Recent rate cuts and additional international funding should boost bank lending in Jordan, with micro, small and medium-sized enterprises (MSMEs) in line to benefit from the increased loan availability. However, lingering concerns over regional instability and rising debt levels could influence commercial lenders’ willingness to extend credit lines.
On August 7, the Central Bank of Jordan (CBJ) announced it was cutting its key rates by 25 basis points, the first time in more than two years that the reserve had eased its position on policy rates. With the cuts, the CBJ’s overnight repurchase rate became 4.5%, the bank’s weekly repurchase rate 4%, its rate on the overnight deposits to 3.75% and its rediscount rate 4.75%.
The lowering reverses part of an increase implemented in December, when the CBJ lifted its overnight rates by 75 basis points, a measure taken to curb capital outflow. The bank said the recent reductions were in response to an increase in demand for dinar-denominated assets and were aimed at further promoting the expansion of private credit and growth-led investments.
Commercial banks will also be given further encouragement to open the credit taps for small businesses, with low-cost funds provided by the World Bank. On July 16 the CBJ announced it had received $50m from the international lender as part of a programme known as the MSME Development for Inclusive Growth Project. The scheme, first announced in early March, will see a total of $70m disbursed, with the remaining $20m scheduled to be provided before March 2014.
The funds will be lent by the CBJ to commercial banks, which in turn will make the money available to support micro-projects and MSMEs. According to CBJ data, the demand for small business credit is growing, with requests for MSME loans from the country’s eight commercial banks estimated at more than $120m as of March. Under the terms of the CBJ’s agreement with the World Bank, the loan carries an interest rate of 1.45%, and is due to mature in 30 years, with the loan having a five-year grace period before interest payments begin.
The central bank has also taken a number of policy measures to open up lending to SMEs, including the issuance of a Credit Information Law and Credit Information By-Law, which will pave the way for licensing private information firms and eventually enhancing creditworthy SMEs’ access to finance. The CBJ has also eased some of its credit and capital adequacy requirements to create financial space for smaller businesses. For example, for the purpose of computing the capital adequacy ratio, loans to SMEs are given a credit risk weighting of 0%.
While banks have been given encouragement to extend more credit, lenders may remain somewhat wary, cautious of regional instability that could directly hit the Jordanian economy and their loan portfolios. The continued fighting in Syria, which has seen more than 500,000 refugees flow over the border in need of support, and the renewed unrest in Egypt, which again threatens to disrupt Jordan’s gas supplies, both throw up risks for the kingdom’s economy and its banks.
In mid-July, ratings agency Standard & Poor’s warned that it saw a rise in the risk levels facing Jordan’s banks, in particular citing the financial challenges faced by the government.
“We also believe that the government’s ability to provide support for the banking system in case of need has decreased, owing to a low level of financial flexibility, dependence on foreign grants, a substantial and growing public debt burden and structural external deficits,” the agency said in a note issued on July 16.
That debt burden, some of which is carried by domestic banks, is sizeable. As of the end of May, Jordan’s debt had risen to $24.3bn, the equivalent of 71.8% of GDP, and a 3.9% increase on the level for the same month in 2012, according to data issued by the Finance Ministry on July 21.
Many of Jordan’s commercial banks are maintaining capital adequacy ratios well above the 12% minimum required by the CBJ, but uncertainty over public debt and future regional trends could make lenders reluctant to extend credit in troubled economic times. While the fund provided by the World Bank may stimulate lending to MSMEs, domestic lenders may still continue to exercise caution with their own capital.