Abstract

Relative to the numerous papers which examine the performance of banks, one of the most important key features of the evolution of foreign direct investment (FDI) flows in recent years has been the increasing proportion of FDI in the service (including banking) industry. This is why the financial economics and finance literatures include a growing number of researches that examine the effect of the entry of foreign banks on domestic bank's performance in terms of, for example, their net interest margin and competition.

This paper analyzes the issues of net interest margin and competition in the Jordanian banking system during the time period from 2000 to 2010. In more specific terms, the paper examines the impact of the entry of foreign banks on the behavior of bank spreads and the extent of competition.

Using a panel of bank-level data, the results indicate that while well-known determinants of net interest margin are appropriate to the Jordanian scene, the effect of the entry of foreign banks on the cost of financial intermediation has not been positive. In addition, based on a non-structural measure of competition (H-statistic), the results indicate that foreign banks have not led to any significant improvement in the monopolistic competition condition that prevails in the Jordanian banking sector.

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