Jordan: A shock-proof financial sector

Photo: Janabi Photography, courtesy of JIC

Representing 20% of the GDP, the financial sector is dominated by banks, highly capitalised, profitable and set to play an increasingly large role in private sector development.




JORDAN’S RESILIENCE IN the face of a challenging environment owes much to the strength and solidity of its financial sector, which is largely dominated by banks. Protected by the prudent policies of the Central Bank of Jordan (CBJ), the sector has proven robust against shocks.

“The Central Bank has historically maintained monetary and banking stability by controlling inflation rates, stabilising foreign exchange rates, and preserving the resilience of the banking system,” says CBJ Governor Ziad Fariz. “Our view is that the growth and success of the Jordanian banking sector is a key driver for the economic development of the country as a whole.”
There are 25 banks in operation, 15 of which are listed on the Amman Stock Exchange (ASE). Jordan also ranks 10th in the world in Islamic banking, according to Thomson-Reuters’ State of the Global Islamic Economy.

The CBJ states that the financial sector represents about 20% of GDP, with commercial banks holding the lion’s share of the industry. In its July 2017 report on Jordan, the International Monetary Fund (IMF) noted that “by the sheer size of their balance sheet, with total assets amounting to 176% of GDP in 2016, commercial banks play the most significant role” in Jordan’s financial sector.

Banks are the main source of funding for both the public and private sectors, and have a capital adequacy ratio of 19%, well above the prudential requirement of 12%. They have comfortable liquidity, with an average ratio of 138.1%, well in excess of the regulatory minimum of 100%. Limited non-performing loans (4.4% of total loans and 3.5% net of provisions) offered a return on equity of 8.8% in 2016. Furthermore, the latest stress tests, conducted by CBJ during that year, concluded banks would preserve adequate capital levels in most scenarios.

Further progress was also made to strengthen supervision and risk management, with CBJ issuing Basel III regulations on capital requirements in November 2016. Reducing the weight of the public sector in the economy and boosting private entrepreneurship are key priorities for the government, and banks are set to play an essential role in this effort.

The Jordan 2025 strategic development plan includes a series of measures to encourage more citizens to turn to banks and spur lending to micro as well as small and medium enterprises (MSMEs), which represent 98% of all businesses in the country, according to the Organisation for Economic Co-operation and Development (OECD).

“Jordan 2025 targets increasing the percentage of bank loans provided to SMEs from 9% in 2014 to 14% by 2025, while the coverage of credit bureaux is targeted to reach 55% of the adult population by 2025,” says Mr Fariz. In particular, CBJ has increased loan guarantees for SMEs and entrepreneurs through the restructuring of the Jordan Loan Guarantee Corporation, and increased funds available to them through the provision of CBJ funding programmes in certain industries and the establishment of a fund to support SME start-ups in partnership with the World Bank.

Set up in June 2017, the Innovative Start-ups and SMEs Fund (ISSF) is co-financed by the World Bank ($50 million) and CBJ ($49 million). It is expected to invest $50 million in approximately 200 Jordanian companies and provide some $3.5 million in support to partner investors, primarily in technology, media, telecommunications and the service sector, with other ventures in agribusiness, pharmaceuticals, water and green energy.

Another measure taken by the CBJ to increase loans to SMEs is the establishment, by Italy’s CRIF, of the country’s first credit bureau in 2015. The bureau provides credit reports as well as support and information on sources of funding, in particular to SMEs, under the CBJ’s supervision.

According to CRIF, there are about half a million people in Jordan who resort to microfinance and are charged up to 30% interest rates. Through the bureau, they will be given access to cheaper credit.
Other initiatives are also in place to develop the non-banking sector, “which will contribute to financial depth, including an amendment to the Insurance Law to allow for the transfer of supervision of the insurance sector to the CBJ,” says Mr Fariz. “This will help foster stronger supervision and minimise spillovers from the insurance sector to banks, as well as enhance financial development and inclusion. We will also continue adopting, and gradually implementing, regulations for the supervision of microfinance institutions under the new licensing framework.”

According to the IMF, the insurance sector’s assets grew by 21% between 2010 and 2015 to JD 870 million ($1.2 billion, 3.3% of GDP), including about JD 534 million ($753 million, 2% of GDP) in financial investments. As for the microfinance industry, although it grew fast at an average yearly rate of 20% between 2011 and 2014, it remains relatively small.

Another lever for boosting private sector involvement in the economy is the Amman Stock Exchange (ASE), which had been on the decline since 2008. Previously registered as the Amman Bourse, a non-profit institution, last year it became a public shareholding corporation. ASE’s CEO, Nader Azar, said its new status “will help it build partnerships with regional and international stock markets.”

Although the market capitalisation of listed shares at the ASE decreased to JD 17 billion ($23.9 billion) in 2017, a 2.2% drop from 2016, an encouraging sign is that the trading value increased by 25.6% to JD 2.9 billion ($4 billion).