Jordan’s banking sector is one of the most stable in the region, boasting a Capital Adequacy Ratio (CAR) of 14%. While this high ratio demonstrates resilience and a strong regulatory framework, I believe it is time to reconsider this approach. Reducing the CAR to 11.5% would balance financial stability with economic growth, unlocking opportunities for businesses and individuals alike.
At its core, the CAR measures a bank’s capital in relation to its risk-weighted assets, ensuring that banks have a cushion to absorb losses. However, Jordan’s 14% CAR significantly exceeds international benchmarks—8% under Basel II and 10.5% under Basel III. While this conservative policy is designed to safeguard the system, it comes at a high cost: a substantial portion of banks' capital is tied up as reserves, limiting their ability to lend, invest, and drive economic growth.
I recently discussed this issue with two of Jordan’s leading bankers, and we agreed that the Central Bank’s overly cautious approach might be inadvertently stifling economic potential. By requiring such high reserves, banks face reduced profitability and are less able to extend credit to businesses and individuals, which can slow down entrepreneurship and development projects.
A reduction to 11.5% CAR would still place Jordan above Basel III’s requirements, maintaining our banking sector’s stability and global competitiveness. More importantly, it would free up significant liquidity, allowing banks to support economic activity and meet the needs of Jordan’s growing economy. This recalibration could lower borrowing costs, encourage investment, and foster sustainable growth without compromising the system’s resilience.
It’s crucial for policymakers and the Central Bank to reevaluate this balance. A move to 11.5% CAR strikes the right chord between safety and efficiency, ensuring that banks not only protect their depositors but also actively contribute to the nation’s economic progress.
What are your thoughts? Is it time for Jordan to embrace a more growth-oriented CAR policy?
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