Director-General of the Association of Banks speaks to Al-Rai

The Director General of ABJ, Dr. Maher Al-Mahrouq, revealed that the banks total assets amounted to about 55.27 billion Dinars at the end of last August pointing out that the balance of government bonds and bills at the Jordanian banking system recorded 7.56 billion Dinars, which constitutes 13.68% of the total banks assets.

In an interview with Al-Rai, Al-Mahrouq said that banks are one of the government’s sources of financing through investing in treasury bills and bonds, noting that the internal debt from bank sources constituted 42.56% of the central government’s internal debt at the end of the first half of 2020.

He stated that, according to data related to domestic credit granted by the banking system, the balance of government bonds and bills of the Jordanian banking system amounted to about 7.56 billion Dinars at the end of last August.

With regard to interest rates on bonds, they vary according to the date of issuance, the prevailing interest rate in the market at the time of issuance, and according to the bond maturity period.

He added that the longer the bond is, the higher the interest rate is noting that interest rate prevailing in the market at the time of the bond issuance is one of the main determinants, and he continued, if interest rates in the market (local and global) are high, the interest rates on the bond are higher.

He explained that analyzing the average interest rates on the outstanding balance of government bonds shows that the average interest rates on two-year maturity government bond is 4.03%, 4.28% for three-year maturity, 4.66% for five-year maturity, 5. 62% for seven-years maturity, 6.18% for ten-years maturity and 6.73% for a fifteen-year maturity.

Al-Mahrouq indicated that these values reflect the general average of interest rates on existing bonds that were issued during the last five years.

He pointed out that interest rates on bonds witnessed a remarkable decrease during the current year as a result of the decline in interest rates prevailing in the market globally and locally, explaining that interest rates on bonds issued in September 2020 with a two-year maturity amounted to about 2.836%, three-year maturity bonds issued in September 2020 reached 3.083%, ten-year maturity bonds issued in May 2020 amounted to about 4.60%, fifteen-year maturity bonds issued in May 2020 amounted to about 5.5% only .

Al-Mahrouq indicated that the funding provided to the government by the banking system does not constitute a competition for the private sector to obtain financing, as the liquidity available in the banking sector is considered high, noting that liquidity exceeded 2.87 billion Dinars at the end of October 7, 2020.

He pointed out that the Central Bank of Jordan, through its management of cash liquidity with the Jordanian banking system, is constantly keen to provide appropriate amounts of loanable funds for all economic sectors, whether public or private.

He stated that credit facilities granted by licensed banks to the private sector grew by 6.1% during the first eight months of this year, or an amount of 1460 million Dinars, indicating that it constitutes 93.4% of the total increase in credit facilities during this period.

On the importance of investing in treasury bonds and bills in supporting development and making profits for banks, ABJ Director said that the availability of funding would generate economic growth and support development, pointing out that this type of investment finances sustainable development goals.

He said that treasury bonds and bills are a major source for government funding, as this source enables government to cover a large part of the budget deficit, and cover its public expenditures, both current and capital as well as implement its various development goals.

Al-Mahrouq said that government bonds are distinguished as a continuous source of financing, as the government usually extinguishes the outstanding bonds by issuing new bonds instead, noting that the government issued new bonds and bills in 2019 worth 5.8 billion Dinars and extinguished 4.0 billion Dinars.

He added that in the first half of 2020, the government issued 2.635 billion Dinars of bonds and bills and extinguished 1.300 billion Dinars of outstanding ones.

Al-Mahrouq indicated that one of the most important features of bonds is the ease and speed in obtaining financing through them, compared to other sources of financing, especially external debt, which requires a long time and complex conditions as is the case in the IMF programs.

He said that government bonds are characterized by longer terms of up to 15 years, which allows the government to make the most of those funds and enables it to use them to finance infrastructure and large and long-term development projects and gives it a longer opportunity to pay them off.

However, judging the extent of the role of this funding source in supporting development remains dependent on how the government exploits the funds derived from bonds, pointing out that its use in capital and development projects has a major role in bringing about the required development while directing it to current spending will achieve a very limited contribution.

In the same context, ABJ Director considered that investing in treasury bonds and bills is important for banks in general for many considerations, the most important of which is maintaining a balanced risk level for the bank’s credit portfolio noting that government bonds are classified as risk-free which achieves good and balanced diversification in the banks’ portfolio.

Al-Mahrouq added that the bonds are characterized by being highly liquid, as the bank can sell part of its bond portfolio in case it seeks to obtain additional liquidity, explaining that considerations of liquidity and risk reduction are among the most important motives for investing in treasury bonds and bills.

With regard to banks’ financial gains from investing in government bonds, Al-Mahrooq stressed that they are relatively modest compared to the gains derived from normal lending operations and the various types of financing granted by banks to the private sector due to the low level of risks of investing in treasury bills and bonds and the high liquidity of these bonds.