Effects of collateral pledges in reducing credit risks - confronting banks in jordan, as lending institutions.

Author:Siam, Zakaria Ahmad


This study aims at examining the effects of collaterals pledges in reducing credit risks confronting banks in Jordan, and to test the study's hypotheses in this regard. The study consists of dependent variables which represent credit risks confronting banks when granting loans, credit facilities; and independent variables which explain the changes in borrowers' ability to pledge collaterals.

Researcher collected data from different sources such as annual reports of the Jordanian commercial banks, and annual reports issued by the Central Bank of Jordan concerning banks that are in the study's sample and for the peril of the study.

Analytical and descriptive methodology has been used in the study; collected data was analyzed accordingly, interpreted and assessed in order to have an accurate test of the study's hypotheses.

Commercial Banks in Jordan, an Overview: The principle reason banks and many competing lenders are issued charters of incorporation by governments is to make loans to their customers. Banks are expected to support their local communities with an adequate supply of credit for all legitimate business and consumer financial needs and to price that credit reasonably in line with competitively determined market interest rate (3). Loans support the growth of new businesses and jobs within the lender's trade territory. Despite the benefits of lending for both borrower and institutions, lending is among the riskiest of all banks functions, bank's problems usually spring from loans that have become uncollectible due to mismanagement, illegal manipulation, misguided lending policies or an expected economic downturn. As it happened with Philadelphia Bank in Jordan, which went bankruptcy and acquired by the Ahli Bank. (4)

It is known that Commercial banks are financial institutions which link the borrowers with banks as lenders. In addition, banks accept deposits: demand deposits, time deposits and saving deposits, etc. Commercial banks in Jordan are governed by the Central Bank of Jordan. The Central Bank operates with favorable policies such as deregulation of interest .Rates and relatively, the reduction of the imposed regulations and restriction on Commercial banks. Consequently, in the last few years new branches in Jordan such as Odeh Bank. There are (8) national banks in 1964, this number increased to (18) bank in 1990 to become (21) bank in 2003 (2).

The number of branches increased from (14) in 1964, Central Bank of Jordan, has taken the fiscal policy practice within the kingdom; it has played an active role by influencing the economic movement in the country (Reylan: 2005) consequently; a positive results have affected the banks. Banks assets increased in 1981 from JD 1330.7 million to JD 3780.3 million in 1989 ad up to JD 14153.6 million in 2001.(2)

The importance of the banking sector in the Jordanian economy can be illustrated by the ratio of banking assets to gross domestic product for the same period to 91.8%, 155% and 223% respectively .(4)

Jordanian Banks Credit facilities: Commercial banks...

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