CAIRO, 14 March 2005 — After several years of talking about banking reforms, large and small banks appear to be heading toward revitalization soon. The deadline given by the Central Bank of Egypt (CBE) for banks to meet a major capital increase has been welcomed by analysts and investors, eager for a stronger banking system.
According to the new unified banking law, passed in June 2003, Egyptian banks have to increase the minimum capital requirement from LE100 million to LE500 million, while branches of foreign banks must have a minimum paid capital of $50 million. All banks are required to complete their capital increase by mid July 2005. The law stipulates that the actual deadline should have been the end 2004, but the CEB has the right to extend the period for up to three years.
Banks that fail to meet the requirement will either have to merge, acquired by other banks or be sold completely. Several banks such as Al Mohandes Bank, Egyptian Unified Bank and Nile Bank have been already selected by the CBE for mergers on the grounds they have no chance of reaching the minimum capitalization requirement.
“We did not wait for the deadline because the central bank said that there was no way for these banks to increase their capital,” said a senior official at the CBE’s department for banking supervision who wished to remain unidentified. “It was also part of the CBE’s scheme to reform and privatize the banking sector.”
The CBE has also recently approved the merger of the Housing and Development Bank with the Egyptian-Arab Land Bank.
The government is also keen on reforming over-banked market by selling some of the state’s banks. The first bank lined up for sale is Bank of Alexandria, the country’s fourth-largest public sector bank with a 6 percent share of the market. It is the smallest of four state banks earmarked for sale, a group that collectively controls some 57 percent of assets in the local market. According to the plan, the three other banks, Banque Misr, Banque Du Caire and National Bank of Egypt, will be sold within two to three years.
Marwa Al-Sheikh, a senior analyst at EFG-Hermes Brokerage, said the rationale behind the minimum capital requirement is far from just raising the capital of Egyptian banks. “The idea is to create a strong financial and banking sector able to face problems by making small banks merge with large banks or in other words consolidation for the entire banking sector,” Al-Sheikh said. Press reports and experts expect that the consolidation will reduce the country’s 64 banks to only 23 but Al-Sheikh believes that the number is overly estimated since only some 25 banks need to increase their capital. “Here we believe that the number of banks will drop to some 30 with a capital that will help them overcome problems like non-performing loans,” Al-Sheikh told Arab News.
Around three dozen businessmen — their names now well known in Egypt — have make off with an estimated LE46 billion borrowed from banks over the past five years. The most famous case is of former parliamentarian Rami Lakah who fled a debt estimated at LE370 million.
Many banks are considering increasing their capital by public offering.
Al Watany Bank of Egypt, with a paid capital of LE315 million, is one such case. The bank has announced in December an increase in capital by LE185 million through a public offering of 18.5 million shares, at a par of LE10/share, in addition to issuance fees of LE0.25/share.
Magdi Abdel Fattah, manager of the bonds department of Al Watany Bank, said his bank understands the importance of the CBE’s move that will improve the banking sector performance and tight the central bank’s supervision over the sector as a whole. “Our bank is not in trouble since we have a small gap to fill, but there are many small banks like Al Omaal Egyptian Bank that have very low capital and will not be able to meet the minimum requirement,” said Abdel Fattah. “I think that the CBE has to give banks until the end of 2005 to increase their capital,” he suggested.
Abdel Fattah also said the timing is a problem since the market is still recovering from the economic slump that hit the country in the late 1990s. “Most of the banks will go for the public offering option and there is not enough liquidity in the market,” he explained. “Right now the liquidity is going into two directions, either to the stock market or buying the advantage certificates that offer 12-percent annual interest.”
He added that inviting shareholders to increase their shares or wait for foreign investors to come and save the ship will be hard since many banks suffer from problems related to loan defaults.
Al-Sheikh stressed that banks should not be given more time since they already knew about the move almost 15 months ago. “The central bank did not notice any serious efforts from banks for the past year to give them more time. It is the time to consolidate,” she added. The CBE’s senior official said the central bank had already given banks enough time to meet the law but many banks have not moved yet and are just asking for more time. “It is a fact that giving more time would not help especially that some banks are struggling and would not even be able to encourage their shareholders to pump more money in,” he said.
While several banks have already announced their failure to meet the minimum required capital by next July, large banks agree with the CBE’s policy saying it is time for Egypt to have a strong banking sector in line with the market’s funding needs for investment.
Sahar Al-Sallab, managing director of the Commercial International Bank (CIB) that is the third largest bank of Egypt with paid-in capital of LE1.9 billion, said the move is an “excellent decision” by the central bank for Egypt’s over-banked market. “In Egypt we have a large number of banks and few services, while in strong economies like England and Germany they have few banks and many sufficient services,” said Al-Sallab. The number of the banking institution, she explained, is bigger than the Egyptian capital and therefore many small-size banks have to go out of the market. “Of course this will strengthen the capital adequacy of the banks and will help them to stand against risks related to liquidity or non-performing loans.”