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'Jordan may face drop in foreign direct investment flows, lower export activity'

LONDON (JT) - The Jordanian economy and, therefore, the banking system may be affected by a global economic slowdown, even if only through a decrease in foreign direct investment flows and a reduction in export activity, according to Fitch Ratings.

In a special report published at the end of last week, Fitch Ratings said that because of the local focus of banks in Jordan, current international credit market conditions have not yet had a significant impact on the banking system.

According to a press release from Fitch Ratings, the Jordanian banking sector has seen a number of regulatory reforms that have strengthened banks' risk management, increased transparency and improved capitalisation.

"However challenges remain, with a large number of banks dependent on a small and relatively undiversified economy," the press statement said while indicating that the market remains over-banked, with 23 full commercial banks serving a population of 5.9 million.

"The Central Bank of Jordan (CBJ) has encouraged consolidation in the system, although so far there have been few signs that banks are keen to consolidate, partly reflecting a culture of family ownership in Jordan," the report indicated.

Fitch Ratings said the banking sector remains dominated by Arab Bank , which, together with the Housing Bank for Trade and Finance , accounts for over 35 per cent of total system assets.

Most Jordanian banks - with the notable exception of Arab Bank - are focused on the local market, although some exposure to the Palestinian territories remains an added risk factor, the press release added.

Fitch views the CBJ as a relatively active and competent regulator.

"Banking supervision has been strengthened in recent years, and has shifted to a risk-based rather than rule-based approach," it indicated. "Prudential regulations are in place to limit banks' exposure to certain sectors such as construction."

The CBJ has strict loan classification and provisioning guidelines and prudential regulations place relatively conservative limits on banks' liquidity ratios. Moreover, accounting standards have been brought into line with international best practices, and the Basel II framework was introduced in January 2008. The quality of disclosure is high by regional standards.

Fitch also notes that, while banking system indicators remain sound and asset quality has been improving in recent years, concerns remain.

"Increasing volatility in local and regional stock markets, a possible property market bubble and political instability in the Middle East continue to have the potential to negatively affect performance, the report stated.

Continued high oil prices could also negatively affect economic growth in Jordan. Margin pressure is likely to continue from intensifying local and foreign competition, the press release concluded.

© Jordan Times 2008