JORDAN'S banks face more demanding conditions this year after returning respectable if unexciting results in 1994. Much of the pressure is coming from the Central Bank of Jordan (CBJ) which is trying to strengthen the sector. As Jordan anticipates the economic impact of a regional peace settlement, its innumerable small banks are being urged to merge.

Results for 14 of the 16 local commercial and investment banks show seven posting improved results in 1994 while seven saw their profits fall. Two banks have yet to release any figures. Last year could not match 1993 with its record demand for credit and a booming financial market but 1994 was still a good year, with a 16 per cent growth in credit facilities.

Those banks that concentrate on commercial activity were best placed to profit from the strong demand for credit and were the winners in profit terms. Banks with a heavy commitment to the local financial market paid the price of its decline.

Little has changed in the year to date. Credit demand is still high and the financial market remains depressed. But bankers have other issues to ponder. A deadline of early 1997 for all local banks to raise their capital to JD 20 million is drawing closer. And prudential measures by the CBJ, which has imposed credit ceilings and higher interest rates, are putting profit targets under pressure. Local observers see the CBJ measures as part of a strategy, direct and indirect, to encourage mergers and reduce the number of banks while building up the strength of the sector.

Little and large

Jordan's banking community is clearly divided into the little and the large. The sector is dominated by the large institutions which include Arab Bank, the Housing Bank and the Jordan Islamic Bank, which are complemented by a mixed group of small banks.

Only two banks - Jordan Gulf Bank and the Arab Bank - already meet the CBJ's new capital requirement. Jordan Gulf was recapitalised at JD 20 million in 1994 and, following a merger with the Jordanian branches of Al-Mashreq bank, posted a profit after tax for the year of JD 1.6 million.

The Arab Bank, with a capital of JD 44 million and assets of JD 8.3 billion, is very much in a class of its own. It has always played a dominant role in Jordanian banking and has every intention of maintaining that position. 'We will always try to have at least one third of the market in deposits and facilities,' says senior manager Tewfick Al-Khalil.

Arab Bank has a continually expanding international network which will always set it apart from its domestic rivals. The opening of a branch in Chile in August is the latest international initiative and Arab Bank's first foray into the expanding Latin American market. The bank is also creating a new management structure to support an expansion into global investment banking.

The Housing Bank has already announced plans to raise its capital from JD 12 million to JD 25 million by the end of this year, drawing JD 6 million from a capitalisation of voluntary reserves while raising the rest from a new share issue. Jordan Islamic Bank already has a capital of JD 15 million and, as the only Islamic bank, has no obvious suitor in the merger market.

The smaller banks have mixed views about increasing their capital. Many are expected to defend their independence fiercely, employing a mixture of capitalising reserves and new share issues to meet the JD 20 million requirement. A number of banks are family-owned enterprises and are part of a wider conglomeration of business activities that embrace industries, services and trade. A merger of such structures, if the banks cannot continue to operate as independent entities, would be an untidy business.

Arab Jordan Investment Bank (AJIB) senior deputy general manager Hani Al-Qadi says there are good reasons for wanting to stay solo. 'Mergers are a good option only if there is a certain synergy between two companies and most small banks in Jordan are similar.' Al Qadi disagrees with the apparent Central Bank view that bigger is better. 'The problem for small banks comes when they try to challenge the majors and do everything,' he says, 'but a well-managed small bank can also create its own niche and be master of an area.' AJIB already has the agreement of its shareholders to capitalise JD 5 million of reserves and make a JD 5 million share issue.

The CBJ is using the carrot as well as the stick, offering incentives to encourage banks to merge. These include preferential rediscount rates, lower interest on credit advances for exports, lowest possible rates for cash reserves on customer deposits and the allocation of a commercial bank licence to two investment banks that merge. For Business Bank general manager and deputy chairman Wasef Azar, such measures provide a sufficient incentive and he hopes to conclude a merger agreement within the next six months.

Containing credit

Like many other bankers Azar is less happy on the issue of credit ceilings. The CBJ has revised earlier ceilings that limited direct credit to 10 per cent of a bank's capital and reserves but has now imposed strict limits on lending to an individual or group of individuals. CBJ governor Mohammed Nabulsi insists that the limits are simply a question of prudent banking and conform with common international standards. He is taking the ceilings very seriously and any bank lending in excess of the limits will have to deposit an equivalent amount, interest free, with the central bank.

Business Bank's Azar believes the credit limits are part of the process of pushing banks to merge and are making life difficult for small banks. 'As the Business Bank we had some very important and very active clients and the restrictions make it very difficult for us to serve them,' he says. Azar feels the credit measure would have been fairer if they had been introduced after the capital increase. Nabulsi has little sympathy for the banks' complaints. 'Some banks have overlent to certain companies,' he says, 'I don't care about the customer, I care about prudent banking.'

Bankers are also concerned at Jordan's rising interest rates. Jordan Investment and Finance Bank deputy general manager Radwan Darwish anticipates that 1995 will be a tougher year for all of Jordan's banks as interest rate margins continue to narrow. 'Interest on deposits is going up,' says Darwish, 'but customers are not willing to pay higher rates. This will squeeze returns and banks will have to find other channels for profit.'

Al-Qadi believes that the solution for smaller banks is to find a niche rather than try to compete with the major banks. 'If as a small bank you want to compete in extending loans to the cement or the phosphate company you will have to pay top rates to attract deposits and undercut on the credit side and in the end you will be cooked,' he says.

Not all the news and views are so grim, however. Bankers have welcomed the prospect that the CBJ, amid moves to liberalise the market, will allow lending in foreign exchange. About 40 per cent of bank deposits are in foreign currency but there has been limited scope to use them. There has been no formal announcement of a change in the lending rules but Nabulsi has made it clear that foreign exchange will only be available for productive projects and not for the purchase of consumer goods.

Foreign banks, in particular, are pleased that such a reform may be in the offing. Many foreign banks are chafing at restrictions that they feel are motivated by unjustified fears that their international connections give them an unfair advantage over local banks. They have been requested, though not obliged, to increase their capital to JD 10 million and Nabulsi is making it clear that their credit limits will also be tied to capital levels.

Amman's bankers are already facing changes to the way they have done their business for decades. The impact that the changes will have on the structure of this small but diverse community is less clear.

Pam Dougherty