COUNTRY BACKGROUND : Egypt
The Central Bank
Under the Unified Banking Law ratified by parliament in June 2003, the Central Bank of Egypt is responsible for the implementation of monetary policy, but responsibility for setting inflation targets lies with the Monetary Policy Co-ordination Council established in the legislation. The central bank is also now answerable only to the president. It is hoped that this clear-cut apportioning of duties will put an end to the previous slightly ad hoc system, whereby policy was determined by a committee of senior ministers. The law also gives legal grounding for the raft of monetary tools announced earlier by the then Central Bank governor, Mahmoud Abul-Ayoun, that should allow more sophisticated monetary management and, eventually, the implementation of monetary policy exclusively through indirect means.
Public-sector dominance
In March 1993, branches of foreign banks were allowed for the first time to conduct business in Egyptian pounds provided that they agreed to abide by local capital requirements. The sector is considered to be overbanked. In June 1996 the restriction on foreign banks holding a majority stake in joint venture banks was removed. As of June 2004, there were 61 banks operating in Egypt: 28 commercial banks, including four state-owned commercial banks (the National Bank of Egypt, the Bank of Alexandria, the Banque du Caire and the Banque Misr), 30 investment and business banks; and three specialised banks—one industrial bank, one real estate bank and one agricultural bank, the Principal Bank for Development and Agricultural Credit. In terms of ownership, there were seven public, commercial and specialised banks, 35 private and joint venture banks and 19 offshore banks. These operate via a network of 2,800 banking units throughout the country. Commercial banks are the most important subsector, holding about 78% of total industry assets. The four state-owned commercial banks dominate the sector, accounting for nearly 57% of total assets, and holding 70% of deposits and 59% of loans. The dominance of the public sector is even greater when the National Investment Bank (NIB) is included. The NIB held the long-term assets of the social security system of E£20bn at the end of 2001/02 and about 25% of total bank deposits.
Banking practices are conservative and the services offered are often basic. State banks suffer from low capitalisation, have a high percentage of poorly performing loans made both to public enterprises and to well-connected individuals, massive overstaffing, and stifling bureaucracy. Between 1991 and 1998 the stability of the Egyptian pound, high real interest rates and an attractive differential between Egyptian pound and US dollar deposit rates led to sharp rises in local currency deposits, and increased profitability. Economic difficulties since 1998 have, however, hit the banking sector hard. The slowdown in the economy that followed the rapid growth of credit extension has led several high-profile businessmen to default on large bank loans, an issue that has become highly politicised. Non-performing loans stood at a quarter of the total as of September 2004: a high rate, according to the IMF. As well as the rise in the proportion of non-performing loans and the tight monetary conditions that have reduced banks’ scope for lending, banks have been put under pressure informally by the central bank to limit fluctuations in the exchange rate and to restrict credit facilities to importers. To restore damaged confidence, new management teams with international and private-sector experience have been appointed to the state-owned banks since early 2002.
The government of Mr Nazif has adopted a number of strategies to strengthen the sector. It has enforced the Unified Banking Law, which raised the minimum capital requirement for Egyptian banks to E£500m (US$81m by average 2004 exchange rate), up from E£100m, and that for foreign banks to US$50m up from US$15m, in an attempt to effect consolidation in the sector. Banks had one year to comply. The stipulation has succeeded in prompting frenetic mergers and acquisition activity in the banking sector, both in the public sector and among the weaker private banks. The government has also breathed new life into privatisation in the sector by pressing ahead with the sales of the government’s existing stakes in joint ventures formed with foreign banks and, most boldly, committing itself to the sale of Bank of Alexandria, the smallest of the four dominant state-owned banks. Citigroup has been appointed as the adviser on the sale—the mode of which is yet to be decided—which the government has said it wants to complete by end-2005. Legislation allowing privatisation was passed in 1998, but the government balked in the face of strong parliamentary opposition and the potential difficulties of reaching a politically acceptable evaluation. In September 2005 the government announced the merger of the second- and third-largest banks, Banque Misr and Banque du Caire, to make Egypt’s largest bank in terms of assets.
A law criminalising money laundering for the first time was passed in May 2002. However, it contained a number of ambiguities. New legislation passed in 2003 cleared up the main points of concern and in February 2004, Egypt was finally removed from the “blacklist” of non-co-operative countries with regard to the international campaign against money laundering compiled by the Paris-based Financial Action Task Force on Money Laundering.
The stockmarket
The government revived the long-moribund Cairo and Alexandria Stock Exchanges in 1992 as a prelude to the privatisation of state-owned enterprises. Legislation was passed reorganising the sector, providing incentives to investors and granting the Capital Markets Authority wide regulatory powers. The system of individual brokers was replaced with one based on licensed stock brokerage firms. Since its inception the market has witnessed sharp rises (notably in 1994, 1996 and early 1997 and 2000) interspersed with prolonged periods of decline—most notably from early 2000 through to late 2002 when the benchmark Hermes Financial Index (HFI) fell to its lowest level in many years. However, the market rebounded extremely strongly in 2003, rising by 116%. The upturn was initially sparked in January by the announcement of the new foreign-exchange regime, and was rekindled when the war in Iraq started in March as uncertainties over US intentions were dispelled. The bull market has persisted, with the HFI rising by 103% in 2004 and 105% in January-mid-October 2005, fuelled by optimism over the prospects for the economy following the mid-2004 cabinet reshuffle and exceptional liquidity among Gulf Arab investors. As of June 2005, the average price/earnings ratio had soared to 48.5 from 6.4 in mid-2002. Market capitalisation stood at US$58bn (equivalent to about 62% of GDP) and 767 companies were listed. However, the market capitalisation and number of companies listed overstates the significance of the stockmarket. The 30 most liquid companies account for around 80% of value traded and only about 100 stocks trade actively.
Nevertheless, the government is determined that Egypt should become a regional financial hub and the authorities have made strenuous efforts to improve the bourse in terms of technology and legislation. In mid-2001 a new automated trading system was implemented, which has brought greater speed and flexibility in trading. In an effort to raise equity trading volumes, the 5% daily limit on share price movements was lifted in mid-2002, although trading is halted if a stock moves by 20%. The authorities have also announced plans to allow margin trading, under which investors can borrow from brokers to purchase shares using existing holdings as collateral. There are more than 150 licensed brokerages, although many appear to have ceased operations—about 30 brokerages account for about 80% of the value traded and the largest, EFG-Hermes, estimated that it alone accounted for 30% of trading in early 2004. Nine fund managers administered 21 funds with net assets worth US$9.8bn as of September 2004.
Insurance
The domestic insurance market was closed to foreign companies until May 1995, although they had been able to operate as minority partners in eight free zones. In 1998 legislation was passed which removed the 49% cap on foreign holdings for domestic insurers, abolished the nationality stipulation for general managers and allowed the privatisation of public-sector insurers—although investors taking a stake of more than 10% have to obtain approval from the slightly conservative Egyptian Insurance Supervisory Authority (EISA). This has led to the entry of several major international insurers, including Legal & General (UK), Royal Sun Alliance (UK) and the American International Group (US), which bought Pharaonic Insurance in early 2001. The Egyptian insurance sector consisted of 21 companies as of mid-2004.
Insurance premiums have grown rapidly in recent years, as awareness has improved and as the growing participation of private companies has brought more sophisticated products, better service and more aggressive marketing. According to the EISA, gross premiums amounted to E£4.04bn in mid-2004, a 33% rise on the E£3.04bn in mid-2003. However, gross premiums remain extremely low, at the equivalent of only 0.9% of GDP in mid-2004. Only about 600,000 Egyptians are believed to have life insurance. The industry has been constrained by public-sector dominance. The three main insurance companies accounted for about 74% of premiums (excluding reinsurance) in mid-2003. The largest, Misr Insurance, accounted for 48% of the life insurance market in mid-2004, with Al Sharq Insurance representing 24% and National Insurance 15.5%. The state-owned Egyptian Reinsurance Company (Egypt Re) dominates reinsurance.
