Banking Sector Reform In Egypt

Banking sector in Egypt was subjected to various transformation and reforms over the years. The system, which is prevailing today is a result of several trials as well as tribulations of the past. There was a switch over of the banking system to an Egyptian system from a system, which was predominantly foreign in origin during the period 1950 to 1960.
Owing to reforms, the banks came under state ownership. It was mainly regarded as �quasi fiscal�, agency whose main function was to provide fund for various projects as well as assignments of the state owned enterprises and Egyptian government. These acted as hindrances in the implementation of the skills related to evaluation of credits.

This led to the increase in the number of assets of the banks, which were comparatively quite risky.

Banking sector reform in Egypt was brought about with a view to better the performance of the banks in the country.

Performance improvement comprised the following:
Restoring profitability as well as solvency
Winning the confidence of the people
Improving quality of assets
Improving the capacity of the banks with regard to financial intermediaries.

Banking sector reform in Egypt and the effects of the same were ascertained by few tools, which can be listed below:
Quality of assets
Capital adequacy
Profitability ratios
Credit/ GDP
credit of private sector/ total credit

Financial viability:
Indicators like equity/assets; non performing loans/total loans reveal that the banking viability or solvency did not improve despite the introduction of banking sector reform in Egypt. With the issuance of Banking And Money Law 88 (2003), the capital requirement got raised. This in turn led to several mergers as well as acquisitions. Low Capital adequacy ratio characterizes the state owned banks in the country. Equity/assets ratio suggests that in case of private banks the under capitalization averages 7% as compared to 4% in case of banks, which are owned by the states.

Non performing loans:
Another factor, which indicates the impact laid by banking sector reform in Egypt are the non performing loans. The ratio between non performing loans/total loans increased to 16% in the year 2003 from 11.7% in the year 1999. The ratio was 22% in the year 2005. The quality of the private banks are far better than those of the state owned banks in the country.

Sustainable profit:
As per information furnished by expense ratios as well as earnings/employees, it is implied that the banking system in the country is affected by low profits and operating costs, which is quite high.

The following reasons may be attributed to the above conditions:
The state ownership dominance
The governing body being ineffective and inefficient
Lack of proper incentives

Challenges faced by the banking sector reform in Egypt:
There are various challenges, which the banking sector in the country has to face with regard to the implementation of reforms. The challenges may be social, political or economic.
Political barriers: Privatization of the banking system was opposed frantically. More so, because in a country like Egypt, the functioning of the financial markets is governed by the state . Therefore, a general trend manifested is the intention to withhold bank ownerships.

Social barriers: The social barrier envisages redundancy of workers. The problem is more pronounced in a country like Egypt where unemployment has reached a point, which is cause of concern for the authorities. Policies pertaining to forced employment , was forsaken in the year 1990, but the state and the government have directed that employment be provided to fresh graduates.

Costs: Just prior to privatization, structural changes in finances and settling issues relating to non performing loans is quite vital. Quality of loans, given by the banks, investment loans, investment portfolio are questionable in the context of restructuring in finances. However, restructuring of finances is essential in the event if the bank has to be sold out. In this case, a good financial restructuring assures that the bank is sold off at an optimum cost. For restructuring the state owned banks, financially, a certain amount of expenditure is also involved. The country already has a huge domestic debt. If the bad loans are accounted for, it may adversely affect the rates of interest, escalate the expenses and further add to the total budget deficit existing in the country.

Although, restructuring of banks, which are state owned has been contemplated, some feel that privatization of banks, which are owned by the state would take some time to complete the entire process.


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Last Updated on : 26th June 2013

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