Central Bank of Egypt

Egypt has a population of approx. 78 million, but it is

estimated that only 10% have a bank account.
The Central Bank of Egypt (CBE) , the country's central bank,
was founded in 1961. The bank had a total paid up capital to
the extent of 1,000 million Egyptian pounds. Since then the
bank has been operating as an independent body.
CBE conducts supervision over banks in Egypt to ensure the
soundness of their financial position and to evaluate their
performance from the perspective of risk-based supervision.

http://www.centralbanknews.info

Banking Sector Structure

Majority loans are to the corporate segment, with retail sector loans making

up 19% of total loans and 7% of assets, nonetheless growing significantly.

The SME sector is also underserved, as SMEs account for 80% of the private
sector workforce, but only a fraction of their working capital requirements are

financed by banks. That is why the Egyptian government launched NILEX

NILEX (Nile Stock Exchange , established 2007) is the Egyptian Exchange'

market for growing medium and small companies ( with maximum paid in
capital 50 million L.E.).

The number of listed companies in NILEX is only 19 companies.

http://nilex.com.eg

Central Bank of Egypt

Important objectives of the bank are as follows:

Issuance of Banknotes
Maintaining Price Stability
Managing the gold and Foreign Exchange Reserves
Implementing monetary and credit policies
Supervising the national payments system.
Recording and following up Egypt's external debt (public and private)

It is worth noting that the public debt estimated at 2010 to be

around 89.5% of GDP (1,080 billion Egyptian pound) .The figure
includes domestic debt of 888 billion pounds, equivalent to 73.6
percent of GDP.
.The gross external debt reached approximately 35 billion US
dollars (15.9% of GDP) in June 2011
Foreign currency reserves stood at $25.01 billion in August 2011

Central Bank of Egypt

Important objectives of the CBE are as follows:
Checking whether banks are complying with CBE
regulatory standards including:
Minimum reserve and liquidity ratio
Maximum limits of a banks exposure to a single
customer
Banks connected parties and exposure to abroad
The asset-liability matching in terms of maturity and
currency.

Regulatory Standards
Minimum paid-up capital requirement of EGP 500 million for
domestic banks and US$ 50 million for branches of foreign banks.
Minimum ratio for capital base to risk-weighted assets of 10%.
Liquidity ratio of 20% on the Egyptian pound portion of their liquid
liabilities, and 25% in respect of their foreign currency portion.
Minimum cash reserve requirement with CBE of

14% of average 14-day local currency deposits and

10% of average quarterly foreign currency deposits.
Excluded are local currency instruments with maturity above 3 years.
Egyptian pound reserves are non-interest earning, unlike foreign currency
reserves

Highest liquidity level in the region

Egyptian banks have been historically
characterized by high liquidity levels as
evident by their low loan to deposit (LTD) ratio
compared to regional peers.
In fact, the LTD ratio has dropped from 74.0%
in 2002 to 52.3% at the end of September
2009 to reach one of the lowest levels, not
only on a regional scale, but also globally.

Highest liquidity level in the region

Egypt is distinctly underleveraged with a LTD ratio of 52.3% for banking in

September 2009. Whereas the high liquidity ratio provides comfort to investors at

times of economic slowdown, it is often looked at unfavorably at times of an

economic boom.
We believe that the main factors that led to such a low LTD ratio are:
1. Rigid credit policy implemented by the CBE in an effort to improve the quality of
banks' balance sheets.
2- The concentration of credit to blue chip corporations. (A nationally
recognized, well-established and financially sound company)
3- Reluctance to aggressively penetrate retail and SME segments.
4- Attractive yields on government securities

Regulatory Standards(cont.)
Bank placements (excluding branches of foreign banks) with a single
correspondent abroad should not exceed 10% of total placements

with correspondents or US$ 3 million, whichever is larger, taking

into account that total placements should not exceed 40% of the
banks capital base.

The maximum single obligor exposure (including related

parties) has been reduced to 20% from 30% and 25%
previously.

Egyptian Banking Sector

The Egyptian banking sector faced serious problems in the

last few years.
This is due to the fact that, before 1990, the Egyptian
banking sector was controlled mainly by state-owned
banks
Egyptian government imposed barriers against the entry
of foreign banks. This is done by applying restrictive
regulations
Non-profitable banks were supported by the
government and were left to operate while measures
such as restructuring and merging were not applied

Egyptian Banking Sector

NPL accumulated and reached its peak due to sever
corruption associated with the lending activity, the weak
supervision by CBE, lacked innovation, poor quality of
governance structure and poor asset quality
Besides, Egyptian government forced banks to lend
state-owned companies; which resulted in 30bn EGP was
owed by such companies to the four state-owned banks.
This resulted in an inefficient and uncompetitive
banking sector which consequently leads to a poor level
of financial intermediation

Egyptian Banking Sector

Egyptian government started to implement the first
stage of the Financial Sector Reform Program
(2004-2008), authorized in September 2004.
The first stage focused on four pillars:
(1) removing government demonization on banking sector
and restructuring state-owned banks
(2) raising the minimum capital requirement for banks,
(3) strengthening the banking supervision at CBE,
(4) addressing of the problem of NPL.

Egyptian Banking Sector

1. Egyptian government started with the privatization of
state owned banks and the divesture of the
shareholding of state-owned banks in a number of joint
ventures and foreign banks
80% of Bank of Alexandrias stake - the fourth largest
state-owned bank - was sold to Italys Sanpaolo IMI
Group for USD1.61 billion

Egyptian Banking Sector

National Bank of Egypt issued 20% of its equity stake

through Global Depositary Receipts (GDR) on the
London Stock Exchange.

GDR are certificates that represent an ownership interest in

the ordinary shares of stock of National bank of Egypt , but
that are marketed outside of the banks home country to
increase its visibility in the world market and to access a
greater amount of investment capital in other countries.
Individual investors in the countries where the GDRs are
issued buy them to diversify into international markets.
GDRs let you do this without having to deal with currency
conversion and other complications of overseas investing.

Egyptian Banking Sector

2. Raising the minimum capital requirement for
banks

Egyptian parliament passed a new banking sector law

(Law No. 88/2003) requiring a minimum capital
requirement of EGP 500 million for domestic banks and
USD 50 million for branches of foreign banks
The ratio of banks minimum capital requirements to
their risk weighted assets has increased to 10% and an
additional capital injection to all state-owned banks has
been implemented
This forced many banks into mergers and acquisitions to
meet the new capital requirements.

Egyptian Banking Sector

3. Strengthening the banking supervision at CBE:
The purpose of such reform is to assure that CBEs
supervisory role is matching with the latest international
standards.
The supervisory method implemented by CBE focused on
evaluation of risks and assessment of the Egyptian
Banks abilities to identify current and future risk.
CBE has the powers to investigate the transactions of
banks and other financial institutions in order to combat
money laundering

Egyptian Banking Sector

4. Addressing of the problem of NPL

The government rescheduled more than 45% of NPLs (26

billion EGP) and the outstanding loans of state-owned
enterprises to state owned banks
This is done by swapping such loans for long-term
government bonds to be repaid by debtor firms over 20
years
Each banking institution was obliged to install an internal
audit department to avoid future recurrences of NPLs.

Egyptian Banking Sector

After the completion of the first stage of the

reform program, the government will focus on
implementing the second stage (2009-2011) of
banking sector reform

This stage aims at :

Egyptian Banking Sector

1. Prepare and implement a comprehensive program for the
financial and administrative restructuring of specialized stateowned banks (the Principal Bank for Development and
Agricultural Credit, Egyptian Arab Land Bank, and Industrial
Development and Workers Bank of Egypt), which is expected
to positively affect these banks performance by the end of
the second stage of the said banking reform plan
2. Follow up the results of the first stage of the restructuring
program of the National Bank of Egypt (NBE), Banque Misr
(BM) and Banque du Caire (BdC), which revealed that the
first stage of the reform plan (2004/2008) had already
yielded fruit and positively affected their performance levels.

Egyptian Banking Sector

3. Apply Basel II standards in Egyptian banks to enhance their
risk management practices.
In this context, a protocol had been signed with the European Central
Bank and seven European central banks to provide a three-year
technical assistance program launched on 1 January 2009, to
implement Basel II requirements in the Egyptian banking sector.

What do we mean by BASEL I & II???

Tasks Performed By Capital

Provides a Cushion Against Risk of Failure

Provides Funds to Help Institutions Get Started
Promotes Public Confidence
Provides Funds for Growth
Regulator of Growth
Role in Growth of Bank Mergers
Regulatory Tool to Limit Risk Exposure

Reasons for Capital Regulation

To Limit the Risk of Failures
To Preserve Public Confidence

Basel I and II
In 1988, the Basel Committee on Banking
Supervision
starts to set up rules and
regulation aiming to enrich the stability and
soundness of the international banking system
This ends up with the development of a new
framework, which known as Basel I
For more detailed explanation see page 486

The Basel Agreement on

International Capital Standards
An International Treaty Involving the U.S.,
Canada, Japan and the Nations of
Western Europe to Impose Common
Capital Requirements On All Banks Based
in Those Countries

Basel I and II
Summary of Basel I :
Primarily focused on Credit risk
Sets out simple rules for calculation of minimum
regulatory capital by using a risk weighting framework
All assets are assigned a weight to reflect their
riskiness
Assigned Risk Weight x Exposure = Risk weighted Asset
Risk weightings at
0% (for cash, claims on central
governments denominated and funded in national currency),
10%, 20%, 50% and 100% (for claims on corporate)

Basel I and II
Summary of Basel I :
Sum of Risk Weighted Assets x Capital Ratio = Minimum
Regulatory Capital
Where Banks capital under Basel I is divided into two main parts:
Tier 1 (core) capital included the book value of common
stock, non-cumulative preferred stock, share premiums (
surplus), retained profit (undivided profit).
Tier 2 (supplementary) capital included the allowance
(reserve) for loan and lease losses, cumulative preferred
stock, and long-term subordinate debt capital instruments.
Where subordinated debt capital representing long-term
debt capital contributed by outside investors , whose
claims legally follow the claims of depositors .

Basel Agreement Capital Requirements

Ratio of Core Capital (Tier 1) to Risk Weighted
Assets Must Be At Least 4 Percent
Ratio of Total Capital (Tier 1 and Tier 2) to Risk
Weighted Assets Must Be At Least 8 Percent

Basel I and II
Under Basel I , Banks with international
presence are required to hold capital equal to
8 % of the risk-weighted assets
As a general role, risky assets (e.g., commercial
loans and consumer instalment loans) require
maintaining total equity capital equal to 8% of the
assets book value.
On the other hand, risk-less assets (e.g. cash and
government debt) have no-capital-requirements

Basel I and II
The Basel II Capital Accord is Structured around three
pillars:
Pillar One Minimum Capital Requirements

Recommend options of increasingly sophisticated frameworks to quantify credit and

operational risks and allocate capital commensurate with these risks
Committee Objective: To provide a more accurate and risk sensitive approach to
allocating capital to protect against the credit market and operational risk exposure

Basel I and II
Pillar Two Supervisory Review Process

Stipulate the procedures that supervisors will have to undertake to

ensure that Banks have sound processes implemented to monitor risk
and capital levels accurately
Committee Objective: Create a framework to guide external and
internal auditors in the supervision of Basel II compliance

Basel I and II
Pillar Three Market Disclosure

Provides detailed guidance on the disclosure of the capital structure, risk exposures
and capital adequacy of banks
Committee Objective: Create another layer of supervision by exposing banks capital
structure, risk exposures and mitigation strategies to the public
Under Basel II , the basic capital requirements for banks (
8%) can be expressed as the ratio of banks capital to credit,
market and operation risks

Basel I and II
Credit risk

is an investor's risk of loss arising from a

borrower who does not make payments as promised. Such an
event is called a default. Another term for credit risk is default
risk.

An operational risk is, as the name suggests, a risk

arising from execution of a bank's business functions. It is a
very broad concept which focuses on the risks arising from
the people, systems and processes through which a bank
operates.

Basel I and II
Market risk is the risk that the value of a portfolio, either
an investment portfolio or a trading portfolio, will decrease
due to the change in value of the market risk factors. The four
standard market risk factors are stock prices, interest rates,
foreign exchange rates, and commodity prices.

Islamic Banks
Islamic banking refers to a system of banking or banking
activity that is consistent with the principles of Islamic
law (Sharia) and its practical application through the
development of Islamic economics.

Sharia prohibits the payment or acceptance of interest

fees for loans of money (Riba), for specific terms, as well as
investing in businesses that provide goods or services
considered contrary to its principles

Islamic Banks
The argument is put forward that an interest-based
economy has a built-in tendency toward inflation,
because the creation of money is not related to
productive investment , either at the level of central
bank or at the level of commercial banks.
Islamic banks capital structure rely mainly on their
shareholders and depositors, who are primarily
individuals. Within the banking community, Islamic
institutions are rather small, because of their
shareholder structure being made up of the general
private public of the host country

Islamic Banks
Islamic Finance Institution may engage in the
following activities for their customer:
a) Participation Financing (Musharaka) : The bank
provides part of the equity and working capital
requirement of a project, and shares with the
entrepreneur any profits or losses. Profits are shared
according to a pre-agreed ratio. Losses, however, are
borne in proportion to the capital contribution.

Islamic Banks
Islamic Finance Institution may engage in the
following activities for their customer:
b) Trust Financing (Mudaraba) : The banks provides all
capital required. The clients provides the
management skill for a given project, again on a
predetermined profit-sharing basis. Losses , in this
case, are borne by the bank alone, the client losing
the value of his or her work

Islamic Banks
Islamic Finance Institution may engage in the
following activities for their customer:
C) Cost-Plus-Trade Financing (Murabaha): The Financial
institution purchases raw materials, goods, or
equipment at cost and sells them to the client on a
cost-plus-negotiated profit margin
D) Rental Financing ( Ijar): The bank acquires equipment
or buildings and makes them available to the client on
a straight forward rental basis.

Islamic Banks
Islamic Finance Institution may engage in the
following activities for their customer:
E) Lease-Purchase Financing (Ijar we Iktina): The
arrangement is similar to Rental financing that the
client has the option of acquiring ownership of the
rented equipment or building by paying installments
into a saving account. The re-investment of this
accumulated capital works in favor of the client ,
allowing him or her to offset rental cost.