SHEMAILEH SCANDAL BANKS BACK FROM THE DEAD

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 008133

SIPDIS

TREASURY FOR DEMOPULOS

E.O. 12958: DECL: 09/28/2009
TAGS: EFIN PGOV JO
SUBJECT: SHEMAILEH SCANDAL BANKS BACK FROM THE DEAD

REF: A. 2002 AMMAN 687


B. 2003 AMMAN 793

Classified By: Charge d'Affaires David Hale for reason 1.4 (b)


1. (C) SUMMARY: Jordan is clearing up the final residue of a
2002 scandal involving hundreds of millions of dollars in
unsecured bad loans to 31-year-old businessman Majed
Al-Shemaileh (Ref A). The Shemaileh fiasco brought down the
former head of Jordan,s General Intelligence Directorate,
pushed Jordan National Bank (at the time the country's second
largest) close to the brink, and, finally, forced two other
banks into insolvency. This last legacy is slowly being
resolved. Jordan Gulf Bank, which has been renamed Jordan
Commercial Bank (JCB),has been relaunched and looks to be on
its way to a relatively successful year. The other,
Philadelphia Investment Bank (PIB),is only now beginning to
generate a pre-launch buzz. The resurrection of both banks
demonstrates the current health of the Jordanian economy, but
runs counter to the GOJ,s stated goal of rationalizing its
small, fragmented banking industry. END SUMMARY


2. (C) The rebuilding of both JCB and PIB has been a
root-and-branch affair. Neither was a healthy bank even
prior to the Shemaileh scandal. JCB had been having problems
as early as the mid-1980s, when it was merged with two other
failing banks and given a large interest-free loan to help
partially cover the non-performing loans it was inheriting
from the other failing banks. PIB was set up more recently,
but from the outset, it had a reputation as a bank "for money
launderers." Central Bank of Jordan (CBJ) Governor Umayya
Touqan claims that CBJ inspectors "always knew there were
problems" in both banks from the early 1990s. Shemaileh,s
activities, by contrast, began only in 1996. Re-launching
both banks has therefore meant that the GOJ has needed to
deal with preexisting problems in both banks, as well as
addressing the corporate governance issues that led to the
scandal itself.

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JCB SPREADS ITS WINGS
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3. (SBU) The JCB relaunch has not been an easy process. It
has been possible only through substantial assistance from
governmental and quasi-governmental bodies, a reminder of how
invested the GOJ is in the saving of this bank. A
substantial GOJ discount on an outstanding interest-free loan
from the CBJ, dating to 1985 and originally intended to cover
lost interest from JCB,s non-performing loans, allowed JCB
to rid itself of JD 41 million (U.S.$58 million) in debt to
the GOJ for a price of JD 9 million (U.S.$13 million). In
addition, JCB has received a new loan of JD 21 million
(U.S.$30 million) interest-free from the CBJ. An injection
of JD 30 million (U.S.$42 million) in new capital, anchored
by Jordan,s Social Security Corporation (SSC) but also
contributed to by several of the bank,s original investors
(including Saudi magnate Nasser Al-Salih),has strengthened
the paid-up capital base of the restructured bank and allowed
it to meet the CBJ minimum capital requirement, which has
been relaxed for JCB for a period of five years.


4. (SBU) These changes in the balance sheet of JCB and the
selection of Jawad Hadid, a former Minister of Planning who
has led three other banks previously and is known as
something of a turnaround specialist for ailing banks, have
created substantial market confidence in the new entity. The
bank,s stock price has risen to match this new confidence,
increasing from 1 JD at the time the restructuring plan was
announced to 1.8 JD today. The SSC, which now holds 25
percent of the bank and will have two representatives on the
bank,s board of directors, views the 80% return on its
investment to date as having been a signal success.


5. (SBU) Hadid, whose resigned in August 2003 as head of the
Social Security Investment Commission (SSIC) in protest at
political meddling in the SSIC,s investment decisions, might
disagree with the SSC,s assessment. If so, however, he is
showing no sign of such disagreement. He has ambitious plans
for JCB to move strongly into the retail market, increasing
the number of branches (17 already exist). He also plans to
set up an investment company within the JCB, and is looking
to obtain a license either alone or with partners. JCB is
enhancing its IT infrastructure as well, and will connect
even its three West Bank branches electronically to the
headquarters. Overall, Hadid believes that on current
trends, JCB will double the modest JD 2.8 million (US $4
million) profit that it had set as a goal in the bank,s
business plan for 2004.


6. (SBU) Hadid also claims that the new structures he has put
in place will prevent a repetition of the lack of internal
accountability that brought the bank down. JCB has brought
in consultants to analyze the bank,s strengths and areas of
risk, and has outsourced both its internal audit (the first
Jordanian bank to do so) and its marketing. Finally, Hadid
is putting in place strong measures to separate the Board
from the management of the bank and thereby reduce the scope
for conflicts of interest.

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MARKET EYES PIB
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7. (SBU) PIB,s situation differs somewhat from JCB. Though
the CBJ initially looked for larger, more financially sound
institutions to take over both JCB and PIB, it quickly found
that such banks were reluctant to become involved with either
bank. The merger terms of Arab Bank, GOJ,s early candidate
as a white knight for JCB, were "ridiculous," according to
Hadid, and the potential for success within JCB was great
enough that with some painful restructuring, it could and did
become attractive to investors and the Arab Bank option could
be dropped.


8. (C) The condition of PIB, on the other hand, is so bad
that it has attracted very little interest from potential
investors or buyers, leaving its hopes over the past year
largely pinned on negotiations between the GOJ and the
Housing Bank. Housing Bank Executive Director Ahmed
Abdel-Fattah still claims that the bank will take over PIB if
the GOJ,s terms are good enough, and private sector bankers
interested in the fate of PIB, such as Hadid, are not
discounting this possibility. However, both CBJ Governor
Touqan and Deputy Governor Faris Sharaf have indicated in
recent meetings with Emboffs their inclination to
recapitalize the bank in a manner similar to that employed in
the case of JCB. This inclination appears to have leaked out
recently, and PIB,s stock price has risen dramatically over
the past month.


9. (C) Nonetheless, considerable uncertainty remains. It
would take a massive infusion of cash to put PIB anywhere
near the minimum capital requirement, and it would be hard to
find a partner willing to put so much cash into a bank with a
reputation and balance sheet like PIB,s. Hadid says that the
CBJ is currently exerting strong efforts to collect PIB,s JD
100 million (U.S.$141 million) in outstanding debts, with a
goal of getting 60 percent, which it hopes will in turn
attract other investors. But such a strategy is unlikely to
gain the necessary assets in the short run. The CBJ
officials, recent statements to Emboffs about planning a
recapitalization for PIB would only make sense if the CBJ
plans to drastically reduce the minimum capital requirement
for PIB or if the SSC plans to anchor this new
recapitalization as it did for JCB.

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COMMENT
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10. (C) While the resurrection of JCB seems at this point a
substantial success and the market seems optimistic about
prospects for a re-launch of PIB, the fates of the two banks
represent the triumph of expediency over principle in the
Jordanian banking sector. Jordan,s bank regulators and
sectoral analysts have long complained about the
fragmentation of the sector, where almost thirty small banks
fight to increase their share of a small market in which over
two-thirds of the assets are held by the three largest banks.
In 2002, the CBJ raised the minimum capital requirement to
JD 40 million (U.S.$56 million) with the unstated purpose of
forcing consolidation in the sector as banks would merge to
avoid dissolution (Ref B). The application of this rule has
already been repeatedly delayed, and no banks have merged as
yet. The relaxation of these rules in the case of JCB is a
sign to other banks not to take them seriously.


11. (C) If the bailout/recapitalization of Jordan Gulf Bank
was unwelcome news to those who had hoped for a strong GOJ
signal that the cycle of moral hazard was over, a PIB bailout
will be even more unwelcome news. One of the smallest and
weakest banks in Jordan well before the Shemaileh scandal,
PIB is known in the banking community as a bank with corrupt
staff and a dodgy overall reputation. Its assets are so
discounted that they are practically nonexistent even today.
If the GOJ cannot let PIB fail, it cannot let any bank fail.
And if the market knows that the GOJ will never let an ailing
bank die, the impetus for banks to consolidate, increase
internal controls, and improve their business models will be
that much weaker.
HALE