Jordan: Competition time

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Competition looks set to continue heating up in the Islamic finance sector, with the latest entrant to the market, Saudi giant Al Rajhi Bank, opening for business in late March. As new players work expand their reach, sharia-compliant financial services will become increasingly accessible for Jordanian customers, while meeting the Basel III capital adequacy and risk-management requirements will remain a top priority for the banks.

Jordan Islamic Bank (JIB), the country’s oldest sharia-compliant lender, having been set up in 1978, is now competing with recent arrivals Jordan Dubai Islamic Bank (JDIB) and Al Rajhi, along with Islamic International Arab Bank, which was the second sharia-compliant lender to join the market, back in 1998.

In 2009 Central Bank of Jordan (CBJ) licensed three banks to enter the country – JDIB, National Bank of Abu Dhabi and Al Rajhi. CBJ has welcomed the expansion of the Islamic banking sector. “It is a response to market demand and we wish to help the sector grow and develop the market,” said the CBJ’s deputy governor, Kholoud Saqqaf. In an address to the First Islamic Finance & Investment Forum for the Middle East in Amman in March 2010, she suggested that the issuance of new Islamic banking licences “would allow for the presence of foreign Islamic banking players to act as a bridge between Jordan and other global Islamic financial markets, increasing the potential to tap new markets and growth opportunities”.

The entry of new players into the Jordanian markets reflects the positive long-term outlook for the expansion of Islamic financial services in the kingdom. Speaking to OBG in 2010, Salem Burqan, the CEO of Islamic International Arab Bank, cited several factors as contributing to the spread of Islamic financial services in Jordan, including increasing devotion among the population, economic growth, improved availability and accessibility of Islamic products, and the repercussions of the global financial crisis.

At present, JIB is the dominant player in the Islamic segment. The bank recorded net profits before tax of JD40.7m ($57.4m) at the end of fiscal year 2010 compared to JD38.9m ($54.9m) the year before. Total client deposits increased by 21.6% to JD2.34bn ($3.3bn) at end-2010, up from JD1.93bn ($2.72bn) in 2009. In February 2010 the Islamic International Rating Agency maintained JIB’s sharia quality rating of AA, citing the management and staff’s level of sharia knowledge and experience.

Of the two new Islamic banks licensed in 2009, JDIB was the first to get under way, beginning operations in January 2010 with its first branch in Amman and paid-up capital of JD50m ($70.4m). The bank quickly grew from there, opening its second branch in March 2010 and several more thereafter. In October 2010 the bank raised its paid-up capital to JD75m ($105.6m).

In May 2010 JDIB announced that it had generated total revenue of JD1.2m ($1.7m) between January and the end of April, mainly from a portfolio of ijara financing, murabaha, international wakala investment and its financial securities portfolio. The JDIB’s assets had increased by JD41m ($57.7m), with the total reaching JD178m ($250.5m). During the same period, total customer investment deposits increased to JD48m ($67.7m).

JDIB introduced several new products and services to the market during 2010, including auto and home finance programmes. In January 2011 the bank signed an agreement with Visa to offer credit cards and loans to customers, and it is currently studying the possibility of issuing sukuk (Islamic bonds) in the local market.

Founded in 1957, Al Rajhi is one of the largest Islamic banks in the world, with total assets of $45.87bn and paid-up capital of $4bn. The bank’s net profit for 2011 has been forecast at $1.97bn, up from $1.6bn in 2010. For Al Rajhi Jordan is the second country after Malaysia that it has focused on as part of its plans for foreign expansion. After a few delays, the bank opened two branches in Jordan on March 23, 2011. The bank has said it will have five branches in Jordan within one year of opening, and it expects Jordan to become its second-biggest foreign market by the end of the first quarter of 2011.

As the segment expands, however, this will bring with it new challenges, with the shortage of qualified and trained personnel a particular problem, both for the banks themselves as well as the sector regulator. In addition, as with Islamic banks elsewhere, the lack of an internationally standardised set of rules for the industry will remain an issue as well.

While the short-term outlook for the kingdom is somewhat clouded by the ongoing unrest in the region, the long-term fundamentals remain in place for the expansion of Islamic banking, with customers likely to benefit from increasing competition in the segment as players new and old seek to differentiate their offerings and attract new custom.

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