Depending on whom you talk to, Egyptian bankers deserve either garlands for the prudential way they avoided financial catastrophe or thorns for throttling their country's small businesses with miserly, short-sighted credit policies. Since the revolution that ousted President Hosni Mubarak in February 2011, Egyptian banks have faced a currency crisis, a surge in delinquencies and a flight of foreign capital that left them choking on their own government's debt. They have survived intact, however, thanks to changes over the past decade that revived the country's sedentary financial sector. “The country is still functioning, and it's largely because of the banking sector," said Hisham Ezz Al-Arab, chairman of the Commercial International Bank headquartered in Cairo. “So let's give credit to the market regulators and the players." Having purged much of their balance sheets of nonperforming loans, the legacies of Egypt's command economics of a half-century ago, Egyptian lenders have much about which to boast. The industry's 39 institutions — dwindled from 62 over the past decade — enjoyed double-digit annual profit growth from 2004 until the advent of the global financial crisis four years later. In the past 10 years, banks have trained their loan officers to lend against future earnings rather than fixed assets. Theoretically at least, that cultural shift means that an entrepreneur with a smart business plan or a popularly branded product might qualify for credit without having to put up an asset — like his home, for example — as collateral. Regulators closely monitor provisions against bad loans, and the industry is in the process of adopting the standards laid down by the Basel Committee on Banking Supervision, known as Basel II. While bankers in Europe loaded up on bundled mortgages and other toxic derivatives, their Egyptian counterparts confined themselves to uncomplicated, mostly locally denominated, debt. In a May report, Standard & Poor's applauded Egyptian lenders for their “plain-vanilla commercial banking products and services" that spared Egypt the ruinous asset bubbles that have derailed economies across on the European side of the Mediterranean. Reaping the benefits of that prudence, a bank — the Egyptian subsidiary of the Greek-owned Piraeus Bank, formerly Egyptian Commercial Bank before it was purchased by Piraeus in 2005 — has emerged as one of the few properties in post-Mubarak Egypt to attract foreign investors. Standard Chartered Bank was in advanced talks to acquire Piraeus bank Egypt, before backing away in November because of Egypt's bleak economic outlook. Despite Standard Chartered's retreat, rumors persist that a Moroccan bank — possibly Attijariwafa Bank, the largest in Morocco — could be interested in a bid for the Egyptian lender. Redemption through restraint, however, has a downside. According to many economists and analysts, risk-averse bankers in Egypt were unwitting contributors to the job insecurity that helped spark the insurrection last year. By favoring large corporate clients with inexpensive loans while ignoring small-scale businesses, they denied credit to what should be the turbine of Egypt's highly decentralized economy just as privatization and reduced import duties were fueling inflation and killing jobs. Though Egypt's commercial bankers today may be more inclined than those of an earlier generation to take cash flow into account as a metric of credit worthiness, they remain as reluctant as most of their peers around the world to enter the low-margin world of small-bore lending. As Egyptians prepare for the decisive round this month of the country's first free presidential elections, it is unclear what, if anything, the two remaining candidates plan to do about the banks. “Banks contributed to the revolutionary environment by deliberately avoiding smaller companies for the corporations," said Magda E. Kandil, executive director of the Egyptian Center for Economic Studies. “There was a lot of growth, but the wealth did not trickle down," she said. Chronic illiquidity among small to midsize enterprises is common throughout the Arab world. Although countries like Jordan, Saudi Arabia and Syria have followed Egypt's example and liberalized their financial industries, the primary medium for Arab commerce is still cash. The problem is particularly acute in Egypt. According to the economist Tarek El Ghamrawy, working from a World Bank study, credit allocated by Egyptian banks for new investment accounts for a mere 3.5 percent of the total, compared with an average 12.8 percent for the Middle East-North Africa region. Only 4.2 percent of those loans are held by small or midsize businesses. More than half of credit extended to the private sector goes to 0.19 percent of bank clients. Prior to the revolution, Egyptian banks were awash in cash. Although only 1 in 10 adult Egyptians has a bank account, according to bankers and economists in Cairo, the total of deposits is equal to a year's gross domestic product, a high ratio by international standards. Yet the country's loan-to-deposit ratio, at 54 percent, is well below both the global and the Middle East and North Africa regional averages of 86 percent and 71 percent, respectively, according to data from the Egyptian central bank and World Development Bank indicators, Mr. Ghamrawy said. Starved of capital, all but a small fraction of Egyptian business owners mine a vast, unregulated shadow market. Estimated by some economists at anywhere between 10 percent and a quarter of official G.D.P., the shadow market is a huge source of lost public revenue, and host to endemic money-laundering schemes. “Egyptian banks need to be more aggressive in the underground economy," said Angus Blair, president of Signet Institute, a research institution in Cairo that specializes in business and politics in the Arab world. “They have to change their business model and decide what kind of banks they want to be." To be fair, Egypt's liquidity crunch extends beyond small businesses. Since the revolt, a large share of bank capital has been locked up in Egyptian sovereign debt, an obligation imposed on local lenders when foreigners, rattled by the prospect of political unrest after the ouster of Mr. Mubarak, liquidated their holdings in government treasuries. Nearly two-thirds of domestic credit is now committed to public debt, and while banks are happy to let their positions ride so long as they continue to reap yields of 16 percent, they do so at the cost of rationing badly needed investment capital for their best customers. The practice also renders them vulnerable to a government default. The same Standard & Poor's report that praised Egyptian banks for resisting exotic securities also downgraded four of them because of their overexposure to government treasuries “at a time when Egypt's credit worthiness has deteriorated markedly." Bankers and financiers agree that underwriting small and midsize businesses, which account for an estimated 80 percent of Egypt's private-sector employment, would be a market worth tapping. Mr. Arab of Commercial International Bank, for example, says that he hopes to reduce the bank's reliance on institutional clients to 60 percent of its loan portfolio from 80 percent by 2016, with the balance allocated to households and consumers as well as small business owners. “We want to build a risk model that allows for delinquencies but hedges small borrowers against the problems they face," he said. What banks can do for small-scale businesses, particularly merchants who routinely work with their suppliers on credit, is less loans for investment or trade finance than overdraft facilities to match their assets and liabilities. Such low-margin services may be worth marketing, banks say, if the client is likely to expand and, ultimately, take his company public. Because few enterprises in the shadow market rarely survive more than a few generations of family ownership, however, lenders are reluctant to invest the time and resources needed to nurture an enduring banker-client relationship. Even among those that succeed, said Andrew Long, chief executive of HSBC Bank Egypt, “there's not much in the way of market depth or brand recognition, nothing beyond niche products." Government efforts to flush the underground economy to the surface have had mixed results. The state-run Bank du Caire has enjoyed some success as a specialized provider of small and midsize businesses as well as microcredit, loans of a few hundred dollars at high rates of interest. Recently, the central bank ruled that small loans could be sourced from the high loan-loss reserves that many banks had built up: But few lenders have followed suit. Some years ago, the Egyptian Exchange started a secondary bourse to help small businesses raise funds through share issues. But amid the uncertainties over Egypt's political and economic future, exchange officials are struggling to recruit companies, despite relaxed listing requirements. “This is a tough environment for small enterprises," the chairman of the exchange, Mohammed Omran, said. “They think the time is not yet right." NY Times
