Jordan’s banking industry on firm footing

While Jordan’s economy remains weighed down by a number of challenges, the banks continue to perform strongly, with intended new measures expected to provide a further boost to the industry.

Data released recently by the Central Bank of Jordan (CBJ) shows a solid increase in credit facilities, assets, capital adequacy and liquidity. The CBJ now plans to introduce reinforced corporate governance regulations, which will make banks more transparent and accountable, while rising confidence among lenders is expected to drive up credit growth.   

Positive indicators

Total assets of banks operating in the Kingdom grew by 9% year-on-year in 2013 to reach $60.5bn at the end of the year, boosted by higher deposits, with the banks’ activity more than twice that recorded during the previous year, according to a research note from Bank Audi. In an interview with the Jordan Times last month, CBJ governor Ziad Fariz said the strong performance is set to continue this year.

The International Monetary Fund (IMF) also highlighted the growth in its latest review of the Jordanian economy, released on May 7. While the report acknowledged the impact of external shocks on Jordan’s economy, led by the conflict in Syria and disruptions to energy supplies from Egypt, it added that gradual and solid growth was now in evidence.

The fund forecasts Jordan’s gross domestic product (GDP) to expand by 3.5% this year, a rate it foresees increasing to 4.5% in the medium term, from its current level of 3%. Inflationary pressures should ease further, the IMF added, while inflation is expected to be contained, declining to 2.5% in 2014 and a slightly lower 2% next year.

The IMF cited a number of positive financial indicators that it predicts will boost Jordan’s banking sector, including a rise in private sector lending. Bank lending is expected to increase by 8.6% this year, before edging up to 9.6% in 2015, coming on the back of modest credit growth in 2013 which followed earlier falls. The fund’s forecasts suggest a growing confidence among Jordan’s banks in the economy which is likely to increase in the coming years. Institutions will have a greater inclination to expand their loan portfolios, having built up their deposit holdings, despite needing to set aside higher levels of funds to meet the changed capital adequacy ratios laid down by the CBJ, the report noted.

The IMF’s year-end growth prediction for Jordan matches that of the CBJ. The reserve bank’s governor is also confident that inflation will stabilise, with the improving economic climate set to galvanise greater banking activity.

“With increasing deposits in banks and the central bank, our reserve levels have improved, which means that we do not foresee any new pressures on the liquidity available to the banking sector,” Fariz told OBG.

The governor added that these, and other factors, had allowed the CBJ to lower its key policy interest rates by a total of 75 basis points, with the aim of reducing the cost of credit to all sectors and supporting lending to the private sector to promote broader based economic activity. “In turn, we hope to see an increase in aggregate demand and thus employment levels,” he said.  

Headwinds to tailwinds

Even the continued conflict in Syria, which has seen up to 1.3m refugees cross the border into the kingdom, could have an upside for the Jordanian banking sector, according to Yousef Ensour, general manager of Bank Audi Jordan.

“Regional turmoil is something that has become a part of life, but each time, Jordan has shown the resolve and the resilience to battle back, and emerge stronger. During difficult times, money has traditionally flooded into the market, as immigrants tend to bring their capital and knowledge for the long term,” he told OBG.

While the migrant influx has put pressure on resources and finance, Ensour is confident that with time, and the correct structural reforms in place to integrate refugees, a new dynamism could enter the marketplace.  

Tighter rules

A more stringent regulatory regime for the industry is also on the horizon. In May, the CBJ released an updated version of its 2007 corporate governance instructions for the banking sector, seeking input from the Association of Banks and its members. Key issues under scrutiny include making banks’ board members more accountable, reinforcing the rights of shareholders, improving transparency over remuneration and reaffirming the role and independence of internal and external auditors.

The bank said that the instructions, which comply with international standards, were aimed at boosting confidence and accountability within the industry.

The CBJ’s consultation process with banks over the new governance regulations will take time to conclude, leaving implementation some way off. However, once in place, the regulatory changes should pave the way for Jordan’s banks to capitalise on an economy that is gaining in confidence.

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