AS Jordan comes to the end of another year of sluggish growth Central Bank Governor Ziad Fariz has been chiding the banking sector for its failure to make a greater contribution towards stimulating business activity. His particular complaint has been the reluctance of the banks to reduce lending rates despite the reduction by the Central Bank of Jordan (CBJ) itself of the interest on the their certificates of deposit (CDs) by three percentage points since February. The banks have begun to reduce deposit rates but have not been keen to hand the benefits on to their customers in the form of cheaper lending. Their justification is that they need an improved spread to compensate for a lack of opportunities in other areas.

The slow economy is certainly forcing the banks to work harder for their profits but they are not relying solely on interest-based activity and have been busy introducing new products, including bonds and new consumer services. The Export & Finance Bank and Cairo Amman Bank have led the way on bond issues, but almost all banks have joined the competition for consumer money by offering easier, if not cheaper, lending for cars and other consumer items. They have also been introducing a growing range of card-based services. 'Even the Arab Bank is competing now, doing more retail and even personal loans,' says one banker.

Jordan Investment & Finance Bank general manager Basil Jardaneh says with a slowdown in government spending, corporate finance has become more difficult and there is a general trend towards consumer credit. 'Our philosophy was to concentrate on corporate financing but now we are moving to a corporate/retail balance,' he says.

CBJ deputy governor Ahmed Abdul Fattah acknowledges the general lack of demand for credit in the market but says margins are still high and if there is nothing else available the CBJ's CDs and overnight window provide a good outlet for excess liquidity. 'It is not a huge market,' he says. 'And the banks would still do better at 12-13 per cent on lending than 9 per cent with the CBJ but it does provide an excess reserve.'

Jardaneh does see new opportunities for the banks coming from the government's privatisation programme. He cites the new business already generated by private telecommunications players, the prospects offered by the privately- financed Aqaba Railways Corporation expansion and the upcoming independent power project (IPP) as examples of new opportunities from which all the banks can hope to benefit.

Despite the challenging background, Arab Bank regional manager Mifleh Akel considers the gloomy outlook portrayed by Moody's Investor Service in a June report on the sector to be overstated. Moody's suggested that economic slowdown was affecting asset quality and that the banks, excluding Arab Bank which has only a small proportion of its assets in Jordan, would be forced to reschedule some of their credits and increase provisions. Says Akel, 'We know we have a slowdown in the economy and there is some asset quality deterioration but it is not significant, the banks are well provisioned and the system is solid and well supervised.'

Not all the banks are happy with the tight CBJ supervision and some would prefer to see provisions decided between the banks and their auditors, but Abdul Fattah is convinced that the CBJ is pursuing the correct approach. 'We are applying international standards,' he says. 'We now require the banks and their auditors to comply strictly and auditors must provide a certificate to say provisions are adequate.'

Banks could face even tighter regulation once a long-awaited new banking law comes into effect. The law, which has been in preparation for the past five years, gives the CBJ the authority to interfere in the choice of bank board and managers, and contains new provisions covering the concentration of risk. Coming in tandem with the new law will be the creation of a Depositors Insurance Company. Abdul Fattah points out that, contrary to common assumptions in Jordan, the CBJ is not required by law to protect depositors in the case of a bank failure although it did step into the case of Jordan's largest-ever bank collapse, that of Petra Bank in the 1980s.

'We want to avoid the idea that the CBJ guarantees deposits so we are creating the new company which be responsible for paying up to JD 10,000 ($14,100) to depositors in any case of bank failure. We want to protect the small depositors who make up 95 per cent of the total,' he says.

Another key provision of the new law is greater transparency regarding licences, which in essence means that if a new bank meets the requirements it can get a licence. This does not necessarily mean that the CBJ is keen to see new banks setting up. The law will also give it the power to force the merger of an existing bank if its thinks its condition or conduct could have an adverse affect on the interests of the sector at large.

Abdul Fattah says it is also important for the banks to be aware that, once Jordan joins the World Trade Organisation (WTO), the sector will be open to new competition and bigger banks will clearly have an advantage. An early sign came in October when Lebanon's Societe Generale Libano-Europeenne de Banque (SGLEB) took a 35 per cent stake in the Middle East Investment Bank through the injection ofJD 5 million ($7 million) in capital.

Arab Bank's Akel champions the idea of mergers. He believes all local banks will increasingly come under pressure, not just from bigger international banks, but from other financial institutions. 'There is already competition for deposits from asset managers and there are more bonds in the market,' says Akel. 'They are eating our lunch and it is the smaller banks that are more vulnerable.'