Following the central bank’s recent decision to bring down the scale of interest, applicable to all the instruments of monetary policy, i.e., on its transactions with commercial banks, banks came under pressure to follow suit and reduce their interest rates on loans and other credit facilities, just as they did regarding interest rate on deposits.

The Housing Bank led the system in a way to ease pressure and be seen in compliance with the central bank’s step.

It announced the reduction of its prime customers’ interest rate by one quarter of one percentage point, to become 8.25 per cent, as an indicator that the bank was going in the direction intended by the central bank.

Other banks did not wait. One after another they announced a similar reduction to bring the prime customers’ rate to 8.25 or 8.5 per cent.

One may ask who are the prime borrowers, and what about other borrowers?

From a credit risk point of view, at the top of prime customers is the Treasury, where practically no risk is involved. Then come borrowers under government guarantees, or those who are so financially solid and who hardly need to borrow, except for expansion projects.

If they need to borrow, banks will compete to oblige.

In other words, prime borrowers are those with almost no risk.

The risks of the individual borrowers are evaluated by the lending banks. The risk premium is added to the prime rate to compensate for the perceived risk. This addition may raise the actual interest rate to 10 per cent or more.

Interest rates on deposits vary.

Strong banks with high liquidity pay less interest. The strong customer, with a sizeable deposit can extract a better rate.

Interest rates vary not only from one bank to another, but also from one depositor to another.

The end result was that interest on credit rose on the pretext that risks are getting higher under the current unstable circumstances, while at the same time interest on deposits dropped due to surplus liquidity, on the one hand, and the decision of the central bank, on the other, even though this decision is not binding when it comes to the relation between bank and customer.

The margin between interest rate payable and interest rate receivable got wider, which of course profits the banks, but at the expense of depositors, in the first place, and of the small borrowers, on the other.

Bank transactions in Jordan are free; they move up and down with supply and demand.

The central bank’s decision to reduce interest rates serves as a trendsetter.