Egyptian banks may have escaped the meltdown of the financial crisis, but they are feeling the pinch of the slowdown in the real economy, Niveen Wahish reports Over the past six months, ever since the financial crisis broke out, experts and observers have often said that had the financial crisis taken place five years ago, everything would have been different, in particular in reference to banks. What the sentiment indicates is that, in general, Egyptian banks are on much better footing than they were five years ago: they are liquid, well capitalised, regulated and closely scrutinised. Had that not been the case, observers have repeatedly said, banks at home would have joined the domino of their counterparts across the globe, and would most probably have collapsed. Their robustness is attributed to measures taken by the Central Bank of Egypt over the past four years to fortify the sector. Banks were required to raise their capital. This resulted in a consolidation of the sector. Today there are 40 banks in Egypt, compared to over 60 banks in 2000. However, although Egyptian banks are safe, they remain part of the economy and are by default affected by what takes place around them. Salwa El-Antari, general manager of the research department at the National Bank of Egypt, told Al-Ahram Weekly that the slowdown in the real economy necessarily affects the banks' profitability. She said the banks' budgets published in December 2008 already showed that they suffered losses on their portfolio investments because of the collapse of stock markets globally and locally. El-Antari expects that their third quarter budgets, which review transactions until March, will show even sharper losses. She attributed the loss in profitability to the fact that banks' investment activity has slowed down with the economy. "There is slower lending activity not merely because it is becoming harder to find creditworthy clients, but there is also less demand for loans to expand or open new businesses," she explained, adding that this affects bank revenues. Other revenue-generating activities, such as export credit, on which commission was collected, are also slower because of the sluggish demand. The Kuwait-based Global Investment House (GIH) expressed a similar opinion in a report on Egypt published in February 2009. The GIH report said, "With the banking sector being primarily influenced by the economic status of the country, we maintain a stable outlook for the sector in Egypt in 2009 and we believe the Egyptian banking industry will remain isolated from the banking problems occurring in international markets." Moreover, the report stressed that "the activities of banks in Egypt are still far from those practised in the West, as their investments do not cover risky instruments like derivatives and securitised bonds." As for Egyptian banks with international parent lenders, the report said that those run an independent operation, and accordingly GIH does not believe that they "would be negatively affected by the financial turmoil occurring worldwide." El-Antari agrees. The list of multinational banks which operate in Egypt, but have witnessed collapses in their headquarters abroad, she explained, are registered as Egyptian joint stock companies, unless they are branches. Given this fact, they are primarily affected by conditions in the local market. Nonetheless, should the mother company of any of these banks be subject to liquidation abroad, they have an obligation to pay up their dues. In addition, she stressed, Egypt's Central Bank is a guarantor of deposits of all banks operating in Egypt. As for the slowdown in banking activity, Bassant Fahmi, advisor to the Egypt-Saudi Finance Bank, deems it "a natural reaction, taking into consideration that there is a lack of clarity on how the situation will develop." She explained that the lending process is very much related not only to the economic situation but also to a psychological state. "If investors are not optimistic they will not commit themselves to any new investments. Likewise, if banks are worried about borrowers defaulting, they will be very meticulous in their lending process," Fahmi said. In fact, according to the GIH report, "A slowdown in growth in the Egyptian economy, along with the world financial disorder, expected to partially affect many business segments in Egypt, may cause various companies to default on their loans, which represents a prospective risk that the banking sector could face." But in these cases, it is good risk management that is needed. Khaled El-Gebali, managing director of Barclays for Egypt and North Africa, told the Weekly that one of the reasons why Barclays is one of the very few banks worldwide that have not collapsed is precisely because it has "very strong internal risk management techniques." El-Gebali pointed out that thanks to their strong position, Barclays is one of the few banks allowed by the Financial Standards Authority (FSA) in the UK to raise capital privately. Barclays raised �13 billion worth of capital. "Those individuals and institutions who were putting money in Barclays see enough strength in the future of Barclays to put their money into the institution," he said. Nonetheless, El-Gebali acknowledges that his bank is not invulnerable to what is happening in the real economy. He cited the example of the automotives market saying that the bank is seeing less demand for car loans. "People do not know whether they will be employed six months from now or not. With that uncertainty, the decision is postponed. And that postponement impacts the market," he said. El-Gebali stressed that banking investments are not about lending alone. And when lending is slow the bank should nurture other banking activities such as deposits, insurance products, and cash management or cash and trade services. He pointed out that in times of crises banks will look for markets where there is growth such as Egypt, unlike the rest of the world where there is negative growth. With this in mind, El-Gebali is bullish on Egypt and continues to believe its banking sector is on solid ground. He pointed out that the CBE is encouraging banks to comply to Basel II, which is mainly about risk management techniques, as well as the International Financial Reporting Standards (IFRS), which provides much more transparency as far as risk disclosures are concerned. Another element of utmost importance to the survival of the sector is that of corporate governance. A seminar organised by the Centre for International Private Enterprise and the Egyptian Banking Institute recently met under the slogan, "Corporate Governance in the Banking Sector: The Way Out". Participants, reviewing the conditions that led to the outbreak of the crisis, agreed that a mismanagement of corporate governance was behind the meltdown. In this regard, Mohamed Ozalp, CEO of Banque Misr, stressed that bank management must be able to make informed decisions and each bank must have a written policy setting out a clear vision for the bank, stating for example how much risk they would be willing to take and which sectors it wishes to invest in. Furthermore, he recommended that banks carry out stress tests on a regular basis to make sure they are operating safely.
