The Central Bank of Jordan has advanced deregulation of the country's banking sector considerably in recent years. According to Adel Satel, analyst at Moody's Investors Service: "Continued reforms in the financial sector have strengthened the banking system's capital base, and introduced additional prudential requirements and more transparency into the system." Roger Smithyes, general manager of Jordan International Bank London, says: "Overall, the sector is very well managed and very well controlled. It goes in line with the general view of Jordan."
The IMF's financial system stability assessment concluded in 2004 that the country had no substantial fiscal vulnerabilities, and the banking system generally showed high capital ratios, liquidity and profitability.
The central bank has taken an active approach to its management of poorly performing banks, and is now able to authorize capital injections, management changes, and mergers with stronger banks. Last year, it doubled the capital requirement of commercial banks to JD40 million ($56 million), a reform that is to be phased in over four years.
A demanding regulator
The CBJ also now insists on tighter reporting requirements, and has stipulated penalties to be imposed should banks fail to comply. In addition, it has gradually reduced the classification period of non-performing loans to 90 days. At the end of 2001, the percentage of NPLs was found to have reached 12.2% of the 16 local banks' total/consolidated direct credit. By 2002, Standard & Poor's says, NPLs totalled 19.8% of total loans, largely as a result of the 90-day rule for past-due loans as well as economic uncertainty.
There are now four undercapitalized banks, accounting for about 14% of banking assets. One bank has also been restructured by the central bank, which coordinated the writing-off of JD30 million in paid-in capital, the injection of new capital by the original shareholders, and a change of the bank's board and management. Its problems stem from a fraud case in 2002, weak corporate governance, and weaknesses in banking supervision.
Jordan has a population of just 5.5 million but boasts 16 local privately owned banks. There are also several foreign banks, including HSBC, Standard Chartered, Citibank, the National Bank of Kuwait (NBK), Banque du Liban et d'Outre Mer (Blom) and Bank Audi. Although the banks remain profitable, and the sector's attractions are evidenced by the recent entry of Blom and NBK, there is a feeling that Jordan is overbanked.
James Reeve of the Economist Intelligence Unit says: "Although the central bank has been keen to promote banking sector consolidation, it has faced reluctance among shareholders to merge, and a reluctance among small banks to open up their accounts to scrutiny." Smithyes adds: "If the Jordanian banking system wants to make an impact on international markets, capital has to be increased, either via mergers or by getting banks to increase their capital requirements."
Henry Azzam of Jordinvest, a company that offers integrated investment banking services in local and regional markets, says: "The banking sector should see some consolidation, but probably won't". He attributes this partly to the family-run nature of the sector, with families largely unwilling to give up control.
A 2003 report by his firm noted: "Most licenced banks are relatively small, with assets of less than JD500 million, which does not afford them sufficient economies of scale to cover their fixed expenses, and bear the rising costs of introducing state-of-the-art technology in banking services."
Yet Azzam says that the real problem is not overbanking but an excess number of branches, and because most of the banks will be able to meet the JD40 million capital requirement and are profitable, mergers are unlikely.
The two largest banks are Arab Bank and the Housing Bank for Trade and Finance. Arab Bank was founded in Palestine in 1930 and is today the largest Arab banking network owned by the private sector, with branches in 30 countries, including every Arab state in which private banking services are allowed. The Housing Bank was founded in 1973 to provide housing finance but was converted to a commercial bank in 1997. It is Jordan's number one bank in terms of capital, shareholder equity and geographic expansion, although Arab Bank is the largest in terms of assets.
Arab Bank is also the largest listed company on the Amman Stock Exchange. According to Jalil Tarif, the ASE's CEO, the exchange has witnessed a major boost in recent years, with trading volume doubling to reach about $2.5 billion in 2003 alone. The current market capitalization is around $12.5 billion, or 115% of GDP, and Tarif notes that primary share issues and bond issues have been worth more than $2.3 billion over the past five years.
"The exchange is expecting some more major listings soon, and some will be privatized companies," says Tarif. Although unable to specify which companies are to be listed, he says some privately owned telecoms firms are thinking of becoming public shareholding companies. A major airline courier could also soon be privatized and listed on the ASE.
Going on past experience, these sales are likely to attract foreign interest. Tarif says: "Almost 40% of the ASE's market capitalization is owned by non-Jordanians, of whom about 30% are Arab and 10% non-Arab." With regards to the banking sector, he says that almost 50% of market cap is owned by foreign investors.