During the Cold War, Egypt’s centralized, state-directed economy served as a model for other countries looking to adopt a socialist system. All commercial banks were state-owned, and bank employees were part of the massive Egyptian bureaucracy. Yet since the early 1990s, Egypt has embarked on an ambitious reform that has progressively made it one of the region’s most attractive markets for growth in banking.
Egypt’s heavy-handed state-directed economy was slowly liberalized beginning with a series of reforms in 1991 that brought the state fiscal deficit under control. In 1996, the government announced a program to begin privatizing public industries, including banks. The government’s reform plans were stalled from 2000 to 2003, when the Egyptian pound (LE) was severely devalued, leading to low economic growth and high inflation rates.
Egypt began to take steps to correct the pound’s devaluation and limit inflation in 2003. The current government, headed by Prime Minister Ahmed Nazif, came to office in 2004 with an agenda for economic reform, and liberal reformers were appointed to key economic posts. The Central Bank of Egypt (CBE) actively changed its monetary policy to curb inflation. As such, the CBE has now begun to float interest rates in an effort to achieve price stability and to encourage investment through a coherent, predictable and transparent monetary policy.
The reforms have been sweeping and have breathed new life into a banking sector that was previously dominated by four public banks that offered few retail banking services. Indeed, the current government targeted the banking sector specifically with an aggressive plan to decrease the number of banks in Egypt from 59 in mid-2005 to 37 by the end of 2007. The Unified Banking Law of 2003 represented the government’s first and most important measure in consolidating the Egyptian banking industry. It raised the paid-up capital requirement more than five fold, from LE 85 million ($15 million) to LE 500 million ($89 million).
Consolidating the sector
The new minimum capital requirements encouraged a frenzy of mergers among Egyptian banks as well as acquisitions by foreign banks. Yasser Hassan, the managing director of Al-Watany Bank of Egypt, referred to this as a “very healthy consolidation wave… whereby the smaller banks have disappeared or were bought by much stronger and more solid institutions.” Citibank, HSBC, Société Générale, BNP-Paribas, Piraeus Bank and Barclays have all since entered the Egyptian market. This rapid consolidation of the banking sector and the entry of foreign banks have greatly enhanced the management structure and technological infrastructure of the Egyptian banking industry.
In 2006, the government began the privatization of state banks that had been planned since the mid-1990s by selling 80% of the Bank of Alexandria to the Italian Sanpaolo-IMI and selling another 15% of the bank’s shares through an IPO on the Cairo and Alexandria Stock Exchanges (CASE). Similar plans are currently underway for Banque du Caire. By late 2007, the number of banks stood at 41, and the CBE had stopped granting licenses for new banks. Foreign banks looking to enter the Egyptian market can now only do so by merger or acquisition.
The Egyptian government decreased income taxes and reduced import tariffs in parallel to the banking reforms, which served as a major stimulus for business development. The results of this stimulus package, coupled with the stability of the Egyptian pound, have fueled foreign banks’ interest in expanding their operations into Egypt. GDP increased from $1,000 per capita in 2003 to $1,700 per capita in 2007, and private consumption has thus increased dramatically.
Financial services now represent 5.7% of the Egyptian GDP but will likely grow significantly in the coming years as commercial banks expand new services into the rapidly developing Egyptian market. Recent reforms have put money into consumers’ pockets and confidence in the banking sector and the Egyptian economy is significantly higher now than in recent years. As such, many wealthy Egyptians and Egyptian expatriates who formerly kept their money outside the country are again beginning to save and invest in Egypt.
Foreign banks have recently introduced American and European banking services to a market where retail banking was nearly nonexistent. Indeed, state-run banks previously focused on supporting the government’s economic strategy and public companies to the detriment of corporate and household banking. As such, only 10% of Egypt’s 76 million citizens today have bank accounts, only 4% have debit cards, and only 1.9% have credit cards. Even basic electronic services, such as online banking access and phone banking, have only been recently introduced in the country, and still are only offered by 12 banks.
As basic banking services expand and improve, Egyptian banks hope to expand the lending market in the country significantly. Lending increased by 8.7% between 2006 and 2007, driven largely by demand in the private sector. Indeed, banks see individual customers as their largest opportunity for growth, as increased consumer purchasing power has driven demand for certain products, especially homes and cars, very high.
While car loans have already taken off — a recent boom in car sales in Egypt was fueled largely by the novel availability of car loans — the booming real estate sector, coupled with state reforms, is encouraging Egyptians to explore borrowing options when purchasing their homes.
Growing the mortgage market
Mortgages are a relatively new concept in Egypt, and the government has thus taken steps to encourage Egyptians to borrow to buy homes. Property can now be counted as collateral, and a new mortgage authority was established in 2005. In order to encourage banks to lend to individuals, the government has made it easier to foreclose on homes of debtors and will soon establish a credit bureau that provides banks with potential borrowers’ credit history.
Yet even faced with soaring real estate prices, the mortgage market remains modest; in 2007 outstanding mortgages only totaled $356 million. While this represents impressive growth from 2005, when banks lent only $34 million, it is still nowhere near its potential in a country where a stream of new real estate ventures have been over-subscribed even before their formal launch. This is likely largely because Egyptians have traditionally purchased their homes in cash. A large segment of the population is likely uncomfortable with borrowing to finance their homes. “People are still a bit reluctant to borrow to finance their houses. There is an awareness effort that has to be done. The culture is starting to change and to move,” Hassan said.
Banks are also increasingly looking to lend to the private sector. Traditionally, public Egyptian banks lent to the government, state-owned companies and well-connected individuals. As a result, the percentage of loans that went unpaid was very high, which has led banks to be especially conservative in selecting their borrowers since deregulation. Though the rate of bad loans still remains high at approximately 25%, the government is using revenues generated by privatization to pay the debts of public companies.
Private corporate loans now represent nearly half of the loans made in Egypt. While this figure remains relatively low, it is up from 42.7% in June 2006. Likewise, individual loans have increased to 11.1% of total borrowing from 9.5% over the same period. The Egyptian government has signaled that it is slowly abandoning its long-held policy of borrowing only from Egyptian institutions; public borrowing fell from 28.1% to 4.5% from 2006 to 2007 and the government has announced it will finance its short term debt caused by the cuts in income taxes and tariffs through Eurobonds. The decrease in state borrowing should free up liquidity for increased lending to the private sector.
Despite these reforms and the potential for growth in lending to individuals and private businesses, Egyptian banks remain conservative, generally lending to larger, more established corporations. While financing options are available for small business through government programs, medium businesses have been left out of the equation. As an official at the American Chamber of Commerce in Egypt said, “Banks are not distributing their credit in a uniform way. Small and medium enterprises are having problems getting credit from banks. This is a bottleneck in terms of financial intermediation.”
In addition to retail banking and an expansion in lending activities, banks offering Islamic financial services are likely to see growth in the coming years. The government’s hostility to the Muslim Brotherhood has meant that Islamic banking services never took off in Egypt as they did in other Muslim countries; even the Islamic banking services in London are more advanced than those in Cairo. As the Egyptian people become increasingly religious, there may be stronger demand for Islamic banking, despite al-Azhar’s fatwa that commercial banking is permissible.
Challenges ahead
Despite the flood of reforms that has brought Egypt in line with international banking standards, the growth of the financial services sector in the past several years and the recent surge in demand for consumer products, there still remain serious obstacles to the banking sector’s continued growth.
Banks have already largely penetrated the approximately five million households wealthy enough to need sophisticated financial services. As they continue to grow, banks will need to find ways to segment the Egyptian market and offer services to fragments of the population that are unfamiliar with banking and have never held a bank account.
Yet Hassan is optimistic that banks will be able to enter the market at all levels of Egyptian society. “You can segment this market in different ways. Banking services are not only made for the upper class. There are different banking services that suit different segments of the market.” He suggested that retail banking services such as traditional savings, unique lending schemes and payroll services would be useful across class lines. This means that banks will also have to branch out of Cairo and Alexandria to educate rural Egyptians on the benefits of banking. “Egypt is characterized as overbanked, but most of the banks are in Cairo. Banks have to try to increase their base by attracting more people to open accounts, by doing something with post office authorities and getting down into the governorates and [reaching] people who aren’t educated on how to open a bank account. This is good for their business,” the American Chamber official said.
Yet even an especially effective education campaign may not persuade Egyptians to trust their money in the hands of financial institutions. The Egyptian economy remains largely cash-based, and using bank accounts would require many businesses currently operating outside of the government’s view to pay taxes.
Moreover, many Egyptians saw their savings disappear when the pound depreciated against the dollar in the early years of this decade and are thus weary about keeping their savings in local currency. Indeed, interest rates in Egypt are currently very low to encourage investment, but are so low that they actually discourage savings, especially with high inflation rates. As such, many Egyptians are bypassing traditional savings programs to invest their money in real estate or the stock market.
As banks expand their services and open additional branches throughout the country, their greatest obstacle remains recruiting qualified staff for their banks. Since the retail banking services were largely non-existent before 2004, there is little knowledge in the country. Moreover, the country’s brightest graduates often choose not to work in Egypt, opting instead for more lucrative positions in the Gulf or in Europe. “Banks need to invest more in the people, in the younger generation — spending on training is a must,” Hassan said.
As such, banks are thus devoting huge resources to ongoing internal training programs. Some foreign banks have also brought middle-and- upper management teams with them from abroad. While the level of expertise is thus quickly improving in private banks, public banks remain over-staffed and under-trained.
Finally, though the highest levels of government have shown the political will to liberalize Egypt’s economy, there are limits to the government’s liberalization plan. Egypt’s two remaining public banks, the National Bank of Egypt and Banque Misr, will not likely be privatized in the near future. Combined, the state banks control between 45-50% of the market, and their poor performance relative to private banks drags down national banking indicators.
The face that Egyptian banks present to consumers has changed dramatically in a remarkably short period of time. As they continue to expand, banks operating in Egypt will need to find ways to grow their base beyond the Cairo and Alexandria elite. At the same time, banks will have to find ways for their profits to trickle down to all levels of society. As the polarization between rich and poor in the Arab world’s most populous country becomes more and more pronounced, private commercial banks can play an important role in encouraging development. Banks could “have a more positive contribution [to the economy] through the private sector giving the private sector access to credit,” the American Camber official said.
Egyptian banks are transitioning: in the near-term, further consolidation and expansion of retail services, especially in the household market, is likely. As Hassan said, “The economy in Egypt is going through structural changes. As we progress in these reforms, banking develops as well.”
