Jordan to Establish Regional Center for Islamic Banking

Amman – The Jordanian government will cement the role of Islamic banking in the kingdom and establish a leading regional center for Islamic finance, especially after the rapid growth of Islamic banking in the country, due to laws that organize the work of takaful insurance and sukuk, KFH-Research said in a report recently.

The assets of the four Islamic banks operating in Jordan is $4.6 billion and forms 5 percent of total banking assets. They achieve annual growth of 13 percent and are better than traditional banks in growth of deposits and financing. This reflects high demand for transactions; especially that they offer various unique services and products. In addition, the report mentioned that Islamic insurance companies are still performing poorly, but after receiving a nod from the government regarding the takaful insurance, the performance is expected to get better. The Jordanian government plans to issue sukuk to face the deficit in budget, after a legislation that organizes that matter received a nod. The legislation allows the trading of sukuk in Amman bourse.

Islamic finance in Jordan is still at a very early stage of development. The Islamic finance started in the country when the Banking Law 13 was endorsed in 1978 which has allowed the establishment of an Islamic bank. Since then, the first Jordanian Islamic bank, the Jordan Islamic Bank for Finance and Investment ( JIB ) was set up. Even though it was established as a member of the Saudi -based Dallah Al Baraka network of Islamic banks, 90 percent of its capital was owned by the Jordanian citizens. By 1986, it had become the sixth largest Jordanian bank in terms of total assets and had financed numerous projects. This indicates that Islamic banking was welcomed by the Jordanian citizen which subsequently led to the introduction of the second Islamic bank, the Islamic International Arab Bank, in 1998.

As at end-2011, the total assets of Jordan’s Islamic banks stood at JOD3.25 billion (USD 4.58 billion) with 13.13 percent y-o-y growth (2010: JOD2.87 billion). Currently, there are 4 Islamic banks operating in the country. In addition to the Islamic banks mentioned above, two other Islamic banks operating in Jordan are Jordan Dubai Islamic Bank which was established in 2010 and Al Rajhi Bank which set up its branch in 2011. Presently, Jordanian Islamic banks hold approximately 4.85 percent of the country’s banking sector total assets. Based on a compound annual growth rate (CAGR) of 18.3 percent between 2009 and 2011, Islamic banking assets in Jordan are expected to grow from JOD3.25 billion as at end-2011 to approximately JOD 3.84 billion by the end-2012, accounting for more than 5.4 percent of the country’s banking sector total assets.

Based on the key financial highlights, total deposits and total financing of Islamic banks in Jordan have increased by 16.35 percent y-o-y and 15.58 percent y-o-y respectively as at end-2011. This indicates that Islamic finance is gradually being accepted in Jordan. In fact, it performs better than its conventional counterpart where conventional loans and advances and deposits grew at less than 10 percent per annum. In terms of products and services, Jordan Islamic Bank offers a wide range of financial products and services to both individuals and corporations. The services include Murabahah and Ijarah Muntahia Bithamleek as well as some investment products such as Musharakah and Mudarabah. Other well established Islamic banks the likes of Islamic international Arab Bank, Al Rajhi Bank and the Jordan Dubai Islamic Bank offer services such as home and car financing as well as Musawwamah and Murabahah.

The Jordanian Islamic capital markets remain relatively nascent. Ijarah has been the main principle for fund raising activities. In 2011, Al Rajhi Cement Co. issued the first sukuk out of Jordan which was based on ijarah principle worth $119.6 million. The country is mulling tapping the sukuk market to bridge its budget deficit with debts worth $3.7 billion maturing 2012.