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AfricaMay 4 2010

Era of optimism prevails in Egypt

High praise: Egypt's central bank has been lauded for its policies that have helped the country's banks survive the global recession in relative good healthSeveral years after a significant overhaul, Egypt's banking sector continues to show its promise in spite of the global financial crisis. Writer Daniel Maalo
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Era of optimism prevails in Egypt

If there is a term that best describes the mood among Egyptian bankers at this time, it is 'unpretentious optimism'. And it is with good reason; recent indicators reveal positive trends across a number of key areas. From September 2009 to January 2010, there was an increase in the total financial position of local banks, deposits with local banks and lending among local banks.

This is all in spite of the negative climate brought about by the global financial crisis, to which Egypt has not been totally immune. Credit provided to the private sector slowed notably during 2009, down 6% year on year in December of that year.

Moreover, the assets held at certain banks experienced a dramatic fall in value. For example, Egypt's investment banking champion, EFG-Hermes, saw its assets under management decrease in value from $7.7bn in June 2008 to between $4.6bn and $4.7bn at present. What makes this particularly noteworthy is that EFG-Hermes did not invest in the toxic assets that were at the heart of the crisis.

Fair play

The Egyptian government receives many plaudits from local banking figures for the way in which it has reformed and managed the sector in recent years. The Unified Banking Law of 2003 stipulated that local banks increase their minimum paid-in capital to E£500m ($92m) from E£100m and maintain Basel II-required 10% in risk-weighted capital adequacy. Furthermore, the government initiated a process of privatisation in 2004 as it started to sell government stakes in local banks, so much so that its market share of the sector's assets has fallen below the 50% mark.

Several years on, Egypt's senior banking figures have declared the programme a success. "Egypt has really avoided a lot of trouble by undertaking the restructuring of the banking sector before the crisis. Prior to the overhaul of the sector, there were a lot of weak banks with negative equity," says Hassan Abdalla, vice-chairman and managing director of Arab African International Bank.

"Now there are 38 to 39 banks, most of which are solid and are backed by international institutions. There has been greater competition as a result, which has allowed the sector to consolidate and become much stronger," he adds.

Hisham Ezz Al-Arab, chairman and managing director of Commercial International Bank, believes those reforms were crucial to seeing the sector through the recent global crisis. He says: "The whole banking sector has benefited from the entry of new international players who have created a rational competition environment.

"The banking law has prevented the banking sector in Egypt from being excessively exposed to the global credit crunch and controlled systemic risk."

The Central Bank of Egypt (CBE) is also credited for the way in which it has managed the sector in recent years. The bank is currently in the process of introducing another set of reforms that is aimed at making the sector more robust, specifically by enhancing its competitiveness and ability to manage risks.

However, there is the feeling that the sector is already well-placed. "The banking sector is definitely not in danger. After all, the local market has a low loan-to-deposit ratio and the CBE forbids local banks from lending outside Egypt.

"The CBE's regulations are very strict and that has safeguarded the sector," says Dina Al-Sonbaty, managing director of corporate affairs and investor relations at EFG-Hermes.

Gaps in the market

Egyptian society is often labelled as underbanked and underleveraged, meaning local banks have much room to manoeuvre in the local market. Mr Al-Arab believes consumer banking products and services are a particular area of growth, especially personal loans, auto loans and mortgage finance.

Business lending also has potential. "From an economic point of view, it would be good to deploy the sector's high level of liquidity in business lending. However, many of our banks lack the human resources to develop that business," says Mr Abdalla.

The CBE can also have a hand in ensuring that commercial banks become more efficient, says Ms Al-Sonbaty. "One area in which the CBE can play an important role is in encouraging local banks to expedite credit review processes without compromising their quality. Such a change will help to develop the sector further," she adds.

Central Bank of Egypt (CBE) indicators of bank performance

Central Bank of Egypt (CBE) indicators of bank performance

Aggregate financial position of banks excluding CBE

Aggregate financial position of banks excluding CBE

Banking survey deposits excluding CBE, concentration as of Jan 2010

Banking survey deposits excluding CBE, concentration as of Jan 2010

Foreign currency deposits in Egypt

Foreign currency deposits in Egypt

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Read more about:  Africa , Egypt