Efforts to enhance capital and intensify supervision are paying off: the Jordanian banking sector’s health has been improving steadily, with banks emerging stronger and more profitable after surviving a number of potentially damaging shocks in the past decade or more.
In Amman, more buoyant local banks’ current priorities are to cope with market consolidation, to introduce more efficient and modern banking technology rapidly, and to develop a wider range of products. “This is a healthy change from our more traditional preoccupations of worrying about local politics and regional conflict,” an Amman banker says.
Business is booming helping to give these trends impetus: chronic instability in Iraq means a large chunk of business involving Jordan’s big neighbour is still being transacted from Amman. Jordan is a beneficiary of Gulf Arab investors’ drive to place their money in familiar emerging markets, most notably in the real estate sector where major developments are now springing up in the Hashemite kingdom financed by Gulf money.
According to Jordan Investment Board data, direct investment rose by 125% (year-on-year) in the first half of 2005, to JD456m ($644m), JD215m of it from non-Jordanian sources. The start of work on major property development schemes like Bayan Holding Company’s Jordan Gate and Royal Village, which are part of the hugely ambitious Royal Metropolis project, suggests bigger inflows are on the way.
Bayan Holding is owned by Bahrain-based Islamic investment bank Gulf Finance House (GFH) and Kuwait Finance and Investment Company (KFIC). Other Gulf investors, too, are convinced that the Jordanian property market is the place to be.
Risk reduction
The authorities have exerted considerable efforts on improving banks’ profitability and increasing provisioning for non-performing loans (NPLs). The level of NPLs in 2003 was estimated to be about15% but, in its latest country report, the IMF recognised progress made during 2004. It noted: “Banks have almost fully provisioned for these loans, and the related financial risk is negligible.”
Improved asset quality and performance indicators are reflected in better financial and credit ratings. Amman’s largest bank, Arab Bank – a venerable institution controlled by the Shoman family, which operates in 30 countries and has assets of about $27bn – has been allocated a BBB+ financial strength rating by regional specialist Capital Intelligence. And in August, a leading medium-sized player, Jordan Kuwait Bank (JKB), had its rating upgraded to BBB+.
According to Capital Intelligence, JKB “continues to boast the lowest NPL ratio and strongest coverage in Jordan’s banking sector, underscoring a prudent credit policy”.
However, the industry is highly fragmented and over-banked, with 24 commercial banks, including five foreign institutions. Three leading players dominate, accounting for a market share of about 70% and there are a number of strong medium-sized players. The fear, though, is that some of the smaller and weaker banks will be unable to maintain profitability.
Encouraging consolidation is a major strategic priority for Central Bank of Jordan (CBJ), which plans to raise the minimum capital requirement gradually from JD40m to JD100m by 2010. “The hope is that this will encourage some of the weaker banks to merge,” an analyst commented.
Better banking supervision is also helping to improve the sector overall. The CBJ issued unprecedented guidelines on corporate governance in 2004 and has increased on-site and off-site inspections.
Questions of governance
Despite this progress, risks arising from corruption, fraud and embezzlement dog the industry. The most notorious case was the Petra Bank collapse in 1992, which resulted in the Jordanian State Security court charging executives led by founder Ahmed Chalabi with the embezzlement of $300m. Petra Bank loaned huge amounts to senior members of the Jordanian establishment. The affair rumbles on: Mr Chalabi fled Jordan, was convicted in absentia and later re-emerged as a well-connected Iraqi opposition politician. After a tumultuous three years, he remains a player to watch in Baghdad.
There have been other less spectacular but troubling cases, including a February 2002 fraud case involving loans drawn from three institutions – Jordan National Bank (JNB), Jordan Investment and Finance Bank and Jordan Gulf Bank – in which important Jordanians were involved. About $120m of funds were said to have been embezzled.
According to JNB assistant general manager Samer Sunnuqrot: “This crisis brought about confusion leading to reduced public confidence in the Jordanian banking sector, not least because the incident also raised some concerns and doubts about the soundness of the system.”
The sector proved resilient enough to weather the storm, however. As Mr Sunnuqrot says: “The turbulence started to subside over time and especially after the government had taken several measures aimed at ensuring creditor’s rights.”
Money laundering is another area of concern that directly affects Jordanian banks. In February, Mohammed Abu Hammour, finance minister at the time, announced that Jordan was drafting new anti-money laundering laws. He also declared that Jordan was free of money laundering because of its strict monetary regulations and practices. This seemed unlikely to be the case.
In August, Arab Bank was fined $24m by US regulators, who said the bank’s New York branch did not establish appropriate controls to guard against money laundering, nor did it report suspicious activity. In a statement, the Arab Bank said it “neither admits nor denies wrongdoing”.
The affair – which generated considerable newsflow in the US – is seen by many to be closed. But Jordan’s proximity to the Middle East conflict zone creates problems. US analysts, in particular, are quick to look for “terrorist financing” connections, real or imaginary.
In testimony given in July to the US Senate Committee on Banking, Housing and Urban Affairs, Anthony Wayne, US assistant secretary for economic and business affairs, highlighted Jordan. “We urge passage of the new anti-money laundering legislation, which will strengthen significantly Jordan’s legal basis for tackling the financing of terrorism,” he said.
Tighter controls
In response to international pressure, the CBJ has issued directives requiring banks to inspect their clients’ accounts regularly and to report any suspicious activity.
Jordanian banks face a number of sector-specific challenges, including the introduction of more modern banking techniques and the development of a wider product base. Activity in these areas has picked up significant momentum. Many banks are beginning to implement automated cheque-clearing, the use of magnetic cheque-processors, unified reporting forms and electronic data transmission networks. In early 2005, Jordan Commercial Bank introduced technology to allow it to archive bank reports and customer account statements electronically. At least seven other banks in Jordan now use this technology.
Telebanking and e-banking services are also increasingly prevalent. In July, for example, Union Bank began offering internet and SMS banking facilities to its customers.
There is also a move to diversify the products offered and introduce more sophisticated instruments to the domestic capital market.
A frequently cited inadequacy is the under-development of the corporate bond market, which is overshadowed by traditional direct lending. However, this is changing and banks are beginning to issue corporate bonds.
Another development area is the long-term credit market. Jordanian banks have tended towards short-term deposit structures: on average standard corporate loans are extended for periods of one to three years, and syndicated loans may reach up to seven years maximum.
Financial beautification
Successive governments have worked on stimulating a more attractive environment for companies. The 2001 Public Debt Law was in part intended to increase the volume of treasury bond and bill issuance as part of a more long-term effort to stimulate a market in longer maturity fixed income instruments.
The IMF has welcomed these developments, saying that Jordanian banks will become stronger as a result. With good capitalisation and profitability prospects, moves to consolidate the market, better CBJ supervision, and the increased introduction of modern technologies and products, the future looks brighter, even in this politically troubled corner of the Middle East.
