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Professional Pages >> Project Highlights >> Jordan The Hashemite
Kingdom of Jordan By: Roger Bird EXECUTIVE SUMMARY The Government of Jordan (GoJ) is attempting to reduce public expenditures and promote overall economic growth through broad economic reform and restructuring programs. The World Bank, in support of the GoJ and through a team of local and international consultants, has developed a strategy to facilitate the development of independent, business-oriented, and self-reliant cooperatives that will form an integral part of the private sector. Key issues being addressed in the World Bank’s strategy are:
It is anticipated that these strategies will be implemented under a Cooperative Reform Program (CRP). As part of this program a Cooperative Service Center (CSC) has been registered as a non-profit organization with the Jordanian Ministry of the Interior. It is envisioned that the CSC will provide cooperatives with management training and business development support so as to enhance their business performance and cooperative member services. The financing objectives are to facilitate the potential growth of the cooperative sector and compliment the counseling and training services of the CSC. The purpose of this report is to examine the current state of access to financing by small and medium size enterprises (SME) and cooperatives. And, if barriers are found to exist then what options might be implemented to reduce these barriers and increase the access to financing for the cooperative sector The cooperative sector in Jordan has very limited access to credit. Currently, the only cooperative sectors that have any access to financing are housing and agriculture; these two sectors represent approximately 48% of the cooperatives in Jordan. Housing cooperatives have access to financing through commercial banks because they have collateral to offer, and agriculture cooperatives have access to credit through the Agriculture Credit Corporation (ACC), an entity with operational and structural problems including 25% percent non-performing loans and a lack of liquidity for lending. Access to credit for the remaining cooperative sectors is limited to informal sources such as: family, friends, and suppliers. Four financing mechanisms that have the potential for providing financing to Jordanian cooperatives were reviewed.
No specific data is available for the level of financing that is currently provided by the informal sector. Based on interviews and data collected by the World Bank technical assistance consultants who provided a diagnostic review of 28 individual cooperatives, informal sector lending plays an important role in the viability of many cooperatives and small businesses. The commercial banking sector generally avoids financing cooperatives because cooperatives generally lack collateral and are not seen as viable businesses but rather as social programs. The exception is the housing cooperative sector because it can provide sufficient collateral. The GoJ has historically supported cooperatives through the now defunct Jordan Cooperative Corporation (JCC) and its predecessors, providing subsidized financing and social programs with which the commercial banks would not compete. With the collapse of the JCC, the agriculture cooperatives turned to the Agricultural Cooperative Corporation (ACC) whose financing programs were limited exclusively to the agricultural sector. The donor-supported programs in Jordan are limited to micro credit financing and are not directed at the cooperative sector. USAID’s AMIR program is the most successful micro credit program currently operating. Barriers to accessing credit are three-fold. First, cooperatives are viewed as "self-help" organizations supported by government subsidies to help the poor and as a result, are not viewed by potential lenders as viable business enterprises. Second, the cooperative sector is generally unsophisticated in their business operations (management, record keeping, marketing, etc.), and do not utilize financial feasibility tools to guide their business decisions. Consequently, they do not know how to prepare business plans, financial projections, or other data that is necessary to make business decision or loan requests. Third, commercial lenders are ultra-risk sensitive and use collateral rather than financial analyses as the primary basis for lending. Finally, since the former JCC and its successors provided subsidized financing to the cooperative sector that commercial banks could not compete with, these banks are uneducated about the cooperative sector and how a cooperative type of business operates. The primary thrust of the CSC program is training and the development of best business practices for cooperative business operations. It is expected that the CSC pilot training will help the cooperative sector behave in a more business-like manner so as to improve its image as a subsidy-needy self-help sector, thus encouraging the commercial banking sector to look upon cooperatives more favorably as potential borrowers / clients. This report, while providing a number of options for increasing the access by the cooperative sector to credit, recommends that a loan guarantee fund be established to facilitate this access to credit. It is suggested that loans would be originated through participating commercial banks and guaranteed on a sliding scale ranging from 50% to 90%. Currently, 19 of the 21 commercial banks in Jordan participate in the Jordan Loan Guarantee Corporation (JLGC) which offers loans to SMEs. The banking sector in Jordan is effective and is currently an efficient distribution system for the JLGC. Although the commercial banks are unfamiliar with the cooperative sector, they have excess liquidity, they are seeking expansion into profitable business sectors, and their lending personnel do have basic credit skills. Finally, to implement the recommendations made in this report, the establishment of a loan guarantee fund, certain parameters have been used to determine what a reasonable level of expected funding might be. Given the lack of reliable financial data available for the cooperative sector, the estimated needs of a loan guarantee fund were calculated based on the total assets of a sample group. Using this calculation, it is estimated that $350,000 would be required for the first two years of the pilot program and an additional $2.5 million would be required for the remaining three years (of a five year program).
© Copyright
2000 by Roger Bird
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