International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-4, Issue-5, May-2018 http://iraj.in THE RESPONSIBILITY OF CENTRAL BANK OF JORDAN IN MAINTAINING THE JORDANIAN FINANCIAL SYSTEM STABLE FOUZAN AL QAISI American university of Madaba, Jordan, P.O.Box: 2882, Amman 11821 E-mail: [email protected] Abstract - This paper aims to seek the responsibility of the Central Bank of Jordan (CBJ) and how it maintains the Jordanian financial stability especially in the banking sector by using ratios such as the Liquidity Ratio, Capital Adequacy Ratio, and Leverage Ratio. This is byinvestigating the stability of five selected banks in Jordanand evaluates the impact of the 2008 Global Financial Crisis (GFC) on the Jordanian financial system, in general, and its impact on these selected banks, in particular.The following hypothesizes will be tested: Hypothesis (1): Did the GFC affect banks in Jordan, Hypothesis (2): did Jordan banks recover after the GFC, Hypothesis (3): did these ratios (Capital Adequacy Ratio, Liquidity Ratio, Leverage Ratio) help in indicating the strength of the Jordanian banking sector, Hypothesis (4): did Jordan financial stability get stabilized after the GFC, and Hypothesis (5): Did the CBJ role affect the Jordanian banking sector positively. Based on the study results, all these hypothesizes have been accepted. Keywords - Central Bank of Jordan, Stability, Global Financial Crisis. I. INTRODUCTION 2016). They also act as private banks which means they process checks and lend money to their The Central Bank is a separate national authority that members; they also store currency in their foreign controls monetary policy, regulates banks and exchange reserve. That allows them to affect provides financial services including economic exchange rates by adding foreign currency to keep its research. The main objectives are to stabilize and own currency alignment that’s also known as "peg" maintain the nation's currency, controls and keep (Amadeo 2016). unemployment low and prevent increase in inflation. The Central Banks are considered as monitory Moreover, Central banks affect economic growth by authorities and bank supervisions to all banks. Banks controlling the liquidity in the financial system. They are financial institutions that are given the authority have many monetary policy tools to achieve these to accept demand deposits and make loans in addition objectives which if achieved would lead to to that banks provide clients and other institutions improvement in financial stability. To have efficient with financial services these services include financial system Central banks must set a reserve providing credit cards and maintaining financial requirement that obligates private banks on how management for each and every account shown in much cash they need to have on hand this reserve is their system, There are many types of banks such as needed in case of any financial problems occur it will commercial banks, saving banks, investment banks, prevent them from collapsing (Amadeo,2016). Islamic banks and much more banks however these Central banks used open market operations to buy ones are the ones everyone is familiar with, starting and sell securities. This allowed changes to cash on with commercial bank; Commercial banks are banks hand without changing the reserve requirement. This that receive money from the public and gives short- tool was used during the financial crisis of 2008. term loans to individuals who needs cash, in addition Banks bought government bonds and mortgage- to that commercial banks provide much more services backed securities to stabilize and maintain the like collecting cheques, keeping money and moving it banking system. On the other hand central banks from one place to another (Pritchard,2017). must set targets on interest rates they charge their Saving banks are banks that are simply made to clients that guide rates for loans, mortgages and create saving habits within individuals. These banks bonds raising interest rates and slows growth which are useful for people with low income, to create a prevents inflation (Corbo, 2004). group and the deposits collected from customers are Monetary policy takes about six months for the effect invested in bonds and securities (Pritchard,2015). On to go through the economy. Banks can misread the other hand investment banks are banks that helps economic data as the Federal Reserve System in businesses work in the financial markets if the owner 2006. But if Central banks stimulate the economy too of a business wants to go public (sell stocks) they much they can trigger inflation as known that Central should consider going to investment banks. Moreover banks avoid inflation (Corbo, 2004). Islamic banks are banks that unchanged within the Central banks control their members by requiring principles of sharia (Islamic Law) and its activities sufficient reserves to cover potential loan losses. and practices are through the development of Islamic They are also responsible for ensuring the financial economics there is another term for Islamic banking stability and protecting depositors' funds (Amadeo which is "sharia-compliant finance" Sharia prohibits The Responsibility of Central Bank of Jordan in Maintaining the Jordanian Financial System Stable 71 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-4, Issue-5, May-2018 http://iraj.in the approval for specific interest or fees for loans of in order to distribute it to the study subjects, and money it's known as riba (Mushtaq,2015). secondary sources: data will be collected from several The Central Banks are responsible to maintain the resources by using scientific references, books, financial stability. Financial Stability is a state in international recourses, CBJ website, and studies which the financial system which includes the published on a specific websites on the internet (e.g. financial markets and the financial institutional social science research network-SSRN Website). system is a shield to economic shocks and is fit to smoothly fulfill its basic functions, financial stability II. OVERVIEW is one of the most widely discussed topics nowadays, a well- functioning sector ensure financing of The financial system consists of banks and central activities in society by providing money from savers banks which have the monitory authority over all to borrowers. types of banks and institutions such as commercial Indeed many central banks were created to serve as banks, financial institutions, saving banks and real shield against episodes of financial stability that had estate banks. The Jordanian banking sector is one of been a local disease of the "free banking era", the important components that supports the economy however the establishment of central banks has not as Jordanian banking sectors goals is to earn enough made financial stability immune to instability and high return on what customers deposit. This sector financial crisis have continued to occur. Financial consists of 26 banks with a joined total of 695 instability doesn’t only affect economy but can be branches throughout the Jordanian kingdom. also very costly because of the binding spillover that affects other parts of the economy and this will lead 2.1. Central Bank of Jordan to financial crisis and adverse consequences for the The CBJ started its operations on October 1, 1964. economy (Gaspar,Hatmann, and Sleijpen, 2002). Before 1964, the Jordan currency board, which had For this reason, central banks must be well been established in 1950". The role of the central capitalized to ensure financial stability as it can be bank was to maintaining excellent asset deposits used as the line of defense when a crisis arises. against the issue of Jordan dinars as local currency, Central banks could also reduce that systemic risk moreover this means that it had no role in controlling through improvements in the payment and security the money supply not even control or supervise settlement system , however that risk can't be banks. completely eliminated that’s why all Central banks The CBJ ensures the availability of bank notes and main objective during a financial crisis is to enclose coins to meet the needs of the national economy and the damage and limit the impact on the real economy maintains an adequate inventory of these banks in (Gaspar,Hatmann, and Sleijpen 2002) case of potential losses, in addition to that the CBJ The first necessary thing to do is to restore calmness works on maintaining and managing the kingdoms in financial markets. As market panics create the reserves of gold to ensure their safety, liquidity and identical of financial heart attack by cutting off the profitability these reserves are important to keep the flow of credit even to healthy institutions. This Jordanian dinar stable. develops the damage in the financial system in The CBJ focuses on improving the capital adequacy addition to that central banks must therefore reduce ratio and managing profitability, liquidity, solvency uncertainty that prevents the collapse of financial and assets. Moreover the CBJ still continues to institutions due to liquidity restrictions. As long as educate banks employees so that they would keep in the failure of a systemically important institution, pace and not lose track, in addition to that CBJ central banks should also prevent the collapse of performs on-site and offsite to make sure that these even if they are insolvent to keep the financial everything is being under control. positions and financial systems stable (Corbo,2004). Commercial Banks needs to be licensed by the CBJ The CBJplays a very important role in maintain the before they can work and operate in Jordan. financial stability in Jordan. This by The law that is Commercial banks must follow and obey the CBJ established by the CBJ that promises that the main regulations and must also respect the CBJ activities objective of the CBJ shall be to maintain the and practices that set ratios for their liquidity ratios, monetary financial stability in the Hashemite cash reserves and capital ratios to make them more Kingdom of Jordan.From that day forward the CBJ efficient.