This week the Central Bank of Egypt succeeded in downsizing, while strengthening, Egypt's banking sector, Niveen Wahish reports The Egyptian banking sector has always been described as over-banked and under- branched. Soon this will no longer be the case. By the end of the year, the number of Egyptian banks, which currently stands at 52, is expected to drop by 20 per cent. The reduction will come as banks have to comply with the capital requirements outlined in the 2003 Banking Law, which stipulates a minimum capital holding of LE500 million for Egyptian banks and $50 million for branches of foreign banks. The grace period the Central Bank of Egypt (CBE) granted banks to adjust their financial positions runs out today. The capital requirements of the current law are five times those of its predecessor. The CBE had given an initial grace period of one year, ending July 2004, but extended it to 14 July 2005. The new law stipulates that banks abide by new provisions within a year of its issuance; however, it gives the CBE the right to extend that period for up to three years. Recently, speculators had been saying that a further extension would be granted, but Central Bank of Egypt Governor Farouk El-Okda ended rumours, saying, "There was no need." Speaking at a press conference late Tuesday, El-Okda, announced that out of 41 Banks, 27 are already compliant, while 11 are finishing off merger procedures or increasing their capital. Only three banks failed to abide by the law. These are the Alexandria Commercial and Maritime Bank, the Egyptian Workers' Bank and the Arab Investment Bank. Action to merge these banks, he said, will commence within a month. As for the branches of foreign banks operating in Egypt, out of 11, seven have completed their capital increase. Of the remaining four, the National Pakistani Bank has received CBE approval to liquidate its position in Egypt. Meanwhile, the CBE board of directors decided to start legal procedures to gradually liquidate the activities of the National Bank of Sudan and Gamal Trust Bank. As for Al-Rafedeen Bank, the CBE decided that it could continue to operate in the transfer of money from Egyptian workers and companies in Iraq. However, it will not be giving out loans or accepting deposits. Once the position of banks that need to conclude adjusting to the new law is settled it is expected that the number of Egyptian banks will not surpass 40. El-Okda described this figure as an "achievement", equal in importance to efforts to establish a strong monetary policy and control over inflation. El-Okda would not disclose what merger operations would cost the CBE. What is more important, he said, is to protect depositors. "I would not leave a bank to drop, no matter what the cost is." The capital increase associated with the new law is meant to be a major catalyst towards raising the profile of Egyptian banks; to create entities, as El-Okda put it, "that are strong and well managed, capable of facing competition". Experts also believe that the consolidation of the banking sector will create bigger, stronger entities capable of meeting the country's growing funding requirements, enabling banks to benefit from economies of scale. It will enable, for example, banks to upgrade their technological infrastructure, which until now has been too expensive to undertake. It will also enable banks to expand their services. Capital increase is one of many steps being taken to restructure the financial sector. There is more than one way for banks to raise their capital. They can either put shares up for sale to investors or the public, invite current shareholders to increase their shares, merge, or be acquired by another bank. The need to reform the banking sector has increasingly come into focus over the past two years, particularly with an increased number of defaulter cases. This reform has been one of the priorities of Prime Minister Ahmed Nazif's cabinet. Another action planned by the government towards that goal is the privatisation of the Bank of Alexandria, one of four public sector banks, by the end of the year. Steps are already underway towards that end. Last week, it was announced that Citigroup has been chosen as the financial adviser for the privatisation of the bank.
