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The forgotten sector

Sep 06,2020 - Last updated at Sep 06,2020

We have structural distortions on both ends of the financial system in Jordan; on the institutional side, we have weakness in an important aspect in the role, size and tools of non-bank financial institutions operating in the market. Consequently, their contribution to providing financing for the real economy is disrupted. This has major negative implications for the size, quality and costs of financing in the economy. At the same time, there is a large part of the financial system that has been disrupted and forgotten since the outbreak of the global financial crisis in 2008, which is the stock market (Amman Stock Exchange). The question that can be raised is why this has been the case for such a long period of time?

In most advanced economies, the importance of non-bank financial institutions has been steadily growing. In the US, non-bank institutions now hold more than double the financial assets of traditional banks. In Europe as well, non-banks have become an increasingly important source of financing for the real economy over the past decade. For example, in the Netherlands, around 35 per cent of new mortgages are provided by pension funds, insurers and mortgage funds.

There have always been calls over the years to revitalise the financial market and activate the role of the non-banking financial institutions. Institutionally speaking, there is a lot that can be done. For example, it is imperative to provide the conditions for transforming the Amman Stock Exchange into an emerging stock exchange due to its role in attracting foreign investments. The rules of governance and accountability must be applied to the boards of directors of public shareholding companies listed on Amman Stock Exchange. There is an urgent need to raise the efficiency and solvency of financial services companies operating in the financial market, and raise investment awareness for investors in the market. It is imperative to develop and implement the necessary policies to attract institutional investment, especially through investment funds, in preparation for the return of liquidity to the market. It is imperative to provide market makers in the stock market, especially that there is a possibility for some banks and the Social Security Investment Fund to play this role, as this would reduce price fluctuations and provide greater confidence in the prevailing price levels, and maintain the provision of liquidity in the market.

The primary market for government securities (bonds) should also be strengthened by expanding the investor base, diversifying public debt instruments and encouraging the existence of an efficient secondary market for government securities. Moreover, the corporate bond market is very small, narrow and illiquid due to the lack of a local credit rating agency, and the absence of mutual funds. The importance of the existence of mutual funds lies in promoting institutional investment in the Amman Stock Exchange so that individual investment based on speculation does not remain in control of the market. The issuance of Islamic sukuk by companies in the private sector and by the treasury should also be intensified.

Many plans have been drawn up for the structural reform of the financial market during the past years, and we have not seen an effect and did not show effectiveness in revitalising the market and enhancing its role and investment attractiveness. There is a clear structural defect in an important aspect in the non-banking financial sector in Jordan, and it must be corrected as soon as possible so that we can provide institutions with strong and new financial instruments, and a healthy investment environment that contribute to bringing about required growth and development in our national economy.

All financial sectors in emerging and developed countries have efficient and effective non-banking financial sectors, and Jordan must join these countries. The stock market is no more a mirror of the national economy, as there is a lot of quality work that can be done to activate this market and there is no room for delay. The luxury of time is no longer available, and the forgotten and idle sector must be activated. The diversification of funding sources can help distribute risks more evenly across investors and lenders, facilitate a sound competitive environment in the financial market, and can also reduce cost of financing in the real economy. All parties can benefit from having an effective and efficient non-banking financial sector; at the top of those are the treasury and the private sector companies. 

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