Interview: Nemeh Sabbagh
How will the central bank’s increased interest rates affect liquidity and demand for loans?
NEMEH SABBAGH: Banks have followed the interest rate increases set by the Central Bank of Jordan (CBJ), sometimes with a lag, to reflect higher rates. As businesses and households also adjust with a lag, the full impact of increased interest rates will become clearer. In addition to the delayed response, recent experience has shown other factors to be more dominant than interest rates on deposits, liquidity and the demand for credit. For example, the drop in interest rates from August 2013 to July 2015 – by a cumulative 250 basis points in the CBJ’s overnight deposit window rate – did not lead to the expected increase in credit demand or a slowdown in the growth of deposits at the time. Similarly, the interest rate increases in 2017 could result in increasing deposits. However, the current low economic and income growth rates along with relatively high fiscal deficits, not only in Jordan but across the GCC, have dampened the growth in deposits, leading to tighter liquidity.
On the credit side, banks have been conservative in raising interest rates on loans due to increasing competitiveness in the banking industry. Consumer loans, especially mortgages, is one category that has shown sensitivity to higher interest rates, and declined by 2.7% in the first half of 2017. But the aggregate credit facilities continued to grow by 5% over the same period compared to figures from December 2016, with some new large loans given to the power and water sectors. However, the private corporate sector continues to show low credit demand, affected by regional developments and slow economic activity, more than interest rate developments.
What do you anticipate the effect of higher interest rates will be for foreign investors?
SABBAGH: Project financing in Jordan is mainly driven by infrastructure projects, with the current focus on renewables, power and water projects. Most financing is not in Jordanian dinar but in dollars, with strong involvement from multilaterals such as the International Finance Corporation and the European Bank for Reconstruction and Development. As this financing is in dollars, the CBJ policy rate increases have little impact on a project’s borrowing costs. Moreover, the dollar interest rate risk is hedged at the outset of the project. Jordan has made pioneering changes to its legal and regulatory framework for public-private partnerships governing these projects, and has become an established market with a proven track record in their implementation.
How are cashless transaction solutions facilitating access to credit for small businesses?
SABBAGH: Cashless transaction solutions are developing very well in Jordan, guided by the CBJ and keenly adopted and developed by banks, with a broader goal of moving towards e-government. For example, eFAWATEERcom was launched by the CBJ and the banks in 2015 as a direct payment system; its use has accelerated, reaching JD1597m ($2.3bn) of payments in the first eight months of 2017 compared to JD175m ($246.8m) in the same period of 2016. Granting credit is usually a decision based on past behaviour, and electronic transactions provide additional information to determine the profile of a customer that can support credit decisions.
Moreover, cashless transactions provide easier tools for payments by individuals and small businesses and exposes them to improved technologies, with a scope for expanding their market opportunities and improving their productivity, in turn becoming more bankable and creditworthy. Under the National Strategy for Financial Inclusion the CBJ is working on improving financial awareness, which should encourage individuals and small businesses to utilise and demand greater financial services, including credit.
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