The Modified Role of the Board’s Characteristics on the Impact of the Net Operating Capital and Liquidity Ratios Affect Commercial Banks’ Profitability: Evidence from Jordan

The study aimed to identify the modified role of Board characteristics on the impact of net working capital and liquidity ratios on commercial banks’ profitability. The study community included all commercial banks listed on the Amman Stock Exchange, twelve banks that were based on secondary data during the period 2018–2022 and analyzed their data using the statistical analysis program (SPSS). To achieve the study’s objectives, descriptive statistics methods such as arithmetic mediums, standard deviations, multiple linear regression, and linear regression were used in Simple hypothesis testing. The study found a modified role for board characteristics in net working capital and liquidity ratios (equity to net facilities and the ratio of short-term investments to total deposits) in return on deposits for Jordanian commercial banks. The study recommended a series of recommendations, including scientific and practical studies studying the impact of board characteristics on the performance of economic sectors other than banks.

Introduction

Commercial banks aim to maximize their profitability by employing the funds available in their reserves (Al Hanini & Al Oqqaily, 2018; Alandijani, 2006). Investing in current assets constitutes more than half of the total value of assets within the bank, giving particular attention to the net working capital when bank managements make decisions revolving around operational processes (Alnabulsi & Hanini, 2023; Hajaj, 2018). The highest administrative authorities in the bank, led by the boards of directors, take on such crucial decisions, meaning that the characteristics of the board of directors have a significant impact on working capital and profitability in commercial banks (Salamehet al., 2023; Al-Owaisher & Alruhman, 2018). The board of directors serves as a trustee agent for the institution’s vision and the interests of its ownership rights (Ziadan, 2017). By enhancing the characteristics of its administrative boards, the financial stability can be strengthened and supported, leading to increased profits. This enables the bank to retain its current shareholders and attract potential investors. Regulatory and supervisory authorities also seek to evaluate the status of banks and ensure their compliance with financial, legal, and regulatory standards and requirements (Al Hanini & Al Oqqaily, 2018).

Study Objectives

The management of current assets and their decisions are required to play a significant role in the overall performance of management (Al-Zubaidi & Salama, 2012). This study aims to find effective policies and procedures that boards of directors can follow, which can be adopted to enhance the profitability of banks and improve their competitiveness.

Problem of the Study

Based on the foregoing, the problem of the study can be expressed through the following main question:

Is there a moderated role for the characteristics of the board of directors (size, gender, experience, and diversity) in the impact of net working capital and liquidity ratios on the profitability of Jordanian commercial banks?

Significance of the Study

The significance of the study arises from the fact that banks play a principal role in economic development tools (Baara, 2018). Given that working capital and liquidity ratios are among the most important factors considered when evaluating the strength of any bank, its financial and accounting position, and its ability to face urgent commitments it may encounter, and to minimize risks as much as possible, it becomes important to highlight the factors that can achieve this for banks. Hence, the importance of this study is evident as it investigates the existence of a moderated role for the characteristics of the board of directors in the impact on net working capital and liquidity ratios, represented by the profitability of Jordanian commercial banks.

Study Hypotheses

The main hypothesis is:

H0.1: There is no statistically significant moderated role at a level (α ≤ 0.05) for the characteristics of the board of directors (size, gender, experience, and diversity) in the impact on net working capital and liquidity ratios, represented by (shareholders’ equity to net facilities, net facilities to total assets, and the ratio of short-term investments to total deposits) in the profitability of Jordanian commercial banks. Which can be subdivided into:

• H0.1.1: There is no statistically significant moderated role at a level (α ≤ 0.05) for the characteristics of the board of directors in the impact on net working capital and liquidity ratios, represented by (shareholders’ equity to net facilities, net facilities to total assets, and the ratio of short-term investments to total deposits) in the return on assets for Jordanian commercial banks.

• H0.1.2: There is no statistically significant moderated role at a level (α ≤ 0.05) for the characteristics of the board of directors in the impact on net working capital and liquidity ratios, represented by (shareholders’ equity to net facilities, net facilities to total assets, and the ratio of short-term investments to total deposits) in the return on equity for Jordanian commercial banks.

• H0.1.3: There is no statistically significant moderated role at a level (α ≤ 0.05) for the characteristics of the board of directors in the impact on net working capital and liquidity ratios, represented by (shareholders’ equity to net facilities, net facilities to total assets, and the ratio of short-term investments to total deposits) in the return on deposits for Jordanian commercial banks.

Theoretical Framework

Networking capital is considered an indicator to assess a bank’s liquidity and its ability to meet short-term obligations (Gibson, 2012; Al-Matarna & Muayyad, 2011). Gamayuni (2015) found that a positive value for net working capital enhances the strength of the bank and its ability to face daily financial challenges, while Salehet al. (2015), Khunfar (2017), Aql (2000), Gibson (2012) considered liquidity ratios are measures used to assess a bank’s liquidity and its ability to repay short-term debts. Shahawi and Mostafa (2013) defined liquidity ratios as a set of financial indicators that measure the bank’s ability to meet current financial obligations using current assets. Shbeib (2009) describes liquidity as the available cash at the bank that can be quickly obtained to meet financial obligations or the ability to convert to cash immediately without incurring losses (Ismail, 2020).

The profitability of banks signifies their ability to generate profits from various activities, including lending, investments, and other banking services (Subramanyam & John, 2008; Gibson, 2012). It is the net increase in real monetary value that can be distributed to the bank’s shareholders at the end of a specific period without negatively affecting the institution’s resources (Salman, 2013; Chenet al., 2019). Profitability serves as a guide used to evaluate the bank’s performance (Kazem, 2014) and is a crucial source for generating capital, enhancing ownership rights, and strengthening its ability to enhance its solvency and liquidity (Al-Ajlouni, 2011; Salman, 2013; Salamehet al., 2023). It contributes to shaping a general understanding and positive reputation regarding the efficiency of the bank’s project management (Kanwal & Nadeem, 2013).

Regarding the characteristics of the board of directors, certain features should be present to ensure its competence and effectiveness. This includes having independent supervision through the presence of members who can compete with each other while working for the benefit of the bank. The key characteristics of the board of directors include board size, diversity of board members, experience of board members (Kim & Lim, 2012; Elzahar & Hussainey, 2012; Adams & Ferreira, 2009; Khanet al., 2022), and diversity in the nationality of board members (Akpan & Amran, 2014; Caoet al., 2019; Aggarwalet al., 2011; Azmi & Barrett, 2013).

Literature Review

The study by Eldinet al.(2023) indicated a significant negative impact of board characteristics on liquidity in Egyptian joint-stock companies. On the other hand, the study by Ahmed (2023) revealed nonlinear relationships between independent variables and profitability in joint-stock companies. The study by Nooret al. (2022) found differences among companies in the application of institutional governance mechanisms related to board size, managerial ownership, and ownership concentration. The study Hamouda and Elaf (2021) emphasized the importance of efficiently managing working capital through prompt collection and slow payment.

Another study by Al-Farjani and Abdullah (2021) showed an inverse relationship between liquidity risks and profitability, suggesting that liquidity risks do not impact profitability. The study by Al-Faouri (2020) demonstrated a statistically significant negative relationship between the cash conversion cycle and return on assets, return on equity, and a negative relationship between accounts payable and profitability. The study highlighted the impact of working capital turnover on profitability and the estimation of remaining debts, reducing liquidity pressures. The study Bakheet and Ezzaldeen (2018) emphasized the need to utilize the positive relationship between the total loans to total deposits ratio, total deposits to total assets ratio, and profitability. The study by Al-Owaisher and Alruhman (2018) revealed that the composition and homogeneity of the board of directors can influence working capital and profitability in banks. Having board members with diverse and compatible experiences can lead to increased working capital and improved profitability. Andohet al.(2022) suggested a reconsideration of the composition of boards of directors in Ghana and improving the number of board members according to the needs of companies. The study Mohamed and Dhaireb (2021) found that banks retaining excess liquidity at a high rate can impact the profitability sought by banks. The study Nongnit and Chamaiporn (2022) showed that boards of directors tend to favor companies with a high level of net working capital. Reducing the independence ratio of the board of directors increases company performance. The study by Alamet al.(2019) identified a statistically significant relationship between the independent and dependent variables. It also suggested that debt financing enhances the slow amortization preference for bonds.

Methodology

Data Collection

In order to measure the study variables, the financial reports of Jordanian commercial banks listed on the Amman Stock Exchange were monitored during the period from 2018 to 2022.

Population and Sample Study

The study population includes all Jordanian commercial banks, totaling 12 banks, based on the Banking Sector Guide (Jordanian Central Bank, 2023) during the period from 2018 to 2022.

Hypotheses Testing

Statistics Methods Used

To answer the study’s questions and achieve its objectives, the Statistical Package for the Social Sciences (SPSS) was used. Through SPSS, various statistical tests were conducted, leading to descriptive and inferential results that serve the study. Descriptive statistical measures, such as mean, standard deviation, and highest and lowest values, were employed to describe the study’s variables during the period from 2018 to 2022.

The normal distribution of data was examined using the Kolmogorov-Smirnov test. Pearson correlation coefficient was used to assess the correlation between variables. The Variance Inflation Factor (VIF) test was applied to check for multicollinearity among independent variables. The Durbin-Watson test was utilized to ensure the absence of autocorrelation issues within the regression equation.

For testing the sub-hypotheses derived from the main hypothesis, multiple linear regression (M.R) was employed. The aim was to identify the impact of a set of independent variables on a single dependent variable. Additionally, hierarchical regression (H.R) was used to analyze the sub-hypotheses derived from the second main hypothesis.

Main Hypothesis Test Results

H0.1: “There is no statistically significant moderating role at a level of significance (α ≤ 0.05) for the characteristics of the board of directors (size, gender, experience, and diversity) in the impact of net working capital and liquidity ratios, represented by (shareholders’ equity to net, net facilities to total assets, and short-term investment ratio to total deposits), on the profitability of Jordanian commercial banks.” To measure the main hypothesis and achieve the study’s objectives, sub-hypotheses were tested, and the results are as follows:

Table I shows H0.1.1 results of hierarchical regression for board characteristics as moderators in the impact of working capital and liquidity ratios on return on assets.

Table I. Results of H01.1

Dependent variable	Result	Shape 1		Shape 2		Shape 3
		T	T.Sig
Return on equity	Net working capital	3.849	0.00*
	Ratio of shareholders’ equity to net facilities	2.280	0.026*
	Ratio of net facilities to total assets	2.593	0.012*
	The ratio of short-term investments to total deposits	0.572	0.569	T	T.Sig
	Board size			1.593	0.117
	Gender diversity of board members			−0.720	0.475
	Experience of board members			0.855	0.397
	Diversity of nationality of board members			1.442	0.156	T	T.Sig
	Bilateral interaction between net working capital and board size					−0.356	0.724
	Bilateral interaction between net working capital and board member gender diversity					−0.842	0.405
	The bilateral interaction between net working capital and the experience of board members					0.289	0.775
	The bilateral interaction between net working capital and the diversity of the nationality of board members					−0.132	0.896
	The two-way interaction between shareholders’ equity to net facilities and board size					1.579	0.123
	The two-way interaction between shareholders’ equity to net facilities and the gender diversity of board members					1.495	0.144
	The bilateral interaction between shareholders’ equity to net facilities and the experience of board members					2.419	0.021*
	The bilateral interaction between shareholders’ equity to net facilities and the diversity of the nationality of board members					0.207	0.837
	Two-way interaction between net facilities to total assets and board size					0.897	0.376
	Two-way interaction between net facilities to total assets and board member gender diversity					0.327	0.746
	The two-way interaction between net facilities to total assets and the experience of board members					1.680	0.102
	The two-way interaction between net facilities to total assets and the diversity of the nationality of board members					0.470	0.642
	Bilateral interaction between the ratio of short-term investments to total deposits and the size of the board of directors					1.165	0.252
	Bilateral interaction between the ratio of short-term investments to total deposits and the gender diversity of board members					0.200	0.842
	The bilateral interaction between the ratio of short-term investments to total deposits and the experience of board members					0.170	0.866
	The bilateral interaction between the ratio of short-term investments to total deposits and the diversity of the nationality of board members					−0.946	0.351
	Correlation coefficient R	0.590		0.648		0.812
	Δ (R)			0.058		0.164
	Interpretation coefficient R2	0.348		0.420		0.660
	(R2) Δ			0.072		0.240
	Adj R2	0.301		0.329		0.426
	(Adj R2) Δ			0.028		0.097
	Calculated R value	7.354		4.620		2.828
	F. Sig	0.00*		0.00*		0.003*
Statistically significant at level (0.05)		The value of T at one degree of freedom (n − 1) = 2.001
Shape 1 4/55 = DF		Shape 2 8/52 = DF				Shape 3 24/35 = DF
Tabulation for the third model F = (2.51)		Tabulation for the third model F = (2.18)				Tabulation for the third model F = (1.79)

Based on the statistical analysis of this hypothesis and in accordance with the two decision rules, we accept the alternative hypothesis (Ha) and reject the null hypothesis (HO).

Table II shows H0.1.2 hierarchical regression results for board characteristics as moderators in the impact of net working capital and liquidity on return on equity.

Table II. Results of H01.2

Dependent variable	Result	Shape 1		Shape 2		Shape 3
		T	T.Sig
Return on assets	Net working capital	2.258	0.028*
	Ratio of shareholders’ equity to net facilities	0.195	0.846
	Ratio of net facilities to total assets	2.856	0.006*
	The ratio of short-term investments to total deposits	2.408	0.019*	T	T.Sig
	Board size			1.997	0.051
	Gender diversity of board members			−0.623	0.536
	Experience of board members			2.097	0.041*
	Diversity of nationality of board members			0.447	0.657	T	T.Sig
	Bilateral interaction between net working capital and board size					−1.345	0.187
	Bilateral interaction between net working capital and board member gender diversity					−1.747	0.089
	The bilateral interaction between net working capital and the experience of board members					0.662	0.512
	The bilateral interaction between net working capital and the diversity of the nationality of board members					1.074	0.290
	The two-way interaction between shareholders’ equity to net facilities and board size					0.323	0.749
	The two-way interaction between shareholders’ equity to net facilities and the gender diversity of board members					2.618	0.013*
	The bilateral interaction between shareholders’ equity to net facilities and the experience of board members					4.293	0.00*
	The bilateral interaction between shareholders’ equity to net facilities and the diversity of the nationality of board members					−1.076	0.289
	Two-way interaction between net facilities to total assets and board size					0.290	0.773
	Two-way interaction between net facilities to total assets and board member gender diversity					2.351	0.024*
	The two-way interaction between net facilities to total assets and the experience of board members					2.424	0.021*
	The two-way interaction between net facilities to total assets and the diversity of the nationality of board members					0.514	0.610
	Bilateral interaction between the ratio of short-term investments to total deposits and the size of the board of directors					1.364	0.181
	Bilateral interaction between the ratio of short-term investments to total deposits and the gender diversity of board members					1.456	0.154
	The bilateral interaction between the ratio of short-term investments to total deposits and the experience of board members					−0.550	0.586
	The bilateral interaction between the ratio of short-term investments to total deposits and the diversity of the nationality of board members					0.061	0.951
	Correlation coefficient R	0.501		0.623		0.861
	Δ (R)			0.04		0.122
	Interpretation coefficient R2	0.251		0.388		0.741
	(R2) Δ			0.052		0.137
	Adj R2	0.196		0.292		0.563
	(Adj R2) Δ			0.009		0.096
	Calculated R value	4.601		4.044		4.164
	F. Sig	0.003*		0.001*		0.00*
Statistically significant at level (0.05)		The value of T at one degree of freedom (n − 1) = 2.001
Shape 1 4/55 = DF		Shape 2 8/52 = DF				Shape 3 24/35 = DF
Tabulation for the third model F = (2.51)		Tabulation for the third model F = (2.18)				Tabulation for the third model F = (1.79)

Based on the statistical analysis for this hypothesis and adhering to the two decision rules, we accept the alternative hypothesis (Ha) and reject the null hypothesis (HO).

Table III shows the results of hierarchical regression for board characteristics as moderators in the impact of networking capital and liquidity on return on deposits.

Table III. Results of H01.3

Dependent variable	Result	Shape 1		Shape 2		Shape 3
		T	T.Sig
Return on deposits	Net working capital	2.570	0.013*
	Ratio of shareholders’ equity to net facilities	2.027	0.048*
	Ratio of net facilities to total assets	0.749	0.457			The ratio of short-term investments to total deposits
	The ratio of short-term investments to total deposits	2.564	0.013*	T	T.Sig
	Board size			1.206	0.234
	Gender diversity of board members			−1.291	0.202
	Experience of board members			1.552	0.127
	Diversity of nationality of board members			−0.026	0.980	T
	Bilateral interaction between net working capital and board size					−1.403	0.169
	Bilateral interaction between net working capital and board member gender diversity					0.291	0.773
	The bilateral interaction between net working capital and the experience of board members					0.720	0.477
	The bilateral interaction between net working capital and the diversity of the nationality of board members					0.541	0.592
	The two-way interaction between shareholders’ equity to net facilities and board size					1.323	0.195
	The two-way interaction between shareholders’ equity to net facilities and the gender diversity of board members					0.526	0.602
	The bilateral interaction between shareholders’ equity to net facilities and the experience of board members					0.704	0.486
	The bilateral interaction between shareholders’ equity to net facilities and the diversity of the nationality of board members					−0.470	0.641
	Two-way interaction between net facilities to total assets and board size					0.756	0.455
	Two-way interaction between net facilities to total assets and board member gender diversity					−1.025	0.312
	The two-way interaction between net facilities to total assets and the experience of board members					1.335	0.191
	The two-way interaction between net facilities to total assets and the diversity of the nationality of board members					0.309	0.759
	Bilateral interaction between the ratio of short-term investments to total deposits and the size of the board of directors					0.765	0.450
	Bilateral interaction between the ratio of short-term investments to total deposits and the gender diversity of board members					−1.606	0.117
	The bilateral interaction between the ratio of short-term investments to total deposits and the experience of board members					0.127	0.900
	The bilateral interaction between the ratio of short-term investments to total deposits and the diversity of the nationality of board members					−0.859	0.396
	Correlation coefficient R	0.627		0.667		0.791
	Δ (R)			0.04		0.124
	Interpretation coefficient R2	0.393		0.445		0.625
	Adj R2			0.052		0.180
	(Adj R2) Δ	0.349		0.358		0.368
	Calculated R value			0.009		0.01
	F. Sig	8.892		5.120		2.432
	F. Sig	0.00*		0.00*		0.008*
Statistically significant at level (0.05)		The value of T at one degree of freedom (n − 1) = 2.001
Shape 1 4/55 = DF		Shape 2 8/52 = DF				Shape 3 24/35 = DF
Tabulation for the third model F = (2.51)		Tabulation for the third model F = (2.18)				Tabulation for the third model F = (1.79)

Based on the statistical analysis for this hypothesis and in accordance with the two decision rules, we accept the null hypothesis (HO) and reject the alternative hypothesis (Ha).

Results

The results of the study were:

1. There is an impact of net working capital and liquidity ratios, represented by (shareholders’ equity to net facilities, net facilities to total assets) on the return on assets, return on equity, and return on deposits for Jordanian commercial banks. This result aligns with the findings of studies by Hamouda and Elaf (2021), Mohamed and Dhaireb (2021), and Alamet al.(2019), but differs from the results of studies by Ahmed (2023), Al-Farjani and Abdullah (2021), and Al-Faouri (2020).

2. There is a moderating role for the experience of board members in the impact of shareholders’ equity to net facilities on the return on assets for Jordanian commercial banks. This result is consistent with the study by Khanet al. (2022) but differs from the studies by Al-Hamoudet al. (2013) and Andohet al.(2022).

3. There is a moderating role for the gender diversity of board members and the experience of board members in the impact of net facilities to total assets on the return on equity for Jordanian commercial banks. This result aligns with the study by Nongnit and Chamaiporn (2022) but differs from the study by Nooret al. (2022).

4. There is no moderating role for the characteristics of the board of directors in the impact of net working capital and liquidity ratios, represented by (shareholders’ equity to net facilities, net facilities to total assets, and short-term investment ratio to total deposits) on the return on deposits for Jordanian commercial banks. This result aligns with the study by Andohet al.(2022) but differs from the study by Nongnit and Chamaiporn (2022).

Recommendations

Banks should enhance gender diversity on their boards and increase the number of experienced board members. This can lead to increased profitability, measured by return on equity for commercial banks. Banks should also work on improving net working capital and liquidity ratios by increasing shareholders’ equity to net facilities and net facilities to total assets, as this has an impact on profitability, measured by return on assets and return on equity. Commercial banks should strive to improve net working capital and liquidity ratios by increasing shareholders’ equity to net facilities and short-term investment ratio to total deposits. This improvement contributes to enhancing the return on deposits. Banks are also advised to seek experienced and financially literate individuals for their board memberships, as this expertise plays a crucial role in improving the impact of shareholders’ equity to net facilities on the return on assets. The study recommends conducting further scientific and practical studies related to the impact of board characteristics on the performance of other economic sectors beyond banks. Additionally, exploring the influence of board characteristics on other dependent variables, such as profit management or quality, in both banking and other sectors would be beneficial.