US embassy cable - 03AMMAN1620

UNCLAS SECTION 01 OF 06 AMMAN 001620 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA--MARSHALL MILLS, WON CHANG 
USDOC 4520/ITA/MAC/ONE/COBERG 
EXIM BANK FOR RITA MURRELL 
 
E.O. 12958: N/A 
TAGS: EFIN, EAID, ETRD, JO 
SUBJECT: JORDANIAN BANKS: WILL WEATHER STORM, BUT FACE 
LONG-TERM CHALLENGES 
 
REF: A. A) AMMAN 793 B) JERUSALEM 566 C) JERUSALEM 144 
 
        D) 02 AMMAN 6852 
     B. E) 02 AMMAN 687 
 
SENSITIVE BUT UNCLASSIFIED; NOT FOR INTERNET DISTRIBUTION 
 
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SUMMARY 
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1.  (SBU) While fundamentally sound, the Jordanian banking 
sector faces a number of short- and long-term challenges: 
Exposure to a military conflict with Iraq, a surplus of 
banks, high infrastructure costs, and implementation of 
modern banking and technological advances that are only now 
beginning to take hold.   Having said that, under the 
watchful eye of the Central Bank of Jordan, the sector seems 
primed to weather the coming storm, and may well prosper in a 
post-Saddam environment. 
 
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THE SECTOR IN GENERAL 
--------------------- 
 
2.  (SBU) Dominated by three major players--the Arab Bank 
(REF D), the Housing Bank, and the Jordanian National Bank, 
which account for 73% of the sector's assets (JD15.1 
billion/$21.2 billion)--the Jordanian banking system 
continues to strive to become a healthy, progressive, 
customer focused service industry.  It consists of 21 banks, 
three of them foreign, with 466 branches.  In addition, 
Jordanian banks have 119 branches abroad, 60 of which are in 
the West Bank/Gaza.  Jordanian banks have branches in the 
U.S., Lebanon, Cyprus, and the Gulf, with pending 
applications in Algeria and Syria.  Most banks recorded 
profits last year at 10% or less, but expect a hard to flat 
year for 2003.  The monthly bulletin of the Central Bank of 
Jordan (CBJ), available at www.cbj.gov.jo, contains timely 
statistical information on the sector. 
 
3.  (SBU) The banking sector has recently undergone 
consolidation, as the CBJ has taken over the administration 
of two banks, the Philadelphia Investment Bank and the Jordan 
Gulf Bank, due to mismanagement and losses brought on by the 
banks' exposure to the Shemaileh scandal, in which a 
Jordanian businessman arranged approximately $100 million in 
unsecured loans and subsequently fled the country (REF E). 
Foreign banks do not figure prominently--HSBC, Citibank, and 
the Egyptian Land Bank hold merely 2.4% of the system's 
assets--but do put some pressure on established banks to keep 
up with global innovations in technology and product 
offerings.  There are two Islamic banks in Jordan: the Jordan 
Islamic Bank and the International Arab Islamic Bank, part of 
the Arab Bank Group, accounting for almost 4% of the sector's 
assets.  Owing to an increase in banking awareness, deposits 
in Jordanian banks have grown by an average of 13% per year 
since 1980, from approximately JD700 million ($980 million) 
in 1980 to JD8.1 billion ($11.3 billion) in 2001.  The share 
of bank deposits in the money supply, an indication of a 
country's rate of economic development, has increased to 62% 
last year from 49% in 1993. 
 
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IRAQ EXPOSURE 
------------- 
 
4.  (SBU) Jordanian officials have repeatedly stressed to 
Embassy their concern about the banking sector's exposure to 
Iraq and the possible negative impact on the banking system 
of a military conflict.  Banks' exposure to companies doing 
business with Iraq is approximately $370 million in terms of 
contracts yet to be executed, according to CBJ officials. 
The number three Jordanian National Bank (JNB) in particular 
is most exposed, and four or five smaller banks are also 
exposed to varying degrees.  The CBJ fears that, once a 
conflict begins, OFF-related deliveries to Iraq, much of 
which were perishables, will cease, the contracts will be 
voided, the goods will spoil, and the Jordanian banks will 
hold millions of dollars in what would become nonperforming 
loans.  According to a top CBJ official, the Bank would be 
prepared to provide emergency loans to the JNB or other banks 
that suffered a temporary liquidity crisis because of OFF 
exposure.  He hoped, however, that it would not come to this 
because of the very negative public signal it could send 
about the banking system's integrity, particularly during a 
period of expected political turmoil and with two banks 
already under CBJ control. 
 
5.  (SBU) The CBJ hopes that once a conflict begins, the UN 
will quickly establish new OFF procedures that would allow 
goods be delivered instead to Aqaba, where they could be held 
in a warehouse until hostilities ended and deliveries to Iraq 
could resume.  This would allow Jordanian banks to continue 
to be paid from the OFF account.  We have advised the 
Jordanian government to address this problem with the UN. 
 
6.  (SBU) Nase Khamhawi, President of the Association of 
Jordan Banks, told us he was most concerned over trade 
exposure with Iraq, and said that "many factories are set up 
just to do business with Iraq", and that banks that have 
relationships with these companies would be adversely 
affected by conflict.  Ali al-Hosri, of the Export Finance 
Bank, echoed Khamis's concerns.  He said that his bank was 
also studying alternative points of delivery in Jordan where 
the goods could be stored pending a resolution of 
hostilities.  As early as December, he said, banks were 
working to reduce their potential exposure by not financing 
some contracts as they came up for review.  Zachy Anderson, 
CEO of HSBC Middle East, said foreign banks in the region "do 
virtually no business with Iraq," but said he sensed that 
some local banks would be hurt.  He added, however, that one 
unintended consequence of an Iraqi conflict might be the 
"bursting of the property bubble" in prosperous West Amman, 
given heavy exposure by banks to loans for homes built as 
investment property and the danger of default given adverse 
effects on the Jordanian economy at large in a prolonged 
conflict. 
 
7.  (SBU)  In addition to the trade exposure, CBJ officials 
estimate that there are JD 600 million ($840 million) in 
Iraqi deposits in the Jordanian banking system, with JNB 
again being a leading recipient.  The CBJ has put together a 
plan to ensure that these deposits, which amount to about 7% 
of total deposits, are not precipitously withdrawn during a 
military conflict.  The plan includes freezing accounts of 
the Iraqi government, known front companies, and senior 
officials and carefully monitoring large and suspicious 
movements in other Iraqi accounts. 
 
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MAYBE A RUN, BUT NO PROBLEM 
--------------------------- 
 
8.  (SBU) Most bankers we spoke with expressed optimism that 
the sector would weather any crisis brought on by a war with 
Iraq.  One executive, however, suggested that "it would take 
months for the sector to recover".  He saw a worst case 
scenario in which a total shutdown of airspace would lead to 
hoarding of dollars.  Khamhawi had the opposite view.  He 
said that banks were well-prepared to handle the conflict. 
As in 1991, he and other informal observers opine, there 
would be a "small rush on the banks, maybe for a few days" 
and then customers would return to redeposit the withdrawn 
funds.  CBJ officials believe that the Bank's $3 billion in 
foreign reserves provide a more than adequate cushion to cope 
with any short-term run on Jordanian banks. 
 
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TOO MANY BANKS 
-------------- 
 
9.  (SBU) Among the longer term issues is the "over-banking" 
of Jordan.  With so many branches and bank offices, Jordan 
presently has about one bank per 10,000 people (compared to 
about one per 30,000 in the Gulf).  CBJ Head of Banking 
Supervision Mai Khamis said many of these are weak, small, 
family-run banks that pose a risk to depositors and borrowers 
alike.  To encourage consolidation, the CBJ doubled minimum 
capital requirements in 2002 to JD40 million ($56 million) in 
order to force the merger or acquisition of the weaker banks. 
 She quickly added that the CBJ was not interested in the 
smaller banks combining with one another, making "one big, 
weak bank."  Rather, Khamis said, the CBJ hopes that stronger 
banks take over smaller institutions when "opportunities 
present themselves".  This in turn would lead to savings on 
overhead and operating costs, encourage efficiency and 
increased use of technology, and dilute the conservative 
influence of family-owned banks on a sector that's flush with 
liquidity.  (NOTE: Talks are under way for the acquisition of 
Jordan Gulf Bank by the Arab Bank.  Likewise, the Housing 
Bank is moving to acquire the Philadelphia Investment Bank, 
under CBJ administration since last year.  END NOTE)  Cairo 
Amman Bank has also indicated interest in the possibility of 
merging with one of the smaller banks if a financially-sound 
candidate comes on offer. 
 
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INTEREST RATE SPREAD 
-------------------- 
 
10.  (SBU) One of business people's main complaints is that 
borrowing rates remain relatively high despite a reduction in 
deposit and CBJ rates in recent years.  The current CBJ 
discount rate is 4.5%.  The average interbank loan interest 
rate stands currently at 2.875%.  The average interest rate 
on consumer loans is 9.85%, with most loans having a tenure 
of five years or less.  In addition, most banks charge an 
annual commission of 1%.  The interest rate for deposits is 
3.9%, and while commercial banks in Jordan have progressively 
lowered interest rates on both deposits and credit facilities 
in concert with U.S. interest rate drops, rates on deposits 
have dropped at a much faster clip.  Since 1999, the interest 
rate on time deposits has declined from 7.9% to 3.9%, while 
credit rates have gone from 12.6% to 9.85% in the same 
period.  Currently, the nominal spread between credit and 
deposit rates is 5.9%.  Interest rate spreads are an 
indication of the general attractiveness of a country for 
investment and the ability of the private sector to finance 
investment activities. 
 
11.  (SBU) Citing an IMF study (Understanding the Margin 
Between Lending and Deposit Rates in Jordan), CBJ officials 
assert the spread between lending and deposit rates in Jordan 
is not especially high compared to other developing 
countries.  (NOTE: Some spreads within the region bear this 
out: Bahrain, 7.6%; Lebanon, 6.5%; Morocco, 7.4%.  In 
contrast: Egypt, 4.2%; Israel, 3.9%; Oman, 3.2%; Kuwait, 3%. 
END NOTE)  Khamis told us that high operating costs fueled by 
excess labor rendered the sector as a whole inefficient in 
its management of overhead costs, typically as high as 4-5%, 
as it is "socially difficult" to fire anyone.  She added that 
corporate taxes for banks, now at 35%, are higher than for 
any other sector.  In addition, due to a history of 
nonperforming loans, banks must impose higher interest rates 
in order to offset their losses.  Private bankers, as well as 
CBJ officials strongly resent recent high profile efforts by 
some GOJ officials, notably Economy Minister Samer al-Tawil, 
to jawbone" banks into cutting borrowing rates.  They expect 
that over time the markets will do their work.  However, as 
an Amman Chamber of Commerce official told us, that time may 
be too long in coming for some companies. 
 
---------------------------- 
CREDIT AND CONSUMER PRODUCTS 
---------------------------- 
 
12.  (SBU) At the same time, credit as a share of GDP is low, 
and banks have been slow to introduce innovative new 
products.  Bank credit extended in Jordan currently amounts 
to JD 5.2 billion ($7.3 billion), an average increase of 12% 
per year since 1980, and an indication that Jordan's 
traditionally tight credit market is loosening.  Most loans 
go to general trade (JD 1.2 billion/$1.7 billion), 
construction (JD800 million/$1.1 billion), and industry 
(JD800 million/$1.1 billion).  The banks, however, are quite 
liquid, with about JD15 billion ($11.2 billion) in total 
assets.  Just under 2% of Jordanian loans are made by foreign 
banks.   Central Bank officials say that Jordan is committed 
to implementing "Basel II" capital adequacy standards, 
although banks will need technical assistance to put in place 
appropriate internal rating systems. 
 
13.  (SBU) Local banks, pushed by foreign competition, are 
beginning to recognize the profitability of expanding 
consumer credit.  Cairo Amman is emblematic of the push to 
pursue the consumer credit market, which officials say caters 
to Jordan's young population.  C-A officials told us, for 
example, that a majority of the bank's 70,000 borrowers are 
government employees, "a good risk, because they have jobs 
and salaries for life."  The bank is increasing its long-term 
lending as well; its 20-year loan portfolio expanded from $8 
million to $21 million in 2002, and it established a real 
estate site linked to its webpage where prospective home 
buyers can view properties, calculate mortgage rates, and 
apply for home loans.  (NOTE: According to bank figures, the 
average mortgage is JD30,000 ($42,000) at 10% interest for 20 
years and requires 20% as down payment. END NOTE.)  HSBC has 
just rolled out a 20 year mortgage product at 7.25% interest, 
the harbinger perhaps of further reduction of rates and a 
narrowing of the spread.  Defaults on mortgages are rare as 
people do not want "to lose their dream home", as one banker 
told us. 
 
14.  (SBU) Auto loans can be problematic.  Issued at 9% 
interest and requiring 30% of the price of the car for down 
payment, they also generally carry an annual charge of 10% of 
the principle of the loan, bringing the real interest rate 
closer to about 17%.  These charges are not often disclosed 
until the contract for the loan is presented to the borrower, 
but, as there is currently no "truth in lending law" in 
Jordan, car buyers have little recourse. 
 
15.  (SBU) Nonperforming loans, set by the CBJ at 90 days as 
opposed to the more common 180 days, make it difficult for 
banks to price their credit facilities to other than their 
traditional large, institutional customers.  But Khamis 
defended the relatively short rating period and said that the 
level of nonperforming loans in the system at 15% is 
"unacceptable" and hoped to see the rate drop closer to 10%. 
She said that even the healthy Housing Bank has a 14% rate of 
nonperforming loans, and that lengthening the rating period 
would not matter as banks just make fresh loans to their 
favored clients in any case.  Regarding specific sectors that 
may be more vulnerable in case of conflict, such as the 
tourism industry, one banker shrugged it off and said, "You 
can't own a hotel unless you own a bank", citing 
cross-ownership between the hotel and banking sectors. 
(NOTE:  For example, the Sabih al-Masri family owns the Zara 
Hotel Company, and, due to partial ownership, has 
representatives on the Board of Directors the Cairo Amman 
Bank.  The Muasher family, owners of the hotel chain that 
owns Marriott hotels in Jordan, has a spot on the Jordan 
National Bank board.  End Note.)  Indeed, according to CBJ 
figures, current sector exposure to tourism, hotels, and 
restaurants is relatively low, at JD174 million ($244 
million). 
 
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CREDIT BUREAU LAW 
----------------- 
 
16.  (SBU) One of the major structural deficiencies in the 
banking system is the absence of a system for sharing credit 
information.  As part of its FY 2003 cash transfer, the USG 
made the passage of the Credit Bureau Law "in principle" a 
condition precedent.  The Cabinet passed the law in January 
2003, and the Law is currently in the Legislative Bureau for 
final and thorough review.  Ahead of final implementation of 
the Law, Khamis said, the CBJ maintains credit information on 
all borrowers with loans above JD50,000 ($70,000), 
information that is available to all banks upon request.  The 
Association of Banks in Jordan is also in the process of 
establishing a credit bureau, which will grow out of a 
current database that tracks all loans over JSD30,000 
($42,000).  There is also a nascent debt collection industry 
in Jordan. 
 
17.  (SBU) The use of checks as an instrument of transaction 
dropped by 3% in 2002, but has generally remained constant. 
Both the value and the percentage of returned checks have 
been steadily dropping as well, as most banks increase 
overdraft facilities, albeit at high (9%) interest rates.  A 
private company working for a consortium of banks, and not 
licensed by the CBJ, maintains a database on bounced checks, 
as does the Association of Banks in Jordan (ABJ). 
 
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TECHNOLOGY CATCHING UP 
---------------------- 
18.  (SBU) The use of ATMs has caught on in the Kingdom, with 
325 ATMs now in use throughout the country.  (NOTE: According 
to Cairo-Amman, each ATM replaces three to four employees, 
resulting in lower overhead and reducing the long-term 
utility of maintaining branches.  END NOTE)  Most of the 
larger banks are linking their branches to one another 
on-line, and many of them are planning to offer on-line 
banking once security and encryption concerns are ironed out. 
 Concurrently, credit card penetration has increased as well 
as banks recognize the profit potential in consumer credit. 
According to Visa Jordan officials, 120,000 cards are 
currently in use, with an increase of 830% in the number of 
transactions since 1998.  3700 merchants are currently 
connected via POS (Point of Sale) units.  The popularity in 
debit cards is also growing, especially among students. 
 
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SHEMAILEH 
--------- 
 
19.  (SBU) The country was shaken early last year by the 
Shemaileh scandal, but CBJ officials said the effects of the 
scandal were receding, as the takeover of the Jordan Gulf 
Bank by the CBJ addressed one of the Shemaileh legacies (REF 
A).  Khamis said the sector recovered some of the lost funds 
via the sale of various Shemaileh assets seized by GOJ 
authorities during the investigation and following his 
arrest.  She noted the investigation was continuing, but 
winding down.  Khamis stressed the way to prevent recurrence 
of fraud is by strengthening market discipline via strong 
corporate governance.  However, she said this was difficult 
to accomplish in Jordan where bankers traditionally maintain 
relationships based on "who you are" rather than the 
soundness of a business's balance sheet. 
 
20.  (SBU) Khamis said that CBJ Governor Toukan is 
"unshakable" in his determination to protect depositors and 
modernize and strengthen the Jordanian banking industry in 
order to prevent another "Shemaileh."  She said that Toukan 
has the advantage of never having worked in the private 
sector, and thus "does not owe anyone anything."  But given 
that some influential Jordanian bankers are former GOJ 
officials, she added, his job is complicated. 
 
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WEST BANK/GAZA EXPOSURE 
----------------------- 
 
21.  (SBU) Khamis said Jordanian banks, particularly the 
Cairo Amman Bank and the Arab Bank (REF D), were highly 
exposed to West Bank/Gaza to the tune of about JD267 million 
($374 million).  She expressed outrage at a January Israeli 
Defense Force (IDF) action against an Arab Bank branch in the 
West Bank (REF C), and said "These are Jordanian banks!"  She 
cautioned that "this sort of thing starts with one incident 
and then becomes the practice."  (NOTE:  On March 2, the IDF 
again conducted a raid on the Arab Bank.  (REF B)  End Note) 
She said that Jordanian banks have approximately 60 branches 
in West Bank/Gaza, and the Jordanian Dinar is the primary 
medium of exchange on the West Bank. 
 
22.  (SBU) Cairo Amman officials told us the bank is heavily 
exposed in Palestine, as one of the first to open on the West 
Bank in 1986.  Counting their offices in Gaza, the bank has 
19 branches in the Occupied Territories, with $500 million in 
the West Bank alone.  In December, the Jenin branch, 
uninsured for acts of war, was hit by an Israeli shell marked 
for a nearby bomb-making facility, causing $100,000 in damage 
to the bank.  The bankers said that business was bad, and 
that Cairo Amman was no longer making loans in the 
Territories, merely managing existing ones.  "When loans 
become non-performing after 90 days," one official told us, 
"what can you do for someone from Nablus, who has been under 
curfew for 120 days."  In addition, he said, "the economy is 
in recession, there is no new investment, and what loans we 
have are not being repaid.  Things are bad." 
 
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REMITTANCES 
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23.  (SBU) Bank officials told us that workers' remittances 
from abroad take a number of forms, according to bank 
officials.  Most remittances, which come from the Gulf 
countries, enter via banks.  Some of the funds are 
hand-carried by workers as they return.  Money Grams are 
gaining in use, primarily by Filipino and Sri Lankan expats 
wiring money to their families back home.  After a lull 
caused by the expulsion of Jordanian workers during and 
following the Gulf War, (a scenario most observers expect 
will not be repeated), remittances have steadily increased 
since 1992 and reached $1.7 billion in 2000, 20% of Jordan's 
GDP. 
 
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COMMENT 
------- 
 
24.  (SBU) As most things Jordanian, the banking sector feels 
the stress of having neighbors on either side that act as a 
real or potential liability on its balance sheet.  Flush with 
reserves and relatively stable, however, the system can stand 
short term strains provided that, as in the last Gulf War, 
regional stability holds.   In the longer term, the extent to 
which Jordanian banks continue to respond to market forces 
and innovate may lead to even greater opportunities for the 
Jordanian banks and their clients as a post-Saddam Iraq comes 
into focus.  USAID is helping this process through a series 
of targeted technical assistance and training programs that 
should help modernize bank supervision and management, with 
the ultimate goal of loosening currently trapped liquidity 
for productive investment in economic activities. 
 
 
GNEHM