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New Round of Crisis Starting to Affect Banking Sector

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Signs of the "second round" of the global financial crisis have started to show on the Kingdom's banking sector, according to the Central Bank of Jordan (CBJ).

However, CBJ Deputy Governor Kholoud Saqqaf stressed that the sector is capable of overcoming the crisis due to strict monitoring and supervision policies adopted by the Central Bank, which she said were already in place even before the global economic slowdown.

Experts in Jordan, meanwhile, say that the CBJ should further tighten its supervision measures on banks and be prepared to act promptly to meet any challenges posed by the coming phase of the global economic crisis warned of in a recent report by the International Monetary Fund (IMF).

"The CBJ acts slowly towards the country's economy by adopting the 'status quo' policy," economist Yusuf Mansur said, describing the banking system in Jordan as "unhealthy" because it is highly concentrated and dominated by two or three banks.

The IMF report, issued in May, said although the direct effects of the global financial crisis on the banking sector in Jordan have been limited, enhanced financial policies and supervision will remain key in the period ahead.

In addition to tighter supervision, contingency plans for dealing with troubled banks should be developed and prompt corrective action frameworks should also be established to set the rules for government intervention, the IMF report indicated.

The IMF acknowledged that the CBJ has taken some steps in that direction, including instructing banks to raise their capital. The CBJ's deputy governor said the bank even does more than required.

For example, "the minimum capital adequacy ratio worldwide is 8 per cent, but the CBJ has set the minimum ratio in Jordan at 12 per cent to protect depositors and promote the stability and efficiency of the Kingdom's financial system," Saqqaf noted.

Recently, the CBJ cited the dissolving of the board of directors of Capital Bank as an outcome of its policy to better streamline the industry. It appointed an administrative committee to manage the bank for six months under its supervision, saying the measure was precautionary and temporary to rectify the situation of the bank's administration, pointing out that corporate governance issues were behind the decision.

Mansur described the central bank's move as "good" but said the CBJ was slow in implementing its supervision measures as violations at Capital Bank had been noticed three months earlier.

Economist Ali Tabbalat told The Jordan Times on Saturday that "the CBJ is on the right track but should keep a close watch on banks' corporate loans".

"Defaulted loans by companies are expected to increase due to the financial crisis as firms may have liquidity problems," Tabbalat added, noting that banks' strict lending policies would naturally have a negative impact on the economy, though these restrictions are "justified".

Meanwhile, Fahmi Abu Dayeh, chief economist at a local bank, said that the CBJ has shown sound supervision of banks and managed, as a result, to protect the banking system in Jordan.

The financial policies of the CBJ are effective enough, but should also include continuous follow-up on risk related to credit facilities, he said, indicating that monetary measures in Jordan are relatively sound, especially when compared to other countries in the region.

Jordan has taken steps to ease monetary policy in light of the fall in international commodity prices and the decline in domestic inflation, with the CBJ lowering policy interest rates by 150 basic points (bps) in three steps during late 2008 and early 2009. The CBJ also reduced reserve requirements by 300bps to 7 per cent.

The experts differed on the issue of strict lending policies.

Mansur said that banks have not eased their policies on credit facilities despite CBJ measures to encourage a flow of cash into the market, which he said has negatively affected development in the Kingdom.

"Banks lowered interest rates on deposits and in many cases increased them on credit facilities, thus increasing their own margins while starving the nation for credit," the economist noted.

However, Abu Dayeh, agreeing with Tabbalat, believes banks' lending measures, which he called "classical banking", are justified because they respond to risk management rules.

According to CBJ figures, credit facilities extended through licensed banks declined by JD179 million, or 1.4 per cent, standing at JD12,865 million at the end of April 2009 compared with its level at the end of 2008, while total deposits reached JD18.9 billion, an increase of JD875.6 million, or 4.8 per cent, over their level at the end of 2008.

Domestic liquidity was up at the end of April 2009, growing by JD643.8 million, or 3.5 per cent compared with its level at the end of the previous year, to total JD18.9 billion.

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