Jordan’s banking sector, comprising 23 banks with total assets of $42.9bn, has remained stable despite the global financial crisis. “When the crisis struck in the last quarter of 2008, alarm bells began ringing and all banks started making provisions,” says Haethum Buttikhi, assistant general manager of retail banking at Jordan Kuwait Bank.

“However, in retrospect, the expectations of the degree to which the banks would be impacted were far worse than what has actually happened to date.”

Indeed, liquidity in the kingdom’s banking sector is good, with deposits at its 23 banks currently standing at a combined $26.8bn.

This is largely due to the kingdom’s limited integration with global financial markets, which has helped insulate it from the sub-prime debt crisis that has affected many US and European banks.

The speed with which the Central Bank of Jordan (CBJ) acted to address the need for liquidity also helped mitigate the effects of the global crisis on the country’s banks.

With the government’s fiscal easing - stimulating the economy by injecting public cash - constrained by its growing budget deficit, which was $490.1m over the first five months of this year, the importance of monetary policy and the CBJ’s policies has come to the fore.

Damage control

“What monetary policy can do, and seems to have achieved in Jordan, is to maintain a sound banking system through the right configuration of interest rates, inflation rates and exchange rates,” says Umayya Toukan, governor of the CBJ.

Since the onset of the crisis, the CBJ has introduced a raft of measures to shore up its banking sector, including reducing the compulsory reserve requirement - the proportion of a bank’s assets that must be held in cash - from 10 per cent to 7 per cent.

It has also reduced interest rates by 150 basis points to 3 per cent, compared with the 1 per cent rate for the Bank of England and a range of 0-0.25 per cent for the US Federal Reserve, allowing banks to borrow money at a lower rate.

Arguably, its boldest move to shore up the financial sector was the announcement in October 2008 of a full guarantee of all bank deposits until the end of 2009. This has played a crucial role in preserving them, but has also played a key role in attracting new deposits.

Indeed, the deposit guarantee, combined with the higher interest rate on the Jordanian dinar compared with the rate on the dollar, has encouraged customers to switch their deposits into the Jordanian currency.

Today, deposits in Jordanian dinars stand at $20.6bn, up from $18.7bn at the end of 2008. By contrast, foreign currency deposits now stand at $6.3bn compared with $6.73bn at the end of 2008.

“This is important underlying evidence of a growing confidence in the Jordanian dinar as a savings instrument,” says Toukan.

Undoubtedly, the CBJ’s intervention has been hugely beneficial. However, the banking system faces some risks. In the Banking Industry Country Risk Assessment: Jordan report published in July this year, ratings agency Standard & Poor’s ranks Jordan’s banking system in group eight out of 10 groups in its global Banking Industry Country Risk Assessment framework, where one is the strongest.

Market slump

In particular, the slump in the real estate market, where trading activity has dropped by 34.3 per cent in the first five months of 2009 to JD1.63bn ($2.92bn) from JD2.47bn for the same period in 2008, is a cause for concern.

Although none of the banks has exceeded the CBJ’s mandatory 20 per cent loan-to-deposit ratio limit on exposure to the real estate sector - the average exposure to the sector stands at 15-17 per cent - growing defaults on real estate poses one of the biggest risks for Jordan’s banks.

Michel Marto, chairman of local retail bank Housing Bank of Trade & Finance, (HBTF), predicts that non-performing loans will increasingly affect Jordanian banks this year.

“I have already noticed businesses and clients being unable to meet their payments because of the slowdown in trading,” says Marto. “So banks are going to have to make provisions for an increase in non-performing loans.”

Although Jordanian banks remain profit-able, they reported some sharp declines in profits in the first quarter of this year, led by HBTF and Arab Bank, which account for more than half of the kingdom’s total banking assets of $42.9bn.

HBTF’s net profit dropped by 34.9 per cent to $27.15m compared with $41.73m for the same period in 2008, while Arab Bank’s first-quarter profits fell by 21 per cent to $216m, compared with $272m last year.

Abdel Hamid Shoman, Arab Bank’s chairman and CEO, says the sharp decline is largely due to the fact the bank earned $37m last year from the sale of Arab Bank branches in Cyprus. But even taking this $37m into account, the difference in profits is $19m, equivalent to an 8 per cent drop, which is still significant.

However, Buttikhi says that although banks’ appetite for lending was largely suppressed between October 2008 and March this year, they are slowly becoming more willing to lend again. “I have noticed their appetite has started to pick up since April, although they remain cautious,” says Buttikhi. “So if a bank was previously happy to finance a project with a 60 per cent debt ratio, it is now closer to a 50:50 ratio.”

Profit predictions

“We would like to be lending more money,” says Marto, who maintains that banks’ policies towards creditworthy customers have not changed. “We would prefer to have clients borrow it at a 7-8 per cent interest rate than place it at the central bank for 2 per cent.”

Marto predicts that Jordan’s banks’ profits will fall by 15-25 per cent in 2009, compared with 2008. But Buttikhi is more optimistic, predicting a 10 per cent sector-wide rise in profits this year.

What have traditionally been regarded as Jordan’s weaknesses - minimal exposure to Western markets and small per capita GDP, of about $4,700 - have helped to mitigate the effects of the downturn and are therefore crucial factors in helping to speed up its recovery.

Marto is cautious about what the next 12 months have in store for Jordan’s banks. “I think the operating environment will start to improve early next year,” he says. “That is when banks will begin to stage a recovery and growth will pick up.”