The draft unified banking law has many positive aspects but it may undermine the central bank's autonomy, , CBE board member, tells Aziza Sami The draft unified banking law, the culmination of years of work aimed at unifying banking sector legislation, is being reviewed by President Hosni Mubarak this week. It will then be referred to the People's Assembly for discussion. The draft law condenses the six laws which currently govern the banking sector, as well as the Central Bank of Egypt (CBE), into one legal document. The move comes in response to long-standing demands by investors and international funding agencies. The draft, presented by the National Democratic Party's (NDP) economic committee to the cabinet, has sparked criticism by economic and legal experts over how it might affect the autonomy and independence of the CBE. One of the most outspoken critics on this matter is CBE board member and veteran legal expert . Fahmy, described as one of the "architects" of Egypt's economic "open-door" laws, participated in modifications of one of the basic laws regulating the banking sector, namely Law 120 of 1975. He also participated in formulating the draft for the unified banking law in 1997 and 1999, which subsequently underwent several modifications. Fahmy says that the proposed draft law has largely succeeded in its basic objective of strengthening the Egyptian banking sector in a manner which would "put it internally in order" and help make it more competitive. He highlights the particular achievements attained in this draft through the, "collection of disparate laws under one law, in a manner which makes this legislation fall in line with the Basle convention and the practice and norms of the world's central banks. This is very important, in order for everyone to know how to function." The unification of laws is a very vital step for the investment community Fahmy says, "because when they see the laws regulating the banking sector they will not, as was the case before, be wondering which ones are being implemented. It is important for foreign investors as well as international bodies like the World Bank and the International Finance Corporation (IFC), that they have one law, not multiple ones." Two basic laws currently govern the Egyptian banking sector. These are Law 163 of 1957 (The Law for Banks and Credit) and Law 120 of 1975 (The Central Bank of Egypt and Banking Sector Law). In the proposed draft law, greater emphasis has been placed on the CBE's role in monitoring and supervising the banking sector's credit practices. This comes in response to the flurry of recent high profile cases of bad loans which have highlighted the laxity of the credit departments of Egyptian banks. Fahmy explains that the CBE's role in supervising credit practices has been strengthened by the new draft law, which controls the concentration of credit in any one bank, and lays down stringent rules for investigating a clients credit- worthiness. Instead of leaving the administration of credit regulated by unwritten banking "convention", the new draft law explicitly restricts the credit taken out of any one bank by a client to no more than 30 per cent of the bank's capital base. The new draft law also opens the door for the privatisation of public sector banks once the step has been deemed politically expedient. Additionally, the draft law removes the 51 per cent ceiling which was formerly placed on foreign ownership of banks. This means that the decision to privatise or to merge banks will not require new legislation. "It will be a question of policy, a political decision. But the legislative basis for it is there, now, in the law." The draft law also increases bank capitalisation in accordance with the Basle Convention. "There is now a wide competency given to the CBE, enabling it to adapt and to place the needed rules, regulations and instructions to the banking sector without having to issue special legislation for a specific purpose, every time." However, Fahmy has expressed strong reservations concerning what he considers unwarranted changes made by the new draft law to the text of the current law. These will, "compromise the autonomy of the CBE instead of consolidating it". He cites four major changes which will have serious repercussions for the CBE's independence. The first article of the current law defines the CBE as a, "legal public autonomous entity". However, in the draft law the terms "public" and "autonomous" have been dropped. "This will have serious implications, since not describing the CBE as a public legal entity will open the door to judicial controversies, and differences in opinion between the courts. If litigation arises between the CBE and its employees, or the CBE and a third party, then some courts might assume that the CBE is a private entity to be looked at by the ordinary courts. This would mean a departure from the practice adhered to over the past 50 years, where all litigation involving the CBE was looked into by the Council of State courts, which is a body comprised of senior judges, more qualified to look into such cases." It is a, "principle of legislation that I not interfere with a text unless it has led to problems demanding some sort of legislative surgery. In the new draft, these phrases were taken out of the original text for no clear reason, which leads one to ask, why change something which is so vital and which has not caused any problems?" Fahmy says. There are other contradictions which could arise because of the omission of the term "public" when describing the CBE. "The CBE's fiscal year starts and ends at the same time as the general state budget. Moreover, it is the state's hand which organises monetary policy. It manages liquidity, credit, the government's external debt and the state's assets in equity, gold and foreign currency. All of these are supreme sovereign functions, not those undertaken by any private company or entity. So how by any criterion, can the CBE not be considered a public entity?" A second major change effected by the draft law and which directly undermines the CBE governor's autonomy, is the designation of a minister to represent the CBE before of the People's Assembly. This, "opens the door for a potential clash between the minister and the CBE governor." The draft law places the CBE under the jurisdiction of the President as a step meant to consolidate the Bank's autonomy. However, it stipulates at the same time that the president will designate "a competent minister" to represent the CBE in front of Parliament. "This will open the door to conflict between the CBE and this minister, since the latter will not accept being held accountable in parliament for the CBE's policies without having been actively involved in formulating them," Fahmy says. Fahmy, who has written a memo to be presented to the CBE board on this subject, suggests that the draft should have specifically defined the exact responsibilities of the minister in relation to the CBE , in order to avert any potential clash with its governor. Another major change in the new draft law makes it possible for the CBE governor to be dismissed before his four year term in office ends. Again, this compromises the CBE governor's autonomy. "The current law stipulates that the CBE's governor and his deputy are to be appointed for four years, renewable, without any term ceiling. During his tenure the governor cannot be removed. If irreconcilable differences of opinion arise between the CBE governor and the cabinet or minister in charge, the governor may then resign." In the proposed draft, these stipulations have been removed. The clause making his term renewable is also absent. "Making the CBE governor immune from dismissal obviously gives him an independence similar to that of a judge. The new draft law, by removing these clauses, has detracted from this," Fahmy says. Restricting the CBE governor's term of office may also have negative implications for monetary stability, "since four years may sometimes not be a sufficient time span for a CBE governor to devise, implement and stabilise the needed policies". Fahmy characterises the situation as one where: "The CBE has been placed under the jurisdiction of the president, as opposed to being under that of a minister. This implies that it is autonomous and independent. But, at the same time, its governor has been made liable to dismissal. His term is no longer renewable and a minister has been made accountable for the CBE before Parliament. It is as if the Central Bank was given something with the right hand, to have it taken away again by the left." A fourth major change in the draft law relegates the role of the CBE to becoming merely an "implementor" of monetary policy rather than the main economic institution for devising it. "According to the present law, the CBE formulates, regulates and implements rules related to monetary and banking policy in accordance with the government's general plan." This has been changed in Article 5 of the draft law to read, "the CBE exercises functions pertaining to the stability of prices and the banking sector's well being as a part of the state's general economic policy." Fahmy emphatically disagrees with this change. "The CBE is not in charge of 'economic policy'. It does not undertake economic projects. It is in charge of monetary, banking, funding and credit economic policies. When you already have a clear text specifying the wide range of macroeconomic policies undertaken by the CBE, how can you relegate its function as the new draft has done, to being in charge of 'economic policy'?" The new draft law also omits the word "formulates" when referring to monetary, credit and banking policies, instead stating that the CBE only "implements". Thus, the new draft has curtailed one of the basic functions of a central bank, which is the formulation of monetary policy. It also stipulates that the CBE will coordinate monetary policy through a, "board or council, whose seven members are to be appointed by presidential decree. This council seems to be a higher body, over and above the CBE's board of directors," Fahmy says. Out of these seven appointed members in the "supra-council, three are ministers concerned with economic affairs, three are 'competent experts' and one is the CBE's governor. This means that one out of seven members represents the CBE on this council." He then asks, "Why the redundancy? You already have the CBE board comprising five experts in monetary, banking, legal and economic fields who are appointed by the prime minister. Why have another council formulating policy and relegating the CBE to becoming an implementor?" Fahmy brushes away the suggestion that these changes were made because of a specific political orientation meant to hamper the CBE's independence. He attributes it instead to administrative and legislative "inaccuracy and haste". He says that one possible explanation for these serious changes to the current banking law is that, "draft laws are no longer all submitted to the State Council, as was the case before". Both the NDP and CBE proposals for the draft unified banking law maintained that the CBE is a public legal entity. However, when asked who it was who inserted the final changes to the draft, Fahmy says, "I do not know. It is said that it was a joint committee from the NDP and the prime minister's office. But we cannot verify this." Fahmy adds that clauses in the current banking laws which guarantee the autonomy of the CBE and its governor, should remain as they are. That they remain is especially important considering the proposed changes comprised in the draft law, currently under review by the president. "There is one suggestion which I would like to propose, though I do not think that our current constitution will allow it. In some countries, parliament nominates the central bank governor. In other instances, it is the president who nominates the governor to parliament. The central bank governor, in some systems, holds a position equal to that of the prime minister because of the pivotal role played by central banks in monetary policy." Fahmy voices his concern over the investment community's reactions to the manner in which the proposed law has dealt with the issue of the central bank's independence. "One wonders what the situation will be when we translate this law and start working with it abroad in international arenas. When the World Bank, the IFC, the International Monetary Fund and Paris Club read it. They will say, 'Do you mean to make the CBE more autonomous, or less?' People will wonder, and will have questions, especially the foreign investor."
