit risk, liquidity risk and bank
profitability in MENA region. Global Business Review, 23(3), 561–583. https://doi.org/10.1177
/0972150919879304
Ahmed, H. M., El-Halaby, S. I., & Soliman, H. A. (2022). The consequence of the credit risk on the financial
performance in light of COVID-19: Evidence from Islamic versus conventional banks across MEA region.
Future Business Journal, 8(1), 1–22. https://doi.org/10.1186/s43093-022-00122-y
Akhmedjonov, A., & Balci Izgi, B. (2015). If bank capital matters, then how? The effect of bank capital on
profitability of Turkish banks during the recent financial crisis. Macroeconomics and Finance in Emerging
Market Economies, 8(1–2), 160–166. https://doi.org/10.1080/17520843.2014.940988
Al-Tarawneh, A., Abu Khalaf, B., & Al Assaf, G. (2017). Noninterest income and financial performance at Jordanian
Banks. International Journal of Financial Research, 8(1), 166–171. https://doi.org/10.5430/ijfr.v8n1p166
Al Zaidanin, J. S., & Al Zaidanin, O. J. (2021). The impact of credit risk management on the financial performance of
United Arab Emirates commercial banks. International Journal of Research in Business and Social Science,
10(3), 303–319. https://doi.org/10.20525/ijrbs.v10i3.1102
Alim, W., Ali, A., & Metla, M. R. (2021). The effect of liquidity risk management on financial performance of
commercial banks in Pakistan [MPRA Paper No. 112482]. Munich Personal RePEc Archive.
https://mpra.ub.uni-muenchen.de/112482/1/MPRA_paper_112482.pdf
Altarawneh, M. H., & Shafie, R. (2018). Risks and bank performance in Jordan. Academy of Accounting and Financial
Studies Journal, 22(6), 1–15. https://www.abacademies.org/articles/risks-and-bank-performance-in-jordan-
7631.html
Amini, S., Delgado, M. S., Henderson, D. J., & Parmeter, C. F. (2012). Fixed vs random: The Hausman test four decades
later. In B. H. Baltagi, R. Carter Hill, W. K Newey, & H. L. White. (Eds.), Essays in honor of Jerry Hausman
(Vol. 29, pp. 479–513). Emerald Group Publishing Limited. https://doi.org/10.1108/S0731-
9053(2012)0000029021
Ayaydin, H., & Karakaya, A. (2014). The effect of bank capital on profitability and risk in Turkish banking.
International Journal of Business and Social Science, 5(1), 252–271. https://www.ijbssnet.com
/journal/index/2342
Boahene, S. H., Dasah, J., & Agyei, S. K. (2012). Credit risk and profitability of selected banks in Ghana. Research
Journal of Finance and Accounting, 3(7), 6–14. https://typeset.io/papers/credit-risk-and-profitability-of-
selected-banks-in-ghana-47u5o9yw2p
Brealey, R. A., Myers, S. C., & Allen, F. (2014). Principles of corporate finance (11th ed.). McGraw-hill.
Chan, M. F., & Phua, L. K (2022). Impacts of IFRS 9 on conditional conservatism and reported performance: Evidence
from Malaysian capital market. Global Business and Management Research, 14(3s), 1192–1207.
http://www.gbmrjournal.com/pdf/v14n3s/V14N3s-83.pdf
Chen, Y.-K., Shen, C.-H., Kao, L., & Yeh, C.-Y. (2018). Bank liquidity risk and performance. Review of Pacific Basin
Financial Markets and Policies, 21(01), Article 1850007. https://doi.org/10.1142/S0219091518500078
Chowdhury, M. M., & Zaman, S. (2018). Effect of liquidity risk on performance of Islamic banks in Bangladesh. IOSR
Journal of Economics and Finance, 9(4), 01–09. https://journals.indexcopernicus.com/api/file
/viewByFileId/414897
Das, N. M., & Rout, B. S. (2020). Banks’ capital adequacy ratio: A panacea or placebo. Decision, 47(3), 303–318.
https://doi.org/10.1007/s40622-020-00255-5
Du, N., Allini, A., & Maffei, M. (2022). How do bank managers forecast the future in the shadow of the past?
An examination of expected credit losses under IFRS 9. Accounting and Business Research, 53(6), 699–722.
https://doi.org/10.1080/00014788.2022.2063104
Ekinci, R., & Poyraz, G. (2019). The effect of credit risk on financial performance of deposit banks in Turkey.
Procedia Computer Science, 158, 979–987. https://doi.org/10.1016/j.procs.2019.09.139
Engelmann, B. (2021). Calculating lifetime expected loss for IFRS 9: Which formula is measuring what? Journal of
Risk Finance, 22(3/4), 193–208. https://doi.org/10.1108/JRF-05-2020-0113
Fayman, A., Chen, S.-J., & Mayes, T. R. (2022). Elimination of the reserve requirement: impact on liquidity at
community banks versus non-community banks. Managerial Finance, 48(6), 939–952
https://doi.org/10.1108/MF-09-2021-0441

402
 Journal of Governance and Regulation / Volume 13, Issue 1, Special Issue, 2024

Gebhardt, G. (2016). Impairments of Greek government bonds under IAS 39 and IFRS 9: A case study. Accounting in
Europe, 13(2), 169–196. https://doi.org/10.1080/17449480.2016.1208833
Golubeva, O., Duljic, M., & Keminen, R. (2019). The impact of liquidity risk on bank profitability: some empirical
evidence from the European banks following the introduction of Basel III regulations. Journal of
Accounting and Management Information Systems, 18(4), 455–485. https://doi.org/10.24818
/jamis.2019.04001
Groff, M. Z., & Mörec, B. (2021). IFRS 9 transition effect on equity in a post bank recovery environment: the case of
Slovenia. Economic Research — Ekonomska Istraživanja, 34(1), 670–686. https://doi.org/10.1080
/1331677X.2020.1804425
Harb, E., El Khoury, R., Mansour, N., & Daou, R. (2022). Risk management and bank performance: Evidence from the
MENA region. Journal of Financial Reporting and Accounting, 21(5), 974–998.
https://doi.org/10.1108/JFRA-07-2021-0189
Ibe, S. O. (2013). The impact of liquidity management on the profitability of banks in Nigeria. Journal of Finance and
Bank Management, 1(1), 37–48. http://jfbmnet.com/journals/jfbm/Vol_1_No_1_June_2013/4.pdf
Kesraoui, A., Lachaab, M., & Omri, A. (2022). The impact of credit risk and liquidity risk on bank margins during
economic fluctuations: Evidence from MENA countries with a dual banking system. Applied Economics,
54(35), 4113–4130. https://doi.org/10.1080/00036846.2021.2022090
Ly, A., Marsman, M., & Wagenmakers, E.-J. (2018). Analytic posteriors for Pearson’s correlation coefficient. Statistica
Neerlandica, 72(1), 4–13. https://doi.org/10.1111/stan.12111
Madugu, A. H., Ibrahim, M., & Amoah, J. O. (2020). Differential effects of credit risk and capital adequacy ratio on
profitability of the domestic banking sector in Ghana. Transnational Corporations Review, 12(1), 37–52.
https://doi.org/10.1080/19186444.2019.1704582
Madah Marzuki, M., Abdul Rahman, A. R., Marzuki, A., Ramli, N. M., & Wan Abdullah, W. A. (2021). Issues and
challenges of IFRS 9 in Malaysian Islamic financial institutions: recognition criteria perspective. Journal of
Islamic Accounting and Business Research, 12(2), 239–257. https://doi.org/10.1108/JIABR-04-2020-0100
Mdaghri, A. A. (2021). How does bank liquidity creation affect non-performing loans in the MENA region? International
Journal of Emerging Markets, 17(7), 1635–1658. https://doi.org/10.1108/IJOEM-05-2021-0670
Mendoza, R., & Rivera, J. P. (2017). The effect of credit risk and capital adequacy on the profitability of rural banks
in the Philippines. Scientific Annals of Economics and Business, 64(1), 83–96.
https://saeb.feaa.uaic.ro/index.php/saeb/article/view/1043
Mitoi, E., Achim, L., Despa, M., & Turlea, C. (2020). IFRS 9 and the interaction with Basel III regulation pillars. Annals
of the University of Oradea: Economic Science Series, 29(2), 213–222. https://doaj.org/article
/8b62fcbfec5741b4a15def1f6ed3af5e
Noman, A. H., Pervin, S., Chowdhury, M. M., & Banna, H. (2015). The effect of credit risk on the banking profitability:
A case on Bangladesh. Global Journal of Management and Business Research, 15(3), 41–48.
https://globaljournals.org/GJMBR_Volume15/5-The-Effect-of-Credit-Risk.pdf
Novotny-Farkas, Z. (2016). The interaction of the IFRS 9 expected loss approach with supervisory rules and
implications for financial stability. Accounting in Europe, 13(2), 197–227. https://doi.org/10.1080
/17449480.2016.1210180
Obadire, A. M., Moyo, V., & Munzhelele, N. F. (2022). Basel III capital regulations and bank efficiency: Evidence from
selected African countries. International Journal of Financial Studies, 10(3), Article 57.
https://doi.org/10.3390/ijfs10030057
Oberson, R. (2021). The credit-risk relevance of loan impairments under IFRS 9 for CDS pricing: Early evidence.
European Accounting Review, 30(5), 959–987. https://doi.org/10.1080/09638180.2021.1956985
Prasetyo, D. A., & Darmayanti, N. P. A. (2015). Pengaruh Risiko Kredit, Likuiditas, Kecukupan Modal, Dan Efisiensi
Operasional Terhadap Profitabilitas Pada PT BPD Bali [The influence of credit risk, liquidity, capital
adequacy, and operational efficiency on profitability at PT BPD Bali]. E-Jurnal Manajemen, 4(9), 2590–2617.
https://ojs.unud.ac.id/index.php/manajemen/article/view/13416
Rahaman, M., & Akhter, S. (2015). Bank-specific factors influencing profitability of Islamic banks in Bangladesh.
Journal of Business and Technology (Dhaka), 10(1), 21–36. https://doi.org/10.3329/jbt.v10i1.26904
Rehman, Z. U., Muhammad, N., Sarwar, B., & Raz, M. A. (2019). Impact of risk management strategies on the credit
risk faced by commercial banks of Balochistan. Financial Innovation, 5, Article 4. https://doi.org/10.1186
/s40854-019-0159-8
Reitgruber, W. (2016). Expected loss provisioning under upcoming IFRS 9 Impairment Standards: A new source of
P&L volatility — can we tame it? Journal of Risk Management in Financial Institutions, 9(4), 332–343.
https://www.ingentaconnect.com/content/hsp/jrmfi/2016/00000009/00000004/art00004
Riahi, Y. M. (2019). How to explain the liquidity risk by the dynamics of discretionary loan loss provisions and non-
performing loans? The impact of the global crisis. Managerial Finance, 45(2), 244–262.
https://doi.org/10.1108/MF-12-2017-0520
Rifqah Amaliah, S., & Hassan, H. H (2019). The relationship between bank’s credit risk, liquidity, and capital
adequacy towards its profitability in Indonesia. International Journal of Recent Technology and Engineering
(IJRTE), 7(5s), 225–237. https://www.ijrte.org/wp-content/uploads/papers/v7i5s/ES2149017519.pdf
Rokhim, R., & Min, I. (2020). Funding liquidity and risk taking behavior in Southeast Asian banks. Emerging Markets
Finance and Trade, 56(2), 305–313. https://doi.org/10.1080/1540496X.2018.1483230
Saleh, I., & Abu Afifa, M. (2020). The effect of credit risk, liquidity risk and bank capital on bank profitability:
Evidence from an emerging market. Cogent Economics & Finance, 8(1), Article 1814509.
https://doi.org/10.1080/23322039.2020.1814509
Santos Garcia, I. A., & Lopes Lucena, W. G. (2022). Adoção mandatória das IFRS influencia na previsão de
crescimento e rentabilidade? Uma análise em países emergentes [Does the mandatory adoption of IFRS
influence the forecast of growth and profitability? An analysis in emerging countries]. Revista
Contemporânea de Contabilidade, 19(50), 95–106. https://doi.org/10.5007/2175-8069.2022.e78851
Schaap, C. M. (2020). The impact of IFRS 9 on the value relevance of accounting information: Evidence from European
Union banks [Master thesis, Erasmus School of Economics]. Erasmus University Thesis Repository.
https://thesis.eur.nl/pub/52524

403
 Journal of Governance and Regulation / Volume 13, Issue 1, Special Issue, 2024

Sinha, P., & Sharma, S. (2016). Determinants of bank profits and its persistence in Indian Banks: A study in
a dynamic panel data framework. International Journal of System Assurance Engineering and Management,
7(1), 35–46. https://doi.org/10.1007/s13198-015-0388-9
Stander, Y. S. (2021). Quantifying the sources of volatility in the IFRS 9 impairments. South African Journal of
Accounting Research, 35(3), 191–218. https://doi.org/10.1080/10291954.2021.1885242
Sullivan, R. J. (2000). How has the adoption of Internet banking affected performance and risk in banks? Financial
Industry Perspectives, 12(1), 1–16. https://fedinprint.org/item/fedkfi/33567
Warsa, M. I. U. P., & Mustanda, I. K. (2016). Pengaruh CAR, LDR dan NPL terhadap ROA pada sektor Perbankan di
Bursa Efek Indonesia [The influence of CAR, LDR and NPL on ROA in the banking sector on the Indonesian
Stock Exchange]. E-Jurnal Manajemen, 5(5), 2842–2870. https://ojs.unud.ac.id/index.php
/manajemen/article/view/18244

404