The bank's credit to the private sector leaves much to be desired. Niveen Wahish attended a seminar pinpointing the reasons The numbers appear incongruously staggering. The banks' lending capacity is LE700 billion but not much more than LE200 billion is extended in credit to the private sector. These figures were delivered at a presentation this week by Khaled Abdel-Qader, senior economist at the Egyptian Centre for Economic Studies. Abdel-Qader made an assessment of the private sector's access to credit which was based on a survey of 351 various-sized companies operating in several sectors. His survey included 19 banks of which 15 were private sector, and four public sector, banks. Abdel-Qader said that credit to the private sector by the banks has been on the decline since 1998/99 and that it improved slightly in 2001/02 before slumping again. The percentage of loans to deposit rates has been on a downward curve, reaching around 60 per cent in 2004/ 05. The percentage of loans to assets has also sharply declined since 199/2000, to reach little over 40 per cent. Net credit flows to the private sector have also declined, but greater credit has been extended to the government. The reasons for the drop are many, according to Abdel-Qader. Companies complain that credit conditions have become tighter, which is manifest in higher interest rates, higher collateral requirements and a shorter maturity for loans. Some 33 per cent of the firms surveyed said that they had encountered difficulties in obtaining credit over the past year. The banks surveyed, on the other hand, were in consensus that the lack of adequate collateral as well as firms' inadequate financial viability have also been obstacles to the extension of credit. Abdel-Qader concluded that the decline in extending loans is not only due to demand factors as would be the case if there were an uncertainty in economic outlook, or an increase in private sector indebtedness. He stressed that the banks are becoming more risk-averse and prefer to hold more liquid, and less risky assets. The interest on risky loans has thus been raised and non-interest criteria have been tightened, especially collateral requirements. Abdel-Qader concluded that the banks are more likely to accept shorter loan terms with credit payment records becoming the main factor in evaluating the credit risk of new borrowers. Abdel-Qader concluded that the credit crunch was also triggered by an information problem. In that regard, he said that the establishment of credit bureaus which would make available shared information on borrowers could help. He cited the example of the credit bureau recently established by the Central Bank of Egypt (CBE) which although still in its early stages can help overcome the deficiency of data. Salwa El-Antary, head of the Research Department of the National Bank of Egypt, contended however that the banks cannot be said to be either strict or overly-careful in the extending credit. She said that in the late 1990s there was more risk-taking than was considered safe. "In such a framework, any adjustment will be regarded as strict, but it does not mean that there is a greater tendency to hamper credit." She added that this can explain why the banks under their new management can now refuse credit to clients who in the past were easily given loans. El-Antary pointed out that monetary policy has played a role in directing the banks' funds increasingly towards government lending. A contractionary monetary policy which up until the first half of 2005 had aimed at cutting inflation had kept interest rates high, in turn affecting the expansion of credit. But towards the second half of 2005, an expansionary monetary policy which encouraged interest rate cuts is now increasingly encouraging the banks to boost their lending. El-Antari said that the lack of flexibility in evaluating collaterals has been the result of the phase in which the banks suffered a non-performing loans crisis. During this period collaterals were evaluated at more than their value, with the outcome that when clients defaulted, the collaterals would not cover the loans that they had incurred. "In the past, credit risk management was not applied properly," El-Antari asserted. The scarcity of credit is not only due to factors related to the banks. El-Antari stressed that companies should not only demand credit in order to be eligible for it. "They also have to be able to repay it. In many instances these companies lack the credit worthiness, otherwise they would have reverted to the stock market for financing." According to Abdel-Qader's survey some 70 per cent of firms have recourse to their own resources as a main source of funding. Approximately 24 per cent depend on the banks for financing their needs, while two per cent depend on bonds and four per cent on the stock market. Vice Chairman of Banque Misr Mohamed Ozalp stressed that as long as the banks' management is afraid to make credit decisions, out of fear of imprisonment, credit to the private sector will continue to be slow. Ozalp said that this has induced the banks, which by nature need to make profit, to invest their funds in totally risk-free government treasury bills. Ozalp argued that large companies have no problem in obtaining credit although it is the smaller firms "which must become bankable. That is, they need to be educated on what is needed to enable them to borrow," he concluded.
