Last week's sweeping banking sector reforms were met with much controversy, reports Yasser Sobhi Just a few days after reducing custom duties and tariffs, the government also announced a comprehensive strategy to undertake much needed banking sector reforms. During a meeting led by President Hosni Mubarak, the government announced its plan: six small banks will be merged with large public banks (National Bank of Egypt, Bank Misr, Banque du Caire and Bank of Alexandria), and the latter will completely sell off their shares in all joint venture banks within 2 years. One or more of the four public banks, meanwhile, would also be privatised in 3 or 4 years. These banks would also be subject to a restructure program, whereby capital injection will be linked with performance. A new unit will be introduced within the Central Bank of Egypt to deal with non-performing loans, while a CBE arbitration committee will be established within 2-3 years. The committee will be the final decision maker on unresolved disputes between banks and their clients. It would take the place of criminal courts, which have proven -- to both credit officers and clients -- to be an impediment to credit expansion. Banking supervision would also be improved thanks to a new unified financial supervision system for banks, capital markets, mortgage, and insurance that will be established within 3 years. In response to the new strategy for banking reform, Egyptian stocks soared. Last Sunday, on the first day of trading following the announcement, the CASE 30 Cairo Stock Exchange index topped 2000 points for the first time. Bank stocks surged 34% in a week. "It's the first time that the Central Bank of Egypt is managed in a professional way. There is a clear framework for monetary policy, and a comprehensive strategy for banking reforms and supervision," said Cairo University economics professor Mohammed Hassan. But not everyone is happy. Top management at the six banks being forced to merge knows that their days are limited. A chairman at one of these banks told Al-Ahram Weekly that he viewed the merge as "bad news". El-Mohandes Bank, Misr Exterior Bank, Egyptian Unified Bank, Nile Bank, El-Togariyoon and the Islamic Investment Bank will all be affected. The six banks have much in common: they're all under capitalised and won't be able to match the minimum capital (LE500 million) required by the new law. Management at the larger banks has also resisted suggestions of mergers for many years. A board member at one of the largest banks, who asked for anonymity, said, "there was no business justification for such a merger. There are no similarities between these banks: they share the same activities and have the same branch locations. The larger banks will only inherit weak portfolios and inefficient systems, and why should they accept that?" Hassan, meanwhile, considers the merge and subsequent privatisation as indispensable to banking reforms and to improving the performance of the banking system as a whole. "We don't need small and inefficient entities that compete using price wars, thus increasing their risks and negatively affecting the market. We also don't need an over banking or an under banking system. These measures ensure a good restructuring for the market and the sequence of the plan makes sense." He said the smaller banks' inefficiency had left them no choice but to compete by raising deposit rates and reducing lending rates, without either economic or fundamental justification, in order to attract clients -- all of which hurts the system. Because the acquisitions, however, would make the largest banks even bigger, the unhealthy phenomenon of market concentration might also become worse. Currently, just seven banks -- the largest four public banks plus the largest 3 private banks -- possess almost 70 per cent of the banking system's assets. The other 45 banks compete for the remaining 30 per cent of the market. Selling off the public banks' shares in joint-venture banks would thus reduce that risk. "You cannot liberalise the economy while allowing the public banks to continue holding more than 50 per cent of loans and deposits in the banking system," Hassan said.
