Not an oil-producing country itself, Jordan has nonetheless benefited from the oil riches in recent years. Along the intertwining roads that crisscross Amman’s calcareous landscape, luxury villas and a rising towers are built. Reflecting the country’s positive economic environment, the Jordanian banking sector continues to display sound financial indicators.
The Jordanian banking sector currently has 23 banks, of which eight are foreign institutions (including two Lebanese), two are Islamic banks and 13 commercial banks, according to Khouloud al-Saqqaf, Vice Governor of the Central Bank of Jordan (CBJ).
A March 2008 IMF report describes the Jordanian banking sector as well capitalized with low non-performing loan ratios, strict loan classification and provisioning rules requiring banks to maintain adequate loan-loss provisions.
The entry of regional players has rendered the market more competitive and prompted the introduction of more sophisticated products. As an indicator, “the number of ATM machines has also been growing significantly,” added the vice governor.
By Q3 of 2007, the Jordanian banking sector grew by $3.89 billion, representing an 8.44 % growth from 2006 year-end to reach $50 billion, according to a report published by Jordinvest, a local financial company.
Players in the banking sector
The Arab Bank was the largest contributor to this increase, its total assets soaring by $2.35 billion. This growth was generated by a surge in net credit facilities estimated at $1.2 billion, accounting for a 10.73 % rise in the first six months of the year. The Housing Bank for Trade and Finance came in second place contributing to an increase of $600 million in total assets, driven essentially by the $266.8 million growth in cash balances at banks.
The Jordanian banking sector is extremely concentrated as demonstrated in the market share of the Arab Bank, which can accounts for just over 60% of the banking sector institutions’ total increase
The entry of the Dubai International Capital into the Jordanian market, through the acquisition of shares in the Industrial Development Bank, will certainly affect the market positively, more particularly in terms of Islamic banking, al-Saqqaf believes. In Jordan, Islamic banking caters for mostly a clientele base. “High liquidity levels boasted by Islamic banks might redirect their funds towards the Gulf to invest that excess liquidity,” al-Saqqaf explained.
In terms of the allocation of credit facilities by economic activity, al-Saqqaf said that the share of the retail sector was estimated at 28%, general trade at 22%, mining and industry at 18.8% and construction at 17.7%. “Loans to the retail sector are limited, however, by law to about 20% of banks assets,” she pointed out.
Facilities granted for general trade and construction purposes were the largest contributors to the growth experienced by banking sector, displaying a rise of $546.3 million and $440.6 million respectively. The mining sector registered the largest percentage growth at 89.48 %.
The IMF estimates that in order to prevent a further increase in the loan-to-deposit ratio, especially of some of the smaller banks that presently have relatively high ratios, prudential limits on the sources versus uses of funds that are under consideration should help mitigate risks. “In addition, they will likely act to curb credit growth, thereby reducing inflationary pressure Although the share of credit to the construction sector and to purchase stocks has increased in recent years, appropriate prudential regulations are in place to curb banks’ exposure to the real estate sector and the stock market,” the report stated.
One particularity of the retail lending segment is born out of the large projects that are underway in the Hashemite Kingdom. According to the Oxford Business Review, Nour Nahawi, the CEO of Arab Banking Corporation in Jordan, has said that, “The demand is in mega-capitalized banks to cope with potential projects like the Red-Dead Canal. Capital must be sizeable enough to remain in step with economic growth.”
Khouloud al-Saqqaf confirmed that another market segment is showing growth levels as ratio of retail to corporate loans have been rising significantly of late. “The corporate market, which is extremely competitive, has pushed banks to expand their retail activity,” she said.
Total liabilities increased by $3.55 billion, hitting $42.3 billion, mainly fuelled by a $2.65 billion increase in customer deposits dovetailed by an $832 million increase in banks’ and financial institutions’ deposits.
Examining the sector’s profitability reveals an increase of $22.6 million in the bottom line year on year, indicating a 5.69% rise to $420.1 million, as compared to $397.5 million in the first half of 2006.
The oil riches as well as the central bank’s new regulations imposing minimum capital levels of approximately $142 million by 2010, has encouraged banks to expand into the region. “Jordanian banks are thus establishing operations in countries such as Syria, Algeria, Qatar, Bahrain, or the UAE where the Housing Bank has opened recently,” underlined al-Saqqaf.
Bank of Jordan received a license to begin operations in Syria. The Housing Bank for Trade and Finance, one of Jordan’s largest domestic banks by assets, has already taken majority shares in subsidiary banks positioning itself on the Syrian and Algerian markets.
Forecast
The banking sector has been closed to outside players since the CBJ decided not to grant more licenses for the time being. “We expect consolidation of the banking industry to take place. There is certainly an appetite for mergers essentially due to the implementation of Basel II and the large projects that are emerging in Jordan,” the vice governor pointed out.
The IMF has declared that the CBJ has made significant progress in strengthening the regulatory and institutional framework for the banking sector in recent years with the implementation of Basel II standards underway and the enactment of an anti-money laundering (AML) law in 2007 as well as the establishment of an AML unit in the CBJ. New corporate governance regulations for banks, implementation of the electronic check-clearing system, and publication of the Financial Stability Report are welcome developments.
In al-Saqqaf’s estimate, the new challenges awaiting the banking sector are mainly articulated around a further automation of the industry, more mergers and structured products. In addition, the recent establishment of a Dow Jones index for the Amman Stock Exchange will certainly add more sophistication to the market and contribute to the development of the broader capital market and the deepening secondary debt market.
