Is Jordan ready for sustainable finance?

In March, Jordan Kuwait Bank (JKB) issued the country’s first green bond, backed by the International Finance Corporation (IFC). The deal was small but important.

According to Adel Al-Sharkas, governor of the Central Bank of Jordan (CBJ), it represents “a ground-breaking achievement, not only for the financial sector but for the entire kingdom.”

He says that the issuance of green bonds will provide investors with the opportunity to support projects that promote clean energy, reduce carbon emissions and support sustainable development in the country.

The $50 million five-year deal saw the IFC invest $36 million in a blended finance co-investment of $10 million from the Canada-IFC Blended Climate Finance Program and $4 million from the Dutch-funded MENA Private Sector Development facility. Proceeds will target renewable energy projects, low-carbon vehicles, green infrastructure such as low-carbon transport, new energy-efficient green buildings and sustainably managed water resources and waste.

“The green bond demonstrates the business case for sustainable finance in Jordan,” says Hela Cheikhrouhou, regional vice-president for the Middle East, central Asia, Turkey, Afghanistan and Pakistan at the IFC. “Since banks can play an instrumental role in financing sustainable projects in Jordan, it’s a positive development when they can tap capital markets.”

For the IFC, it was clear that the market was waiting for this project and that JKB was the obvious partner. The bank is one of the few to issue sustainability reports annually since 2021 and it has established its own solar plant to cover its electricity needs. Its headquarters are gold-certified under the Leadership in Energy and Environmental Design programme.

The hope is that this bond will incentivize other banks in JKB’s peer group to bring more green lending products to the capital markets.

“Compared to 18 months ago, we’ve reached a point of inflection,” says Philip ter Woort, director for the eastern Mediterranean region at the European Bank for Reconstruction and Development. "The green bond that IFC has structured with JKB is an example of that. I’m not surprised by the timing."

From a regional standpoint the country has established a relatively comprehensive green strategy. It has had a nationally determined contribution (NDC) action plan since 2019, which it revised in 2021 to double down on greenhouse gas (GHG) emissions reduction.

Its climate commitment now targets an unconditional 5% and conditional 31% reduction of macroeconomic GHG emissions by 2030, compared with Israel’s unconditional target of 27% and Lebanon’s unconditional target of 20% and conditional 31%.

And there are plans to go further. In January last year, King Abdullah II announced the rolling out of his economic modernization vision, which includes sustainability as one of three key pillars to be implemented in three phases from 2022 to 2033.

The environmental, social and governance objectives include improving Jordan’s ranking in the Global Environmental Performance Index to the top 20 percentile, and in the Global Sustainability Competitiveness Index to the top 40 percentile. With the help of the World Bank, the CBJ is finalizing its sustainability strategy for the greening of the banking sector.

“We expect to see a significant shift once the central bank publishes its new sustainability strategy for the banking sector,” confirms Cheikhrouhou.

For Bashar Al-Natoor, global head of Islamic finance at Fitch Ratings, whether or not the green bond is a one-off is a key question that remains unanswered. “It’s too early to call it,” he says. "It would be very speculative to say now this is where it’s going."

While a handful of deals driven by development banks is a positive result, whether there is sufficient market depth to spur future deals remains unclear.

To date, the IFC has 55 investment projects in Jordan, totalling $1.59 billion, and 22 advisory projects worth $30.2 million. Its strategy focuses on three drivers: sustainable finance, inclusion and digitalization.

Under the jurisdiction of the CBJ, the expectation is that local banks will start adapting internal operations to make their processes more sustainable and implement climate-risk management across business lines.

This is certainly the case for Arab Bank Group, the country’s biggest lender. “Interest will certainly deepen further as regulators in the region issue their sustainable finance directives for banks to comply with,” says Maram Al-Jazireh, global head of financial institutions at Arab Bank.

Arab Bank launched its sustainable finance framework late last year.

“The regulator is well aware of the need for guiding principles in this space and has already carried out a number of roundtable discussions with the local banks on the matter. We expect a series of initiatives to follow,” Al-Jazireh adds.

In Jordan’s core sectors, including energy and water management, there is a dire need for structural economic reform. Some of the country’s development assistance budget contributes to this, such as a World Bank programme that focuses on increasing efficiencies within the energy system.

In April, the World Bank approved loan agreements for two additional projects “to promote job creation and business opportunities for women and help improve the efficiency of Jordan’s electricity sector with an emphasis on strengthening sector governance,” it said.

For ter Woort at the EBRD, the modernization vision and the central bank sustainability strategy are necessary milestones to initiate capital flows to green assets. “We expect to see much more happening on the green side going forward,” he says.

The EBRD has been aligning itself with the country’s strategic priorities, for example, by engaging with distribution companies to roll out smart metering in the country.

The EBRD has also been leveraging its work with Jordanian banks to progress its own environmental mandate.

“The overarching strategy of the EBRD is to become an even greener bank, with the aim of 50% of total business labelled green by 2025,” says ter Woort. "That drives many of the strategic choices in each of the economies where we operate."

In Jordan, this led to three green economy finance facilities signed last year. The bank issued senior unsecured loans worth $25 million to Cairo Amman Bank, another worth $10 million to Bank Al Etihad and a $2 million loan to the Microfund for Women.

The proceeds of the loans are distributed as sub-loans to small and medium-sized enterprises that invest in climate-change mitigation and adaptation technologies and services.

But the bank is also able to leverage its other initiatives to drive a sustainable agenda in Jordan. Amman is now part of the EBRD’s Green Cities programme, a donor funded scheme allowing cities to get technical support to prepare a five- to 10-year strategy identifying potential projects to make themselves greener.

The EBRD is in the process of adding the southern coastal city of Aqaba.

There are also signs that the local banking sector is maturing and consolidating. There has been growing Gulf interest in Jordan’s banking sector. Although small, the country sits at the crossroads of important markets for Gulf investors, including Israel and Iraq.

In July 2022, Saudi Arabia’s sovereign wealth fund invested $180 million in a 23.97% stake in Capital Bank Group. Capital Bank has also received a financing facility from EBRD for digitalization. Capital acquired Societe Generale Banque de Jordanie in October last year.

Meanwhile, Arab Jordan Investment Bank signed agreements in March to acquire Standard Chartered’s business in Jordan, having also acquired National Bank of Kuwait’s banking business in the country earlier in 2022 and HSBC’s Jordanian banking business back in 2014.

Jordan’s banks are also investing further afield. “Some local banks are looking at expanding their business beyond the [country’s] borders, especially into Iraq, which could be an interesting angle for Gulf investors,” says ter Woort.

Jordan Kuwait Bank acquired 51.75% of Bank of Baghdad’s capital in January this year, while Capital Bank Group has an important presence in Iraq with the acquisition of Lebanon-based Bank Audi’s Jordanian and Iraqi subsidiaries in 2020.

If recent activity marks an inflection point, it comes after years without climate risk really being on the banking sector’s radar.

“Jordan is of course a stable country, but also at times with a conservative mindset, and it took a while for the banks to see that this makes sense from a business perspective” says ter Woort.

Regional players are, however, becoming more receptive to the need for sustainable strategies. Arab Bank, for example, wants to use its new sustainable framework to strengthen its product line.

“The launch of our sustainable finance framework is in line with our strategic direction to achieve sustainable growth and develop our sustainable finance capabilities,” says Arab Bank’s Al-Jazireh. "This will include rolling out green/sustainable lending products to our customers in a phased approach.

“We are open to the different viable debt-issuance options if they make sense to our strategy and liquidity management considerations,” she adds.

While recent efforts to implement a top-down sustainability strategy will hopefully drive investment into green assets and social inclusion initiatives, the local banks’ strong focus on SME lending means that getting those clients on board is particularly important.

Bank lending in the country is concentrated in loans to SMEs, mid-caps and retail clients. And one of the biggest challenges is raising awareness in the business community of the necessity to adapt operations towards more environmentally and socially conscious methods.

“It is still a learning curve for the overall corporate segment in Jordan. However, the sector is not new to initiatives in sustainable financing facilities,” says Al-Jazireh.

SME clients account for the majority of Arab Bank’s corporate lending in Jordan.

“Many corporates have invested in renewables and green energy as part of their strategies to be more environmentally friendly in their activities and operations – in addition to implementing power-saving initiatives and more digitalization,” she adds.

In 2017, Arab Bank signed a €300 million regional credit facility with the European Investment Bank to facilitate financing for SMEs in line with the European Union’s sustainable financing guidelines in the five countries where the bank operates, including Jordan, Palestine and Egypt.

Providing sustainable loans to Jordan’s SME business sector is the foundation for developing a sector-agnostic sustainability strategy in the country.

For the IFC’s Cheikhrouhou, there is a virtuous circle here: the more the benefits of sustainable lending can be tied to financial performance, the quicker the behavioural change will happen. This, in turn will create more eligible assets in the business community.

“If people become more aware of the risks posed by climate change and companies adapt their business models accordingly, we will see the development of a more robust pipeline of projects for green finance and climate resilience,” she predicts.

But Jordan’s SME businesses face the same issues as the sector worldwide when it comes to sustainability: a lack of resources and expertise to identify problem areas and find solutions.

“Over time, Jordan’s banks, like others globally, will sharpen their capacity to assess projects and technology needs, and will develop innovative tailored products for their clients,” says Cheikhrouhou. "The IFC is playing a key role here by sharing best practices from other regions."

The EBRD also sees the benefit of looking at what has worked in other markets and applying it to Jordan. If local banks don’t yet know what and where the green potential is in their corporate lending portfolios, the bank’s consultants can help figure it out.

“EBRD consultants do exactly that. They will have done this before in different jurisdictions, they know what works and what doesn’t,” says ter Woort. "Their international experience can guide our clients about the opportunities in their portfolios for green products.

“Jordanian banks stand to benefit from more awareness of the opportunities to become greener,” he adds.

However, such small-scale sustainable finance initiatives will fall far short of addressing the growing funding gap in Jordan for essential large-scale infrastructure projects, which have so far been the preserve of multilaterals such as the EBRD, IFC and the EIB.

The Aqaba-Amman National Desalination and Carrier Project is the largest desalination project in Jordan and, once completed, will provide Jordan with 300 million cubic metres of desalinated Red Sea water annually.

The project is due to start at the end of this year. The estimated cost stands at $2.7 billion, including a $400 million investment loan from the IFC and $510 million in EIB financing.

According to its country climate and development report, the World Bank estimates that Jordan’s investment needs for resilient and low-carbon developments in key sectors to be $9.5 billion if priority actions are to be fully implemented by 2030.

The report projects that government financing, including grants, would be about 37% of the total, with the remaining 63% provided by private investments.

“This could incentivize governments to work more with the private sector and international partner stakeholders to move into and accelerate sustainable finance both on the Islamic and conventional front,” says ter Woort.

Ultimately, it comes down to the sustainability agenda of the country and its access to international public and private-sector capital.

“Larger projects that need a lot of international finance and donor support will bring up the environmental standards, as for these financiers the project will need to be Paris aligned,” he adds.

Jordan’s first green bond can only be understood in this context. The enthusiasm for sustainable finance will not lead to a structural transition without a more robust capital market to facilitate access to private finance.

“The development of its debt capital market is still at a very early stage,” adds Fitch’s Al-Natoor. “We need to ask if there is an appetite from investors, and the right incentives and structures for people to enter into the market.”