8 - 14 February 2001
Issue No.520
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Al-Ahram Weekly On-line 8 - 14 February 2001 Issue No.520 |
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Banking for growth
By Ibrahim Nafie
Problems that have been accumulating in the Egyptian banking sector for the past three years have finally come to a head. Between the 1996-97 and 1998-99 financial years, banks were lending far more than their assets justified, converting what was a healthy liquidity surplus into a major shortage.
Expansion in lending activity primarily serviced the private sector. In some instances banks approved loans without sufficient guarantees and debtors defaulted on their loans. More serious was the phenomenon of stockpiled inventories of imported consumer durables, certain local products and luxury real estate. Entrepreneurs in these domains, faced with unsaleable assets, also defaulted. Then came an additional blow. A number of debtors absconded abroad, followed by a spate of litigation against banking officials exposed for furnishing them with huge, virtually unsecured loans. This scandal, though it affected a very small number, sapped confidence in the banking sector.
Credit officials grew increasingly wary over extending credit while entrepreneurs began to think twice before applying for loans, fearful of unforeseen circumstances that might force them to default and expose them to litigation.
The resultant deceleration in lending activity is not healthy. Credit is one of the prime engines of economic growth, furnishing the capital injections necessary to stimulate new business ventures, boost production and create jobs. Yet the anxieties that precipitated the current slowdown have been grossly exaggerated. The problems that occurred in the Egyptian banking sector could occur anywhere; what is important is to avert such pitfalls in the future.
More importantly, the situation was not as critical as many imagined. The ratio of bad debts to the overall volume of debts fell from 14.7 per cent in 1996 to 11.7 per cent in 1999. Compare this, for example, to the situation in the banking sector in a major industrialised company such as Japan where the $600 billion in bad debts recorded in 1998 represented 14.3 per cent of GDP -- double the ratio in Egypt.
In all events, the crisis, such as it was, has been brought under control speedily. Essential reforms were introduced and the Central Bank was accorded greater powers, not only in its supervisory capacities but in the management of currency policy.
These measures should ensure that the regulatory mechanisms that are already in place are respected. Banks will now be expected to adhere strictly to the ratio of assets deposited with the Central Bank and the ratio of cash they must keep on hand to fulfil their commitments. They are not to furnish credit beyond twelve times their assets, and have clear guidelines fixing the levels of exposure allowable to single clients. In addition, banks must apply the most stringent criteria in assessing the credit worthiness of loan applicants and adhere strictly to banking ethics which prohibit loans to members of their boards of directors or to associate companies and their boards of directors. Furthermore, banks will be expected to abide by President Mubarak's directive to only extend credit in foreign currency to those enterprises capable of repaying their debts in foreign currency.
These codes of conduct should encourage a more positive and energetic spirit within the banking and business sectors. Those who object that such regulations are too complicated and obstructive should contemplate the stricter regulations and harsher deterrents against infractions that are enforced in advanced industrialised nations. Conversely, when businessmen furnish the necessary guarantees and collateral to obtain loans and when banking credit officials apply the appropriate criteria for extending loans this will generate smooth and vigorous credit activity which, in turn, will fuel economic growth to the benefit of businessmen, the banks and the general public.
One of the reasons that the government was able to act so quickly in remedying the situation in the banking sector was that it has preserved its powers to monitor, steer and maintain an even keel in the economy through a range of financial and fiscal mechanisms. The government, moreover, has continued to pump new blood into the Egyptian economy through major investments, primarily in infrastructure, in scientific and technological development and in the fields of education, health and defence industries.
It is natural that the government be expected to take a lead in closing the gap with more industrialised nations. Its economic activities generate an investment multiplier, a series of spin-off effects that rebound through the economy as a whole. Consider, for example, that government funded enterprises purchase most of their supplies from the private sector, that private contractors implement them, that this generates jobs, that increased income distribution generates greater demand for goods and services, and that this, in turn, furnishes incentives for investment and growth.
It has been Egypt's experience that the government's role in the economy has helped ensure that economic growth remains equitable, an essential factor in sustained development. The government's commitment to this has been steadfast, in spite of pressures from international monetary organisations. Only through gradual and balanced deregulation is it possible to ensure that economic transformation proceeds smoothly and that the changes that take place are welcomed by the populace at large and do not adversely affect limited income sectors of society. Egypt's gradual approach to economic transformation is very similar in spirit to what British Prime Minister Tony Blair and former US President Bill Clinton called "the third way," which is based on instituting regulatory mechanisms to prevent fluctuating market forces from precipitating economic and fiscal crises that wreak economic havoc.
It is in this light that we should view the regulatory mechanisms in the banking sector, which are ultimately intended to stimulate the economy, while protecting the wider base of the business sector and furnishing equal opportunity to all to secure credit in keeping with the principles of fairness and integrity.
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