New 12 per cent interest on savings certificates may mean more than meets the eye, writes Niveen Wahish It started a couple of weeks ago. Out of nowhere, the National Bank of Egypt (NBE) and Misr Bank (MB) simultaneously placed what they called "Advantage Certificates" on the market -- offering a 12 per cent interest rate, or more than two per cent higher than prevalent interest rates on other savings certificates and deposits. The certificate proved immediately successful; at both banks, demand was overwhelming. An MB banker said individuals were withdrawing their money from regular deposits and buying the certificate, even -- in some cases -- pulling deposits out of other banks as well. MB client Mohamed Abdallah, for one, was ecstatic. Compared to the 8.5 per cent he was previously getting, the 12 per cent he will now get was a major boon. In fact, some individuals were even exchanging their dollar savings into Egyptian pounds to buy the certificates. "If this goes on," the banker said, "it will create a problem for other banks." To prevent their clients from fleeing, other banks have actually begun making similar offers. Suez Canal Bank, for one, decided to offer a similar certificate, not because it originally intended to, but in order "to hold on to its clients", said Safaa Safwan, who heads the bank's international division. The financial sector as a whole has been debating the rationale behind the new NBE and MB offerings. Many are wondering why these two public sector banks, which have enough liquidity to cover their investments, would need the additional funds that have been generated by the higher rates. Others were surprised mainly because experts have actually been calling for lowering interest rates in order to catalyse a more investment-friendly climate. Most bankers interviewed by Al-Ahram Weekly suggested that the move was meant to boost the value of the pound. With many individuals relinquishing their dollars to capitalise on the higher interest rate, the economy's long-term dollarisation dynamic may finally be reversed. The pound has lost 80 per cent of its value over the past five years; only recently, over the past six months, has the currency finally stabilised, with the gap between its official and parallel black market rates nearly eliminated. Many think the new interest rates will be dollarisation's deathblow. By choosing to issue these certificates via two public sector banks with tremendous countrywide presence, the government was also clearly trying to aim for the largest possible number of individuals ahead of a hajj and umra pilgrimage season when demand for hard currency is high. BNP Paribas Le Caire, one of the banks that has also chosen to follow NBE and MB's lead, is only offering its 12 per cent interest rates to individuals and institutions willing to exchange their hard currency savings for pounds. The bank's General Manager treasurer Shahinaz Foda said that despite this restriction, demand for the certificates has been "huge". It was about time, she said, that individuals with dollar savings cut their losses, since current interest rates on dollar savings do not exceed one per cent. Delta International Bank is also offering certificates at 12.25 per cent to individuals as well as i5nstitutions. "We were pushed into doing this," said Delta Bank Chairman Ali Negm, because "we need the funds for our investments." He lamented the lack of transparency regarding the Central Bank of Egypt's approval of the new rates. Negm also warned of the rate's possible negative repercussions, which "will definitely reflect on the lending rate, thus raising the cost of investment". That, in turn, would reflect on the cost of both goods and services, thus leading to a hike in prices which would fly in the face of government plans to put a lid on inflation, he said. While BNP's Foda said, "the rate did not have to be that high," at the same time, she did not expect lending rates to go much higher than their current average of 13 per cent. Suez Canal Bank's Safwan was also not as worried as Negm about the effects on investment, pointing out that the lending rate will not change drastically because the interest rate was raised on only one, rather than all, banking instruments. The other factors that affect the lending rate include a bank's average cost of funding, the risk factor and the length of investment at stake. Investment Minister Mahmoud Mohieddin also shrugged off the potential ramifications for investment. A statement he issued last week pointed out that stock market investments have not been affected by the attractive interest rates. He also said the change in interest rates was part of CBE policy which did not involve any government intervention. Were interest rates on lending to rise in the manner described by Delta Bank's Negm, a heavy public debt service bill would ultimately result. It is estimated that every one per cent rise in interest rates will mean LE2.1 billion in debt service. It would also affect demand on currently traded bonds, as well as those scheduled for issue. "Their issuers would have to reconsider their pricing to make them attractive enough," Safwan said. Most analysts are guessing the move will be temporary. In the early 1990s, they recalled, interest rates on the pound were as high as 18-20 per cent for similar reasons. The government's foreign currency reserves, at that time, were upwards of $20 billion. An economist who preferred to remain anonymous said the move to offer higher interest rates had not been adequately studied. The coordinating committee stipulated by last year's new banking law needed to be immediately established, she said. The committee's role would be to make sure fiscal and monetary policies don't conflict. "Had this committee been in place," she said, "the implications of the interest rate rise on the country's fiscal balances, and particularly its deficit, could have been taken more prudently into consideration."
