Interview: Ahmad Abu Eideh
In the current economic climate, could perceived risks be more severe than the reality?
AHMAD ABU EIDEH: There are a number of perceived risks that are important to address, namely liquidity, foreign exchange and interest rates, and credit risk. In terms of liquidity risk, the situation pertaining to the Jordan-ian dinar has much improved. We’ve seen a good return from the dollarisation we experienced at the end of 2012. Liquidity levels on the dinar have much improved.
In terms of the fixed foreign exchange risk, one con-cern is the maintenance of the peg between the Jor-danian dinar and the dollar. In this regard, indicators show that the peg will remain at its current level. Accord-ing to Standard Chartered projections, the dinar exchange rate should remain at $0.71 for the next three to four years. This is a level at which Jordanian banks are comfortable. Interest rate risk is another area that must be monitored closely. Due to the move towards the dollar at the end of 2012, the central bank increased the interest rate on the dinar by 75 basis points. This resulted in higher fixed deposit rates and a high level of conversion from dollars back to dinars on account of the attractive rates. However, the increased costs of funds meant that lending rates must also be increased, which banks have done gradually. At this juncture and with the improvement in liquidity, I do not see Jordan-ian banks lending at a high level in terms of loans on either the corporate or retail side.
How mature is Jordan’s banking sector in terms offering non-traditional products and investment vehicles? What is likely to drive this segment?
ABU EIDEH: Jordan’s banking sector is still relatively dependent on traditional banking products. Non-tra-ditional banking products such as derivatives, invest-ment vehicles, merger and acquisition transactions, debt capital markets and equity capital markets are not suited to the Jordanian sector as it doesn’t current-ly have the maturity for these sorts of transactions to be offered on a standalone basis. In this regard the sec-tor still needs the support of international banks. This is not because of a lack of understanding of these products, but more due to a lack of opportunities in the market, which has not yet had access to a consis-tent pipeline of opportunities that would make such transactions viable for local banks.
Additionally, before the banking sector can add more non-traditional products, it will be necessary to put in place a more user friendly legal framework that shows an understanding of and support for these products.
The current legal framework does not provide the right environment for banks to add value to their products.
How can Jordan improve its investment banking productivity? How well equipped is the sector to interact with international markets?
ABU EIDEH: The investment venues and methods dif-fer between international banks and local banks. Many local banks have white-labelling arrangements with international banks, meaning that they sell interna-tional banking products such as investment funds local-ly. Most of the investment products that are being sold on the priority banking side are high-yield, capital-guar-anteed, fixed-income products.
For investors who have opted to keep their funds in dollars, the returns at this time are very low. Now investors are looking for opportunities for high-yield, international dollar-denominated bonds, which can bring returns of 6-7%. By providing opportunities in this respect, local banks have greatly improved their offerings, even while they are white-labelling products.
With regard to the ability of the sector to success-fully interact with international markets, Jordanian banks have traditionally maintained solid relationships with offshore banks in mature markets. At this point, access-ing international markets is not a very big problem for Jordanian banks. However, we have not yet been able to test the waters with corporate bonds. This will be necessary if we hope to tap into the international cap-ital markets on the corporate or banking sector side.
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