Egypt's non-performing loans present one of the greatest financial threats to the national economy. Half-hearted government efforts to settle them have failed. It is now time for more drastic measures. Gamal Essam El-Din reports Click to view caption On 30 May, Amr El-Nasharti, the owner of Egypt's largest chain of private retail supermarkets, rushed to leave Cairo for the Red Sea beach resort of Hurghada. El-Nasharti was not seeking Hurghada's cool breeze. He had decided to flee the country, dodging the repayment of LE370 million in loans to banks, companies and individuals. On 7 May, a Cairo court ordered that El-Nasharti be sentenced to 30 years in jail after finding him guilty of swindling the National Bank of Egypt to the tune of LE170 million. El-Nasharti was not the first, and probably will not be the last, businessman to run away from the country after having been found guilty of defrauding banks out of millions of pounds in unpaid loans. In fact, the phenomenon of loan defaulters has been worsening over the past four years. Those who have fled the country belong to some of Egypt's most famous and wealthy families: El- Nasharti, El-Beleidi, El-Hawari, El-Ayyouti, El- Garhi, El-Mansterely, Lakah and Rizk. This has seriously dented confidence in the local private sector and negatively affected the investment climate. Worse, loan defaults coupled with a market recession have left banks burdened with colossal amounts of non-performing loans and poor profitability. The Central Bank of Egypt's (CBE) official figures show that the value of non- performing loans or bad debts owed by the private sector to Egyptian banks has soared over the past four years, hitting a record of LE25 billion on 30 April. This is in addition to around LE29 billion in unpaid loans owed by public-sector companies to banks. All in all, the CBE places total debt defaults at around 14 per cent of LE355 billion in total loans and 3 per cent of Gross Domestic Product (GDP). Mindful of the grave implications of this phenomenon on the national economy in general, and the banking sector in particular, Prime Minister Atef Ebeid unveiled an initiative offering safe return to all fugitive businessmen with large local bank debts on 28 July. However, he stressed that the government initiative target loan defaulters in general. This initiative, Ebeid said, aims to grant all loan defaulters a non-repayment grace period ranging from six to 18 months, reduce interest rates on debts, extending them with new credit lines to save their businesses from bankruptcy. Ebeid also promised that the government would not proceed with legal action against loan defaulters as long as they contacted banks to settle their debts. On 25 August, the cabinet indicated that the government's initiative would be implemented in two stages. The first stage consists of holding negotiations with clients who have defaults valued at less than LE250 million. These are estimated to number only 50. The second stage involves targeting around 200,000 clients who defaulted on loans valued at more than LE250 million. The cabinet, however, warned that the government would not hesitate in taking legal action against those who failed to respond to the initiative within two weeks. Although initially welcomed by economic pundits and some businessmen, Ebeid's two-week initiative has turned out to be a disaster. Some of the fugitive loan defaulters, such as businessman and former MP Rami Lakah, described the initiative as half-hearted and by no means different from an earlier one that the government announced last year. Last year's initiative aimed to set up a committee, including representatives from the CBE, banks and businessmen, to monitor private sector debt and engineer bank reform. The committee, however, declined to hold any meetings or discuss any default case. In general, businessmen accuse the government of ignoring the real factors which led to the worsening of non-performing or bad debts and made it harder for many of them to service their debts. These, they assert, go back to 1999 when Egypt was seriously hit by an economic slowdown, severe liquidity crisis, and foreign exchange squeeze. Said El-Tawil, the former chairman of the Egyptian Businessmen's Association, argues that these factors have exposed most of the country's private businesses to dramatic losses, leaving them on the brink of financial bankruptcy. El-Tawil added that the government's reluctance to extend a helping hand to troubled businessmen was equally disconcerting. "Remember that for every loan default there is a troubled borrower. It is really shameful that in encountering their financial hardships some businessmen opted to flee the country without settling their debts. But the fact remains that government is to blame in large part for the worsening of non-performing loans in Egyptian banks," El-Tawil told Al-Ahram Weekly. However, economic pundits think the government's initiative was doomed because it fell short of the real medicine needed to cure the banking sectors ills. Ahmad Rashad Moussa, chairman of the Shura Council's Economic Committee, attributes the ballooning of non- performing loans to the performance of the former government of Prime Minister Kamal El- Ganzouri, which came to office in January 1996. Moussa argued that in the first half of the 1990s, the Egyptian government's reformist prime minister, Atef Sedqi, managed to put banks on a sound track. "This came through raising interest rates on deposits (up to 17 per cent) with the objective of discouraging citizens from hoarding dollars and attracting higher saving rates," said Moussa. Moussa added that this was highly successful in providing banks with cash. "When El- Ganzouri came to office, he said the aim of his government was to raise the private sector's contribution to GDP to 70 per cent. This required instructing banks to provide private businessmen easy access to bank credit facilities," Moussa said. "As a result the private sector's debts to banks increased by LE74 billion in three years (or from LE68 billion in June 1996 to LE142 billion in 1999)," Moussa said. This was made in the absence of strong supervision, as El- Ganzouri insisted on stripping the CBE of full independence in monitoring the banking sector. "It is no surprise that personal crony relationships and hefty bribes, rather than adequate collateral or reliable feasibility studies, played the greatest role in the provision of loans," Moussa said. Banque Du Caire, topping the list of banks suffering from bad debts, gave LE12 billion in credit facilities to eight businessmen in the absence of adequate collateral. The lukewarm reaction of businessmen to Ebeid's initiative was countered by a quick and firm counter-reaction from President Hosni Mubarak in person. Returning from a short visit to Libya on 30 September, Mubarak announced the end of the government's initiative because the response of loan defaulters "came short of what was required". President Mubarak's announcement heralded a new stage of more drastic measures aimed at confronting loan defaulters. The government has since begun a massive clean-up of the banking sector. To achieve this, it used two tactics. First, the government decided to remove all banking bosses and executives who had been found guilty of exacerbating the non-performing loans problem: a dozen top banking officials have been sacked and replaced. This includes Misr Exterior Bank, El- Mohandes Bank, El-Nil Bank, the Commercial International Bank and the Arab-Egyptian Land Bank. Abdallah Tayel, the former chairman of Misr Exterior Bank and parliament's economic affairs committee, and Mohamed Abul-Fath, the former chairman of Banque Du Caire, have both been banned from leaving the country and brought under investigation over claims that they abused their position by providing around LE14 billion in credit facilities to a small group of businessmen without adequate collateral. Second, several banks, under their new leadership, also rushed to refer some of their big loan defaulters to the Prosecutor-General. As a result, Prosecutor-General Maher Abdel-Wahed ordered that the assets of five businessmen: Hossam Abul-Fotouh, Hatem El-Hawari (and his brothers Hazem and Mohamed), and Mohamed El-Garhi be sequestrated following defaults on loans of LE3.7 billion appropriated by Banque Du Caire and Misr Exterior Bank. The CBE's Governor Mahmoud Abul-Oyoun indicated that the banking clean-up will also involve placing the CBE under the direct purview of the president and introducing a unified banking law aimed at guaranteeing CBE independence. Abul-Oyoun said this would be complemented by raising the capital of some banks, merging small ailing banks into large financial institutions and increasing supervision of auditing.
