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Abstract
This study investigate the impact of credit policy on loans portfolio
in the Jordanian commercial banks. It was found that there is strong
empirical support of a positive relationship between credit policy
(Independent Variables) and loans portfolio (dependent variable).
Moreover, it contains empirical evidence of more lenient credit standards
during boom periods, both in terms of screening of borrows and in
collateral requirements. A robust evidence was also found that during
upturns, riskier borrowers get bank loans, while collateralized loans
decrease.
Strong competition among domestic banks or with other foreign
banks and financial intermediaries erodes margin as both loan and deposit
interest rates get closer to the inter bank rate. To compensate for the fall in
profitability, bank managers might increase loan growth at the expense of
the (future) quality of their loan portfolio.

Key word: Credit Policy, Loan Portfolio, Liquidity, Profitability, Risk,

Interest Rate, Collateral Banking Relation, Domestic Competition, Forging
Competition.

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1.1. Introduction
Banking services are affected by the economic situations and the free
financial system of the country. Banking sector play very important role in
the national economy by performing functions such as accepting deposits
(Liabilities) and make loans (assets). Further more, banks works as
intermediaries by making money available for financing the economic
growth of the country. Credit play very important role in the efficiency of
economic activities. A country can not acquire economic progress without
emphasizing credit mechanisms, and developing it is credit policy. Credit
activity is considered the most important because granted loans for clients
(borrowers) representing the important part of the banks assets.
Credit facilities are considered the most financial sources that gain
profit for commercial banks. Therefore, these banks need to manage, direct
and guide their credit policies because it has direct impact on their returns.
If banks follow lose credit policy, the size of credit facilities will definitely
increase, the opposite will happen when they follow strict policy.
Credit quality is also very important issue, since it is linked with
macroeconomic, competition and banking supervision aspects; and thus it
is especially important and relevant for banks-based economic systems
(Belaish, 2001), It is worth to emphasize that quality of credit, together
with its availability and cost, is important for both resource allocation and
growth. Borrowers credit worthiness need to be evaluated by the banks in
the resource allocation process. Poor credit quality often seen as a signal of
excessive credit risk, may cause greater volatility in total credit with
possible backward linkages to the banking system itself (Berger and Udell,
2004).
The globalization of financial markets, the increasing competition
and the new activities carried out by banks do not diminish the importance
of credit risk. To the contrary, credit quality is an important intermediate
target for regulators in order to dampen possible financial crisis, and it is
the focus of Basel reform in the banking supervision system. In addition,
credit quality is a major instrument in banking competition to the extent
that it may lead to an efficient cost structure. A bad credit screening
moreover makes the bank's lending subject to the winner's curses (Lozano
and Pastor, 2006).

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Moreover, banks ultimate goal is profitability; therefore, banks need

to increase the number of their clients, and increase the volume of business
with current clients, and ensure their continuity in the market. Banks need
to improve their performance under tough circumstances and severe
competition by their rivals. They should improve banking services and try
to innovate new products and services to guarantee their continuity and
profitability. They must not forget to take into consideration the cost factor.
In other words, the more banks can control their overheads and running
costs, the more they can increase their performance, profitability and
maintain a decent image on banking services (kakish, 1995).
Bank deposits are the dominant liability item in the balance sheet of
banks. They are the principle source of funds for banks. In the case of
Jordan, most sources of the funds in Jordanian banks are considered to be
short- term. This might create a problem of liquidity for banks when they
grant loans on a longer- term.
Jordanian banks cant extend long-term loans suitable for the
financing of development projects especially agriculture, industry and
housing. Therefore, it was necessary to establish institutions to provide
medium and long-term facilities for such sectors on easy terms in order to
accelerate the economic development process (Al-Karasneh, 1997).
It is worthy to mention that, one of the major tasks of the Central
Bank of Jordan is the supervision of the banking system, so as to ensure its
soundness, and protect depositors and shareholders. In addition to that, the
central Bank of Jordan regulates the quantity, quality, and cost of credit to
meet the requirements of economic development and monetary stability.
Monetary policy tools available to the central Bank of Jordan to regulate
credit include open market operations, the reserve requirement ratio and the
discount rate.

1.2. Problem Definition

Credit policy is one part of fiscal policy. It can be affected directly
by economic and political surrounding. Credits are granted more during
economic growth and inflation time. Banks become more conservative
about granting credits during economic crisis or deflation time. Therefore,
banks must be aware of the economic fluctuations of the country. Besides,

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banks must specify the best time to offer credits. However, credits must be
given in different forms to a large number of people in order to accomplish
the main goal of the bank as well as to cope with banking competition.
Accordingly, this study will try to answer the following questions:
1- What are the major factors that influence credit policy in the
Jordanian Commercial banks?
2- What are the obstructions and difficulties facing the commercial
banks in Jordan?
3- What is the importance of credit policy in banking industry?
4- What are the most important advantages of credit facilities, and how
does this effect credit quality?
5- What are the solutions that facilitate and maintain safety for
Jordanian banks when granting loans to clients?

1.3. Importance of Study

Banks maintain their central role in the economic systems of many
developed and developing countries. Banks activities and performances are
thus the focus of large body of literature. Credit policy in particular is a
critical issue, since it is linked with macroeconomic, competition and
banking supervision aspects, and thus it is especially important and relevant
for bank-based economic systems, such as in Jordan.
Jordanian Commercial Banks like any other banks in the world has
loans portfolio which is very important to maintain from risks. As it is well
known loan portfolio compositions plays an important role as an indicator
of bank risk profile. Besides, risk concentration is an additional source of
concern as many banking crises have pointed out. In addition to that,
Jordanian bankers need to make the required investigations on the
borrowers. Inefficient banks performing poor screening and monitoring of
borrowers will have lower portfolio quality. As well as, the Jordanian
bankers must not negligent the competitive factor, the overall competitive
environment in which banks operate could also affect the level of credit
risk the bank is willing to take.The results and recommendations of this
study could be a source of help to the bankers of Jordan especially in
improving the efficacy and performance of their loans portfolio.

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1.4. Objectives of study

The main objectives of this study are:
1- Emphasizing the importance of using credit policy in the Jordanian
commercial banks.
2- Finding out the impact of credit policy on loans portfolio in the
Jordanian commercial banks.
3- Determining the fundamental factors that influence credit policy in
the Jordanian commercial banks.
4- Identifying the obstacles and difficulties facing the banking sector of
Jordan when extending different types of credit.
5- Recommending solutions which can be a source of help to the
bankers of Jordan.

2- Literature Review
Clair (1992) found that, a rapid credit expansion is deemed one of
the most important causes of problem loan. During economic expansions
many banks are engaged in fierce competition for market share in loans,
resulting in strong credit growth rates. The easiest way to gain market share
is to lend to borrowers of lower credit quality. This market share strategy is
even more dangerous if the bank is a new entrant in a product or regional
market. Initially, banks selling new products will probably have more
problem loans in their new business simply because they lack the necessary
expertise.
Berger and De Young (1997) added that, several additional factors
could affect the level of bank problem loans. First of all, loan portfolio
composition plays an important role as an indicator of bank risk profile.
Besides, risk concentration is an additional source of concern as many
banking crises have pointed out. Secondly, inefficient banks performing
poor screening and monitoring of borrowers will have lower portfolio
quality. Thirdly, the overall competitive environment in which banks
operate could also affect the level of credit risk the banks is willing to take.
If the bank has some degree of monopoly power, it has the possibility of
charging higher interest rates in the future. Therefore, a higher number of
firms of lower quality could obtain funds from the bank. This would not
happen in a competitive market where it is not possible to recover in the

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future the present losses because the firm, after solving its difficulties,
would not pay an interest rate above the market rate.
More recently, Berger and Udell (2003) have developed
complementary hypothesis in order to explain the markedly cyclical profile
of loans and non-performing loan losses. They call it the institutional
memory hypothesis and, essentially, it states that as time passes since the
last loan bust, loan officers become less and less skilled in order to avoid
granting loans to high risk borrowers. That might be the result of two
complementary forces. First of all, the proportion of loan officers that
experienced the last bust decreases as the bank hires new, younger,
employees and the former ones retire. Thus, there is a loss of learning
experience. Secondly, some of the experienced officers may forget about
the lessons of the past and the more far away is the former recession the
more they will forget.
Crockett(2001),described the situation as : banking supervisors,
through many painful experiences, are quite convinced that banks lending
mistakes are more prevalent during upturns than in the midst of a recession.
In good times both borrowers and lenders are overconfident about
investment projects and their ability to repay and to recoup their loans and
the corresponding fees and interest rates. Banks, over optimism about
borrowers future prospects bring a bout more liberal credit policies with
lower credit standards requirements. Thus, some negative net present value
projects are financed just to find later the impairment of the loan or the
default of the borrower. On the other hand, during recessions, when banks
are flooded with non-reforming loans and specific provisions, they
suddenly turn very conservative and tighten credit standards well beyond
positive net present values. Only their best borrowers get new funds and,
thus lending during downturns is saver and credit policy mistakes much
lower.
Salas and Saurina (2002). In their paper they produce clear cut
evidence of a direct, although lagged, relationship between credit cycle and
credit risk. A rapid increase in loan portfolios is positively associated with
an increases in non-performing loan ratios later on. Moreover, those loans
granted during boom periods have a higher probability of default than those
granted during slow credit growth periods. Finally, they show that in boom
periods collateral requirements are relaxed while the opposite happens in

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recessions, which they took it as evidence of looser credit standard during

expansion.
Davis and Zhu (2004) explained that, collateral might also play a
role in fueling credit cycles. Usually loan booms are intertwined with asset
booms. Rapid increase in land, house or share prices increase the
availability of funds for those that can pledge them as a collateral. At the
same time, the banks are more willing to lend since it has an (increasingly
worthier) asset to back the loan in case of trouble. On the other hand, it
could be possible that the widespread confidence among bankers results in
a decline in credit standards, including the need to pledge collateral.
Collateral, as risk premium, can be thought to be a signal of the degree of
tightening of individual bank loan policies.
Borio and Lowe (2002) argued that, either in credit markets or
between managers and bank shareholders. All of them might get worse
with increasing competition among banks or between banks and other
financial intermediaries. Strong competition erodes net interest and gross
income margins as both loan and deposit interest rates get closer to the
inter bank rate. To compensate the fall in profitability bank managers
increase asset growth (i.e. loan growth) and that can come at the expense of
the (future) quality of their loan portfolio.
Williamson (1963), examined the relationship between shareholders
and managers, he pointed out that, the classical principal-agency problem
between bank shareholders and managers can also feed excessive volatility
into loan growth rates. Mangers, once they obtain a reasonable return on
equity for their shareholders, may engage in other activities that depart
from firm value maximization and focus more on managers rewards. One
of these activities might be excessive credit growth in order to increase the
social presence of the bank (and its managers) or the power of managers in
a continuously enlarging organization.
Myers and Majluf (1984) argue that, in the presence of asymmetric
information which prompts rationing behavior by commercial bankers.
They added that, in the presence of asymmetric information, increases in
the interest rate affect the quality of the loan portfolio of the lender
negatively, either in terms of the riskiness of the projects being funded or in
terms of the expected monitoring costs. The lender may have a reason to

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wish to hold the interest rate below the market clearing level in order to
maintain a reasonable level of quality of the loan portfolio, rather than
acquire the direct gains available from a higher rate.
Fama (1985) argue that banks are able to learn about the
characteristics of borrower firms, after they have provided loans to those
firms. Based on this proposition, several studies have proposed models that
relate borrower-lender relationship to the availability/ cost of debt finance.
While previous studies are generally agree that closer lending relationships
will boost availability of credit, they have different views on the impact of
lending relationship on cost of credit. As detailed presently, some studies
suggest that lending relationships will reduce credit cost, and others do not.
Diamond (1991) introduces two mechanisms in which lending
relationship may reduce the cost of credit. First, lenders reject loans to
borrowers who have chosen risky projects and gone bankrupt. This credit
allocation process improves the quality of lenders portfolio, generating
additional profits. Second, borrowers who have been able to repay their
loans and thus have established a good reputation to lenders have incentive
to keep the reputation by choosing safer projects. Thus, credit allocation
criteria to give priority to borrowers who have longer relationships to
lenders will generate additional gain.
Chan and Thakor (1987), note that, the collateral pledged by
borrowers may help attenuate the problem of adverse selection faced by the
bank when lending. Lower risk borrowers are willing to pledge more and
better collateral, given that their lower risk means they are less likely to
lose it. Thus, collateral acts as a signal enabling the bank to mitigate or
eliminate the adverse selection problem caused by the existence of
information asymmetries between the bank and the borrower at the time of
the loan decision. In a context of asymmetric information between the bank
and the borrower, banks design loan contracts in order to sort out types of
borrowers: high risk borrower choose high interest rates and no collateral,
where as low risk ones pledged collateral and get lower interest rates.
Aleksashenko (1999) raised an important issue regarding the
consequences of foreign banks admission at the domestic bank sectors in
number of countries. In others opinion on whether the impact of foreign

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banks is (or will be) positive or negative are rather controversial while most
of the researchers agree on following:
i) In the most countries where foreign banks were admitted they
influence substantially the structure of the bank sector and enhance
competition.
ii) In the most cases the domestic banks were placed at the relatively
bad position comparing to the position of foreign ones. Here the
number of factors are distinguished: lack of managerial expertise,
heavy burden of bad loans in the portfolios, and high reserve
requirements or other pressures to finance government deficit.
iii) Foreign banks activity in long-term lending is revealed.

3. Theoretical Framework
Credit policy work as an indicator guides the workforce in the
banks. Credit is an important tool in the economic life. Economic progress
can not be acquired without employing credit mechanisms, renewing and
developing credit policy. Credit activity is the most important activity for
commercial banks. Loans granted to clients represent the most important
part of the assets of commercial banks. It is the best source for its returns or
income. Therefore, banks make good plans for it is credit policies and
make good measurement for granting loans and allowances in order to
maintain it is investment assets and to minimize it is losses from bad debits.
Banks use other money deposits to grant credits. Thus credit policy is part
of financial and monetory policy. Moreover, banks are capable to give
loans and allowance, and also capable of issuing different types of credit.

3.1. Types of Credit

The types of credit can be classified as follows;
1- Consumption Credit:
This type is used to get personal consumption commodities or to pay
contingency expenses which can't be faced by present income of the
borrower. These amounts are repaid from the borrower income in the future
2

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or liquidating his properties to be given as collateral. The borrower can

transfer his salary to the bank, any other personal collateral, commercial
papers or real estate mortgage.
2- Productive Credit:
This type of credit is used to make the business people able to buy
fixed assets for their project; it is also used to support the productive
powers of the factories by financing and buying the equipments for the
factory as well as buying the required raw materials for production.
This type of credit is also used to finance the new establishment of
economic growth projects in the society.
Self liquidity is one of the characteristics of this type of credit.
Commercial banks don't prefer to grant capitalist productive credit. From
their point of view they consider such kind of loan of a high risks and they
don't want their money to lye-idle.
3- Investment Credit:
This type of credit is given to investment banks and investment
companies; they use it to finance their subscribing in bonds and new shares.
Investment credit is granted in the form of due dated and under demand
loans or for the brokers of financial paper. It is also granted for individuals
to finance part of their buying of financial papers.. (Rose and Hudgins,
2005).
3.2. Credit According to Time Period
1- Short -Term Credit: The period of this credit doesn't exceed one year.
It is used to finance the current activities of the organizations.
2- Medium- Term Credit: The period of this credit extends to five years.
It is used for the purpose of financing some capitalist operations of the
projects.
3-Long -Term Credit: The period of this credit exceeds five years . It is
used to finance housing projects, reforming lands, and building factories.
(Gary, 1982).

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In addition to that, loans are dominant asset in most banks'

portfolio, representing an average 50 to 75 percent of total assets. Loan
types are categorized as follows:
3.3. Types of loans
What types of loans do banks and many of their closest
competitors make? Bank loans may be divided into seven broad categories
of loans, delineated by their purpose:
1- Real estate loans, which are secured by real property-lands, buildings,
and other structures-and which include short-term loans, and longerterm loans.
2- Financial institution loans, including credit to banks, insurance
companies, finance companies, and other financial institutions.
3- Agricultural loans, extended to farm and ranch operations to assist in
planting and harvesting crops and to support the feeding and care of
livestock.
4- Commercial and industrial loans, granted to businesses to cover such
expenses as purchasing inventories, paying taxes, and meeting
payrolls.
5- Loans to individuals, including credit to finance the purchase of
automobiles , homes, appliances, and other retail goods.
6- Miscellaneous loans, which include all those loans not listed above,
including securities loans.
7- Lease financing receivables, where the lender buys equipment or
vehicles and leases them to its customers (Rose and Hudgins, 20050
Banks issue loans mostly to all types of borrowers after making
inquiries about the borrower's creditworthiness.

3.4. Is the borrower Creditworthy?

The question that must be dealt with before any other is whether or
not the customer can service the loan that is, pay out the credit when due,
with a comfortable margin for error. This usually involves a detailed study
of six aspects of the loan application:

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1- Character:
The loan officer must be convinced that the customer has a welldefined purpose for requesting credit and a serious intention to repay. If the
officer is not sure exactly why the customer is requesting a loan; this
purpose must be clarified to the lender's satisfaction. Once the purpose is
known, the loan officer must determine if it is consistent with the lending
institution's current loan policy. Even with a good purpose, however, the
loan officer must determine that the borrower has a responsible attitude
toward using borrowed funds, is truthful in answering questions, and will
marked every effort to repay what is owed. Responsibility, truthfulness,
serious purpose, and serious intention to repay all monies owed make up
what a loan officer calls character. If the loan officer feels the customer is
insincere in promising to use borrowed funds as planned and in repaying as
agreed, the loan should not be made, for it will almost certainly become
problem credit.

2- Capacity:
The loan officer must be sure that the customer requesting credit ha
the authority to request a loan and the legal standing to sign a binding loan
agreement. This customer characteristic is known as the capacity to borrow
money. For example in most states a minor (e.g. underage 18 or 21) cannot
legally be held responsible for a credit agreement; thus the lender would
have great difficulty collecting on such loans. Similarly, the loan officer
must be sure that the representative from a corporation asking for credit has
proper authority from the companys board of directors to negotiate a loan
and sign a credit agreement binding the corporation.

3- Cash:
This key feature of any loan application centers on the question:
Does the borrower have ability to generate enough cash- in the form of
cash flow-to repay the loan? In general, borrowing customer have only
three sources to draw upon to repay their loans: (a) cash flows generated
from sales or income, (b) the sale or liquidation of asset, or (c) funds raised
by issuing debt or equity securities. Any of these sources may provide
sufficient cash to repay a loan.

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4- Collateral:
In assessing the collateral aspect of a loan request, the loan officer
must ask; Does the borrower possess adequate net worth or own enough
quality assets to provide adequate support for the loan? The loan officer is
particularly sensitive to such features as the age, condition, and degree of
specialization of the borrower's assets.

5-Conditions:
The loan officer and credit analyst must be aware of recent trends in
the borrower's line of work or industry and how changing economic
conditions might affect the loan.

6- Control:
The last factor in assessing a borrower's creditworthy status is
control, which centers on such questions as whether changes in law and
regulation could adversely affect the borrower and whether the loan request
meets the lender's and the regulatory authorities' standards for loan quality.
(Rose and Hudgins, 2005).

3.5. Measuring Risks in Banking and Financial Services

Commercial banks are exposed to the following risks while granting
loans to borrowers:
1- Credit Risks:
The probability that some of a financial institutions assets, especially its
loans, will decline in value and perhaps become worthless is known as
credit risk.
2. Liquidity Risk:
Bankers are also concerned about the danger of not having sufficient
cash and borrowing capacity to meet customer's withdrawals, loan demand,

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and other cash needs. Faced with liquidity risk a financial institution may
be forced to borrow emergency funds at excessive cost to cover its
immediate cash needs, reducing its earnings. Very few financial firms ever
actually run out of cash because of the ease with which liquid funds can be
borrowed from other banks.
3. Market Risk:
Changes in market interest rates and currency prices, shifting public
demands for bank services and the service offered by non-bank financial
firms, sudden alterations in central bank monetary policies, and changing
invertors perceptions of the riskiness of banks and non-bank financial firms
cause the value of institutional assets, liabilities, and equity to move up or
down frequently, depending on the direction financial winds are blowing.
4- Interest Rate Risk:
Movements in market interest rates can also have potent effects on the
margin of revenues over costs for both banks and their competitors. For
example, rising interest rates can lower a banks margin of profit if the
structure of the institution's assets and liabilities is such that interest
expenses on borrowed money increase more rapidly than interest revenues
on loans and security investments. However, if a bank or other financial
firm has an excess of flexible-rate assets over flexible-rate liabilities,
falling interest rates will erode its profit margin. In this case, asset revenues
will drop faster than borrowing costs.
5- Earning Risk:
The risk to a financial institution's bottom line-its net income after all
expenses are covered-is known as earning risk. Earning may decline
unexpectedly due to factors inside the financial firm or due to external
factors, such as changes in economic conditions or in laws and regulations.
For example recent increases in banking competition have tended to narrow
the spread between earning on a bank assets and the cost of raising bank
funds. Thus, a bank's stockholders always face the possibility of a decline
in their earning per share of stock, which would cause the value of the
bank's stock to fall, eroding its resources for future growth.

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6- Capital Risk:
Bankers and their competitors must be directly concerned about risks
to their institutions long-run survival, often called capital risk. For example,
if a bank takes on an excessive number of bad loans or if a large portion of
its security portfolio declines in market value, generating serious capital
losses when sold, then its equity capital account, which is deigned to
absorb such losses, may be overwhelmed. If investors and depositors
become aware of the problem and begin to withdraw their funds, regulators
may have no choice but to declare the institution insolvent and close its
doors.
7- Inflation Risk: The probability that an increasing price level for goods
and services (inflation) will unexpectedly erode the purchasing power of a
financial institution's earning and the return to its shareholders.
8- Currency or Exchange Rate Risk:
The probability that fluctuations in the market value of foreign
currencies will create losses by altering the market value of a bank's or
other financial institution's assets and liabilities.
9- Political Risk:
The probability that changes in government laws or regulations, at home or
abroad, will adversely affect a bank's or other financial firm's earnings,
operations, and future prospects.
10- Crime Risk:
The possibility that a bank's or other institution's owners, employees,
or customers may choose to violate the law and subject the institution to
loss from fraud, embezzlement, theft, or other illegal acts. (Tayler, 1996)
3.6.Competitors, Sizes, Location, and Regulatory of Commercial
Banks

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The size of a bank (often measured by its assets, deposits, or equity

capital) and of competing financial service institutions can have a highly
significant impact on profitability and other performance measures. For
example, when we compare institutions of similar size. One reason is that
similar-size financial firms tend to offer the same or similar services, so
you can be a bit more confident that your performance comparisons have
some validity.
To conduct even more valid performance comparisons, we should also
compare banks and competing financial firms serving the same or similar
market areas. Performance is usually greatly influenced by whether a
financial-service provider operates in a major financial center, smaller city,
or rural area. The best performance comparison of the all is to choose
institutions of similar size serving the same market area. Unfortunately, in
some smaller communities it may be difficult, if not possible, to find
another financial firm comparable in size. The financial analyst will then
usually look for another community with a similar-size financial institution,
preferably a community with comparable business and house holds because
the character of financial firm's customer base significantly impacts how it
performs.
Finally, where possible, it's good idea to compare financial institutions
subject to similar regulations and regulatory agencies. For example, in the
banking community each regulator has a somewhat different set of rules
banks must follow, and these governments imposed rules can have a
profound impact on performance. This why comparisons of banks and
other financial firms in different countries is often so difficult and must be
done with great caution.
Therefore, central banks must be compared against similar banks.
Similarly, the performance of national banks, where possible, should be
compared against that of other national banks. There is an old saying a bout
avoiding comparing apples with oranges because of their obvious
differences; the same is true in banking and the financial- services field. No
two financial firms are ever exactly a like in size, location, service menu or
customer base. The performance analyst must make his best effort to find
the most comparable institutions and then proceed with caution. (Rose,
1987).

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3.7. Central Bank and Monetary Policy

Like all central banks around the globe, the central bank of Jordan
has more impact on the day-today activities of banks. A central bank's
primary job is to carry out monetary policy, which involves making sure
the supply and cost of money and credit from the financial system
contributes to the nations economic goals. By controlling the growth of
money and credit, the central bank try to ensure that the economy grows at
an adequate rate, unemployment is kept low, inflation is held down, and the
value of the nations currency in international markets is protected.
Most central banks are an important source of short-term funds for
banks and other depository institutions, especially the largest banks, which
tend to borrow frequently to replenish there legal reserves. When the
central bank loans reserves to borrowing institution, the supply of legal
reserves expands temporarily, which may cause loans and deposits to
expand. Later when the discount widow loans are repaid, the borrowing
institutions lose reserves and may be forced to curtail the growth of their
deposits and loans.By raising the discount rate on credit, the central bank
makes new loans from the discount window more costly. This discourages
some depository institutions from borrowing reserves, which may lead to
slower growth in credit. Lowering the discount rate, on the other hand, may
act to stimulate borrowing from the central bank. Depository institutions
may become more liberal in making credit available to their customers.
Changes in the discount rate seem to affect other interest rated in the
financial system, generally pushing them in the same direction as the move
in the discount rate. Finally, changing the discount rate seems to have a
psychological "announcement effect" bringing on investor expectations of
higher or lower interest rates (Rose, 1983).
4. Research Methodology
4.1. Nature of Study

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It is an exploratory study that focused on analyzing the factors that

may affect the implementation of credit policy on the loans portfolio of the
Jordanian Commercial Banks.

4.2. Theoretical Model

The model of this study consists of two types of variables, the
independent variables: (liquidity, the economic situations-cycle,
profitability, interests, collaterals, domestic competition, foreign
competition, risks, relationship banking).
And the dependent variable (The loans portfolio) as show in the
following figure:
Figure (1): Theoretical Model of the Study
Independent Variables
Liquidity

Dependent Variable

Economic Situations-cycle
Profitability
Interest Rates
Loans Portfolio
Collaterals
Domestic Competition
Foreign Competition
Risks

Relationship Banking

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4.3. Operational Definitions

Liquidity
The ability of a bank or business to meet its current obligations or
the quality that makes an asset quickly and readily convertible into cash
without significant loss.
This factor will be measured by the following questions in the
questionnaire (Q 24, Q 30).
Economic Situations-Cycle:
A pattern of fluctuation in economic activity characterized by four
stages: expansion, contraction, recession, and recovery.
This factor will be measured by the following questions in the
questionnaire (Q1, Q2, Q4, Q7, Q13, Q15, Q27, Q 28)
Profitability:
The excess of revenues over costs incurred in earning revenues.
Profit center is a unit in a bank that generates income. In a profit-planning
system that unit budgets both income and expenses.
This factor will be measured by the following questions in the
questionnaire (Q6, Q7)
Interest Rate:
The rate assessed for the use of borrowed funds. The rate generally is
computed on a percentage-per-year basis
2

2009

This factor will be measured by the following questions in the

questionnaire (Q 10, Q16, Q 20, Q 26)
Collateral
One of the five Cs of credit. Specific property, securities, or other
assets pledged by a borrower to a lender as a back up source of loan
repayment. If the borrower does not pay as agreed, the financial institution
has the right to reposes the asset and sell it to satisfy any outstanding loan
amount.
This factor will be measured by the following questions in the
questionnaire (Q9, Q20, Q26)
Domestic Competition:
A list of banks major competitors and a comparison of their growth,
product mixes, and services. For banks, this competition would include a
comparison of growth in deposits and loans volume.
This factor will be measured by the following questions in the
questionnaire (Q 3, Q5).
Foreign Competition:
A rival business-banks selling identical or similar products in the
same market.
This factor will be measured by the following question in the
questionnaire (Q 22, Q 23).
Risks:
The degree of possibility that a loss will be sustained in a loan or
investment, or other transaction. Types of risk include interest rate risk,
liquidity risk, exchange risk, credit risk, inflation risk, volatility risk, and
market risk.
This factor will be measured by the following question in the
questionnaire (Q 11, Q 12, Q14, Q 18, Q 25).

2009

Relationship Banking:
A selective marketing strategy that focuses on attracting,
maintaining, and improving relations with individual bank customers.
Relationship banking strives to satisfy clients, total financial services
needs.
This factor will be measured by the following question in the
questionnaire (Q 17, Q 19, Q 21).
Loan Portfolio:
This dependent variable can be identified as the total of all loanscommercial, consumer and real estate-held by a financial institution and
managed as a collective whole.
4.4. Study Hypothesis
Based on the previous studies and the theoretical framework of this
study, the following hypothesis are introduced:
A- Major Hypothesis:
HO: There is no statistical relation between credit policy and loans
portfolio.
B- Minor Hypothesis:
HO (1-1): There is no statistical relation between bank liquidity and the
size of granted loans.
HO (1-2): There is no statistical relation between economic situations
and granted loans.
HO (1-3): There is no statistical relation between banks profitability
and the size of granted loans.
HO (1-4): There is no statistical relation between interest rates and the
size of granted loans.

2009

HO (1-5): There is no statistical relation between pledged collaterals

and the size of granted loans.
HO (1-6): There is no statistical relation between domestic competition
and the size of granted loans.
HO (1-7): There is no statistical relation between foreign competition
and the size of granted loans.
HO (1-8): There is no statistical relation between risk and the size of
granted loans.
HO (1-9): There is no statistical relation between bank relations with
the borrowers and the size of granted loans.
4.5. Research Population
Only the commercial banks of Jordan were chosen as a research
population for its importance and effective participation in the development
of the country especially Jordan's economy. In addition to that this sector
has a regional recognition and international presence. Twenty seven banks
are operating in Jordan and registered with the central bank of Jordan in the
year ended 2007. After excluding the non-Jordanian banks which are eight
in number, two Islamic banks, as well as excluding the four specialized
loan institutions, the remaining thirteen are the commercial banks which
represent the sample of study. The following table shows the types and
number of banks in Jordan:
Table (1)
Banks Operating in Jordan at the end of 2007
Name
* Commercial Banks
No-Jordanian Banks
Islamic Banks
Specialized loan Institutions
Total

Type
Private
Private
Private
Public

No. of Banks
13
8
2
4
27

2009

Source: Central Bank of Jordan-2007.

The research population includes:
1) Top Bankers
2) Credit Managers
3) Bank relations managers
In order to achieve the objectives of this study a sample of selected
managers were considered from the different commercial banks of
Jordan.
4.6. Sample of Study
The questionnaire were organized and distributed to 100 selected
bankers working in the commercial banks of Jordan. Only 84 bankers
responded on the questionnaire and the rest 16 were excluded from the
sample. Thus, only 84% will be included in the sample of study.
The questionnaire were developed based upon the literature review
to get the most important issues. Also, they were translated to Arabic to
enable the non-speakers of English understand the questions and answer
them easily.
4.7. Data Collection Method
Required data have been collected through two main sources:
a) Primary Sources:
Required information for the statistical analysis of the study and for
testing the hypothesis has been collected using a questionnaire that was
distributed among the representatives of the sample that is most of the
banking top managers, credit managers and bank relation managers
working in the commercial banks of Jordan.
b) Secondary Sources:

2009

Data have been gathered from Books, Specialized International

Journals, the World Wide Web (Internet). In addition to data, gathered
from previous studied of similar and related subjects.

5. Data Analysis and Hypothesis Testing

5.1. Reliability and Validity of Data
To ensure the validity of the measuring tools, different lecturers at
the faculty of Finance and Banking in Amman College for Financial and
Administrative Sciences-Al-Balqa Applied university thankfully reviewed
it. Their opinions and suggestions were taken into consideration prior to
data collection stage.
To ensure the reliability of the measurement tool, many criteria were
conducted; the first is the accurate scoring and coding of responses by the
researcher as respondents were encouraged to ask for clarification for any
terms or questions that seemed unclear, in addition to the frequently visit
which were done by the researcher.
The second criterion was the computation of the mean and standard
deviation( see Table No. 2) of reliability and the calculations of Cronbach
Alpha for this study which were as follows:
- Cronbach Alpha was used to test the reliability of the scale and it
was (0.817) which is good because it is greater than accepted percent
(0.60).
5.2. Study Hypothesis Testing

2009

The decision rule; Accept HO if calculated value is less than

tabulated value and reject HO if calculated value is greater than tabulated
value.
Major Hypothesis Testing:
(HO) There no statistical relationship between credit policy and
loans portfolio. One sample t-test was used to test the major hypothesis and
it was found that (calculated t=22.449) is greater that tabulated t (see table
No. 3).According to both credit policy and loans portfolio, there is
statistical relationship between credit policy and loans portfolio.

Minor Hypothesis Testing:

HO (1-1) There is no statistical relationship between bank liquidity and
the size of granted loans.One sample t-test was used to test the first minor
hypothesis and it was found that (calculated t=8.607) is greater than
tabulated t (refer to table No. 4). According to both bank liquidity and the
size of granted loans, there is a positive relationship between banks
liquidity and the sizes of granted loans.
HO (1-2) There is no statistical relationship between economic situationscycle and the size of granted loans.One sample t-test was used to test this
hypothesis and it was found that (calculated t=18.995) is greater than
tabulated t (see table No. 5).According to both economic situation-cycle
and the size of granted loans, there is a positive relationship between
economic situations-cycle and size of granted loans.
HO (1-3) There is no statistical relationship between banks profitability
and the size of granted loans.One sample t-test was used to test this
hypothesis and it was found that (Calculated t=2.861) is greater than
tabulated t (refer to table No. 6) According to both banks profitability
and the size of granted loans, there is a positive relationship between
banks profitability and the size of granted loans.
HO (1-4) There is no statistical relationship between interest rates and the
size of granted loans. One sample t-test was used to test this hypothesis

2009

and it was found that (calculated t=5.95) is greater than tabulated t (see
table No. 7). According to both interest rates and the size of granted
loans, there is a positive relationship between interest rates and the size
granted loans.
Ho (1-5) There is no statistical relationship between pledged collaterals and
the size of granted loans. One sample t-test was used to test this
hypothesis and it was found that (calculated t=2.848) is greater than
tabulated t (see table No. 8).According to both pledged collateral and the
size of granted loans, there is a positive relationship between pledged
collateral and the size of granted loans.
HO (1-6) There is no statistical relationship between domestic competition
and the size of granted loans. One sample t-test was used to test this
hypothesis and it was found that (calculated t=11.78) is greater than
tabulated t (see table No. 9). According to both domestic competition and
the size of granted loans, there is a positive relationship between domestic
competition and the size of granted loans.
HO (1-7) There is no statistical relationship between foreign competition
and the size of granted loans. One sample t-test was used to test this
hypothesis and it was found that (calculated t = 15.167) is grater than
tabulated t (refer to table No. 10).According to both foreign competition
and the size of granted loans, there is a positive relationship between
foreign competition and the size of granted loans.
HO (1-8) There is no statistical relationship between risk and the size of
granted loans. One sample t-test was used to test this hypothesis and it
was found that (calculated t = 13.238) is grater than tabulated t (see to
table No. 11). According to both risk and the size of granted loans, there
is a positive relationship between risk and the size of granted loans.
HO (1-9) There is no statistical relationship between bank relation and the
size of granted loans.One sample t-test was used to test this hypothesis
and it was found that (calculated t = 9.65) is greater than tabulated t (see
to table No. 12). According to both bank relation and the size of granted
loans, there is a positive relationship between bank relation and the size
of granted loans.

2009

6. Results
After analyzing the data and testing the hypothesis, the following
results were extracted:
1. It was found that there is a positive relationship between all the
independent variables and dependent variable.
2. All the respondents of the Jordanian commercial banks agree that there
is a very close relationship between loans portfolio and the economic
situation cycle. During recessions the problem of loans portfolio
increase as a result of firms' and households, financial distress. When
the economy grows strongly, the income of non-financial firms and
household expands and they can repay loans easily.
3. A rapid credit expansion is deemed one of the most important causes
of loan portfolio problem. During economic expansions many
Jordanian banks are engaged in fierce competition for market share in
loans, resulting in strong credit growth rates. The easiest way to gain
market share is to lend to borrowers of lower credit quality. This
market share strategy is even more dangerous for the Jordanian
commercial banks.
4. Loan portfolio composition plays and important role as an indicator of
bank risk profile.
5. Inefficient Jordanian commercial banks performing poor screening
and monitoring of borrowers will have lower portfolio quality.
6. The overall competitive environment where the Jordanian commercial
banks operate could also affect the level of credit risk.
7. It was found that entry by foreign banks into the world of the
Jordanian commercial banks increases both competition and sector
stability, factors that should benefit all borrowers. As well as these
banks reduce both the profitability and expenses of domestic banks.
8. In order to avoid loan default most Jordanian commercial banks ask
borrowers to pledge collaterals.
9. It was found borrowers who have longer relationship with banks will
get lower lending rates.
10.Lenders of the commercial banks of Jordan initially charge borrowers
an above-market interest rate and require collateral, but after the
borrowers have succeeded their projects they advance loans to them,
without collateral requirement at a lower interest rate.

2009

11.Jordanian commercial banks extend additional credit to existing

borrowers during liquidity expansions.
12.The performance of the Jordanian commercial banks becomes poor
when the entire borrowing sector hit by a systematic and unpredictable
adverse shock.
13.When credit policy is tightened, both total loans and business loans are
affected.
14.To compensate for the fall in profitability, Jordanian commercial
banks managers might increase loan growth at the expense of the
future quality of their loan portfolios.
15.A rise in interest rates in this sector leads to reduction in spending by
interest sensitive sectors of the economy, such as housing and
consumer purchases of durable goods.

7. Recommendations
The researcher mainly recommends the following in order to enable
the bankers in the commercial banking sector of Jordan to seriously apply
them in their banks:
1. Jordanian commercial banks need to improve their loans portfolio by
increasing the production of good output and reducing bad outputs.
2. Monitoring and liquidity creation emphasize the role of Jordanian
commercial banks in the evaluation of borrowers credit worthiness and
hence in the resource allocation process.
3. Jordanian bankers need to bear in mind that excessive credit risk could
impair the efficient allocation of capital. But bad credit may also
impair the performance of banking institutions.
4. It is worth to emphasize that quality of credit, together with its
availability and costly, is important for both resource allocation and
growth. Poor credit quality, often seen as a signal of excessive credit
risk, may cause greater volatility in total credit with possible backward
linkages to the banking system in Jordan.
5. Many credit risk mistakes are made during the expansionary phase of
the economic cycle. Therefore, it is necessary to improve bank
manager's awareness of credit risk.

2009

6. Lenders of the Jordanian commercial banks must have good lending

relationships with borrowers who have been able to repay their loans
and established a good reputation as well as they must know more
about their characteristics than others do. These relationships will
improve the quality of lender's portfolio, generating additional profits.
7. Bank managers of the Jordanian commercial banks need to ask
borrowers to pledge more and better collaterals, because collateral acts
as a signal enabling the bank to mitigate or eliminate the adverse
selection between the bank and the borrower at the time of the loan
decision.
8. Bankers must use various kinds of contract feature to mitigate liquidity
and credit risk.

Descriptive statistical Tables

Descriptive statistics: Mean and standard deviation were used to test the
attitudes toward following questions.
Table (2)
Descriptive Satieties the questions
Mean
Std. Deviation
1.
3.2381
1.27647
2.
4.1071
0.93161
3.
4.1190
1.31172
4.
4.1548
0.99993
5.
3.9524
1.17098
6.
3.4881
1.56385
7.
4.1429
0.88007
8.
2.8690
1.29670
9.
3.0476
1.22134
10.
4.1190
0.94938
11.
4.0952
1.07119
12.
4.0952
1.10442
13.
2.8214
0.98373
2

2009

14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26
27
28
29
30

3.6667
4.3810
2.5833
3.0952
4.0476
3.9524
3.5714
3.8214
3.7619
3.8929
3.8571
3.1429
3.0238
4.1667
3.4167
4.5714
3.4643

0.99799
0.79007
0.82445
1.07119
1.22134
1.00486
1.00942
1.05466
1.05988
1.00622
1.13161
1.08819
1.27039
1.06232
1.28202
0.78057
0.85653

It was found that, there are negative attitudes toward q (8, 13, 16),
meanwhile there are positive attitudes toward the rest question because
their means are greater than the mean of the scale.
Hypothesis (1):
Table (3)
Test of hypothesis (3)
t calculate
t tabulated
t Sig
Result of Ho
22.449

t calculate
8.607

1.989

0.000

Hypothesis (2):
Table (4)
Test of hypothesis (4)
t tabulated
t Sig
1.989

0.000

Hypothesis (3):
Table (5)

reject

Result of Ho
reject

2009

t calculate
18.995

t calculate
2.861

t calculate
5.95

t calculate
2.848

t calculate
11.78

t calculate
15.167

Test of hypothesis (5)
t tabulated
t Sig
1.989

0.000

Hypothesis (4):
Table (6)
Test of hypothesis (4)
t tabulated
t Sig
1.989

0.000

Hypothesis (5):
Table (7)
Test of hypothesis (5)
t tabulated
t Sig
1.989
0.000
Hypothesis (6):
Table (8)
Test of hypothesis (6)
t tabulated
t Sig
1.989

0.000

Hypothesis (7):
Table (9)
Test of hypothesis (7)
t tabulated
t Sig
1.989

0.000

Hypothesis (8):
Table (10)
Test of hypothesis (8)
t tabulated
t Sig
1.989

0.000

Result of Ho
reject

Result of Ho
reject

Result of Ho
reject

Result of Ho
reject

Result of Ho
reject

Result of Ho
reject

2009

t calculate
13.238

t calculate
9.65

Hypothesis (9):
Table (11)
Test of hypothesis (9)
t tabulated
t Sig
1.989

0.000

Hypothesis (10):
Table (12)
Test of hypothesis (10)
t tabulated
t Sig
1.989

0.000

Result of Ho
reject

Result of Ho
reject

2009

DESCRIPTIVE
VARIES= q1 q2 q4 q4 q5 q6 q7 q8 q9 q10 q 11 q 12 q13 q14 q15 q16 q17
q18 q19 q20 q21 q22 q23 q24 q25 q26 q27 q29 q30
STATISTICS=MEAN STDDEV MIN MAX
Descriptive
Descriptive Statistics
N Maximum
Maximum
Mean
Std.
Deviation
q1
84
1.00
5.00
3.2381
1.27647
q2
84
.002
5.00
4.1071
.93161
q3
84
1.00
5.00
4.1190
1.31172
q4
84
1.00
5.00
4.1548
.99993
q5
84
1.00
5.00
3.9524
1.17098
q6
84
1.00
5.00
3.4881
1.56385
q7
84
1.00
5.00
4.1429
.88007
q8
84
1.00
5.00
2.8690
1.29670
q9
84
1.00
5.00
3.0476
1.22134
q 10
84
2.00
5.00
4.1190
.94938
q 11
84
1.00
5.00
4.0952
1.07119
q 12
84
1.00
5.00
4.952
1.10442
q 13
84
2.00
5.00
2.8214
.98373
q 14
84
2.00
5.00
3.6667
.99799
q 15
84
1.00
5.00
4.3810
.79007
q 16
84
1.00
5.00
2.5833
.82445
q 17
84
1.00
5.00
3.0952
1.07119
q 18
84
2.00
5.00
4.0476
1.22134
q 19
84
2.00
5.00
3.0952
1.00486
q 20
84
2.00
5.00
3.5714
1.00942
q 21
84
2.00
5.00
3.8214
1.05644
q 22
84
2.00
5.00
3.7619
1.05988
q 23
84
2.00
5.00
3.8929
1.00622
q 24
84
1.00
5.00
3.8571
1.13161
q 25
84
2.00
5.00
3.1429
1.08819
q 26
84
1.00
5.00
3.0238
1.27039
q 27
84
2.00
5.00
4.0667
1.06232
q 28
84
1.00
5.00
3.4167
1.28202
q 29
84
2.00
5.00
4.5714
.78057

2009

q 30
84
Valid N 84
(leastwise)

2.00

5.00

3.4643

.85635

RELIABILITY
Naples= q1 q2 q4 q4 q5 q6 q7 q8 q9 q10 q 11 q 12 q13 q14 q15 q16 q17
q18 q19 q20 q21 q22 q23 q24 q25 q26 q27 q29 q30
/SCALE (ALL VARIABLES) ALL/MODEL=ALPHA
Reliability
(Data Set 10) C:\Ptogtam Files\SPSS\
Scale: ALL Variables
Case Processing Summary
N
%
Case Valid
84
100.0
Excluded*
0
.0
Total
84
100.0

Cronbach's Alpha
.817

Liquidity
Economic
Profit
Interest
Collaterals
Domestic
Competition
Foreign
Risk
Relation

Reliability Batistes
N of Items
30

T-Test
(Data Ste 10) C:\Program Flies/SPSS\
One-Sample Statistics
N
Mean
Std.
Std. Error Mean
Deviation
84
3.6607
.70352
.07676
84
3.8036
.38773
.04230
84
3.4881
1.56385
.17063
84
3.3244
.49967
.05452
84
3.2143
.68965
.07525
84
4.0357
.80580
0.8792
84
3.8274
.49996
.05455
84
3.8095
.56047
.06115
84
3.6230
.59173
.06456

2009

One-Sample Statistics
Test Value-3
t

Liquating
Economic
Profit
Interest
Collaterals
Competition
Foreign
Risk
relation

8.607
18.995
2.861
5.959
2.848
11.780
15.176
13.238
9.650

df

83
83
83
83
83
83
83
83
83

Sig.
(2tailed
.000
.000
.005
.000
.006
.000
.000
.000
.000

Mean
Difference

.66071
.80357
.48810
.32440
.21429
1.03571
.82738
.80952
.62302

95% Confidence
Inertial of the
Difference
Lower

Upper

.5080
.7194
.1487
.2160
.0646
.8608
.7189
.6879
.4946

.8134
.8877
.8275
.4328
.3639
1.2106
.9359
.9312
.7514

2009

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