The banking
sector in Jordan witnessed fantastic growth figures in 2022 relative to 2021.
Last year, the year-on-year profits of the banking sector grew by 38 percent.
However, social media has been rife with criticism and concerns over this
profitability and claims that it is harmful to the economy. While it is clearly
beneficial to an economy to have a healthy banking sector, a pertinent question
arises: does the growth of the financial sector lead to growth in the economy?
The answer, although intuitively obvious, is not immediately clear.
اضافة اعلان
The banking
sector in Jordan is prominent both in size and impact. In 2022, the market
value of the banking sector (JD8 billion) was 90 percent of the market value of
the financial sector, 106 percent of the industrial sector, 290 percent of the
services sector, and 41 percent of the total market value of all sectors.
In other words,
it is the largest sector in the market.
The majority
ownership of the two
largest banks in Jordan goes to non-Jordanians. The Arab
Bank is 52.3 percent owned by non-Jordanians, and the Housing Bank, the second
largest Jordanian bank, is 81 percent owned by non-Jordanians. Overall, the
banking sector is 55 percent owned by other Arabs and foreigners, which could
possibly mean that over half of the JD900 million will be paid to foreign
investors' accounts in other countries in their respective currencies.
In Jordan, the data indicates a bias among private banks to lending to large companies, retail purchases, and real estate investments.
Foreign
indirect investment, such as investments in stocks, is also usually fickle with
herd–like departures at the whiff of trouble — one example is what occurred in
the Asian economies in 1997 as investors dumped their stocks and took
flight.
In terms of
policy, the regulator of the banking sector is the
Central Bank of Jordan (CBJ). Articles 40–44 of the Central Bank Law provide it with the powers and
tools to ensure that the growth in banking complies with the stipulations of
Article 4 of the Law, which state that the monetary policy (including, of
course, the banking sector) should contribute to economic growth.
Now to answer
the question posed at the beginning of this article. There is evidence from the
literature (for example, see a BIS Working Paper by Stephen G. Cecchetti and
Enisse Kharroubi, "Why does financial sector growth crowd out real
economic growth?") that the growth of a country's financial system harms
productivity growth. In other words, higher growth in the financial sector
reduces real growth in the economy.
One possible
explanation is that the financial sector competes with the rest of the economy
for resources as its wealth increases. Indeed, in Jordan, the banking sector
can attract the best talents because of the high compensation and benefits
packages it offers its employees. Another reason is that credit booms, which
usually go into financing real estate activities (safe, easy to assess, and
stable) harm the engines for growth, such as knowledge and R&D intensive
products. In Jordan, the data indicates a bias among
private banks to lending to large companies, retail purchases, and real estate investments.
… In a market where there is competition, one would expect that banks would rival each other in lowering the rates instead of increasing them.
It has been
reported in the media that 2023 was heralded with interest rates on loans
exceeding 12.5 percent as the CBJ raised the discount rate (the lending rate to
banks) seven times last year, almost in perfect such with the US Federal
Reserve rates. Banks in Jordan have either increased the interest rates to
their clients or increased the number of payments while keeping the rate the
same. But, the fact that
most banks do not borrow from the CBJ begs the
question of why they would increase the interest rates. Moreover, in a market
where there is competition, one would expect that banks would rival each other
in lowering the rates instead of increasing them.
It is time that
both monetary and fiscal policies are subjected to the ultimate and most
important test: do they, individually and jointly, lead to economic growth?
Let us not wait
too long for an answer.
Read more Opinion and Analysis
Jordan News
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