US embassy cable - 05AMMAN538

C O N F I D E N T I A L SECTION 01 OF 04 AMMAN 000538 
 
SIPDIS 
 
TREASURY FOR SHWARZMAN 
 
E.O. 12958: DECL: 01/18/2015 
TAGS: EFIN, PREL, EINV, ECPS, KPRV, JO 
SUBJECT: FIRST NEW BANK LICENSES IN DECADE PROVOKE 
COMPETITION, COMPLAINTS 
 
REF: A. 2004 AMMAN 8133 
     B. AMMAN 9 
     C. 2004 AMMAN 9226 
 
Classified By: Charge d'Affaires David Hale for reasons 1.4 (b) and (d) 
 
1. (SBU) SUMMARY: The past two years have seen the Central 
Bank of Jordan (CBJ) perform an increasingly difficult, but 
so far successful, balancing act.  On the one hand, CBJ has 
remained committed to consolidation of the fragmented 
Jordanian banking sector and resisted pressure from domestic 
magnates seeking licenses for new banks.  On the other hand, 
it has tried to bring innovation to the staid sector by 
approving the applications of three new foreign banking 
licensees.  The new licensees have played the hoped-for role 
of driving change in the sector, selling new products that 
domestic banks have hastened to copy, and provoking an 
innovative plan by a domestic bank that may aid in the 
privatization of Jordan,s postal service.  The resulting 
improvement in competition within the sector and its positive 
knock-on effects have gratified the CBJ, while aiding in some 
of King Abdullah,s political goals; it has also once again 
drawn attention to the nexus between governmental and 
business power in Jordan. END SUMMARY. 
 
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"FOREIGN INVASION" OF THE BANKING SECTOR 
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2. (U) Over the past nine months, Jordan has seen three new 
commercial banks open their doors - the first new banks in 
Jordan in a decade.  The three are all foreign, and are the 
largest and most stable banks in their respective countries. 
National Bank of Kuwait (NBK), which was awarded its license 
in October 2002, began operations in April 2004.  Bank du 
Liban et d,Outre Mer (BLOM), the second-largest bank in 
Lebanon, was awarded its license in August 2003 and began 
operations in November 2004.  Bank Audi, the largest bank in 
Lebanon, was awarded its license in December 2003 and began 
operations in September 2004. 
 
3. (C) The country manager of National Bank of Kuwait, the 
first of the three banks to receive a license, believes that 
political considerations - in particular, King Abdullah,s 
interest in improving relations with Kuwait - drove NBK's 
application through.  Once the precedent had been 
established, however, the CBJ appears to have taken more of 
an activist role in attracting banks to Jordan.  The 
applications of both BLOM and Bank Audi, according to the 
banks, country managers, were sparked by meetings initiated 
by CBJ Governor Umayya Touqan to both banks, CEOs during 
visits to Lebanon by Touqan in 2003.  Prior to this 
prompting, neither bank had considered Jordan as a potential 
target for expansion.  All three banks, country managers 
gave high praise to the speed and ease of the application 
process, handled by the CBJ.  CBJ Deputy Governor Faris 
Sharaf has reinforced this sense of CBJ activism in 
conversations with emboffs, during which he has repeatedly 
stated his dismay with the lack of innovation in the 
Jordanian banking sector and his wish that a new major 
American financial institution would enter the Jordanian 
market. (Citibank, the one American bank active here, 
"behaves like a Jordanian bank," complains Sharaf.) 
 
4. (SBU) Of the three banks, however, only one has really 
made an impact.  NBK and BLOM have proceeded cautiously, 
primarily targeting their natural constituencies - NBK is 
focusing on the business of major Kuwaiti investors in 
Jordan, former Jordanian residents of Kuwait, and the 2500 
Kuwaiti students in Jordan,s universities, while BLOM 
appears to have had success in serving import/export 
merchants operating between Jordan and Lebanon.  Bank Audi, 
on the other hand, has been much more aggressive in its 
approach.  The bank, operating here for only four months, 
already has opened four branches in Amman, with two more 
under construction and three in the planning stage in Aqaba, 
Zarqa, and Irbid.  It has a balance sheet currently amounting 
to JD 119 million ($164 million), and has targeted growth to 
JD270 million ($381 million) in deposits by the end of 2005 
and JD 400 million ($564 million) by the end of 2006.  The 
latter figure, if achieved, could place Bank Audi within the 
top ten of 22 banks active in Jordan by size - a significant 
achievement, if realized, for a three-year-old bank. 
 
5. (SBU) More significant still has been Bank Audi,s strong 
focus on retail and its innovation in offering services new 
to Jordan.  Aside from the bank,s quick rollout of its 
branch network, Bank Audi has launched a major publicity 
campaign announcing its presence and the services it offers, 
and is looking to co-brand several financial service-related 
products.  It has also cut special deals with certain 
customers, such as the University of Jordan, that might serve 
as a conduit to wider awareness of the Bank Audi brand.  In 
the introduction of services, Bank Audi has been similarly 
dynamic and quite influential - its introduction of 
bancassurance (the sale of specialized insurance products by 
banks directly to their customers) to the Jordanian market 
has spurred the introduction of similar products by nine 
other Jordanian banks, and its introduction of several 
e-banking services new to Jordan has been followed as well, 
though at slower rates.  CBJ Deputy Governor Sharaf has 
confided to emboffs his pleasure at Bank Audi,s performance 
to date. 
 
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A DOMESTIC BANK RESPONDS WITH INNOVATION... 
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6. (SBU) The better-run among the Jordanian incumbents are 
responding aggressively to this challenge, taking actions 
that will have ramifications outside the banking sector. 
Exemplary of this trend is Jordan-Kuwait Bank (JKB), 
Jordan,s seventh-largest (but second-most profitable) bank, 
which has proposed a joint venture with Jordan,s 
soon-to-be-privatized postal service.  The plan, initially 
proposed by JKB to the postal company in December 2003, would 
allow JKB to base employees, and in some cases rent space to 
set up offices, in 43 post offices throughout Jordan.  This 
would more than double the coverage of JKB, which currently 
has 34 branches nationwide, at costs potentially around 25 
percent of what JKB might pay were it to build out an 
equivalent number of branches.  (NOTE: The amount of money 
changing hands is not negligible for the postal service, 
however - Jordan Post, which last year had approximately 
$4.25 million in losses on revenues of approximately $10 
million and has come under intense pressure to create new 
profit centers in order to become more attractive to 
potential strategic partners, could expect to make close to 
$1.5 million annually on the deal.) The plan would also give 
JKB the second-largest branch network in Jordan, after that 
of the Housing Bank.  Over 350 currently active offices of 
Jordan Post would remain unoccupied by JKB offices or 
employees, and would be open to any other bank that might 
wish to use them, though JKB would retain right of first 
refusal on any post offices that might be opened in the 
future. 
 
7. (C) Perhaps inevitably, the plan has spurred criticism 
from banks slower to the draw.  A whispering campaign linking 
the deal to a "corrupt bargain" has already begun, officials 
in Jordan,s Ministry of ICT (to which Jordan Post reports) 
have become increasingly circumspect in their statements on 
the issue, and JKB has rushed to make the plan a fait 
accompli.  The rumors center around JKB,s Chairman, 
Abdulkarim al-Kabariti, who was Prime Minister from 1996-1997 
after serving in a variety of ministerial positions 
stretching back to the 1980s, and who supposedly used his 
residual connections in the GOJ to get a sweetheart deal with 
the state-owned enterprise. The CBJ has not ruled on whether 
this would be acceptable, and there is evidence that an 
ad-hoc coalition of rival banks is quietly pressing the CBJ 
to refuse permission.  At least one banker doubts that JKB 
could successfully manage a venture into the highly 
specialized field of "postal banking."  Nonetheless, JKB 
plans to press on with its plan and seems confident that the 
venture - already in place in the form of a pilot program - 
will indeed be approved by the CBJ. 
 
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...WHILE THOSE LEFT OUT COMPLAIN AND JOSTLE FOR POSITION 
--------------------------------------------- ----------- 
 
8. (SBU) While the CBJ,s choices in licensees appears to 
have paid off, however, these choices have created some 
tension in Jordanian financial circles.  2004 has been a very 
good year for the banking sector.  Even previously troubled 
banks have seen their balance sheets improve, and banks 
across the board have seen their stocks rise dramatically in 
the past year,s "tide that lifts all boats."  The past 1 1/2 
years, performance has produced considerable pent-up demand 
for new licenses.  The CBJ,s longstanding refusal to offer 
new banking licenses has led to complaints about the CBJ,s 
supposed preference of the interests of foreigners over those 
of Jordanians. 
 
9. (SBU) The intense interest surrounding licensing can be 
clearly perceived in the case of Jordan,s Industrial 
Development Bank (IDB).  Originally licensed in 1965 under a 
special law, the bank was a quasi-governmental body with a 
limited mandate.  The terms of its license allow it only to 
make loans to two defined types of borrowers: investors in 
industrial projects and investors in tourism projects.  The 
bank,s balance sheet of JD 111 million ($157 million) is 
small even by the standards of Jordanian banks, and deposits 
represent less than a third of overall liabilities.  Over the 
past year, however, the bank has become an increasingly 
attractive target for wannabe banking magnates, due to the 
freeze on new licenses.  The bank has filed for a change in 
its license to that of a normal commercial bank, and bank 
president Marwan Awad claims to be in contact with three 
consortia of willing investors competing for the IDB,s hand. 
 Since its bid to join the "normal" banking sector became 
public, IDB,s stock has been consistently among the top five 
most traded stocks on the Amman Stock Exchange, as wild 
rumors of the CBJ,s willingness or unwillingness to change 
IDB,s license cause share prices to veer sharply up or down, 
respectively. 
 
10. (C) Despite the interest - and pressure - from the 
private sector, however, the CBJ seems unwilling to relent in 
its hard line against more licenses.  It has even scored a 
small blow for consolidation as Jordan National Bank, the 
country,s third-largest, announced plans earlier this week 
to take over the moribund Philadelphia Investment Bank.  This 
step, while perhaps not quite as salutary as a CBJ decision 
to simply let the bank fail, at least belied earlier 
suggestions from the CBJ that it might allow the bank to be 
re-launched (Ref A). 
 
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COMMENT 
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11. (C) The sour grapes of would-be financiers aside, the CBJ 
appears to have succeeded so far in its bid to spur 
innovation and inter-bank competition while for the most part 
holding the line on further fragmentation of the sector. 
Nonetheless, the awarding of the new licenses represents at 
least a partial swing towards a less conservative approach 
towards CBJ management of the banking sector through 
licensing, as memories of the 2002 Shmaileh scandal - and the 
even more devastating 1989 Petra Bank collapse that preceded 
it - fade and the whiff of panic that pervaded the sector 
prior to the war in Iraq dissipates.  This shift is not a 
negative development; use of the restriction of bank 
licensing is a very blunt tool for prevention of bank 
failures, a job for which the auditors of the CBJ,s Banking 
Supervision Department should by now be well-enough equipped. 
 Nor are the licenses that have been awarded particularly 
risky - each of the parent banks of the three new licensees 
is larger than even Arab Bank, Jordan,s 800-pound gorilla. 
And Jordan,s banking sector has been held back at least as 
much by its provincial attitudes as by its banks, lack of 
size. 
 
12. (C) It is surely no coincidence that the home countries 
of the three new licensees have been increasingly prominent 
investors and strategic partners in the Jordanian economy. 
In addition to Jordan,s hopes for Kuwaiti grant aid (ref B), 
Kuwaiti investors own part or all of two of Jordan,s four 
mobile telephony networks, are major investors in several 
Jordanian banks (including JKB), and are increasingly deeply 
involved in Jordan,s retail sector.  Lebanon - especially 
former PM Rafiq al-Hariri and associated interests - has also 
been an increasingly intrusive force in the Jordanian economy 
and polity.  Hariri (whose Palestinian wife grew up in Amman) 
now controls the largest single stake in Jordan,s flagship 
Arab Bank, Hariri's Saudi Oger contracting firm has been 
increasingly in evidence in competitively bidding for major 
Jordanian infrastructure projects such as the Disi Water 
Project, and Jordan,s Mawarid (ref C) has received 
substantial technical support from Lebanon,s Solidere, to 
name but a few examples of heightened Lebanese activity in 
Jordan in recent times. 
 
13. (C) JKB,s response to the Bank Audi challenge offers 
both hope for the Jordanian sector and a sobering reminder of 
the structural obstacles facing the promotion of transparency 
in Jordan.  The bank,s plan to cooperate with the Jordan 
Post in facilitating its expansion appears to be a win-win 
deal, helping to expand the bank,s retail network while 
giving the beleaguered postal company a badly-needed source 
of revenue that will help it be a more attractive candidate 
for privatization.  The controversy surrounding the MoICT,s 
approval of the deal appears to be baseless - JKB has 
received nothing more than the standard reward for the first 
mover.  Nonetheless, the whispers reflect a very real trend 
that highlights the overlap between the public and private 
sectors in Jordan.  Of Jordan,s fourteen domestically-based 
commercial banks, six have former ministers as chairmen or 
CEOs.  This is not a new phenomenon; nor is it unique to 
Jordan - all three country managers for the new licensees 
downplayed this trend as simply "part of doing business in 
the Middle East."  Nonetheless, until this situation reverses 
at least in part, it will be difficult for Jordan to credibly 
proclaim itself as a corruption-free society. 
HALE