As financial services continue to recover from the crisis and strengthen risk management, the focus remains on regulations and cost reduction.
Financial services continue to recover from crisis...
Low business confidence, pressure on margins and issues affecting profitability make financial services vulnerable to an incoherent environment. One has to understand the dynamic operative environment to manage the challenges and capitalise on the vast opportunities.
As part of the Banking sector consolidation reforms, which were
implemented in May 2015, 40 banks were licenced to operate in Egypt, in contrast to 57 banks operating in 2005. This resulted in the removal of the distinction among different kinds of banks. Licences are currently provided to cover both commercial and investment banking services.
The aggregate earnings of Egypt's banking system have remained healthy due to the increase in government borrowings.
The injection of Gulf Arab aid in 2013 lowered yields on treasury
bills from 14 percent to 11 percent, which decreased the profit margins of certain banks.
The results of leading privately owned banks in 2014 showed an improved performance, owing to an increase in the ROA from an average of 2.4 percent to 2.9 percent, in addition to an increase in the ROE from 25.8 percentto 30.7 percent.
In March 2012, the CBE lowered the reserve requirement for commercial banks from 14 percent to 12 percent of deposits and again to 10 percent in May 2014. Aiming at increasing liquidity, starting from March 2011, the CBE has continued to issue weekly repurchase agreements, and at the end of July 2012, the 28-day repos were launched for the first time.
Asset managers in the market are obliged to hold mutual-fund and portfolio-management licences. Asset managers have been regulated by EFSA since 2009 when it took over the Capital Market Authority The wholesale foreign-exchange activity is mostly controlled by the commercial and investment banks. Foreign-exchange bureaus and a few other banks actively trade notes and retail foreign exchange. The Egyptian pound is supported by CBE due to the economic instability as a result of the revolution.
The CBE has managed the steady decline of the currency, selling foreign reserves to pledge a lack of capital inflows. The CBE has also decided to ration the sales of foreign exchange by introducing an auction system due to the decrease in the net international reserves.
A significant inflow of grants to the CBE from Saudi Arabia, the UAE
and Kuwait, which have welcomed Egypt's new revolutionary transitional road map,has led the CBE to hold a US$40 million auction three times a month.
Even though swaps in Egyptian pounds are permitted between banks, it is restricted for bank clients. Furthermore, swap activity in other foreign currencies is limited and used by banks for hedging purposes. This type of deal normally does not exceed a period of six months. Furthermore, the swap
rules/regulations are not clear enough. It is unfortunate that the CBE does not
offer any guidelines related to the approval for a given swap deal. It is a
common practice that the banks involved in such deals contact the CBE, which then provides or withholds its consent verbally.
The CBE is the supervisory body and is in-charge of setting and
coordinating monetary and banking policies. The Unified Banking Law, issued in 2003, empowered the CBE's authority to regulate asset quality, for which
specific benchmarks were provided to the discretion of the CBE board. The local legislation does not allow Egyptian banks to deposit more than 10 percent of total investments abroad, or more than US$3 million with a single bank abroad.
Banks must also make the following provisions for non-performing loans: 20
percent for NPLs (over 90 days), 50 percent for those over 180 days and 100
percent for those over 365 days. Since most Egyptian banks do not meet theserequirements, the CBE pressurises the banks to follow these loan provisions, irrespective of their adverse effects on the banks’ profitability. The
management unit at the CBE is responsible for setting a national policy
regarding bad loans. The reform unit cooperates in line with similar units at
individual banks to address settling business debts.
A licence for a new credit reference bureau was issued by the CBE, in
addition to the i-Score, which officially opened in July 2008. The bureau, owned by the country's leading banks, offers a substantial number of consumers and business records. The CBE and the Ministry of Investment aimed at making the credit bureau facilitate the lending to SMEs; however, this strategy is yet to prove beneficial.
Since 1980, no new commercial-banking licence has been issued by the
CBE, despite a number of applications. The only way for a new bank, whether
foreign or local, to penetrate the market is to acquire an existing bank.
Pure investment banks and brokerage houses are regulated by EFSA and
operate separately from the banking system. Since 2009, EFSA has become the responsible body and the regulator of all non-banking financial services. This has merged the following three now-defunct authorities: the Capital Market Authority, the Egyptian Insurance Supervisory Authority and the Mortgage Finance Authority. EFSA oversees non-bank financial markets and instruments as well as the capital market, the stock exchange, insurance services, mortgage finance, financial leasing and factoring.
The EFSA was established in 2009. It is yet to implement an efficient
regulatory body for non-bank financial services. However, it has improved in
terms of publishing up-to-date information.
The Unified Banking Law requires all banks (including foreign banks)
to operate in Egypt, to establish a deposit-insurance fund. In response to the
global market conditions, in 2008, the CBE announced plans to form this fund; however, this entity has not yet been established.
Rules to protect deposits are to be set by the CBE to bring them in line with international banking practices and usage.
According to the Egyptian Financial Supervisory Authority (EFSA),
insurance penetration in Egypt remains low, with gross premiums of E£14.4
billion (US$2 billion) in the year ending in June 2014 (approximately 0.72
percent of GDP).
Premium income has increased gradually in recent years; however, the market has failed to grow as a percentage of the overall economy. The sector has been able to absorb losses from the constant civil unrest that has swept the country since early 2011, irrespective of the market growth in premiums.
EFSA has been regulating Egypt's Insurance market since 2009 when it
took over the Egyptian Insurance Supervisory Authority. The Insurance sector is open to foreign investors. There were 32 insurers operating in Egypt, as of June 2014, of which 12 were in the Life sector, 18 in the Non-life sector, one
co-operative and one company specialising in reinsurance. Out of the
organisations, three are state-owned companies and 29 are private. In addition, there are 18 companies that are partly foreign owned, and eight companies issue sharia-compliant takaful insurance.
Most of Insurance sector investments comprise bank deposits (25.3
percent of the total), government securities (23 percent) and non-government securities (22 percent). Furthermore, in 2013/2014, investments in nongovernment securities increased by 24 percent.
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Abd El-Hady Ibrahim