Committee presents report to King Abdullah proposing changes needed to Jordan's financial market
After three months of reviewing Jordan's financial market a committee led by Naser Amad, general manager of United Financial Investment and member of the Economic Consultative Council, presented His Majesty King Abdullah their recommendations of changes to be made to Jordan's financial market on Oct. 29, 2000.
The report contains 28 definitive recommendations that would make Jordan's market prosper and create a safer atmosphere for investors.
After reviewing Jordan's capital market growth during the last 20 years, the report concluded that the stock market has not failed, but has been restricted by many circumstances outside of its control. The report is divided into five sections that would attempt to correct these outside influences. They include changes that need to be made to procedures within the financial market; changes to be made to the professional infrastructure of the financial market; better dissemination of information; international modifications and changes in the laws that govern the financial market.
“There is currently a lack of trust and confidence in the investment environment and management of Jordan's financial market. To regain the confidence and trust we need to create a safer business environment. To do that we have made recommendations that will promote timely and accurate transparency, fairness for all participants and liquidity and efficiency in the market,” said Amad.
The recommendations to the procedural side are as follows:
To create new financial instruments through draft rules and regulations
Currently the only items traded on the Amman Stock Exchange (ASE) are stocks and bonds. They recommend adding more instruments for an investor to choose from, so that the ASE will be able to attract investors regardless of their income and objectives. Some of the recommendations suggested include allowing for stock splits, options, mutual funds, treasury stocks and buybacks.
In addition, they suggest creating Islamic instruments to invest in, so the market opens itself up to people who might not normally invest. Islamic funds are mutual funds that comply with the Sharia. These changes will allow more people to invest in the market and maximize their earnings potential.
Enhancing the role of privatization in economic development
As privatization increases throughout Jordan, the committee suggests that when a company decides to sell shares, a certain percentage of stock should be held back for employees to purchase, allowing them the opportunity to buy into the company where they work. They recommend that stock privatization should take place on the ASE. This action will help initiate more interest in Jordan's market and more awareness in the privatization program. The placement of these stocks on the ASE will fuel the supply side and naturally the demand will follow to create a fair market price of the stock. This would also generate pride among workers and create a more open, and less intimidating investment environment for the employees.
Need to build a financing structure to help brokers
The report proposes that brokers need to be more active participants in the market and this can be achieved by enabling them to set margins and finance investors, through repurchase agreements. The Jordan Securities Commission (JSC) would oversee all of this.
Restructure the Social Security Corporation (SSC)
The report recommends the restructuring of the investment division of the SSC. As Jordan's largest institutional investor, the SSC needs to recruit qualified employees and increase their proficiency. They also need to revisit their policy of buying stocks and not selling them, as well as reviewing the companies and industries in which the SSC invests. This policy has not changed in 20 years and needs to be updated to maximize the investment opportunities, especially during volatile times in the market. They also recommend new software for the management of portfolio managers.
The small investors who buy into the stock market are often the investors who are short-term buyers and deeply affected by the markets ups and downs. With that instability, they are the ones who end up losing money. The report suggests that banks should establish mutual funds that would cater to the different needs of different clients. By creating mutual funds, the ASE would be safer for the millions of people in Jordan who do not have a lot of extra money to invest.
JSC and Ministry of Trade and Industry
These two entities are responsible for overseeing company management and fair-trading on the ASE. The report recommends that they intensify and coordinate their efforts when executing this task. These two entities should be able to detect problems in companies early on and take preventative measures to create stability. There are already corporate duties and articles in place that specify their responsibilities; the committee charges that these duties are not being enforced fully.
Security Depository Centre (SDC)
The committee suggests that the SDC migrate from keeping its records on paper to the electronic book entry of documents, which would produce a delivery versus payment plan. In addition, they should seek cooperation from other Middle Eastern markets and comply with international standards. This will enhance diversification, allow protection of the investors' holdings and give credibility to the market.
Amman Stock Exchange (ASE)
Although some remote trading has been introduced, the committee states they would like to see the ASE more proactive in using the Internet to implement trading and disseminate information. This would allow people from all over Jordan, as well as international investors, to trade on the ASE with ease and make trading more viable. The report recommends changes in the software and procedures of electronic trading to create a fairer trading environment.
The recommendations to the professional infrastructure are as follows:
Create an association that governs auditing and accounting
An association should be established that oversees the roles of auditors and accountants. The association would organize both businesses and specify the terms of practice. It would also make sure auditors were not being influenced by outside pressures and opinions.
International auditing and accounting standards would apply, in addition to the establishment of a code of ethics for members. Before being allowed to work in Jordan, an auditor would need to comply with this association and show proof of malpractice insurance.
The report proposes that the commissioners currently overseeing the insurance sector provide a report to the Economic Consultative Council and to the Royal Palace. This report would establish the foundation for an insurance sector that is on par with international standards and best practices. They would also look to the future of the sector to maintain growth and innovative solutions to the problems that it currently faces. The report also suggests the hiring of qualified personnel by the commissioners paying them what is common in the private sector.
For 20 years, brokerage firms have not accomplished much more than to matching orders. The committee advocates they should take it upon themselves to expand their role in Jordan's financial market. Firms should start offering a full range of services including financial consultation, financial analysis and portfolio management. This cannot be done without highly qualified professionals.
The committee recommends that the Certified Financial Professional Association start doing their job by overseeing, recruiting and training financial professionals.
Capital adequacy of brokerage firms
The report states that many brokerage firms are suffering from a lack of capital, which is endangering the investments of their clients. Currently the JSC receives weekly reports from brokerage firms. However, since two firms have gone bankrupt this year alone, this shows that the gravity of these reports has not been taken into account. The committee recommends hiring compliance officers to be a liaison between the JSC and brokerage firms; their sole responsibility would be to make sure brokerage firms are complying with the rules and regulations.
Financial managers and officers of public shareholding companies
The report states that currently there is a lack of knowledge among financial officers about capital and liability management. They suggest conducting specialized courses and training regarding the financial market and securities.
The recommendations for the informational side are as follows:
Disclosure and transparency
The committee says that the regulations that are currently in place are very good, but they are not being fully implemented by the JSC. They feel that when a financial issue or incident is being disclosed it should be done in a comprehensive fashion and not allow for facts to become misleading. They also suggest an all-inclusive form be created and filled out whenever an issue or incident presents itself. This form would eliminate the manipulation of facts. They also suggest companies increase the number of times they report their earnings.
In addition, the committee calls for a timely disclosure of any financial incident. They also suggest that the JSC hires qualified professionals to oversee the above-mentioned changes. After an investigation is conducted of an incident, a report should be made public along with all of its findings. Disclosure also affects the Central Bank of Jordan.
Currently the bank collects yearly financial reports and has the right to accept or refuse these income statements. This process needs to be done in a more expedient way, the committee suggests accomplishing this task within three months.
The report suggests that the Jordanian media needs to be more forthcoming when reporting on political, economic and social incidents. With the advent of satellites, news is being reported all over the world. If Jordan's media doesn't report something, it will generate rumor and innuendo that causes more problems and affects the financial market.
The committee proposes the accurate and timely reporting of all major economic indicators. This includes Jordan's rate of inflation, interest rate, the GDP and employment. These numbers will help investors in the decision-making process about what to invest in and when to invest. The report also suggests the government set a calendar so Jordanians will know when to expect this information and then have it disseminated through the mass media.
Investor relations officer
The report also states that companies are reluctant to give out information, so they suggest each company hire an investor relations officer. This person would answer any questions from investors or the press regarding the company and its future.
Public awareness campaign
The committee suggests as Jordan looks to future investors, they should further educate the public, by tapping into the school system and universities. This could be initiated by teaching introductory courses on the financial market to most students and more specific courses to those in higher education.
The committee summarized that most investors lack the awareness of where the market is headed. This can be overcome with the help of the media and the investor relations officer. In addition, they suggest training reporters to help them understand financial markets.
The committee suggests enhancing the role of banks and insurance companies to create greater savings awareness in the public sector. They state banks can achieve this by conceiving products that have incentives for savings and tailoring them to the different needs of different customers. Also insurance companies need to play a larger role, by promoting insurance possibilities and providing more options. They also suggest creating incentives for insurance companies to merge, making them stronger and safer.
The international recommendations are as follows:
Promotion and marketing of Jordan
The report recommends creating a public relations and marketing campaign for investing in Jordan both locally and internationally. This campaign would spotlight Jordan's new financial market. They also recommend that the government establish a committee of Jordanian volunteers who work in financial communities around the world to gather together at least once a year to discuss the new implementations that are occurring in other parts of the world and how these ideas can be used to help Jordan's financial market.
The Middle East and a one-market economy
With the advent and popularity of IT companies around the region, the committee advocates establishing one Middle Eastern market that caters exclusively to them. Since most IT companies do not fit the criteria to be traded on the ASE due to their lack of profits, the creation of a new regional market would allow investors to trade on this emerging sector.
The recommendations on the legislative side are as follows:
Change the laws that govern the earnings of the government
Currently, the government receives money through taxes on purchases, income tax, customs tax, etc. The report asserts that the laws that govern these earnings impede investment and savings in Jordan, by creating hurdles for people who want to invest. They suggest rewriting the laws, not only to ease taxes, but also to create incentives for domestic and international investors to bring their money to Jordan.
Government debt securitization
After amending the public debt laws, the report suggests the government should securitize its debts through the Central Bank. By issuing treasury bills and government bonds with different maturities, this can lead to a yield curve and give investors more fixed income devices. This would allow people to invest in something they know is secure and aid the government with its debt.
Create harmony between the different laws
In Jordan's growing financial markets there are several different kinds of laws that are in place. There are laws that deal with companies, banks, financial papers and income tax. However, in the committee's review of these laws they found that many of them contradict one another, which creates confusion. Therefore it is their recommendation that these laws be revised to compliment one another.
Companies Law/Securities Law
The report suggests establishing a committee to revise both of these laws to ensure a clear and distinct division between them. They suggest all companies' laws should handle the creation of a company, as well as its termination, and securities laws handle everything else. The roles of the ministries and commissioners need to be more clearly defined and also the process of listing a company on the ASE needs to be simplified.
The committee urges the redrafting of articles of the Companies Law that cover all corporate governance. They also suggest the creation of laws that will encourage companies to merge and make them stronger. The report also states that Jordan needs to increase the rights of the minority shareholder. These changes will allow for a more fluid and transparent market.
The committee suggests a reexamination of Article 34 in the Banks Law, which dictates an individual cannot own more than 10 percent of a bank, until he receives approval. They also recommend that some of the other articles in the Banks Law be revisited to ensure that the ASE has an efficient trading environment.
Restructuring of the judicial system
The committee urges the establishment of specialized judges that deal only with financial cases. These judges can be trained to understand the complex laws that accompany financial transactions.
The report states its goal is to restore trust and confidence in Jordan's financial market and this can be acquired by creating attractive investment opportunities. It also can be achieved through fairness, efficiency, liquidity and transparency. These steps need to be translated into reality by actions, procedures and policies.
In addition, the financial market laws in Jordan need to be modified to offer a suitable infrastructure. They state the main problem is not with the appropriateness of the law, but the gravity in which it is implemented. The members of the financial community need to understand that no one is above the laws that govern them.
They further state that Jordan cannot look to attracting foreign investors until it starts retaining local investors and developing qualified professionals who work in the financial market. After that is achieved, they state the country needs to be ready when positive opportunities arise.
In addition to Amad, the committee writing this report consisted of five members from all aspects of Jordan's financial community — Samir Jaradat, chief executive officer of the Securities Depository Center; Mohamed Tash, general manager of National Securities Brokerage Company; Mohammad B. Belbeisi, chairman and CEO of National Portfolio Securities; Bashar Amad, capital market specialist for Jordinvest Trust Company; Khalil Naser, executive assistant manager of the Securities Depository Center. — ( Jordan Times )
© 2000 Mena Report (www.menareport.com)