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Reformers out to shake up banking sector Ever since the appointment of Farouk El Okdah as governor of the Central Bank of Egypt (CBE) last December, the gnomes of the CBE have been busily crafting a plan for reform of the banking sector. Last month, President Hosni Mubarak gave the go-ahead for the five-year reform plan, which aims at getting public banks ready for privatization. The announcement came just days after reforms were introduced to other parts of the economy – including customs and fuel subsidies – as part of a broader economic stimulus package touted by the new Nazif government. Although banking reform has been an important topic for several years, the previous Ebeid government only went as far as to introduce new banking legislation, which is still not fully enforced. Analysts welcomed the new plan, which some said was designed to show that the government is serious about economic reform. “This is not new – it has already been planned for over a year. The new government wanted to show that it was committed to reform, and that it is serious,” said Marwa El-Sheikh, a senior analyst at EFG-Hermes brokerage. Egypt’s key trading partners have long recommended changes to the country’s banking sector. The US in particular has pushed for tighter banking regulation to close loopholes that could be used for money laundering to finance terrorism. Banking legislation introduced since 2001 compelled the international watchdog, Financial Action Task Force on Money Laundering (FATF), to remove Egypt from its list of countries that lack adequate controls against money laundering. The new laws – which keep closer tabs on customer identities, regulate charity funds and strengthen bank surveillance – have also paved the way for reform of the banking sector. The newly announced reform plan targets six small banks – El-Mohandes Bank, Misr Exterior Bank, Egyptian Unified Bank, Nile Bank, El-Togariyoon Bank and the Islamic Investment Bank – for mergers with the larger state banks. Five of the six banks were selected because they did not meet the minimum capitalization requirement of the 2003 Unified Banking Law, which stipulates that local banks should have at least £E 500 million in capital. The sixth, Misr Exterior Bank, is a more prominent bank, which has been plagued with mismanagement and suffers from unresolved problems with non-performing loans (NPLs). All six banks were regarded as “problem banks” by analysts and stand to benefit from their incorporation into larger entities. It is, however, not clear at this point which of the “big four” – National Bank of Egypt, Banque Misr, Banque du Caire and Bank of Alexandria – will be acquiring one or all of the six banks. A second important step in the plan is that all public shares (i.e. those owned by the big four) in joint venture banks will be sold within two to three years. One possible scenario was played out earlier this year when Banque du Caire sold its shares in the joint venture bank Cairo Barclays to British financial group Barclays Plc. The stake sale allowed the British firm to enter the Egyptian retail banking market directly. Despite recent economic difficulties, Egypt’s maturing banking sector is generally seen as attractive to foreign banks. Several foreign investors have been eyeing local joint venture banks over the past year. One analyst said on the condition of anonymity that London-based Standard Chartered was rumored to be “enthusiastic about Egypt.” Kuwaiti banks have also expressed interest in acquiring at least one Egyptian bank. Analysts claim the Egyptian market is “over-banked,” but the sale of joint ventures could result in a series of mergers and acquisitions in the sector, as well as an influx of foreign direct investment. “Foreign banks will come in and buy shares in joint ventures,” said El-Sheikh. “Even during the bad times, there was an appetite for that.” She said the management of smaller banks might be resistant to getting swallowed up by the big four, but in the case of the six selected by the reform plan it will largely be irrelevant considering the problems they are facing. A third important step in the reform plan is the privatization of one or more of the four biggest public banks within three to four years. The idea has been circulating for some time, but has never materialized. The leading candidates for privatization, according to senior government officials, are Banque du Caire and Bank of Alexandria, whereas the National Bank of Egypt and Banque Misr remain unlikely to be sold. All four banks, however, will undergo restructuring to prepare for privatization and make them more efficient. Other parts of the banking reform plan include the creation of a new unit at the CBE to deal with NPLs and the establishment of an arbitration committee within two to three years to take over the role of criminal courts in resolving disputes between banks and their customers. Finally, a unified financial supervision system for banks, capital markets, mortgage and insurance companies is expected to be introduced within three years. Many elements of the reform plan have come out of cooperation
between the CBE, the ruling National Democratic Party’s Economic
Committee, the World Bank (WB) and the International Monetary Fund
(IMF). “The government has requested that the World Bank and
IMF [provide] support in technical and financial terms,” said
Mahmood Ayub, the country director of the World Bank. “This
could take the form of loans from the World Bank to clean up portfolios
of banks, improve the efficiency of banks or, in the long term,
help with the privatization of banks.” Whether or not Egypt gets funding to carry out banking reforms could be determined as soon as early October, when senior finance officials are due to meet WB and IMF officials in Washington for an annual consultative meeting. An agreement on the amount and nature of financial and technical assistance from the IMF could be decided there. In the meantime, one short- or medium-term impact of the new banking reforms could be movement on the issue of mortgages, which have long been planned under financial legislation but are still not available at banks. The decision by the National Bank of Egypt and Banque Misr at the beginning of September to introduce “advantage certificates” – long-term obligations bearing interest rates several points over the going rate – has led to speculation that banks may be experimenting with new financial instruments to prepare for the introduction of mortgages. The prospect of reform has cast a spell of optimism on the banking sector, which only recently emerged from a liquidity crisis. Investors responded favorably to news of the five-year plan, sending bank stocks soaring nearly 35 percent in the week following the September 12 announcement. “This is an extremely important step towards reform,” Ayub stressed. “The banking sector is the backbone of the real economy – if it’s good, the economy can fully take advantage of the country’s comparative advantages.” Issandr El
Amrani |
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