JORDAN’S MONETARY POLICY

Jordan 2020 | FINANCE | VIP INTERVIEW

TBY talks to Dr. Ziad Fariz, Governor of the Central Bank of Jordan (CBJ), on interest rates, financing SMEs, and Jordan's position in the Doing Business Report.

Last year, the Central Bank of Jordan cut interest rates on all monetary policy instruments by 25 basis points, the first decrease in four years. What is the intended impact of this move?

The CBJ effectively maintained exchange rate stability, a key factor as a nominal anchor of monetary policy, while sustaining a comfortable level of foreign reserves. Empirical studies show the current exchange rate is broadly in line with its medium and long-term macroeconomic fundamentals, and there are no significant misalignments with its long-term equilibrium exchange rate. In 2019, most central banks around the world switched to monetary policy easing, following years of leaning toward tightened monetary policy. The key drivers for the policy reversal were softening the domestic economic outlook, falling growth rates and lower than expected inflation, in addition to weakening business and consumer confidence. The CBJ's policy was in sync with global patterns, whereby it cut interest rates on key monetary policy tools three times in 2019 by 25 basis points each time, aiming to boost credit growth and to stimulate domestic demand for consumption and investment. The decision was also prompted by projected receding of inflationary pressure, a declining current account deficit, and noticeable recovery in JD deposits and foreign currency reserves.

What is the expected effect of the rate cut on the retail banking market?

The three consecutive cuts in CBJ policy rates in 2019 by 75 bps, resulted in a decrease in the interbank rate by 85 bps, and is expected to be followed by reductions in lending rates during 2020. The interest rate margin, measured by the difference between the weighted average interest rates on loans advances and time deposits, decreased from 396 bps at the end of 2018 to 332 bps in 2019. The lower interest rate margin in 2019 reflects 12 bps higher deposit rates, and 52 bps lower lending rates compared to 2018. Although the decline in interest rate margin may negatively affect banks' profitability in the short-run, it is deemed an important indicator of improvement in the banking business environment, and hence of efficiency and competitiveness among banks.

How is the Central Bank of Jordan working to stimulate credit flows and financing options to companies and support the private sector?

Credit facilities extended to corporates rose by JOD294.2 million (1.9%) to JOD15.5 billion at the end of 2019, compared to 2018. This constitutes 57.3% of total credit extended by banks.

What CBJ initiatives support industrial and exporting companies in Jordan?

The CBJ launched a number of initiatives to provide adequate financing for nine vital economic sectors, including SMEs. In addition, the CBJ strengthened the Jordan Loan Guarantee Corporation (JLGC), through multi initiatives, including: Launching a program to support national exports, through a JOD100 million loan from the CBJ to the JLGC to enhance the export credit program and, subsequently, to boost exports, especially in newly-opened markets. The CBJ granted a JOD100 million facility to support the export of construction companies beyond the Kingdom through the JLGC. Beyond that, in Jordan, about 98% of all businesses are classified as SMEs, accounting for 70% of jobs in the private sector and contributing around 40% to GDP. Thus, banks in Jordan play a vital role in financing SMEs and industrial companies. The outstanding balance of credit facilities extended to SMEs is around JOD2.0 billion (8% of total credit granted by banks). Credit provided to the industrial sector is at JOD3.5 billion (including that provided to SMEs in the industrial sector).

With a majority of Jordanian companies being SMEs, how has the CBJ endorsed them?

The CBJ is aware of the importance of SMEs in creating jobs and bolstering economic growth and improving standards of living. Therefore, we launched a number of initiatives to guarantee the availability of appropriate financing for SMEs sector, where: First, the CBJ provides a "Long Term Financing for Licensed Banks" program with competitive interest rates, oriented towards industry, tourism, agriculture, renewable energy, information technology, engineering consulting services, health, education and transportation sectors. The funds available under this program account for around 5% of credit facilities granted by the banks, currently at around JOD1.2 billion. The total amount of funding granted to targeted sectors to date has reached about JOD782.4 million, benefiting around 1,185 projects and creating 11,663 job opportunities. The total amount of funding granted to the industrial sector has reached about JOD401.5million (33.5% of total funding) under this program.
Second, the CBJ also continues to provide a bundle of incentives for licensed banks to strengthen SME lending through signing several agreements with international institutions, amounting to USD440 million. The total amount lent was around USD292 million benefiting over 16,000 projects. Third, the CBJ established the Innovative Startups and SMEs Fund (ISSF) with capital of USD98 million in cooperation with the World Bank. The ISSF will promote entrepreneurship and contribute to job creation in Jordan by increasing private, early stage equity finance for SMEs. Fourth, the CBJ has decided to expand its regulatory umbrella to include Micro-Finance Institutions (MFIs), having taken practical steps and set the regulatory framework to supervise MFIs. Finally, banks have established two investment funds in Jordan: a “Trade Banks Fund for Investment" with capital of JOD100 million and the “Islamic Investment Fund", with capital of JOD25 million. The two funds will be investing in medium-sized companies to trigger growth that reflects positively on their job-generation capacities.

How do you evaluate Jordan's credit improvements in the World Bank's Doing Business report?

Jordan has achieved a spot among the world's top 20 most-improved economies, as well as a place among the world's top-ten improvers in implementing business-climate-improving measures in the World Bank's 2020 business rankings. The report shows a significant improvement in Jordan's overall ranking by 29 places to 75th out of 190 countries, compared to 104th in the 2019 report. According to the report, Jordan has strengthened access to credit, as well as made paying taxes and resolving insolvency easier. Indicators related to the Central Bank's work in the report are limited to the 'Access to Credit' index, which has witnessed a significant improvement in its performance by 130 places to rank 4th compared to 134th in 2019. Jordan expanded access to credit after the credit bureau began offering credit scores to banks and other financial institutions, in addition to introducing a new law on secure transactions, which regulates functional equivalents to loans secured with movable property, such as financial leases and fiduciary transfer of title.

What are the CJB's short-term strategic objectives?

In line with CBJ Law, we will continue maintaining our primary objective of monetary and financial stability and thereby contributing to economic growth in the kingdom. The CBJ will continue its efforts in maintaining an investment environment that is attractive for economic and social development through providing a convenient interest rate structure and implementing macro and micro prudential supervision policies that maintain financial and banking stability. Efforts to promote financial inclusion and improve the business environment will help support investment and productivity and enhance inclusive growth. Within this context, we developed the National Financial Inclusion Strategy 2018-2020 to increase financial inclusion from 33.1% to 41.5% by 2020, covering youth, women, low income segments, SMEs, and refugees. This represents a high level of commitment of state institutions and the government to create a legislative and technical environment that enables individuals and institutions to save, invest and obtain necessary funds. As the CBJ aims to financial stability, it has expanded its supervision umbrella to include insurance companies besides banks, exchange companies, and MFIs. This will be implemented in the near future.