Special feature: JORDAN

Interview with Mr Ihab G. Saadi, CEO of Housing Bank, Jordan

May, 2017

QAccording to the World Bank, over the past 10 years, Jordan has successfully pursued structural reforms in education, health, privatization and liberalization. Real GDP growth is forecast to stand at 3.7% in 2016 which considering the global economy is a figure that many countries are envious of. From your position as the leader of one of the main banks in the country, how do you see the fundamentals of the Jordanian economy at this time.

IGS: First of all the revised GDP growth figure was 2.3%. I wish it remained at 3.6 but unfortunately it’s not. As far as fundamentals, I think Jordan does have the right and necessary fundamentals, as you said we have undergone a lot of reforms. We continue to do that. In regards to the banking sector, we are, through the Central Bank, implementing a lot of the governance reforms. In my opinion one of the key fundamentals in Jordan is the political stability that we enjoy; because that is the difference between attracting investments and not attracting investments. Consider that we are in the middle of so many crises all around us and yet we are still hosting you here, safely, enjoying yourselves, and talking business; I think that says it all. There's a lot of things happening, for example, on the investment authority side in terms of improving and making it a bit easier for investors and so forth. So all in all, I think the country is moving in so many directions. Unfortunately, we are undergoing tough situations worldwide and we are part of this world so we just have to survive for the time being yet we are moving, we are growing, and we are reforming. That’s a general type of impression or general type of conclusion that you can see or make about the country.

QThis summer saw the United Kingdom vote ‘Leave’ during the BREXIT referendum. However, with regards to its foreign policy – and Jordan specifically – the UK government was quick to point out that BREXIT would in no way affect the bilateral relationship. What do you believe will be the impact of BREXIT in in terms of the bilateral ties internationally and specifically with Jordan and what will be impact on London as the financial hub of the world?

IGS: I am not the expert of that, but I will give it my best shot. Tomorrow, when you meet with the finance minister, maybe he can shine more light on this. I see it like this: from a U.K. perspective, it probably should benefit Jordan in the sense that, now that the U.K. has exited from the European Union, it probably needs to develop more ties with other countries such as Jordan. I see that as a positive from that particular angle. On the European side, the ties will remain good, maybe they will improve as well. When you look at Europe today, it is probably too busy with its own issues. There were talks a couple of days ago about the Euro probably reaching to a dollar. So again, they have their own set of issues. It doesn't mean the bi-laterals won’t continue to be there, they are just too busy with their own separate issues. On the U.K. side, if you ask me my personal opinion, I would have preferred that it didn’t happen. But from what I understand it might be prevented at the parliamentary level now. I think that was a big gamble at the time. An issue like that, it needs more depth, studies, and insight to make a decision like that. I think their relationship with the U.K. will continue to be there, the business will probably grow, as far as bi-laterals are concerned. At the end of the day, they have their sets of issues, we have ours, and I'm sure we'll manage. I still insist that question is probably better answered by the Minister of Finance.

QMoving to the Banking Sector in Jordan. Financial inclusion is a major topic in the Arab world, and something we also discussed at length with the Governor of the Central Bank, Dr. Ziad Faris. Earlier this year, you were awarded the "Arab World's Leading Bank in Financial Inclusion", presented by the World Union of Arab Bankers. Could you please share with us some of the measures that you have undertaken to increase financial inclusion in Jordan?

IGS: The compliance world we are living in today is a big challenge, so you’ve got your banked people, unbanked and so forth. One example of a simple measure we are doing, is that we are connecting with a large company that has thousands of foreign labour employees from the far east, who are unbanked by definition. We are issuing debit cards and such through MEPS and therefore enabling them to utilise banking services; yet they are unbanked as far as having accounts. So, we engage in initiatives like that. We are trying to cater a lot of services to those who are able, and also those who are less able. We came up with products like the tourism loan with the U.S. Aid, trying to cater for small businesses who don't have much collateral. They may not be your best bankable segment; but with some guarantees from other agencies, we are trying to make that happen. We are taking initiatives here and there in order to reflect our wide presence and put it to use. We are the widest spread bank in Jordan. We have almost 140 branches, and those branches are strategically widespread. Another bank may have 90, branches; but 70 of those may be in western Amman, as opposed to us spread all over the country, and that is the key difference. We are spread at the branch level, and where that is not possible, we are spread at the ATM level, trying to cater to a lot of people. That is the strategy the bank has been growing for years, and we are continuing it.

SZ: In terms of regulations and compliance, well banks are prominent in the news everywhere lately – Deutsche bank was the latest victim. There has been emphasis on the de-risking of regulations. Banks are cutting regulations, cutting costs. To on-board the new clients or to maintain the existing clients, you need to have proper controls and systems in place to monitor the traffic going through the institution. This has impacted banks in the middle east, and especially banks in the Levan area – in Lebanon and Jordan. Basically banks have to revisit all of the procedures and systems – the human side, and to ensure they have enough resources to be able handle the transactional banking. Because we are the largest retail bank in the country, we need to put more emphasis on the controls. This is one area that our CEO – who has been with us for a while – has looked at closely. When he became the General Manager he was reviewing all aspects of the bank, there has been, with his direction, more emphasis on controls and compliance; because we are a country surrounded by turbulence and we need to have proper systems in place in order to monitor all this traffic going through our bank. Part of the ongoing process now, is that we have hired one of the top audit firms to evaluate the systems and procedures that we have in place in the area of compliance. So far the feedback is positive; but it is good to have that insurance with an unbiased third party who are exposed to international best practices to ensure that the bank is in line with all the changes happening. This is very important to sustain the relationship with global banks and be able to fulfill the role that our CEO has mentioned – to be an important element in the growth of this economy, to facilitate the cross-border trade with our partners whether in the UK or other European countries. This is where we stand now.

Q Speaking about the UK, Jordan Housing Bank holds a controlling stake in the Jordan International Bank – London, and you have said “you don’t go to London to compete with large international banks, you have your little niche which is more on property type of financing and complementing trade finance and private banking activities.” So could you elaborate on the strategic importance that this London operation has for Jordan Housing Bank overall please?

IGS: This bank has been there for quite some time and it used to be owned by most of the Jordanian Banks. It was not doing that well, or it was too small for all of the Jordanian Banks to be involved. So several years back the bank was transformed into 75% ownership by Housing Bank and 25% by Arab Jordan Investment Bank. I’m the Chairman of the Board right now, and basically we had to put together a vision – it was there; but we had to reinforce that vision. Where do you go with one bank, one branch, you can’t really cater to the retail market and be everywhere. Basically, it was more refocused towards property and that’s called structured property finance and it has 2 elements to it. The development part and the investment part. Development, as in you are a developer, you get short term financing, you get your thing and then you re-finance with long term loans from other banks. Investment – It is the same thing but you don’t develop, it is a rental type of facility. I personally like that part of the business, I think it is quite secure. Nothing is risk free obviously but it’s not a bad venture to be in. Now having said that, you must build other pillars as well going forward; and that is where the trade finance part, although small, is a hub whereby we can benefit our Algerian operation through GIB with us and vice versa. That is not a big segment, but it is an important segment to keep and to have. The third pillar is investment – private banking. Similar to wealth management. You have certain customer base in Jordan for example who like to have an account in London and have savings and what have you. The fourth pillar is the investment side of it into bonds and we have our investment person, and he is on the board for that purpose.

We realize you cannot do all of these things without having the right risk framework, and you have to have the right vision of the strategy and on the investment as well. So we restructured our board to include, aside from myself, our Chief Risk Officer, and our Treasury and Investment Head for that purpose. Mainly we are trying to share experience, and contribute as much as we can. The bank is doing well, it has been a bit troubled with the PRA and so forth, we have to use an auditor and see where our shortcomings are. We are not on the watch list at all, we are fixing any shortfalls that may happen. At the end of the day, we don’t want to be portraying the idea that it is Housing Bank money sitting there working with it. No, it is a bank on its own merit. It does get support from the shareholders, whether financial or otherwise in terms of deposits and lines and so forth. We are happy to be there, we comply, and we try to service wherever we can.

Q So just to clarify, in regards to the private banking the key target market is Jordanians in London? Is that the target market for Jordan International bank overall? Jordanians in London? Or is it a wider pool?

IGS: No, it is open for everyone. What I’m saying is when you really need to service, if your clients really want you to be there, you are here to help them and to be the first to help. You don’t even have to go to London to open an account, you can do it out of Jordan, open it here or open it there.

Q SR: Are you targeting a specific group in terms of that bank?

IGS: Only those who have money? [Laughter]

Q You mentioned that operations are going well. What role will this bank play in the overall internationalization of Jordan Housing Bank?

IGS: Well, it does give that window. It does give that image that Housing bank is spread out. It does give some back and forth dealings and transactions on trade, finance, and that sort of thing. We are not going to play a major role in the U.K. economy; but we do service a small segment especially in that private banking sector as well as the Structured Property Finance (SPF).

Q Besides your operations in London, you also have a subsidiary in Algeria, and branches in Palestine and Bahrain, and different offices in Iraq, Abu Dhabi and Libya. What are the bank’s general plans for regional and international expansion?

IGS: First of all, some of those operations are subsidiaries, so they are on their own, we just support them. And at the end of the day we consolidate, so we are sitting on the board, we are watching and monitoring and growing the business in those two locations (because Syria is a subsidiary but right now with its status quo… they do local business though you cannot really grow very much under the circumstances). Algeria, we are helping and pushing to grow as well as the U.K. So as far as those two locations are concerned, they are subsidiaries that are on their own. I’m not going to go to the U.K. and say, look you must follow my strategy in Jordan – that would be stupid. They have a niche and we will encourage that niche. Versus the situation in Palestine and Bahrain, where yes they follow our strategy because they are branches as opposed to being subsidiaries on their own.

Our overall plan is to grow our subsidiaries on one hand, and to grow our business locally here on the other hand. One way of growing it is that we have a lot of untapped potential in our existing customer base. A lot of banks are envious, they would love to have that customer base, in terms of the number of customers, in savings accounts too; but also you want to grow your wallet with your existing customers, not only trying to get new customers; but you have to work on your own as well. In terms of our local operations and growth, we are focusing on the gold mine we have in terms of retail; to grow it and to make the best out of it. At the same time, we happen to be real experts and leaders here on mega projects – in fact other banks loved it and they followed our lead. You can go from the very small retail customer into the mega projects – LNG, oil and gas, power, Nepco. So we have been quite big on this. We are calculating and aggressive. We have the appetite and if it makes sense, we go for it. Other banks go in with us in that respect. The number of big projects is limited in Jordan, nevertheless we capture whatever we can in that respect. Our corporate base is quite wide as well, we are trying to grow there, we are being reasonably aggressive but mindful of the overall economic situation. Whereby we are watching our MPL’s and so on. We managed to grow our facilities this year – 300 million [we can give you that exact number] while our MPL has declined. So we are targeting more prudent transactions.

QUnder your leadership as General Manager of the bank, by the end of September 2016 profits before tax were up 10% compared to the same period last year, reaching JD 145.2 million. Profit after tax, gross income, and total assets are also on the rise. Going into 2017 what will be the key underlying factors for Jordan Housing Bank to keep on growing at these rates considering the challenges you have mentioned?

IGS: That is a good question, because everyone talks about 2017 and it is going to be a tough one. One element of this you must know, is that banks in Jordan, while they are doing their business in various sectors of the economy; one reasonably big player in Jordan is the government of Jordan through treasury bonds. In 2012 treasury bills were a hot commodity for banks because the rates used to be extremely lucrative at 7% and 8%, so for 3 years banks enjoyed nice returns. When you are dealing with treasury bonds, you are free to go as much as you want. Those bonds are maturing now in 2015. What you had done at 7% or 8% in 2012 – 2015, keeping the same exact comparison, you will do it at probably 4% now. Suddenly you have a forfeited profit that you cannot compensate through the same instrument. Now you have redemptions coming, you want to reinvest it but you cannot do it at the same rate. That on its own, two banks, has created a big challenge and a big actual difference on your PNL. You must compensate for it somehow. So that one big factor is going to contribute to so-called “difficult” 2017.

Another factor is a challenging economy in light of the overall economy in the world, in the region, the problems around us. One example of the problems around us is the border with Iraq and Syria. Lots of trade finance business is gone. There has been talk about re-opening the border with Iraq so goods can flow, so banks can work. Until that happens, you have another element that is being forfeited. You’re now competing with each other on a much tighter market. Interest rates are extremely low as far as the overall economy is concerned and that is hurting a bit as well. Whether it increases by first quarter next year, maybe there are some expectations that it will, but there is no real word that it will – that might help a bit. You’ve got tight situations, I don’t want to call it bad, I’m just going to call it “tight” – there is a difference. Challenging. In that respect, 2017 is going to be difficult.

One of the reasons you see success in numbers in 2016 is that we have read interest rates properly. We read that we’re losing control as banks on the revenue side, as far as the credit interest side, from your debt facilities and everything; because the competition was so hot, with few opportunities (fewer than normal), so we knew that on the revenue side it was going to be challenging. What we have done is we have hammered on the debit side of the formula for interest. We maintained ourselves as a lower cost to fund and we became even lower cost to fund, and that is what made our net interest margin healthy as opposed to various other banks. We read it correctly and I hope we read it just as well for 2017, and if we do, I promise you we will be in good shape.

QThere are two banks that lead and control 40% the market in Jordan – being Arab bank and Housing Bank and then there are many national and international players. In terms of branding and image, how does Jordan Housing Bank try to set itself apart and create its own identity in this market?

IGS: This is something that, as we speak, we are trying to revisit as a whole. If you ask me about awareness, I’d say that the population knows us and have heard of Housing Bank. We have a good brand, a strong name, it is a household name. If you ask me about our customer base, we have probably the biggest customer base. If you ask me whether I’m happy with that, and with moving forward staying the same as we are now; I’d say no, we have some uplift to do. We recognize the customer base can only be there if you are really following the right demographics and so forth. Right now, 70% of the population is under 30 years old, that is the future. Housing Bank is a solid name, a reliable name; but maybe the younger generation are not quite aware of what Housing Bank really is, and that is what we need to cater to. You talk about middle-age to an older generation – to them it is a household name. To the younger crowd, the brand awareness is partially there, and partially not there. You can’t just sit on your laurels saying “I’ve got the good brand name” and just rely on the name and assume business will come. We must do some things, and you will see those things.

QYou mentioned earlier that your company is helping to roll the wheel of the economy. Last June you signed an agreement in partnership with USAID to provide loans specifically for businesses working in tourism. This agreement was signed in June of this year, and you said “The signing of this agreement is the result of our belief in the Bank’s need to support the tourism sector, one of Jordan’s most vital sectors due to the importance of its contribution to the national economy, one which drives the wheel of development forward”. When you try to convince foreigners to visit your country, what are the main aspects about Jordan that you point out?

IGS: Let’s be clear here, like you said, diversification of the country and that sort of thing starts with His Majesty the King and flows all the way down to the whole economy. We have a role to play to help achieve that vision – we are not the investment authority to go and attract a company from abroad, someone else is doing that. But once they have done that, it is our role to ensure that they know how banking is done here, how we can support them, and that they understand how we can partner with them as far as being their bankers in order for them to achieve their investment and projects. If the vision manages to get that investor to land in Jordan but then he cannot get any financing, he will just say goodbye. So we complement each other and we contribute our part to the formula in order to do this. A good example of this is the Original Natural Gas Project from Egypt. Now the Jordanian and Egyptian governments had long discussions, negotiations and talks until they got this deal going as far as BOT etc. Now where we came in – and I remember this clearly, sitting in negotiation meetings between the government – The Ministry of Energy and Mineral Resources and the Egyptian counterpart. Although we had no signature to that agreement, we were there to advise: this will work, this is bankable, this is not; to make sure that the agreement that they had formulated at the end of the day can come to fruition. That it is not just a beautiful agreement, but a workable one. That is where we came in. I remember it was a lot of difficulties even within our own bank to accept such a large deal, project finance, BOT, 30 years, etc. So you put all of your various expertise together, and backed by a strong bank like Housing Bank it can all then come together. So, in that respect, I think we are helping in terms of attracting investors, to make things happen. For an investor to come here, take the risk, bring his money from abroad, to work with it here… the formula is wrong. So that is where we come in, and I think over the years the banking sector in Jordan has advanced a lot in terms of the big projects, project financing and what have you. There is a lot of advancement that has been made in quite short period of time.

QMr. Saadi, you’ve had a successful career in banking. You were formally appointed the General Manager/CEO of the bank in April of this year, and you have a very distinguished career in finance and consulting that took you to Chicago and Dubai amongst other places. If you were to address a class of MBA graduates at the London School of Economics, what would you teach them about what it takes to do business successfully in Jordan and the Middle East?

IGS: I think the most important part is that you have to customise yourself, you can’t expect that what you do in New York can be done exactly the same way in Jordan. The fundamentals can be the same, but you do need to do some customisation. For example, there is room for some flexibility in how you look at transactions. In Jordan, for example, you cannot say “I do business in London, and that’s not how we do it, and I’m not into real estate here for collateral”. When you customize yourself, you notice that a lot of Jordan’s financing revolves around collateral in properties. So another country may not percieve properties as a good thing, whereas in Jordan its percieved as key. You have to be flexible. The important part is keeping the fundamentals the same, you must adapt to cultures. You must accommodate for local culture, adaptation is the important thing.

For someone to come from the London School of Economics and hopefully contribute to this country and the banking sector, I would say, the spreads that we enjoy here (although we don’t enjoy that much anymore) but what we used to, is probably unheard of in the western world. Their profits may be made out of transactions and fees and that sort of thing. In Jordan this is an area where we still need to develop in the banking sector. We are heavily dependant on spreads as opposed to fees, this is an area we need to work on. I remember the days when we charged 1, 1.5% lead arrangement fees, it was probably not very much welecomed. But you have to train people to accept it, this is one area the Jordanian banking sector needs to improve. Now, yes you improve, but then you have a culture that pushes back – people are not yet accepting of this. Things happen over time, as opposed to smaller spreads yet they are making good money and probably the reason is the fees.

QWe are looking to publish this in 2017, so thinking about The Times readers in 2017, what is the lasting impression you want them to take away about Jordan?

IGS: The very first thing I would like the readers to know, aside from Housing Bank and banking all together; is about the country. It is a safe country, a stable country, a modern country and free. You can do whatever you like so long as it is within the law, you are free to do so many things. People have to become more aware about Jordan, as you said earlier, rightfully so. If you are somewhere in the world and they know you are Jordanian: “Oh but Iraq is very near” they think a bullet in Iraq is hitting Jordan, or from Yemen for that matter.

Basically we must have more awareness about the country as a country, so that would be step number 1. Step 2, once you are comfortable and aware, you get to see a different culture than you are used to. If you are in the western world, this is a different culture. Most people I have met who have come from Europe and the U.S., they enjoy it, they enjoy it very much. People are hospitable, It’s fun to be here, you eat well, and then you find all the right industries and sectors to support all of this. From nice entertainment and restaurants, to good banks to serve you, to a whole infrastructure that is here in Jordan. I’d like people to really realize and be aware of what Jordan is all about, and realize Jordan is a country you can not only come and visit and enjoy, but even have a longer stay and become an expatriate. It is a country you can rely on. It is a balanced country, that is what I call Jordan all the time. You don’t need to have the nicest tower in the world; but you need to have a nice culture behind it. We don’t necessarily have the best of everything, but we have everything.