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Banking on Tourism in Jordan

With Sharia-compliant financing, small- and medium-sized tourism enterprises in Jordan can more easily access bank loans that are critical to economic growth.

Every year, millions of travelers from across the world are drawn to Jordan’s beautiful attractions. Visitors explore the pre-historic city of Petra, float in the Dead Sea, and hike in the Wadi Rum desert. However, despite efforts to strengthen perceptions of its tourism, Jordan’s competitiveness in the industry has suffered since 2012, in large part due to regional turmoil and political instability. Fewer visitors are entering the country, several hotels in Petra have closed, and fewer tour operators and car rental companies are in business. The minister of tourism and antiquities noted in 2015 that the country stood to lose $750 million in tourism revenue in one year as compared to 2014.

Financial constraints are at play here. Tourism is one of the country’s most important socioeconomic sectors, contributing close to 11 percent of the gross domestic product. A weakening sector thus poses a significant threat to Jordan’s economy. Increasing economic growth and job creation through tourism is critical to the country’s future. Owners of small- and medium-sized tourism enterprises are trying to expand and flourish under these circumstances, but they are facing a major obstacle: They cannot obtain bank loans.

Historically, many tourism businesses in Jordan have not had access to financial loans because banks consider the sector to be a risky investment. The ability to repay a loan is affected by the country’s political and economic situations, which fluctuate. Additionally, many business owners face the challenge of finding loans that comply with their religious beliefs. Approximately 92 percent of Jordanians are Muslim; Islamic tenets prohibit them from dealing with interest (“riba” in Arabic). Some Muslims in the tourism industry will accept commercial loans, but many will not. And for those that would accept commercial loans, they still struggle to find a bank willing to lend to tourism businesses.

With the goal of strengthening Jordan’s tourism sector and economy, USAID’s Building Economic Sustainability through Tourism (BEST) program, implemented by Chemonics, is working to develop broader tourism financing mechanisms. The program addresses issues such as the lack of collateral, high interest rates, and the seasonality of tourism operations. BEST has also established partnerships with commercial banks, making more types of lending available to tourism businesses.

One exciting new type of lending came from a recent partnership with the Islamic International Arab Bank (IIAB) to offer Sharia-compliant financing, including technical assistance to small- and medium-sized tourism enterprises. This partnership was established to address findings from an assessment conducted by BEST in 2015, in which tourism businesses requested Islamic Sharia-compliant products offered by Islamic banks.

The IIAB has been in operation for 19 years and is one of the leading Islamic banking institutions in Jordan and the Middle East. It is a Sharia-compliant financial institution, meaning that in following Islamic Sharia law, the bank provides only asset-based financing, does not collect interest on loans, and does not offer interest on deposits. By providing new, Sharia-compliant loans to tourism businesses, the IIAB is filling a financing gap in Jordan’s tourism sector and is promoting tourism growth and expansion across the country. The previous lack of access to financial loans from religious and secular banks had severely hindered tourism businesses’ ability to invest in operations and expand.

This new financing vehicle is open to any small- and medium-sized tourism enterprise, whether the owners are Islamic or not, that meets the conditions and limitations of the IIAB. Iyad Asali, the bank’s general manager, recognizes the widespread impact that Islamic banking can have on Jordan’s economic growth, saying, “The Islamic International Arab Bank's mission as a Sharia-compliant financial institution is to play a role in economic development in [Jordan] by encouraging projects, which will result in increasing GDP, and reduce unemployment among young people.”

These new Sharia-compliant financing options will do just that, strengthening businesses, boosting local economies, expanding tourism products, and creating employment opportunities in the country. Other banks could possibly follow suit and also provide credit to small- and medium-sized tourism enterprises.

“It is through small- and medium-sized enterprises that local communities benefit directly from tourism, and this new loan product will help such businesses grow and benefit tourists as well,” explained Russell Bauer, director of the Economic Development and Energy Office at USAID/Jordan. “This Sharia-compliant form of financing ensures that tourism entrepreneurs have access to all possible types of financing in Jordan.”

As businesses grow and offer additional tourism products — such as higher-quality hotels and new guided tours to Jordan’s many attractions — tourists will have better experiences in the country and encourage others to visit as well. But these small- and medium-sized tourism enterprises need a solid financial foundation first.

In addition to partnering with the IIAB to create Sharia-compliant financing, the BEST program also provides technical assistance to the owners of tourism projects. For instance, business owners receive lessons on preparing requests for funding, determining project feasibility, and developing their skills in financial and operations management.

The IIAB financing is new and innovative, and it contributes to the numerous ways that the BEST program is improving access to finance for these companies.

“This partnership between the BEST project and IIAB has established Sharia-compliant financial loans for the tourism sector for the first time in Jordan, and very likely in the region,” said Ibrahim Osta, chief of party of BEST.

With this new funding, Jordan can hope to see a change in the direction of its tourism industry.


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