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.
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.
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.
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.
Published in Jordan News on Feb 27,2023
https://www.jordannews.jo/Section-36/Opinion/On-banking-and-economic-growth-27240
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