From being a small and unimportant Islamic bank established in 1978 and under the loyal and unbroken stewardship of the seasoned General Manager Musa Shihadeh, Jordan Islamic Bank (JIB) has, over the last three decades transformed itself into the largest Islamic lender and the third largest domestic bank in Jordan. This is by all standards impressive given that JIB’s main competitor in the market is the mighty Arab Bank Group, one of the largest banks in the Middle East and which has its own dedicated Arab International Islamic Bank.Had it not being for the fact that JIB operates exclusively in Jordan which is a relatively conservative market, the bank could have moved to even greater heights. Not surprisingly this has impacted on the rating of JIB. In fact, Standard & Poor’s (S&P), the international rating agency, in its latest counterparty credit ratings assigned to JIB of BB/Stable/B in September confirmed that JIB’s ratings “are primarily constrained by the fact that bank operates in Jordan, which in S&P’s view creates high credit risk.”
The strengths of JIB is that it has a strong retail franchise with a satisfactory financingand liquidity profile, and has shown great resilience in its asset quality and in sustainable profitability through the economic downturn precipitated inter alia by the global financial crisis. However, the bank would have to expand greatly especially in its capital strength and adequacy to even aspire to an investment-grade rating.
JIB is 66 percent owned by Bahrain-based Albaraka Banking Group (ABG), which is not renowned for supporting its subsidiaries with huge capital injections. Its two flagship entities are indeed JIB and Albaraka Turk Participation Bank (ATPB), both with huge potential but punching below their weight. During the 2001 Turkish banking crisis, for instance, the Dallah AlBaraka Group was conspicuous in its absence of throwing a lifeline to ATPB, which like other banks in Turkey were experiencing varied degrees of runs on their deposits. It was the Islamic Development Bank (IDB) that gave ATPB a line of credit which was collateralized with some of the Turkish Islamic bank’s prize assets — Murabaha and other receivables which were ring-fenced by the IDB.
With its huge experience, JIB should be the natural gateway for Islamic finance in the Palestinian Territories and perhaps more importantly to Iraq and Syria. While the former two are still mired in political deadlock in their respective situations, Islamic finance is starting to make genuine inroads into Syria, where the central bank has already authorized five Islamic banks, including one by ABG, which is JIB’s parent.
The genteel but experienced Musa Shihadeh, the vice chairman and general manager of JIB since its launch, is also a pragmatic banker. He knows the limitations of the geopolitics of his home market and those across the border into the neighboring Iraq and Palestinian Territories. As such any imminent forays into these markets would be nigh impossible if not premature.
Nevertheless, he is heartened by S&P’s ratings which he stresses is a vindication of the “bank’s policy and strategy of continuing to enhance its banking and financing activities in Jordan on the one hand, and maintaining its special relations with foreign financial institutions on the other hand.” The rating, he adds, is also an important motivation for JIB to further improve its business and to contribute to the economic prosperity and development of Jordan.
JIB, which held assets totaling $3.2 billion at end March 2010, focuses primarily on the domestic market servicing both retail and corporate clients in consumer finance, construction finance and trade finance.
“We consider JIB,” stressed S&P, “to be of high systemic importance in the Jordanian banking sector. We classify the authorities as supportive toward the banking system. The long-term rating on JIB is therefore one notch above its stand-alone credit profile, reflecting our expectation of extraordinary parent support in case of need. JIB’s strategy emphasizes sustained growth and further enhancement of its systems and integration within the group, in our view. Although we acknowledge the bank’s good track record in terms of asset quality, we remain cautious about the risks related to its rapid growth in a country that in our view carries high economic risk.”
S&P however does not qualify the basis and assumptions for its strong view of group support for any of its subsidiaries in times of need. However it does stress that it “could align the ratings with the bank’s stand-alone credit profile if we were to revise downward the potential for extraordinary parent support.”
The rating rationale further extols JIB’s funding to be a strength for the ratings, and its very high liquidity should enable it to mitigate mild shocks. JIB’s total regulatory capital adequacy ratio under Basel II of 14.5 percent is well above the minimum 8 percent. But it is at variance with S&P’s estimated risk-adjusted capital ratio (RAC) which applies higher risk weightings across the main asset classes and takes into account geographic concentration of assets. Under the banking industry country assessments, Jordan sits in Group 8, two lower than Group 10 which denotes the highest risk. As such, JIB’s RAC under this S&P methodology is 5 percent which is lower than the estimated average for international peers.
The stable outlook assigned to JIB is based on the assumption that the bank’s business and financial profile will remain relatively unchanged over the medium-term. But the rating agency warns that it would take a negative view should JIB’s business profile changes especially if it grew rapidly in a still uncertain operating environment.
JIB will have to work much harder to elicit a positive rating action in the foreseeable future because “it would require an upgrade of the sovereign foreign currency rating as well as a substantial improvement in the bank’s financial profile, especially its capitalization.”
However, there are exciting new opportunities looming on the horizon. The Ministry of Finance and the Central Bank of Jordan have given the go-ahead for Al-Rajhi Bank in Jordan to explore the possibility of issuing a sukuk. Assuming that the Treasury and the central bank are working on introducing enabling legislation for sukuk origination and listing in Jordan, this would open up new avenues of raising finance and investments for the likes of JIB.
Source : http://arabnews.com/economy/islamicfinance/article163325.ece - Oct 17, 2010
The strengths of JIB is that it has a strong retail franchise with a satisfactory financingand liquidity profile, and has shown great resilience in its asset quality and in sustainable profitability through the economic downturn precipitated inter alia by the global financial crisis. However, the bank would have to expand greatly especially in its capital strength and adequacy to even aspire to an investment-grade rating.
JIB is 66 percent owned by Bahrain-based Albaraka Banking Group (ABG), which is not renowned for supporting its subsidiaries with huge capital injections. Its two flagship entities are indeed JIB and Albaraka Turk Participation Bank (ATPB), both with huge potential but punching below their weight. During the 2001 Turkish banking crisis, for instance, the Dallah AlBaraka Group was conspicuous in its absence of throwing a lifeline to ATPB, which like other banks in Turkey were experiencing varied degrees of runs on their deposits. It was the Islamic Development Bank (IDB) that gave ATPB a line of credit which was collateralized with some of the Turkish Islamic bank’s prize assets — Murabaha and other receivables which were ring-fenced by the IDB.
With its huge experience, JIB should be the natural gateway for Islamic finance in the Palestinian Territories and perhaps more importantly to Iraq and Syria. While the former two are still mired in political deadlock in their respective situations, Islamic finance is starting to make genuine inroads into Syria, where the central bank has already authorized five Islamic banks, including one by ABG, which is JIB’s parent.
The genteel but experienced Musa Shihadeh, the vice chairman and general manager of JIB since its launch, is also a pragmatic banker. He knows the limitations of the geopolitics of his home market and those across the border into the neighboring Iraq and Palestinian Territories. As such any imminent forays into these markets would be nigh impossible if not premature.
Nevertheless, he is heartened by S&P’s ratings which he stresses is a vindication of the “bank’s policy and strategy of continuing to enhance its banking and financing activities in Jordan on the one hand, and maintaining its special relations with foreign financial institutions on the other hand.” The rating, he adds, is also an important motivation for JIB to further improve its business and to contribute to the economic prosperity and development of Jordan.
JIB, which held assets totaling $3.2 billion at end March 2010, focuses primarily on the domestic market servicing both retail and corporate clients in consumer finance, construction finance and trade finance.
“We consider JIB,” stressed S&P, “to be of high systemic importance in the Jordanian banking sector. We classify the authorities as supportive toward the banking system. The long-term rating on JIB is therefore one notch above its stand-alone credit profile, reflecting our expectation of extraordinary parent support in case of need. JIB’s strategy emphasizes sustained growth and further enhancement of its systems and integration within the group, in our view. Although we acknowledge the bank’s good track record in terms of asset quality, we remain cautious about the risks related to its rapid growth in a country that in our view carries high economic risk.”
S&P however does not qualify the basis and assumptions for its strong view of group support for any of its subsidiaries in times of need. However it does stress that it “could align the ratings with the bank’s stand-alone credit profile if we were to revise downward the potential for extraordinary parent support.”
The rating rationale further extols JIB’s funding to be a strength for the ratings, and its very high liquidity should enable it to mitigate mild shocks. JIB’s total regulatory capital adequacy ratio under Basel II of 14.5 percent is well above the minimum 8 percent. But it is at variance with S&P’s estimated risk-adjusted capital ratio (RAC) which applies higher risk weightings across the main asset classes and takes into account geographic concentration of assets. Under the banking industry country assessments, Jordan sits in Group 8, two lower than Group 10 which denotes the highest risk. As such, JIB’s RAC under this S&P methodology is 5 percent which is lower than the estimated average for international peers.
The stable outlook assigned to JIB is based on the assumption that the bank’s business and financial profile will remain relatively unchanged over the medium-term. But the rating agency warns that it would take a negative view should JIB’s business profile changes especially if it grew rapidly in a still uncertain operating environment.
JIB will have to work much harder to elicit a positive rating action in the foreseeable future because “it would require an upgrade of the sovereign foreign currency rating as well as a substantial improvement in the bank’s financial profile, especially its capitalization.”
However, there are exciting new opportunities looming on the horizon. The Ministry of Finance and the Central Bank of Jordan have given the go-ahead for Al-Rajhi Bank in Jordan to explore the possibility of issuing a sukuk. Assuming that the Treasury and the central bank are working on introducing enabling legislation for sukuk origination and listing in Jordan, this would open up new avenues of raising finance and investments for the likes of JIB.
Source : http://arabnews.com/economy/islamicfinance/article163325.ece - Oct 17, 2010
