Islamic banking is a global player in the increasingly sophisticated current business environment in the world. The first idea was initiated in 1963 by Dr Ahmad El-Najjar when he founded a microfinance program based on profit-sharing according to Shariah compliant financial services. Later on, the project became the Nasser Social Bank.
According to the 2015/2016 State of the Global Islamic Economy Report issued by Thomson Reuters, Jordan ranked ninth among the top ten countries in Islamic finance. Islamic finance received strong support from the Jordanian government despite being a small part of the Jordanian banking system.
The government issued a special law for the establishment of the first Islamic bank in Jordan in 1987. In 2000, the law was replaced by the private law for Islamic banks – this law organized the operations for Islamic banks and its own regulatory issues. The Jordanian banking system consists of 16 local banks (13 conventional and three Islamic); and nine foreign banks (eight conventional and one Islamic). These banks present innovative banking tools that are harmonized with modernity and the requirements of modern technology.
Review of 2015
Jordan has a unique experience in Islamic banking and finance. The formative years began by establishing Jordan Islamic Bank as the first Islamic bank in 1978. The Islamic International Arab Bank followed after two decades in 1997. In 2010 and 2011, the Jordan Dubai Islamic Bank and Al Rajhi Bank were established respectively. Currently, Jordan has four operating Islamic banks, six Islamic finance and investment companies and two Islamic insurance companies. Islamic banks inside Jordan have around 140 branches in 2015.
In terms of financial figures, total deposits for Islamic banks are expected to be around 18% of total deposits, while total equities are expected to be around 11% of total equities for working banks in Jordan. Total assets were 14.9% in 2014 and expected to reach 15-17% of total assets of the banking system in 2015. In addition, total liabilities for Islamic banks were 21.8% in 2014 and expected to reach 22-25% of total liabilities of the banking system in 2015.
In 2015; Islamic banks introduced a wide range of diversified products. For example, the retail sector introduced customer accounts such as current, savings, Wakalah, joint investment, portfolio of Sanadat Muqarada and investment through certificates of deposits. Retail facilities were also introduced through products structured with Qard Hasan, Murabahah, Musawwamah, Ijarah, Ju’alah and also products for the financing of benefits and car and housing financings. The retail sector presented other products such as Visa cards, transfers (inward and outward), foreign exchange and safe boxes. For the corporate sector, a wide range of financial services was introduced such as different client accounts, trade finance services such as letters of credit, letters of guarantee and bills of collection.
Corporate sector financing relies on Murabahah, forward selling, Ijarah, Musharakah, Mudarabah, Istisnah, Salam and other Shariah compliant tools. Islamic banking focuses on replicating traditional banking activities with Shariah compliant standards, with Islamic banks being retail and trade finance-oriented .Recently, Islamic banks in Jordan have become more sophisticated with new financial products reaching into every field of treasury and investment such as money markets, capital markets and wealth management.
For capital markets, the government plans to support the first sovereign Sukuk in the Kingdom and provide technical support for Sukuk issuance denominated in Jordanian dinars.
Preview of 2016
Financial experts expect that the Jordanian government will benefit extensively from issuing sovereign Sukuk. The Central Bank of Jordan (CBJ) is a regular player in the bonds market. A clear signal was sent previously to local financiers in order to participate in any coming Sukuk issues. The CBJ is expected to begin managing the first issue of sovereign Sukuk in 2016. This issue will be directed toward financing part of the accumulated deficit in the government and independent public department’s budgets after the official institutions have succeeded in endorsing the Sukuk law and its related regulations. This action will benefit the government and Islamic banks operating in Jordan as they have a liquidity surplus of around JOD1.4 billion (US$1.97 billion).
Indeed, experts are expecting the number of Islamic banks in Jordan to increase due to its political and economic stability. In addition to sustainable growth for all financial figures for Islamic banks, Jordan has significantly contributed to the Islamic banking industry. For example, Jordanian Islamic banks were the first Islamic banks to apply Islamic finance tools such as Istisnah and Ijarah in modern contracts.
In addition, Dr Sami Hamoud, a Jordanian entrepreneur, was the first person who introduced the Murabahah contract which was traded widely in Islamic banks in 1970 at Dubai Islamic Bank. Not only that, Jordan was the first country which organized special laws for Sukuk. This law was called the Muqarada bond law and was issued in 1982. It is no surprise then that Jordan is a main player in the Islamic finance industry.
Nafith Nazzal is an Islamic banking specialist; selected among the top 500 leaders in the Islamic Economy 2015, is a certified financial and investment advisor and a statistical analyst in Jordan. He can be contacted at [email protected].