Over the past two years, there's been a lot of lost trust in financial institutions in the wake of global economic turmoil, which gave rise to new banking regulations, financial watchdogs as well as heightened public scrutiny. Some of the key lessons learned by markets worldwide are the importance of risk management, transparency and, overall, healthy corporate governance practices. The Arab African International Bank (AAIB) recently published its corporate governance guidelines for the first time. Dalia Abdel Kader, head of marketing and communications and deputy general manager of AAIB, spoke with Daily News Egypt about how banks and financial institutions in the Middle East can learn from the mistakes of the west, changing the way finance is conducted. According to the bank, the guidelines have been drafted to provide a formal overview of the principles, internal rules and regulatory framework which govern their business management practices. On impact The bank is part of the United Nations Global Compact, a strategic policy initiative for businesses committed to aligning their operations with 10 universally accepted principles in the areas of human rights, labor, environment and anti-corruption. “2002 was a turning point in the bank's history as we moved towards an aggressive expansionary policy and after that point, our year-on-year profit increases were exceptionally high,” said Abdel Kader. “We have been very focused on corporate governance over these years,” she added, which are integral in the bank's business dealings, defining the control framework that is established to manage various risks. “Corporate governance offers banks several defense lines,” she said, “and our risk departments, internal auditors and external auditors are fully empowered …Furthermore, corporate governance extends to address the interests and relations of AAIB's stakeholders (mainly shareholders, staff and management and clients within this context).” When it came to the meltdown of financial markets worldwide, the crisis, she said, was all about governance. “It shook the whole world; hit the financial sector at its core [and] the main reason was lack of governance.” Although the regulations were in place, she said, corporate governance took a back seat to an insatiable drive for profit, leading financial institutions to fall “at the peak of their profitability.” Even though Egypt's banking sector was cushioned through the central bank's conservative policies and a series of recent regulatory reforms, “we were affected indirectly as the financial sector around the world is still linked. “Maybe we were cushioned because we were not as sophisticated but this sophistication was a fallacy as this is what brought them down. I think Egyptian and Middle Eastern banks have to take this chance to re-conceptualize finance. All we need is the confidence and the right structure to rewrite our financing strategies,” Abdel Kader said. Responsible financing Abdel Kader broke down this strategy into two main parts. First comes the role of banks which finance larger businesses — they must have more responsible financing practices. Corporate financing requires more responsibility from banks, she added, and AAIB has had success in corporate financing partly due to a new focus on the social and environmental evaluation of potential clients as part of the UN's Global Compact principles. According to Abdel Kader, using Equator Principles (EPs) since 2009, a voluntary standard for managing social and environmental risk in project financing, they have set a standard for responsible financing in Egypt. “We are now choosing companies not only based on financial credentials but on other criteria as well. To give away more than $10 million we have to review a social and environmental audit of a company.” Being a novel practice in the banking community, she said it took some time before the bank's policies were accepted. “At the beginning, we felt that this mode of selective financing would cause us to lose clients to our competitors; but after some time, the regulations proved profitable especially in the environmental sectors as financing green energy and technology have become increasingly profitable,” she said. “Down the road I feel that non financial auditing will be as important as the financial aspect,” she added. Talking about another role of banks in developing economies, Abdel Kader said that while banks compete to finance Egypt's larger corporations and businesses, small-, medium- and micro-sized firms, which comprise a larger part of the economy, are largely ignored. “We cannot ignore the middle section of the [business] pyramid and more so, we cannot ignore the bottom section, or the pyramid will crumble.” According to a recent conference on SME financing, 90 percent of the companies operating in Egypt are SMEs. Solving this problem requires the country to have a balanced banking approach with different banks funding different sections of the society. Other banks have to emerge focusing completely on this aspect, she added. Another solution is for every bank to have a microfinance arm. AAIB was recently named Best Financial Group in Egypt of 2010 by World Finance, a UK-based financial magazine. “We won the award mainly because we have been very successful at developing the bank from a banking institution to what it is now: a fully fledged financial group with subsidiaries,” Abdel Kader said. “Along with this expansion over the years,” she added, “the bank has strived to illustrate that growth is not only in [the] numbers, and not only about profit and that there has to be a moral mission.”
