Deposit Dollarization and Bank Performance: The Jordanian Case
Ghassan Omet, Muthana Abu Hadhoud, Morad Abdel-Halim

Abstract
It is common knowledge that banks all over the world hold deposits in foreign currencies. Some of these deposits might account for a large proportion of local banks’ deposits. This phenomenon (dollarization) has attracted attention in the literature. Indeed, if a significant part of a banking sector is dollarized, then such a sector incurs extra liquidity and solvency risks. Based on the time period 2000-2011, this paper examines the impact of foreign exchange deposits on the performance of Jordanian banks in terms of their profitability, efficiency (net interest margin), and credit behaviour. The empirical results indicate that foreign exchange holdings have a significant impact on bank profitability and net interest margin. However, this impact is not significant in the case of bank credit. These results imply that Jordanian banks with higher proportions of their deposits in foreign currencies pass on the extra risk they incur in the form of wider net interest margins.

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