Consolidated assets of the banks in Egypt grew at a CAGR of 11.3% in the four year period from 2001/02 to 2005/06.
The Central Bank of Egypt (CBE) supervises and controls all commercial, investment and specialized banks in Egypt. It is also responsible for implementing monetary policy to maintain foreign exchange stability and economic growth. In June 2003 the government ratified the Unified Banking Law, which increased the independence of the CBE. As per this law CBE is responsible for the implementation of monetary policy, but responsibility for setting inflation targets lies with the Monetary Policy Committee. Mr. Farouk El-Okdah replaced Mr. Mahmoud Abul-Ayoun as governor of the CBE in December 2003.
The Egyptian banking sector is currently undergoing a restructuring process with the aim of increasing its robustness and ena¬bling it to perform competitively on a regional and international level as well as achieving the targeted economic growth. The Banking Reform Unit (BRU) within the Central Bank of Egypt is taking the lead on the program, and has introduced a plan comprised of four main objectives: (i) privatization and consolida¬tion of the banking sector; (ii) addressing the issue of non-performing loans; (iii) streamlining the financial and managerial structure of state-owned banks; (iv) upgrading CBE banking supervision. The plan was put into action in September 2004.
As on June 2006, the Egyptian Banking system consists of 43 banks with an aggregate network of 2,944 branches, down from 62 banks as on June’2003. This number is falling as the government has expressed its intention to consolidate the sector to as few as 22 banks by the end of 2007. This is because it feels the number of banks in Egypt is very high with few of these banks having enough capital to be competitive and most facing a larger risk of collapsing should borrowers fail to pay back large sums of money. Along with reduction in number of banks, the government also plans to increase their paid-in capital to make them more competitive and help them to remain compliant with Basel II regulations. The restructuring of industry has accelerated in 2006, as evident from the fact that number of banks have reduced from 57 in Dec’2005 to 43 in June’2006.
The consolidated assets of the banks in Egypt grew at a CAGR of 11.3% in the four year period from 2001/02 to 2005/06. Securities and investments in treasury bills was one of the main drivers behind the asset growth, which grew at a CAGR of 21.9% during the same period. Its share in total assets increased from 17.7% in 2001/02 to 25.5% in 2005/06, as most banks wanted to utilize their excess liquidity during this period to boost asset yields and margins. However the treasuries growth and volumes have tapered off recently with the CBE’s move to bring down treasury rates.
Total credit facilities extended by banks grew at a CAGR of 5% during the four year period from 2001/02 to 2005/06. Loans growth has been relatively slow due to factors like non-performing loans (NPL) problems, slow reduction of lending rates by the banks in the sector as well as presence of attractive treasury yields. However recently there are signs of loans growth picking up with the decline in interest. On a year on year basis, total credit facilities grew by 5.1% to reach LE324bn in 2005/06. In terms the distribution of credit facilities, non-government sector accounted for 93.5% whereas share of government sector is rest 6.5%. Out of the credit facilities to non-government sector, credit in local currency accounted for 75.1%.
Deposits are the main source of financing for the Egyptian banks, accounting for 74.7% of total liabilities of the banking sector in 2005/06, and have grown by 9.5% on a year on year basis to reach LE568.8bn in 2005/06. Bank deposits grew at a CAGR of 13.7% during 2001/02 to 2005/06 on the back of tighter monetary policy advocated by the Egyptian government, thereby resulting in excess liquidity in the banking sector, which was further utilized in expanding treasury holdings with higher yields.
Considering the reforms taking place currently in Egyptian banking sector, we believe the sector will undergo transformation in coming days and is also poised for high growth. Non-performing loans are expected to drop with the increase in provisioning levels and maintenance of high credit quality in the banks. The credit portfolio of banks are expected to increase with the Egyptian banks targeting new markets particularly SMEs (small and medium enterprises) and mortgage financing apart from corporate lending. The government through privatization and consolidation aims to create a banking sector which will be able to stimulate growth opportunities available in the economy. The continued commitment to the reform process would be the impetus for domestic growth, leading to demand for investment and increasing consumption levels. The banking sector has all the growth potential of a typical emerging market banking sector. (Source: Global Investment House)