It is no question that Egypt has a large banking sector, but low financial intermediation. This is reflected in high transaction costs and large non-performing loans, which is an issue that has been acknowledged by The Egyptian Banking Institute in recent years, and remains as one of the priorities for improvement in our country's financial sector. With the Egyptian government currently working on reforms to streamline financial activities in the market, there are several opportunities to help enhance the role of the banking sector in financial intermediation, such as education and bank restructuring. First, it is important to define what financial intermediation is, and to identify what the current status of activity is in Egypt. A financial intermediary is a financial institution that connects surplus and deficit agents; this is typically a bank that consolidates deposits and uses the funds to transform them into loans. Similar to many emerging market economies, Egypt undertook banking sector reforms in the 1990s towards a more liberal system. However, the country's banking sector was impacted by the instability of the revolution and the years following. Recently, though, it is beginning to see increased momentum, with the formal launch of an Emirati-owned bank and modest upgrades in credit ratings for a pair of key players. For example, Dubai's biggest bank, Emirates NBD, formally launched its brand and new headquarters in Egypt in April 2014, 10 months after completing the purchase of the Egyptian assets of French lender BNP Paribas for $500m. The investment by Emirates NBD reflected the bank's desire to diversify its activities, as well as to take advantage of the long-term potential that it sees in the Egyptian banking sector. This came at a time when the broader economy was struggling with slow growth and policy uncertainty. However, a large and growing population combined with low levels of financial intermediation suggested that there is still significant room for growth. The challenge that the country's financial sector is facing is with regards to financial intermediation lies mostly within education.Currently, state-owned banks are accepting deposits from their customers, but not turning enough of them into loans. This is due to the fact that the general public is not educated about how to take loans and thus, is not comfortable doing so. For this reason, Egypt lags in financial intermediation activity compared to the international community. In the private sector, however, one regional investment bank has begun tackling this issue. EFG Hermes, the leading investment bank in the region, has just announced its investment in an initial EGP 100 million in capital to launch its leasing arm, a wholly-owned subsidiary of the firm specializing in providing leasing services to large corporates and SMEs across Egypt. EFG Hermes Leasing will specialize in offering financial leasing solutions and value-added advisory to help qualified corporations and SMEs meet their business goals, covering a wide range of diverse sectors including technology systems, vehicles for employee transport, medical equipment and machinery. Similarly, if state-owned banks began taking the initiative to educate their customers and the general public about comparable loan opportunities, this would be a major step in improving the financial intermediation environment in the country. In addition, another opportunity lies within bank restructuring, a key tool to improve the banking system's capacity to provide financial intermediation between depositors and borrowers. Bank restructuring aims to improve bank performance by restoring solvency, profitability and public confidence. Specifically, it can be classified into three broad categories: financial, operational and regulatory. Financial restructuring refers to the attempt to improve banks' balance sheets by raising additional capital and by raising the recovery value of problem loans and collateral. Operational restructuring requires improved management and accounting systems, and better assessment of asset risk. Finally, enhancing supervision and regulation raises public confidence and adds to the banking system's capacity for financial intermediation. Restructuring the state-owned banks is important, not only for stability and reducing fiscal costs and contingent liabilities, but also for access to finance. Overall, it is relieving to see an improvement in the role of the banking sector in financial intermediation, however, we are also looking forward to seeing how the market can utilize the current opportunity to restructure state-owned banks and to educate the general public about advances in order to encourage and expand the market of personal loans, thus improving financial intermediation in the country as a whole. About the writer: Ahmed El Khouly is the CEO of EFG Hermes Leasing.
