The banking sector took centre stage at a conference scrutinising financial reform last week. Niveen Wahish and Sherine Abdel-Razek report Bank privatisation and introducing new investment instruments in the capital market were underlined as key elements of financial sector reform at a recent conference. The conference, organised by the American Chamber of Commerce in Egypt (AmCham), called for reform encompassing all aspects of the financial sector, namely the banking, capital markets insurance and mortgage systems. Experts lamented that the banking sector has always been the focus of attention. But as Managing Director of the Arab African International Bank (AAIB) Hassan Abdullah said, banking should be dealt with hand in hand with other areas, not in isolation. "Clients have options when financial markets start growing," he said. Speaking at the start of the conference, International Monetary Fund (IMF) Country Representative in Egypt Nadim El-Haq also stressed this point saying that the market must be developed in a balanced fashion, and the emphasis should not solely be on banks. Nonetheless, issues related to banks still took up a good part of the discussion during the conference. "Banking sector reform must be taken seriously and is long overdue," said Abdullah. One of the major issues was that of bank privatisation. The need for privatisation in the banking sector, particularly of public sector banks, was clear following a presentation by Yasser Mallawani, CEO of EFG-Hermes Holdings. He showed that state-owned banks directly or indirectly dominate the banking sector, accounting for 89 per cent of assets. "Involvement of the state is correlated with inefficiency, low returns, poor asset quality and delays in the sector's development, even in developed countries such as Germany," he said. Egypt's four state-owned banks control 55 per cent of banking sector deposits and 49 per cent of loans. These banks include the National Bank of Egypt, Banque du Caire, Banque Misr and the Bank of Alexandria. According to Mallawani, despite their economies of scale, the four public sector banks are considerably less profitable than the four biggest joint venture banks. The ratio of non-performing loans (NPLs) at state owned banks is another problematic area. While its volume is not officially disclosed, Mallawani said that it could be as high as 30 per cent. "The cost of cleaning those NPLs is likely to rise with delay," he said. He argued that privatisation and liberalisation in the framework of an independent regulator and a sound legal framework will eventually lead to competition, growth and macroeconomic stability. The privatisation of banks got the green light in 1998 when amendments to the banking law were made. Privatisation was also enabled through the new banking and credit law of 2003. And although government stakes in some joint venture banks have been divested, many still remain. Those remaining stakes of public sector banks in joint venture banks could be sold right away, according to Mahmoud Mohieddin, chairman of the Economic Committee at the National Democratic Party. "What's stopping joint ventures from being fully privatised?" he asked. He pointed out that the stagnation of the economy for the past three to four years reduces the exposure of those banks. "More than 10 to 15 banks could have been privatised, particularly since there were actual offers on the table, but it did not happen," he said. He argued that "there is no such thing as privatisation of management," continuing that in the absence of an incentive structure and good monitoring, the new management "will not do what we want them to do". The cost of delaying privatisation according to Mallawani amounts to lost banking profitability. He pointed out that private banks are four to five times more profitable than public sector banks. As a consequence, he said, the treasury is missing out on the annual income tax that could be collected. Ahmed Galal, executive director of the Egyptian Centre for Economic Studies, said that privatisation is necessary for efficient regulation. "Why do we have to wait until we have a crisis?" he asked. "We should reform now." Part of this reform process, according to Hassan Hussein, chairman of the Banking, Insurance and Finance Committee at AmCham, is for banks to expand their business to include more retail banking, investment banking, project finance, and offer more insurance products. In the meantime, to enable banks to offer new products, he highlighted that the lack of interest rate trends for the future makes it difficult to innovate sophisticated debt products. "Long-term instruments are based on interest rates and foreign exchange projected for up to 10 years," he said. As for the capital market, the other pillar of the financial market in Egypt, it remains distinctly underdeveloped and thus only has a limited role in the economy. "Banks are still the primary source of funds to investors at the expense of less contribution of venture capital, equity and bond markets, which results in capital flight to more developed countries," said Alaaeddin Sabaa, chairman of Beltone Asset Management. He said that while the value of the credit extended by Egyptian banks as of December 2003 came at $46.9 billion, overall market capitalisation is as low as $27.6 billion. This level is not competent even by regional standards, as compared to $65.9 billion and $157.3 billion respectively in Saudi Arabia. One of the main reasons for this marginal role as shown by presentations given by financial experts in the seminar is "the shallowness of the market", given the limited variety of financial instruments. While equities corner the lion's share of market transactions and the Egyptian stock exchange boasts the largest number of listed companies in the region, it is among the least liquid with only two per cent of the listed companies actively traded, according to a paper prepared by the AmCham's Capital Market Committee and distributed during the seminar. As for bond transactions, they are still 95 per cent dominated by treasury bonds. In order to deepen the market, participants called for supporting the bond market with a clear interest rate policy and the introduction of a benchmarking yield curve which enables the investor to compare his returns from different investments. The paper also called for the activation of the mortgage and securitisation laws in order to allow for the development of mortgage and asset-backed securities. One of the new ideas proposed for the overall reform of the financial sector was offered by Sabaa, who backed setting up an International Financial Services Centre (IFSC) in Egypt. An IFSC serves as a base from which corporations carry out financial services in neighbouring countries. The services range from banking, insurance and asset management to securities trading. "Corporations meeting certain criteria located anywhere in the host country of the IFSC would be eligible for special treatment, like a lower cost of doing business with low of zero to a 10 per cent tax rate" Sabaa pointed out. Other incentives include the business being governed by international standard laws and enjoying prompt and efficient dispute mechanisms. These two can be ideal for companies working in Egypt where regulations governing the financial transactions are still immature and there is no dispute resolution system, as various speakers in the seminar explained.
