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.

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"FOREIGN INVASION" OF THE BANKING SECTOR
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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.

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A DOMESTIC BANK RESPONDS WITH INNOVATION...
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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.

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...WHILE THOSE LEFT OUT COMPLAIN AND JOSTLE FOR POSITION
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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).

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COMMENT
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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