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Wednesday, 24 March 2010

Removing barriers - Jordan moving to further Islamic Banking

Jordan is moving to further open its financial sector to sharia-compliant lenders, having unveiled plans to change regulations and legislation that will strengthen the regulatory environment for the Islamic component of the banking industry.

At present, Islamic banks have a relatively low profile in Jordan's finance sector, though this is in the process of changing. The country's older Islamic banks have assets representing some 11% of the total asset holdings of the banking system and 12.5% of all bank deposits and credit facilities, accounting to around 15% of credit extended by Jordan's financial institutions, according to Central Bank of Jordan (CBJ) data.

While these figures are expected to expand with the recent entrance of two new lenders into the segment - the Jordan Dubai Islamic Bank, which began its operations in Jordan in January 2010, and Saudi Arabia's Al Rajhi Bank, expected to start operating in the next two months - it will take more than issuing new licences to help the Islamic finance sector blossom, officials say.

Currently, Islamic banks and authorities have to contend with difficulties in developing the sharia-compliant finance model in Jordan, according to Khulud Saqqaf, the deputy governor of the CBJ.

In early March Saqqaf told delegates attending a seminar held at Sweimeh on the Dead Sea that among the biggest challenges faced by Islamic banks operating in Jordan are the absence of a secondary market for Islamic financial instruments and the lack of lender of last resort facilities. She added that there is a shortage of qualified and trained personnel skilled in the workings of Islamic banks.

Supervisory authorities have to contend with the dual challenges of understanding the Islamic finance industry and achieving a balance between providing effective supervision and facilitating the industry's legitimate aspirations for further growth and development against conventional finance, she said.

At present, the CBJ applies a single regulatory framework to govern both conventional and Islamic banks, though this "takes into account some issues related to the work of Islamic banks, especially in the management of liquidity and credit risks," said Saqqaf.

However, in an acknowledgement of the growing acceptance of the Islamic financial system, the CBJ is in the process of studying the standards issued by the Islamic Financial Services Board so they could be applied to the country's Islamic banks, she said.

The move would be a welcome one for the Jordanian government, which is increasingly looking to the Islamic finance market as a source of funds, though current restrictions limit the instruments it can access. The government is keen to avail itself of the broadest range of options as it is in need of resources to bridge the gap in the national budget, with the deficit this year projected to hit a record $1.5bn.

On March 8, the minister of finance, Mohammad Abu Hammour, said the government was considering putting in place new legislation that would clear the way for the issuance of Islamic sukuk, sharia-compliant bonds backed by assets.

The state has yet not tapped Islamic finance instruments to fund government projects, and with Islamic banks enjoying high liquidity levels worldwide the ministry is working to open the market to sharia-compliant financial institutions as soon as possible, said Abu Hammour.

"We are very interested in Islamic sukuk, especially since Islamic banks were less affected by the global financial crisis than commercial banks," he said.

The minister was speaking after signing a $100m murabaha contract - an instalment credit agreement for the sale of tangible goods - with the Jordan Islamic Bank to finance grain imports. Under the agreement, the bank will buy consignments of wheat and barley and resell it to the state at a marginal profit. Under the terms of the contract, the government is to repay the principal amount of the loan in three biannual installments, following a six-month grace period.

Though Jordan plans to push ahead with expanding its Islamic finance sector, it intends to do so only after putting the necessary safeguards in place, said the governor of the CBJ, Umayya Toukan.

While Islamic banking and finance proved to be the least vulnerable to losses and the least affected by the negative impact of the global financial crisis, the sector should be consistent with international benchmarks such as Basel II, Toukan said in his opening address to the Islamic Finance and Investment Forum for the Middle East on March 3.

To meet these benchmarks, Islamic banks in Jordan should have special monitoring and international auditing standards, allowing the sector to assume a larger role in the local and global banking system, he added.

Enacting a stronger regulatory and legislative framework will take time, something officials acknowledge, but by removing the barriers to a broad-based Islamic finance industry, both the private and public sectors in Jordan will be able to access higher levels of capital to fund their activities, in turn promoting faster economic growth.

Global Arab Network

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