The Global Financial Crisis and its Impact on the Financial Sector in Jordan - Literature review Example

The Global Financial Crisis and its Impact on the Financial Sector in Jordan Introduction The global financial began from the mortgage crisis which took place in the U.S. The real estate crisis had deeply impacted the banking sector of the nation which slowly began to get transmitted to other nations in America, Europe and the Middle East, as these banks began to sell off their risky debts and financial instruments. The current paper analyses the impact of the financial crisis upon the Jordan economy which is one of the nations whose economy was related to that of the U.S. Although Jordan was less impacted by the financial in the beginning, the effects were felt later on during the year 2009 as unemployment began to rise, the real estate began to crash and the stock market began to fall (Behrendt, Haq and Kamel, 2009). The trend of delayed fall and slow recovery felt in the Jordan economy was similar to that of many of the other Arab nations. The current paper analyses the impact of the financial crisis upon the Amman Stock Exchange (ASE), with particular reference to the financial sector companies listed on the exchange. Research Questions and Objectives The financial crisis had a delayed impact upon the economy of Jordan’s financial sector as its banking sector was relatively isolated and less exposed to the international financial crisis. Although a few efforts were taken by the government authorities to protect the nation from the effects of the financial crisis, they could not prevent the emerging dangers for long. The effects began to be felt as the oil prices rose. Foreign grants began to decline which seriously impacted many of its industrial growth (Al-Akra, Ali and Marashdeh, 2009). The weak financial position had impacted the banks which thereby could not provide the necessary support to other sectors of the economy. The objective of the current paper is to understand the extent to which the economy of Jordan was impacted by the financial crisis. Accordingly the primary research questions are: 1) How have the banking and insurance sectors of Jordan been affected due to the financial crisis? 2) What were the impacts upon the diversified financial sectors? 3) Was the impact of the crisis significant upon the real estate sector of Jordan? 4) Identify the most crucial sectors in the financial segment which were impacted due to the crisis? 5) Were the financial firms listed on the ASE affected more due to the financial crisis as compared to other financial sectors companies? Previous Literature Al-Anani (2009) had stated in his research work that the economic structure of Jordan is sound enough to withstand crisis. He had stated that the impact of the crisis upon the financial sector of Jordan were limited and not as drastic as compared to many European nations such as Cyprus. This was primarily due to the reserved character of the economy of the nation. Wazani (2009) had however taken up a distinctive approach by stating that not all economies that are related or are active in the international economy were deeply influenced during the crisis period. He had identified that since Jordan’s financial sector was less associated with the economies of other nations; their recovery from the crisis was slow. A significant level of freedom of the economy would have facilitated easier and stronger growth. Al-Nessor (2008) had stated that the markets of the gulf nations depends hugely upon the fund procured from foreign nations. Due to the failure of the international markets, many Arab countries faced a decline in the strength of their banking activities. Government intervention was necessitated so as to save the economy of the nation. This led to liquidity crisis and drainage of fund from the central bank. Al-Billawi (2008) had identified that the economic crisis was primarily due to the shift of the financial economy from the real economy. Improvement from Previous Studies Although much discussion have been carried out in respect of the manner in which the financial crisis had impacted the economy of Jordan, very less exploration has been made in respect to the specific sectors which were crucially impacted. The works of most literary experts were seen to be focussed on identifying the general impacts of the crisis upon the economy such as inflation rates, interest rates unemployment and consumer spending (Al-Fayoumi, Abuzayed and Alexander, 2010). The current paper tries to adopt a distinctive approach by focussing on the companies which are registered in the ASE, the primary stock exchange of the nation. Of the companies registered on the ASE, greater preference has been given to the companies belonging to the categories of real estate, banking, insurance and other segments of the financial which were deeply impacted. Not all firms of Jordan were impacted at the same level. The current study lays focus only upon the financial sector impacts which is considered to be more directly related to the economy of the nation as a whole. Data Set The survey takes into account the companies belonging to the financial sector of the ASE. The stock exchange consists of markets I and II. The net financial companies in market I was 62 and those in market II were 51. Hence, 113 financial companies from the ASE were analysed. These companies represent 50.5% of the total companies registered with the ASE. The companies selected were then divided into the categories of banks, insurance, diversified financial services and real estate. Such a data set is considered to be most suitable for analysing the impact of the financial crisis upon the financial companies of Jordan. Moreover, the access to data from the financial companies is more convenient as the sector is required to meet reporting standards more effectively (Lim, Brooks and Kim, 2008). Another strong reason behind selection of such a data set is due to the fact that they represent the true impact of the financial crisis upon the markets of Jordan. This facilitates a descriptive approach to the study. The period taken into consideration for conducting the study is 1st January 2008 to 31st December 2009. The researcher had taken the stratified sampling approach to select the firms from the population of a large number of firms listed in the ASE. Method of Analysis The paper makes use of both the primary and secondary data collection. Primary data has been acquired from the ASE in respect of the selected category of industry and the firms operating within. Primary data is based upon a number of non-structured interviews with managers of the companies of the firms who have provided information based on the set research questions. Managers of brokerage firms were also conferred with, in order to gain deeper explanation on the variables. The different variables are the index and the extent of change in the index from the period of 1st January 2008 to 31st December 2009. The managers of the selected companies were interviewed mainly in this respect. In order to ascertain the instrument of validity, the researcher has considered consulting with a number of arbitrators who operate with the financial and administrative sector. Their suggestions and proposals have been taken into deep consideration before including the data for analysis. This has facilitated in complying with the validity and reliability norms of the proposed study. The primary data collected has been analysed using the SPSS (Statistical Package for Social Sciences) software for constructing different graphs. Thus, it can be stated that the method of study is descriptive. Secondary data in the current paper is sourced from a variety of books and journals which provide suitable information regarding the ASE listed companies. Results of Data Testing Question 1 The results of the data collected show that there has been a significant decline in the stock values of banks and insurance companies listed on the ASE. There had been a slight increase in the change of stock values during the initial period of the crisis, however from the latter half of 2008, until the end of 2009 there had been a sharp turn down in the value of these companies. Question 2 The diversified financial sector had also witnessed a sharp decline in their stock performance and the percentage of change of their index values kept falling steadily. The sharpest decline was felt during 2009. Question 3 As compared to the diversified financial sector, the fall in the values of firm belonging to the real estate sector was less drastic. The fall in the values of the index of real estate companies were seen to be lower in the initial crisis period. The fall in the values was mainly felt in the second half of the year 2009. Question 4 The real estate and the diversified sectors were seen to be the main sectors which were drastically impacted by the financial crisis. The banking and the insurance sectors did not face vey high loses. This was primarily due to a number of crucial restrictive and reform measures undertaken by the government before the onset of the financial crisis (Siam, Khrawish and Jaradat, 2010). Question 5 The financial sector firms had suffered more losses as compared to the other companies listed in the ASE. Conclusion The effect of the financial crisis upon the financial sector, although less drastic were felt for a considerably long period of time. The continuous fall in the values of the index had led towards a slow performance of the economy which ultimately resulted in a slow recovery process. In order to improve the conditions existing in the diversified and the real estate sector, it is essential to reduce the interest rates so to increase liquidity (Alnajjar, Al-ahmad and Issa, 2011). Absorption of liquidity by the central banks through bonds must be halted. Medium and small scale enterprises which are present at large in these sectors must be provided with greater protection. Reference List Al-Akra, M., Ali, M. J. and Marashdeh, O., 2009. Development of accounting regulation in Jordan. The International Journal of Accounting, 44(2), pp. 163-186. Al-Anani, J., 2009. The effects of the economic crisis, global financial impact on Jordan. Jordanian Center for Studies and Information, 1(1), pp. 1- 15. Al-Billawi, H., 2008. Characteristics of the current financial crisis and its relation to previous similar Crises. Middle East Studies Centre in cooperation with the Arab Academy for Banking and Financial Sciences, 1(2), pp. 8- 19. Al-Fayoumi, N., Abuzayed, B. and Alexander, D., 2010. Ownership structure and earnings management in emerging markets: The case of Jordan. International Research Journal of Finance and Economics, 38(1), pp. 28-47. Alnajjar, F. J., Al-ahmad, N. M. and Issa, S. S., 2011. The global financial crisis and its impact on the financial sector in Jordan: applied study on financial companies listed in Amman stock exchange. Journal of International Finance and Economics, 10(1), pp. 87-96. Al-Nessor, M., 2008. The impact of financial crisis on capital markets, trade and economics Arabic. Middle East Studies Centre in cooperation with the Arab Academy for Banking and Financial Sciences, 1(1), pp. 15-32. Behrendt, C., Haq, T. and Kamel, N., 2009. The impact of the financial and economic crisis on Arab States: Considerations on employment and social protection policy responses. Geneva: ILO. Lim, K. P., Brooks, R. D. and Kim, J. H., 2008. Financial crisis and stock market efficiency: Empirical evidence from Asian countries. International Review of Financial Analysis, 17(3), pp. 571-591. Siam, W. Z., Khrawish, H. A. and Jaradat, M., 2010. The relationships between stock market capitalization rate and interest rate: Evidence from Jordan. Business and Economic Horizons, 1(2), pp. 60-66. Wazani, K., 2009. The Jordanian economy and the global financial crisis - challenges and opportunities. AL-Isra University, 1(1), pp. 3-7. Read More