When it comes to managing banking sector crises, the Central Bank of Jordan (CBJ) has a solid track record of success. Over recent decades, it has been presented with a wide assortment of financial sector dilemmas, which have compelled it to respond with various and sometimes vigorous interventions.
These have taken a number of different forms. When Petra Bank collapsed due to fraud in 1989, the CBJ consolidated the troubled bank’s balance sheet into its own. In 1993, when Jordan Gulf Bank became financially unsound, the CBJ granted it a 30-year interest-free loan facility. This allowed the smaller bank to maintain its independence while it restructured its balance sheet.
Non-Performing Loans (NPLS)
Even banks that have steered a more prudent course have faced asset-related challenges. The sector’s NPL ratio reached as high as 19.3% in 2001, according to the World Bank. Even though Jordan’s banks generally have substantial capital buffers, an NPL level of this scale presented an obvious danger in the form of financial stress to the nation’s financial institutions, especially where banks’ provisioning was inadequate. Such elevated ratios are also harbingers of more general concerns, such as over-indebtedness in the retail or corporate sectors. The deleveraging and restructuring that such a scenario invariably entails can be a drag on credit growth, and thereby impede the wider expansion of the economy.
Both the regulator and market participants have therefore worked assiduously to address the NPL problem over the last decade, and with considerable success. By 2013 Jordan’s NPL ratio had been reduced to 7.4%, according to World Bank data, a level that compares favourably to regional peers such as the UAE (8.4%) and Egypt (9.5%). Other asset quality metrics follow a similarly encouraging trend. Provisioning levels increased in the first half of 2013 to produce a healthy NPL coverage ratio of 75%, a significant improvement on the 69.4% posted at the close of 2012. Likewise, the net of provisions for NPLs amounted to a modest 6.5% of total equity at the end of June 2013, a marked reduction from the 8.3% figure seen at the close of 2012.
The banking sector’s relative stability in the wake of the global economic crisis of 2007-08, its resilience in the face of regional political turbulence and the steadily improving asset metrics displayed by its participants are a testament to the CBJ’s determination to ensure best practice in its jurisdiction. There is, however, room for improvement. The sector’s aggregate NPL level of 7.4%, though much improved and now at sustainable levels, is still higher than in many developed markets, such as the UK (3.7%) and the US (3.2%), as well as some in some of its neighbouring countries, such as Saudi Arabia (1.3%) and Kuwait (4.6%). Moreover, ensuring the financial soundness of a banking sector is a constant and incremental process – one that permanently claims the attention of regulators worldwide.
New Credit Bureau
The advent of the nation’s first credit bureau is set to have a profound impact on the ease with which banks can extend credit to certain segments of the market – such as small and medium-sized enterprises (SMEs) and start-ups – which will in turn promote economic growth and job creation. The start of the bureau’s operations, expected by the end of 2014, will result in a major strengthening of the sector’s institutional infrastructure.
It will be the culmination of years of effort. As early as 2008, the International Finance Corporation (IFC) began working with the CBJ to draft a new credit reporting law, with a long-term ambition of establishing a credit reporting industry. Speaking in 2012, when the criteria for licensing and regulating the credit information bureau were still being formulated, IFC’s country manager in Jordan, Ahmed Attiga, explained the rationale for the coming legislation in a press release: “One of IFC’s strategic goals is to expand access to finance for those who need it most,” it read. “Credit bureaus are a crucial building block that enables greater access to financing for individuals and small businesses.”
By early 2014 the bureau’s launch was imminent, with the CBJ’s governor, Ziad Fariz, announcing that the by-laws and basic regulations were in place and indicating that 22 out of 26 banks, an insurance company and a telecommunications firm had signed up to a data-sharing agreement. Securing the cooperation of institutions outside the banking sector is something of a triumph for the new bureau: other jurisdictions in the region that have recently established credit information companies, such as Egypt, have been unable to secure the cooperation of the non-banking sector due to laws protecting data.
With the launch of the bureau keenly anticipated in the short term, attention in the banking sector has turned to questions of detail, particularly with regard to how much data-sharing the bureau will require. In this respect, Jordan’s new institution appears to be concentrating on capturing as large a pool of credit information as possible in the short term, by reducing the reporting threshold in the interim. According to the IMF’s recently published Article IV Consultation with Jordan, this would allow the bureau to support a broad base of credit providers and clients while it becomes fully operational.
The potential effect on the banking sector’s lending activity is difficult to gauge. Credit bureaus usually take a number of years to become effective, as credit histories are built only gradually, and most of the NPL distress at the turn of the century came not from SMEs but from big-ticket lending corporates or large family enterprises. All the same, there is no doubt that the bureau’s arrival will be a qualitative step forward for financial intermediation, and will greatly enhance the banking sector’s ability to engage in transparent, risk-based lending to individuals and the nation’s increasingly important SME sector.
Retail Payment Systems
The development of the credit bureau is only one part of the broader push towards a more transparent and effectively governed banking sector. Another important infrastructural improvement has been brought about by the National Payment Council, led by the CBJ, in the form of national retail payment systems. These include various projects addressing mobile payment, bill presentment and automated clearing houses – all of which, according to the IMF, are expected to “enhance financial inclusion as well as the efficiency and safety of the payment system”.
However, as the CBJ’s continues its drive to maintain the sector’s integrity, the question of governance, rather than infrastructure, is likely to assume greater prominence in the coming year. In May 2014 the CBJ issued a new set of corporate governance instructions and requested feedback from all interested parties, intended to ensure that “board members possess experience and competency besides guaranteeing that there is no conflict of interest”. The proposed governance criteria, it has said, are in line with the principles of the Basel Committee on Banking Supervision, the OECD and the Financial Stability Board’s efforts to address systemic weaknesses exposed by the global financial crisis. Key provisions of the instructions include a requirement that boards be fully responsible for the financial safety of their banks; that they are accountable to the rights of all stakeholders; that chairmen may not double as general managers; and that financial remuneration be transparent and linked to risks and performance levels.
The scope of corporate governance as applied to banks has developed rapidly in Jordan, from the CBJ’s issuance of a simple guideline booklet in 2004 to the comprehensive framework proposed in 2014. While the Association of Banks is likely to request some modification to the new instructions – as of mid-2014 it was consulting with its membership in order to formulate its response – the direction of travel is clear. Jordan’s banking sector, which owes much of its resilience to the prudent approach adopted by the CBJ, will be an even better governed one in future.
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