FIRST NEW BANK LICENSES IN DECADE PROVOKE

C O N F I D E N T I A L SECTION 01 OF 04 AMMAN 000538 SIPDIS TREASURY FOR SHWARZMAN E.O. 12958: DECL: 01/18/2015 TAGS: EFIN PREL EINV ECPS KPRV JO SUBJECT: FIRST NEW BANK LICENSES IN DECADE PROVOKE COMPETITION, COMPLAINTS REF: A. 2004 AMMAN 8133 ¶B. AMMAN 9 ¶C. 2004 AMMAN 9226 Classified By: Charge d'Affaires David Hale for reasons 1.4 (b) and (d) ¶1. (SBU) SUMMARY: The past two years have seen the Central Bank of Jordan (CBJ) perform an increasingly difficult, but so far successful, balancing act. On the one hand, CBJ has remained committed to consolidation of the fragmented Jordanian banking sector and resisted pressure from domestic magnates seeking licenses for new banks. On the other hand, it has tried to bring innovation to the staid sector by approving the applications of three new foreign banking licensees. The new licensees have played the hoped-for role of driving change in the sector, selling new products that domestic banks have hastened to copy, and provoking an innovative plan by a domestic bank that may aid in the privatization of Jordan,s postal service. The resulting improvement in competition within the sector and its positive knock-on effects have gratified the CBJ, while aiding in some of King Abdullah,s political goals; it has also once again drawn attention to the nexus between governmental and business power in Jordan. END SUMMARY. -------------- "FOREIGN INVASION" OF THE BANKING SECTOR -------------- ¶2. (U) Over the past nine months, Jordan has seen three new commercial banks open their doors - the first new banks in Jordan in a decade. The three are all foreign, and are the largest and most stable banks in their respective countries. National Bank of Kuwait (NBK),which was awarded its license in October 2002, began operations in April 2004. Bank du Liban et d,Outre Mer (BLOM),the second-largest bank in Lebanon, was awarded its license in August 2003 and began operations in November 2004. Bank Audi, the largest bank in Lebanon, was awarded its license in December 2003 and began operations in September 2004. ¶3. (C) The country manager of National Bank of Kuwait, the first of the three banks to receive a license, believes that political considerations - in particular, King Abdullah,s interest in improving relations with Kuwait - drove NBK's application through. Once the precedent had been established, however, the CBJ appears to have taken more of an activist role in attracting banks to Jordan. The applications of both BLOM and Bank Audi, according to the banks, country managers, were sparked by meetings initiated by CBJ Governor Umayya Touqan to both banks, CEOs during visits to Lebanon by Touqan in 2003. Prior to this prompting, neither bank had considered Jordan as a potential target for expansion. All three banks, country managers gave high praise to the speed and ease of the application process, handled by the CBJ. CBJ Deputy Governor Faris Sharaf has reinforced this sense of CBJ activism in conversations with emboffs, during which he has repeatedly stated his dismay with the lack of innovation in the Jordanian banking sector and his wish that a new major American financial institution would enter the Jordanian market. (Citibank, the one American bank active here, "behaves like a Jordanian bank," complains Sharaf.) ¶4. (SBU) Of the three banks, however, only one has really made an impact. NBK and BLOM have proceeded cautiously, primarily targeting their natural constituencies - NBK is focusing on the business of major Kuwaiti investors in Jordan, former Jordanian residents of Kuwait, and the 2500 Kuwaiti students in Jordan,s universities, while BLOM appears to have had success in serving import/export merchants operating between Jordan and Lebanon. Bank Audi, on the other hand, has been much more aggressive in its approach. The bank, operating here for only four months, already has opened four branches in Amman, with two more under construction and three in the planning stage in Aqaba, Zarqa, and Irbid. It has a balance sheet currently amounting to JD 119 million ($164 million),and has targeted growth to JD270 million ($381 million) in deposits by the end of 2005 and JD 400 million ($564 million) by the end of 2006. The latter figure, if achieved, could place Bank Audi within the top ten of 22 banks active in Jordan by size - a significant achievement, if realized, for a three-year-old bank. ¶5. (SBU) More significant still has been Bank Audi,s strong focus on retail and its innovation in offering services new to Jordan. Aside from the bank,s quick rollout of its branch network, Bank Audi has launched a major publicity campaign announcing its presence and the services it offers, and is looking to co-brand several financial service-related products. It has also cut special deals with certain customers, such as the University of Jordan, that might serve as a conduit to wider awareness of the Bank Audi brand. In the introduction of services, Bank Audi has been similarly dynamic and quite influential - its introduction of bancassurance (the sale of specialized insurance products by banks directly to their customers) to the Jordanian market has spurred the introduction of similar products by nine other Jordanian banks, and its introduction of several e-banking services new to Jordan has been followed as well, though at slower rates. CBJ Deputy Governor Sharaf has confided to emboffs his pleasure at Bank Audi,s performance to date. -------------- A DOMESTIC BANK RESPONDS WITH INNOVATION... -------------- ¶6. (SBU) The better-run among the Jordanian incumbents are responding aggressively to this challenge, taking actions that will have ramifications outside the banking sector. Exemplary of this trend is Jordan-Kuwait Bank (JKB), Jordan,s seventh-largest (but second-most profitable) bank, which has proposed a joint venture with Jordan,s soon-to-be-privatized postal service. The plan, initially proposed by JKB to the postal company in December 2003, would allow JKB to base employees, and in some cases rent space to set up offices, in 43 post offices throughout Jordan. This would more than double the coverage of JKB, which currently has 34 branches nationwide, at costs potentially around 25 percent of what JKB might pay were it to build out an equivalent number of branches. (NOTE: The amount of money changing hands is not negligible for the postal service, however - Jordan Post, which last year had approximately $4.25 million in losses on revenues of approximately $10 million and has come under intense pressure to create new profit centers in order to become more attractive to potential strategic partners, could expect to make close to $1.5 million annually on the deal.) The plan would also give JKB the second-largest branch network in Jordan, after that of the Housing Bank. Over 350 currently active offices of Jordan Post would remain unoccupied by JKB offices or employees, and would be open to any other bank that might wish to use them, though JKB would retain right of first refusal on any post offices that might be opened in the future. ¶7. (C) Perhaps inevitably, the plan has spurred criticism from banks slower to the draw. A whispering campaign linking the deal to a "corrupt bargain" has already begun, officials in Jordan,s Ministry of ICT (to which Jordan Post reports) have become increasingly circumspect in their statements on the issue, and JKB has rushed to make the plan a fait accompli. The rumors center around JKB,s Chairman, Abdulkarim al-Kabariti, who was Prime Minister from 1996-1997 after serving in a variety of ministerial positions stretching back to the 1980s, and who supposedly used his residual connections in the GOJ to get a sweetheart deal with the state-owned enterprise. The CBJ has not ruled on whether this would be acceptable, and there is evidence that an ad-hoc coalition of rival banks is quietly pressing the CBJ to refuse permission. At least one banker doubts that JKB could successfully manage a venture into the highly specialized field of "postal banking." Nonetheless, JKB plans to press on with its plan and seems confident that the venture - already in place in the form of a pilot program - will indeed be approved by the CBJ. -------------- -------------- ...WHILE THOSE LEFT OUT COMPLAIN AND JOSTLE FOR POSITION -------------- -------------- ¶8. (SBU) While the CBJ,s choices in licensees appears to have paid off, however, these choices have created some tension in Jordanian financial circles. 2004 has been a very good year for the banking sector. Even previously troubled banks have seen their balance sheets improve, and banks across the board have seen their stocks rise dramatically in the past year,s "tide that lifts all boats." The past 1 1/2 years, performance has produced considerable pent-up demand for new licenses. The CBJ,s longstanding refusal to offer new banking licenses has led to complaints about the CBJ,s supposed preference of the interests of foreigners over those of Jordanians. ¶9. (SBU) The intense interest surrounding licensing can be clearly perceived in the case of Jordan,s Industrial Development Bank (IDB). Originally licensed in 1965 under a special law, the bank was a quasi-governmental body with a limited mandate. The terms of its license allow it only to make loans to two defined types of borrowers: investors in industrial projects and investors in tourism projects. The bank,s balance sheet of JD 111 million ($157 million) is small even by the standards of Jordanian banks, and deposits represent less than a third of overall liabilities. Over the past year, however, the bank has become an increasingly attractive target for wannabe banking magnates, due to the freeze on new licenses. The bank has filed for a change in its license to that of a normal commercial bank, and bank president Marwan Awad claims to be in contact with three consortia of willing investors competing for the IDB,s hand. Since its bid to join the "normal" banking sector became public, IDB,s stock has been consistently among the top five most traded stocks on the Amman Stock Exchange, as wild rumors of the CBJ,s willingness or unwillingness to change IDB,s license cause share prices to veer sharply up or down, respectively. ¶10. (C) Despite the interest - and pressure - from the private sector, however, the CBJ seems unwilling to relent in its hard line against more licenses. It has even scored a small blow for consolidation as Jordan National Bank, the country,s third-largest, announced plans earlier this week to take over the moribund Philadelphia Investment Bank. This step, while perhaps not quite as salutary as a CBJ decision to simply let the bank fail, at least belied earlier suggestions from the CBJ that it might allow the bank to be re-launched (Ref A). -------------- COMMENT -------------- ¶11. (C) The sour grapes of would-be financiers aside, the CBJ appears to have succeeded so far in its bid to spur innovation and inter-bank competition while for the most part holding the line on further fragmentation of the sector. Nonetheless, the awarding of the new licenses represents at least a partial swing towards a less conservative approach towards CBJ management of the banking sector through licensing, as memories of the 2002 Shmaileh scandal - and the even more devastating 1989 Petra Bank collapse that preceded it - fade and the whiff of panic that pervaded the sector prior to the war in Iraq dissipates. This shift is not a negative development; use of the restriction of bank licensing is a very blunt tool for prevention of bank failures, a job for which the auditors of the CBJ,s Banking Supervision Department should by now be well-enough equipped. Nor are the licenses that have been awarded particularly risky - each of the parent banks of the three new licensees is larger than even Arab Bank, Jordan,s 800-pound gorilla. And Jordan,s banking sector has been held back at least as much by its provincial attitudes as by its banks, lack of size. ¶12. (C) It is surely no coincidence that the home countries of the three new licensees have been increasingly prominent investors and strategic partners in the Jordanian economy. In addition to Jordan,s hopes for Kuwaiti grant aid (ref B), Kuwaiti investors own part or all of two of Jordan,s four mobile telephony networks, are major investors in several Jordanian banks (including JKB),and are increasingly deeply involved in Jordan,s retail sector. Lebanon - especially former PM Rafiq al-Hariri and associated interests - has also been an increasingly intrusive force in the Jordanian economy and polity. Hariri (whose Palestinian wife grew up in Amman) now controls the largest single stake in Jordan,s flagship Arab Bank, Hariri's Saudi Oger contracting firm has been increasingly in evidence in competitively bidding for major Jordanian infrastructure projects such as the Disi Water Project, and Jordan,s Mawarid (ref C) has received substantial technical support from Lebanon,s Solidere, to name but a few examples of heightened Lebanese activity in Jordan in recent times. ¶13. (C) JKB,s response to the Bank Audi challenge offers both hope for the Jordanian sector and a sobering reminder of the structural obstacles facing the promotion of transparency in Jordan. The bank,s plan to cooperate with the Jordan Post in facilitating its expansion appears to be a win-win deal, helping to expand the bank,s retail network while giving the beleaguered postal company a badly-needed source of revenue that will help it be a more attractive candidate for privatization. The controversy surrounding the MoICT,s approval of the deal appears to be baseless - JKB has received nothing more than the standard reward for the first mover. Nonetheless, the whispers reflect a very real trend that highlights the overlap between the public and private sectors in Jordan. Of Jordan,s fourteen domestically-based commercial banks, six have former ministers as chairmen or CEOs. This is not a new phenomenon; nor is it unique to Jordan - all three country managers for the new licensees downplayed this trend as simply "part of doing business in the Middle East." Nonetheless, until this situation reverses at least in part, it will be difficult for Jordan to credibly proclaim itself as a corruption-free society. HALE