Investment Policies of the Jordanian Banking Apparatus

Its Past Performance and the Horizon of the Future

Professor Muflih Muhammad Awad Akel

Introduction:

During the past four decades, Jordan witnessed an economic revival in all its economic sectors.  Its result was to create a social awakening, and to generate general economic prosperity.  However, it was the Jordanian banking apparatus that witnessed the most  comprehensive advancements during this period, when compared to other sectors.  This apparatus, after a series of structural and legislative changes, was transformed from one limited in the number of its institutions, variety and resources, into an advanced system consisting of a number of financial institutions, varied in their activities, and under their disposal relatively large financial resources.  It has worked competently to service the different economic sectors by using its relevant instruments, after successfully having filled the national reserves of the country with local and foreign currency.

Until the writing of this paper, the Jordanian banking apparatus was known to consist of the Central Bank, commercial banks, investment banks, real-estate saving institutions, specialised lending institutions, insurance companies, the Amman financial market, intermediary financial institutions combined and the Jordanian financial market.  The financial system is known to consist of a group of markets, institutions, legislation, organisations and technical methods, through which stocks, bills, bonds, and other securities are traded and through which interest rates and commissions are set.

In the introduction of this paper, I shall address what is understood by investments, and I will take a brief look at the role of the banking apparatus in the national economy.  I will then take a historical look at the banking apparatus in Jordan, and at the advanced financial markets.  Then I will look at the investment philosophy of Jordanian banks, and will end my discussion with a look at the challenges facing this apparatus and its future role.

II. The Understanding of Investment

A distinction must be made between two types of investment.  They are:  financial investments, and real investments.

1.  Financial investments are investments in contracts and securities such as future contracts, option contracts, stocks and bonds.

2.  Real investments involves the acquisition of acquiring tangible assets such as equipment, raw material, buildings, and factories.

Investments of primitive societies are concentrated in real investments, while the economic investments of modern societies are concentrated in financial investments.  Both real and financial investments are considered to be compatible investments.  If an institution needs financing to invest in a project, it can increase its capital by placing its stocks in the principal market.  Its buyers can trade it in the secondary market, if they should need to regain its liquidity.

Despite the fact that trading in the secondary market does not generate money for the institution issuing the stock, its mere presence in the market raises the attractiveness of the stock, and facilitates investment.

The existence of securities in its different forms, and the existence of an active securities market  favouring the intermediary financial institutions, are considered prerequisites for facilitating investment.

III.  The Role of the Banking Apparatus in the National Economy

The banking system consists of mechanisms that transfer the general public's reserves into investments in equipment, raw material, buildings, infrastructure, goods and services.  These mechanisms provide an opportunity for the growth of the national economy, thus improving the population's standard of living.  The banking system is considered to be one of the greatest modern social inventions, because of the central role it plays, particularly in the following areas:

1.  A mediatory role between areas where there is a  monetary surplus and a deficit  in the national economy.

2. Transforming short-term deposits into long-term loans.

3. Providing payment facilities to the national economy to facilitate an exchange of goods and services.

4. Providing credit facilities to maintain the level of national spending.

5. Maintaining the future purchasing power of money in the form of deposits, bonds, stocks, and other securities.

6. Providing protection against the dangers to institutions and individuals by using future protection means such as options and forward deals.

7. Working to ensure that government policies that aim at strengthening economic growth, reducing idleness, and combating inflation, are successful.

The banking system is considered an integral part of the national economy, and cannot be viewed in isolation.

IV. A Look at the Jordanian Banking Apparatus

A.  Historic Background

The  first Jordanian banking institution can be traced to 1925, when the Ottoman Bank began working in the country as the first commercial bank.  In 1934, the Arab Bank followed suit by opening its first branch in Amman, and after that the British Middle East Bank did the same.  The banking apparatus was limited to these three banks until 1955, when three new commercial banks were established between 1955-1960.  They are: the Jordan National Bank, the Bank of Jordan and the Cairo Amman Bank.  In addition, the Rafidain Bank opened its first branch in Jordan.

During the 60s, no new developments to the banking apparatus took place as no new banks were established, and no branches of foreign banks were opened.  As of the 70s, the Jordanian banking apparatus began to see significant developments in number and variety.  Several new Jordanian commercial banks were established - Jordan Kuwaiti Bank, Jordan Gulf Bank, Petra Bank, Syrian Jordanian Bank.  In addition, several foreign banks also opened branches in Jordan - Citibank NA, Chase Manhattan and the Bank of Credit and Commerce-BCCI).  Numerous financial institutions, specialised banks and investment banks were established.  This development completed the evolution of the Jordanian financial market in terms of its specialisation and the variety of its institutions.  Financial instruments increased and the reserves of the banking apparatus grew.  The size of their operations also grew (see Annex 1).

The situation confirmed that what had occurred in terms of expansion in the numbers of banks and their variety during the 70s and early part of the 80s was great, as is apparent from the following table:

The evolution of the number of working banks in Jordan:

       Year                                   65       70         75         80         85         90         91         92

       Number of Banks                 8         8        12         18         18         22         20         20

       Number of Branches           25       41         79      142      272      307      333      344

B. The Institutions of the Jordanian Banking Apparatus

In the Jordanian financial market there are numerous financial institutions.  They are the following:

            1. The Central Bank of Jordan which handles the administration of monetary           policy, and directs and encourages the evolution of the banking apparatus, and    monitors it.

            2. Seventeen commercial banks, including the Housing Bank and the           Jordan Islamic Bank.  They have a network of some 325 branches distributed    throughout the cities of the country.

            3. Six investment banks with 18 branches.

            4. One financial institution with 6 branches.

            5. Specialised lending institutions.  They are:

                 a. Agricultural lending institutions - the Agriculture Lending Institute, and                     the Co-operative Organisation.

                 b. The Industrial Development Bank which specialises in industrial loans.

                 c. Real-estate lending institutions - the Housing Bank and the Housing                         Institute.

                 d. Cities and Villages Development Bank which specialises in financing                

                     municipalities.

            6.  Governmental and government-like investment institutes.  They include:

                  a. The Institute of Social Guarantees.

                  b. Pension Fund.

                  c. The Post Office Fund.

            7.  Thirty-one insurance companies.

            8. The Amman Financial Market.

            9. Twenty-seven intermediary financial institutions.

This quick glance at the institutes that comprise the Jordanian banking apparatus indicates that it has reached an advanced stage, when compared to other developing countries of similar circumstances.  It is also apparent that it consists of all the different types of financial institutions that are needed in a modern national economy capable of providing a variety of affordable services in advanced markets.

C. Monetary Instruments in the Jordanian Financial Market:

The availability of a good number of financial institutes and their variation has resulted in the introduction of a number of monetary instruments that facilitate real investment.  There are active markets for these instruments, and markets that are still in their preliminary stages in comparison to others.  Amongst the instruments of the Jordanian financial market are the following:

1. Deposits:

These deposits represent the banks' and the financial institutions' obligations towards their depositors, whether it is an obligation in local or foreign currency.  The deposits in Jordanian banks, in all currencies, had reached by 31/12/92 JD 4749 million.

These deposits are not represented by securities, and therefore there is no direct secondary market for them.  The inter-bank market provides the opportunity to transfer surplus deposits among the institutions of the banking apparatus.  However, this market remains limited.  The deposits of the inter-commercial bank market had reached by the end of 1986 JD 131 million, approximately 6.7% of the deposits of the banking apparatus.  By 31/12/19192 it had reached JD 220 million, representing 4.6% of total deposits.

2. Banker Acceptances:

Banker acceptances are temporal withdrawals accepted or guaranteed by a banking institute, originating from either internal or external trade.  Banker acceptances are treated as one of the instruments of the monetary market.  They are often handled by subtracting a specific portion of its written value.  It must be noted that a secondary market for these banker acceptances is not available in Jordan.  It is limited only to the primary market.

3. Overdrafts:

The instrument of granting advances enjoys wide acceptance amongst institutions and individuals because of its low cost, its flexibility, and its administrative ease.  It is used to a large extent to finance working capital.

4. Commercial Bonds:

This is one of the instruments widely used in some of the commercial sectors.  These bonds represents buyers' debts.  They are sold (discounted) at commercial banks.  A portion of them are accepted for rediscount at the Central Bank of Jordan.  Otherwise, these bonds are not handled within the financial institutions, but are traded, on a limited basis, by appearing in the commercial sector.

5.  Commercial Papers:

These consist of bills of bonds issued by large companies with strong credit facilities, to gain access to short-term financing. They are sold to investors directly, without an intermediary.

There is nothing like this instrument in the Jordanian market.  There is something similar to it which is bonds which organise matters for banks for particular amounts, and for short periods of time, until a bank buys it at a particular discounted price.  The absence of such an instrument in the financial market is regarded as one of the major deficiencies of the market.

6. Certificates of Deposits

This is one of the instruments that attracted premature attention from the authorities.  As a result, in March 1983 the authorities issued organised instructions for these certificates.  They issued the certificates of deposits either by way of publicly announcing them, or by ordering them through an agent.

The certificates of deposits did not face success in neither the primary nor the secondary markets, despite the fact that their interest rates on offer were attractive.   Perhaps their failure was a result of the population's lack of education about them when they were first proposed.  This instrument faded away, until now it no longer exists.    The Central Bank recently issued instructions that the certificates of deposits should be issued in dollars to the commercial banks.  This experiment is still in its early days.

7. Stocks:

Setting up the Amman Financial Market in 1978 had the largest impact on the development of the number of stocks proposed for general subscription,  and the number of companies whose stocks are handled in the Financial Market.  The number of listed companies in  1978 was 57, with the total  rights of the investors standing at JD 242 million.  It went up by the end of  1992 to 103 companies, the total  rights of its investors having reached JD 1189.  The market value of the handled stocks had reached JD 2.27 billion.  The handling size in the Organisational Market had reached in 1992 JD 879 million - a daily average of JD 1.4 million.  The Amman Financial Market is considered to be amongst the most active of the Jordanian financial markets and the most capable.

8. Government Bonds:

Government bonds are issued according to the general lending law that was first enacted in 1966. Its aim was to create a nucleus for the capital market, and to serve as a  weapon of monetary policy.  This legislation called for two ways in which governmental loans were to be granted:  by issuing treasury bills, and issuing general debt bonds or to its holders.  In the Jordanian market there are four types of government bonds.  They are:

a. Treasury Bills:

The first treasury bill was issued in January 1969, thus forming the first nucleus for the financial market in Jordan.  These bills are issued on a monthly bases for a period of three months, and are sold at a discount through general subscription, with an interest rate of 4.5%.  50% of the income generated is tax-exempt.

The general lending law has set the maximum limit for these bills issued by the treasury  to lie at 25% of the average of local revenue of the last three financial years  of people whose accounts had been closed or the sum of the handled money, or whichever is greater.

The balance of the treasury bills had reached by 31/12/1992 a total of JD 256 million.

B. Treasury Bonds:

These bonds were first proposed in 1986.  They are issued for a period of two years, and are sold at a particular discount.  The balance of these bonds reached by 31/12/1986 a total of JD 32 million.  Most of them were acquired by commercial banks.  The balance of these bonds, in relationship to their size, remained stable during the past seven years.

C. Public Corporation Bonds:

These are governmental bonds issued to finance projects of independent governmental institutions.  Their interest rate is close to the interest rate on growth bonds.  The balance of these bonds had reached by 31/12/1992 a total of JD 37 million.  Some were acquired by commercial banks.

D. Government Bonds:

These are growth bonds which were first issued in 1971.  The balance up until 31/12/1992 had reached a total of JD 573 million.  The acquisition by commercial banks amounted to JD 108 of the balance.  As for the acquisitions of the Central Bank, they were totalled at JD 390 million, which included bonds and securities of government and public institutions.

Government bonds were first handled in the financial market in 1979.  Their handling was limited because of their distinction for good revenue, tax exemptions, and the liquidity which they enjoy. These factors made them attractive to banks and financial institutions.  This is the reason behind its lack of activity, and its handling in the secondary market.

Despite the fact that the size of the government bonds by the end of 1992 had reached a total of JD 573 million, the size of those bonds handled in the secondary market did not exceed JD 4.3 million, most of which were growth bonds.

9. Loan Bonds:

Loan bonds are among the modern financial instruments in the Jordanian financial market.  Public share-holding companies began issuing them.  The first  were issued in 1978, and by  31/12/1986, 23 had been issued valued at JD 109 million.  The balance from these issues had reached JD 96 million.  As of that date, the level of activity of this market has receded until the balance of the commercial bonds by the end of 1992 had reached a total of only JD 33 million.

To make the primary bond market in Jordan a success, all issues were accompanied by a government guarantee.  Financial institutions were granted the right to return a percentage of the financing from these bonds at low interest rates through the Central Bank, even though the interest rates on these bonds were rewarding to begin with.  Income generated from these bonds were tax-exempt.  After this idea had entered the market and been implemented for several years, all these distinguishing factors were eliminated, except for the income tax-exemption.  The distinctness of liquidity, government guarantees, fixed interest rates, and tax exemption were amongst the reasons which led to a concentration of the holdings of these bonds in the hands of banking institutions.  Because of the high tax imposed, (alongside other distinguishing factors), it led to the weakness of these bonds in the secondary market.  But in the wake of the new adjustments to the income tax law which affected some 90% of the income of banks generated from bonds, banks will look again at the value of these bonds.

10.  Medium and Long Term Loans:

This is a relatively new market, not in existence for longer than 10 years.  This market grew with the increasing needs of the Jordanian industry for advanced and guaranteed capital equipment.

11.  Lease:

Leasing is considered a modern way of introducing financing.  The use of it in Jordan is still in its preliminary stages because of legal, accounting and tax reasons.

12.  Financing Projects:

This is one of the new methods of financing. It relies on the feasibility of the project and its income as a major source for debts, instead of relying on the financial ability of the person in charge of the project.  This idea has begun to gain acceptance by the banks because of the rewards it enjoys through the preparation of feasibility studies.

13.  Syndicated Loans:

This is amongst the most important developments that had taken place in the Jordanian financial market by the end of the 70s in the area of financing large medium-term projects.

This financial instrument was capable, since its first use in 1978, in providing suitable financing resources, and meeting the excessive financial needs of large companies and public institutions.  Its practical implementation proved how rewarding this could be in achieving the goals set out.

The syndicated loans had reached by the end of 1986 a total of JD 144 million, most belonging to companies and public institutions.  Despite the fact that this financial source represents only about 9% of the banking facilities provided, its importance lies in its nature and in what it achieves which is insuring huge financing that a single bank would not want, or cannot , undertake alone.  The importance of this market has receded.  Since 1987 it has been on a steady decline in terms of the amount of these loans, and its balance.

It becomes apparent that the Jordanian financial market, despite its relative newness, is a market varied in its institutions, and has numerous financial and monetary instruments.  Available to it are financial resources appropriate for the size of the Jordanian economy.  The only disadvantage of this market is that it is primarily a primary market, and excluding the active secondary market for shares, there is practically no secondary market for other financial instruments.  This is a factor that reduces the capability of the market, and reduces its role in amassing savings and expanding investments.

IV.  The Crisis of the 1980's and the Revival in the Aftermath

During the 80s, Jordan witnessed a long period of economic recession which coincided with the decrease in the price of oil.  This had come after a long period of prosperity that began with the improvement in the price of oil.  Many looked at the banking apparatus to play a noticeable role in reducing the effects of this crisis, and providing financing for investments.  But the banking apparatus was also subjected to clear pressures as a result of the changes that affected the working structure of the local, regional and international banking system.  These pressures mostly led to a weakness in the banking apparatus (with a few limited exceptions).  As a result, it could not fulfil the role expected of it.  Amongst the most important factors responsible for the weakness of the banking structure are the following:

1. The economic decline that affected the Jordanian economy, as a result of the collapse in the oil prices in 1982.  The price of oil continued on a steady decline until it reached its lowest point in 1989.

2. The explosion of the debt crises and its consequences, one of which resulted in  limited foreign resources for investment financing.

3.  The inflation of the number of banking units in an economy incapable of absorbing them.  This problem created intense competition which imposed pressures on the profit margins, and led to transgressing sound, effective banking principles.

4. Limited liquidity of some banking institutions, and exposure to continuous  pressures.

5. The increase in the cost of production, low profit, and the decrease in returns on assets and capital.

6. The increase in the tax burden, the drying up of special exemptions, particularly those linked to doubtful loans and written off debts.  This reflected negatively on the size of the reserves that is made up of inactive debts, which resulted in greater leniency in categorising the different types of loans.

7.  The collapse of some of the institutions of the banking apparatus.  This exposed technical shortages and inadequacies.  Sound banking principles were abandoned, and their were clear cases of administrative mismanagement.

8. The inadequacy of banking legislation to deal with some of the problems confronting them.

9. The lack of distinct banking rewards/capabilities.

10. The weakness of the ratio reflecting sufficient capital, in particular the ratio of capital to assets.

11. The lack of particular policies defining loans and their use.  This is what led to the increase of the problem of inactive debts.  This affected the real profit of banks.

12. The limitations on the profits of the banking institution, and their inability to accumulate sufficient reserves to counter doubtful debts, and to distribute profits to shareholders.

13.  The crisis of foreign exchange, and the resulting difficulties in acquiring capital and consumer commodities.

The existence of these conditions simultaneously, have had a negative impact on the role of the banking system, in particular on its investment role.  It also affected the variety of its assets, and resulted in an explosion of problems in areas of weakness.  This required a set of comprehensive reforms to correct the path of the banking system.  It needed reorganisation to insure its soundness, and to reactivate its role in the national economy by meeting its financial needs, which includes investment financing, and supporting a fixed currency.

Policies for reform appeared to be defined by the middle of 1989, after taking stock of the relics of the former problems.  A comprehensive look was taken at the banking system, and the standard of the institutions and its instruments were evaluated.  The most important areas on which these new reforms concentrated were the following:

1. Re-evaluating banking and financial legislations to take stock of the new developments in the field of modern banking.  This included the right to isolate corrupt administrations, to oppose appointments to top administrative levels, and to grant wider responsibilities to the monitoring apparatus.  It also included the right to define punitive measures for those not abiding by the new regulations and for issuing false statements.  These reforms defined specialised banking legislation, with a direction towards universal banking.

2. Encouraging the policy of mergers, and providing technical and financial assistance to deal with the problems of some of the institutions.  It included forming banking units with a greater ability to realise their aims.  Policies of encouragement as well as some mandatory policies were adopted.

3. Developing a system of monitoring banking institutions, and meeting legislative demands, technical aid, and defining the responsibilities of each.

4.  Adopting a national programme to encourage the staff of the banking apparatus, and to train it with the necessary skills to be able to confront the next stage, and the needs of global banking.

With the return of many immigrants to Jordan, the Jordanian economy and the banking apparatus benefited greatly from their fortunes.  Deposits in the banking apparatus were doubled during the short period after their return, thus providing it with a level of liquidity it had never before enjoyed in its history.  As a result, liquidity was available in abundance, after a period of shortage.

The policies of investment banks in Jordan became very conservative, and were limited to working capital.  It slowly was transferred with the beginning of the 70s to medium-term financing until by the mid 80s, the policy had shifted to long-term financing and direct investments.  This important development couldn't have taken place, had the banks not understood the effects of investment on economic growth, and if it weren't for their experience in investment financing.

V. The Current Situation of the Banking Apparatus

The banking apparatus witnessed during the last four years numerous important developments in the area of policies and organisation:

A. Policies:

1.  Expansion in long-term loans as many banks began establishing investment departments with high technical standards, and distinguished marketing capabilities aiming at identifying investment opportunities and studying their feasibility.  Banks began entering the arena of long-term investments with greater vehemence than in the past. But this time they entered with greater knowledge, and sounder reading of the opportunities available.

2. The banking institutions began to accept the idea of social responsibility.  They became aware that profit must not always be their primary objective.  Issues of economic growth and employment became the determining factors in banks deciding to finance particular projects. 

3. Actively introducing the market of direct investments.  In addition to the funding role of banks, one begins to notice that banks headed the founders lists of almost all new companies. Banks were in the forefront of researching for direct investment opportunities.  In the past they had been content to play the role of lending to companies only after they had successfully confronted the dangers associated with setting up a new business, approached production level, and the risks had become more limited.

This role is considered an evolution in the philosophy of investment banks in Jordan.  It represents abandoning their traditional role of merely lending working capital, and moving towards the German philosophy in banking.  It had previously  given the German industry a great push and strength enabling it to embark on the Industrial Revolution, in which Britain had preceded it.  Production relied on its high profits which then financed its growth and development.

B. Organisation:

1. The success of banking reforms in rectifying some of the problems that the banking apparatus had confronted.

2. Resolving the profit problem as a result of floating interest rates and the economic revival.

3. Resolving the problem of insufficient capital by improving profits, increasing reserves, raising capital, and applying international standards for increasing capital.

4. Tremendous growth in local and foreign currency reserves.

Most of these developments resulted in banks adopting advancing policies that were more courageous. Banking facilities had grown during the period 1989-1992 by JD 489 million (from JD 1729 million to JD 2218 million). This growth did not enable banks to take advantage of the surplus liquidity because the increase in credit was only 23% of excess deposits available during this period.  This originated from the inability of banks to utilise their deposits in dollars. The facilities in foreign currency did not exceed 14.2% from the total of deposits in foreign reserves, which had reached by 31/12/1993 a sum of JD 1964 million.

5.  Documenting the existing capital of the different institutions in the banking apparatus by using a new framework of measures for sufficient capital that complies with the new international standards.  In addition, it must take measures to support reserves, and to encourage the increase of capital from JD 5 million to JD 10 million.

6. Introducing greater liberties to the instructions on monitoring foreign currency, making them compatible with economic openess and liberalisation.

7. Establishing an institution to guarantee deposits, and to develop appropriate means to finance exports and to insure them.

VI. The Investment Philosophy of Jordanian Banks

The investment philosophy of Jordanian banks passed through four phases, and it is currently experiencing the birth of the fifth phase.  They are:

1. Phase One (1925 - 1967):

This period began with the early activities of banking in Jordan and ended in 1967.  It is distinguished by the limitations of the banking apparatus in terms of its number, its reserves and its role.  It was also marked by the absence of the Central Bank which was only established in 1964.

The policies of lending banks during this period was limited to short-term financing, which is represented either by a discount in commercial short-term bonds, or overdrafts.  Credit facilities during this period did not exceed JD 39 million, and the size of local investments did not exceed JD 912,000.

2. Phase Two (1968 - 1973):

This period did not witness any great developments in the Jordanian banking apparatus.  This sector concentrated its activities on maintaining its position and its credibility because of economic and security conditions that imposed themselves in this period, exerting pressure on its liquidity.

3. Phase Three (1974 - 1981):

This period was distinguished by great accomplishments achieved in the Jordanian economy, and the banking sector in particular.  It witnessed tremendous growth in its assets, and in the number of its institutions and its instruments.  The number of banks increased to 17 with 174 branches.  Its assets reached JD 1330 million and its facilities JD 721 million. This period was also distinguished for the appearance of the nucleus of a capital market, where the first loan bonds and the first syndicated loans were issued.  Also in this period, the Amman Financial Market was established.

4. Phase Four (1982 - 1990):

This period is considered to have been the toughest and longest through which the banking apparatus passed.  It left many negative impacts which required a concerted effort to overcome.  Amongst the most important of these were the recession in the performance of the Jordanian economy. This affected the profits of the banking apparatus, its reserves, and resulted in the explosion of the debt and foreign currency problem, and the devaluation of the Dinar.  These issues will be discussed in more detail shortly.

Despite the fact that the bulk of the efforts of banks was addressed at internal administration and reorganisation, the banking apparatus continued its amassing of savings.  The deposits of commercial banks had reached by 1988 JD 1811 million, and JD 535 million in foreign currency.  Facilities reached JD 1630 million.

The end of this period was characterised by comprehensive revaluation conducted by the monetary authority to reorganise the banking apparatus to insure its continuity and its soundness.

5. Phase Five (1990 - 1992):

This period was over shadowed by the Gulf crisis and its results.  One of the major repercussions was the return of large numbers of Jordanians residing in Kuwait.  This exerted tremendous  pressures on the resources of the region and its infrastructure.  In addition, it deprived Jordan of its market in Iraq and the Gulf Arab states, and from assistance from the oil producing countries.  This resulted in a severe relapse in the industrial, agricultural, transportation and tourism sectors. The positive aspect to this crises was the return of many qualified administrators, along with their resources in local currency which were invested locally.  The problems arose not because of any inadequacies in the banking apparatus, but because of the situation that was imposed on them such as:

1. A rise in the danger of lending foreign currency, in comparison to lending local currency.  There is also the danger linked to the availability of foreign currency at the end of the lending period.

2.  The constraints on lending foreign currency, and retaining it.  Current legislation does not permit institutions to retain more than 10% of the value of their resources in foreign currency resulting from exports.

3.  The growth in the bank's resources in foreign currency coincided with the currency crises which Jordan faced in the last years of the 80s.  Any use of these currencies created concerns for the depositors which could prompt them to withdraw their deposits.

4.  Employing foreign currencies for local loans might result in the dolarisation of the economy, a matter that might limit the role of the monetary policy in influencing credit and regulating it.

5. Some have proposed the conversion of these currencies into Dinar and then loaning them.  However, banks have rejected this proposal, as it could lead to further disasters.  This kind of behaviour exposes banks not only to the dangers of credit, but also to the dangers associated with the availability of foreign currencies and the rate of conversion.  These dangers can create disasters for the banking system, and therefore this proposal was never open for discussion.

VII. A Look at the Structure of Advanced Money Markets

In the national economy, there are three markets:  factors of production market, produce market, and financial market.  The existence of these three markets within an advanced money market leads to the following:

1.  The availability of securities and financial assets which constitute the legal rights of its holders to get returns or future benefits within certain defined conditions. Examples of these securities are treasury bills, bonds and common stocks.

2.  The existence of a financial market with varying activities that constantly works towards finding a link between the sellers of securities and its buyers.  This market can be divided into the following:

            a. The Money Market:

                This market handles financial securities of a duration of less than one year.

            b. The Capital Market:

                 This market handles securities of a duration that is greater than one year.

3. The existence of financial intermediary institutions or financial institutions:

These institutions issue financial claims on themselves (such as deposits in commercial banks), and use the remainder of these financial requirements to acquire financial assets from money, stocks and securities and loans.  The advanced financial markets are distinguished by their specialisation.  The money market and capital market are divided into smaller markets, each with its importance for depositors and claimants.

The money market can be divided into the following smaller markets:

            - Treasury Bills Market.

            - Certificates of Deposit Market.

            - Banker Acceptances and Securities Market.

            - Surplus Reserves Market.

The capital market can be divided into the following smaller markets:

            - Mortgage Loans Market.

            - Municipal Bonds Market.

            - Consumer Loans Market.

            - The Stock Market (Financial Market).

            - The Secondary Market.

The financial market can be divided into the following:

1. The open market versus the negotiated market.  Company bonds are usually sold on the open market for the highest bidder.  It is handled in this market many times before it is acquired.  However, in the negotiated market of bonds, bonds are sold to a limited number of buyers through a special contract which they must abide by in order to retain the bonds before acquiring them.

2. The primary market versus the secondary market.

3. The spot market versus the future forward market and the options market.

The spot market: It is a mechanism to trade in securities for immediate transfer.

Future forward market: It is a mechanism to trade in securities which are transferred at a later point in time.

The options market: This gives investors in the money market and the capital market an opportunity to reduce the dangers of negative changes in securities.

The money market and all its branches have the following functions in the national economy:

1. Saving Function:

This function seeks to use national savings to invest in low risk profitable investments.

2. Liquidity Function:

This function provides the means for the acquisition of liquidity by transferring securities and other instruments into money at the lowest possible loss.

3. Payment Function:

This function provides a mechanism to ease payments for the purchase of commodities and other services.

4. Policy Function:

This is considered the main channel through which government policy is made to realise its national aims.  This is done by providing employment, reducing inflation, achieving a realistic level of growth, and striving towards economic independence.

5. Wealth Function:

Financial instruments used by financial institutions in both the money and financial market provide excellent means to store wealth for when it is needed in the future.

6. Credit Function:

This function provides a constant source of credit to the institutions, consumers, and the government to acquire their commercial and investment needs.

7. Risk Function:

The financial market provides business men, consumers, and government with protection by providing life, property, and income insurance.  This is done through the investment bodies, and the different types of financial protection.

Trends in Financial Systems

For five years now, the financial market has been witnessing quick developments.  These trends have been most distinguished by the following:

1. An increase in competition amongst the providers of financial services.

2. Expansion of markets, becoming more global in nature.

3. The increase in dangers facing financial institutions.

4. A move towards mergers and acquisitions to form larger units.

5. Dramatic and fast technological changes used in producing and providing services.

6. Decreasing constraints and leaving matters to market forces.

7. An increase in the indebtedness of individuals and institutions, and larger incidents of failure.

8. An increase in the ability of the borrowers and the lenders to identify available opportunities.

9. Concentrating on financial innovation.

This quick glance at the developments that have taken place in the financial market suggests that the Jordanian financial market possesses most of the components present in these markets.  What is lacking in the Jordanian financial market, however, is advanced expertise, and structural and legal  depth conducive to fast development  and that is sufficiently flexible to accommodate change.

VIII. The Problem of Investment Financing in Jordan

The level of national savings and investment that is financed, represents the ability for independent growth.  Annex 2 shows the average of savings and investments in Jordan during the period 1976 - 1991.  From these figures it becomes apparent that local savings were not sufficient for investment.  One also notices a gap in investments that were covered by foreign loans.

The investment gap that ensued has meant that local savings are still low. This reflects the need for encouraging local savings, and finding appropriate opportunities for savings.  Investment in Jordan in the period to come will depend to a large extent on local financing because of the difficulty of foreign borrowing in the wake of the debtor crisis abroad, the decrease in the transfers of money abroad, and the decrease in foreign resources.

The Programme for Economic Reform addressed this problem.  It called to correct consumerism and to reduce it from %100.9 of the general domestic production of 1991, to 79.5% of the general domestic production in 1998.  This would aim at improving the portion of savings and investment from general domestic production.  It would also entail improving the investments of the private sector at the expense of the public sector (Annex 3).

First:  The size of investments:

The composition of the general capital in terms of current prices, reflects the size of public and private investments in the kingdom during the years 1987 - 1991 in the following way:

           Million Dinars

                                                              1987    1988    1989     1990     1991

     Residential Buildings              125.3   224.6   229.5    301.5    266

     Non-residential buildings                201.8   146.7   146.1    131.9    116.4

     and other construction projects                              

     Transportation Equipment                 53.4     39.5     89.9    177.2    156.4

     Machinery  and other                         87.9     97.4     81.9      80.9      71.3 

     equipment      

     Composition of the Fixed                468.4    508.2   547.4   691.4    610.1

     General capital             

* source: The Monthly Statistical Publication (Central Bank), Vol. 29, No. 1, June 1993.

From the table the following becomes evident:

1.  An increase in the composition of fixed general capital by a moderate percentage of 7.6% yearly.  What explains the decrease in this percentage is the large decrease in its average size during 1991 by a percentage of 11.8% as a result of the Gulf war.

2. The construction sector enjoyed a much larger share of the size of investments in Jordan. Investments in this sector enjoyed %65.8 of the size of all investments during 1987 - 1991.

Investments were distributed between the private and public sector along the following lines:

                        Size of investments/million Dinar

                        Year                Public  Private            All

                        1987                     272                 196.4              468.4

                        1988                     256                 252.2              508.2

                        1989                     243                 304.4              547.4

                        1990                     188                503.4              691.4

                        1991                     191                 419.1              610.1

                        1992                     272                   N.A.              N.A.

                        1993*      340                   N.A.              N.A.

* derived from the estimated national budget of 1993.

N.A.: Not Available.

The percentage of private investments in financing the composition of the general fixed capital during the period 1987 - 1991 was visibly increased, reaching 68.7% in 1991.  This reflects the importance of the private sector and its role in enhancing the size of investments in the kingdom.

Local banks attempted to finance investment operations in both the private and public sector by providing direct credit facilities to all the country's sectors, and the industrial sector in particular.  In addition, the banks played a role in financing foreign trade and direct investment in the Jordanian economy, as shall become apparent.

Second: Savings:

Amongst the problems that Jordan faces is the unavailability of capital needed for investments because of low levels of income and savings.  This has led to a  gap in savings that was financed mainly through loans.  The average of savings and investments in Jordan during the past years were the following (Annex 4):

  Year   Savings           Investment     Gap in Savings Gap between                                                                                                  imports and exports

   1983      207.8                538.2                   330.4                                 891

   1984      118.7              528.8         410.1                                 778

   1985        20.6                385.2                   364.6                                 762

   1986      148.9                410.3                   261.4                                 592

   1987        72.7                468.4                   395.7                                 597

   1988      122.0              508.2                 386.2                                 638

   1989      201.8              547.4                 345.0                                 585

   1990      353.1              691.4               1044.5                               1008

   1991      416                  610.1               1026.1                                994

A sharp decrease in the size of the savings in the years 1990 and 1992 is evident, becoming negative.  This can be explained by the following:

1. There was an increase in local consumerism during 1990 and 1991 valued at %27.6 and 7.8% respectively, while national income by current prices did not increase except by 3.9% and 3.5%.  This gap resulted from the increase in population by 10% which was a result of the Gulf crisis.

2. There was an increase in local consumption without an increase in national income from imports which had increased in 1990 and 1991 by 27.6%.

3.  As a result of an increase in imports, and with exports remaining the same, the gap between imports and exports increased by 70% in the two years 1990 and 1991.

4. The deficit in savings was financed by way of foreign aid, the increase of transfers from abroad, particularly from the savings of Jordanians returning from Kuwait, and through loans.

Third: The Investment Role of the Jordanian Banking Apparatus:

Local banks played an important and distinguished role in financing investment operations in both the public and private sector.  This is represented by the provision of credit facilities needed to buy  fixed and traded instruments. In addition, they invested  directly by purchasing stocks in some of the public companies, and participating in the establishment of different industrial companies.

Fourth:  The Stockholding of Banks in Investment

Commercial banks play a central role in financing investment activities through what they provide the national economy in credit facilities.  The following is a table of the distribution of such facilities during the years 1987 - 1992.

      million Dinars

            Sector                                     1987   1988  1989  1990  1991  1992

            *Public Sector                204         216      218      219      201     187

            *Private Sector:                                     

              Agriculture                                  40           47        47        54        50       54

              Mining                            45           33        19        12          5       20

              Industry                                   175         188      220      225      245     269                      General Trade              364         402      392      408      466     525

              Establishments             385         374      399      423      436     463

              Transportation                39           52        43        45        66       78

              Tourism, Restaurants      33           27        31        33        32       37

              and hotels

              Financial Institutions                 31           29        33        46        38       51

              Craftsmen and individuals         159          203      254      288      319     375

              Other                             64            61        76      111      110     160

              Total facilities              1513       1634    1730    1864     1968   2221

*Sources: Monthly Statistical Publication, The Jordan Central Bank.

The credit facilities provided by the banks increased moderately by an annual percentage of 8% during the mentioned period.  The public commercial sector became the largest recipient of credit facilities, receiving 23.4% of total credit facilities granted during 1987 - 1992.   The construction sector came second receiving 22.4% of total credit facilities during the same period.

No doubt, the larger portion of credit facilities provided to the mining and construction sectors are used for financing fixed investments in these two sector.  It is believed that no less than 20% of the facilities provided to the public commercial sector goes to finance investments in the kingdom by way of importing spare parts, vehicles, and other equipment.  In addition, the credit facilities provided to the industrial sector in the kingdom is used to cover the gaps of this sector, including capital deficiency.

Fifth:  Financing the Industrial Sector:

The commercial banks partake to a large extent in financing the expenses of the industrial sector in general, and buying raw material in particular. The following table shows the expenses of this sector (in thousands of Dinars) and the financing by banks:

                                                                  1987       1988     1989      1990

Raw Materials                                  448.583     524.234    740.960    831.436

Current Expenses                                           56.122       37.761      54.727      53.156

Fixed Assets                                                  60.562       41.519      28.902      23.283

Total expenses of the industrial sector       565.267     602.514    824.589    907.875

Facilities provided for the sector                175.000     188.000    220.000    225.000

The percentage of the facilities                           31%         31.2%       26.7%      24.8%

It can be observed that the banking facilities reached an average of 28.8% from the total yearly expenses of the industrial sector during the period mentioned.  This reflects the extent of the participation of the banking sector in the process of financing the buying of the required raw material for industry.  However, this percentage is not accurate for reasons that shall be mentioned later.

It is difficult to define the extent of the participation of banks in financing the buying of raw materials and fixed assets in the industrial sector in an isolated fashion.  This is because there are no itemised statistics that categorise the different types of credit, which of it is directed at raw material and which to fixed assets.  Despite the non-existence of statistics for the facilities offered one time or those recurrent,  such as overdrafts, it is clear that local banks play a crucial role in financing the industrial sector.  Its value is greater than what is indicated above. This amount only represents the balance at a particular period in time, and only reflects the net changes, without accounting for loans granted or paid debts,  and the number of times overdraft facilities are used.

Sixth: Direct Investment of Banks:

The role of banks has not been restricted to financing investment operations by providing banking facilities only, but also includes direct investment in the industrial and services sectors.  Commercial banks started to head the list of founding members of new industrial companies.  The following table confirms the growth in investments of local banks:

                        Year                            Local Investments

                        1985                                       36,176

                        1986                                       38,585

                        1987                                       40,676

                        1988                                       43,261

                        1989                                       52,192

                        1990                                       71,137

                        1991                                       76,652

                        1992                                       90,793

* Monthly Statistical Publication, Jordan Central Bank, Vol. 28, No. 12, Dec. 1992.

The average of the increase in the size of local investments was around 14.6% yearly during the period mentioned.  Most of its excesses was concentrated in the years 1989 - 1992.  The excess was part of an effort of banks to expand the grounds for its investments, and its financial treasury.

Seventh:  Financing Foreign Trade:

Commercial banks' participation in funding foreign trade is done on two levels.  The first is by opening the relevant letters of credit to finance imports.  The total imports to Jordan, and the amount of the exported currency to import goods through the assistance of the banking sector during the years 1985 - 1992 took the following shape (in thousands of Dinars):

 Year   Total Imports  *Financing through banks      Percentage of bank                                                                                             financing to

                                                                                                     total imports

  1985          1,074,445                    767,897                               71.4%

  1986             850,199                    629,604                               74.1%

  1987             915,555                             673,057                                 73.5%

  1988         1,021,667                             756,366                             74.00%

  1989         1,230,142                             849,698                             69.1%

  1990         1,725,828                          1,275,588                             73.9%

  1991         1,710,463                          1,505,138                             87.9%

  1992/10    1,719,716                          1,559,525                             90.7%

* The figure used represents the value of the permits for currency exported and paid through banks for the import of goods.

Source: The Monthly Statistical Publication, The Jordan Central Bank, Vol. 28, No. 12, Dec. 1992.

As for the other aspect of the financing of foreign trade operations, it consists of financing provided by banks to acquire necessary raw material to manufacture the goods to be exported.  In addition, there is the cost of manufacturing, until the goods are sold and the receipt of payment, which often takes the form of postponed payments for periods reaching one year.  They are granted at low interest, with favourable conditions.

IX.  The Banking Apparatus and Future Challenges

Since its foundation, the Jordanian banking apparatus has gone through two generations.  Each one of them had a different role than the other due to the differences in the underlying conditions.  The first generation held the responsibility for establishing the banking apparatus under harsh conditions which included the lack of resources and qualified people, as well as restrictions in communications and openness to the outside world.  In addition, this period was marked by the lack of banking legislation and the non-existence of a central bank acting as the last source of loans to the banking apparatus when the need arises.  Hence, the practices applied by this banking generation were characterised by extreme caution.  Their philosophy focused on the concept of personal confidence, which was considered the correct basis for the  limited financing decisions.

After the role of this distinguished generation resulted in the establishment of the banking apparatus on firm foundations, the responsibility shifted to a generation more exposed to the culture of modern banking.  This generation surpassed the older one, because of greater educational opportunities for diverse practical training programmes.  The new banking generation began giving from its ability and the advantages that it experienced, a greater depth.  They realised the importance of banks and its role in advancing the national economy through its financial needs.  In addition, this new generation was consciously aware of the diversity of the financial needs of the institutions, and their variety.  It also was aware that their needs were not limited to financing running capital only, but also there was a need for long-term financing to satisfy the ambitions of business men aspiring to set up large projects that exceeded their financial resources, and which only would receive returns on investment after years of building and work.  With all these important developments, the most important change that was introduced by the new generation was the adoption of the philosophy of advancing money to a particular project, and not only concentrating on the merits of the individual. With this new generation, the requirements to insure the continuation of this philosophy were set in place. However, they are currently facing several challenges which include the following:

The First Challenge:

The first challenge is to absorb the sweeping changes that are taking place in the global financial institutions and markets.  These changes include the introduction of new services and instruments, with a tremendous increase in their size and variation.  It also includes a move towards deregulation and disintermediation, reducing the role of the government sector, increasing the role of the private sector, and the increase in intense competition.  These changes were not limited to the introduction of new services and instruments, but also to the need for large institutions to adopt new requirements: to be more varied in their production and comprehensive in their activities.  They need to acquire advanced technical standards, excellent marketing skills, and better abilities to deal with the danger of increased intense competition in the constantly changing markets.

The Second Challenge:

This is represented by the necessity of banks to adhere to the principles of social responsibility, before adhering to the principle of profit making.  This call does not mean that banks should transform themselves into purely charitable institutions, as they no doubt will continue to be institutions seeking profits for their owners, but they must not ignore social objectives while trying to increase their profits.  They must direct  the money they are entrusted with towards fulfilling their goals in society, which constitutes an increase in investment and production to achieve prosperity.

The Third Challenge:

As for the main challenge confronting the Jordanian banking apparatus, it is to play a larger more active role in financing investments.  This role requires the adoption of an advanced financing philosophy that differs from the philosophy of the past which was responsible for short-term financing based on individuals.  The coming phase requires increased capital investment to achieve the following:

1. Expediting the growth process, and transferring from the manufacturing of products for industrial use dependent mostly on foreign raw material, to final integrated products.

2.  Acquiring technology and employing  long term financial resources appropriate for increasing revenues.

3. Enhancing Jordan's competitive role in general because a success in production depends on the ability to market the products.

4.  Confronting the challenge of peace, which if a just and comprehensive peace is achieved, will result in the redefinition of the region from a political, security, economic and financial aspect.  Peace will result in the creation of political and economic relationships, and will transform the region into an open market.  Arab products will have to compete with Israeli products supported by advanced technology and technical-know-how, and an abundance of capital.  This will be the primary confrontation between the economy of Jordan and Israel as they compete for the West Bank market.

For the banking apparatus to play its new role, an environment conducive to such a role must be achieved through the following:

1.A clear economic philosophy that believes in the importance of the role of the private sector in development.

2. A financial policy that results in a suitable proposal for savings, and fulfils the demands imposed on it in terms of investment.

3. Expanding the absorptive capabilities of the national economy, and to press forward in its ability to set up investment projects with acceptable profits.

4. Encouraging the establishment of  large banking institutions that are highly efficient and capable to carry out its role by meeting financial demands and supply.  They must also link the parties on the different sides of the investment process.

5. Providing governmental guarantees to some types of financing as an alternative to the participation of the government in certain stages.

6. Finding an organisational and credible framework that provides sufficient protection for the rights of the participants, and to facilitate their paperwork and to adapt to new changes.

7. The availability of a variety of different investment instruments to provide depth and effectiveness to the financial market.They should also provide an opportunity for investors to choose the relevant available instruments.

8. To activate an interbanking market, for the purpose of liquidity movement between institutions of the banking apparatus so that the national economy would achieve the maximum benefit of its national savings.

Jordan now possesses an advanced banking apparatus by the standards of developed countries.  This apparatus successfully works in amassing savings and resources, and placing them at the service of investments.