14 - 20 October 1999
Issue No. 451
|Published in Cairo by AL-AHRAM established in 1875|
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Eyes on the banksHours before the new cabinet was formed this week, President Hosni Mubarak announced there would be "no changes in the leadership" of the banking sector, indicating his support for the sector as well as underlining the economic significance of the latest reshuffle. The president's announcement was a refutation of press reports that the chairmen of the National Bank of Egypt (NBE) and Banque Misr were "on extended leave" because of alleged malpractices in giving loans to businessmen.
It was also reported that Ismail Hassan, the governor of the Central Bank of Egypt (CBE), is soon to be removed from office because of the Central Bank's alleged mismanagement of the monetary crisis. The liquidity crunch reached a peak last summer when there was a serious shortage of dollars in the market and the exchange rate shot up from LE3.40 to as high as LE3.60.
In business and political circles, the ongoing dispute ranges from allegations that the CBE mismanaged the crisis to accusations that the government interfered in the CBE's operations. A banking source, who declined to be named, said that it was the overriding of the demands of the market by political directives from the cabinet, and the government's reluctance to give free rein to the CBE to manage the currency crisis as it saw fit which aggravated the problem. "The dollar shortage and ensuing liquidity squeeze would not have reached the proportions they had, if the CBE had been left to deal with the situation without interference," said the source.
Financial circles are asking some tough questions including: Could foreign currency reserves have been made available to the public at a time other than that determined by the CBE in line with the government's directives? (The bank had released more than $1 billion of reserves on the market in June, and imposed an unrealistic rate for the dollar in exchange bureaus); will the central bank continue to resort to its depreciated foreign currency reserves to avert future crises?
Now, under the new cabinet, new responsibilities have been given to the Minister of the Economy Youssef Boutros Ghali, who during past months had kept a noticeably low profile. Ghali's expanded portfolio includes external trade and the reduction of the deficit in the balance of payments. It is expected that he and the CBE will work closely. CBE Governor Ismail Hassan announced this week that he and Ghali are on good terms. However, the issue of the CBE's independence remains a pertinent question.
Some experts argue that current laws governing the banking sector make for a strong central bank. Legal consultant Mahmoud Fahmi, who is also a CBE board member, said that Law 163 for the year 1957 and Law 120 for the year 1975 and their amendments provide the central bank with sufficient guarantees. By law it is not possible that the CBE governor can be removed from his post. The law also makes the bank accountable by requesting that it submit an annual report to parliament.
"The Central Bank coordinates with the capital market and with the ministries in carrying out national economic policy, and does not act in isolation. But it is the institution which is capable of dealing with any monetary crisis because it possesses the necessary instruments and policies to do so," Fahmi said.
The banking sector has also been embattled for a long time because of what has become known as the "case of the loans deputies". This case has brought the soundness of the credit practices of some banks into question. There have been allegations that credit was extended to businessmen who are also MPs without sufficient guarantees.
In the coming phase, the four major public sector banks are expected to grapple with the issue of privatisation, which remains politically sensitive. Since the government announced three years ago that one of these banks would be privatised, this has triggered a lot of speculation, but nothing has materialised to date. Although laws governing the banking sector allow for the privatisation of the public sector banks, pending the CBE's approval, the issue has been postponed. Two opinions inside the banking sector exist: one advocating integration into the global economy through mergers and sales, and the other opting for going more slowly in selling what are considered to be important national assets.
At present, the public sector banks -- the National Bank of Egypt, Banque Misr, the Bank of Alexandria and Banque du Caire -- are also seeking to raise their current levels of capitalisation, which can be done through the issuance of shares to the public. It is anticipated that the new government might give the sector a push in this direction, especially since the new Prime Minister Atef Ebeid has been in charge of the privatisation process for the past six years. Minister of Economy Ghali is also a strong advocate of financial services liberalisation, but the question still remains one of political will.
The Egyptian banking sector also faces the challenge of technical upgrading so that it can function more fully in the international market and grapple with the growing wave of bank mergers worldwide. The banking sector must develop, according to Fahmi, "spectrum objective banks capable of taking on a multitude of functions, from underwriting to financial leasing as well as long- and short-term loans, so as to be able to operate in the global market."