 |
Al-Ahram Weekly 3 - 9 February 2000 Issue No. 467 
|
||
Published in Cairo by AL-AHRAM established in 1875 |
| ||
|
Al-Ahram Weekly 3 - 9 February 2000 Issue No. 467
|
||
| Published in Cairo by AL-AHRAM established in 1875 |
| ||
Egypt Region International Economy Opinion Culture Features Special Profile Travel Living Sports People Time Out Chronicles Cartoons Letters Shoring the bank
By Sherine Abdel-RazekLiberalising the banking sector was one of the major planks of Egypt's reform programme. Yet if the sector is to thrive in the post-stabilisation period, and meet the challenges posed by accelerated globalisation, much remains to be done.
The sector withstood the strict monetary controls that aimed at curbing inflation, but which also narrowed the range of banking activities. The challenge now is to expand services to include new products, and to secure adequate long term sources of finance needed for development-related projects.
External challenges, too, are daunting. International mergers and increasing globalisation have dwarfed local banks and exposed them to increasing competition.
In short, the challenge now facing the banking sector is to successfully adapt so as to meet the requirements of the post-stabilisation period. But how?
There is some consensus among financial commentators on the sector's shortcomings -- among which the prominent role of public sector banks, the lack of diversity in sources of finance, an absence of technology and the increasing threat from regional and international competitors are the most commonly cited.
Certainly, the four fully state-owned banks have cornered more than 60 per cent of overall business, including deposits and loans. Furthermore these same four banks -- the National Bank of Egypt, Banque de Caire, Banque Misr and Bank of Alexandria -- hold an average 24 per cent equity in an additional 23 joint venture banks. And in twelve of these banks their holdings are in excess of the 20 per cent stake that is seen as the critical point beyond which private sector partners are unable to make any meaningful impact on management style and structures. Indeed, in many cases, the joint-venture banks are subject to the same senior management as the private sector, a situation that has continued despite attempts since 1996 to force public sector banks to dilute their holdings in all 23 joint-ventures to a ceiling of 20 per cent.
In the case of the Islamic Bank for Development and Investment, the minority holdings of the four public sector banks amount to 79 per cent of total equity, while in the case of El-Tugariyyun it is 59 per cent. And despite the decree allowing for the privatisation of banks and insurance companies, passed by the People's Assembly in 1997, efforts to privatise just one of the four banks remain frozen.
But has this resulted in gross inefficiencies within the establishment t is generally accepted that public sector banks are debt burdened and over staffed, some at least are well-managed.
Hisham Ezz El-Arab, deputy managing director of CIB, Egypt's biggest private sector bank, insists that the public sector banks' influential role in lending and depositing patterns is inevitable given their vast networks of branches and the general public perception that state owned banks are the safest place to deposit savings.
This general belief persists, says Ezz El-Arab, despite the fact that private sector banks have stronger bases in terms of capitalisation and net worth, and offer a greater choice of products.
Farouk El-Okdah, advisor to the Bank of New York, argues that increasing their capital is an urgent priority for public sector banks if they are to cover the costs of non-performing loans.
Ezz El-Arab agrees with El-Okdah on the importance of increasing capitalisation, especially in the current phase during which banks will increasingly be expected to contribute towards financing mega projects.
"CIB's capitalisation of LE1.4 billion is still considered low by international standards. How can I finance a mega project requiring investments of about a billion pounds while I cannot, according to central bank regulations, invest more than 30 per cent of the capital?" queries Ezz El-Arab.
Both El-Okdah and Ezz El-Arab agree there is no longer any real role for small-scale Egyptian banks. They are increasingly likely to find themselves squeezed out of business given the international trend towards mergers.
Ezz El-Arab believes that the most obvious way forward is for the banking authorities to raise the minimum capitalisation requirements of existing banks to LE500 million.
"This will encourage smaller banks to merge to form stronger institutions, with enough resources for staff-training and creating strong cadres capable of effectively managing these banks."
Mergers, and the resulting institutions, will result in an end to the Central Bank of Egypt's practice of overprotecting small and poorly-performing banks at the expense of better performing and better managed institutions.
More efficient banks may well have higher lending costs than government-backed institutions, losing potential customers in favour of weaker banks that are effectively, if indirectly, subsidised.
Commercial banks must also meet high reserve requirements, placing 15 per cent of total deposits with the CBE on an interest free basis.
CIB's deputy managing director argues that this problem might be resolved if commercial banks deposit holdings of treasury bills and
bonds rather than cash.
Another shortcoming is that the banking sector is dependent mainly on short term deposits.
"Most of our deposits," says El-Okdah, "are short term, yet have to be used in financing long term projects such as housing and construction. And this results in a liquidity crunch that could be avoided could we institute medium and long term deposit schemes in Egypt."
Enhancing banking infrastructure and technology is also critical if the sector's future is to be secured.
"Technology is the backbone of the banking industry," says Ezz El-Arab. To remain technologically underdeveloped will mean losing ground as financial intermediaries, particularly given the growing presence of foreign banks in Egypt.
Last year alone Barclays Bank (UK), Credit Commercial (France) and the Arab Banking Corporation (Bahrain), all consolidated their presence in Egypt. And as a signatory to GATT, Egypt is expected to fully liberalise its banking sector by 2002, a prospect that worries neither El-Okdah and Ezz El-Arab.
Egypt's banking sector is already open, they argue, with 60 foreign banks competing with rivals from the Egyptian banking sector.
Technological advances have also opened the market more that ever allowing the possibility of on-line and even mobile banking.
