James Drummond reports from Cairo on the implications and reactions to the potential changes to the country’s banking law.The Egyptian parliament is reviewing a potentially far-reaching banking law. Its backers hope it will bring about a series of mergers in an over-banked market and clarify the conduct of monetary policy.
If passed, legislators and bankers hope the law will restore credibility to a financial sector battered by a slew of corruption allegations and go some way to reinvigorate an economy depressed by the war in Iraq and an ongoing liquidity crisis.
The question is whether the letter of the law will be observed in practice. Here, it has to be said, despite the best intentions of those behind the new banking law, there are doubts. Not only does the new law not address sensitive issues like disclosure in the banking system but its more far-sighted provisions may be frustrated by conservative forces inside Egypt.
Hosni Mubarak, the autocratic Egyptian president, has long resisted measures that might result in public sector employees losing their jobs. In the name of defending the value of the Egyptian pound, he has also made Egypt’s foreign exchange reserves a no-go area, preventing technocrats from dealing with deep-seated economic problems.
Nonetheless, the law – as it currently stands before the people’s assembly – seeks to do some worthwhile things, according to Mahmud Muhieddin, chairman of the economic committee of the ruling National Democratic Party and architect of the legislation. In the first place the Central Bank of Egypt (CBE) and its governor Mahmoud Abul-Eyoun, advised by a committee, will be given responsibility for the managing monetary policy. Mr Abul-Eyoun will be answerable only to Mr Mubarak. This replaces an ad hoc system whereby policy appeared to be determined by a committee of senior ministers.
“What’s new in the law is for the first time it will determine who is going to do what as far as monetary policy is concerned. It says that the coordination committee is going to set the target but the conduct and implementation will be the responsibility of the CBE,” Mr Muhieddin says.
Banking overhaul
For the banks, the ancient distinctions between investment, commercial, specialised and trade banks will go. There will just be banks.
In addition, domestic institutions will have three years to meet a minimum paid in capital requirement of EŁ500m ($83m) while foreign banks must invest $50m, up from the previous minimum of $15m. They must also abide by a 10% risk-weighted capital adequacy ratio.
Earlier this year the big four public sector banks that continue to dominate the Egyptian market announced capital increases that enabled them to reach the 10% threshold.
Morris Helal of Capital Intelligence, the regional credit rating agency, says, “Clearly the more capital the better. [But] I think the banks still need additional capital to cope with the provision shortfalls that persist in their loan portfolios. The Egyptian banking sector as a whole has suffered from the last three or four years and provisioning levels have not kept up.”
Mr Helal notes that the new banking law does not address the lack of transparency that bedevils analysis of the banking system and particularly of the four public sector institutions. “There is no information on non-performing loans. There are just different market estimates from 18% to 22% [of NPLs] depending on who you talk to,” Mr Helal says.
Nonetheless Mr Muhieddin of the NDP estimates that the new law will at least result in the merger or disappearance of some of the smaller, unsustainable banks – he puts the number at between six and 10 – that currently survive in Egypt.
“This (law) will result in a wave of mergers and acquisitions because some of the 60 or so banks operating in Egypt will not really be able to meet the capital requirement. And if they are able to meet the capital requirement, some of them will not really find themselves in a good capacity to compete,” says Mr Muhieddin.
There is also a range of provisions contained in the legislation on corporate governance. Single borrower exposure will remain at 30% of paid in capital but senior board and executive appointments within the banks will have to be vetted by the CBE.
This last measure appears designed to try to head off the risk of a repeat of the high-profile lending scandals that have been flushed to the surface in Egypt over recent months. In a blaze of gleeful publicity a series of businessmen and the bankers who lent to them have had their passports seized, been forcibly retired and in some cases sent to prison.
There is, though, little in the provisions of the law that might ease Egypt’s immediate economic plight.
Cairo appears to have been successful in gaining $2.3bn in loan guarantees from the US as a result of its low-key logistical support for the war against Iraq and negotiations are ongoing with the World Bank for an additional $1bn in soft loans.
Buffering tourism tumble
But tourism, the country’s major earner of hard currency, is stumbling and the shortfall has only been offset only by bumper revenues from the Suez Canal, a function of the number of US and British warships passing through on their way to the Gulf.
In an attempt to pre-empt the economic impact of the war, the prime minister, Atef Obeid, surprised nearly everyone in January by freeing the Egyptian pound from what had been billed as a crawling peg against the dollar but what in practice amounted to just a peg. Since January the Egyptian pound has fallen in value to trade in early June at around $1=EŁ6.00. But a black market persists and liquidity has yet to return to the wider economy.
Equally there is no prospect of the law doing away with a detested provision introduced in April as an emergency measure that obliges all exporters and the tourism sector to lodge and convert 75% of hard currency earnings with the banking system.
Businessmen in Cairo are furious that the provision, designed to force liquidity into the sector and prop up the Egyptian pound, amounts to a re-imposition of capital controls.
Economic liberals such as Mr Muhieddin point to the fact that the new banking law stipulates that the value of the Egyptian pound should now be determined by market forces.
“For the first time it is established in black and white that the foreign exchange regime of Egypt will be subject to the rules of supply and demand,” he says. But he admits that how the law is implemented is likely to determine whether its impact will be broadly beneficial or whether it will be left to gather dust on a shelf.
“Banking laws are more or less like traffic laws. It is not how good you are in drafting articles but how are you in applying them in practice,” he says.
