Egypt's Great Financial Scandal: The Repercussions
On June 25, 2000, Egypt's biggest financial scandal was formally concluded, 31 of the individuals accused of taking out roughly EP 1.6 billion in bad loans convicted, and the four parliamentarians among them having their seats and privileges removed. An array of bankers, politicians, and businesspeople were sentenced to between one and 15 years in prison. But, as Egypt's Business Monthly Magazine reports, the scandal will continue to have ramifications on the country's banking and financial sector.
The scandal, which centering around loans made by several different banks, including Nile Bank, Mohandes Bank and Daqahliya Bank, involved offenses such as offering loans without collateral, lending to board members, and not registering loans on the books. Undercapitalized shell companies were created with the express purpose of qualifying for massive loans.
During the course of the trial, defense lawyers repeatedly attempted to prove that their clients' offenses, particularly deceiving banks through illegal loans, were common practices in the Egyptian banking system--even in the four flagship public banks. Most industry experts, however, prefer to view the case as a symptom of a system that is young rather than corrupt.
Egypt's central bank has been criticized for not adequately monitoring the country's banks and for not preventing the issue from spiraling so seriously out of control. But other parties also deserve part of the blame, for although the central bank is overseer of last resort, there are still several levels of auditing and supervision within the banking system that were meant to prevent bad loans from being offered. These organs clearly had not done their work correctly.
The roots of the scandal can be traced back to the 1990s, with the liberalization of the banking system. With the four major public sector banks—Misr, National Bank, Banque de Caire and Alexandria Bank —still control the bulk of deposits, a number of private sector establishments began claiming market share. Most of the current bad loans were issued during the transitional period, when most banks lacked a risk management department, and the central bank was unable to inspect all the institutions on an annual basis.
The scandal erupted in 1995, when Nile Bank president Issa Al Ayouti exposed his daughter for giving "sweetheart" loans to her parliamentarian husband, Mohboud Azzam, and his associates. The case dragged through the courts for five years and the former attorney general permitted several leading suspects to flee the country.
As a result of the scandal, the central bank demanded that each bank establish a sub-committee from the board of directors to monitor loan portfolios and risk assessment. It now also requests monthly lists of the largest borrowers. One of the results of these measures was general perception in the business community of a liquidity shortage. Indeed the trial's climax came at an inopportune time, with the economy in recession and general feeling of crisis over the perceived liquidity shortage.
In an effort to boost confidence in the country's banking system, Minister of Economy Youssef Boutros Ghali announced on July 4 that the Central Bank is committed to insuring all loans, regardless of their size, and that bad loans do not exceed 5 to 7 percent of the country's total. Other estimates put the figure of all non-performing loans near 11 percent.
Egypt's public sector banks still maintain past legacies, whereby large loans to public sector companies did not require any supporting capital. But now that the trial has ended and banking reforms are underway, the government's objective is to maintain quiet and avoid any new scandals.- (Albawaba.com-MEBG)
© 2000 Mena Report (www.menareport.com)