LONDON, 28 April 2008 — If ever there is a case of the sustainability and vertical growth of a local medium-sized Islamic bank and contributing to the real economy of a country for a change, then it has to be Jordan Islamic Bank for Finance & Investment (JIB), which has been around since 1978. As such together with Dubai Islamic Bank and Kuwait Finance House, it is one of the first commercial Islamic banks to be established.
At end March 2008, international rating agency, Fitch Ratings, assigned a ‘BB-’ foreign currency long-term issuer default rating (IDR) and a ‘B’ foreign currency short-term IDR to JIB with a long-term stable outlook.
These ratings, stressed Fitch, is unlikely to change for the worse unless “there is a sharp deterioration in the Jordanian economy” and any negative impact from heightened serious political tensions in the neighboring Palestinian Territories and Iraq. The ratings are reflected in JIB’s strong franchise in Islamic banking in Jordan, supported by its good profitability, strong funding base and shareholder structure.
JIB, of course, has long-standing shareholder connections with Saudi Arabia. It is a subsidiary of the Al-Baraka Banking Group (ABG), which is incorporated in Bahrain and is the restructured holding company of the financial services division of Jeddah-based Dallah Al-Baraka Group (DAG) headed by Saleh Kamel.
In fact, ABG’s main shareholders are DAG with a 30 percent equity stake; Saleh Kamel, who owns a personal 25 percent stake; Jeddah-based Al-Tawfeek Company for Investment Funds with a 21 percent stake and which is owned by DAG; Dubai-based Emirates Bank International with a 10 percent stake; and Abdulla Al-Rajhi of Saudi Arabia who owns a 7 percent equity stake. The remainder is widely held through a public listing on the Bahrain Stock Exchange and the Dubai International Financial Exchange.
Dallah Al-Baraka Group in fact is finalizing negotiations with Saudi Investment Bank (SAIB) for the latter to acquire a 50 percent stake in ABG in exchange for an undisclosed equity stake for DAG in SAIB. The share swap deal is awaiting regulatory approval from the Saudi Arabian Monetary Agency (SAMA), the banking regulator, and the Capital Market Authority (CMA).
ABG is the majority shareholder in Jordan Islamic Bank (JIB) with 57 percent of the equity, with Kuwaiti investment bank, Global Investment House (GIH) headed by Maha Al-Ghinaim, owning another 12 percent stake. The remainder of the stock is widely owned through a public offering on the Amman Stock Exchange.
JIB, despite the constraints of the size of the Jordanian economy and its own balance sheet, is certainly one of the jewels in ABG’s crown. It is holding its own in terms of profitability and other performance indicators, compared to conventional banks of similar size such as Jordan Kuwait Bank and Bank of Jordan.
However, according to Fitch Ratings, “capital ratios are only just adequate, given the potentially volatile operating environment (political instability in the Palestinian Territories and Iraq). JIB’s cost/income ratio improved to 35 percent in 2007, which compares well with the peer group. They also reflect basic risk management systems, the risks associated with rapid loan growth and reliance on a small and undiversified economy.”
JIB recently reported a 32.6 percent increase of net profits for the year ending 2007 to 23 million Jordanian dinar; and total assets amounting to 1.602 billion Jordaian dinar ($2.249 billion). Fitch regards this profitability as good and its operating return on average equity (ROAE) of 27.81 percent as comparable to that of competitor banks.
However, JIB’s position in Jordan is tempered by the fact that it has had a virtual monopoly in the Islamic banking sector in the country and has only one competitor in Arab International Islamic Bank, a wholly-owned subsidiary of Arab Bank Limited, the largest bank in Jordan and one of the oldest and largest banks in the Arab world.
JIB has grown to become the fifth largest bank in the country, and at end 2007, the bank enjoyed a market share of the Jordanian banking sector of 7.2 percent of total assets and 10.6 percent of total deposits. This compared with 2 percent market share of total assets of its only competitor, Arab International Islamic Bank.
The Central Bank of Jordan also has a curious anti-competition policy for the Islamic banking sector in that it does not allow conventional banks to open Islamic banking windows.
Surely in the interest of competition and choice to the customer and the growing globalization of Islamic banking, this proscription is not sustainable especially at a time when Jordan is attracting increasing inward investment from GCC Islamic financial institutions including Gulf Finance House, Arcapita Bank and Kuwait Finance House; and corporates which are investing primarily in the real estate and leisure sectors.
A breakdown of the direction of financing of JIB indicates that in 2006 the bank allocated 35 percent of financing to the construction sector; 28 percent to trade and 22 percent to the transport sector, underlying its contribution to the real economy and infrastructure development of Jordan.
Much of the credit for JIB’s sustainability, growth and progress has to go to the unassuming and experienced Musa Shihadeh, the general manager of JIB who has been at the helm of the bank virtually since its establishment. Over the last decade, JIB assets grew by an average annual rate of 12 percent; deposits by 10 percent; and equity by 12 percent.
According to Fitch, “JIB is well positioned to benefit from the rapid growth of Islamic finance in the country, as well as the improving operating conditions. Any threat would come from new entrants into the market, however, this threat would be limited in the short-to-medium-term, given JIB’s scale and longer track record.”
