Sharia-compliant lenders offer alternative financing in Jordan

Still comprising a small portion of the financial services sector, Islamic finance is set to play a much bigger role in Jordan’s economic development by supporting financial services diversification and offering a potential solution to limited credit access and excess liquidity.

The segment currently comprises four banks, three of them Jordanian and one foreign. The country’s first Islamic bank, Jordan Islamic Bank (JIB), was established in 1978 and now holds a 60% share of the domestic Islamic banking market. Islamic International Arab Bank was the next entrant, founded in 1997. Safwa Islamic Bank, the successor of Jordan Dubai Islamic Bank, and Al Rajhi Bank were established in 2010 and 2011, respectively, filling out the current market.

Loan Growth

Islamic banks accounted for 18% of total deposits in 2015, and an estimated 15-17% of total assets. Local Islamic banks have been active in introducing increasingly diversified products since 2015, including joint investment instruments; investment through deposit certificates; and retail, current, savings, and wakala (agency) accounts.

Retail loans have also been rolled out under qard hasan (interest-free), murabaha (cost-plus financing), musawama (bargaining sale), ijara (leasing) and ju’ala (commission) structures. Corporate financing relies on murabaha, forward selling, ijara, musharaka (joint venture), mudaraba (profit sharing), istisn’a (deferred delivery) and al salam (short-term bond) structures.

The effect on lending has been positive, with the value of Islamic receivables rising from JD4.1bn ($5.8bn) in 2014 to JD4.7bn ($6.6bn) in 2015 and growing by 8% to JD5.1bn ($7.2bn) in 2016, or 22% of total bank lending, according to the Central Bank of Jordan (CBJ).


Sukuk (Islamic bonds) are also expected to play an increasingly important role in supporting economic expansion and infrastructure delivery. The Jordan Economic Growth Plan 2018-22 includes plans for the CBJ to encourage commercial and Islamic banks to establish private equity and venture capital investment funds.

A 2017 Deloitte report on the potential for Islamic finance to be deployed in the energy sector highlighted Jordan’s inaugural October 2016 sovereign sukuk issuance as a way to finance green energy projects. The $48m issuance was supported by the Islamic Corporation for the Development of the Private Sector – the private arm of Saudi Arabia’s Islamic Development Bank – and the Japan International Cooperation Agency. The five-year bond was developed using a flagship amortised ijara structure and was more than three-times oversubscribed, with an expected profit rate of 3.01%. A state-owned special purpose vehicle issuer was established in Amman to support the issuance, with the proceeds earmarked for development purposes.

The National Electric Power Company issued a JD75m ($105.8m) sukuk in May 2016, priced at 3.5%, and a second JD75m ($105.8m), five-year sukuk in March 2017 under a murabaha framework, priced at 4.1%.

Future Implications

In October 2016 the minister of finance, Omar Malhas, told media that the sovereign issuance is significant for Jordan’s Islamic banks, as it offers a much-needed tool to deploy excess liquidity, which was estimated at JD1.4bn ($2bn) in 2016. Sukuk are also expected to play an important role in improving the government’s ability to finance its budget deficits, with Malhas noting that the sukuk was priced inside Jordan’s existing conventional curve, meaning the bond can be used to lower borrowing costs.

Green for Go

Green bond and green sukuk issuances at the sovereign level are becoming a more popular method by which to finance renewable energy projects in the Middle East, and Jordan’s issuance is a notable development for the region, as it is widely expected to encourage similar activities in the future.

Deloitte noted that some of the renewable energy projects in the kingdom have received support from the International Finance Corporation, which also played an important role in the structuring of an Islamic syndicated loan to finance a separate power project in Iraq.

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