Many public and private-sector banks in Egypt have been reducing the interest rates they offer on deposits, with one to 10-year investment products offering a return of some 10 per cent compared to the almost 12.5 per cent they offered in April. The Egyptian banking sector would not have taken the decision to reduce interest rates without first receiving the green light from the Central Bank of Egypt (CBE), which has given its approval. Central Bank decisions to reduce interest rates usually trigger such moves on the part of retail banks, and the CBE's Monetary Policy Committee (MPC) has lowered interest rates twice since August in response to falling inflation. The two largest public-sector banks, the National Bank of Egypt and Banque Misr, were the first to lower their deposit rates, followed by a handful of private banks. Abdel-Wahab Al-Ruby, a branch manager for Banque Misr, said that interest rates on three-year investment certificates had gone down from 12.5 per cent three months ago to 10 per cent today. Rates had also been reduced on five-year, seven-year and 10-year certificates, he said. Al-Ruby attributed the move to excess liquidity that the banks have not been able to invest, leaving deposits on their hands. Reducing interest rates would encourage depositors to withdraw their deposits and put them in better-yielding products elsewhere, he said. A revival in investment would give the economy a much-needed push, he added. However, while lowering bank interest rates could encourage investment, it might also increase inflation as a result of the increase in the money supply. The MPC statement in September on the reasons for the second interest rate cut said that low investment levels due to the uncertainty facing market participants since 2011 and weak credit growth in the private sector had posed downside risks to domestic GDP, limiting upside risks to the inflation outlook. Last April, the banks raised interest rates on Egyptian-pound denominated long-term certificates in a bid to stop dollarisation and encourage people to keep their deposits in Egyptian pounds. Mohamed Hazem, a sales and service manager in an Arab bank, gave another reason for the reduction in rates. Rates on treasury bills and bonds were the benchmark the banks used to decide their deposit rates, he said, and “now that the government treasury bills are paying less interest than before, the Egyptian banks have also opted to reduce their interest rates.” Last week, the government raised LE4.5 billion in treasury bonds at interest rates ranging between 11.65 per cent on 18-month notes and 14.46 per cent on 10-year securities. This compares to an average of 15 per cent three months ago. Hazem said that a main target of the Central Bank and the Egyptian banks in reducing interest rates on deposits was also to reduce interest rates on loans. Reducing rates would encourage people to take out loans and make investments in projects that yielded a higher income than the interest on deposits, he said. Any excess liquidity in the banks would be optimally utilised as a result, and this would help in lifting the economy. Hazem said that many of the banks' clients were now abandoning low-yield deposits and investment certificates and were applying for loans to finance new investments that yielded better payments instead. The effect would be felt in increased demand and the improved performance of the stock market as an alternative investment, he added. Ahmed Saleh, a product development manager at HSBC, said that almost all the developed countries are now paying low rates of interest on deposits and are charging low rates on loans, and that this was also part of the present Egyptian government's expansionary strategy. Saleh said that while some people mistakenly believe that the banks reduce the interest rates they pay on deposits in order to maximise their profits, this is not true. The banks depend for their profits on the difference between the rates they receive on loans and the rates they pay on deposits. “If both rates are reduced, then the banks' profits margins remain the same,” he said.
