JORDAN'S banking and finance sector is undergoing a major regulatory shake-up. A new banking law is due to be submitted to the cabinet within the next few weeks and the Jordan Securities Commission (JSC) is getting into its stride, implementing regulations for the financial market and related institutions.

Central Bank of Jordan (CBJ) governor Ziad Fariz says the new law will not contain radical changes, but is rather intended to provide more specific definitions of elements in the existing law - which dates back to 1966 - and to introduce a new level of transparency.

Fariz says the law sets out the entire banking process 'from licensing to liquidation' in a way that will give the CBJ a precise framework within which to monitor the banks and give it more authority to supervise, while leaving the banks with greater responsibility within the management process. 'We are not going to undertake responsibility for management in the banks but at the same time we want the banks to follow the rules set out in the law,' he says.

A crucial addition to the law is the introduction of a depositors insurance law. 'We want to send a clear signal to the banks that they should be responsible for financial soundness,' says Fariz. The law will end CBJ's current role as final guarantor of deposits. Jordan has not had many bank failures but those it has had, notably that of Petra Bank in 1987 and the 1997 collapse of the Amman Bank for Investments (ABI), have been expensive for the CBJ.

The new law will also introduce greater transparency in dealings between banks and their affiliates, subsidiaries and significant clients. 'We want to ensure that they can be regulated and that the rules are not open to differing interpretations,' Fariz says.

The CBJ has already taken a firm line with Jordan's banks by getting them to clean up balance sheets and strengthen provisions for doubtful loans. By the end of May, nine had posted results for 1997, with Arab Bank, Housing Bank, Jordan National Bank, Jordan Kuwait Bank, the Export & Finance Bank and the Industrial Development Bank all showing improved profits. The Islamic Bank for Finance & Investment, Arab Banking Corporation (Jordan) and the Arab Jordan Investment Bank saw profits fall for the year.

Fariz says the new law also clarifies procedures for the licensing of new banks and, in a new departure, the CBJ will have to explain any rejection of a new licence. The law also strengthens incentives for mergers between banks. Some incentives are already in place but have had limited success and the CBJ has made no secret of the fact that it would like to see consolidation in the sector.

Jordan has seen years of arguments over whether it is over-banked, but as some institutions disappear - most recently the Business Bank through a merger with the Jordan National Bank, and the ABI through bankruptcy - new banks emerge. The Islamic International Arab Bank, a subsidiary of the Arab Bank, started operations in 1997 and a new investment bank, Jordan Investment Trust (Jordinvest), is under formation and will bring the total number of local commercial and investment banks to 17.

Distinct from the new law, but part of the process of banking modernisation, is a new cheque clearance system now being developed by the CBJ. It currently takes between four and 10 days to clear a cheque, and studies show that each day saved could release JD 35 million ($50 million) into the system.

The Amman Financial Market (AFM) is also being re-organised as part of a two-year programme launched in September 1997 with the establishment of the Jordan Securities Commission (JSC). The JSC is now responsible for setting up and overseeing the Amman Securities Exchange, which will run the exchange's daily activities, and a central depository body.

It has already issued new, wide-ranging financial disclosure rules and the next stage will be rules governing the licensing of financial services and mutual funds. A programme for the full automation of the AFM and the establishment of a central depository are both due for completion by September 1998.

Market activity is improving but remains sensitive to local and regional political developments. Total trading for 1997 reached JD 355 million ($499 million) - a 43 per cent increase over 1996 - but was still far below the 1993 high of JD 969 million ($1,362 million). Foreign investors have responded to a September 1997 decision by the government to scrap a 50 per cent foreign ownership ceiling on most stocks.

Total non-Jordanian investment in the AFM for the first four months of 1998 was JD 20.2 million ($28.5 million), an improvement on the JD 5.3 million ($7.4 million) figure for the same period in 1997, but not startling. Brokers say the government's apparent confusion over issues such as the sale of its shares in the Jordan Cement Factories Company (JCFC) is discouraging foreign interest.

JSC chairman Michel Marto says he is confident that the new financial disclosure regulations will boost trading substantially. Others are not so sure. Naser al-Amad, managing director of leading brokers United Financial Investments (UFI), says he welcomes improved transparency, but is not convinced it is enough to drive the market up. 'It adds confidence and may attract some foreign investors but it is financial and political factors that affect the market,' he says.

Al-Amad says corporate news for 1997 is good, profits are up over 1996 levels and blue chips are performing well, but the results are being offset by other factors, notably the bad regional picture and the lack of trust in the government. He notes that during 1992-94, when the market was booming, many companies were not actually doing as well as they are now.

Al-Amad feels the government has, unintentionally, harmed the market through its monetary policy and has also failed to make proper use of the market in trying to liquidate its own share holdings. 'The government is ignorant about the AFM and how it works,' he says. 'The sale of JCFC shares is a divestiture of holdings rather than privatisation and could have been done through the market.'

Any new legislation or regulation is unlikely to get an unqualified welcome and local economist Fahed Fanek has already suggested that the new banking law in itself will not prevent bad banking practice or insolvency, but the experience of the ABI suggests the strengthening of Jordan's banking law is needed.