CBJ TAKES ACTION AS LOAN SCANDAL WINDS DOWN

UNCLAS SECTION 01 OF 02 AMMAN 000793

SIPDIS

SENSITIVE

TREASURY FOR OASIA--MILLS/CHANG
USDOC 4520/ITA/MAC/ONE/COBERG

E.O. 12958: N/A
TAGS: EFIN EINV JO
SUBJECT: CBJ TAKES ACTION AS LOAN SCANDAL WINDS DOWN

REF: A) AMMAN 313 B) 02 AMMAN 687


1. (SBU) SUMMARY: In the wake of last year's "Shemailah"
banking scandal involving unsecured bad loans by three
Jordanian banks (REF B),the Central Bank of Jordan (CBJ) has
assumed management of the two banks most weakened by the
losses. The move signals a determination by the CBJ to use
newly-instituted minimum capital requirements to force
smaller banks with unhealthy balance sheets to merge. It
also highlights the potential for greater challenges to the
sector in light of the same banks' exposure to UN
Oil-For-Food Program contracts and the effects of even
isolated bank failures on the sector and the economy. END
SUMMARY

--------------
THE HOUSECLEANING BEGINS
--------------


2. (SBU) According to CBJ officials, the CBJ dissolved the
Board of Directors at the Jordan Gulf Bank (JGB) and took
over the day-to-day operation of the bank on February 2.
This follows a similar action regarding the Philadelphia
Investment Bank (PIB) in late 2002. The CBJ has also
recently referred the former chairman and general manager of
the PIB to the prosecutor general on suspicion of criminal
acts, most probably related to last year's Shemailah scandal.
Similarly to PIB, JGB will be run by an administrative
committee appointed by the CBJ. CBJ Board member Thabet
Taher will head JGB's committee.


3. (SBU) As in the case of the PIB, the CBJ is looking to
merge the bank with another bank; according to the local
press, four local banks have expressed interest. Dr. Mai
Khamis, the new Head of Banking Supervision at the CBJ, told
us that there was no intention to merge the two banks with
one another, as "the result would be one big weak bank
instead of two smaller weak banks." Rather, successful
suitors for each of the banks would emerge from four banks
that have expressed interest. Khamis expected the process to
take four to six months.

--------------
A NEW TOOL
--------------


4. (SBU) By using increased minimum capital requirements
instituted under the Banking Law approved last year, Khamis
said the CBJ is attempting to overcome the traditional
antipathy of smaller, family-run Jordanian banks to merge,
and to force the weaker small banks to combine with healthier
institutions. She expects the new JD40 million ($28 million)
minimum capital requirement to push a number of smaller banks
to choose between merger and liquidation. Khamis noted that
JGB failed to meet these requirements, and was greatly
weakened by its high exposure to the Shemailah scandal. With
an eye to protecting depositors' funds, the CBJ decided to
act. (NOTE: According to Khamis, the investigation into the
Shemaileh case is continuing, but winding down. The
Prosecutor General is currently questioning CBJ officials, a
process Khamis expects to end shortly. End note.)


5. (SBU) Along the same lines, the Jordan National Bank
(JNB),the third bank exposed to the bad loans to Shemailah,
announced plans to raise its capital to JD 60 million via a
public subscription of 10 million shares (presently listed at
JD.94 per share on the Amman Stock Exchange). 8 million
shares had already been sold via private offering to the
Government of Kuwait, the Social Security Corporation, the
Mu'asher Investment and Trading Company, and the Jordanian
Investment Center Company. Khamis said of the three banks
most affected by the loan scandal, JNB was the strongest and
the most likely to survive.

--------------
COMMENT
--------------


6. (SBU) Of Jordan's 21 banks, PIB and JGB are in the bottom
tier in terms of size. Their combined assets of JD558
million ($391 million) account for 2.3% of all assets in the
Jordanian banking sector. The CBJ is clearly taking the
opportunity provided by the Shemailah scandal to force
consolidation in Jordan's over-crowded banking sector (to be
covered SEPTEL). The moves also serve to heighten awareness
of the precarious health of a number of smaller Jordanian
banks, some with significant exposure to OFF contracts (such
as the Jordan National Bank) that face danger of collapse
should the contracts default as described in REF A. (While
small in number and value relative to the sector as a whole,
OFF exposure is concentrated in a few banks.) Coupled with
an expected short-term run on banks triggered by an outbreak
of war, default on OFF contracts due to inability to deliver
the goods in Iraq under current UN procedures could push some
of these banks over the edge, causing a potentially damaging
loss of confidence in Jordan's banking sector as a whole and
subsequent knock-on effects to larger banks.



GNEHM