15 - 21 February 2001
Issue No.521
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Al-Ahram Weekly On-line 15 - 21 February 2001 Issue No.521 |
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Bigger banking
The cabinet economic group's announcement that steps will be taken to effect mergers among the smaller public sector banks during the coming year is commendable. Prime Minister Atef Ebeid said that in conjunction with the Federation of Banks he will explore the possibility of "merging small banks into bigger entities."
The aim of such mergers is to strengthen these institutions to better face the vicissitudes of the market and to improve service for investors. Such reform is especially important given that the financial sector will be fully opened to international competition in 2005, as ordained by the General Agreement on Tariffs and Trade. Thus, such measures are imperative if the Egyptian banking sector is to survive at all in the coming phase.
Among those working in the sector, it is recognised that Egypt's small banks will not be able to withstand the impending competition from multinational conglomerates whose operations have edged out small and medium-sized entities around the world.
Recently, the Egyptian banking sector has faced many problems, the most prominent of which was the crisis ensuing from bad loans that were extended to a limited number of borrowers in the business community. While some of these debtors have negotiated a schedule for repayment, others have defaulted indefinitely.
These setbacks have exhausted the already overextended banks -- not only the small ones -- but the four main public sector banks as well. Since the mid-1990s these four banks have failed to increase their capitalisation effectively. And, like other players in the economy, the exchange rate situation and the recession have intensified the pressure on banks. The only way for them to escape this situation would seem to be through increasing their capital, otherwise they are in danger of going bankrupt.
Head of the Federation of Banks Mahmoud Abdel-Salam Omar has announced that 16 studies will be prepared on the mechanisms to implement mergers, improving the performance of investment portfolios, establishing mortgage funding institutions and expanding the provision of e-banking. Such studies, in effect, cover the full array of issues concerning the requirements for establishing an efficient banking system operating anywhere.
But there remain unanswered questions; how will these mergers be effected? will international consultants provide advice on this matter? and, what other measures will be taken concurrent with these to re-establish confidence in our banks?
There are many things which these banks have to contend with besides resolving their problems with loans gone sour and adhering to effective credit practices. Banks working in a global economy need to manage risk efficiently and train their employees in the provision of a wide array of investor services so that their clients will not defect to foreign banks offering a wider range of investment options and connections to global markets.
Producers and investors need to be assured as well that, hand in hand with banking sector reform, policies will be implemented that are directed at reinvigorating the economy as a whole. This entails adhering to a consistent exchange rate policy, away from administrative intervention which to date has failed to "protect" the Egyptian pound from market forces. Monetary policies need to give investors confidence in the pound and offset the tendency to dollarisation, while at the same time promoting investment.
Looking at banking system as a whole and its performance over the past decade, one is given to wonder just how ready this sector is to initiate and implement its own reform. At the risk of sounding cynical, one might ask whether merging will become another oft-reiterated slogan, the panacea for all of the banks' problems.
Before merging -- and we have a couple of years in which to do this -- it is crucial that the banks demonstrate that they are reform-minded and that they are striving to be more competitive rather than this being imposed by the vagaries of globalisation.
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