It is a tough job to find an ocean of calm in the Middle East these days, but one country that could make such a claim is Jordan. The Arab Spring uprisings of 2011 have transformed the Middle East and north Africa, and although Jordan has experienced its own unrest, in comparison with close neighbours such as Syria, Egypt and Iraq, the country has remained stable.
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This relative stability is something that comes as a huge relief to Jordan’s small but seemingly healthy financial sector. As the global economy finally shows signs of emerging from the wreckage of the financial crisis, Jordan's banks are busy cultivating their own green shoots.
A good year
Profitability at some of the country’s most well-known domestic banks has risen on the back of a good year in 2013. The Housing Bank for Trade and Finance (HBTF) and Arab Bank are two of Jordan’s largest financial institutions and both have reported healthy preliminary jumps in profit for last year, providing the whole sector with a confidence boost.
Arab Bank’s net profit after tax jumped 43% from $352.1m at the end of 2012 to $501.9m at the end of 2013, which prompted a recommendation of a 30% cash dividend for shareholders. Sabih Masri, chairman of Arab Bank, puts the growth down to the bank’s “prudent policies and strategic initiatives, and the confidence the bank’s customers have in Arab Bank”. He says he is “confident that the bank will continue to show strong performance, notwithstanding the challenging regional environment”.
Over at HBTF, net profit after tax and allocations increased from Jd104.5m ($148m) to Jd106.9m in the same period, with the capital adequacy ratio at 18.8%. Mohammad Qaryouti, assistant general manager for commercial banking at HBTF, believes the Jordanian banking system at present is very solid.
“We have 13 Jordanian banks, nine foreign banks and four Islamic banks,” says Mr Qaryouti. “Most of them are cash liquid. We don’t have high leverage in Jordan; this is part of the banking system. There is a solid regulatory system from the central bank. Non-performing loans [NPLs] are very minimal in Jordan, not exceeding 8%. They are not high because there is some caution on lending and of the lending methodology.”
Lending environment
The lending environment has proved a contentious subject in many countries in the aftermath of the financial crisis. The willingness of banks to lend can often hold the key to the success of an economy and all too often has the capacity to frustrate a government’s efforts to achieve growth. On the flip side, the caution of banks can often be linked to the prospects for accumulating an unhealthily large collection of NPLs.
Paul-Henri Pruvost, associate director of the Dubai bank team at ratings agency Standard & Poor’s, says the figure for NPLs in Jordan stabilised in 2013 at between 7.5% and 7.8%, and that banks will be able to buffer any rising cost of risk. He adds that domestic banks' asset quality moves in tandem with economic cycles, deteriorating sharply during downturns.
“In an economy where we estimate that about two-thirds of lending is to the corporate and small and medium-sized enterprise [SME] sectors, the banking system's ratio of NPLs to customer loans rose sharply from 3.9% at year end 2007 to about 8.5% at year end 2011,” says Mr Pruvost. “We believe the worst of the economic slowdown has passed in Jordan. But we do not expect a strong rebound anytime soon. Private sector growth, and therefore bank lending, is nevertheless expected to be sustained and primarily achieved via public investments made possible by donors from the Gulf Co-operation Council [GCC], and primarily aimed at reducing Jordan's energy dependence and expense.”
Dr Heike Harmgart, head of the European Bank for Reconstruction and Development’s (EBRD) office in Jordan, believes the banking sector is now slowly recovering from the NPL hike experienced as a result of the global financial crisis. “Jordanian banks are very liquid and well capitalised, however lending practices are very conservative. In particular, SMEs find it difficult to access bank finance, partially due to a lack of collateral,” says Ms Harmgart.
Regional unrest
It would be folly to make forecasts about the future stability of the Middle East; many have tried in the past and failed. In fact, according to some, instability is something factored into the culture of any bank doing business in a country such as Jordan.
One international bank operating in this environment is Citibank. Mayank Malik is the bank’s chief executive for Jordan and Iraq, and he says that this year Citi will have been in Jordan for 40 years, highlighting some of the less obvious advantages of being positioned in the middle of a troubled region such as the Middle East.
“Egypt has been a positive for Jordan,” says Mr Malik. “The reason I say that is because if you try an experiment such as the Muslim Brotherhood and [find] that you cannot sustain it, people do not want to try out that experiment anymore. The popularity which the Muslim Brotherhood had in Jordan has waned as a result.”
Mr Malik also believes Jordan is well positioned to take advantage of any reconstruction programme that takes place in Syria following the destruction that has resulted from the conflict there. But he is also aware of the changes that have taken place in Syria as a result of military action. “There is an economic impact [on Jordan] because of the refugees, but that is being managed. It will not be the way it is forever,” he says.
Sustained stability
In Jordan, Mr Malik believes the central bank has proven itself to be professional and robust in the sphere of banking regulation. And in the future, he sees the country’s growth being driven by small and medium companies.
“Jordan is a very stable country. We have seen this both politically and economically over a sustained period of time," says Mr Malik. "That is something that is very important for the banking industry. It’s in a rough neighbourhood. Things in an economic sense have shaped up quite nicely over the past six to nine months… Jordan is well on track for the International Monetary Fund programme. We are going exactly as planned.”
Mr Malik points to the confidence of people from neighbouring countries to visit Jordan as an example of the health of the country. “We have seen an increase in the number of tourists from the GCC. They see Jordan as a natural place to go.”
Elsewhere, Iraq appears to be one of Mr Malik’s main focuses for the future, where he sees plenty of opportunity, despite the ongoing issues the country faces. “We see Iraq as the next big thing,” he says. “We see Jordan as a gateway into Iraq. The economic fundamentals of Iraq remain intact. We are following our clients into Iraq, using Jordan as a base.”
Citi may still be going strong in Jordan, but one of its international counterparts, HSBC, made a recent notable exit from the country. HSBC announced last year that it was selling its banking business in Jordan to Arab Jordan Investment Bank. As of September 30, 2013, the business comprised four branches with assets of about $1.2bn.
Government ties
The state of the banking industry in Jordan has strong links to the health of public sector finances, which according to the EBRD’s Ms Harmgart have deteriorated over the past few years. Overall gross public debt levels remain high and are estimated at about 90% of gross domestic product for the end 2013, she says.
“The government has adopted a fiscal consolidation plan, centred largely around the energy subsidy reform that is aimed at reducing fiscal pressures,” says Ms Harmgart. “Large increases in social spending, in particular on fuel subsidies, contributed to a widening of pre-grant fiscal deficit, which reached 8.2% in 2012. During 2013, however, the overall fiscal deficit has improved thanks to an influx of grants and fuel price increases adopted in November 2012. Moreover, the Electricity Regulatory Commission raised electricity tariffs in response to mounting losses of the National Electric Power Company following gas disruptions from Egypt.
“Jordanian banks have some exposure to government debt, but thus far the government continues to service this debt so the impact on the banking industry has been minimal.”
Standard & Poor’s Mr Provost adds that since 2011, Jordan has suffered a weakening of its external and fiscal position due to the political instability in the region. “Lower foreign grants meant the government had to find alternative sources of funding to finance some of its public entities’ needs. Jordanian banks have notably provided support to the government by supporting public sector entities’ significant financing needs,” he says. “We believe Jordanian banks’ depositor base will remain ample and resilient, enabling this ad hoc support, unless the wider Middle East region unravels politically and financially.”
Islamic finance
The remarkable growth of Islamic banking globally in recent times is something that could assist Jordan in its bid for future growth. At the end of last year, the ruler of Jordan King Abdullah II told delegates at the World Islamic Economic Forum in London that Islamic banking had proven more resilient and more secure than conventional methods in the aftermath of the financial crisis.
The king spoke about the untapped potential for Islamic banking and Islamic finance in the region, and how Jordan was committed to realising the promise of the sector, giving market participants in Jordan the confidence that they were in an industry backed by the most powerful man in the land. In his speech, King Abdullah said: “I am proud that despite recent global crises and regional turmoil, our country remains a resilient and safe haven for our people and our partners.
“We are determined to keep leveraging Jordan's strengths. First and foremost are our people: talented, educated, tech-savvy and globally aware. Jordan also has a unique geo-strategic position, in the heart of the Levant, making us a strategic platform to the GCC and wider Middle East and north Africa [Mena] region, and a global East-West hub. Free-trade agreements with major economies give access to over 1 billion consumers. Jordan is simply the place to be when you need a manufacturing base and outsourcing centre; a distribution and assembly gateway; a back office and consulting hub; or a base for infrastructure and reconstruction projects in our Mena region.
“We also have a regulatory environment aimed at helping opportunity grow: with attractive incentives, economic development zones, business parks, industrial estates, free zones and more. And the opportunities are ripe: in information and communications technology and professional services, financial services and engineering, agro-industries and tourism, healthcare and pharmaceuticals, education and more. We also have significant mega projects, in water, energy, transport and other infrastructure.”
The opportunities and threats in Jordan’s diverse banking landscape are more stark than in some other markets. The understandably conservative lending environment means the banks have been less affected than some international peers with regard to NPLs, but that can make it tough for borrowers hoping to access funds.
Banks and the government remain strongly interconnected and both are beholden to events that unfold in more volatile countries nearby. These problematic neighbours can, however, provide ways for Jordanian banks to do more business and shine a positive light on a country with more stability than most. Then there is the innovative and potentially highly lucrative world of Islamic finance – something that is backed by those at the very highest levels in Jordan and much of the Middle East.
Whether Jordan is an ocean of calm is still up for debate. The seas can seem decidedly choppy from time to time. But the banks have good navigators that know these waters well, ever ready for whatever appears next on the horizon.
