Non-performing loans were singled out as the main problem facing the Egyptian financial sector at a conference this week. Sherine Abdel-Razek reports on causes and proposed solutions The Egyptian financial sector faces many chronic problems. These include the concentration of assets in state owned banks, non- performing loans and the absence of an effective capital market. Weak plastic payments and new United States-imposed anti-laundering measures show that as time goes on the sector's problems are simply growing. Most of these problems were highlighted in Egypt's International Economic Forum Conference on Banking and Finance held last week. Two years on from when the problem first emerged, discussion on causes and possible solutions for problems arising from non- performing loans is still in fashion. An initiative to re-schedule some of these loans attracted much attention and stirred many comments during the conference. According to Minister of Finance Medhat Hassanein there is currently an agreement among some public sector enterprises, state owned companies slated for privatisation and public sector banks to re-schedule defaulted loans. While the size of these loans has not been revealed, they are set to be repaid over a period of 10 to 15 years with a ceiling interest rate of 10 per cent. While this initiative would cover state owned company debt, attendants at the seminar asked about the possibility of public sector banks adopting such a policy to deal with private sector debts. Businessmen unanimously agreed that they are currently facing many difficulties, both in acquiring new credit loans and in managing to soften the conditions of their old loans, especially after the devaluation of the pound added to their woes. One of the success stories in dealing with this problem was that of the Gulf of Suez Bank, as revealed by Chairman and Managing Director Wagdi Rabbat. The bank has re-scheduled the payment of $1 billion worth of bad loans to both the private and public sectors, and collected $375 million in cash. The issue now, according to Rabbat, is for banks to find a way to deal with problematic balance sheets, given that they are burdened with bad loans. "To extend new loans and deal with the current ones, we have to form provisions, and the only way to do this is by increasing capitalisation. This is something that we still cannot afford." As one of the speakers at the conference explained, banks in Egypt -- and indeed throughout the region -- are undercapitalised. Total assets of all Arab banks, even including those of the Gulf countries, equal the assets of Citigroup. As well as debating possible solutions to the problem, experts also discussed reasons for it. Inefficient management by banks was cited as one of the main causes. Galal El-Zorba, chairman of Nile Clothing, lamented that by the time the loans' problematic nature had been exposed, in some banks the value of the original loan amounted to as little as 34 per cent of the value of the total loan. The balance was interest payments and expenses. "How come the bank management waited till we reached this point?" he asked. Rabbat agreed with El-Zorba, saying that even if it were possible to recover the current defaulted loans, what would guarantee that the problem would not occur again in the future? Rabbat stressed the importance of giving banks' management teams solid training to teach them to efficiently manage their loan portfolios. One of the solutions proposed during the sessions to face the problems arising from non- performing loans was to set up a company that buys these loans from banks for less than their original value, and to re-schedule them with defaulters. Banks would have to transfer the collateral to this company and would receive in return a percentage of what the company collects. The suggestion was warmly welcomed. Moreover, attendants pointed out that the problem should not paralyse banks. On the contrary, the decline in the ratio of banks' loans in relation to deposits over the last year was pointed to as a more pressing negative indicator. "Banks should undertake a more aggressive approach in lending, even if this means more risk. I am calling bankers to do business, extend more credit, take risks and activate the economy," said Hassanein. The most popular recommendation was that the role of the capital market in financial intermediation be expanded as a way to lighten the burden on the banking sector. Banks in the region still dominate the financial sector, as they account for 40 to 70 per cent of financial intermediation in Arab countries. Hassanein said that the bad loans problem was mainly caused by the banking sector's involvement in financing long-term projects by providing short-term credit. "Long-term finance is the role of the capital market," he said. According to Hassanein, in order to play this role in the economy, the capital market must be enriched with the creation of more long-term investment mechanisms. "Our economy is a capital-scarce one. We need new instruments in the market such as derivatives, options and convertibles," he said. The government treasury instruments market will be supported by the new activity of primary dealers. The dealers are the banks or financial institutions, which will cover treasury bonds or bills issues and then re-sell them to the public. This new sector will be launched on 5 July this year. The importance of developing the government securities market, according to Hassanein, lies in that it acts as a yield setter for other kinds of investments, especially for corporate bonds.
