This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 AMMAN 000793 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA--MILLS/CHANG 
USDOC 4520/ITA/MAC/ONE/COBERG 
 
E.O. 12958: N/A 
TAGS: EFIN EINV JO
SUBJECT: CBJ TAKES ACTION AS LOAN SCANDAL WINDS DOWN 
 
REF: A) AMMAN 313 B) 02 AMMAN 687 
 
¶1.  (SBU)  SUMMARY: In the wake of last year's "Shemailah" 
banking scandal involving unsecured bad loans by three 
Jordanian banks (REF B), the Central Bank of Jordan (CBJ) has 
assumed management of the two banks most weakened by the 
losses.  The move signals a determination by the CBJ to use 
newly-instituted minimum capital requirements to force 
smaller banks with unhealthy balance sheets to merge.  It 
also highlights the potential for greater challenges to the 
sector in light of the same banks' exposure to UN 
Oil-For-Food Program contracts and the effects of even 
isolated bank failures on the sector and the economy.  END 
SUMMARY 
 
------------------------ 
THE HOUSECLEANING BEGINS 
------------------------ 
 
¶2.  (SBU) According to CBJ officials, the CBJ dissolved the 
Board of Directors at the Jordan Gulf Bank (JGB) and took 
over the day-to-day operation of the bank on February 2. 
This follows a similar action regarding the Philadelphia 
Investment Bank (PIB) in late 2002.  The CBJ has also 
recently referred the former chairman and general manager of 
the PIB to the prosecutor general on suspicion of criminal 
acts, most probably related to last year's Shemailah scandal. 
 Similarly to PIB, JGB will be run by an administrative 
committee appointed by the CBJ.  CBJ Board member Thabet 
Taher will head JGB's committee. 
 
¶3.  (SBU) As in the case of the PIB, the CBJ is looking to 
merge the bank with another bank; according to the local 
press, four local banks have expressed interest.  Dr. Mai 
Khamis, the new Head of Banking Supervision at the CBJ, told 
us that there was no intention to merge the two banks with 
one another, as "the result would be one big weak bank 
instead of two smaller weak banks."  Rather, successful 
suitors for each of the banks would emerge from four banks 
that have expressed interest.  Khamis expected the process to 
take four to six months. 
 
---------- 
A NEW TOOL 
---------- 
 
¶4.  (SBU) By using increased minimum capital requirements 
instituted under the Banking Law approved last year, Khamis 
said the CBJ is attempting to overcome the traditional 
antipathy of smaller, family-run Jordanian banks to merge, 
and to force the weaker small banks to combine with healthier 
institutions.  She expects the new JD40 million ($28 million) 
minimum capital requirement to push a number of smaller banks 
to choose between merger and liquidation.  Khamis noted that 
JGB failed to meet these requirements, and was greatly 
weakened by its high exposure to the Shemailah scandal.  With 
an eye to protecting depositors' funds, the CBJ decided to 
act.  (NOTE: According to Khamis, the investigation into the 
Shemaileh case is continuing, but winding down.  The 
Prosecutor General is currently questioning CBJ officials, a 
process Khamis expects to end shortly.  End note.) 
 
¶5.  (SBU) Along the same lines, the Jordan National Bank 
(JNB), the third bank exposed to the bad loans to Shemailah, 
announced plans to raise its capital to JD 60 million via a 
public subscription of 10 million shares (presently listed at 
JD.94 per share on the Amman Stock Exchange).  8 million 
shares had already been sold via private offering to the 
Government of Kuwait, the Social Security Corporation, the 
Mu'asher Investment and Trading Company, and the Jordanian 
Investment Center Company.  Khamis said of the three banks 
most affected by the loan scandal, JNB was the strongest and 
the most likely to survive. 
 
------- 
COMMENT 
------- 
 
¶6.  (SBU) Of Jordan's 21 banks, PIB and JGB are in the bottom 
tier in terms of size.  Their combined assets of JD558 
million ($391 million) account for 2.3% of all assets in the 
Jordanian banking sector.  The CBJ is clearly taking the 
opportunity provided by the Shemailah scandal to force 
consolidation in Jordan's over-crowded banking sector (to be 
covered SEPTEL).  The moves also serve to heighten awareness 
of the precarious health of a number of smaller Jordanian 
banks, some with significant exposure to OFF contracts (such 
as the Jordan National Bank) that face danger of collapse 
should the contracts default as described in REF A.  (While 
small in number and value relative to the sector as a whole, 
OFF exposure is concentrated in a few banks.)  Coupled with 
an expected short-term run on banks triggered by an outbreak 
of war, default on OFF contracts due to inability to deliver 
the goods in Iraq under current UN procedures could push some 
of these banks over the edge, causing a potentially damaging 
loss of confidence in Jordan's banking sector as a whole and 
subsequent knock-on effects to larger banks. 
 
 
 
GNEHM