Browse Profiles > Jordan > Core Principles for Effective Banking Supervision
  Score Rank
Standards Compliance Index 27.50 out of 100 58
Business Indicator Index 9.15 out of 12 35
Jordan

Core Principles for Effective Banking Supervision

Summary
A 2005 report by the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF) notes that the IMF did conduct a Financial Sector Assessment Program (FSAP) for Jordan and reported its finding in a Financial System Stability Assessment (FSSA) report, which the Jordanian authorities declined to publish. However, the IEO report indicates that the FSSA concluded that Jordan has achieved a high degree of compliance with international standards with regards to prudential regulations. The report also noted that the Jordanian reform process is motivated by the authorities desire to align its banking supervision practices with international standards. Furthermore, a more recent (2006) report by the Commission of the European Communities states that Jordan has been making progress in its financial supervision and intends to become compliant with the Basle Core Principles (BCPs) for Effective Banking Supervision in 2008. The IMF in its 2004 Article IV commends Jordan on its supervisory framework and states that the framework in general is in line with international standards and codes. However, apart from this statement, there has been little subsequent information publicly available to indicate that Jordan has enacted or implemented the BCPs.

    General Overview

    A recent (2006) report by the Commission of the European Communities notes that Jordan has been making progress in its financial supervision and intends to become compliant with the Basle Core Principles for Effective Banking Supervision in 2008 (p. 7). Jordan's regulatory and supervisory framework has been strengthened over the years and, according to the International Monetary Fund (IMF), in its 2004 Article IV Consultation report, "generally observes international standards and codes in banking" (p. 13). The 2004 IMF report indicates that the banking system generally shows high capital ratios, liquidity, and profitability.
    According to a 2005 report by the Independent Evaluation Office (IEO) of the International Monetary Fund, the IMF did conduct a Financial Sector Assessment Program (FSAP) for Jordan and reported its finding in a Financial System Stability Assessment (FSSA) report, which the Jordanian authorities declined to publish. However, based on information provided by the 2005 IEO report, the FSSA indicated that Jordan "had reached a high level of compliance with international best practice in the areas of prudential standards in the banking sector" (p. 59). The report also notes that the IMF has been providing technical assistance to Jordan's reforms, especially in improving the Central Bank of Jordan's (CBJ) supervisory and reporting practices and aligning them to international standards. Moreover the 2005 IEO report also mentions that CBJ officials indicated that the goal of achieving international standards motivates Jordan's authorities to pursue reforms.
    The IMF's Article IV Consultation report, completed in 2006 and published in 2007, indicates that Jordanian authorities have undertaken various progressive measures since the FSAP in terms of banking regulation and supervision. According to both the IEO and IMF, among the FSAP's recommendations that have been implemented by Jordan are: publication of prompt corrective action measures and a handbook of corporate governance/risk management guidelines for banks; (2) introduction of an electronic reporting system for off-site supervision; and (3) improved licensing procedures for banks. Also, the IMF's 2007 Article IV Consultation report mentions that Jordan is moving forward in its implementation of Basle II's Second Pillar and the Jordan authorities welcomed an FSAP update in 2007 once all the requirements for Basel II are in place.
    According to the IMF in its 2007 report, the increased expansion of credit in Jordan in the near term will necessitate stricter measures by banks in terms of supervision. The IMF reports that presently (as of 2006-2007) banks are well-capitalized and there has been a decline in nonperforming loans. The Central Bank of Jordan's 2005 Annual Report states that there were 23 banks operating in Jordan as of 2005, eight of which were branches of foreign banks. The findings of the FSAP, as presented in the 2004 IMF Article IV report, were that banks in Jordan are well capitalized and the central bank intents to double the minimum capital requirement by 2007. The IMF report also notes that the Jordanian authorities have taken measures to improve corporate governance and financial disclosure in banks and strengthened its early warning system.


    The Principles

    1. (1) Clear responsibilities and objectives for each supervisory agency.

    According to information provided by the CBJ on its website, the main objective of the Banking Supervision Department (a division of the CBJ) is to maintain the safety and soundness of the banking system. However, there is insufficient information publicly available as to Jordan's compliance with this principle.

    1.(2) Operational independence and adequate resources.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    1.(3) A suitable legal framework for authorization and ongoing supervision.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    1.(5) Legal protection for supervisors.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    4. Authority to review and reject transfer of ownership.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    5. Authority to review major acquisitions and investments.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

    According to Creane et al., writing in 2004, "risk-weighted capital requirement was raised to 12 percent effective June 1997 and all banks reportedly meet this requirement (p. 35). However, there is insufficient information publicly available as to Jordan's compliance with this principle.

    7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    9. Prudential limits and management information system on concentration of exposure.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    10. Arm's length rule and monitoring for connected lending.

    According to Creane et al., writing in 2004, "for connected lending, banks have to seek approval for lending more than JD1000 and Connected companies cannot receive loans in excess of 10 percent of capital" (p. 38). However, there is insufficient information publicly available as to Jordan's compliance with this principle.

    11. Policies and procedures for country risk and transfer risk.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    13. Comprehensive risk management processes.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    14. Adequate internal controls.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    15. Strict "know-your-customer" rules and high ethical and professional standards.

    According to a 2007 report by the U.S. Department of State (DoS), Article 93 in the Banking Law of 2000 covers money laundering with respect to suspicious transactions and requires that banks alert the Central Bank of any such transactions. The report further indicates that, in 2006 the Central Bank of Jordan issued instructions to banks to comply with international best practices in the areas of customer due diligence (CDD), politically exposed persons, wire transfers, record keeping, suspicious transactions reporting (STR), and internal controls of banks. Also, Article 147 of the Jordanian Penal Code prohibits banking transactions related to terrorist activity. However, there is no publicly available information as to Jordan's compliance with this principle.

    The U.S. DoS also reported that Jordanian financial institutions do file STRs and cooperates with the government regarding information on drug trafficking and terrorist financing; according to sources among Jordanian officials. However, there has not been any prosecution or convictions for money laundering in the country.

    16. Effective supervisory system consisting of on-site and off-site supervision.

    Based on information provided on the CBJ on its website, the CBJ undertakes both off-site and on-site supervision of banks (CBJ website). However, there is insufficient information publicly available as to Jordan's compliance with this principle.

    17. Regular contact with bank management and understanding of bank's operations.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    18. Analytical reports and statistical returns on solo and consolidated basis.

    According to information provided in a 2006 report by Oxford Analytica, financial institution are required to provide financial statement and data on their operations to the CBJ and also required to publish these "financial statements and audit reports in two national daily newspapers within six months of the end of the fiscal year" (p. 195). However, there is insufficient information publicly available as to Jordan's compliance with this principle.

    19. Independent validation of supervisory information through on-site examination or external auditors.

    The Word Bank in its 2004 Report on the Observance of Standards and Codes (ROSC) notes that the Central Bank of Jordan has a team of bank supervisors that reviews the financial statements of banks but to ensures that these statements are in compliance with the appropriate reporting standards the BJ mostly relies on the statutory auditors of the banks. The report further indicates that the CBJ has the authority to take corrective action against those banks that do not comply with the accounting requirements set forth by the CBJ and the external auditors are required to report to the CBJ any infraction in reporting by the banks. However, there is insufficient information publicly available as to Jordan's compliance with this principle.

    20. Ability to supervise on a consolidated basis.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

    The World Bank's 2004 ROSC assessed Jordan's accounting and auditing standards, and indicated that the Banking Law of 2000 "requires all banks to keep records, maintain books of account, and prepare financial statements in accordance with recognized accounting principles" (p. 5). The report also notes that the instructions of the CBJ require that bank's financial statements be prepared in accordance with International Accounting Standards/International Financial Reporting Standards (IAS/IFRS). The external auditors are also required to be pre approved by the CBJ and CBJ is responsible for verifying that bank financial statements are prepared in compliance with applicable accounting and reporting standards according to the 2004 World Bank report. However, there is insufficient information publicly available as to Jordan's compliance with this principle.

    22. Adequate supervisory measures to ensure timely corrective action.

    According to information provided in a 2006 report by Oxford Analytica, "an Early Warning System was implemented in late 2003, and a comprehensive framework for prompt corrective measures for unsound banking practices was initiated in early 2004" (p. 196). However, there is insufficient information publicly available as to Jordan's compliance with this principle.

    23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    24. International exchange of information with other supervisors.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

    25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

    There is insufficient information publicly available as to Jordan's compliance with this principle.

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    Sources of Assessment

    Commission of the European Communities, "Communication from the Commission to the Council and the European Parliament on Strengthening the European Neighbourhood Policy - Progress Report: Jordan," Brussels, Belgium: CEC, December 2006. Available from the European Commission website. Accessed on May 23, 2007. (CEC 2006)

    Independent Evaluation Office of the International Monetary Fund, "Evaluation Report IMF Support to Jordan, 1989-2004," December 6, 2005. Available from the Independent Evaluation Office of the International Monetary Fund website. Accessed on May 23, 2007. (IEO 2005)

    International Monetary Fund, "Jordan: 2004 Article IV Consultation and Second Review under the Stand-By Arrangement - Staff Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Jordan," Country Report No. 04/122, Washington, D.C.: IMF, May 2004. Available from International Monetary Fund website. Accessed on May 17, 2007. (IMF 2004)

    International Monetary Fund, "Jordan: 2006 Article IV Consultation and Fourth Post-Program Monitoring Discussions - Staff Report; and Public Information Notice on the Executive Board Discussion," Country Report No. 07/128, Washington, D.C.: IMF, March 2007. Available from International Monetary Fund website. Accessed on May 17, 2007. (IMF 2007)

    World Bank, "Jordan: Report on the Observance of Standards and Codes - Accounting And Auditing," June 10, 2004. Available from World Bank website. Accessed on May 23, 2007. (WB 2004)

    Relevant Organizations

    Association of Banks in Jordan (ABJ)

    Central Bank of Jordan (CBJ)

    Ministry of Finance of Jordan (MoF)



    Relevant Legislation/Regulation

    Banking Supervision Regulations (Arabic)

    Banking Law No. 28, 2000

    Central Bank of Jordan Law No.23, 1971



    Supplementary Sources

    Central Bank of Jordan, "Annual Report," 2005. Available from International Monetary Fund website. Accessed on May 21, 2007. (CBJ 2005)

    Central Bank of Jordan website. Accessed on May 23, 2007. (CBJ website)

    Creane, S., et al., "Financial Sector Development in the Middle East and North Africa," International Monetary Fund Working Paper 04/201, Middle East and Central Asia Department, Washington, D.C.: IMF, October 2004. Available from International Monetary Fund website. Accessed on May 23, 2007. (Creane et al 2004)

    Oxford Analytica, "Monetary Transparency Report - Jordan," Oxford: OA, December 2006. Available from California Public Employee Retirement System website. Accessed on May 23, 2007. (OA 2006)

    U.S. Department of State, Bureau for International Narcotics and Law Enforcement Affairs, "Money Laundering and Financial Crimes," March, 2007. Available from U.S. Department of State website. Accessed on May 3, 2007. (U.S. DoS 2007)
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