Sparkles in the Egyptian banking sector


The Egyptian banking sector has witnessed rapid changes and reforms and deregulation in the 1990s. These changes have led to a banking industry characterized by fast technological changes, enlarging institutions, and the entry of multinational financial institutions into the banking scene. These changes have contributed not only to intense competition among different banks in the market, but have also seriously impacted on segmenting and targeting the type and profile of their customers (Elsharnouby, T., & Parsons, E., 2010) How the banking sector is restructured according to these reforms and changes?

The Egyptian banking sector consists of two major types of banks. The first are commercial banks, which usually accept deposits and provide finance for a wide variety of corporate and retail customers. The second are specialized banks, which carry out mainly corporate operations, serving a specific type of economic activity such as industry, agriculture, housing, or rural development. Commercial banks operating in Egypt can be classified according to their ownership into state-owned (public or governmental), private and joint venture, and branches of foreign banks (Elsharnouby, T., & Parsons, E., 2010).

Over the last three decades, a range of economic and cultural circumstances have contributed significantly to a situation in which state-owned banks have dominated the banking sector in Egypt (Elsharnouby, T., & Parsons, E., 2010). “These banks have a close relationship with state-owned companies and governmental sector which give them pre step over their competitors. They are also the major participant in the equity capital of most joint-venture banks” (Central Bank of Egypt, 2008).

Over the last two decades, the Egyptian banking sector has witnessed significant changes in the legislations and rules that govern it. Examples of these changes include the removal of regulations that discriminate against private banks like allowing branches of foreign banks to operate in local currency, foreign partners were allowed to own majority equity holding in JV banks, and transactions on the foreign exchange market were liberalized (Elsharnouby, T., & Parsons, E., 2010).

In sum, as a result of this reform, many barriers to competition have been removed in order to create a healthy market. These changes made it difficult for state-owned banks to maintain their domination in the Egyptian banking sector. The flat organizational structures and customer-orientated culture of the private, joint-venture, and foreign banks have made them ready for competition with state-owned banks. This process of the gradual liberalization of banking services, twinned with the increasing freedom given to private banks (Elsharnouby, T., & Parsons, E., 2010).This give the banking sector a power to withstand shocks locally or enable banks to diversify the risk of their portfolios and be flexible with market circumstances which enable government to have a powerful arm in the market that could support and implement their initiative to push the economic wheel like SMEs initiative.

Liberalization and privatization of the Egyptian banks

The situation of Egypt has been exceptional in the banking liberalization and deregulation history since it has followed a policy of restrained and measured deregulation without the same impact had been on other countries. In Eastern Europe, The loan expansion policy appears to less be efficient, but it give a signal of weaker risk management. Our experience in Egypt that it is possible to deregulate or liberalize a banking system taking into consideration the risk management associated with loans (Fethi, M. D., Shaban, M., & Weyman-Jones, T., 2011).

Although the Economic Reform and Structure Adjustment Program (ERSAP) aimed to liberalize the financial sector overall including the banking sector, the Egyptian banking industry is still segmented as, the public sector banks seem to have the upper hand in having the higher percentage of deposits as well as financial intermediation and existence. This is due to the cultural effect on the Egyptian households’ perspective, among other reasons which played a crucial role in the emergence of such a segmented industry (Fethi, M. D., Shaban, M., & Weyman-Jones, T., 2011).

Most of Egyptian households would prefer to deposit their savings in public banks. They consider them safer and more trustworthy compared with the private banks. Mostly the governmental entities, for political reasons, deal with public banks rather than private banks despite the government initiatives, which allowed them to deal with both private and foreign banks since 1993 (Fethi, M. D., Shaban, M., & Weyman-Jones, T.,2011).

The public sector banks then keep higher percentage of deposits in the market as they have more sources of finance. This gives them an advantage over both private and foreign banks in granting loans and to increase their investing and operating activities. The policy maker try to diversify risk by increasing number of private banks to mitigate the risk of only few banks who dominate the market with certain products or services. In order to avoid what happened in 1997 when total granted loans decreased by 18% compared to previous year due to the high attractiveness of the capital markets which is an alternative source of finance particularly for long-term projects (Fethi, M. D., Shaban, M., & Weyman-Jones, T.,2011).

The privatization efforts could also have had an indirect effect on the public Banks’ market share. This was represented in an indirect swap of their market share to other forms of ownership. It is concluded that there is still dominance from the public banks in the Egyptian banking industry among the private banks in terms of total assets, total loans and total deposits (Fethi, M. D., Shaban, M., & Weyman-Jones, T.,2011).

Productivity of banks

The banks with higher loans to deposit ratio and higher returns on equity have higher productivity growth ratios which reflecting good management practices and enhance their competitive position in the market. The size of bank portfolio seems to be associated with an increase in productivity. The history and existence assist to reach higher productivity ratios. (Jriesat, A., & Hassan, H., 2016). It has been revealed that during the 2008 crisis the banking sector wasn’t significantly affected as banking assets are well allocated and risk calculated.

Global financial crisis effect on banking sector

Before the global financial crisis, Egyptian banks are having high liquidity ratios, well capital, and highly regulated. However banks profitability was negatively affected because of the collapse of the Egyptian stock market while the banks are not investing on risky instruments like derivatives or securitized bonds. The banks suffered losses on their portfolio investment due to the slow down on the economy. After the crisis central bank of Egypt take decisions like putting a deposit insurance to protect small depositors or investors. And establish non-banking financial sector regulatory body to regulate capital markets, insurance companies and mortgage finance companies. Finally, the macroeconomic environment for Egyptian banks became more challenging, characterized by lower per capita GDP, high unemployment and soaring consumer price inflation (Jriesat, A., & Hassan, H., 2016)..

SMEs is the engine of economy

Loans to SMEs playing avital role in an emerging economy in raising living standards, it is highly recommended that the CBE encourage banks to lend to this vital sector. It may be true that the central bank has already started giving these incentives by exempting loans to SMEs from the legal reserve ratio since the eruption of the Global Financial Crisis (Abdel-Baki, M. A., 2012).it obligates banks to give 20% of their credit portfolio to SMEs and injecting market with EGP 20b for this initiative. The main obstacle is that SMEs lack enough collaterals make it difficult to deal with such companies and some banks lacks experience to deal with such segment. The SMEs considered in Egypt as one of the major contributors to our GDP and tool to attract the unregistered economy traders to enter the banking sector if the initiative succeed who are representing a huge potential to improve the economy.[vc_row][vc_column][vc_tta_accordion][vc_tta_section title=”List of references” tab_id=”1514372105806-b99fed62-12df”][vc_column_text]

  • Elsharnouby, T., & Parsons, E. (2010). A broader concept of relationships: Identifying new forms of consumer–provider interactions in Egyptian financial services. Journal of Marketing Management, 26(13-14), 1367-1388. doi:10.1080/0267257x.2010.523833
  • Fethi, M. D., Shaban, M., & Weyman-Jones, T. (2011). Liberalisation, privatisation and the productivity of Egyptian banks: a non-parametric approach. The Service Industries Journal, 31(7), 1143-1163. doi:10.1080/02642060903431686
  • Abdel-Baki, M. A. (2012). Coalitions within the Egyptian Banking Sector: Catalysts of the Popular Revolution. Business and Politics, 14(01), 1-24. doi:10.1515/1469-3569.1385
  • Jriesat, A., & Hassan, H. (2016). Productivity Change of the Egyptian Banking Sector: A Two Stage Non-Parametric Approach. Topics in Middle Eastern & North African Economies: Proceedings of the Middle East Economic Association. 18(1), 145-155

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