Banking Sector in Egypt

1. Banking Sector in Egypt Presented by Amr S. Algarhi Hanan Nasr El-Din December 2005

2. Contents • Historical development and Legal framework • Banking Sector Indicators • Descriptive analysis. • SWOT analysis. • Development Strategies. • Conclusion.

3. Historical development and Legal framework • Bank establishment and foreign control. • Nationalization and the socialist era. • “Infitah” or open-door policy. • The ERSAP.

4. Historical development and Legal framework • Bank establishment and foreign control. • Bank of Egypt (1856); • National Bank of Egypt (NBE) (1898); • Banque Misr (1920).

5. 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.

6. 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.

7. 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).

8. 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

9. Indicators • Profitability • Capital Adequacy • Liquidity & Reserve Requirements • Risk

10. Indicators • Profitability (Average ROA & ROE) Source ERF Egypt Country Profile, December 2004, p 57.

11. 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%).

12. Indicators • Risk • Market risk. • Operation risk. • Economic Climate risk.

13. BP LM LM’ BP’ IS’ IS Analysis: Short-Term Economic Policy Monetary policy applied to Egypt using the MF model i id A C B YF Y

14. BP BP’ IS’ IS Analysis: Short-Term Economic Policy Fiscal policy applied to Egypt using the MF model LM i id A Y

15. 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.

16. Analysis: Structure Medium term Central Bank of Egypt branches Banks structure. Mergers and Acquisitions. Public Sector Banks 4 • M&As are highly encouraged by the CBE through the new law. • Aims to reduce the number of banks in Egypt. • Acquisition of existing local banks is the only way for market entry 923 Commercial Banks Private and Joint Venture Banks 24 409 Private and Joint Venture Banks 11 162 Business & Investment Banks Off-shore Banks 19 59 Specialized Banks The Egyptian Industrial Development Bank 1 14 Private and Joint Venture Banks The Arab Egyptian Real Estate Bank 1 27 Private and Joint Venture Banks Private and Joint Venture Banks Principal Bank for Development & Agricultural Credit 1 1189 Total banks and branches 61 2783

17. 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.

18. 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) f(k) (+n+g)k srf(k) sEgyptf(k) kEgypt kr k

19. 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

20. Analysis: Neo-classical LT Economic Implications • The banking system can influence the growth rate permanently: • 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. • 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.

21. SWOT Analysis

22. Development Strategies • The main objectives: • Bank Performance Enhancement • Information System Development • Human Resource Optimization

23. Development Strategies

24. Development Strategies

25. Development Strategies

26. 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.

27. Thank You