Interview: Hisham Ezz Al Arab
How are borrowing costs affecting the demand of domestic players that are looking to secure loans in the local market?
HISHAM EZZ AL ARAB: After the currency floatation in November 2016 interest rates were raised to combat soaring inflation. While this created external demand for Egyptian debt, driven in large part by the competitive currency, private sector demand for credit shrank. Consumers have been facing high inflation, increased costs of financing and a reduction in purchasing power, which has also affected the business volumes of individual companies. However, inflationary pressures have now relaxed, leading to the recovery of purchasing power and consumption rates similar to pre-devaluation levels. We expect a continued easing of monetary policy, which will lead to lower borrowing costs, increased private sector investment and future advancement of the economy.
How smoothly have banks adjusted to the International Financial Reporting Standard 9 (IFRS 9) that was rolled out in 2019?
AL ARAB: The implementation of IFRS 9 has been strenuous, but banks are working diligently to comply. Some major changes include the adoption of new disclosure requirements, which will require aggregated systems and processes to collect the data that is necessary to support impairment modelling and calculations. The new requirements also imply greater direct interaction between risk-adjusted performance management and financial reporting.
Similar to increased capital requirements, banks with large capital, established data infrastructure and strong governance are better positioned and better able to make the necessary investments, while smaller banks may find the process somewhat challenging. Generally, liquidity in the banking sector has been historically high, with the loan-to-deposit ratio at 47%, as per Central Bank of Egypt data published in November 2018, giving banks liquidity necessary for future growth.
What impact will the reopening of the Egyptian market have on international banks’ branches?
AL ARAB: We welcome and embrace competition to the market as it only serves to strengthen the sector and the overall Egyptian economy. However, any new entrants or existing players must be committed to the market, meaning that they are eager to invest. For this reason, the regulators and legislature are currently revisiting banking laws, as the existing law has a minimum capital requirement of LE500m ($28.1m) for local bank branches and $50m for a foreign bank branches, which is far too low compared to other similar markets. For instance, the UAE has recently raised the minimum capital requirement to nearly $2bn. Therefore, if we aim to open the market, the minimum capital requirement for banks in Egypt should be at least LE10bn ($562m), as increasing the capital commitment will encourage consolidation while only attracting serious players.
What potential do Egyptian banks have in expanding into other African markets?
AL ARAB: There is tremendous potential for local banks to expand beyond our local market. However, this is not only about transferring our experience to other African markets. Rather, the potential lies in collaboration. The African market is quite ahead of other developing markets in the region. Kenya, for instance, invented mobile money. In addition, financial inclusion in Zimbabwe stands at a remarkable 99%. And in terms of governance and regulation, most African central banks have implemented IFRS 9. Several African banks are also quite developed in terms of behaviour, data analytics and artificial intelligence. Therefore, we can benefit significantly from sharing our knowledge with other African nations.
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