US embassy cable - 04AMMAN8133

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 008133 
 
SIPDIS 
 
TREASURY FOR DEMOPULOS 
 
E.O. 12958: DECL: 09/28/2009 
TAGS: EFIN, PGOV, JO 
SUBJECT: SHEMAILEH SCANDAL BANKS BACK FROM THE DEAD 
 
REF: A. 2002 AMMAN 687 
 
     B. 2003 AMMAN 793 
 
Classified By: Charge d'Affaires David Hale for reason 1.4 (b) 
 
1. (C) SUMMARY: Jordan is clearing up the final residue of a 
2002 scandal involving hundreds of millions of dollars in 
unsecured bad loans to 31-year-old businessman Majed 
Al-Shemaileh (Ref A).  The Shemaileh fiasco brought down the 
former head of Jordan,s General Intelligence Directorate, 
pushed Jordan National Bank (at the time the country's second 
largest) close to the brink, and, finally, forced two other 
banks into insolvency.  This last legacy is slowly being 
resolved.  Jordan Gulf Bank, which has been renamed Jordan 
Commercial Bank (JCB), has been relaunched and looks to be on 
its way to a relatively successful year.  The other, 
Philadelphia Investment Bank (PIB), is only now beginning to 
generate a pre-launch buzz.  The resurrection of both banks 
demonstrates the current health of the Jordanian economy, but 
runs counter to the GOJ,s stated goal of rationalizing its 
small, fragmented banking industry. END SUMMARY 
 
2. (C) The rebuilding of both JCB and PIB has been a 
root-and-branch affair.  Neither was a healthy bank even 
prior to the Shemaileh scandal.  JCB had been having problems 
as early as the mid-1980s, when it was merged with two other 
failing banks and given a large interest-free loan to help 
partially cover the non-performing loans it was inheriting 
from the other failing banks.  PIB was set up more recently, 
but from the outset, it had a reputation as a bank "for money 
launderers."  Central Bank of Jordan (CBJ) Governor Umayya 
Touqan claims that CBJ inspectors "always knew there were 
problems" in both banks from the early 1990s.  Shemaileh,s 
activities, by contrast, began only in 1996.  Re-launching 
both banks has therefore meant that the GOJ has needed to 
deal with preexisting problems in both banks, as well as 
addressing the corporate governance issues that led to the 
scandal itself. 
 
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JCB SPREADS ITS WINGS 
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3. (SBU) The JCB relaunch has not been an easy process.  It 
has been possible only through substantial assistance from 
governmental and quasi-governmental bodies, a reminder of how 
invested the GOJ is in the saving of this bank.  A 
substantial GOJ discount on an outstanding interest-free loan 
from the CBJ, dating to 1985 and originally intended to cover 
lost interest from JCB,s non-performing loans, allowed JCB 
to rid itself of JD 41 million (U.S.$58 million) in debt to 
the GOJ for a price of JD 9 million (U.S.$13 million).  In 
addition, JCB has received a new loan of JD 21 million 
(U.S.$30 million) interest-free from the CBJ.  An injection 
of JD 30 million (U.S.$42 million) in new capital, anchored 
by Jordan,s Social Security Corporation (SSC) but also 
contributed to by several of the bank,s original investors 
(including Saudi magnate Nasser Al-Salih), has strengthened 
the paid-up capital base of the restructured bank and allowed 
it to meet the CBJ minimum capital requirement, which has 
been relaxed for JCB for a period of five years. 
 
4. (SBU) These changes in the balance sheet of JCB and the 
selection of Jawad Hadid, a former Minister of Planning who 
has led three other banks previously and is known as 
something of a turnaround specialist for ailing banks, have 
created substantial market confidence in the new entity.  The 
bank,s stock price has risen to match this new confidence, 
increasing from 1 JD at the time the restructuring plan was 
announced to 1.8 JD today.  The SSC, which now holds 25 
percent of the bank and will have two representatives on the 
bank,s board of directors, views the 80% return on its 
investment to date as having been a signal success. 
 
5. (SBU) Hadid, whose resigned in August 2003 as head of the 
Social Security Investment Commission (SSIC) in protest at 
political meddling in the SSIC,s investment decisions, might 
disagree with the SSC,s assessment.  If so, however, he is 
showing no sign of such disagreement.  He has ambitious plans 
for JCB to move strongly into the retail market, increasing 
the number of branches (17 already exist).  He also plans to 
set up an investment company within the JCB, and is looking 
to obtain a license either alone or with partners.  JCB is 
enhancing its IT infrastructure as well, and will connect 
even its three West Bank branches electronically to the 
headquarters.  Overall, Hadid believes that on current 
trends, JCB will double the modest JD 2.8 million (US $4 
million) profit that it had set as a goal in the bank,s 
business plan for 2004. 
 
6. (SBU) Hadid also claims that the new structures he has put 
in place will prevent a repetition of the lack of internal 
accountability that brought the bank down.  JCB has brought 
in consultants to analyze the bank,s strengths and areas of 
risk, and has outsourced both its internal audit (the first 
Jordanian bank to do so) and its marketing.  Finally, Hadid 
is putting in place strong measures to separate the Board 
from the management of the bank and thereby reduce the scope 
for conflicts of interest. 
 
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MARKET EYES PIB 
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7. (SBU) PIB,s situation differs somewhat from JCB.  Though 
the CBJ initially looked for larger, more financially sound 
institutions to take over both JCB and PIB, it quickly found 
that such banks were reluctant to become involved with either 
bank.  The merger terms of Arab Bank, GOJ,s early candidate 
as a white knight for JCB, were "ridiculous," according to 
Hadid, and the potential for success within JCB was great 
enough that with some painful restructuring, it could and did 
become attractive to investors and the Arab Bank option could 
be dropped. 
 
8. (C) The condition of PIB, on the other hand, is so bad 
that it has attracted very little interest from potential 
investors or buyers, leaving its hopes over the past year 
largely pinned on negotiations between the GOJ and the 
Housing Bank.  Housing Bank Executive Director Ahmed 
Abdel-Fattah still claims that the bank will take over PIB if 
the GOJ,s terms are good enough, and private sector bankers 
interested in the fate of PIB, such as Hadid, are not 
discounting this possibility.  However, both CBJ Governor 
Touqan and Deputy Governor Faris Sharaf have indicated in 
recent meetings with Emboffs their inclination to 
recapitalize the bank in a manner similar to that employed in 
the case of JCB.  This inclination appears to have leaked out 
recently, and PIB,s stock price has risen dramatically over 
the past month. 
 
9. (C) Nonetheless, considerable uncertainty remains.  It 
would take a massive infusion of cash to put PIB anywhere 
near the minimum capital requirement, and it would be hard to 
find a partner willing to put so much cash into a bank with a 
reputation and balance sheet like PIB,s. Hadid says that the 
CBJ is currently exerting strong efforts to collect PIB,s JD 
100 million (U.S.$141 million) in outstanding debts, with a 
goal of getting 60 percent, which it hopes will in turn 
attract other investors.  But such a strategy is unlikely to 
gain the necessary assets in the short run.  The CBJ 
officials, recent statements to Emboffs about planning a 
recapitalization for PIB would only make sense if the CBJ 
plans to drastically reduce the minimum capital requirement 
for PIB or if the SSC plans to anchor this new 
recapitalization as it did for JCB. 
 
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COMMENT 
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10. (C) While the resurrection of JCB seems at this point a 
substantial success and the market seems optimistic about 
prospects for a re-launch of PIB, the fates of the two banks 
represent the triumph of expediency over principle in the 
Jordanian banking sector.  Jordan,s bank regulators and 
sectoral analysts have long complained about the 
fragmentation of the sector, where almost thirty small banks 
fight to increase their share of a small market in which over 
two-thirds of the assets are held by the three largest banks. 
 In 2002, the CBJ raised the minimum capital requirement to 
JD 40 million (U.S.$56 million) with the unstated purpose of 
forcing consolidation in the sector as banks would merge to 
avoid dissolution (Ref B).  The application of this rule has 
already been repeatedly delayed, and no banks have merged as 
yet.  The relaxation of these rules in the case of JCB is a 
sign to other banks not to take them seriously. 
 
11. (C) If the bailout/recapitalization of Jordan Gulf Bank 
was unwelcome news to those who had hoped for a strong GOJ 
signal that the cycle of moral hazard was over, a PIB bailout 
will be even more unwelcome news.  One of the smallest and 
weakest banks in Jordan well before the Shemaileh scandal, 
PIB is known in the banking community as a bank with corrupt 
staff and a dodgy overall reputation.  Its assets are so 
discounted that they are practically nonexistent even today. 
If the GOJ cannot let PIB fail, it cannot let any bank fail. 
And if the market knows that the GOJ will never let an ailing 
bank die, the impetus for banks to consolidate, increase 
internal controls, and improve their business models will be 
that much weaker. 
HALE