Loans crisis revisited
The urgency of finding a solution for loan defaulters is back on the table. Niveen Wahish reports
It has been a while since news of loan- defaulting, country-fleeing businessmen have made headlines.
The recent return of escaped businessman Mustafa El-Beleidy has, however, brought the issue back in the glare of publicity. El- Beleidy, whose debts are estimated at about LE170 million, has reportedly returned to settle his debts.
An analysis of the loan defaulters crisis was the subject of a seminar organised by the Egyptian Centre for Economic Studies this week. Central Bank of Egypt Governor Mahmoud Abul-Oyoun has, on previous occasions, categorically refused to announce the size of the defaults, arguing that it would be futile to pinpoint a figure that is constantly changing.
Omneya Helmy, professor of economics at Cairo University and ECES researcher, offered some of her own figures. In a presentation to the seminar, she said the size of irregular loans to total loans rose from 11.7 per cent to 16 per cent during the period between 1999 and 2002. Uncollected interest also rose from LE19.6 billion to LE23 billion between 1990 and 2000. She also compared the total of loan-loss provisions to total loans and concluded that they rose from 9.7 per cent in 1999 to 11.3 per cent in 2002.
The government's unsound monetary and fiscal policies in times of recession, the borrowers and the banks who extended the credit all share the responsibility for the crisis, Helmy said. She argues, however, that the situation was exacerbated by the overall economic slowdown caused by repeated external shocks. A large number of companies lost the ability to perform and, hence, defaulted on their commitments.
This point was backed by Mohamed Taymour, chairman of EFG-Hermes. He said the consumption of cement and steel -- indicators of growth -- had been growing since 1993, but had witnessed a consistent decline since 1998. Factories that had been building up their capacity to meet the growth suddenly found there was no demand for their goods and that they were unable to cover their expenses.
While there were clear signs that the economy was diving into a recession, Taymour said government policies hurt, rather than helped. He said the government stalled on the payment of some LE25 billion in debts owed to contractors, which, in turn, affected their commitments. By defending the value of the pound, it caused a liquidity drain of around $8 billion and by persisting on high interest rates, it slowed the market down.
While the government was short-sighted in its policies, so were the banks, experts said. Salwa El-Antary, general manager of the National Bank of Egypt's research department, said banks were irrational in extending credit during the period between 1996 and 1999. While prudent banking dictates that loans should not exceed 65 per cent of deposits, total loans given out were larger than the deposits made. The excessive extension of credit went to a handful of clients.
Participating experts suggested short and long-term solutions. In the short run, Helmy stressed the need for clear and publicised settlement guidelines. She also recommended amicable, rather than court settlements, and the use of more than one settlement mechanism simultaneously for better results.
For the longer run, she highlighted the need to reactivate the local market, strengthen the financial sector and boost CBE's supervisory role.
"We need speedy monetary and economic policies that revitalise the economy," Taymour said. "This could be done by aggressive money supply growth and lowering interest rates."
It was clear this would not happen overnight. El-Antary said that the fact that these bad debts have not come back has affected banks' ability to pump additional money. Although banks encourage lowering interest rates on deposits, as it lowers their expenses, they are very reluctant to cut down interest rates on loans. "A large part of the interest rates income on loans is not coming in because of defaults," she said. "What comes in is barely enough to cover interest rate payments on deposits."
An expansionary fiscal policy is also not an option in light of the growing budget deficit. Ahmed Galal, executive director of ECES, believes the expansion of exports and attracting foreign investments may be more feasible solutions.
The need for reforming the financial sector was agreed upon by all. Taymour advised the recapitalisation of banks, possibly through mergers and acquisitions. "It will force banks to shape up, even if they have to accept painful write-downs," he said.
Among the ideas presented was the creation of capital risk companies to buy the debts from banks at a discount, restructure the companies and sell them. Some held that the establishment of such companies would require a legal framework that is currently not in place.
