Public and private sector banks have been restructured on the long journey to banking sector reform, but major challenges remain, writes Nadine Marroushi.

Privatising the government’s 80% stake in Egypt’s third largest bank by assets, Bank of Alexandria (BoA), has created renewed interest among foreign investors who are keen to tap into the opportunities that the market presents; the Cairo financial community is convinced that BoA’s sale to an Italian bank signalled that the sector’s long-awaited clean-up had finally arrived.

Following Sanpaolo IMI’s takeover of BoA, another 15% is to be floated in an initial public offering (IPO) on the Cairo & Alexandria Stock Exchange (CASE), scheduled for October/ November 2007, and 5% goes to the bank’s employees.

A major restructuring of the banking system has been a matter of urgency since the economic crisis of the late 1990s, when public banks were handing out an irrational amount of loans and causing a large accumulation of non-performing loans (NPLs).

Cairo-based investment bank EFG Hermes says: “Although there are no official figures on the magnitude of the NPL problem, because only some of the private banks disclose this figure, some unofficial estimates have put the NPL ratio for the sector at 25%-30% of gross loans – very high, even by emerging market standards.”

Privatisation has been, and still is, key to the reform. Youssef Boutros Ghali, minister of finance, recently admitted: “Forty-five state companies have been privatised this year [fiscal year 2006-07], but this is slow if you ask me. We need to get rid of a lot more.”

The two remaining state-owned banks, National Bank of Egypt (NBE) and recently merged Banque Misr & Banque du Caire, still retain a dominant market share, controlling 39% of system loans, 51% of deposits and 848 branches.

The top 10 private commercial banks, including National Société Générale Bank (NSGB), BoA, Commercial International Bank (CIB), Faisal Islamic Bank (FIB) and HSBC, retain 23.5% of system loans and 30% of deposits, operated through a total of 495 branches.

Public sector share

Until recently, public sector banks controlled a much larger market share; several also held minority stakes in private commercial joint venture banks. Asset sales in 2004-06 resulted in the transfer to the private sector of about 20% of system assets either completely or partially controlled by the state (see table 1).

National Bank for Development (NBD) is one of the last of the smaller public sector banks awaiting privatisation. Abu Dhabi Islamic Bank (ADIB) is the expected purchaser, amid early signs of an emerging Islamic finance market.

Some analysts estimate that NBD still has a huge 50% NPL ratio, causing Central Bank of Egypt (CBE) to place some restrictions on the sale, which include raising the paid-up capital from EŁ281.9m ($49.5m) to the minimum EŁ500m, and agreeing a NPL clean-up strategy.

Islamic finance remains a niche product in Egypt but it could soon become mainstream. A large number of players are entering the market, acquiring banks with Islamic licences and setting up takaful (Islamic insurance) companies.

Local acquisitions

The sale of NBD – which is a conventional bank with an Islamic licence – to ADIB marks a trend in the local acquisition plans of Gulf institutions that are looking at banks with Islamic licences, but have not developed this area of the business. This trend has been encouraged by the central bank, which is no longer issuing any new domestic Islamic licences, leaving Gulf institutions to buy into existing players.

ADIB plans to convert NBD into a fully Islamic bank. Industry sources said Gulf banks were looking at Al-Watani bank, which also has an Islamic licence.

FIB remains the largest Islamic bank in Egypt. According to EFG Hermes, FIB’s total deposits per branch are the country’s largest.

Industry sources believe it will take at least three years for further privatisation. Elena Sanchez-Cabezudo, EFG senior research analyst, told The Banker: “This is because the remaining banks are huge and in need of a lot of restructuring before they become appealing to buyers.”

Positive trends

Appointing Dr Farouq Al-Okda as central bank governor in 2003 and a reform-oriented cabinet in 2004 has allowed the reform programme to gain momentum. Tarek Amr, deputy CBE governor, says: “In 2003, a new board was appointed to produce an independent CBE and price stability. At the time, the banking sector was very fragmented, monetary policy was ineffective and the actions of CBE were not reflected in the market. So, our first objective was to establish a credible system, and we eradicated the black market. We also gained a bank flow of $160bn in 2006 after successful moves towards bank consolidation.”

He adds: “We are still building the framework for our system and, to help us do this, we have built a new unit for CBE, brought in new economists and signed agreements with the IMF.”

There has also been some bank restructuring, increasing concentration so that the number of banks today stands at 39 (down from 57 in 2004), cleaning up NPLs and stronger supervision led by CBE.

“For the first time we have qualified technocrats,” says Khaled Gibaly, managing director of Barclays Egypt. “What used to be antiquated units in the public sector are now very professional. Recent moves by CBE are the trademarks of the beginnings of a sophisticated banking system.”

The economy has also picked up, with real gross domestic product (GDP) increasing from 4.5% in 2004-05 to 6.8% in 2005-06. According to Mr Boutros Ghali: “In 2007-08, we expect to have real GDP growth of 7% and lower inflation. For the foreseeable future, until 2010, we forecast growth of 7%-9%.”

Nevertheless, economic challenges remain, and these include reducing inflation and unemployment rates, and addressing the high level of poverty. According to EFG Hermes: “Following a period when inflation averaged 4%, a number of factors fuelled a rise in inflation since April 2005, pushing it to a high of 12.4% year-on-year in January 2007. The effect of seasonal rises in the prices of food items, building materials and services was compounded by the partial removal of subsidies on utilities and some energy items, and an increase in the prices of tobacco and some telecommunication services.”Mr Boutros Ghali says: “Our inflation target for the next 12 months is 6%-8%.”

While official figures put unemployment at 10%, EFG believes the actual figures to be much higher, especially among young graduates.

Some of the obstacles in the banking sector are related to the high level of poverty. Only 10% of adults have bank accounts. “One reason is that people don’t earn enough money to save,” says Ms Sanchez-Cabezudo.

The World Bank estimates that 23% of Egyptians live below the national poverty line. Government entities, including ministries, and small private companies still pay employees in cash. Only large private companies pay wages through bank accounts.

Retail potential

Cairo bankers complain that a majority of Egyptians are neither financially savvy nor sophisticated. An industry source, who declined to be identified, told The Banker: “Egyptians need to spend an incredibly large amount of money to use a credit or debit card. Some will still pay for cars in cash.” According to EFG estimates, about three million credit cards are distributed among Egypt’s 75 million population.

The lack of complexity in Egypt’s retail market is particularly apparent in retail lending and insurance trends. “The legal framework poses problems for retail lenders, as the law stands in favour of the borrower not the lender,” says Mr Gibaly.

Dispute resolution is problematic across the financial services industry. “A major hindrance for foreign investors in Egypt is the platform for business disputes in commercial courts. The problem is that people ruling on business issues are experts in the law but don’t have an understanding of business,” says Mr Gibaly. CBE has reduced the time for resolving business disputes to four months, but Mr Gibaly and other bankers still deem this too long.

If a borrower fails to repay a debt, the bank cannot repossess the asset, but must go through a civil case to regain control. This process can take up to three years, by which time, “if the asset is a car, the value has significantly diminished”, says Mr Gibaly.

This, in part, explains why the mortgage market, and lending to small and medium-sized enterprises (SMEs), is non-existent.

According to EFG: “Mortgage contracts up to June 2006 were just below 5000 and mortgage lending amounted to EŁ514m in June 2006, of which EŁ300m was provided by the banks and the rest by the specialised mortgage providers. This compares with total bank loans of EŁ324bn and represents just below 1% of nominal GDP in Egypt.”

Given the high level of poverty, civil cases are sensitive, and failure to repay debt is not usually won in the bank’s favour.

Mortgage market

Mortgage lenders must operate in a market where an estimated 80% of properties are unregistered, as owners duck costly registration fees; mortgage loans require legally secure collateral. To counter this, the government has reduced registration fees from 13% to 3% of the property’s value, capping the payment at EŁ2000. “However, it will take time for the percentage of registered properties to rise,” says EFG’s Ms Sanchez-Cabezudo.

Car loans are a more mature, salary-based market, but only in a small segment of the population. “A portion of the loan is taken out of the borrower’s salary via a bank account; it works like a direct debit, so that there is no risk,” says Ms Sanchez-Cabezudo.

Growth plans

International banks are looking closely at the retail market. Barclays Egypt has traditionally focused on commercial corporate business, but now plans to venture into retail, despite its risks, says Mr Gibaly. “To turn our business into a global entity, we need to offer a full spectrum of financial products and services to meet the needs of both individual customers and commercial clients. This includes retail lending, such as SMEs, car loans, personal loans and durable loans,” he says.

“One of our strategic focuses will be on SMEs. These companies are drivers of economic growth, because they provide employment opportunities, foster entrepreneurship and drive productivity. Indeed, it is a higher risk segment for many reasons, including the question marks surrounding the reliability of the companies’ audited financials. However, the pitfall of large players is that they try to get into the SME business with a large corporate mentality where the financials count for a large part of the decision criteria. We will be looking at behavioural and psychographic data as surrogates, so that we have our own quantitative and qualitative data to reach a decision,” he says.

Barclays gained 20% of the car loans market share only three months into the game. It plans to launch personal and durable loans this month.

Geographical expansion is also on the agenda. Last year, Barclays Egypt had eight branches; by end-July it hopes to have 30.

Finding suitable employees and the right platform for resolving business disputes are among the challenges that Mr Gibaly lists. “When a company wants to grow at a fast pace, it needs skilled people, and it is very hard to find them in the required quantities. As a result, every multinational has to establish its own training academy,” he says.

Barclays Egypt is expanding its human resources department, working with training company Dale Carnegie to structure its employee induction plan. It is setting up a regional training centre and working with the not-for-profit Egyptian Banking Institute to structure joint training programmes on specialist subjects such as treasury management.

Investment arena

Investment banking is still largely underdeveloped, despite the emergence of some impressive local players, led by EFG Hermes, and the smaller Beltone Financial Group and HC Securities.

“There is massive resurgence in domestic confidence. There are private commitments to spend $60bn over the next decade. Gulf investors are coming back in a big way, and not because of liquidity, but because of opportunities in transport, real estate and pharmaceuticals. But transport and infrastructure must be upgraded at every level, otherwise the economy will grow and no-one will get anything around,” says Angus Blair, head of research at Beltone.

The overall product offering remains simple with huge potential for growth. “There are no derivatives, futures, short selling or anything that is complex,” says Karim Awad, EFG deputy head of investment banking. “The regulator, Capital Markets Authority, is looking into diversifying the product base.”

EFG’s four main businesses are private equity, asset management, brokerage services and investment banking, such as mergers and acquisitions, and equity ratings. Market focuses are in Egypt, Dubai and Saudi Arabia, where EFG gained a licence to operate in 2006.



Insurance is a retail product with major growth potential but bancassurance is still a novel concept. The insurance market penetration rate in Egypt is just 0.8%, compared with 3.1% in Lebanon.

“Only 20% of the population uses insurance through their own accord, while the other 80% is forced into it through mandatory programmes,” says insurance adviser to AIG Egypt Sameh Thabet. These include requirements for travel insurance to issue visas, and motor insurance for a car loan.

Nevertheless, “many banks are interested in signing bancassurance agreements because it offers them an edge, and competition among banks is fierce,” Allianz Egypt communications manager Shadia George tells The Banker.

Allianz has a bancassurance agreement with 10 banks, including HSBC, Arab Bank, Crédit Agricole and BNP. Commercial International Bank’s insurance arm, Commercial International Life, has a deal with Barclays Bank to sell its products, and more are in the pipeline.

As yet, there is only one takaful company in Egypt: the Egyptian Saudi Insurance Company. However, more are preparing to enter the market. In July, the Egyptian Bankers’ Takaful Insurance Company (EBTIC) will open. Its eight main shareholders are banks: Arab International Bank, National Bank of Egypt, Banque Misr, Misr Grand Development Bank, Egyptian Gulf Bank, Faisal Islamic Bank, Egyptian-Saudi Financial House, and Arab Société International Banco.

EBTIC managing director Ahmed Arfeen tells The Banker: “We will be relying heavily on these banks to distribute our products.”


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