Banking Reform and Liberalization
The banking sector plays a crucial role in the development process of Egypt. The banking sector consists of commercial banks, which are local banks and non-local banks. It also includes specialized banks and financial institutions operating in the fields of investment and credit for industry, agriculture, housing and rural development. In addition, there are branches affiliated to these banks and institutions. Deepening this sector and its reform would lead to higher rates of economic growth. This mechanism is achieved mainly through the role of the banking sector in mobilizing more savings and channelling them to better investment allocation. This, in turn, would lead to higher productivity and more capital accumulation. To achieve these results, an efficient banking system, prudential controls and a friendly, non-distorted macroeconomic framework are required.
The Banking industry in Egypt is amongst the oldest and largest in the region.
Banking reform started as part of the open door policies in the mid seventies when foreign banks were allowed to operate in Egypt. Later in the nineties, as part of Egypt’s economic and financial reform program, the banking sector was completely liberalized, while banking supervision was further strengthened in accordance to international standards .
The Government of Egypt has been currently undertaking a comprehensive reform strategy for the financial sector as a whole and the banking system in specific. The goal of banking reform was creating an efficient banking sector which offers better quality services .The financial reform measures taken in the early 1990s emphasised reform of the monetary and fiscal policies, not the revamping of financial institutions.
Egypt is currently moving steadily towards becoming the biggest financial center in the region. Owing to the flourishing privatization program and the prospering domestic bond market, banks have encountered new investment fields which helped them diversify their portfolios and lower their financial risks. Meanwhile, most banks expanded on providing non traditional services such as brokerage, investment consultations, asset valuation and sales, and mutual fund operations which also helped improving capital market services.
Banking reform was primarily based on promoting transparency and use of adequate accounting and supervision standards. According to the Law, banks are required to publish their financial statements on quarterly basis in compliance with the Accounting Standards (IAS). In addition, the Law requires all banks to be audited by two different independenl auditors, with auditors changing every two years
In addition, Laws are periodically reviewed with the aim of refining legislation to foster competitiveness in the sector. To this effect, the new income tax law No. 5/1998 closed a chronic loophole which provided banks and financial institutions with a double tax exemption through deducting interest income from the tax base and use the proceeds in purchasing tax free securities. The provisions of the new law aim to spur innovation and healthy competition among banks to engage in productive activities and extend loans to customers and smaller businesses.
In June 1998, major amendments to the Banking Law which permitted private ownership in public banks were ratified by the Parliament. Individual banks invited international financial houses for internal valuations and ratings. Later in mid 1999, the Central Bank of Egypt and the General Assembly of the two real estate banks approved the first bank mergering in Egypt by merging the "Credit Foncier Egyptien" and the "Arab Land Bank" into one financial entity.
With a view to strengthening the Central bank role and independence, the Ministry of Economy in cooperation with CBE drafted a new Central Bank Law which aims towards institutionalizing the Central Bank independence and defining its role in determining the monetary policy.
Government efforts to reform monetary and fiscal policies have gained momentum in 2001 when the cabinet agreed to prioritise the modification of laws governing the performance of the banking sector. In addition, drafts of two key banking laws -- the Central Bank and National Investment Bank laws -- were endorsed.
The first of these was an amendment to the law governing the performance of the Central Bank of Egypt (CBE). Under the amendment, the CBE would have full independence in drawing up monetary policies and greater supervisory powers over the banking system in Egypt.
The second bill aimed to alter the role of the state- owned National Investment Bank (NIB) in boosting development and fighting recession.
The cabinet’s decision to amend the CBE law has been widely hailed as a progressive step in Egypt’s economic history.
The year 2007 witnessed the operation of the first credit information company by the participation of more than 32 banks. Besides, the first release of stocks presented by the Egyptian Pound succeeded, as the coverage volume reached 250% in the world money markets which reflects their confidence in the Egyptian economy.
Banking Reform and Liberalization