The transition of the Egyptian economy to market principles is leaving few members of the business community unaffected, and Egypt’s bankers are no exception. The money men can no longer exist on a simple diet of loans and letters of credit. Competition is squeezing margins and banks are having to become more creative with the funds in their charge.

‘Banks realise if they want to compete they have got to get into new areas,’ says Gary Jones, managing director of Egyptian American Bank (EAB). That challenge is at least being made easier by the range of new opportunities opening up in the local capital market. Prices on the local stock exchange may be down on last year, but the level of activity is continuing to rise. The government has started to issue a range of financial instruments, including its first five-year bond, and the private sector is expanding as more assets are put up for privatisation.

Foreign banks could once present themselves as the only real innovators in Egypt when it came to developing new products, but local bankers are now keen to challenge that claim. Foreign banks are also giving local banks a run for their money in areas from which they were once excluded. Several foreign institutions – American Express Bank, Citibank, Credit Lyonnais and Arab Bank among them – have taken advantage of new legislation that allows them to operate in local currency. But almost as many have scaled down their activity in Egypt, including Bank of America, Banca Commerciale Italiana and Chemical Bank.

‘The banking scene has not changed considerably since foreign banks were allowed to deal in local currency,’ says Adel el-Labban, general manager of Commercial International Bank (Egypt – CIB). ‘Foreign banks will always be restrained by the risk perception of local business.’

At Arab African International Bank (AAIB), a pan-Arab investment bank that now offers local currency accounts, chief general manager Mohsen Khaled agrees. ‘We feel the commercial banking scene is crowded on the local front, but we feel there is enough room for high quality corporate banking services,’ he says. AAIB has four branches in Egypt at present, and plans to open two more before the end of 1995.

AAIB also has branches in the UK, US and Lebanon, which strengthen the services it can offer local customers and through which it plans to attract foreign funds into Egypt. ‘We believe it is an emerging market, and that there are plenty of opportunities to offer foreign investors,’ Khaled says. ‘With the liberalisation of the economy, these opportunities are going to grow.’

The privatisation programme is providing many of the new investment opportunities. But foreign investors, more often than not, complain about being squeezed out of the bidding for new issues by an almost insatiable local demand for shares.

Catering for this local demand are a host of mutual funds set up by local banks, which by October will have raised about £E 1,300 million. Five banks have launched mutual funds. Two of their number – National Bank of Egypt and Banque Misr – are already raising capital for the second in a series of funds they plan to launch.

EAB has also entered the mutual fund market. According to Gary Jones, the EAB fund, which was launched in 1994 and raised £E 200 million, has proved a successful way of attracting new customers. ‘We expected a shift from deposit accounts into the mutual fund, but new customers account for 60 per cent,’ he says.

The government sell-offs have been unable to keep up with the demand for shares with the result that there was a sharp rise in prices on the local bourse last year. In 1994, the Egyptian stock exchange was one of the world’s top performing emerging markets, as all the main market indices rose by more than 100 per cent. But this year has seen a correction, with all the indices now lower than at the start of 1995.

Reviving momentum

Public Enterprise Sector Minister Atef Obeid, in charge of the privatisation programme, has responded to the critics who complain about the market’s lost momentum (Cover Story, MEED 1:9:95). In July he announced several technical improvements to the trading system. In August, Obeid met business people to discuss ways of improving privatisation proceedings. Several measures have followed, including new regulations which require public companies to be listed on the exchange before being sold off.

But it is not only the authorities that have come in for criticism about the market’s performance this year. Mutual funds have been blamed for exacerbating the problems by increasing demand and falsely inflating prices when the supply of shares was not adequate. Not everyone has chosen to follow the mutual fund strategy.

‘We march to a different drum,’ says CIB’s El-Labban. ‘The market lacks sufficient liquidity to develop a strategy based on traded shares.’ In addition, he says these funds have a significant downside risk, because local banks must appoint an outside manager, but if the fund performs badly it is the reputation of the bank that launched the fund that will be tarnished.

‘Our policy is to develop a very strong investment banking arm through affiliate companies with the focus on merchant banking and advisory services,’ he says. CIB has set up its own subsidiary, Commercial International Investment Company, which will now carry out the investment activities of CIB. Other banks are starting to follow suit. EAB, for example, is planning to set up its own brokerage firm and investment company by the end of 1995.

Diversification may be the fashion of the moment but traditional banking activities still require attention. For a country with a growing private sector, the banks’ track record in supporting private business has not been exemplary. Lending ratios remain low. At most banks the value of loans in relation to total assets ranges between 30-50 per cent. The highest ratio reported in 1994 – 54 per cent at CIB – still leaves plenty of room for a more efficient mobilisation of funds.

Mohammad Ozalp, senior general manager at Misr International Bank (MIBank), says banks are becoming more active lenders. By the end of 1995, most banks should report expanded loan portfolios, he says. But he admits that the banking community is not doing enough to channel funds to entrepreneurial projects. ‘Banks are not creative enough in venture capital,’ he says.

Bankers would also like to see more activity in the corporate bond market. The opportunity for local companies to raise money through issuing corporate bonds has been available during the past two or three years. Yet, as interest rates rose during the period, companies have preferred to borrow directly from banks instead of venturing into the bond market. With interest rates now stabilising, the corporate bond option is beginning to look more attractive.

Only two corporate bonds have been in circulation so far, issued by Hoechst Orient and Victoria United Hotels, but more are on the way. The first issue is likely to be a £E 500 million bond planned by Metallurgical Industries Company (Micor), to refinance the debts of some of its affiliates. EgyptAir has also held preliminary discussions for a bond launch to help finance the purchase of six new long-range aircraft, a deal expected to cost between $800 million- 900 million.

Camouflaged loans

However, interest rate stability is only one prerequisite for a healthy bond market. ‘Without a rating agency, companies will continue to issue bank supported bonds,’ says El-Labban. This, he says, means the bonds are more like a ‘camouflaged loan’.

The market has, however, been given new impetus by the government’s issue of five-year treasury bonds worth £E 3,000 million. It is the first long- term, tradable government instrument on offer to local banks, and the treasury has government approval to issue an additional £E 12,000 million. ‘As a bank, it is not my goal to buy treasury bonds, my main goal is commercial banking. But if I have excess funds, it is an attractive way to invest those funds,’ says MIBank’s Ozalp.

The bonds do not yet have universal appeal. ‘The government bond is about three years too late, and 3 per cent too low,’ says one Egyptian banker. With a 12 per cent six-monthly coupon, bankers say inflation is likely to wipe out most of the gains made from holding the bonds over a long period. Although the capital gains on government paper are tax-free, this is small compensation for the impact of inflation on real earnings. Short- term treasury bills are still more attractive, despite the lower pricing, mainly because they carry none of the long-term risk, he adds.

‘If it was a short-term tactic to borrow cheaply then the bond issue was successful. But the government ought to realise that if it is to create a viable capital or treasury bond market, it needs to take account of the long-term inflationary outlook,’ comments another sceptical Cairo banker.

Bankers are also keen to see action on public sector debts, which are estimated at £E 66,000 million. Public sector banks hold most of these debts, which bankers estimate are equivalent to the net worth of these public sector institutions ‘It is an issue that is continually swept under the carpet,’ says one local banker.

But the government has shown it is not immune to criticism, and in early August, Obeid announced a three-year programme to clear up the debts problem. Indebted companies will be required to meet a certain level of profitability that will be agreed with the banks. They will also settle the debts through selling idle assets and using privatisation receipts secured from the sale of profitable affiliates.

‘We’re going through a phase that has happened in other markets as the market deregulates,’ explains El-Labban. It has

created a tougher, more competitive environment. But deregulation has also revitalised the financial sector, and bankers are eager to see further changes. Most bankers, like Ozalp, can afford to be cautiously optimistic: ‘It’s getting there. Obviously things are not going to change overnight.’