Despite the entry of an increased number of Gulf Cooperation Council-based Islamic banks, including Al-Rajhi Bank and Dubai Islamic Bank, in the domestic Islamic banking market, Jordan Islamic Bank (JIB) continues to control a substantial share of Shariah-compliant financing and deposits in Jordan.
Going forward in a post credit crunch and global financial crisis era characterized by the risk management and capital adequacy demands and requirements of Basel III, the challenge for JIB, and for that matter any of the other banks operating in Jordan, will be to maintain a sound capital adequacy ratio (CAR) and also to mitigate the impact of a challenging operating environment due to slower economic growth and heightened credit risks. JIB’s CAR at end June 2010 was a healthy 13.86 percent under Basel II criteria where the recommended minimum is 8 percent.
Indeed net profit for interim 2010 decreased by 29 percent to $21 million, although the decrease in income was very marginal for the period compared to the same period in 2009. Indeed, JIB’s asset base expanded by 7 percent to reach $3.3 billion in interim 2010 and its return on average assets (ROAA) stood at 1.3 percent in the same period.
From being a small Islamic bank established in 1978 and under the unbroken stewardship of the seasoned general manager Musa Shihadeh, JIB has over the last three decades transformed itself into the largest Islamic lender and the third largest domestic bank in the Kingdom. This is by all standards impressive given that JIB’s main competitor in the market is the mighty Arab Bank Group, one of the largest banks in the Middle East and which has its own dedicated Arab International Islamic Bank.
Had it not being for the fact that JIB operates exclusively in Jordan which is a relatively conservative market, the bank could have flourished to even greater heights. Not surprisingly this has impacted on the rating of JIB which, according to Capital Intelligence (CI), is also constrained by Jordan’s sovereign ratings. CI in its latest rating affirmed JIB’s Foreign Currency Long and Short-Term Ratings at BB and B respectively.
However, CI warns: “Although the Financial Strength Rating (FSR) is maintained at BBB-, this rating could be adjusted downward in the event that asset quality and profitability indicators deteriorate to any significant degree.”
CI also affirmed Support Level 3 and "Stable" outlook for the bank.
The sanguine Shihadeh, vice chairman and general manager of JIB since its launch, is fully aware of the limitations of the geopolitics and macro-economics of his home market and is heartened by CI’s ratings which he stresses is a vindication of the “bank’s policy and strategy of continuing to enhance its banking and financing activities in Jordan on the one hand, and maintaining its special relations with foreign financial institutions on the other hand. Achieving such as result is considered a continuous success and also creates a motive to improve the bank’s services and to go hand in hand with the country’s prosperity.”
JIB is 66 percent owned by Bahrain-based Albaraka Banking Group (ABG), which is not renowned for supporting its subsidiaries with huge capital injections. Its two flagship entities are indeed JIB and Albaraka Turk Participation Bank (ATPB), both with huge potential but punching below their weight.
With its huge experience, JIB should be the natural gateway for Islamic finance in the
Palestinian Territories, and perhaps more importantly into Iraq and Syria. While the former two are still mired in political deadlock in their respective situations, Islamic finance is starting to make genuine inroads into Syria, where the central bank has already authorized five Islamic banks, including one by ABG, which is JIB’s parent.
The drivers supporting the ratings, according to CI, include JIB’s strong liquidity; its dominant share of Islamic banking assets and deposits; and its comfortable capital adequacy. However, the drivers constraining the ratings include the increase in non-performing financing (NPFs), reflecting Jordan’s economic slowdown; a downward trend of profitability as a result; and the challenging operating environment which has increased credit risks in particular. NPFs in interim 2010 rose to constitute 5.7 percent of gross loans. Impairment provisions together with the investment risk fund continued to provide a comfortable 93 percent coverage for NPFs.
However, CI maintains that notwithstanding the rise in JIB’s problem financing, the quality of the financing portfolio remains satisfactory, as evidence by the comparatively low ratio of NPF facilities together with the good coverage provided by financing-loss reserves and the investment risk fund.
Perhaps not surprisingly low-risk commodity Murabaha facilities dominated JIB’s financing portfolio.
