Government will issue Sukuk, approve Sukuk trading at bourse, establish regional center for islamic banking

USD 4.6 assets of four Islamic banks in Jordan that represent 5% of total banking assets

01 December 2012
KFH-Research issued a report that shed light on the efforts of the Jordanian government to cement the role of Islamic banking in the kingdom and establish a leading regional center for Islamic finance; especially after the rapid growth of Islamic banking in Jordan, due to laws that organzie the work of Takaful insurance and Sukuk.

The assets of the four Islamic banks operating in Jordan is USD 4.6 billion and forms 5% of total banking assets. They achieve annual growth of 13% and are better than traditional banks in growth of deposits and financing. This reflects high demand for transactions; especially that they offer various unique services and products.

in addition, the report mentioned that Islamic insurance companies are still performing poorly, but after receiving a nod from the government regarding the Takaful insurance, the performance is expected to get better. he Jordanian government plans to issue Sukuk to face the deficit in budget, after a legislation that organzies that matter received a nod. The legislation allows the trading of Sukuk in Amman bourse.

Islamic finance in Jordan is still at a very early stage of development. Presently, Islamic finance in Jordan is governed by Banking Law No.28 of 2000 as there is no specific legal framework in place. The Islamic finance started in the country when the Banking Law 13 was endorsed in 1978 which has allowed the establishment of an Islamic bank. Since then, the first Jordanian Islamic bank, the Jordan Islamic Bank for Finance and Investment (JIB) was set up. Eventhough it was established as a member of the Saudi Arabia-based Dallah Al Baraka network of Islamic banks, 90% of its capital was owned by the Jordanian citizens. By 1986, it had become the sixth largest Jordanian bank in terms of total assets and had financed numerous projects. This indicates that Islamic banking was welcomed by the Jordanian citizen which subsequently led to the introduction of the second Islamic bank, the Islamic International Arab Bank, in 1998. 

As at end-2011, the total assets of Jordan's Islamic banks stood at JOD3.25bln (USD 4.58bln) with 13.13% y-o-y growth (2010: JOD2.87bln). Currently, there are 4 Islamic banks operating in the country. In addition to the Islamic banks mentioned above, two other Islamic banks operating in Jordan are Jordan Dubai Islamic Bank which was established in 2010 and Al Rajhi Bank which set up its branch in 2011.  Presently, Jordanian Islamic banks hold approximately 4.85% of the country's banking sector total assets. Based on a compound annual growth rate (CAGR) of 18.3% between 2009 and 2011, Islamic banking assets in Jordan are expected to grow from JOD3.25bln as at end-2011 to approximately JOD 3.84bln by the end-2012, accounting for more than 5.4% of the country's banking sector total assets. Based on the key financial highlights, total deposits and total financing of Islamic banks in Jordan have increased by 16.35%y-o-y and 15.58% y-o-y respectively as at end-2011. This indicates that Islamic finance is gradually being accepted in Jordan. In fact, it performs better than its conventional counterpart where conventional loans and advances and deposits grew at less than 10% per annum.

In terms of products and services, Jordan Islamic Bank offers a wide range of financial products and services to both individuals and corporations. The services include Murabahah and Ijarah Muntahia Bithamleek as well as some investment products such as Musharakah and Mudarabah. Other well established Islamic banks the likes of Islamic international Arab Bank, Al Rajhi Bank and the Jordan Dubai Islamic Bank offer services such as home and car financing as well as Musawwamah and Murabahah.

The Jordanian Islamic capital markets remain relatively nascent. Ijarah has been the main principle for fund raising activities. In 2011, Al Rajhi Cement Co.issued the first sukuk out of Jordan which was based on Ijarah principle worth USD119.6mln. The country is mulling tapping the sukuk market to bridge its budget deficit with debts worth USD3.7bln maturing 2012.

On takaful front, there are three takaful operators, namely Islamic Insurance Company Plc (established in 1996), Al-Barakah Takaful Company (formerly known as Arab American Takaful Insurance Co. Ltd, established in 1996) and First Islamic Insurance Company (2006). The Islamic Insurance Company, the oldest player in the market, enjoyed a dominant market share of 43.5% as at end-2011, with gross takaful contributions of  JOD16.2mln. This was followed by First Insurance (37.7%) and Al-Baraka Takaful Company (18.9%) with gross takaful contributions of JOD14.0mln and JOD7.0mln respectively as at end-2011.

Takaful products in Jordan exist across nearly all business segments including life, medical, motor, property, and marine. General or non-life takaful accounted for approximately 94% of the Islamic insurance market in 2009 with motor, medical and property segment generating more than 85% of total premiums. It is estimated that the percentage remains at approximately similar level today.

Despite being a small part of the Jordanian financial system, Islamic finance has been receiving strong support from the Jordanian government. The support from the government was reflected when a committee was formed in 2010 to study legislative issues relating to the issuance of sukuk and other Islamic financial products and services and in 2011 a draft law was submitted. The proposed law was to enable the issuance of sukuk under various Islamic principles such as Ijarah and Murabahah as well as other mortgage and equity type of transactions which will benefit the retail and wholesale market.

Recently, in October 2012, the Jordanian house of representatives has approved the sukuk law. According to this law, sukuk shall be tradable at the stock exchange. It is required by the state law that the owner of the sukuk shall have all rights, obligations and actions as decided by the Shariah concept. The law has also provided a number of forms which can be used for sukuk issuances, such as, leasing, Mudarabah, Murabahah, Musharakah, Al-istisna' and any other contract the commission approves of.

The approval of the long-awaited law has allowed the state to issue sukuk and helped paving the way for the government to tap on the strong global appetite for sukuk. In order to encourage the growth of sukuk market in Jordan, following exemptions are given to the special vehicle companies that are responsible in issuing sukuk:

      i.        All fees, including companies' registration and licensing fees

     ii.        The prior payment of the share capital of the company prior to the registration

    iii.        Property sale tax and fees pertinent to lands registration applications conducted between special purpose company and the entity which established it upon the transfer of its title or performing any actions amongst each other

    iv.        All taxes and fees relating to registration of assets and benefits conducted between the company and the entity which established it upon the transfer of its title or performing any actions amongst each other.

On the takaful front, according to Swiss Re's World Insurance Report, insurance penetration in Muslim countries in general and in Jordan in particular is very low compared to the global average. As at end-2009, insurance penetration in Jordan was only 2.3% while the global average was 7.0%. In order to improve the insurance penetration as well as to meet the citizen's difference insurance needs, the Insurance Commission of Jordan has issued orders which regulate the takaful industry in the country.

In 2011, the Commission has enacted and developed the takaful legal framework which includes several components; mainly, compulsory insurance against fire and earthquake risks for economic entities, industrial and commercial enterprises, and the official and public institutions. The law also provides allowance for takaful companies to practice takaful business management processes and investment of policyholders' subscriptions which based on Wakala, Mudarabah or both and in accordance to Shariah law. There are also provisions covering the Shariah supervisory board in terms of members' eligibility, appointment and dismissal in addition to the board's mandate and duties. We believe that such provision of the necessary legal framework will help create the business environment necessary for developing the insurance sector including annuity and takaful insurance business. 

Moving forward, we expect the Jordanian government to continue to intensify its efforts to develop its Islamic finance sector in the country. Other than support from the government, its local demand from the Muslim population who has a growing preference for Islamic finance, especially after political reforms in the country, are among the factors that would assist the future growth of the Islamic finance industry in Jordan. Overall, we believe that the potential for Islamic finance in Jordan is vast given the following factors:

·           Proactive measures undertaken by the government and relevant authorities to promote the development of Islamic finance in Jordan.

·           Increasing demand for more transparent and ethically structured products, which point to immense potential for further growth of the Islamic finance industry.

·           Large Muslim population in the region as well as in the Middle East who are looking for Shariah-compliant products and services.

Nevertheless, challenges that need to be overcome by Jordan establishing itself as an Islamic financial hub include increasing education and awareness, as well as competition from other countries in the region such as Turkey, Egypt and Saudi Arabia who also aspire to be regional champions of Islamic finance.

© Press Release 2012


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