INTERNATIONAL LEGAL ENVIRONMENT FOR BANKING

TERM PAPER

ON

GATS AND BANKING REGULATION

Submitted To,

Dr.R.Anita Rao

Professor-GSIB

Submitted By,

Kiranmayee.K (111)

Sanjay Durga (118)

M.B.A (IBF)

GITAMS SCHOOL OF INTERNATIONAL BUSINESS

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EXECUTIVE SUMMARY

This report is about how the progress achieved in the liberalization of international trade in

banking services as part of the General Agreement on Trade in Services (GATS). In

particular, it examines the existing legally binding commitments and discusses the progress in

the negotiations at the Doha Round.1

The liberalization of trade in financial services is one aspect of the trend toward international

economic and financial integration. The driving forces of global, regional, or bilateral

economic integration are two: first, economic and technological developments that facilitate

the flow of goods, services, capital, and persons; second, the operation of political forces that

eliminate the remaining legal and institutional impediments to cross-border transactions

through either unilateral domestic reform or international legal agreements.

The concept of financial integration denotes the economic integration of financial markets

and activities: first, the elimination of legal obstacles obstructing cross-border flows of

capital, financial services, and financial institutions and, second, the economic and

technological forces that facilitate cross-border financial activities, so that with respect to

finance, there are no foreigners within the integrated area.2 The institutional component of

this process (i.e., the elimination of artificial legal barriers obstructing financial flows,

services, and institutions) is an essential but not sufficient condition of international financial

integration. The original rival of international economic integration was geography, not legal

and political institutions. The historical causes of fragmentation of national markets were

distance, expensive, and inefficient means of transportation and poor communications.

Legal and institutional obstacles became apparent only after rapid advances in information

technology, telecommunications, and transportation rendered the prospect of transnational

economic relations realistic. The paper is structured as follows. In section two, the question

of tradability of banking services is discussed and the four different modes of supplying

banking services across national borders are presented. The different types of barriers and

obstacles to trade in banking services are discussed in section three, and the various strategies

to deal with them are outlined in section four. In section five, a brief history of financial

services negotiations in the WTO is presented and the most important provisions of the

GATS are discussed, as well as their importance for trade in banking services. In section six,

there is an overview of the current state of play with regard to the liberalization commitments

undertaken under the GATS by the 148 WTO members. An assessment of the state of play is

presented in section seven. In section eight, the key issues and the progress achieved so far in

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the current Doha Round are discussed. A case study about the Jordanian Banking how they

faces challenges in their banking services and what benefit they got after implementing

GATS principle in their financial and banking services. At last it is concluded about the

benefits and what GATS is lacking and some recommendation is suggested.

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OBJECTIVE OF THE TERM PAPER

To establish and understand the role of GATS in Banking Sector and also to its impact on

Trade and Services.

INTRODUCTION

The General Agreement on Trade in Services (GATS) is a treaty of the World Trade

Organization (WTO) that entered into force in January 1995 as a result of the Uruguay Round

negotiations. The treaty was created to extend the multilateral trading system to service

sector, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a

system for merchandise trade.

All members of the WTO are signatories to the GATS. The basic WTO principle of most

favoured nation (MFN) applies to GATS as well. However, upon accession, Members may

introduce temporary exemptions to this rule.

HISTORICAL BACKGROUND

Before the WTO's Uruguay Round negotiations began in 1986, public services such as

healthcare, postal services, education, etc. were not included in international trade

agreements. Most such services have traditionally been classed as domestic activities,

difficult to trade across borders, notwithstanding the fact that for example educational

services have been "exported" for as long as universities have been open to international

students. Nevertheless, foreign participation has existed in many countries prior to the GATS.

Nonetheless, most service sectors—in particular, international finance and maritime transport

—has been largely open for centuries, as necessary components of merchandise trade. Other

large sectors have undergone fundamental technical and regulatory changes in recent

decades, opening them to private commercial participation and reducing barriers to entry. The

development of information technologies and the internet have expanded the range of

internationally tradable service products to include a range of commercial activities such as

medicine, distance learning, engineering, architecture, advertising and freight forwarding.

While the overall goal of the GATS is to remove barriers to trade, members are free to choose

which sectors are to be progressively liberalised, under which mode of supply a particular

sector would be covered under, and to what extent to which liberalisation will occur over a

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given period of time. Members' commitments are governed by a "ratchet effect", meaning

that commitments are one-way and should not be wound back once entered into. This reason

for this is the creation of a stable trading climate. Article XXI allows Members to withdraw

commitments and so far two members have used this option (USA and EU). In November

2008, Bolivia notified that it will withdraw its health services commitments.

Some activist groups consider that the GATS risks undermining the ability and authority of

governments to regulate commercial activities within their boundaries, with the effect of

ceding power to business interests over the interests of citizens. In 2003 'GATS watch'

network published a critical statement which was supported in 2003 by over 500

organisations in 60 countries.

GATS OBJECTIVE:

“Establish a multilateral framework of principles and rules for trade in services with a view to

the expansion of such trade under conditions of transparency and progressive liberalization”

ROLE OF GATS IN THE LIBERALIZATION OF BANKING SERVICES

In general, there are four ways in which central banks/monetary authorities intervene

in the market to affect the activities of suppliers of banking services.

Central banks institute measures for macroeconomic policy management.

Central banks maintain and introduce measures aimed at ensuring the soundness and

stability of the banking system as well as protecting the interest of the consumers of

banking services.

GATS commitments do not impede on the prerogative of monetary authorities to adopt

prudential measures. Paragraph 2(a) of the Annex on Financial Services stipulates that:

“Notwithstanding among other provisions of the Agreement, a Member shall not be

prevented from taking measures for prudential reasons, including for the protection of

investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a

financial service supplier, or to ensure the integrity and stability of the financial system.”

There is also a provision in the Annex on Financial Services which states that when

prudential measures run counter to the other provisions of the GATS, such must not

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be used as a means of avoiding commitments or obligations of a country under the

Agreement.

Monetary authorities can maintain other regulations that could affect operations and

competition in the financial market.

Monetary authorities can impose trade restrictions that could prevent the

establishment of commercial presence of foreign service suppliers and impede the

flow of foreign services through cross border supply.

The reduction and elimination of this type of measure are the main focus of the trade

liberalization efforts in the GATS.

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REVIEW OF LITERATURE:

Non-discriminatory treatment concerns the notion of "national treatment", which provides

that a government treat enterprises controlled by the nationals or residents of another country

no less favourably than domestic enterprises in like situations. National treatment requires

equivalent, not identical, treatment. Equivalent treatment is when a different regime applies

to non-residents as compared to residents to place them on an equal footing (e.g. for

prudential purposes). Non-discriminatory treatment also means that an investor or investment

from one country is treated by the host country no less favourably than an investor or

investment from any third country (referred to as Most Favoured Nation or MFN in

international agreements) in like situations. Reciprocally, non-discriminatory treatment does

not call for providing advantages to foreign investors.

 The application of these principles towards investment varies considerably across countries,

partly because a state’s right to regulate sometimes involves discriminating against foreign

investors. Policies that favour some firms over others (i.e. any policies that derogate from

national treatment or MFN) involve a cost, however. They may result in less competition (see

also the chapter on Competition Policy), distort resource allocation, impede linkages between

MNEs and local suppliers and slow the diffusion of technological innovations. These effects

discourage all investors and give a negative perception about a country’s receptiveness

towards investment. This is why exceptions to non-discrimination, especially in sectors that

play a central role in the development of an economy (e.g. financial and telecommunication

sectors), need to be periodically re-evaluated to determine whether the original motivation

and national benefits behind an exception remain valid and outweigh the costs borne by

consumers, suppliers and investors.

 The ability to transfer investment-related capital, including repatriating earnings and

liquidated capital, is important for any firm to be able to make, operate, and maintain

investments in another country. At the same time, governments sometimes need to limit these

economic freedoms in order to address serious balance of payment difficulties. Since

measures that restrict the free transfer of capital may adversely affect inflows of international

investment, deter domestic companies from accessing international capital markets to fund

investment and encourage inefficient and non-transparent practices such as transfer pricing,

restrictions on the transfer of funds also need to be reviewed periodically. Governments have

authority to take any measure required to prevent evasion of their laws and regulations

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ANALYSIS

MODES OF TRADE IN BANKING SERVICES UNDER THE GATS FRAMEWORK

TRADE IN BANKING SERVICES AND INTERNATIONAL CAPITAL

FLOWS

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There are three broad types of trade:-

Loan by domestic Supplier.

Loan by foreign supplier on a cross border basis.

Loan by foreign supplier established in the country.

The difference could be explained in two scenarios namely:-

Scenario-1: Loan involves domestic capital only.

Scenario-2: Loan involves foreign capital only

THE BARRIERS TO INTERNATIONAL TRADE IN BANKING SERVICES

Although physical barriers at the border and tariffs do not obstruct the flow of financial

capital across borders, a large number of national laws and regulations preclude or disturb

international financial integration. Legal impediments to international capital flows and trade

in financial services are classified as direct or indirect, depending on whether the adverse

effects of the pertinent rules on cross-border transactions are express and intentional or

indirect and inadvertent.

A. DIRECT BARRIERS

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Direct (or discriminatory) measures draw an explicit distinction between resident and non-

resident financial institutions, investors or borrowers to the disadvantage of non-residents

(overt discrimination), or result in disadvantageous treatment of non-residents without stating

so explicitly (covert discrimination). In light of the three most common modes of delivery of

banking services across borders, institutional barriers may obstruct, discourage, or prevent

financial institutions from operating in another country, consumers from accessing financial

services abroad, or services from being delivered at a distance without the parties being

simultaneously present. With regard to the specific aspect of the service to which the

discriminatory rule relates, discriminatory barriers may relate to the firm providing the

service (e.g., a prohibition of entry in the local market), the customer receiving the service

(e.g., a requirement that local depositors may not deposit funds with foreign institutions or

adverse tax rules which might have the same effect), or the cross-border flow of capital upon

which the service relies.

B. INDIRECT BARRIERS

The removal of all discriminatory regulatory barriers and the establishment of a level playing

field between domestic and foreign financial institutions do not necessarily lead to full

contestability and integration of international banking markets. With the substantial decline

of direct legal barriers during the 1980s and 1990s, a subtler and more elusive source of legal

restrictions has come to the forefront: the coexistence and conflict of diverse national laws

and regulatory standards. In particular, it is argued that the diversity of national regulatory

structures and rules imposes substantial regulatory costs on international financial operations,

thus obstructing the process of international financial integration. The concept of regulatory

diversity refers to the coexistence of many national jurisdictions with legal and regulatory

systems that develop different laws, regulations, and practices to suit diverse national and

local preferences, objectives, and resources. Whatever its effects on international economic

relations, regulatory diversity is the inevitable outcome of the right of sovereign jurisdictions

to self-government and rulemaking autonomy.

THE SUBJECT-MATTER OF LIBERALIZATION COMMITMENTS

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An important question relates to the subject-matter of the GATS financial services

framework. Put simply, what sort of laws, rules and regulations are subject to liberalization

commitments on market access, non-discrimination, regulatory transparency and so forth?

According to article I of the GATS, the agreement applies to “measures by Members

affecting trade in services. Measures by Members means measures taken by central, regional,

or local governments and authorities, as well as those taken by non-governmental bodies in

the exercise of powers delegated by central, regional or local governments or

authorities.

The WTO Panel on EC-Bananas III defined the scope of application of the GATS in the

following terms: “The scope of the GATS encompasses any measure of a Member to the

extent it affects the supply of a service regardless of whether such measure directly governs

the supply of a service or whether it regulates other matters but nevertheless affects trade in

services.”

The Appellate Body upheld this finding and held that the use of the term ‘affecting’ reflects

the intent of the drafters to give a broad reach to the GATS. The ordinary meaning of the

word ‘affecting’ implies a measure that has ‘an effect on’, which indicates a broad scope of

application.”

In accordance with the foregoing definition, the liberalization commitments undertaken in the

WTO cover all measures taken by governments or regulatory authorities provided that, first,

there is trade in banking services and, second, the measures affect such trade.

THE NORMATIVE IMPACT OF THE GATS

The purpose of the GATS is the removal of barriers to trade in services through a process

of negative integration. The framework specifies measures that nations must eliminate or

refrain from taking. The process is de-regulatory in that it involves the elimination or

reduction of trade barriers. There is no process of positive integration that would result in the

transfer of law-making and standard-setting powers from nation states to the WTO level. The

second underlying idea, which is a stark reminder of the limitations of the GATS as a

mechanism of negative integration, is the express carve-out of prudential matters from the

normative effect of the financial services commitments. Whatever the implications of

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national regulation on international trade, there is no provision in the GATS preventing

national authorities from taking measures to ensure the integrity and stability of the financial

system or for prudential reasons, including the protection of investors, depositors, policy

holders, or persons to whom a fiduciary duty is owed by a financial service supplier.

1. THE PRINCIPLE OF MOST-FAVORED NATION

One of the most significant principles of the GATS is the MFN rule. According to article II of

the GATS, in adopting measures affecting trade in banking services each country “shall

accord immediately and unconditionally to services and service suppliers of any other

Member treatment no less favourable that that it accords to like services and service suppliers

of any other country.

The motto of the GATS is “favour one, favour all.” Members cannot afford privileges to

services or firms originating in other countries without affording the same treatment to all

other members. MFN means treating one’s trading partners equally on the principle of non-

discrimination. Under GATS, if a country allows foreign competition in a sector, equal

opportunities in that sector should be given to service providers from all other WTO

members.

The legal commitment of MFN raises a number of interpretative difficulties. The first

difficulty is whether the concept of like services and services suppliers is given a narrow or

wide scope. Suppose that Country X has no objections to foreign banks establishing branches

within its domestic territory, provided that the country of origin of the foreign bank never

applied to the IMF for financial assistance in the past. The rule discriminates between banks

from different countries on the basis of their nationality. But is a bank from Group A

(countries which never applied for IMF assistance) like a bank from group B (countries

which applied for IMF assistance)? One view is that a bank is like any other bank, and,

therefore, the measure breaches the MFN clause. But a narrower view of the MFN provision

would be that banks from countries with weak financial systems are not like banks from

countries with strong financial systems—assuming programs of financial adjustment

administered by the IMF are indications of a country’s financial weakness. Hence, the

measure falls outside the scope of article II. The wider the definition of like services, the

more measures will fall within the scope of the MFN clause, with potential benefits for

international trade.

The issue has now been resolved. A bank from Group A is like a bank from Group B

regardless of the quality of the financial systems in the two groups. Under WTO law, the

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notion of like services is a wide one—to the extent that the service suppliers concerned

supply the same services, they should be considered like for the purposes of article

A second difficulty relates to the definition of the notion of “treatment no less favourable.”

Regarding the permissible exemptions from the obligations under article II of the GATS, the

Annex on article II exemptions is clear. First, WTO Members may negotiate and schedule

exemptions from MFN to the benefit of specific WTO Members. Second, the principle of

MFN does not apply to regional agreements of trade integration. Provided that the conditions

of article V are met, WTO Members may enter into bilateral or multilateral trade agreements

that would otherwise breach the MFN principle.

The principle of MFN is an interesting rule of trade liberalization. On certain conditions its

impact could be substantial but in itself it is hardly a method of trade liberalization. A WTO

Member is perfectly capable of respecting the MFN rule even in the absence of liberalization

commitments, provided that it treated all foreign firms similarly. Indeed, a country may be

completely isolated from international markets and still comply with the MFN rule provided

that no foreign country received trading privileges. The principle of MFN has liberalizing

effects only when it is complemented by affirmative commitments of trade liberalization,

primarily commitments of market access and equal national treatment.

2. THE PRINCIPLE OF MARKET ACCESS

Market access is one of the fundamental concepts of the GATS framework and signifies the

commitments ofWTOMembers to open up their borders to trade in services, including

banking services. The Agreement does not define the concept of market access, but there is

little doubt that the concept refers to the ability of exporting firms to provide services in one

of the four modes of trade in services. In contrast with the MFN principle, the GATS do not

contain an overarching rule prohibiting restrictions on market access. Instead, it was a major

choice of institutional design that WTO Members must expressly list the types of services

and the modes of supply that are subject to a market access commitment, as well as any

restrictions to market access that apply in the relevant types of services and modes of supply.

Provided that a market access commitment is in place with regard to a given type of service

(e.g., acceptance of deposits) and a mode of supply (e.g., modes 1, 2, and 3), article

XVI of the GATS contains an exhaustive list of measures that a member shall not maintain or

adopt: (1) limitations on the number of service suppliers whether in the form of numerical

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quotas, monopolies, exclusive service suppliers, or the requirements of an economic needs

test; (2) limitations on the total value of service transactions or assets in the form of

numerical quotas or the requirement of an economic needs test; (3) limitations on the total

number of service operations or on the total quantity of service output expressed in terms of

designated numerical units in the form of quotas or the requirement of an economic needs

test; (4) limitations on the total number of natural persons that may be employed in a

particular service sector or that a service supplier may employ and who are necessary for, and

directly related to, the supply of a specific service in the form of numerical quotas or the

requirement of an economic needs test; (5) measures that restrict or require specific types of

legal entity or joint venture through which a service supplier may supply a service; and (6)

limitations on the participation of foreign capital in terms of maximum percentage limit on

foreign shareholding or the total value of individual or aggregate foreign investment.

The list of market access restrictions that a WTO Member cannot maintain or adopt has no

effect unless the WTO Member schedules a specific market access commitment with regard

to a given type of service and mode of supply. When the commitment is in place, the

measures enumerated in the list cannot be maintained or adopted unless the member

schedules a specific limitation. Specific commitments on market access effectively preclude

or eliminate discriminatory barriers. The common denominator of the limitations enumerated

in the list of article XVI is that they preclude, restrict, or otherwise impede access to the

market of the WTO Member employing the limitation.

Under the scheme established by the GATS, a WTO Member grants full market access in a

given sector and mode of supply when it does not maintain in that sector and mode any of the

types of measures listed in article XVI. The measures listed comprise four types of

quantitative restrictions (items (1)-(4)), as well as limitations on forms of legal entity (item

(5)) and on foreign equity participation (item (6)).

3. THE PRINCIPLE OF NATIONAL TREATMENT

The close-ended list of market access limitations does not exhaust the pool of potential

discriminatory measures against foreign financial institutions. There is a potentially open

ended list of measures that are designed for, or simply result in, less favourable treatment of

foreign banks vis-à-vis their domestic competitors. The national treatment rules of the GATS

framework are designed to eliminate or reduce this long list of discriminatory provisions.

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Again, the prohibition of discriminatory treatment does not apply automatically. WTO

Members must schedule specific types of services and modes of supply that will be subject to

the national treatment requirement. For these types of services and modes of supply, in which

specific commitments have been scheduled, article XVII of the Agreement requires each

WTO Member to accord to services and service suppliers of any other Member, in respect of

all measures affecting the supply of services, treatment “no less favourable” than that it

accords to its own like services and service suppliers.

A WTO Member grants full national treatment in a given sector and mode of supply when it

accords in that sector and mode conditions of competition no less favourable to services or

service suppliers of other Members than those accorded to its own like services and service

suppliers. The national treatment standard does not require formally identical treatment of

domestic and foreign suppliers: formally different measures can result in effective equality of

treatment; just as formally identical measures can in some cases result in less favourable

treatment of foreign suppliers (de facto discrimination). Thus, it should be borne in mind that

limitations on national treatment cover cases of both de facto and de jure discrimination. Of

course, the institutional design of the Schedules of specific commitments permits WTO

Members to retain the right to discriminate between identical services supplied through

different modes by not guaranteeing national treatment with respect to each mode.

The policy of national treatment may raise difficulties and destroy reciprocity to the extent

that rules and regulatory practices are different in different jurisdictions. Reciprocal national

treatment obligations necessarily result in some sort of advantage for financial institutions

originating in countries with complex and more restrictive regulatory structures when they

operate in markets with less strict regulatory regimes. This is a structural problem of

competitive equality that is caused by differences in national rules rather than the principle of

national treatment. Eliminating structural barriers will always involve some sort of regulatory

coordination or even the harmonization of laws and covenants of mutual recognition of

regulatory standards and supervisory practices.

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ASSESSING THE PROGRESS IN BANKING SERVICES LIBERALIZATION AND ISSUES FOR THE DOHA ROUND OF NEGOTIATIONS

The progress achieved so far may tell two entirely different stories depending on the premise

from which one starts. If the starting premise is a world of disrupted trade in banking

services, blatant protectionism, tight controls on international capital flows, and few

opportunities for cross-border trade, the 1997 Financial Services Agreement and subsequent

developments clearly marked a change for the better: the establishment of an ongoing process

of multilateral negotiations resulting in legally binding commitments, subject to quasi-

judicial review; the elimination of discriminatory barriers to market access in a large number

of developed countries; the reduction of barriers in many developing and emerging market

economies; the achievement of a more or less integrated market for wholesale services to

non-consumer parties; and a broad participation of sovereign jurisdictions which keeps

expanding.

Looked at from a different perspective, the progress thus far is at best modest. In the era of

financial globalization, where cross-border trade in banking services may benefit from the

extraordinary advances in information, telecommunications, and network technology, the

GATS framework has done little to advance international trade in banking services despite

the broad participation and resources available to it. A large number of countries, inside and

outside the WTO, remain entirely uncommitted. Supplying services across borders remains

largely unaffected by existing commitments whereas trade in services through locally

established entities is subject to persistent discriminatory barriers. The scope for further

improvement of legal commitments regarding types of services and modes of supply is vast.

Last, but not least, under the existing institutional design of the GATS framework, the large

pool of structural non-discriminatory barriers will never be addressed.

As always, the truth is in the middle. Inasmuch as it is obvious that the GATS process has

thus far contributed to banking services liberalization, there is huge scope for improvement

and a number of thorny issues to be resolved in subsequent rounds. Depending on the WTO

Member, more services and modes of supply can still are included or financial services

commitments being scheduled for the first time. Also, existing exemptions and limitations

can be eliminated leading to the gradual elimination of applicable barriers to trade.

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In particular, market access and national treatment commitments can be broader and stronger.

The few exemptions from MFN can be eliminated. The clarification of the definition of mode

one (cross-border services) and mode two (consumption abroad) in light of electronic

banking and finance is a pressing need. With regard to substantive commitments, the scope

and scale of mode one commitments is nowhere near the level of liberalization for

commercial presence. In the era of electronic banking and finance, the gap has to be bridged.

The same applies for the divide between developed and developing countries, which,

however, is linked to the fate of reciprocity in the central issues of the current round, namely

agriculture and intellectual property.

Second, the institutional framework could do with some simplification and user friendliness.

There are seven GATS-related legal instruments and dozens of national schedules that

constitute the legal framework for trade in banking services. Some of them are ambiguous

(intentionally or unintentionally) and poorly drafted. A fundamental structural weakness is

the positive list approach. Simply put, we cannot make sense of the applicable barriers to

international trade unless we take the pains to examine individual legal systems.

A negative list approach whereby WTO Members undertake full commitments of market

access and national treatment and list specific exemptions and limitations makes much more

sense and improves dramatically the final product. It is also easier to negotiate and agree

from a technical point of view.

The remaining gaps between liberalization commitments and liberalization practices could be

eliminated. Arguably the function and technical definition of the prudential carve out must be

discussed. Negotiating parties must clarify the scope of the domestic regulatory deference.

What is prudential? Is there still a requirement of transparency? Is the deference absolute or

limited by requirements of proportionality, necessity, and suitability? Furthermore, there is

currently no standstill provision, which means that current commitments may theoretically be

revoked. Since the 1997 Agreement, further market opening or financial services has taken

place in a number of emerging market economies, either through unilateral action or as part

of the conditionality in IMF financial assistance programs.

Despite the changes, there has been no concomitant alteration in the relevant national

schedules of commitments, which creates further gaps between reality and liberalization

commitments.

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The new round should address this question. With regard to the crucial relationship between

financial sector stability and financial services liberalization, recent developments have

revealed a difference in perspectives between financially developed and developing

economies. For developed countries, there is work to be done in many interesting areas, such

as establishing meaningful regulatory dialogue and cooperation between financial services

negotiators and financial regulators within the WTO context; strengthening the existing links

between international standard setting bodies such as the Basel Committee, the International

Organization of Securities Commissions (IOSCO), and the WTO to ensure consistency,

mutual understanding, and non-duplication of efforts; actively promoting a financial

liberalization ethos in the domestic regulatory agenda (e.g. enhancing regulatory

transparency, participation of foreign financial firms, selection of the least restrictive among

suitable measures of regulation, supervision, consumer protection, etc.); and, finally, in the

long term, identifying areas of substantial regulatory convergence with a view of initiating

mutual recognition discussion at a broad international level. For developing economies and

financial systems, the current round of financial services negotiations raises a slightly

different set of regulatory priorities, such as continuing to work towards the strengthening of

domestic financial systems and legal institutions of regulatory and supervisory control in

tandem with the reduction of regulatory barriers.

The foregoing agenda reveals an extraordinary mix of issues and policies that could or should

have been included in the current Doha round of financial services negotiations. Some of the

items are already within the current agenda (e.g., quantitative and qualitative improvements

of national commitments). Others require a more profound revision or improvement of the

whole process. Taken together, they set the optimal objective against which the progress of

the current Doha round could be measured.

THE DOHA ROUND AND DEVELOPMENT IN FINANCIAL SERVICES

NEGOTIATIONS

One of the main strengths of the GATS is the ongoing obligation of WTO Members to enter

into successive rounds of negotiations to progressively liberalize trade in services. In other

words, the formal adoption and implementation of the GATS schedules of commitments is

not the end of the story. It was recognized that liberalization of trade in services would be a

long process with several rounds of negotiations.

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THE DOHA ROUND

With regard to financial services, the post-Uruguay Round ended in December 1997 with the

Financial Services Agreement. The ink in that agreement was hardly dry when a new round

of services negotiations had to begin according to the provisions of the GATS.

Indeed, the services negotiations started officially in early 2000, under the auspices of the

WTO Council for Trade in Services. Financial services were a key component of this process

from the start. In March 2001, the Services Council established the negotiating guidelines and

procedures. The work towards further progress in the institutional conditions of international

trade was further stimulated in November 2001 by the Declaration of the Fourth Ministerial

Conference in Doha, Qatar that provided the political mandate for trade negotiations on a

range of subjects, including financial services.

The Doha Declaration endorsed the work already done with regard to services, reaffirmed the

negotiating guidelines and procedures, and established some key elements of the timetable,

including the key deadline ( January 1, 2005) for the conclusion of the negotiations as part of

a single undertaking.

According to the Doha Declaration, the negotiations on trade in services shall be conducted

with a view to promoting the economic growth of all trading partners and the development of

developing and least-developed Countries. It was envisaged by the Doha services timetable

that participants should submit initial requires for specific commitments by June 30, 2002 and

initial offers by March 31, 2003. The actual progress turned out to fall short of these

expectations.

Following the September 2003 Cancu´n Ministerial Conference, the deadlock in highly

contestable political issues relating to agricultural subsidies had a knock-on effect on services

negotiations. To heal the wounds, WTO Members in Geneva began efforts to put the

negotiations and the rest of the work program back on track. Work intensified in the first half

of 2004, with the new target date of reaching agreement on a package of framework

agreements by the end of July, in effect Friday, July 30. The first draft of the July package

was circulated on July 16, and members started negotiating intensively in various formats

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in the fortnight beginning July 19. Final political agreement on a revised set of political

guidelines for negotiators was reached by the (then) 147 WTO members shortly after

midnight on August 1, 2004. These political commitments, also known as the July package,

Were relevant for the political climate and mandate for banking services negotiations in the

Following respects:

• WTO members reaffirmed the Ministerial Declarations and Decisions adopted at Doha and

their full commitments to give effect to them.

• In the light of the poor results achieved since the beginning of the services negotiations in

January 2000, WTO members endorsed the recommendations of the WTO Council for Trade

in Services that basically urged negotiators to increase their efforts towards greater services

liberalization.

• More importantly, the delays and failures of the past few years were recognized and a new

deadline was set in the hope to induce a new wave of liberalization requests, offers, and

commitments. Under the new deadline, which is currently in force, revised offers for

liberalization commitments must be tabled by May 2005. The negotiations will conclude with

the ministerial sessions to be held in Hong Kong in December 2005, one year later than

envisaged in the 2001 Doha Declaration.

KEY ISSUES

With regard to banking services, the main objectives of the current Doha agenda draw

heavily on the limitations and shortcomings of the 1997 Agreement. First, more developing

countries are expected to broaden their commitments and reach the scope and scale

commitments made by financially developed WTO Members. Second, commitments in mode

one (cross-border services) are expected to match the level of commitments in mode three

(commercial presence). It is also expected that the scope of the prudential carve-out will be

defined although there is currently disagreement among developed countries (that like it

narrow) and developing countries (that wish it was broader). The Doha round is also hoped to

strengthen the disciplines relating to regulatory transparency and administrative due process

as a means of removing some of the structural barriers that impede international financial

activities. Finally, it is expected that WTO Members will clarify the relations between the

work in the WTO and the work in other international organizations and standard-setting

bodies involved in the international financial system, such as the Basel Committee. In that

20

respect, developed countries believe that the processes of financial liberalization and soft

international regulatory convergence are mutually reinforcing, but ought to remain separate

and independent, while developing countries have repeatedly expressed their discomfort at

being recipients of standards set by others and for that mreason want to link WTO

commitments with greater input in the process of international standard-setting.

THE PROGRESS ACHIEVED SO FAR

The financial services component of the Doha round has missed several deadlines and

milestones and probably fallen short of expectations. Perhaps the most obvious conclusion is

that developed countries are encouraging more market access and national treatment

commitments, while developing countries are still refusing to open their cards before other

more pressing trade disputes were settled. The data are revealing. Despite the deadline for the

final submission of offers by May 2005, no more than eleven WTO Members (the EU

considered as a single WTO Member) have tabled initial offers or revised offers for financial

services commitments. These are Turkey, Chile, EC, Liechtenstein, United States, Japan,

Norway, Canada, Australia, New Zealand and Iceland. The following table summarizes the

extent to which the initial offer or revised offer improves on the WTO Member’s

commitments under the 1997 Agreement. It is apparent that the most jurisdictions in this

table are close to exhausting the room for further improvements in GATS-related national

treatment and market access.

21

CASE STUDY ON ASSESSMENT OF THE JORDANIAN BANKING SECTOR

WITHIN THE CONTEXT OF GATS AGREEMENT

Facts about the case

This case study assesses the Jordanian banking sector within the context of the General

Agreement on Trade in Services (GATS) agreement. We start this study by providing an

overview of the main characteristics of Jordan’s banking system to date and pursue to analyze

how the Jordanian regulatory environment is developing significantly to meet the new

changes in the banking sector. Consequently, we evaluate the level of compliance of the

Jordanian banking sector with the rules and requisites of the GATS. Finally, we analyze the

constraints for the sector development and present specific recommendations for remedial

action.

Issues in the Case 1

Banking sector plays an important role in an economy to improve stability and increase

economic growth. Banks play a central role in the money creation process and in the payment

system. Moreover, bank credit is an important factor in the financing of investment and

growth. Therefore, regulators have a special interest in maintaining banking system stability.

However, a recent strand of literature maintains that stronger competition may improve

stability and concludes that competition among firms tends to produce a more efficient

outcome and a lower probability of failure. Therefore, the degree of competition in the

banking sector has been in the frontier of policy making. Both developed and developing

banking systems are being transformed as a result of the global forces for change which

include: technological innovation, the deregulation of financial services at the national level

and opening-up to international competition. While developed financial systems are believed

to be capable to withstand with these changes, less developed economies are required to

reform their economies, international improvement agreements and correct their systems of

corporate governance, competition policy and other similar institutional structures. With

respect to the competition policies, this paper analyzes the competitiveness of one emerging

banking sector, namely Jordanian banking system, within the context of General Agreement

on Trade in Services (GATS) agreement. Although, a number of studies have been conducted

to examine the Jordanian banking sector, most of them have concentrated on the technical

aspect of the sector. Therefore, this paper examines the GATS agreement signed by the

Jordanian government in 2000 in order to assess how this agreement helped to encourage the

competitiveness and the openness of the Jordanian banking sector.

22

We start this study by providing an overview of the main developments of Jordan’s banking

system to date. Currently, the banking industry is seeing the advent of new products with the

boom in retail banking. E-banking is also flourishing, and investing in information

technology and human resources is the path that most banks have taken also analyze how the

Jordanian regulatory environment is improving considerably to meet the developmental needs

of the banking sector. Moreover, the new regulations aim to improve corporate governance,

banks' control, and anti-money laundering procedures.

Consequently, we evaluate the level of compliance of the Jordanian banking sector with the

rules and stipulations of the GATS; present an opportunity scan of the banking sector in

Jordan. Finally, we highlight the opportunities and threats that should be taken into

consideration in strategizing for the development of the sector in a manner consistent with

best practices and the Jordanian development drive.

Analysis

Sector Analysis

Financial transactions in Jordan are primarily intermediated through the banking sector.

Jordan's banking sector is fully privately owned, well developed, and profitable. The number

of banks operating in Jordan currently stands at 25 banks, of which two are Islamic banks and

eight are branches of foreign banks.

Jordanian banks carry out their operations through a network of 558 branches and 79

representative offices throughout the Kingdom. Accordingly, the index of population to the

total number of operating branches was about 10.2 thousand citizens per branch at year-end

2007. On the other hand, the number of branches of the Jordanian banks operating abroad at

the end of 2007 was 129 branches and 24 representative offices, of which 57 branches and 12

representative offices were operating in Palestine.

Jordan’s favourable economic conditions in 2007 have had positive spillovers on a banking

sector that continued to grow and post double-digit growth rates in practically all major

aggregates. The licensed banks’ balance sheet displayed a growth of JD 2,578.0 million, or

10.6 percent, at the end of 2007 compared to JD 3,151.1 million, or 14.9 percent, and JD

3,265.4 million, or 18.3 percent, in 2006 and 2005, respectively. On the asset side, domestic

assets grew by JD 2,264.9 million, or 12.6 percent, accounting for 87.9 percent of the overall

increase in total assets during 2007 compared to a growth amounting to JD 2,309.5 million,

or 14.7 percent, in 2006.

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Credit facilities were a major and much stronger impetus for the expansion of banking sector

activities. They have been on a steady and solid rise in recent years and are increasingly

catering to the growing funding needs of economic agents at large and thereby enticing a

much wider customer base for banks, ranging from individuals seeking personal loans to

large corporations with substantial liquidity. The outstanding balance of credit facilities

extended by licensed banks stood at JD 11.3 billion by the end of 2007; increasing by JD

1,533.7 million, or 15.7 percent, compared to an increase in the amount of JD 2,017.6

million, or 26.1 percent, during 2006. The increase in credit facilities was concentrated in the

facilities extended to the general trade sector, which recorded an increase amounting to JD

518.1 million, or 33.8 percent of the total increase in the facilities, followed by the increase in

credit facilities extended to the construction and industry sectors, which were up by JD 381.3

million and JD 255.0 million, accounting for 24.9 percent and 16.6 percent of the total

increase in credit facilities, respectively.

In parallel, banks’ total equity continued to grow in 2007 to fund their increasing activity,

though at a slower pace than last year. Total equity of banks in Jordan reached JD 3,523

million at year-end 2007, increasing by 10.7% from JD 3,183 million at year end 2006. This

rise could be attributed to increased non-distributed bank earnings but also to equity raised in

anticipation of the new JD 100 million minimum capital requirements that should be

gradually introduced by the sector regulator, i.e. the Central Bank of Jordan, by JD 20

million.

According to a survey conducted for this study as of November 25, 2008, the number of

foreign minority-ownership banks is 9, while the number of foreign majority-ownership

banks is 6. The banking sector employs 15853 people and the share of the banking labour

force employed by the foreign banks equals 11%. The ratio of the number of employees to

operating income equals 0.003% for nationally owned banks, 0.002% for foreign branches

and 0.004% for foreign-owned subsidiaries. The nonperforming loans, as a percentage of

total bank assets, equal 1.72% for nationally-owned banks and 1.99% for foreign banks.

Legislative and Regulatory Environment

The Jordanian banking sector is regulated by the Central Bank of Jordan (CBJ), which was

established in 1964. Currently, the number of professional regulatory and supervisory staff

working at CBJ is eighty. Although the government is main source of financing for the CBJ,

the CBJ operates independent of regulatory oversight.

24

In recent years, the Jordanian commercial banking industry has undergone numerous changes

in laws and regulations for the purpose of bringing the banking sector operations in line with

international standards. After 1993, the CBJ largely de-regulated interest rates and the

allocation of credit, liberalized entry into the sector, and introduced modern prudential

regulation and supervision.

The CBJ exercises strict controls to ensure that Jordanian banking sector regulations are

broadly consistent with international norms. These regulations include bank payments,

foreign currency positions, government securities transactions, commercial papers, large and

internal loans, capital adequacy, risk-based provisioning, internal controls, liquidity

management, payments issued by debit/credit cards, and deposit insurance. Within this

regulatory environment, there are no controls on deposit or lending rates.

Any new entrant (domestic and foreign) banks must fulfil a number of conditions:

registration as a public shareholding companies, payment of license fee, presentation of

detailed business plan and minimum capital of 40JD million for domestic banks and 20JD

million for branches of foreign banks, compatible home country regulation, in addition to

other conditions (see articles 6-20 of Jordanian Banking Law, 2000). Once licenses have been

allocated, there are restrictions on banks’ ability to sell or dispose these licenses.

Foreign banks are subject to additional licensing requirements. For example, the bank must

be licensed to accept deposits in its home country, enjoy good reputation and strong financial

position, and have the approval of the competent authority in the country of its head office to

operate in the kingdom.

A number of banking classification institutions (such as Fitch, a banking risk classification

institute) views the CBJ as a relatively active and competent regulator. Furthermore, banking

supervision has been strengthened in recent years, and has shifted to a risk-based rather than

rule-based approach.

Prudential regulations are in place to limit banks' exposure to certain sectors such as

construction, the CBJ has strict loan classification and provisioning guidelines, and prudential

regulations place relatively conservative limits on banks' liquidity ratios. Accounting

standards have been brought into line with international best practice, and the Basel II

framework was introduced in January 2008. The quality of disclosure is high by regional

standards.

Key aspects of regulations include minimum capital adequacy of 12 percent, which is higher

than the 8 percent, but consistent with BIS guidelines to factor in higher levels of market risk

25

in places. Loan classification requirements are set at 90 days, which refers to the number of

days after which unpaid loan has to be classified as a non-performing loan.

According to regulation No. (37/2007) dated 11/11/2007, all banks should achieve 100 per

cent liquidity ratio, which refers to the percentage of assets to be held against deposits for

liquidity purpose. Additionally, the regulations limit exposure to single borrowers. Thus,

Jordanian banks should consider improving their liquidity positions and the level of

diversification of their credit operations.

All banks are required to join the deposit insurance scheme and publish their financial

statements annually and semi-annually. It's worth noting that the CBJ, Jordan's lender of last

resort facility, is available for nationally owned banks and foreign owned branches and

subsidiaries to buttress their positions. Therefore, the banks are subject to annual on-site

inspections and frequent off-site inspections. The CBJ requires banks to disclose critical

information related to performance, changes in ownership, and risk. Additionally, all foreign

banks supervisory systems are subject to these controls, and service providers are consulted

in advance of regulatory decisions. The laws and regulatory decisions are made public

through the CBJ website, Official Gazette and the media. The structure of domestic supply of

the banking sector is open for competition from private sector firms, although banking

services are restricted to licensed banks. Non-banking financial services are open to service

providers of foreign origin. Supply of all money market services is regulated by the Central

Bank of Jordan’s regulations, which is, as in the rest of the world, the ultimate authority on

money supply in Jordan and the Jordanian Dinar’s maintenance of convertibility and

exchange rate inside and outside the country.

The recent turmoil in the international banking industry following the deterioration of

mortgage backed securities, which culminated in the present Global Credit Crisis and the

consequent melt down in financial systems across the developed economies, has intensified

the centuries-old debate on whether banks are properly governed and regulated.

Note that when bank managers are subject to sound regulations and proper governance

mechanisms, the likelihood that banks will efficiently mobilize and allocate savings is

enhanced, and sound governance of the firms they fund is encouraged. Appropriate

regulations and governance systems can reduce bankruptcies, lower the cost of capital to

firms, and accelerate economic growth. On the other hand, the changes in regulatory

frameworks, advances in technology and market enlargements impose increasing pressures

and, therefore, aggravate concerns for competition and efficiency within a deregulated

industry. The deregulation and liberalization of financial market have transformed the

26

banking systems in many countries. The global reforms will most likely to have a profound

effect on the development of the banking sector in Jordan and its overall macroeconomic

performance.

GATS / Restrictiveness measures

GATS require the removal of capital account restrictions in order to facilitate cross border

supplies and consumption abroad. Thus, in principle, by facilitating the international flow of

capital, GATS ensures that investment flows internationally to those enterprises where it will

be most productive in terms of risk and returns in the new world trading regime. In theory,

freer capital flows are an opportunity for producers to attract the new investment necessary

for development, and an opportunity for domestic savers to invest in projects anywhere in the

world.

GATS define trade in banking services by way of four service supply modes.

Mode 1: Jordan has fairly liberal regimes regarding cross-border supply (Mode 1) with no

limitations on market access or national treatment for deposit taking, guarantees and

commitments, money broking, lending for all types, financial leasing, advisory and other

auxiliary financial services, provision and transfer of financial information and all payments

and money transmission services. The only limitation is related to real property which may

not be mortgaged to banks outside Jordan. Moreover, there are no limitations for trading of

securities/financial services, except derivatives products, which is unbound. The other

unbound financial services are underwriting of securities, asset management and settlement

and clearing services due to technical limitations.

Mode 2: For consumption abroad (Mode 2) the financial services that are classified without

limitations under Mode 1 are also classified to be without limitations under Mode 2, but

without any exception. Moreover, there are no limitations for trading of securities/financial

services, except derivatives products, which is unbound. However, the other financial

services (underwriting of securities, asset management and settlement and clearing services)

become unbounded, except for issuance and public offer of securities outside Jordan by

Foreign Service providers abroad, and for management by service suppliers outside Jordan of

assets which are not traded in the Amman Stock Exchange or in Jordan.

Mode 3: Jordan’s GATS schedule of commitments includes commitments on most financial

services sub-sectors in all GATS ‘modes of supply’. The ‘commercial presence’ mode of

supply (Mode 3) has the most significant commercial application for banking services

because national regulators can most effectively oversee banks established on their territory.

27

Jordan’s GATS schedule defines the scope of banking services subject to WTO discipline,

and describes permissible limitations or conditions on foreign investment, the forms of

establishment permitted for foreign financial institutions, and limitations that Jordan may

apply to restrict market access by foreign financial institutions. Foreign banks in Jordan act as

licensed Jordanian banks or Jordanian branches of foreign banks, but they are practically

foreign banks operating in Jordan. These banks are allowed to open subsidiaries, branches

and representative offices. There are no restrictions on, accepting deposits, guarantees and

commitments, the number of foreign banks branches and ATMs to be opened by the foreign

bank. According to securities services, all banks and financial services companies have the

permission to trade, for their own account or for the accounts of customers, the following:

Money market instruments, derivative instruments, exchange rate and interest rate

instruments, transferable securities, and other negotiable instruments and financial assets. In

this area, Jordan has limitations on market access (Mode 3).

The most usual limitation is “legal form of entry” which means that Jordan requires a certain

type of domestic legal incorporation (e.g., banks and financial services) in order to achieve

domestic market access. This finding is directly comparable with that reported recently for a

number of countries in south east Europe. All banks operating in Jordan are allowed to

participate in the issue of all kinds of securities, and asset management. However, some

limitations exist on market access. For settlement and clearing services for financial assets,

the most common limitation is the access regarding these assets. This access is restricted to

the Depository Centre at the Amman Bourse and the Central Bank of Jordan for other

financial instruments. Also, banks can provide advisory and other auxiliary financial services.

The most usual limitation is “legal form of entry” which means that Jordan requires a certain

type of domestic legal incorporation. Finally, lending, financial leasing provisions and

transfer of financial information can be provided without restrictions. Foreign competitors

enjoy an open market, and according to financial services intermediaries, the market is more

open to foreign competitors than what the official commitments exhibit (as restrictions) in the

Jordanian services schedules. In this sector, competition is a prominent feature of trade-in-

service in banking and financial services. Issues related to market access and services trading

are not a problem for the providers in this sector, but for the other Jordanian services

exporters that rely on these services to engage in more export transaction, there are problems

in the supply/offer of credit, financing, funding, lending, and facilities.

Mode 4: Under Mode 4, the limitations on market access and national treatment for all

banking financial services, are unbounded, except as provided by Jordan's horizontal

28

commitments and special provision which indicate that branches of foreign banks in Jordan

are required to have a resident regional manager.

Opportunity Scan

To support Jordanian enterprises to expand abroad, Jordanian banks should develop an

appetite for international business and should make room for their own expansion overseas.

While some Jordanian banks have grown externally by simply increasing the number of their

branches in the region; the time may soon come for Jordanian banks to consider merger and

acquisition options to improve their market presence abroad. Breaking new ground in a

foreign market can be very slow and expensive for foreign banks in Jordan and also for

Jordanian banks in foreign countries; therefore, some foreign banks entering Jordan would

have to cooperate with local banks to foreign partners’ help.

There are two main reasons for the banks not to merge, which should be addressed by the

banking regulatory authorities:

Purveyance of ownership of banks by families that have a wide investment portfolio and

thus benefit from banks in financing own expansion in other sectors.

The non-implementation of the Credit Law of 2002 as the Central Bank has not allowed

the creation of credit bureau(s) in Jordan as of yet. Each bank maintains its own banking

credit history of its customers, which it does not share in a national database or with other

banks. The impact is that customers who wish to switch banks may suffer the loss of their

banking credit history. Hence, a case of "adverse selection" emerges: the customer, albeit

dissatisfied with the bank, remains with the bank in order not to lose such a long

established history – the other bank does not know the client. Furthermore, a "moral

hazard" results from lack of efficiency being not an incentive to merge; thus, banks have

no internalized incentives to merge with other banks.

Jordanian banking market (both by domestic and foreign banks) needs further

internationalization, leading to better identification of both foreign investment

opportunities and improved portfolio allocation. Furthermore, improvements in the

regulatory regimes, and competitively driven improved financial procedures are likely to

promote a greater willingness to invest in the Jordanian economy and through improved

confidence reduce contagion effects from any likely domestic financial crisis (UNCTAD,

2005).

Constraints to Development

29

By increasing market access, or even by simply creating the possibility of access to foreign

banks, there is likely to be an increase in the competitiveness of the domestic market.

Furthermore, foreign banks will now have to receive equal treatment. Therefore, domestic

banks will be further exposed to competitive pressures and the need to improve efficiencies.

The financial liberalization under the GATS is likely to address moral hazard, adverse

selection and reduce the scope for corruption problems. This will occur both through the

marriage of superior international expertise in project monitoring and assessment and local

knowledge and through increased competition, reducing the scope for malpractice on the part

of previously favoured domestic financial institutions. In part these benefits rely on the wider

aspiration of the GATS that signatories will take steps to ensure that the regulatory and

supervisory regimes conform to international best practice, concomitant liberalization in the

provision of business services, as well as proper application of equal treatment provisions

(Murinde and Ryan, 2003).

Within the region, Jordan has a high potential to become a major growth market for

traditional banking, investment banking and securities growth given its rapidly growing

economy and banking industry. This clearly indicates a one-sided flow, which needs to be

changed for the Jordanian banking sector to have visibility in the global market; in other

words, inward and outward flows of banking services have to be addressed. However, as

banks compete for globalization, it might become difficult to propagate social sector and

government policy signals through them.

The GATS environment brings in its wake risks along with profitable opportunities, and

technology plays a crucial role in managing these risks. In addition to being exposed to credit

risk, market risk and operational risk, the business of Jordanian banks would be susceptible to

country risk, which will be heightened as controls on the movement of capital are eased. In

this context, Jordanian banks are upgrading their credit assessment and risk management

skills and retraining staff, developing a cadre of specialists and introducing technology driven

management information systems.

In today’s competitive environment, Jordanian banks will have to strive to attract and retain

customers by introducing innovative products, enhancing the quality of customer service and

marketing a variety of products through diverse channels targeted at specific customer

groups.

Besides using their strengths and strategic initiatives for creating shareholder value, Jordanian

banks have to continue improving their efforts towards the application of corporate

30

governance. Following financial liberalization, as the ownership of banks gets broad based

the importance of institutional and individual shareholders will increase.

Judgement and Specific Recommendations for Remedial Action

The bankers must recognize that innovation or evolution of financial services is

crucial to retaining customers. Therefore, they should create new services and

products beyond the classical services (e.g., expanding electronic services, reaching

new regions outside Jordan, and improve the investment in off-balance sheet

activities).

Even though the regulations of the CBJ are consistent, to a large extent, with the

international standards, it needs to train its supervisory staff on the new dimensions

in regulation especially those related to financial crisis, advanced risk management

techniques, mergers and acquisitions, and competition.

To support Jordanian enterprises that wish to expand abroad, Jordanian banks should

develop an appetite for international business and should make room for their own

expansion overseas. They can start looking for joint venture projects or full-

subsidiaries outside Jordan.

The CBJ should organize the banking sector within a more competitive environment

than a concentrated one. As mentioned before, the banking sector in Jordan is highly

concentrated. Therefore, CBJ can encourage banks in terms of mergers and

acquisitions in order to improve the financial strength and the competition level in the

sector.

A number of Jordanian banks have an opportunity to enter the Islamic Banking that’s

been growing rapidly through the past few years. They can analyze and evaluate the

new Islamic financial products. There is a good opportunity for Jordanian banks to

coordinate with other foreign banks that are interested in these products. Recently,

many foreign banks start thinking about these Islamic products because they expect

to generate attractive return with reasonable level of risk.

Develop new strategies to deal with increasing volatility in local and regional

markets. This can be achieved by concentrating on product and location

diversification.

CONCLUSION & RECOMMENDATION

31

The 1997 Financial Services Agreement was a key moment in the history of international

financial integration. Within the context of a legally binding international agreement, a

substantial number of WTO Members committed themselves to eliminate or reduce

discriminatory barriers to trade in banking and financial services. It was an important step

towards international financial integration despite the remaining weaknesses and gaps. A

new round of financial services negotiations was launched in January 2000 and was later

incorporated in the 2001 Doha Development Agenda. During the last few years, the

progress made by financial services negotiators has been modest at best with few

developed countries being able to go much further in their liberalization commitments.

From their part, developing jurisdictions are unlikely to rush in further financial services

commitments before their remaining trade differences with developed countries,

particularly in the area of agricultural products and commodities, are settled.

Following are the Recommendations to be implementation by the Countries for their

Banking and Financial Services

The barriers of international banking services can be removed only by examining the

individual legal system.

There are 7 GATS related legal instruments and many national schedules that

constitute the legal framework for trade in banking services .some of them are

ambiguous and poorly drafted.

This negotiation is conducted with a view to promote the economic growth of all

trading partners and the development of developing and least developed countries

There is a huge scope for improvement a number of thorny issues to be resolved in

subsequent rounds.

32

REFERENCES

Commission of the European Communities (2008). European Financial Integration

Report 2008, Brussels.

Committee on the Global Financial System (2004). Foreign Direct Investment in the

Financial Sector of Emerging Market Economies. Basel, BIS, March.

European Central Bank (2005). Banking structures in the new EU Member States,

January.

www.ecb.int/pub/.

Developing Countries and Services Trade. Penang, Malaysia, Third World Network.

Strategic vision of the Voorburg Group on Services Statistics for 2005–2008,

background document prepared for the 36th session of the United Nations Statistical

Commission, March.

http://www4.statcan.ca/english/voorburg/2004%20ottawa/papers/2004-087.pdf.

Measuring Trade in Services, a training module produced by WTO/OMC in

collaboration with the Inter-agency Task Force on Statistics of International Trade in

Services, November 2008.

www.wto.org/english/res_e/stats_e/services_training_module_e.

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