Global Arab Network | Banking reform in Egypt leads to a higher rate of growth

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Banking reform in Egypt leads to a higher rate of growth

Global Arab Network - - John Short

Wednesday, 22 July 2009 15:50

The banking system is central to the development process in Egypt; deepening this sector and its reform will lead to a higher rate of economic growth. In the nineties, as part of Egypt’s economic and financial reform programme, the banking system was liberalized and supervision was further strengthened in accordance to international standards. The introduction of the Central Bank and Banking Sector Law in 2003 saw a further significant improvement in the regulatory environment which is fast converging to international best practice. Under this Law, the role of The Central Bank of Egypt (CBE) as the regulatory body supervising the entire Egyptian banking sector was strengthened. The reformist Egyptian government appointed in 2004 recognized the necessity of a sound banking system in order to revitalize the economy and improve the business environment. The government has pushed restructuring by means of privatization, a lowering in tax rates and fiscal reforms. Social concerns are predominant in their strategy, for that reason the government lends support to the banking sector through regulatory forbearance, the injection of capital, or the transfer of assets and liabilities to a stronger bank. The high level of support given to the stability of the banking system has ensured the prevention of a default by any Egyptian bank.

Sector Consolidation and Privatization
The banking system reform programme initiated by the Egyptian government is necessary to increase credibility and confidence in its economic policy. The Banking Reform Unit achieved outlined improvements to the system such as the requirement of CBE that state-owned banks sell their stakes in joint-venture banks, a raise in paid-up capital requirements to a minimum of LE 500 million (USD 50 million for branches of foreign banks) and the stop on issuing any further banking licenses; foreign banks and investors can either buy or form partnerships with local banks when wishing to access the Egyptian market. Implementation of these improvements has resulted in a decrease in the number of banks operating in Egypt to 40. The Egyptian banking sector is still dominated by three major state-owned banks, National Bank of Egypt, Banque Misr and Banque du Caire.

The Small & Medium Enterprise (SME) sector employs 80% of the private sector workforce but finance of their capital requirements by banks is extremely limited. In 2007 the launch of the Nile Stock Exchange (NILEX), the first mid and small cap market in the MENA region, has improved access to capital for expansion of SME’s in Egypt.

Supervisory and Regulatory Framework
The Central Bank and Banking Sector Law has given the CBE more autonomy, the CBE is now better able to enforce the regulatory requirements necessary for the reform and modernization of the banking sector in Egypt. Major essential bank regulations include the minimum paid-up cash requirement of LE 500 million for Egyptian banks and USD 50 million for branches of foreign banks; a liquidity ratio of 20% on the Egyptian pound portion of their liquid liabilities, 25% in respect of their foreign currency portion; a minimum cash reserve requirement with CBE of 14% of the average 14-day local currency deposits and 10% of average quarterly foreign currency deposits; CBE’s written consent to acquire a stake above 10% in a bank; CBE has the authority to investigate the transactions of banks and financial institutions in order to fight money laundering.

A single Financial Service Regulator is replacing a variety of regulators such as the Capital Market Authority, Egyptian Insurance Supervisory Authority, and Mortgage Finance Authority. Weak loan enforcement practices that have led to high level NPL’s (Non-performing loans) have been addressed through the creation of an NPL Management Unit, and there have been regulatory changes in the Real Estate Finance Law.

The CBE has upgraded its supervisory framework by applying international best practice and has improved its supervisory techniques. The CBE is in the process of shifting to risk-based supervision and has signed a three year protocol to assist with implementation of Basel II. The Basel Committee on Banking Supervision has published an international standard of recommendations on banking laws and regulations in 2004 based on rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices.

Conclusion
While the Egyptian banking and financial sector still has some way to go in the process of developing a sound and reliable banking system, the sector has largely escaped any direct impact from the global economic crisis. This can mainly be attributed to the lack of exposure of Egyptian banks to failed Western financial institutions, and the fact that Egyptian banks do not hold any toxic assets. Egypt’s involvement in the world capital markets is very limited, and what is invested is government guaranteed. In the meantime, the mortgage system is under strict control. Egypt’s nominal GDP is estimated at LE 897 billion (USD 165 billion), the total asset-to-GDP ratio is 121% and loans-to-GDP stands at 45%. Remarkably the financial sector contributed only 4% of GDP in 2008, and only 10% of the Egyptian population has a bank account. Compared to mature markets, the Egyptian banking system is less developed as can be seen from the low penetration ratio and has significant growth potential.

Global Arab Network

Prepared by: The Egyptian-British Chamber of Commerce
N.B. The primary source of information for this report has been the presentation given by Dr. Amr Hassanein, EBCC Board Member and Chairman of MERIS (Moody’s affiliate in Egypt), at the EBCC Debate held at Parliament on 10 June 2009.

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Published comments are the opinions of private individuals and do not reflect the views of Global Arab Network