Banking & Finance:

The dominant financial institutions in Jordan were the Central Bank and the Amman Financial Market. Jordan's largest commercial bank was the Arab Bank. Until 1989 many small money-changing offices were operated by small proprietors. Jordan also had three Islamic banks.

The Central Bank, established in 1964, was responsible for note issue, management of exchange reserves, and regulation of credit. It acted as the fiscal agent for the government, regulated the commercial banking sector, and sponsored the creation of certain new financial institutions. In 1985, for example, the Central Bank acted jointly with the Egyptian government to establish a new bank to finance bilateral trade. The government's presence in the financial sector was augmented by several specialized institutions that filled voids in commercial lending activity: the Agricultural Credit Corporation, the Housing Bank (which provided mortgages), and the Industrial Development Bank (which channeled capital to small start-up manufacturing businesses). The government also channeled equity capital to the private sector through large government pension and social security funds.

The banking sector more than doubled loans and deposits between the mid-1970s and the early 1980s. During the same period, the number of financial institutions tripled. The government encouraged the expansion of banking services as a key to its economic development policy. Deposits were attracted from other Arab nations, and the savings and remittances of the many Jordanians who traditionally had never used banks were captured. These deposits were in turn funneled as loans to growing companies that needed capital. Monetization--the use of legal tender as a medium of exchange rather than barter--was very successful. By the mid-1980s, Jordan was the only Arab country in which the value of bank assets exceeded GDP. Total commercial bank assets rose from JD1.1 billion in 1980 to JD2.3 billion in 1985. During the same period, total deposits increased from about JD800 million to JD1.7 billion. Demand deposits decreased from about 35 percent to 20 percent of total deposits, while savings deposits grew. Strict Central Bank consumer credit controls and government success in encouraging savings also were indicated by the growth of the liquid money supply at about 7 percent per year from 1980 to 1987. The liquid money supply reached about JD900 million during this period, with no significant inflation.

In the mid-1980s, however, the government became apprehensive that the banking sector was expanding too rapidly. One concern was that the proliferation of banks could engender excessive competition for assets and risky lending activity; as a result, in 1984 the Central Bank imposed a moratorium on the establishment of new commercial banks. The government also was worried that Jordanian banks preferred making loans to foreign companies rather than to Jordanian companies, that the banks avoided long-term lending, and that loans often financed trade rather than capital investment. In 1985 more than 27 percent of commercial bank credit financed trade, whereas less than 10 percent financed corporate investment.

Another concern was that banks had been so successful in attracting deposits that they were diverting public investment from Jordan's stock exchange, the Amman Financial Market. As a result, companies were unable to obtain equity finance and had no choice but to finance themselves through bank loans. The value of traded shares--less than JD70 million in 1984--had always been dwarfed by banking activity. The total value of share prices on the stock market grew an average of 20 percent annually from 1978 to 1982. From 1983 to 1986, however, share prices dropped an average of 13 percent annually. Companies in the service and manufacturing sectors were especially hard hit, and in 1986 their total share value was less than it had been in 1978. In 1987 and 1988, the stock market recovered as investors tried to hedge against the shaky dinar. Trading volume reached a record high of JD149 million in 1987.

To counterbalance fluctuating stock values and the rapid expansion of banking, the government initiated greater regulation of bank activity. Banks were required to invest 8 percent of their deposits in government bills and bonds. Investment of at least 15 percent of capital in public and mixed sector corporate equity also was mandated, and the minimum capital requirement was increased to JD5 million. Binding interest rate ceilings were set on both loans and deposits, and the dinar exchange rate was fixed by the Central Bank.

In the late 1980s, thirty major banks and financial institutions operated in Jordan, including eight major locally based conventional commercial banks with numerous branch offices, six foreign banks, two major Islamic banks, and a host of smaller or more specialized foreign and domestic financial institutions, some of which conducted merchant banking, investment banking, and trade or agricultural finance. By far the largest locally based commercial bank was the Arab Bank, a Palestinian institution that moved to Amman from Jerusalem in 1948. Because the Arab Bank catered mainly to Palestinians throughout the world, it was not a dominant force in the local market. In terms of total assets (primarily loans) the Jordan National Bank, the Cairo-Amman Bank, the Jordan-Kuwait Bank, and the Petra Bank were perhaps more important local institutions. Foreign banks included Citibank, Grindlays Bank, the Hong Kong-based British Bank of the Middle East, as well as Iraq's Rafidayn Bank and Egypt's Arab Land Bank. Chase Manhattan Bank left Jordan following the 1984 government- imposed financial regulations.

The Central Bank had permitted the virtually unsupervised operation of hundreds of small money-changing offices by individual proprietors. The system had worked well when the dinar was valued realistically compared to foreign currencies. But throughout 1988, as the government attempted to prop up the value of the dinar by freezing the official exchange rate, money changers became an open black market that facilitated the slide of the dinar. In February 1989, the government abruptly canceled the licenses of all money changers, closed their offices, froze their bank accounts, and seized their records.

Jordan also had permitted the establishment of three Islamic banks that adhered to Islamic legal tenets proscribing interest rate (riba) transactions. The Islamic banks paid no interest on deposits, and collected no interest on loans. Instead, they made equity investments in companies and then shared in the venture's profit or loss, some of which would then be passed on to depositors. The Islamic banks also were active in financing rural or low-cost housing as well as capital investment by manufacturing companies. Typically, Islamic banks built or bought a housing development or a piece of equipment and then leased it to a client or company on terms that approximated loan repayments. Jordan's Islamic banks attracted the savings of pious Muslims from Jordan and other Arab countries who would not use conventional, interest- charging banks. The Islamic banks also financed socially desirable projects that conventional banks regarded as too risky or unprofitable.

Islamic banks have had mixed success in Jordan. The Jordan Islamic Bank for Finance and Investment was created in 1978 as a member of the Saudi Arabian-based Al Baraka network of Islamic banks, but 90 percent of its capital was Jordanian owned. By 1986 it had become the sixth largest of Jordan's banks in assets and had financed numerous projects. The Islamic Investment House, which was established with Kuwaiti backing in 1981, was shut down for an indefinite period by the government in 1984 because the projects it had financed were losing money and were putting deposits at risk.

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