Limited access to finance is still one of the major impediments to private sector growth and expansion, Yasser Sobhi reports Borrowing from banks is still a complicated process and a privilege that most firms do not enjoy. Although the banking system is overwhelmed by excess liquidity, banks are not yet willing to take risks, nervous about acquiring the portfolio of bad loans that most banks have suffered from during the past five years. For the third consecutive time, the Egyptian Centre for Economic Studies' (ECES) semi- annual business barometre, surveying 220 private sectors firms in the industrial, contracting and tourism sectors, has labelled access to credit as the main obstacle expressed by those firms in doing their business. This view is shared across the three sectors regardless of firm size, though the middle and small-sized firms face the hardest time. "Banks have been more flexible during the last few months in providing credit, but it is still a very difficult process," says Ashraf El- Attal, chairman and CEO of Egyptian Traders Co, one of the largest food exporters in the country. He explained that credit officers are still focussing on lending to individuals based on their reputation and credit history rather than on the merits and drawbacks of the project itself. The money is then given to the firm but should be directed to finance the transaction. El-Attal added that the banking loan should also exceed 50 per cent of the transaction value ceiling applied by banks, and that the timing is important because banks provide loans after the transaction is settled, yet many companies are in need of a pre-export financing that help them in the preparatory phase. The guarantee and collateral system should also, in his opinion, shift from personal collateral to the products in the transaction. "What is really intriguing is that foreign banks are adopting the same Egyptian methods in financing. It is different from their credit policies and methods applied in their countries, maybe because they relied on Egyptian bankers who kept the mindset of local banks," said El-Attal. Nevertheless, it is odd that banks are remaining tight-fisted at a time when they are basking in excess liquidity. The governor of the Egyptian Central Bank, Farouk El-Okda, has estimated excess liquidity at 15-20LE billion. Hussein Abdel-Aziz, chairman of the National Bank of Egypt (NBE), the largest bank in Egypt in terms of assets, admits that banks are facing a dilemma. He said that during the last few years, deposits have been growing at an annual rate 15 to 20 per cent, but this has not been met with a corresponding allocation of this money, as credit is growing by less than five per cent annually. "I am ready to offer credit to anyone, but only if you can guarantee that he is going to pay back his debt. Banks are prudent and cautious about lending, because they do not want to repeat the experience of bad loans," Abdel-Aziz told Al- Ahram Weekly. During the period of high economic growth in the mid-1990s, banks were imprudently offering loans and competing to attract clients. Financial international institutions have cautioned against a repeat of the rapid credit expansion that exceeded 75 per cent in 1998. After receiving several external and internal shocks, the economy sank in a recession from which it is still attempting to recover. Borrowers, including the big clients, defaulted and banks were exposed to a bad loans crisis wherein the size of bad loans is estimated to reach 30 per cent of banking loans. It was later discovered that most of these loans were not properly conducted, with the resulting scandals landing many credit officers and bank officials in jail. Since 2000, many banks have undergone programmes to clean their portfolios, while replacing their leaderships and managements. Nevertheless, prudence is still the name of the game. "The banking system is still dominated by state ownership that is generating a 'moral hazard' situation; there is an asymmetry between incentives and penalties for the banks management: if you give credit and the bank makes money, you are not rewarded. But, if there is a default, you bear the responsibility. Private ownership would improve the situation as there are more incentives to the management to lend and to earn more money," says Ahmed Galal, executive director for ECES. He pointed out that a glance at the macroeconomic situation reveals a more fundamental reason for banks' behaviour. The rising budget deficit and the increasing need for the government to borrow from the household sector have forced the government to offer risk- free treasury bills and bonds at attractive rates. Banks are finding it more attractive to invest in government securities that offer them a return that exceeds 11 per cent rather than take the risk of lending to the private sector. On the other hand, the stock market is not yet a financing alternative to firms. As is the case in most developing countries, the capital market, though evolving and flourishing, is not yet deep and mature enough to attract most companies. Many firms, largely dominated by family ownership, have not yet gained the culture or the will to go public, bringing new shareholders and giving up some of their control over their company. "The credit growth for new private businesses is almost zero. How can an economy grow without lending and financing businesses and new investments?" asked Galal.
