Consumers and traders are requesting that
the banks postpone their monthly loan payments. And the outcry and its
justifications, supported by a group of parliamentarians, have been rebutted by
many seemingly objective arguments from the Central Bank of Jordan (CBJ), the
bankers themselves, and several pundits. However, the debate gained momentum
during the Holy Month of Ramadan and the upcoming Eid holiday.
اضافة اعلان
The CBJ has raised its main interest rate
from 2.5 percent March 3, 2010 to 7 percent March 26, 2023. According to the CBJ
database, the new rate is the highest it has been since 2017. The 4.5 percent
escalation occurred over nine raises during the mentioned period. Conversely,
the announced reason(s) for these raises were two: safeguarding the
attractiveness of the Jordanian dinar relative to the US dollar and maintaining
the dollar to dinar peg of 1995; and combating inflation.
Both arguments, however, are subject to
debate. There is strong empirical evidence that maintaining the interest rate
margin between the JD and the US dollar is not effective in attracting JD
deposits versus dollar deposits when the real economic growth rate is low. In
other words, the paltry margin between the two currencies is dismal when
compared to what would be a catastrophic collapse of a currency, which would be
in double digits. On the other hand, the dollar to dinar margin is effective in
attracting dinar deposits when the economy is doing well. Meaning, when people
are optimistic about the economy, rationality leads them to dinar deposits as
they pay higher and there is very little risk.
So, should banks postpone payments this month? It stands to reason that at least one bank or more would do so to compete with others and expand their client base. Should banks move in unison, the move would be considered by some as a signal that some form of tacit collusion exists in the banking sect, which is illegal under the law and harmful to the economy.
As to combating inflation, and raising the
interest rate, the argument used is not accurate. Even though it may shrink the
money supply and thus reduce liquidity in the hands of people, in a country
like Jordan where imports are almost two-thirds of the GDP, one should discern
that two-thirds of the inflation is imported. Consequently, raising the
interest rate will raise the cost of production, lower the inflow of
investment, reduce demand for large ticket items such as real estate, and thus
reduce economic growth while not affecting inflation per se. For example, while
the Industrial Production Index rose in March 2023 by 0.9 percent, the
Producers Price Index also rose by 3 percent (which, in a productive economy,
would be an anomaly), and the Consumer Price Index rose by 3.91 percent.
In the US, banks are not allowed to raise
the interest rate on existing loans; in Jordan, they are. Hence, when someone
takes a loan at the old rate, they would not be affected by the interest rate
increase. Only those wishing to borrow anew will be affected. In Jordan, the
interest rate rises for both old and new loans; this is not healthy at all.
Why? Let us demonstrate with an actual example. A colleague has taken a 30-year
loan of JD37,000 at 5.75 percent two years ago; the interest rate now is 9.45,
an increase of 3.7 percent or 65 percent of the original interest. The bank did
not increase her monthly payments; it simply increased the repayment period by
almost two years. Given that the banks in Jordan also deduct the interest
payments first, which is an absurd practice; my colleague, even if she won the
lottery and became able to pay the loan early, would have to pay the full
amount plus all interest payments. The bank never loses.
Note that the whole risk burden of the
loan, which is typically guaranteed by a real estate property that far exceeds
the value of the loan, is upon the borrowers and not the banks. Also, the banks
do not need to borrow from the CBJ since they have ample dinar and dollar
deposits as Jordanians shy away from the stock and real estate markets in favor
of bank deposits.The CBJ is not interfering with the banks even though as a
regulator its law empowers it to do so.
Is it good for the economy that people can postpone payments now to enable them to spend more? Of course yes, A heightened demand leads to a surge in the GDP, even if temporary.
So, should banks postpone payments this
month? It stands to reason that at least one bank or more would do so to
compete with others and expand their client base. Should banks move in unison,
the move would be considered by some as a signal that some form of tacit
collusion exists in the banking sect, which is illegal under the law and
harmful to the economy.
Is postponing loan payments with full
interest good for the borrowers? Depends. For those that desire to consume now
(Ramadan and Eid are occasions for increased spending, followed by a period of
temporarily heightened poverty) at all costs, they should have the choice. The
banks lose nothing; in fact, they gain. If one is frugal, it is better not to
increase borrowing now.
Is it good for the economy that people can
postpone payments now to enable them to spend more? Of course yes, A heightened
demand leads to a surge in the GDP, even if temporary. All nations spend more
during the religious or national holidays, whether it is Eid or Christmas,
spending goes up before and during the festive occasion and declines thereafter
to pay off the debt that was accumulated.
Is the banking sector hurting and is
therefore in need of cash, which justifies its refusal to postpone the
payments? Not at all. The banking sector grew at an average rate of 3.5 percent
in constant prices over the past four years. In 2021, and 2022, it grew by 4.2
percent and 4.4 percent, respectively while the economy grew by 2.2 percent and
2.5 percent. In the COVID year (2020), the banking sector was the least
affected as it grew by 3.1 percent in constant prices and the economy grew by a
negative 1.3 percent.
In summary, offering those who request a
postponement of payment is costless to banks and even revenue-generating.
Competition rules indicate that since there is a demand, and no additional
risk, postponing payments should not have been so controversial.
Read more Opinion and Analysis
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