Amman, 22 July (Petra)- Deputy Governor of Central Bank of Jordan, Dr. Adel Sharkas inaugurated on Monday the Forum on Enhancing Financial Stability organized by the Union of Arab Banks (UAB), in cooperation with the CBJ and ABJ.

Arab bankers took part in the event.

Deputizing for the CBJ Governor, Dr. Sharkas said banking industry is facing challenges that are offspring of successive global financial and economic crises and the political turmoil in the region. Those have negative reflections on the unstable countries themselves as well as on neighbouring countries.

Such challenges, he added, should be faced through strengthening the capacity of banks to face risks and shocks. Strengthened capacity is achieved by implementing rules of good governance, enhancing the role of risk management departments in banks, and increasing compliance with local and international laws and standards, in addition to strengthening banks’ capital and their liquidity levels and implementing the new monitoring requirements.

Sharkas said the world financial crisis proved that stability at the individual level of each institution of financial and banking system is not sufficient to achieve macro financial stability. There are risks at the level of financial system that require precautions against risks, assessment, and implementing hedge policies and monitoring procedures at the macro level to guarantee due control, stimulating financial institutions to enhance their strength and enable them to absorb spillover of those risks, hence minimizing their repercussions and enhancing the capacity of banking and financial sectors to face them.

To achieve this goal, he said, the CBJ established a financial stability department at the beginning of 2013 that plays a complementary role with the banks’ supervision department and departments of drawing and implementing monetary policy to maintain the monetary and financial stability in the kingdom.

At each bank’ individual level, Dr. Sharkas said, an efficient risk management is the best way to maintain bank’s stability and attain its goals. It enables the bank to have well-considered expansion, optimal exploitation of its money resources; risks are better monitored, controlled and hedged against. All those advantages are positively reflected on the bank’s growth and profitability while maintaining the strength and soundness of its financial conditions.

Rigorousness in compliance and risk management, adherence to the requirements of anti- money laundering and terrorism financing, and Know your Client are urgent issues that enhance the soundness of banking and mitigate risks relevant to correspondent banks.

For some time now, correspondent banks are reconsidering dealings with some Arab banks. There is a threat of either reducing or even stopping their bank transactions with concerned Arab banks, which means their imminent going out of business due to the increasing compliance costs. Therefore, compliance departments in banks should be strengthened with qualified and trained human resources and the adoption of specialized software.

The CBJ is pinning great importance on activating risks and compliance departments in banks, he stressed. The CBJ was among the first central banks in the region to implement the Basel III requirements and issuing instructions to implement IFRS 9.

Dr. Sharkas added that achieving financial stability requires implementing stress tests as an important tool of risk management. Stress tests measure banks’ ability to withstand shocks and high risks. The CBJ issued in 2016 new instructions to develop stress tests as well as the concept of macro stress testing that measures the impact of macroeconomic changes on the conditions of banks.

The Deputy Governor said that achieving financial stability requires enhancing the wise and well-considered financial inclusion along with setting the proper infrastructure. The CBJ, he said, launched the National Financial Inclusion Strategy for 2018-2020 seeking to have a sustainable and comprehensive financial system that is in line with the components of the national agenda and the strategic directions of the kingdom. The strategy helps to strike balance between four major goals: financial inclusion, financial stability, integrity of the financial sector, and protection of the financial consumer.

In this regard, Jordan is witnessing many leaps in the field of fintech and innovation, due to the increasing demand on fintech in the local market and the kingdom’s innovation-friendly investment environment.

On his part, the ABJ Director General Dr. Adli Kandah said maintaining financial stability has become a challenge for central banks in developed and developing countries alike, especially with the increased globalization and financial liberalization that imply market complementarity and the free movement of capital.

This situation makes the issue of financial stability a top priority for countries, combined with a focus on improving and enhancing supervision on banks.

The concept of financial stability, he added, refers to the state in which the financial sector is capable to hedge against internal and external crises or to be the victim of crises, and it is capable of performing its mission of efficiently gearing financial resources towards investment opportunities, and maintaining the efficient payments performance, without prejudice to working mechanisms of curbing risks relevant to credit granting and liquidity, or market risks and operational risks. It takes into consideration the balance in growth between the value of financial assets and that of real economy, and the sustainable growth in working opportunities.

Dr. Kandah said that making sustainable economic growth requires having developed and stable financial sector that is capable of gearing saving to finance productive investment opportunities that generate work opportunities and maximize levels of productivity. Attaining stability in the financial sector can be the starting point for economic stability.

Realizing financial stability requires monetary stability and the ability of the monetary sector to secure maintaining the general price level at the targeted levels, he said. It also requires having a clear structure of interest rates that is in harmony with local and international economic developments. It requires a monetary sector that can, with a certain degree of efficiency, organize the amount and rates of credit terms in a way that strengthens economic growth and prevents concentration and accumulation of credit risks, especially in the sectors that are most vulnerable to fluctuations.

Dr. Kandah went on to say that the relationship between the monetary policy and financial stability becomes clear when we consider the effect of monetary policy tools, such as the interest rate, on the ability of companies to work and serve their debts to banks, as well as the effect of developments in interest rates on prices of financial assets and commodities.

Therefore, he mentioned that stimulating the role of monetary policy tools, such as the interest rate, and an exchange rate policy in place to curb unjustified rate fluctuations are apt to enhance economic growth, prevent speculation, strengthen efforts to reach economic stability and enhance international competitiveness.

The ABJ general director said that the general framework of financial stability requires a set of indicators and criteria that aim to explore the system’s weaknesses and strengths, provided that those points of weakness and strength be followed up on biannual or annual basis. Future scenarios of ways of dealing with expected scenarios through procedures and plans are prepared in advance.

Jordan’s experience in dealing with the repercussions of the world financial crisis was the best evidence of the strength and resilience of Jordanian banking system and the soundness of its foundations. This is the result of the CBJ’s wise monitoring and supervisory system and the wise managements of banks working in Jordan, their distinguished experience and their full compliance with the local and international control and bank supervision requirements. The fruit of all these elements is a healthy and sound banking sector that was capable to stand steadfast in the face of the harshest financial crisis in contemporary history.

The financial soundness and strength indicators of the Jordanian banking sector continued to be positive, demonstrating the sector’s resilience, soundness and ability to absorb shocks and high risks. Available data indicate that the capital adequacy rate of banks in Jordan is 16.9% at the end of 2018, which is comfortably higher than the percentage set by the CBJ (12%), and higher than the percentage set by the Basel Committee, which is 10.5%.

Data also indicate a rise in the quality of bank assets in Jordan. Non-performing debts account for 4.9%, while the percentage of coverage of non-performing debts was 79.3%.

Jordanian banking system had high and secure liquidity levels. The legal liquidity rate amounted to 131.9% at the end of 2018. The sector reached profitability levels where the ROA amounted to 1.2% and the ROE reached 9.6%.

Kandah drew attention to the fact that banks have been able to strike positive growth rates in terms of assets, deposits and granted credit facilities. The average growth rate of total assets reached 3%, the average growth rate of customers’ deposits reached 2% and the average growth rate of facilities reached 5.3%, all of those figures were registered at the end of 2018.

UAB Secretary General Wissam Fattouh said the issue of financial stability has become a constant source of worrying to our Arab banking sectors because of the regional and world developments. Therefore, the UAB heeded extreme importance to this issue, especially as the Arab world is experiencing a state of uncertainty resulting from political conflicts, security issues, wide- spread poverty and unemployment and the dominance of illiteracy.

The UAB, he added, seeks to enhance financial stability and stimulate sustainable development efforts, in addition to making the Arab banking sector safe from the regional political conflicts, by developing the legislative and institutional frameworks of financial stability in the Arab World.

Fattouh stressed that financial inclusion improves the efficiency of banks’ intermediary role between national savings and investments, helps to improve the efficiency of financial system, helps bank customers to have a more stable basis for deposits, especially retail banking, and reduces their reliance on wholesale banking.