Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
WorldDecember 2 2013

Egypt's banks defy local difficulties

Amid global economic stagnation and domestic upheaval, the Egyptian banking sector has performed remarkably steadily. However, one of the key facets behind its success – its conservatism – is coming under increasing criticism from some, who claim its reluctance to lend beyond large corporations and government entities is holding the country back.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Egypt's banks defy local difficulties

Egypt’s economy is struggling and it is not hard to see why. Two governments have been overthrown in three years, more than 1000 have died in clashes with security forces since Mohammed Morsi, the country’s first democratically elected president, was deposed in July and a full-blown insurgency is under way on the Sinai Peninsula. International governments have advised against travel, all-important tourist attractions stand empty, foreign businesses have cut back or suspended operations and investors are running for cover.

Fiscal issues have been mounting since the 2011 popular revolution that toppled ex-president Hosni Mubarak after almost 30 years in power. At the time, foreign reserves in Egypt stood at about $36bn. Earlier this year they dropped as low as $13bn, prompting tough restrictions on the transfer and purchase of foreign currency. Meanwhile, high unemployment and increasing inflation have proved hard to tackle and the Egyptian pound continues to fall against the US dollar.

Nevertheless, the economy has proven to be surprisingly resilient and expanded by 2.1% in the first half of 2013, planning minister Ashraf al-Arabi told state media. It is a far cry from the several years of 7% growth Egypt had experienced prior to Mr Mubarak’s ousting, but just 0.1% down from the year before.

This continued solid performance is partly thanks to support from friendly Gulf countries, which are providing financial aid packages in the form of loans, non-refundable grants and free energy worth as much as $12bn. Foreign reserves were boosted to almost $19bn in September as a result, allowing the central bank to avoid fully fledged devaluation and the interim government to meet its short-term outgoings.

Strong performance

Unsurprisingly, conditions have not been easy for Egypt’s banking sector either. Currency woes and a flight of foreign capital have inevitably impacted an industry that had been enjoying several years of double-digit growth up until early 2011. But it too has also proven remarkably robust and a number of banks have continued to perform strongly.

In September, Faisal Islamic Bank of Egypt announced profits of E£371m ($52.8m) for the first half of 2013, up 31% from the E£284m recorded the previous year. Crédit Agricole's Egypt subsidiary, meanwhile, posted half-year profits of E£365m, up by 39% compared with 2012. Commercial International Bank and National Société Générale Bank also reported increases in profits.

“We have a market that is seeing quite significant growth in all sectors and we’re seeing good new business for many of the players in the banking industry,” says Halla Sakr, deputy chief executive and head of commercial banking and strategy at HSBC Bank Egypt.

According to Sahar Nasr, lead economist at the World Bank’s finance and private sector development department for the Middle East and north Africa, the banking industry’s sturdy performance is a result of extensive financial and operational reforms that began in the 1990s. The reforms were intended to boost transparency and supervisory standards, and included management reshuffles and the introduction of international accounting standards. Huge capital injections were also made and some institutions became privatised and/or merged.

By the 2000s, this had transformed a once underperforming sector and produced an industry of conservative institutions with very little risk, strong liquidity, deposit-to-lending ratios in the 50:50 region and a credit portfolio heavily concentrated on large corporates, state institutions and government debt. This, says Sherif Elbehery, director of strategy, planning, marketing and corporate affairs with Barclays Egypt, helped the country’s banks weather both the global financial crisis and its own political instability. “Fundamentally, the banking sector in Egypt is much less likely to be influenced by macro events and risks than many other different countries and regions.”

Time to think small?

The conservative nature of the banking sector’s portfolios has, however, led some to criticise its reluctance to lend outside the large corporate or government arena and its traditional disregard of a sector that could drive growth in the Egyptian economy – small-scale business.

“The financial sector is just lending to the government. It prefers, in general, to invest in Treasury bills than in the private sector,” says Hoda Selim, an economist with Cairo-based Economic Research Forum. It is an understandable decision, she says; banks can earn double-digit rates for Treasury bills, while paying out single-digit interest rates on deposits. This concentration is exacerbated, Ms Selim adds, because a large proportion of business loans are also made to state-owned institutions.

Now, however, this concentration may become a liability. Large holdings of sovereign debt led consultancy IHS to downgrade Egypt’s banking sector to the 'significant risk' category in July. Egypt’s sovereign rating, meanwhile, has been subject to repeated rating agency downgrades.

Banking on small business

There is external pressure to diversify into different areas too. Lending to businesses outside the top tier of corporates could help the rest of the economy climb out of a rut, boosting growth and employment levels, says Dalia Abdel Kader, head of sustainable banking and director of marketing and mass communication with Arab African International Bank. “Overall, looking at the sector, I personally think it can do more for the country provided it doesn’t play the traditional role. In Egypt, the financial sector is the one that can produce a growth cycle”

This is also a major focus for the World Bank’s Egyptian operations, which Ms Nasr says are designed to push lending towards small and medium-sized enterprises (SMEs) and entrepreneurs. “We are trying to push for more financial inclusion. [Egyptian banks] should not be so conservative, they should be lending and this is the time they should be supporting the private sector. We want to build the capacity of the system to serve these enterprises and not to be so risk-averse.”

Accordingly, it is becoming an increased focus area for banks also. Barclays, for example, is seeking to increase its corporate finance loans by 35% in the coming year, says Mr Elbehery, and while he notes that its priority customer segments are still multinational companies, large local corporates and high-net-worth individuals, SMEs have been added to the list as a segment in which it expects to see large rates of growth. “It’s crucial for the banking sector as a whole to play a role in supporting the economy. This includes supporting all economic sectors of all sizes on a local level.”

Credit check

But it is new ground for most on both sides of the deal. Because there has historically been little credit extended to the private sector, SMEs have faced the chicken-and-egg problem of being unable to establish creditworthiness. The situation has not been helped by a general lack of audited financials among smaller businesses.

However, according to Ms Sakr, things have begun to change in the past 10 to 15 years and even sole proprietors are starting to keep properly audited books. “Because of this, some of us have felt much more confident about beginning to tap the SME segment,” she says. Banks, for their part, have remodelled their lending models to factor in future earnings as opposed to fixed assets, so that popular business products or smart plans for growth should be awarded loans.

Some feel there is a lot more to be done. Nancy Maghrabi, managing director of Al Mal GTM – a private sector think tank set up as a joint venture between Al Mal financial newspaper and think tank Global Trade Matters – believes the amount of paperwork holding back SME investment is still sizeable. “The bureaucracy and red tape for these companies to grow and expand is ridiculous,” she says. As a result, Al Mal GTM launched a pilot go-between scheme in partnership with legal and accounting firms that helps SMEs to get the legal documentation and paperwork they need to apply for a loan. They subsequently follow up with the SMEs to make sure the loans are not high risk. 

“It’s very simple,” says Ashraf Mohamed Naguib, chief executive of Global Trade Matters. “There’s money here and there’s demand, but no connection. We’ve created the connection and made sure there’s money getting to the SMEs.” The project has only been undertaken on a relatively small scale, but Mr Naguib hopes to develop it into a larger private sector or nationally endorsed project.

Bottom of the pyramid

Egypt’s small businesses are not the only ones to be underserved by the banking industry. Less than 15% of its 80 million population have bank accounts. Here too, says Ms Kader, benefits are multi-faceted. Catering to a population that has been largely ignored by the banking sector boosts financial inclusion, but also unlocks many potential customers from what she describes as “the bottom of the pyramid”.

She adds that suppliers of microfinance services often see extremely low default rates, considerably lower than delinquencies seen among commercial loans. “Typically, you have people that pay back within a quick timeframe and you achieve diversification of risk away from big blue chips which tend to all fall down in times of crisis. There is profitability logic in catering to the bottom of the pyramid,” she says.

There is also room for growth in other segments of the retail market, says HSBC’s Ms Sakr, particularly high-net-worth individuals and those with more sophisticated expectations. Traditionally Egyptian banks have been slow to branch out into the retail market, but now some are starting to offer a number of new products and services.

“The retail sector continues to provide significant opportunities for growth, both in terms of depth and breadth,” says Ms Sakr. “Investment in this sector is ongoing and it’s expected to grow further.” For HSBC, these new products have included mobile and online banking tools, such as dedicated smartphone applications.

Khaled Bassiouny, director of business development at the Egyptian Banking Institute, says there are many more opportunities for modernisation in the banking sector. “We need to be equipped with the latest training and development tactics that will deliver the best results and output. The banking industry is similar to any industry; there are always new concepts and new methods that need to be introduced.”

Reasons to be cheerful

There are other reasons to be positive too. If the economy as a whole begins to gather pace, there will be an inevitable increase in demand for banking services. Plus Egypt’s strategically important geographical position, scope for development and still underutilised tourist sector means there is huge potential for growth.

Moreover, in September 2013, Egypt's interim government launched a $4.2bn programme for “economic development and social justice”, that comprises a mix of labour-intensive public works projects, improvements to the business environment and poverty alleviation measures such as reductions in the prices of basic goods and transport services. And officials have said they are in talks with foreign energy firms to increase both exploration and production in an effort to repay the $6bn the firms are owed by the state.

However, this potential will remain unrealised if the economy continues to flounder and banks will inevitably suffer as a result. Restrictions on foreign currency, for example, makes catering to the needs of business and high-net-worth personal customers ever more difficult and there is only so long the sector can outperform everything else.

“Any political transition period leads to a slowdown in the country's economic growth,” says Mr Elbehery. “At this end, it’s inevitable that economic conditions will have an effect on the banking sector through increasing credit costs, as well as falling revenue-generating capacity.”

Sitting on the sidelines

Recovery in the rest of the economy, analysts say, requires a level of political stability that may not be easy to come by. So far, the interim government has scrapped the constitution and promised elections in early 2014. Many potential investors will choose to sit on the sidelines until economic policies come into sharper focus. Even then, though, some observers are not optimistic.

Maha Azzam, an associate fellow with the Royal Institute of International Affairs' Middle East and north Africa programme, expects the economy to deteriorate further. “Looking ahead, the economy doesn’t look good at all,” she says. “I don’t think the military is going to be able to deliver economically in terms of investment pouring in and facilitating the return of tourism. I believe the economic situation will continue to deteriorate and at best it will remain at a stalemate.”

Ms Azzam also anticipates that the security situation, essential to maintaining both foreign investment and tourism, will deteriorate further. As the military-backed government continues to crack down on supporters of the ousted former president Mohammed Morsi, they are increasingly retaliating by force. Meanwhile, Jihadist groups fighting on the Sinai Peninsula have claimed responsibility for recent attacks in Cairo, which have included an assassination attempt on interior minister Mohamed Ibrahim in September and a rocket-propelled grenade attack on a satellite communications centre in the leafy suburb of Maadi in October.

Not everyone fears the worst, however. Ms Sakr expects both increased stability and a continuation of the banking sectors’ impressive track record: “We have had three years of significant challenges across every level and the banking industry is, thankfully, performing quite well. Yes, we might be affected this year, yes there might be some impact, but it’s not bothering me at all. I have a lot of confidence in the current system.” 

Was this article helpful?

Thank you for your feedback!

Read more about:  Africa , Egypt