banking sector in egypt december 2005 presented by presented by amr s. algarhi hanan nasr el-din

Banking Sector in EgyptBanking Sector in Egypt

December 2005

Presented byPresented by

Amr S. Algarhi Hanan Nasr El-DinAmr S. Algarhi Hanan Nasr El-Din

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ContentsContents

•Historical development and Legal frameworkHistorical development and Legal framework

•Banking Sector IndicatorsBanking Sector Indicators

•Descriptive analysis.Descriptive analysis.

•SWOT analysis.SWOT analysis.

•Development StrategiesDevelopment Strategies. .

•Conclusion.Conclusion.

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Historical development and Legal frameworkHistorical development and Legal framework

•Bank establishment and foreign control.

•Nationalization and the socialist era.

•“Infitah” or open-door policy.

•The ERSAP.

44


•Bank establishment and foreign control.

Bank of Egypt (1856);

National Bank of Egypt (NBE) (1898);

Banque Misr (1920).

55


•Nationalization and the socialist era.

Law 22/1957; capital requirement: LE 500 thousand.

Law 163/1957; more power to NBE (i/r & d/r).

Law 117/ 1961; Central Bank of Egypt (CBE) (1961)

& nationalization of all banks.

66


•Infitah or Open Door Policy (1974).

Law 43/1974; allow foreign capital to enter JVB (<49%);

Interest rate ceilings;

High reserve requirements (25%);

Domination of public sector banks;

Ex. CIB (1975) - 100% Egyptian ownership in 1987.

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•The ERSAP

Phase I (1991 – 1995)

Financial and banking sector reform (i/r liberalization, reduction in required reserves);

Fiscal and monetary contraction.

Phase II (1996 – 1998)

• Privatization; Law 97/1996 (>49% foreign ownership of JVB was permitted).

88

Legal frameworkLegal framework

•The Unified Banking Law 88/2003

•Secure Payment Systems

•The Unified Tax Law 91/2005

•The Electronic Signature Law 15/2004

•The Anti-Money Laundering Law 80/2002

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IndicatorsIndicators

ProfitabilityProfitability

Capital AdequacyCapital Adequacy

Liquidity & Reserve RequirementsLiquidity & Reserve Requirements

RiskRisk

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IndicatorsIndicatorsProfitability Profitability (Average ROA & ROE)(Average ROA & ROE)

Source ERF Egypt Country Profile, December 2004, p 57.

Return on Assets

0.1

1

10

1999 2000 2001 2002 2003

Years

Perc

enta

ges

Public Banks

Private Banks Return on Equity

1

10

100

1999 2000 2001 2002 2003Years

Perc

enta

ges

Public Banks

Private Banks

1111


Capital AdequacyCapital Adequacy

- Minimum capital LE 500 million (DB) vs. $ 25 million Minimum capital LE 500 million (DB) vs. $ 25 million (foreign bank branches).(foreign bank branches).- CAR : 10%.CAR : 10%.-Egypt : 11.2% (9% core capital & 2.2% supplementary Egypt : 11.2% (9% core capital & 2.2% supplementary capital)capital)

Liquidity & Reserve RequirementsLiquidity & Reserve Requirements- LC (20%), FC (25%).- LC (20%), FC (25%).

- MRR (14%).- MRR (14%).

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RiskRisk

- Market risk.Market risk.

- Operation risk.Operation risk.

-Economic Climate risk.Economic Climate risk.

LM BP

IS

A

IS’

BP’

LM’

YF

B

C

id

i

Y

Analysis: Short-Term Economic Policy

Monetary policy applied to Egypt using the MF model

BP

IS

IS’

id

i

Y

BP’

A

LM


Fiscal policy applied to Egypt using the MF model


For Egypt, an easy Monetary policy is effective while Fiscal policy is not.

Monetary policy should be a carefully planned target, and have a time constraint.

Banks through interest rate adjustment should influence demand and supply behavior to follow the set Monetary policy.

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Analysis: Structure Medium termAnalysis: Structure Medium term

Commercial Banks

Business & Investment Banks

Specialized Banks

Central Bank of Egypt

Public Sector Banks 4

Private and Joint Venture Banks 24

Private and Joint Venture Banks 11

Off-shore Banks 19

Private and Joint Venture Banks



The Egyptian Industrial

Development Bank 1

The Arab Egyptian

Real Estate Bank 1

Principal Bank for Development & Agricultural Credit 1

923

branches

409

162

59

14

27

1189

61 2783Total banks and branches

CBECBE

Private Sector Banks (32)

Private Sector Banks (32)

Public Sector Banks (7)

Public Sector Banks (7)

Foreign Branches (7)

Foreign Branches (7)

Commercial Banks (4)

Commercial Banks (4)

Specialized Banks (3)

Specialized Banks (3)

Banks structure.

Mergers and Acquisitions.

M&As are highly M&As are highly encouraged by the CBE encouraged by the CBE through the new law.through the new law. Aims to reduce the number Aims to reduce the number of banks in Egypt.of banks in Egypt. Acquisition of existing local Acquisition of existing local banks is the only way for banks is the only way for market entrymarket entry

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Analysis: Structure Medium termAnalysis: Structure Medium term

Banks as a catalyst for the big push.

1. Historical evidence.

2. Large banks can offer loans with low interest.

3. Are banks better than government?

Banks are natural candidates as coordinating agents.

Banks are in contact with a large number of firms.

Banks can influence firm’s decision to invest through the provision of loans.

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Analysis: Neo-classical LT Economic Analysis: Neo-classical LT Economic ImplicationsImplications

sEgyptf(k)

f(k)

srf(k)

(+n+g)k

kr

f(k)

kkEgypt

Mobilizing savings by implementing effective and efficient reforms, Egypt’s level of capital stock per capita can converge to that of a rich economy.

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kr kkEgypt

(+n+g)

Although the banking system may not be able to influence the growth rate permanently, it can effect the level of output.

2020


The banking system can influence the growth rate permanently:

1. Improving the average productivity of capital;

Collecting information and evaluating alternative investment projects (screening) and monitoring borrowers to ensure that the loaned funds are efficiently utilized.

Inducing individuals to invest in riskier but more productive technologies, by providing risk sharing opportunities.

2. Increasing the efficiency of the banking system itself;

Improving the level of management by appointing better educated managers.

Improving staff training.

The adoption of modern technology.

The removal of bureaucratic rigidities and controls.

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SWOT AnalysisSWOT AnalysisSStrengthstrengths

The private banking system is The private banking system is competitive.competitive.New banking law 88/2003 includes New banking law 88/2003 includes steps to reform and modernize.steps to reform and modernize.Establishing branch networks are Establishing branch networks are relatively at low cost, allowing 90% relatively at low cost, allowing 90% foreign ownership.foreign ownership.

WWeaknesseaknessPublic sector domination.Public sector domination.Low level of deposits per capita.Low level of deposits per capita.Mismatching LT vs. ST lending.Mismatching LT vs. ST lending.Commission and fees are high.Commission and fees are high.Low level salaries.Low level salaries.Bureaucratic barriers.Bureaucratic barriers.Lack of quality lending opportunities.Lack of quality lending opportunities. Insufficient hedging & risk management Insufficient hedging & risk management instruments.instruments.

OOpportunitiespportunities Wide range of products & services to Wide range of products & services to present (structured lending).present (structured lending).Underserved lower income levels Underserved lower income levels (SMEs).(SMEs).Presence of expansion possibilities for Presence of expansion possibilities for local banks in regional markets & vice local banks in regional markets & vice versa.versa.

TThreatshreatsMarket entry is closed.Market entry is closed.Political unrest and economic instability.Political unrest and economic instability.Local banks manage old problems & Local banks manage old problems & compete with current global market compete with current global market simultaneously.simultaneously.

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Development StrategiesDevelopment Strategies

The main objectives:

Bank Performance Enhancement

Information System Development

Human Resource Optimization

2323


Objectives

• Bank Performance Enhancement

Strategies

• State Bank Privatization.• Lowering and eliminating barriers.• Decrease interest rates on loans.• Mergers & Acquisitions to encourage competition• Adopt a variety of customer relationship management systems.• Introduce new types of loans: e.g. Education, Tourism, Car, Home Improvement.

Impacts

• Raising funds for the government.• Increasing competition.• Promoting economic efficiency.• Reducing government interference in the economy.• Increase banks profitability.•Encourage Foreign Investments•Introducing a wider range of services in the banking sector

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Objectives

• Information System Development.

Strategies

• Increase investment in Bank’s technical infrastructure (invest in technology and more IT spending).• Build a system of client history.•Utilize E-banking services to foster transaction facilitations, and security measures

Impacts

• Better liquidity.

• Risk management.

• Exchange data.

• Reduce costs.

• Apply risk-forecasting methods.

• Improve efficiencies.

• Provide competitive. advantages.

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Objectives Strategies Impacts

• Human Resource Optimization.

• Intensive Training and Re-training programs: (e.g. Banking Business, Foreign Language Courses, IT & Computer).

• Reduce the huge wage gap between public and private sectors.

• Choose best persons for management.

• Keep operating personnel up with change in business environment.

• Raising the efficiency of working staff.

• Reduce operation risk and human error.

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ConclusionConclusion

Egypt’s sector reform plan is being effectively implemented expected to end the fragmented states of Banks & increase their competitiveness.

Product innovation creates room for growth in the sector.

M&As is an important venue to becoming a regional financial player, hence laws and regulations governing this issue should target to accelerate this process rather than hindering it.

Good Banking practices in compliance with international standards are inevitable for achieving efficiency.

Human resource development & an industry wide rise in remuneration and salaries are required to stop cross border brain drain.

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Thank You

banking sector in egypt december 2005 presented by presented by amr s. algarhi hanan nasr el-din

Documents

din slide

development strategies

mf model slide

shore banks

total banks

central bank of egypt

foreign bank branches

foreign capital