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'Idle capital' comes out of the mattress as banking sector develops

There was a time, not long ago, when the most popular banking and savings facility in Jordan was a mattress. After the mid-1970s, when the trickle of Gulf oil money throughout the region rose to a flood as Jordanian workers began sending home fatter paychecks, it is widely suspected (though undocumented) that there was a proliferation in Jordan of mattresses stuffed full of petrodollars - or what bankers call ''idle capital.''

''In Jordan, under the mattress has been a fairly common way to do it,'' a banker in Amman says.

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The popularity of keeping one's savings at home, where they can be regularly thumbed over, counted, and generally appreciated comes in part from a basic mistrust of banks, bankers, and interest, according to bankers. (There has never been a bank failure in Jordan, however.) In addition, a majority of the potential banking public has had personal experience with how quickly wars develop in the Middle East, and many of them can recite the date and time when they hurriedly packed their bags and fled Palestine with whatever cash they had in their pockets.

Such factors have presented a significant challenge to those in Jordan eager for the development of a modern banking and financial sector. But today, as a result of an active Central Bank campaign since the early 1970s, Amman has to a great extent overcome this hurdle and developed into a sophisticated financial center.

The problem was not unique to Jordan. It has been a hurdle faced by bankers in countries throughout the developing world: how to educate the public in the advantages of banking and promote public confidence in the banking sector so as to attract increased bank savings deposits and thus create a larger pool of funds available for investment and development of the country.

''This was wanted just to utilize the savings of the community rather than have them kept in the mattresses,'' says Husayn S. al-Kasim, deputy governor of the Central Bank.

As the public became more and more receptive to the idea of banking, the Central Bank continued to push the banks themselves to become more innovative, both in competing for deposits and in facilitating investment activity in Jordan.

One banker says the campaign was ''a way to mobilize capital that might have been kept at best in short-term bank deposits, or maybe it was kept in the pocket.''

He added, ''It's still a cash society in a lot of ways.''

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Last year, according to the Central Bank, Jordanians wrote about 3.8 million checks - the equivalent of fewer than two checks per person for the entire year. ''That's a ridiculously low number when you figure how many checks you may write at home in the United States,'' a Western banker commented. He added, ''It gives you some indication that Jordan may be underbanked.''

But the phenomenon that most raised bankers' suspicions that large sources of untapped savings - ''mattress money'' - remain in Jordan was the continuous flow of large amounts of funds into a series of oversubscribed stock issues in the Amman Financial Market (stock market). The market opened in 1978.

Although financial analysts are not sure exactly where the funds came from, they note that the money was not withdrawn from commercial banks. In fact, commercial bank deposits during that period increased from $1.6 billion in 1978 to $4.25 billion in February 1983, according to the Central Bank. This, during a period of unprecedented investment in the local stock market.

The basic explanation most accepted by bankers and economists in Amman is that money-stuffed mattresses in Jordan are getting thinner. That is a development the Central Bank considers quite healthy for depositors, investors, and the economy in general.

In the meantime, the Central Bank is continuing to push the banking sector to break away from its conservative tradition of extending only short-term, trade-oriented loans. The Central Bank has offered a series of incentives to banks such as favorable deposit ratios and interest benefits to get banks more involved in long-term credit projects, particularly in agriculture, tourism, and industry.

The Central Bank also backed the creation of new types of financial institutions. These include so-called finance companies which function like a US investment bank and a stockbroker.

With these developments have come the encouragment, use, and acceptance of more innovative investment instruments, particularly syndicated loans and corporate bonds.

The first syndicated loan in Jordan was organized in 1979 by 11 banks headed by the government-backed Industrial Development Bank.

The $27 million loan came as part of the refinancing of a Eurodollar loan to the Jordan Cement Factory Company. The ability of banks in Jordan to pool their resources and offer long-term loans at a relatively low rate of interest (about 11 percent), fixed by the Central Bank, offered the Cement Factory and other Jordanian companies an alternative to 19-, 20-, and 21-percent interest rates in the US and European credit markets. The Cement Factory loan now heads a long list of similar financial arrangements organized by local banks for Jordan's largest industrial companies, including a $36 million syndicated loan to the Jordan Phosphate Company.

''Where the bigger projects used to go to the Eurodollar market for long-term financing, the local banks stepped in and made loans in Jordanian dinars at almost a fixed rate of interest. This was a benefit to industry and investment, '' says Ziyad Annab, general manager of the Industrial Development Bank. He adds , ''Part of it was even used for repayment to Eurodollar loans at the lower rate of interest.''

He says, ''Syndicated loans are done as a normal operation now.''

As of 1982, according to Central Bank statistics, more than $330 million has been extended by local banks through syndicated loans, and another $143 million has been raised via corporate bonds. Corporate bonds were first issued in Jordan in 1979.

At present there are 16 commercial banks, 2 investment banks, and 10 finance companies in Jordan. There are also 6 government-backed specialized credit institutions, including the Housing Bank and Industrial Development Bank. These institutions are designed to provide soft loans for projects that profit-oriented commercial banks have shunned in the past.

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