Identifier
Created
Classification
Origin
05CAIRO6171
2005-08-10 13:50:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Cairo
Cable title:  

EGYPT: BANKING SECTOR REFORM UPDATE

Tags:  ECON EFIN ETRD EINV PGOV EG USTR 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 CAIRO 006171 

SIPDIS

SENSITIVE

STATE FOR NEA/ELA, NEA/RA, AND EB/IDF
USAID FOR ANE/MEA MCCLOUD
USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT/PETERS
COMMERCE FOR 4520/ITA/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV PGOV EG USTR
SUBJECT: EGYPT: BANKING SECTOR REFORM UPDATE

Sensitive but Unclassified. Please protect accordingly.

Ref: Cairo 5941

-------
Summary
-------

UNCLAS SECTION 01 OF 03 CAIRO 006171

SIPDIS

SENSITIVE

STATE FOR NEA/ELA, NEA/RA, AND EB/IDF
USAID FOR ANE/MEA MCCLOUD
USTR FOR SAUMS
TREASURY FOR MILLS/NUGENT/PETERS
COMMERCE FOR 4520/ITA/ANESA/TALAAT

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV PGOV EG USTR
SUBJECT: EGYPT: BANKING SECTOR REFORM UPDATE

Sensitive but Unclassified. Please protect accordingly.

Ref: Cairo 5941

--------------
Summary
--------------


1. (SBU) As part of its banking sector reform program, the
GOE has pushed legislation through parliament designed to
strengthen the sector. As a result, banks now have more
leeway in pursuing legal remedies and setting compensation
for public bank staff. Requirements on foreign exchange
bureaus and international money transfer agencies have also
been relaxed. Changes were also made to stimulate a
moribund mortgage market by allowing foreign institutions to
operate in it, permitting the establishment of credit rating
agencies, and allowing banks to foreclose on mortgaged real
estate. The Central Bank of Egypt (CBE),which is
undergoing positive internal reform, also signaled its
commitment to sectoral reform by forcing banks to meet new
minimum capital requirements, which resulted in the merger
of several banks. The legislative changes and recent CBE
actions indicate that Nazif government and the reform-minded
CBE Governor are determined to address long-festering
problems in the banking sector. While the GOE still faces
some significant hurdles in restructuring the banking
sector, progress to date demonstrates that the political
will exists to move forward with the reform agenda. End
summary.

--------------
Banking Law Amendments
--------------


2. (U) In addition to progress on privatization of public
and joint venture banks (reftel),the GOE has advanced its
banking sector reform program by pushing through parliament
several amendments and additions to Banking Law 88 of 2003.
Law 162 of 2004, issued December 22, 2004, amended the
banking law to allow for suspension of legal proceedings
against defaulting clients if those clients settle their
outstanding debts with their banks. The law had previously
required that legal proceedings brought against clients in

default be completed, regardless of the disposition of the
loans. A number of high profile cases last year resulted in
jail sentences for prominent businessmen, prompting a flight
from Egypt by a number of other businessmen fearing similar
fates.


3. (U) Law 93 of 2005, issued June 21, made a number of
amendments to the banking law. In what some CBE officials
claim is the most significant of the amendments, Law 93
liberalized compensation schemes for public banks employees.
Public bank employees were previously governed by broad
public sector compensation regulations, which tended to be
overly rigid and uncompetitive in comparison to market-based
compensation schemes. Public banks may now determine their
own compensation packages designed specifically to attract
talented employees and improve overall employee performance.


4. (U) Another significant amendment was the lowering of
minimum capital requirements for foreign exchange bureaus
from LE 10 million to LE 5 million. Banking Law 88 of 2003
had raised the minimum capital requirement for exchange
bureaus from LE 1 million to LE 10 million, setting July 15,
2005 as the deadline for meeting the new requirement. Many
exchange bureaus were up in arms over the LE 10 million
requirement, fearing they would not be able to raise the
additional capital and would be forced to exit the market.
Although the new lower minimum capital requirement may give
exchange bureaus some breathing room, many may still fail to
meet the new LE 5 million requirement, and will likely be
forced to exit the local foreign exchange market.


5. (U) Law 93 also amended the banking law to allow the CBE
Board of Directors to issue licenses to money transfer
companies. This amendment addresses longstanding obstacles
faced by foreign money transfer companies, including Western
Union. In the past, money transfer agencies had been
granted special administrative treatment to handle these
obstacles, but the amendment provides a new legal basis
under which transfer companies will operate.


6. (U) As part of an effort to stimulate a moribund
mortgage market, Law 93 also included amendments authorizing
international financial institutions to secure and guarantee
finances and operate in the mortgage finance market. Many
banking sector analysts had noted the lack of a developed
mortgage financing market as one of the major impediments to
development of Egypt's real estate sector. Despite
increased demand and rising prices, the lack of access to
efficient mortgage financing hindered growth in the real
estate market.


7. (U) Law 93 also removed another obstacle to growth of
the mortgage market by allowing for the establishment of
independent credit reporting agencies. Bank managers and
credit analysts had long expressed frustration at the lack
of credit agencies in the Egyptian market, noting that their
absence made credit risk assessment especially difficult.
Law 93 provides a legal basis to establish credit agencies,
complementing efforts already underway by several banks and
financial institutions, notably CIB, NBE, HSBC Egypt and
Bank Misr, to set up such agencies. Independent credit
rating agencies will provide a base of information on
financial sector clients that can be shared among banks,
mortgage finance and financial leasing companies.


8. (U) Law 93 also added a new article to the banking law
that allows banks to foreclose on real estate mortgaged to
the bank under the Real Estate Finance Law. This new
article strengthens banks' ability to manage mortgage
finance operations. Banks were previously in a weak
position to foreclose on real estate assets, which added to
their reluctance to enter into the mortgage market. With a
strengthened hand, banks are now in a better position to
expand mortgage operations, meeting the increased demand
noted above.

--------------
Consolidation of the Banking Sector
--------------


9. (U) Another aspect of the GOE banking sector reform
program is consolidation of the sector and reduction of the
number of banks operating in the Egyptian market. Most
banking sector analysts believe the market is over-banked
and under-serviced. In what is likely to be the biggest
step toward consolidation, CBE recently refused requests
from numerous banks to extend the grace period for meeting
the new bank capitalization requirements, which ended July

15. The banking law required banks to raise their minimum
capital to LE 500 million for Egyptian banks and $50 million
for foreign banks' branches by July 15.


10. (SBU) As a result of CBE's enforcing the deadline, 14
banks are now in the process of merging, 11 voluntarily and
3 under pressure from CBE. CBE is also forcing a number of
banks to exit the market. Last week alone, 3 banks - Iraqi
Rafidin Bank, Lebanese Gamal Trust Bank, and Sudanese
National Bank - were forced to close their operations in
Egypt (Note: Rafidian Bank will continue to process pay
transfers from Iraq). CBE Deputy Governor Amer noted to
econoff that although consolidation of the banking sector
was scheduled to take 2-3 years, it is likely to be
completed by 2006. Analysts provide varying assessments,
but most believe that approximately 20-25 banks will
continue to operate in the market after consolidation is
completed.


11. (SBU) While most bankers agree that consolidation of
the sector is a positive step, some are critical of CBE's
preferred method of merging banks to meet the new capital
requirement. Essam Abdel Hammed, Chairman of Alexandria
Commercial and Maritime Bank, told econoff on a recent visit
to Alexandria that CBE is approaching mergers in the wrong
way. Some of the smaller banks in the sector have been
merged into larger banks with good management, but CBE has
also approved the mergers of small, weak banks with other
small, poorly managed banks. Abdel Hammed believed this
would not ultimately strengthen the banking sector as a
whole, as these new banks would remain weak and poorly
managed, albeit with the required minimum capital. Abdel
Hammed predicted a second wave of consolidation a few years
down the road, once all banks have met the new minimum
capital requirements and the sector becomes more
competitive.


12. (SBU) International investors are taking advantage of
this period of consolidation to enter or expand their
operations in Egypt. Mona Nasrallah, Head of the Alexandria
Branch of Calyon Bank, told econoff that Calyon, a French
bank, was looking to purchase the GOE's shares in one of the
joint venture banks currently up for sale. The French
Societe General Bank has already purchased a controlling
share in National Societe General Bank in Egypt (reftel).
The Greek Piraeus Bank also recently acquired 69.3% of the
Egyptian Commercial Bank for a total of 19 million Euros.
Roderick Richards, Managing Director of Egyptian American
Bank (EAB),told econoff that many of the inquiries he has
received about EAB's impending sale have come from foreign
investors.

--------------
Reform at CBE
--------------


13. (U) CBE senior management also continues to restructure
CBE itself and improve the quality of its personnel. One
primary focus is establishment of an effective system for
implementation of monetary policy. The European Central
Bank and the EU are assisting CBE in creating models and
systems for formation and implementation of long-term
monetary policy. As noted in previous reporting, the chosen
monetary policy framework is inflation targeting, ultimately
aiming to maintain inflation within a certain range. CBE
intends to use short-term interest rates as the operational
target for the policy. Plans are underway at CBE to hire an
IMF expert by September 2005 to manage implementation of the
new inflation targeting policy.


14. (SBU) USAID is also providing assistance to CBE in the
personnel restructuring. Mohamed Ozalp, Vice President of
Bank Misr, told econoff that the effect of El Okdah's reform
of CBE personnel could be seen most clearly in the behavior
of auditors sent to audit Bank Misr's books. According to
Ozalp, in the past CBE auditors primarily conducted audits
to ensure that the public banks were cooperating with
government finance and spending priorities, and not acting
too independently. There was also a significant amount of
corruption. Since El Okdah took office in December 2003,
CBE audits of the public banks have been less frequent and
more professionally conducted, aimed at ensuring that the
banks were following banking regulations.

--------------
Comment
--------------


15. (SBU) While the GOE still faces some significant
hurdles in restructuring the banking sector, progress to
date demonstrates that the political will exists to move
forward with this aspect of the GOE's economic reform
agenda. The strong interest in Egypt's banking sector among
potential investors, particularly international investment
banks, is testimony to renewed confidence in Egypt's economy
as a whole. This strong international response to the Nazif
administration's performance bodes well for re-appointment
of the economic reformers in the Nazif Cabinet after Egypt's
September 7 presidential election. End comment.
JONES