Jordan’s banking sector fared well during the recession of the last two years due to tight central regulation and an overall cautionary outlook, resulting in healthy deposit and profit levels that are attracting increased interest from overseas lenders.
As the global financial crisis was felt across the region in late 2008, the Jordanian government announced it would guarantee all deposits until the end of 2009, a pledge it later extended until the end of 2010. This commitment came on top of an existing scheme operated by the Jordan Deposit Insurance Corporation that insured deposits of up to $14,000 if a bank fails.
There has been no significant pressure put on Prime Minister Samir Rifai to extend the blanket guarantee. While it has been in place, the state has not needed to bail out any of the country’s lenders nor has there been a concern over a possible crash.
While financial institutions elsewhere in the region have faltered, all of Jordan’s 15 local banks posted a profit in 2009, with four managing to post an increase in their loans’ portfolios. However, total earnings for the banking sector fell to $942.2 million last year from $1.3 billion in 2008.
The solid position of Jordan’s banks was further bolstered in the first half of 2010 by a rise in deposits at licensed banks of 4.5 percent in the January to June period, with the additional $1.3 billion taking the total held to $29 billion.
This increase in deposits was matched by higher levels of credit extended by Jordan’s banks, with a further $814 million in loans made in the first six months of 2010, lifting the overall balance of credit facilities to $19.75 billion.
According to Antonia Dimou, an associate at the Centre for Strategic Studies of the University of Jordan, the country’s economy only suffered a minimal impact from the crisis, with the Central Bank of Jordan (CBJ) having ensured the stability of the banking system while maintaining monetary stability.
“The setting of 12 percent as a percentage for capital adequacy has preserved the banks from any financial problems and led to a near impossibility of bankruptcy,” Dimou said in an article carried by the World Press Organization on August 19. “The world standard for capital adequacy does not exceed 8 percent; however, Jordan used a conservative banking system to save its banks in 2008.”
This, combined with the fact that the financial sector is tightly regulated also helped it avoid any major meltdown during the international economic crisis. According to data from the central bank, local lenders only had some $40 million worth of exposure to toxic papers, a very low level, especially when the sector’s high profits for 2008 are taken into account.
There has been increasing interest in the Jordanian banking sector by overseas lenders. Late in 2009, the CBJ announced it was granting operating licenses to three new lenders: the Jordan Dubai Islamic Bank, National Bank of Abu Dhabi (NBAB) and Saudi Arabia’s Al Rajhi Bank, which would take the number of licensed financial institutions operating in the country to 26. Of these three, Jordan Dubai and NBAB have already opened their doors, with Al Rajhi looking to commence operations by November.
However, while the banking sector is expanding, both in the number of lenders and in its capital value, the industry has come under fire from some quarters who say banks initially reined in credit during the crisis instead of focusing on building up deposit and asset levels.
There is a strong need for a specialized financing institution that would allow players in the industrial sector to gain access to funding and to circumvent the stringent lending measures applied by commercial banks, believes financial analyst Ali Tabbalat.
“Commercial banks prefer to extend short-term loans and these policies do not fit the industrial sector whose production process takes a long time,” Tabbalat said in an interview with The Jordan Times in mid-August.
This view was echoed by Nazzal Armouti, the deputy chairman of the Jordan Chamber of Industry, who said setting up a financial institution offering long maturities and reasonable interest rates is a basic need for the development of the industrial sector.
“We, as industrialists, always call for setting up such a bank otherwise the sector will suffer and the country will lose important investment opportunities,” he said on August 11.
Though credit may currently be tighter than some would like, the fact that Jordan’s banking sector has ridden out the financial crisis without faltering means that it is better placed than many to increase funding should the economic outlook improve.
