The plans mark the latest public sector attempt to tackle the bad loans crisis that has affected the local banking system in recent months. 'This could be seen as a first step towards cleaning up the system. Acquisition may be the only way out for some of the smaller banks, as shareholders may think that subscribing to further capitalisation would merely be throwing good money after bad,' says a local banker. 'The question is what to do from here on, as there is a need to recapitalise these banks without taking away more dividends from the state banks. One possibility is to do what they did in Korea by skimming off the bad loans portions and putting them in a central asset management fund.'

The Central Bank of Egypt has focused its efforts on two key areas of public banking sector reform over the last year: first, by encouraging the 'privatisation of management' by bringing in bankers with private sector experience; and second, by pushing for substantial capital increases. National Bank of Egypt, Bank of Alexandria and Banque Misr, which with Banque du Cairecomprise the 'big four' of the public banking sector, agreed in February to raise their capital by a combined total of £E 4,000 million ($696 million) by the end of the year.

Increasingly demanding capital adequacy laws are being applied to the sector as a whole, putting further pressure on smaller banks. All financial institutions were required to raise their paid-in capital by 31 March to meet the 10 per cent capital adequacy ratio demanded by the central bank. A draft banking law expected to be passed before the end of the parliamentary session in June will set a £E 500 million ($87 million) capital threshold for all Egyptian banks, in a move intended to encourage further consolidation in the sector.