Al-Ahram Weekly | Economy

		30 May - 5 June 2002 Issue No.588 Economy	Current issue Previous issue Site map
Published in Cairo by AL-AHRAM established in 1875		Recommend this page

Less is more
Should Egypt's banks consolidate? Niveen Wahish found an answer at a recent seminar

The issue of whether to consolidate Egypt's banks, which for the past two years has bubbled in and out of public view, has surfaced once again. Some time ago there was talk that six private banks and one public bank would be merged into bigger entities. But then the issue sank out of sight.
Last week, however, the matter was discussed for the first time in a public forum: at a seminar organised by the Egyptian Centre for Economic Studies entitled, "Mergers and Acquisitions in Egypt: Opportunities and Challenges."
One of the speakers, Yasser El-Mallawani, managing director of the Commercial International Investment Bank (CIIC), opened by putting Egypt's situation into a global context by describing the extent of consolidation among banks internationally. He pointed out that more than 500 mergers and acquisitions took place in the period 1997-2000, with a total transaction value of $1.6 trillion. Developed markets led the way. Those transactions, he showed, led to a drastic decline in the number of institutions, yet their market capitalisation increased.
That trend has not yet caught on in the Egyptian market. In the past 40 years, only 14 mergers or acquisitions have taken place, according to Nabil Hashad, head of the Arab Centre for Financial and Monetary Studies. Mahmoud Abul-Oyoun, Central Bank of Egypt (CBE) governor, added that those transactions took place during the 1960s, 1970s and 1990s and were for the sake of nationalisation or to decrease the number of banks. He stressed that the public needs to be made aware of the benefits of mergers. He said that in the mind of the Egyptian public, a merger tends to happen only when a bank is in financial trouble. "This is wrong. Mergers can transform existing small entities into larger entities capable of competing," he said.
While Abul-Oyoun summarised the benefits of consolidation, El-Mallawani went into the details. He explained how consolidation can lead to cost savings: overlapping branches can be closed and the high cost of technology and human resources can be spread over a larger platform. He added that high fragmentation amongst banks is restraining profitability. Egypt has 55 private banks and seven public sector banks, of which three are specialised banks.
El-Mallawani also stressed that consolidation can help local banks survive the competition brought by a growing foreign presence in the sector.
He warned, however, against two weak banks merging. Instead, he suggested that incentives be given to larger banks to encourage them to buy smaller banks.
In the meantime, the CBE is studying the best way to make this happen. For starters, Abul-Oyoun said, the CBE will raise the capital adequacy ration (a measure of a bank's capital expressed as a percentage of its risk-weighted credit exposures) required of banks from a current eight per cent to 10 per cent by the end of this year, then to 12 per cent by the end of next year. Applying the new ration will force banks either to raise their capital or lower their exposure to risk by granting fewer loans. "Those who are not able to raise their capital will seriously consider merging with other banks," the governor said. Currently the banking and credit law states that the authorised capital for a bank must be LE100 million while the paid-in capital must be $50 million.
The CBE is also considering giving incentives to banks to merge. These could include tax perks, equal to what the bank paid to buy a smaller bank, or a discount on the reserve requirements a bank must keep with the CBE equal to the value of an acquisition.

Send a letter to the Editor Recommend this page

ARCHIVES
Letter from the Editor
Editorial Board
Subscription
Advertise!

WEEKLY ONLINE: www.ahram.org.eg/weekly
Updated every Saturday at 11.00 GMT, 2pm local time
weeklyweb@ahram.org.eg

Al-Ahram Organisation