THE EFFECT OF FINANCIAL CONSUMER PROTECTION ON BANKS’ COMPETITIVENESS AND PROFITABILITY

How to cite this paper: Daradkah, D., & Janaideh, R. (2022). The effect of financial consumer protection on banks’ competitiveness and profitability. Corporate Governance and Organizational Behavior This study examines the effect of Financial Consumer Protection (FCP) on banks’ competitiveness and profitability, using data from Jordanian banks for the period 2013–2020. The study constructs a FCP index related to customer complaints statistics, communication channels, dispute resolution, and protection of the rights of special needs people. Fixed-effect model is used as an estimator based on balanced panel data. The study finds evidence that stricter and complying with FCP requirements tend to decrease banks’ profitability in Jordan. The main result is confirmed by different robustness tests (dynamic panel estimation by applying the generalized method of moments (GMM) and random-effect). Overall, this study contributes to the existing banking literature and provides a better understanding and balancing between customers of financial products’ interests and financial institutions’ rights and obligations. Finally, this study has essential implications for customers of financial products, policymakers, and researchers. Thus, future studies in this area are recommended. and R.J.; Formal Analysis D.D.; Investigation R.J.; R.J.; Data Curation D.D. and R.J.; Writing Original Draft D.D. and R.J.; Writing — Review Editing D.D.; Visualization D.D.; there is no of statistics, channels, resolution, and right special The results indicate stricter and to FCP tend profitability in On the other hand, the study finds no evidence supporting the effect of FCP on banks’ competitiveness in Jordan. These results are robustly confirmed by different robustness tests.


INTRODUCTION
Serious attention has moved toward re-examining the relationship between consumers of financial products and financial institutions after the great global financial crisis of 2007-2009. More specifically, foreground the Financial Consumer Protection (FCP) issue on the global financial development strategy, in which Ardic, Ibrahim, and Mylenko (2011) argue that one of the most important reasons for the great global financial crisis of 2007-2009 was the poor protection of the consumer of financial products. As a result, international bodies such as Organisation for Economic Co-operation and Development (OECD), the World Bank, and the Financial Stability Board (FSB) introduced a set of regulations and supervisory mechanisms to decrease information asymmetry and unequal distribution of power between consumers and financial institution to enhance competitiveness, efficiency, and performance in financial markets (Kriese, Abor, & Agbloyor, 2019).
FCP is defined as the act of protecting purchasers of products and services from unfair market practices. Such acts are intended to prevent firms from participating in deceptive activities in order to obtain an edge over competitors or to deceive consumers (Akinbami, 2011). Furthermore, FCP entails improving consumer awareness and enabling them to make well-informed financial decisions by encouraging them to develop the knowledge and skills necessary for asset management (Poliakh, 2018).
Banking literature has noticed the importance of FCP as a driver of banks' stability, profitability, and competitiveness (Benston, 1999 This study aims to contribute to the existing banking literature connecting FCP and its significance on banks' profitability and competitiveness. Moreover, given that Jordan is a small and open country in the Middle East, it has been successful in achieving rapid economic growth with a GDP at the current market price of JD 34,115.6 million at the end of the year 2020 (Central Bank of Jordan, 2020). The banking system in Jordan is considered among the most innovative in the Middle East and the region (Miani & Daradkah, 2008). Jordan was one of the first countries to respond and was aware of the importance of this issue. Jordan worked to reformulate the existing legislations, creating new ones, and established a special department in the Central Bank of Jordan in 2013 (Central Bank of Jordan, 2013). This study has major implications for customers of financial products, regulators, and researchers.
Therefore, this study investigates the customers of financial products and financial institutions' relationship and their effect on banks' profitability and competitiveness. To the best of our knowledge, this is considered the first study to shed light on this issue in Jordan, and considered the first study to take into account the protection the rights of special need people indicators when constructing the FCP index. The sample provides a comprehensive period from 2013 to 2020 since the implementation of FCP legislation in Jordan. Moreover, the study provides further tests (e.g., robustness check) to confirm the main results and control for potential dynamic endogeneity.
Apart from this introduction, the study contains five sections. Section 2 presents the previous literature review and hypotheses development. Section 3 presents the study data and research methodology. Section 4 presents the study results and its discussion. Section 5 provides further tests (robustness check), and, finally, a conclusion and recommendations are presented in Section 6.

LITERATURE REVIEW
Several studies have examined the issue of consumer protection on a broad level. Despite this, there are just a few studies that examined the issue of FCP. The starting point was evident in the most important works of La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997) and Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998), who examined the effect of investor protection on economic growth. Followed by Levine (1999)  To date, the form of a balanced relationship between customers of financial products and financial institutions is still not clear. Pasiouras (2018) documents evidence that FCP requirements positively affect banks' profitability for developing countries, thus having no effect on banks' profitability for advanced countries during the period from 2010 to 2013. Moreover, this result is in regulatory with Gaganis et al. (2020) who found that FCP negatively affects profit efficiency for an international sample from 82 countries.
Overall, the previous studies show prosperous FCP research, a part remains to be done to set up the effect of FCP on banks' profitability and competitiveness. However, most of these studies were conducted in industrialized countries and emerging markets from Africa and Latin America, and it has not been conducted in MENA countries and, more specifically, in Jordan. Hence, post a gap in the literature, which this study tries to fill. Therefore, this study examines the effect of FCP on banks' profitability and competitiveness in Jordan during the period 2013 to 2020. The study is triggered by this period when the FCP law was enacted in 2012 and began to be implemented in 2013 by the Central Bank of Jordan (CBJ). Hence, the following two hypotheses will be tested: H1: FCP has an effect on banks' profitability in Jordan.
H2: FCP has an effect on the bank's competitiveness position in Jordan.

RESEARCH METHODOLOGY
The Jordanian banking industry is relatively a young industry, where only 24 banks are operating in Jordan at the end of the year 2020. Of these, 16 are domestic commercial banks (3 of them are Islamic commercial banks). On the other hand, 8 of them are foreign commercial banks (1 of them is an Islamic commercial bank) (Central Bank of Jordan, 2020). The study sample includes all listed banks on Amman Stock Exchange (ASE). Foreign banks have been dispensed because they are branches of parent banks and also Islamic banks because they have a different nature of work. Therefore, it constraints the study database to 13 banks during 2013-2020.
The data gathering process was difficult because the FCP index was built from banks' financial reports. Moreover, banks' control data were gathered from the ASE bulletin.  (2017), competitiveness is measured by the Herfindahl-Hirschman index (HHI) from credit facilities, and it is the most generally used measure of concentration. It is measured as the sum of the squares of exposures relative to total exposure for a given classification: The HHI ranges between (1/n) and 1. The lowest HHI indicates more competitiveness in the market and indicates that all banks in the market are of equal size. Meanwhile, the highest HHI indicates the case of monopoly.
Profitability: One of the most common measures of banks' profitability is the return on assets (ROA), which indicates the ability of managers in converting total assets into profits (Rose & Hudgins, 2013 The first indicator is the customer complaints statistics, in which banks have complained, as well as the extent to which they are disclosed. The second indicator is the communication channels and the means of communication that customers use to submit complaints and that the bank provides. The third indicator is dispute resolution in banks, which is based on resolving conflicts, and the study focuses on that between banks and consumers, and how banks can protect the consumer and handle disputes in a friendly, appropriate, and timely manner. Consumers are not charged for any of the procedures, and they are resolved outside of the courts. The fourth indicator is the indicator of protection of the rights of special needs people, which determines what the bank does to protect the rights of special needs people, as well as the amount of implementation and disclosure of these items. The contents of indicators are not reported, although they are available upon request.
The study determines the level of disclosure, assigning a score of 1 when revealing and a value of 0 when not disclosing. The proportion is then calculated for each bank and each year for all banks for each indicator.
Furthermore, the study utilizes a set of banks' characteristics to evaluate their effect on banks' competitiveness and performance. This is bank size (Log(Total assetsit)), following Kras

Empirical methods
To investigate the effect of FCP on a bank's competitiveness and profitability, this model is applied following Iacovoiu where, Performanceit is the dependent variable of either competitiveness or profitability of bank i in year t; FCPit is the financial consumer protection index of bank i in year t; Bank's characteristicsit is a bank-specific characteristic for bank i in year t; ∂ denotes the fixed effect of banks i(1,2,…, 13), t(2013,2014,…,2020), and ε represents the residual term.
The study uses a fixed-effect model as an estimator based on balanced panel data, as the Hausman test indicates that a fixed-effect model is more appropriate than a random-effect model.

Descriptive statistics
Descriptive statistics of the study variables is reported in Table 1. For the FCP index, it is noticed that the average value is 21.94%. The sub-indicators have a comparable average value, where customer complaints statistics are 23.82%, 21.95% for dispute resolution, whereas communication channels are higher at 32.88%, and protection of the rights of special needs people is lower, at 2.88%. Also, it was noticed the improvement in the FCP index during the study period, where the average value was 13.10% in 2013 and increased to 29.84% in 2020. Those data are not reported, although they are available upon request.
The average of the study sample's ROA is 1.12%, this value indicates high profitability for banks in Jordan. Thus, the average of the study sample's HHI is 3%, this value indicates a high competitiveness position in the Jordanian banking sector.
As for bank characteristics variables, the average bank's size is JD 4,020,405,151. The average bank's debt ratio is 81.71%, and the average bank's credit risk is 5.8%.  Table 2 shows the regression findings estimating FCP on banks' competitiveness and profitability, where bank and year fixed-effects are employed. In column 1, regression is employed where competitiveness is employed as a dependent variable, thus in column 2, regression is employed where profitability is employed as a dependent variable.

Empirical results and discussion
The findings indicated no evidence supporting the effect of FCP on banks' competitiveness in Jordan (column 1). Therefore, the study rejected the hypothesis that FCP affects banks' competitiveness in Jordan (H2). This result is consistent with the results of Iacovoiu and Stancu (2017) who found that the competitive position of the Romanian sector does not provide an adequate FCP over the period from 2013 to 2015.
On the other hand, the findings indicated negative and statistical evidence supporting the effect of FCP on banks' profitability at a 5% confidence level (column 2). Hence, accepting the hypothesis that FCP has an effect on banks' profitability in Jordan (H1). This result indicates that stricter and complying with FCP requirements (related to customer complaints statistics, communication channels, dispute resolution, and protection of the rights of special needs people) will significantly decrease banks' profitability. This result is consistent with Gaganis et al. (2020) who found that FCP negatively affects profit efficiency for an international sample from 82 countries.
Moreover, this result is in regulatory with Pasiouras (2018) who documents evidence that FCP requirements positively affect banks' profitability for developing countries, thus having no effect on banks' profitability for advanced countries during the period from 2010 to 2013. These results can be explained by the fact that compliance with FCP requirements may add extra costs decreasing banks' profitability. These costs are mostly related to disclosure, reporting statistics numbers, and collaborating with regulators. Elliehausen and Lowery (1997)

ROBUSTNESS TEST
In general, the findings state that FCP diminishes banks' profitability for Jordanian banks in the period from 2013 to 2020. To affirm the main result, extra tests are run. Wintoki, Linck, and Netter (2012) dispute that endogeneity in the conventional fixedeffect estimation may develop a biased result, therefore, the study runs the generalized method of moments (GMM). GMM findings are presented in Table 3, which affirms the main result; and indicated negative and statistical evidence supporting the effect of FCP on banks' profitability at a 5% confidence level. Hence, the study results are not referred to as dynamic endogeneity or negligent variables. Moreover, the study re-runs the analysis using random-effect estimation. Random-effect results are presented in Table 4, which affirm the main result; and indicated negative and statistical evidence supporting the effect of FCP on banks' profitability at a 5% confidence level.  For 13 commercial banks listed on ASE between 2013 and 2020. FCP is the financial consumer protection index related to customer complaints statistics, communication channels, dispute resolution, and protection the rights of special need people. Banks characteristics are bank size; it is the natural logarithm of the total assets at the end of the year. Debt ratio it is the bank's total liabilities divided by the total assets. Credit risk it is the bank's provision for loan losses divided by total loans, all measured at the end of the year. Statistical significance are denoted as ***, **, *, at the levels of 1%, 5%, 10%, respectively.

CONCLUSION
The form of a balanced relationship between customers of financial products and financial institutions is still not clear. Therefore, the study seeks to contribute to the existing banking literature related to FCP and its effect on banks' profitability and competitiveness in Jordan during the period from 2013 to 2020. FCP is related to customer complaints statistics, communication channels, dispute resolution, and protection of the right of special needs people. The results indicate that stricter and responding to FCP requirements tend to decrease banks' profitability in Jordan. On the other hand, the study finds no evidence supporting the effect of FCP on banks' competitiveness in Jordan. These results are robustly confirmed by different robustness tests.
These results have essential implications for customers of financial products, and policymakers since FCP tends to decrease banks' profitability. However, the previous studies point out the importance of the banking system for economic growth and stability. Hence, regulators have to better understand and balance between customers of financial products' interests and financial institutions' rights and obligations.
FCP requirements and rules may have distinctive and particular necessities in each country, and, hence, these results only explain the effect of FCP on banks' profitability and competitiveness in Jordan. Consequently, these results cannot clarify all financial institutions. Furthermore, the results should be used only at the level of institutional quality and financial freedom. Future studies in this area are recommended, where they may examine the effect of FCP on banks' stability and economic growth. Moreover, examining other countries, especially other countries from MENA countries is value-added.