Determining policies for saving and lending is proving to be a balancing act these days, and, at times, a game of patience in dealing with the financial crisis while maintaining Egypt's banking reform and growth strategy. Thankfully, unlike the banking sector in most other countries, Egyptian banks have high liquidity and lots of cash in the form of bank deposits. In fact, the Egyptians' tendency to save has reached a saturation point, and the current way forward is to encourage lending instead of saving to help boost economic growth. "After placing their reserves with the Central Bank, banks are able to lend up to 66 percent of their deposits, Mahmoud Sadek, head of product development at the National Bank of Greece, said. "Currently ratios by most banks have not hit the 40 percent mark, indicating opportunities for banks to invest in small, medium and large investment projects, he added. To make use of the cash surplus in the economy, Prime Minister Ahmed Nazif has repeatedly highlighted over the past few months investment projects on the national agenda for 2009 onwards, namely in infrastructure, as attractive alternatives for high returns on cash assets, according to Oxford Business Group. In mid-February, the Central Bank cut its overnight deposit rate by 1 percent to 10.5 percent and the lending rate to 12.5 percent. The widely anticipated decision, the first of its kind in almost three years, is meant to prompt banks to reduce their rates, making it cheaper to take out loans. "By lowering rates, the government and Central Bank are sending a signal to the Egyptian market to encourage spending, Sadek said, "[They are] communicating that at this time, it is more attractive to spend than to save. Faced with fewer incentives to save with banks, the retail money market is looking for alternatives to utilize its cash savings. Starting businesses, investing, consuming goods and services - spending in general - are some of those alternatives. Increasing consumption would boost economic activity and get the cash cycle moving again. "The Central Bank's main target is to contain inflation and drop it, Engy El-Dishish, financial analyst at HC Securities and Investment Research Department, said. Inflation has fallen from a 16-year high of 23 percent this summer, to around 14 percent in January; and officials are hopeful that it will soon be in the single digits. "Now, that it has reached its target, the CBE decided to drop rates in order to stimulate economic growth by offering cheaper lending to counter the existing slowdown, she added. Still, it seems Egyptian banks are faced with a conundrum. On the one hand, El-Dishish explained, "Egyptian [banks] have not been affected by the global crunch due to their excess liquidity. Nevertheless, due to the global economic slowdown, banks will be cautious in their lending strategies so as not to bare non-performing loans (NPLs). Looking at the retail market, Sadek sees a trend of conservatism in the way banks grant personal loans. "Perhaps banks used to aggressively sell personal loans but have recently slowed down, he said. According to El-Dishish, retail loans saw an increase of 26.1 percent in fiscal year 2008 compared to the previous year. However during the first half of fiscal year 2008, monthly growth declined to an average of 2 percent in tandem with a slight slowdown. "As of December 2008, aggregate banks' utilization ratios were at 56 percent. Despite abundant liquidity that banks enjoy, Egyptian banks are relatively prudent in their lending strategy due to the large NPLs that hit their books in the early 2000s; but several reforms have been made [recently] to protect banks' interests, she said. In the retail loan market, Sadek said, "Egyptian banks are being prudent and safe in lending at this time in general and especially to [businesses] linked with the contraction in certain sectors globally. News of large-scale lay-offs in neighboring markets, such as Dubai, affects the confidence factor involved in granting loans to individuals. Cautious sentiment and strategies are also reflected in the early process of qualifying for a loan. Instead of approving a loan in 24 hours, loan officers are more likely to wait around three to four days. International banks operating in Egypt mostly implement strategies passed down from their headquarters, which, more often than not, are in markets that are at the heart of the financial crisis. This could lead to conservative management decisions that do not necessarily reflect the situation on the ground in Egypt. In that context, the uncertainty factor creeps into the decision-making and risk management process. Anticipating a deeper global recession, more job losses as well as increasing food and energy prices creates a wary finance and banking environment. "There is a 'wait and see' factor that is affecting loans in Egypt Sadek said. Virtually unaffected by the global credit crunch, Egypt's banking system is trying to avoid being dragged into stagnation. Combating a slowdown from the global crisis has become a perceptual rather than financial battle, which makes instilling confidence and focusing on risk management the main priorities of the local banking sector.
