Egypt: Finance

Egypt: Financial Sector Profile

Egypt’s economic performance since 2004 has been impressive, averaging 7 % in the years through 2007, underpinned by a supportive external environment and the structural reform program that has included the liberalization of foreign trade, investment, the exchange market, the privatization of national entities, and measures to strengthen bank balance sheets and banking supervision.

GDP increase is expected to slow down to 4.3 % in 2008/2009 and to 4 % in 2009/10. The decline is largely attributable to the negative repercussions of the world financial crisis on the economy, which saw a drop in levels of foreign direct many– of which Egypt is the second major recipient in Africa – and lower Suez Canal and tourism revenues. In addition, fluctuations in commodity and food prices led to lower real incomes, higher inflation, which reached peaks of 20 % in autumn 2008, and increasingly large trade and budget deficits. In response to the downturn, the Government has implemented a multi-pronged response program including a USD 2.7 billion stimulus package and a package of incentives to encourage private sector investment.

The Egyptian financial sector has escaped the worst of the international crisis and is expected to continue to do so. The relative financial stability reflects the strengthening of balance sheets under the reform program, improved banking supervision, conservative practices with respect to funding, investments, and lending, and the central bank reiterating its existing guarantee of amount bank deposits.

In relation to Egypt’s total people, banks offer few outlets for basic banking services. Based on 2006 and 2007 estimates, 41 % of the total people had access to financial services, with about bank branch for each 27,624 inhabitants – a smaller proportion than for nations at similar per-capita income levels. In general, banks tend to concentrate on the urban people. National-owned banks have the majority balanced branch network in general, although their presence is still better in urban than in rural areas.

The microfinance sector remains largely undeveloped, with an estimated number of active beneficiaries of microcredit of no additional than 1.2 million, compared to an estimated request of 21 million people. Nearly 450 microfinance institutions operate in the country and the major 15 serve nearly 85 % of the beneficiaries. Prevailing products include individual loans to finance existing small and medium enterprises (SMEs), which account for roughly 50 % of the beneficiaries, and solidarity group loans to finance people with limited income, especially women, accounting for around 48 % of the beneficiaries.

Mobile banking is increasingly available to consumers in Egypt with increasing competition in this area. In recent years, several major banks have teamed up with mobile banking service providers to enter the market.

The banking sector, dominated by national-controlled banks, accounts for 95 % of total economy assets and includes 4 commercial banks, 3 specialized banks, and 17 joint-venture banks with national participation. Financial intermediation by the banking system is weak by international standards: savings are high and banks collect large deposits, amounting to about 100 % of GDP, but they lend little. Nevertheless, Egypt is currently moving towards becoming the biggest financial center in the region.

As part of the reform program, the Egyptian banking system is being substantially revised, with the exit of several weak banks, large scale financial restructuring, divestiture of national shares in joint venture banks, and over-aching regulatory reforms. The full implementation of the program will reduce national participation from 75 to 43 % of total bank assets and will as well lead to consolidation of the banking system with the number of banks decreasing from 54 in 2004 to 40 by the end of 2008.

Non-bank finance remains moderately developed in Egypt, as financial institutions face obstacles that range from the lack of well-functioning and efficient means of registering and enforcing property rights and limited data on potential clients and borrowers.

The Cairo and Alexandria Stock Exchange (CASE) has witnessed increased activity in recent years. Equity market capitalization grew from 30 to 90 % of GDP between 2001 and 2007, and the turnover ratio increased from 14 to 49 % in the same period. The investor base expanded significantly, with foreign investors increasing their equity holdings from 7 to 10 % of GDP. However, the number of traded companies remains small, at under 200.

Tradable government debt has increased from 22 to 36 % of total debt and from 13 to 27 % of GDP since 2001. The average maturity of tradable securities has increased from 120 days to 2.1 years.

Credit data and market data systems remain weak in Egypt. Bankers and firms have difficulty making sound credit decisions due to lack of data on clients’ creditworthiness and sector-related statistics. Evolution has taken place, however, with the first credit data company being established in 2007 with participation by additional than 32 banks.

Egypt’s insurance sector is small compared to the size of the economy and largely publicly owned. Only around million Egyptians use insurance products. Total insurance premiums represent about 0.8 % of GDP, and assets amount to less than 3 % of GDP, low ratios by comparison with other middle-income nations. The major insurers are majority national-owned, accounting for about 70 % of premiums. However, additional foreign insurers are entering the market. In May 2008, the insurance law was amended to strengthen the role of the Egyptian Insurance Supervisory Authority, to allow for banks’ involvement in marketing of insurance products and to require companies to specialize in either life insurance or property insurance.

Mortgage finance is constrained by limited access to long-term funding, cumbersome property registration procedures, inadequate collateral enforcement, lengthy court process, and untested foreclosure procedures.