As Jordan’s financial services industry comes of age, the banking sector has been shaping itself into one of the major contributors to the country’s increasing economic power. The sector may also be experiencing what is equal to its Sturm und Drang period, brimming with ambitions, growth instincts, and sometimes conflicting impulses.
In recent reports, analysts credited increased purchasing power of consumers along with liberal attitudes towards personal debt with driving Jordan’s explosive banking sector growth. Deeper rooted drivers of development included increased investment from the GCC, improved regulations, and focus on the development of retail business.
A variable helping the sector sustain its growth is trade and banking services activities originating from neighboring Iraq, which has provided significant fee income for local and foreign banks. Observers also say that the sector appears to have benefited from the ongoing political instability in Lebanon where certain capital inflows make it to Jordan in search of a safer environment for investment.
Banking sector deposits, which last year reached $20.6 billion and equaled 1.4 times Jordan’s nominal GDP, have grown at a slightly faster rate than GDP – supporting the notion that the country’s financial culture has left its underbanked past firmly behind and that banks are reaching the customers. However, in spite of the highly competitive environment, the market remains concentrated, with the top three banks dominating the market.
Good asset
Jordan sports 13 local commercial banks plus eight foreign owned, two Islamic banks and five investment banks for a population of 5.9 million. There is no state ownership in the sector. But one of the significant features of Jordan’s banking sector is its high concentration. The leading bank is the Arab Bank, which holds approximately 60% of overall banking assets. Observers agree that size matters when it comes to the performance of banks and Arab Bank demonstrates the accuracy of this theory.
Research shows the strength of Arab Bank is such that the bank’s 40% increase in profits in 2006 reflected very positively on total sector results, which rose for all banks to $773 million (JD547.35 million; JD1 buys $1.41) in 2006 from JD 500.77 million in 2005, representing a 9.3% increase. According to research firm Amwal Invest, only Arab Bank and four other banks experienced growth in their bottom line in 2006.
In any case, the sector’s 2006 growth is paltry when compared to the 80% increase in 2005. But nevertheless, experts say the sector’s prospects for 2007 are promising, specially the sector’s performance on the Amman Stock Exchange.
In 2006, the sector’s consolidated assets grew by 14.9% to reach JD 24.24 billion. Figures from the Central Bank of Jordan (CBJ) showed that 25.6% of the total assets at the end of 2006 comprise foreign assets, with balances held at foreign banks making up the bulk. The remainder represents local assets, with the lion’s share claimed by facilities given to the private sector, constituting 39.31% of total assets. The largest increase in assets in absolute terms was for the Arab Bank, which grew by JD1.624 billion.
The International Monetary Fund said it expects Jordan’s economy to keep growing at around 6% in 2007 on the back of 6.5% real GDP growth in 2006. Expecting a bumper year in 2007, a number of the local and foreign bankers are willing to expand their business in the kingdom.
The IMF encouraged the increasing role of the banking sector, but issued a warning on credit growth. “Particular care is required with new forms of lending, which carry greater risks, such as margin and non-collateralized loans that have been growing rapidly,” the international watchdog admonished, arguing that the profitability of banks and, implicitly, the health of loan portfolios have yet to withstand tests of a slowing economy.
The stats
Figures by Amwal Invest show 2006 saw the consolidated credit facilities offered to the private sector grow by 26.1% to reach JD9.7 billion. “Facilities extended to public entities increased by 18% to JD423.2 million, while those to financial institutions declined by 63.4% from JD20.5 million in 2005 to JD7.5 million.”
Amwal did note two distinct changes in the sector between 2005 and 2006. “In 2006, net interest income made a more significant contribution to total operating income at almost 70%, pursuant to a refocusing on core operations, while gains from investments played a much smaller role, making up only 3%.” When compared to 2005, interest income contributed 55% to total operating revenue, and gains from investments around 13%. “The average increase of net income for all the banks was 27%, the most significant being Jordan Commercial Bank, rising by 62.9% from JD 9.66 million to JD 15.74 million,” Amwal’s report said.
Property financing increased to meet the expansion in the real estate sector in Amman and other tourist areas. Similarly, other kinds of financing, such as personal loans, holiday loans, marriage loans, car loans, and business loans also thrived. These developments trickled down to fee-income and thus, the bottom line.
Both the Arab Bank and the Housing Bank for Trade and Finance (HBTF) posted profit increases of over 20% in the first quarter of 2007. Arab Bank announced first quarter profits of $187 million after taxes and provisions, which was a year-on-year increase of 24.6%. HBTF reported even a better increase of 36% with profits standing at $51.7 million for the first quarter of 2007. These robust results to a certain extent were also achieved by other banks with Jordan Kuwait Bank reporting profits of $15.7 million in the first quarter of 2007 or a 5% increase when compared to the same period in 2006.
Despite rapid growth and high levels of profitability, the banking sector still requires further development, including long-term strategies to diversify sources of income, innovations in product and service delivery, greater choices for customers and investing more on staff training.
Charging ahead
Experts agree that the upcoming three years hold considerable challenges for the banking sector, as well as for policy makers who determine aspects of the environment in which the sector operates. Banks will be looking for sources of growth and to maintain the high profit rates that they become accustomed to, while competition intensifies, and technological changes impact on the way that banking operations are carried out.
Banks must also introduce new strategies aimed at the most efficient utilization of capital in line with capital adequacy requirements. Large banks must accelerate efforts to penetrate new markets regionally and internationally. The CBJ must also encourage a consolidation phase in the next two years as the market is saturated. Consolidation should first start in acquisitions between local banks, especially smaller ones. This move would encourage the introduction of new products and services and enhance the quality of those already existing, allowing effective competition on a regional and international level.
Another challenge local banks must face is the entry of foreign banks. Foreign banks have many advantages over their local counterparts and could eat away at their profits if additional reforms and development of the sector fails to materialize.
Although experts warn of the potential shortfalls in the sector, the report by Amwal Invest acknowledges that most “Jordanian banks enjoy a higher capital adequacy requirement ratio than the 12% set by the CBJ, which is also higher than the 8% ratio set by Basel II Committee.” After the CBJ raised the minimum paid-up capital for Jordanian banks last year, “most banks went about increasing their capital through the distribution of stock dividends or through private placements. The step helped banks secure sufficient funds to seize investment opportunities locally, regionally and globally.”
In non-fiscal aspects, Jordan’s financial services industry has a number of governance and cultural issues to master. The sector’s evolution recently showed some large-scale employee migrations and shifts in personnel that seemed indicative of challenges in the management of highly skilled human banking resources, which are somewhat scarce in the country. In one recent banking conference in Amman, a sector critic asked the president of a smaller bank outright why his institution was lambasted by so many people for “loan sharking”. In other instances, industry insiders still frequently clam up when asked about the dominance of Arab Bank and its impact on the entire sector, virtually forcing further questions on transparency and the authenticity of all facets in the country’s banking picture.
Although the economy and leading sectors are showing consistent growth, the government in Amman is tasked to have strong strategies to mitigate potentially even higher oil prices, address unemployment and control inflation in order to remedy the country’s trade and current account deficits. As more foreign investment is flowing in and alternative financing means gain in popularity in the broadening financial industry, supervision of the Jordanian banking sector through the CBJ will be existential for the further sound development, believes the IMF. But, the government must also assist in establishing a central credit bureau to help banks make better risk assessment. And implementation of the Basel II accords by the end of 2007 is a move that cannot be avoided. Market forces will drive mature banks to excel – with a little helping hand from the regulator.
