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Jordan BANKING AND 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.
* * *
The reader interested in more information on the Jordanian
economy can consult primary as well as secondary sources. The
economic reports and statistics published and disseminated by the
government of Jordan are probably more comprehensive, reliable, and
up-to-date than those produced by any other Arab country. Of
particular value is the Five-Year Plan For Economic and Social
Development: 1986-1990, published by the Ministry of Planning,
which contains in-depth information on all aspects of the economy,
from macroeconomic national income accounting to infrastructure
development.
One of the recognized experts on the Jordanian economy is Ian
J. Seccombe, who has produced numerous authoritative articles
discussing Jordanian labor emigration and remittance income.
Another expert is Rodney Wilson, who has produced excellent work on
Jordan's banking and financial system. In 1987 Seccombe and Wilson
together produced Trade and Finance in Jordan. Both authors
contributed to The Economic Development of Jordan, an
anthology edited by Bishara Khader and Adnan Badran, which is
arguably the best book on the Jordanian economy. Of the many good
articles appearing in the book, those by Michel Chatelus and
François Rivier are noteworthy for their penetrating and original
analysis. Another valuable source of information on the Jordanian
economy is Jordan to 1990: Coping with Change by Philip
Robins, a special report published in 1986 by the Economist
Intelligence Unit. It concentrates on information that businesses
would want to know about Jordan. Pamela Dougherty, a journalist who
covers Jordan for the Middle East Economic Digest, has
produced high quality, informative, and timely articles. (For
further information and more complete citations,
see Jordan -
Bibliography.)
Data as of December 1989
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