NEW BANKING LAW BRINGS CHANGE FOR THE BETTER
Stricter rules on capitalization and credit will tighten up the system and improve performance

Banque du Caire is the first Egyptian bank to turn its attention to micro-lending, helping to build the small industries of the future

Egypt has one of the oldest and largest banking sectors in the Middle East. A far-reaching new banking law passed last year is aimed at establishing a modern, efficient, and well-capitalized banking system, and to restore public confidence after a series of loan default scandals.

Egypt’s Central Bank has been granted greater independence and the Governor of the bank reports directly to President Mubarak. The bank has been given responsibility for managing monetary policy, in addition to regulating the banking system.

Distinctions between investment, commercial, specialized, and trade banks have been removed. Corporate governance practices are being promoted and implemented by the four large public banks that dominate the system—Bank of Alexandria, Banque du Caire, National Bank of Egypt, and Banque Misr—with the recruitment of individuals from the private sector into their senior management. Encouragement is being given to foreign investment in the sector through acquisition of public sector ownership in joint venture banks.

A spur to modernization has been provided by the upcoming (2006) implementation of the Basel II accord, the international agreement aimed at regulating the global banking system. The accord focuses on risk management and demands higher capital requirements, a supervisory review process, and market discipline.

Egypt has been working to ensure that it has the sound credit culture required. The minimum capital adequacy ratio has been increased from 8% to 10% across the board, and an automated credit risk information system is being developed to provide online access to clients’ credit profiles.

The new law gives Egyptian banks three years to meet a minimum paid in capital requirement of £500 million Egyptian pounds ($83 million), while the paid in capital of foreign banks operating in Egypt has been increased to £50 million Egyptian pounds ($8 million).

The number of banks operating in Egypt—almost 60—is expected to reduce. “We are over-banked and I am sure we will see lots of movement,” says a spokesman for the Central Bank. “If banks fail to increase their capital within the grace period allowed by the new law, some tough decisions will have to be made about their future, including mergers or acquisitions by bigger banks, or liquidation.”

AHMED EL BARDAI Chairman of Banque du Caire

Mohamed Kamal El Din Barakat, Chairman of Banque Misr, says, “It was a courageous step for the government to implement these changes. It is the first time they have ever appointed people to the public sector banks from the private sector. They are giving full support to enable the public banks to develop as viable commercial concerns.”
Ahmed El Bardai, Chairman of Banque du Caire, agrees that the effects of the new law have been beneficial. “The perception in the market has changed. Now if you borrow the bank’s money, you have to think how you are going to pay it back. The standard of credits has improved enormously, and the collection has improved as well.”

Banque du Caire itself is in a much stronger position, Mr. El Bardai believes. “The bank is better today than it was yesterday. We are as good as any other local or international bank operating in Egypt. The balance sheet is much stronger than when we took over. Our liquidity has improved dramatically—we are actually over-liquid and are looking for interesting and profitable ways to use our money.

“Our systems have been upgraded and customer services have achieved a totally new standard; the concept of customer service used to be non-existent in any of the public sector banks.”

Approximately 30% of Banque du Caire’s portfolio is focused on financing trade. Recently, however, the bank became the first in Egypt to enter into micro-lending—currently it serves more than 60,000 clients in this area. “These are the small industries of the future; they are micro now but they will become bigger,” Mr. El Bardai explains. “In the Egyptian economy, micro, small, and medium industries constitute a very large proportion of GDP.”

The Cairo and Alexandria Stock Exchange (CASE), which celebrated its 100th anniversary last year, has a close relationship with the New York Stock Exchange, which has been providing assistance with the development of Egypt’s capital market.

“We have accomplished a lot with regard to listing requirements and introducing new rules so that the listed companies can improve their disclosure, corporate governance, and transparency, and also deal with legal issues regarding trading,”says CASE’s Chairman, Sameh El Torgoman.

Dr. El Torgoman believes that the stronger the local market becomes, the more it will attract foreign investors. Egypt has already seen a significant increase in foreign portfolio investment, especially following the flotation of the Egyptian pound last year.