Download Banking Sector in Egypt

Banking Sector in Egypt
Presented by
Amr S. Algarhi
December 2005
Hanan Nasr El-Din
Contents
•Historical development and Legal framework
•Banking Sector Indicators
•Descriptive analysis.
•SWOT analysis.
•Development Strategies.
•Conclusion.
2
Historical development and Legal framework
•Bank establishment and foreign control.
•Nationalization and the socialist era.
•“Infitah” or open-door policy.
•The ERSAP.
3
Historical development and Legal framework
•Bank establishment and foreign control.
 Bank
of Egypt (1856);
 National Bank of Egypt (NBE) (1898);
 Banque Misr (1920).
4
Historical development and Legal framework
•Nationalization and the socialist era.
 Law
22/1957; capital requirement: LE 500 thousand.
 Law 163/1957; more power to NBE (i/r & d/r).
 Law 117/ 1961; Central Bank of Egypt (CBE) (1961)
& nationalization of all banks.
5
Historical development and Legal framework
•Infitah or Open Door Policy (1974).
 Law 43/1974; allow foreign capital to enter JVB (<49%);
 Interest rate ceilings;
 High reserve requirements (25%);
 Domination of public sector banks;
 Ex. CIB (1975) - 100% Egyptian ownership in 1987.
6
Historical development and Legal framework
•The ERSAP
Phase I (1991 – 1995)
 Financial and banking sector reform (i/r liberalization,
reduction in required reserves);
 Fiscal and monetary contraction.
Phase II (1996 – 1998)
• Privatization; Law 97/1996 (>49% foreign ownership of
JVB was permitted).
7
Legal framework
•The Unified Banking Law 88/2003
•Secure Payment Systems
•The Unified Tax Law 91/2005
•The Electronic Signature Law 15/2004
•The Anti-Money Laundering Law 80/2002
8
Indicators
 Profitability
 Capital Adequacy
 Liquidity &
Reserve Requirements
 Risk
9
Indicators
Profitability (Average ROA & ROE)
Public Banks
Return on Assets
Private Banks
Private Banks
10
100
1
1999
2000
2001
2002
2003
Percentages
Percentages
Public Banks
Return on Equity
10
1
1999
0.1
Years
2000
2001 2002
Years
2003
Source ERF Egypt Country Profile, December 2004, p 57.
10
Indicators
 Capital Adequacy
- Minimum capital LE 500 million (DB) vs. $ 25 million
(foreign bank branches).
- CAR : 10%.
-Egypt : 11.2% (9% core capital & 2.2% supplementary
capital)

Liquidity & Reserve Requirements
- LC (20%), FC (25%).
- MRR (14%).
11
Indicators
Risk
- Market risk.
- Operation risk.
-Economic Climate risk.
12
Analysis: Short-Term Economic Policy
Monetary policy applied to Egypt using the MF model
BP
LM
i
LM’
BP’
id
A
C
B
IS’
IS
YF
Y
Analysis: Short-Term Economic Policy
Fiscal policy applied to Egypt using the MF model
LM
i
BP’
BP
id
A
IS’
IS
Y
Analysis: Short-Term Economic Policy
 For Egypt, an easy Monetary policy is
effective while Fiscal policy is not.
 Monetary policy should be a carefully
planned target, and have a time constraint.
 Banks through interest rate adjustment
should influence demand and supply
behavior to follow the set Monetary policy.
Analysis: Structure Medium term
Central Bank of Egypt
branches
Public Sector Banks
 M&As
4
923
are highly24
409
Banks structure.
encouraged by the CBE
Private
Public
Sector 11
Foreign
162
PrivateSector
and Joint Venture
Banks
Business & Investment Banks
through
theBanks
new(7) law. Branches
Banks
(32)
(7)
59
Off-shore Banks
19
 Aims
to reduceSpecialized
the number
Commercial
Specialized Banks
Banks (4)
Banks (3)
of
banks
in
Egypt.
Mergers and Acquisitions.
The Egyptian Industrial
14

Acquisition
of
existing
local
Development Bank
1
Private and Joint Venture Banks
banks
the only way for 27
The Arab is
Egyptian
Private and Joint Venture Banks
Real Estate Bank
1
market
entry
Commercial Banks
Private and Joint VentureCBE
Banks
Private and Joint Venture Banks
Principal Bank for Development &
Agricultural Credit
Total banks and branches
1189
1
61
2783
16
Analysis: Structure Medium term
Banks as a catalyst for the big push.
1. Historical evidence.
2. Large banks can offer loans with low interest.
3. Are banks better than government?
Banks are natural candidates as coordinating agents.
 Banks are in contact with a large number of firms.
 Banks can influence firm’s decision to invest through
the provision of loans.
17
Analysis: Neo-classical LT Economic
Implications
Mobilizing savings
by implementing
effective and
efficient reforms,
Egypt’s level of
capital stock per
capita can
converge to that of
a rich economy.
f(k)
(+n+g)k
srf(k)
sEgyptf(k)
kEgypt
kr
k
18
Analysis: Neo-classical LT Economic
Implications
Although the banking
system may not be
able to influence the
growth rate
permanently, it can
effect the level of
output.

(+n+g)
kEgypt
kr
k
19
Analysis: Neo-classical LT Economic
Implications
The banking system can influence the growth rate permanently:
1. Improving the average productivity of capital;

Collecting information and evaluating alternative investment
projects (screening) and monitoring borrowers to ensure that the
loaned funds are efficiently utilized.

Inducing individuals to invest in riskier but more productive
technologies, by providing risk sharing opportunities.
2. Increasing the efficiency of the banking system itself;

Improving the level of management by appointing better educated
managers.

Improving staff training.

The adoption of modern technology.

The removal of bureaucratic rigidities and controls.
20
Strengths
SWOT Analysis
Weakness
The
private banking system is
competitive.
New banking law 88/2003 includes
steps to reform and modernize.
Establishing branch networks are
relatively at low cost, allowing 90%
foreign ownership.
Public
sector domination.
Low level of deposits per capita.
Mismatching LT vs. ST lending.
Commission and fees are high.
Low level salaries.
Bureaucratic barriers.
Lack of quality lending opportunities.
 Insufficient hedging & risk management
instruments.
Opportunities
 Wide
range of products & services to
present (structured lending).
Underserved lower income levels
(SMEs).
Presence of expansion possibilities for
local banks in regional markets & vice
versa.
Threats
Market
entry is closed.
Political unrest and economic instability.
Local banks manage old problems &
compete with current global market
simultaneously.
21
Development Strategies
The main objectives:
 Bank Performance Enhancement
 Information System Development
 Human Resource Optimization
22
Development Strategies
Objectives
• Bank
Performance
Enhancement
Strategies
• State Bank Privatization.
• Lowering and eliminating
barriers.
• Decrease interest rates on
loans.
• Mergers & Acquisitions to
encourage competition
• Adopt a variety of customer
relationship management
systems.
• Introduce new types of
loans: e.g. Education, Tourism,
Car, Home Improvement.
Impacts
• Raising funds for the
government.
• Increasing competition.
• Promoting economic
efficiency.
• Reducing government
interference in the economy.
• Increase banks profitability.
•Encourage Foreign
Investments
•Introducing a wider range of
services in the banking sector
23
Development Strategies
Objectives
• Information
System
Development.
Strategies
• Increase investment in Bank’s
technical infrastructure (invest
in technology and more IT
spending).
• Build a system of client
history.
•Utilize E-banking services to
foster transaction facilitations,
and security measures
Impacts
• Better liquidity.
• Risk management.
• Exchange data.
• Reduce costs.
• Apply risk-forecasting methods.
• Improve efficiencies.
• Provide competitive.
advantages.
24
Development Strategies
Objectives
• Human
Resource
Optimization.
Strategies
• Intensive Training and Retraining programs: (e.g.
Banking Business, Foreign
Language Courses, IT &
Computer).
• Reduce the huge wage gap
between public and private
sectors.
Impacts
• Keep operating personnel
up with change in business
environment.
• Raising the efficiency of
working staff.
• Reduce operation risk and
human error.
• Choose best persons for
management.
25
Conclusion

Egypt’s sector reform plan is being effectively implemented
expected to end the fragmented states of Banks & increase
their competitiveness.

Product innovation creates room for growth in the sector.

M&As is an important venue to becoming a regional financial
player, hence laws and regulations governing this issue should
target to accelerate this process rather than hindering it.

Good Banking practices in compliance with international
standards are inevitable for achieving efficiency.

Human resource development & an industry wide rise in
remuneration and salaries are required to stop cross border
brain drain.
26
Thank You
27