JORDAN'S banks have been smartening up in anticipation of better times ahead and key steps have been taken in the past two months to liberalise the sector. But now that Cinderella is dressed and ready to go, someone seems to have cancelled the ball - Jordan's domestic economy is limping while the stalled peace process is doing nothing to encourage regional projects and trade.

This unpromising outlook has not meant business is bad for individual banks in the short term. Eight of the 14 commercial banks boosted profits in 1996, while six out of the eight banks to have published provisional figures for the first half of this year also show higher profits. But the head of merchant banking at the Arab Bank, Mufleh Akel, believes that overall profits in the banking sector will decline in 1997. 'Jordan's banks are solid and liquid,' he says, 'but they have high deposits which they have not repriced and there is little demand for credit so 1997 probably won't be as profitable as 1996.'

Arab Bank itself is likely to run against this trend, however. The bank dominates the local market with close to two-thirds of deposits and about 40 per cent of all business, and its international presence is expanding steadily. Arab Bank is also preparing to launch itself into the Islamic banking market in Jordan through a wholly-owned subsidiary, the JD 40 million Arab Islamic International Bank (AIIB). Arab Bank took over the licence of the collapsed Amman Bank for Investments (ABI), which was put under the custody of the Central Bank of Jordan in March 1997 and is turning it into AIIB.

The new bank will provide the first direct competition for Jordan Islamic Bank (JIB) but as the demand for Islamic banking is growing, the advent of AIIB should stimulate the sector rather than weaken JIB. 'It is a major move,' says one local banker, 'and will bring strength and reputation to the Islamic banking sector.'

While the Arab Bank remains the giant, the revamped Housing Bank (HB) is giving it a run for the money. Since the Housing Bank law was repealed earlier this year HB has started to operate as a fully commercial entity. It has already doubled its capital to JD 50 million and in July it received an overwhelming response from Arab shareholders for a private offering of 25 million shares.

Buyers included the Libyan Arab Foreign Bank and Khaled Bin Mahfouz of Saudi Arabia, each taking 7.5 million shares. The Kuwait Real Estate Company snapped up 8.5 million shares, lifting its holding to 27.5 per cent. The sale attracted $200 million in foreign investment into Jordan and has boosted HB's liquidity by JD 135 million.

Kuwaiti investors have also restored their stake in the Jordan Kuwait Bank while Philadelphia Investment Bank (PIB) has succeeded in attracting the interest of Saudi Arabia's Prince Alwaleed Bin Talal Bin Abdul Aziz. PIB general manager Nimr Al-Shaka says that Saudi Arabian investors, including the prince, will take 60 per cent and local investors 40 per cent of a private placement which will boost the bank's capital from JD 10 million to JD 20 million.

Al-Shaka says Jordanian banks have had to market themselves heavily to meet a Central Bank of Jordan (CBJ) requirement that they increase their capital to a minimum of JD 20 million. But he adds that foreign investors have been keen to buy because the banks are sound and the Jordanian economy is moving in the right direction. The involvement of Arab investors in the three banks is being welcomed as a sign of an improvement in relations between Jordan and some of its wealthy neighbours.

Mergers are another option. This year the Jordan National Bank has become the fourth largest local institution with total assets of JD 652 million, following its merger with the Business Bank. Other banks have considered mergers but there have been no concrete developments so far.

Bankers are more concerned by the sorry state of the domestic and regional business climate. They have done well from a high interest rate differential for the past couple of years but interest rates are finally coming down. There is also a recession in Jordan which is obliging the banks to raise their loan loss provisions. In addition, there is a shortage of quality lending opportunities.

Official moves to liberalise Jordan's economy and stimulate investment should help. 'The government is moving faster than ever on reforms,' says Export and Finance Bank chairman Ali Al-Husry. 'Subsidies are being reduced faster - cement, taxi fares, fruit and vegetables - and the scrapping of the 50 per cent ceiling on foreign ownership of most publicly listed stocks have all been done in recent months.'

To the delight of the banking sector the CBJ lifted all controls on foreign currency transactions at the end of June. This included scrapping the ceiling on local foreign currency deposits, removing restrictions on the amounts transferred abroad by Jordanians for personal use and lifting all barriers to the movement of capital for investment purposes.

'It is a major move for the whole country and has boosted confidence in the system. We can see local money coming back and foreign investors are happy,' says Al-Husry.

One of the first banks to take advantage of the removal of controls was the Arab Jordan Investment Bank (AJIB) which in August scored a first for a Jordanian bank with the issue of an $8 million certificate of deposit. Like most Jordanian banks, AJIB has no shortage of foreign exchange but it is all on short-term deposit. 'We were looking ahead to the need for medium to long-term forex lending,' says AJIB foreign relations manager Said Budeiri. 'And we thought it would be a positive move to tap the market for a small amount as we may go back later for larger amounts.'

While Jordan's banks are showing themselves able to take advantage of the new opportunities offered by liberalisation, the government has managed to blunt the impact of its reform efforts by a hesitant implementation of the new measures. The peace process which gave rise to such hopes barely three years ago has also dampened expectations. Without a marked change in the atmosphere there is every reason to expect a harder year ahead for all the banks.