Egypt's banking industry adjusts to economic headwinds, regulatory changes

Consistently posting robust financial stability data, Egypt’s banking sector has shown itself capable of weathering difficult economic circumstances over recent years. However, profitability has been challenged by a range of forces, including significant changes made in 2016 to the regulatory framework surrounding lending activity and a shortage of foreign currency that negatively affected the daily operations of banks and wider investor sentiment. Banks now face a period of adjustment, both to a new regulatory landscape and an adverse macroeconomic environment.

The sector is also seeing something of a shake-up in terms of ownership, following an announcement in 2016 by the Central Bank of Egypt (CBE) that the country intends to sell stakes in two state-owned lenders. The shift towards higher levels of privatisation in the sector has to date been slow and sporadic, but is clearly moving forward.

Decades Of Development

Egypt’s banking sector is one of the oldest and most diverse in the region. The introduction of Nasserite socialism in the 1950s saw the industry reduced to just four state-owned commercial banks and a small number of specialised financial institutions. Two decades later President Anwar Sadat reversed many of his predecessor’s reforms and oversaw the promulgation of Law 120/1975, which opened the industry up to private lenders again.

By the 1980s the sector was populated with operators holding one of three types of licences: commercial banks, which accepted deposits and offered financing and other services to customers; business and investment banks, which focused on medium- and long-term financing of new businesses and fixed asset investments, took deposits and offered commercial services such as trade finance; and specialised banks, which focused on a particular type of economic activity, such as lending to the agricultural sector, for example.

Sector growth was accelerated by a series of central bank decisions in the 1990s, which resulted in a more favourable lending environment. However, the subsequent increase in lending which came about as a result of the proliferation of new operators and looser credit requirements led to structural issues, including rapid growth in the number of non-performing loans (NPLs). To address this, the CBE embarked upon a process of reform – the most visible result of which has been the reduction of the number of banks from 61 in 2004 to 40 banks licensed by the CBE as of 2016.

Public Sector

The different banking models established by the 1975 law have since been removed by a process of reform, and banking licences are now universal, covering the whole spectrum of activities. The state continues to play a major role in the banking sector: of the five largest commercial banks in the market, three are public sector institutions.

The largest of these is National Bank of Egypt (NBE) with assets at the close of the 2014/15 financial year, the latest year for which data is available, in excess of LE470bn (equivalent to $24.9bn as of December 2016). NBE occupies a dominant market position, claiming 23.6% of the total banking system assets. Its closest rival in terms of balance sheet size is Banque Misr, another state-owned institution, which posted total assets of LE331bn ($17.5bn) at the close of the 2014/15 financial year. A third public sector player, Banque du Caire, rounds out the big five, with total assets of LE70.5bn ($3.7bn) when it last reported at the close of the 2013/14 financial year. Another seven public-private joint-venture banks further extend the government interest in the market.

Private Market Players

Two of the 26 licensed banks in the private segment have made it into the big five. The largest of these lenders is Commercial International Bank (CIB), which as of June 2016 recorded total assets of LE195.4bn ($10.4bn), making it the third-largest commercial bank in the country. Qatar National Bank (QNB), which operates in Egypt as QNB Alahli following its acquisition of National Société Générale Bank (NSGB) in March 2013, is the country’s fourth-largest player, with total assets of LE146.3bn ($7.8bn) as of June 2016.

Foreign Presence

The banking sector is relatively liberalised even by regional standards, and hosts a variety of foreign lenders. Barclay’s, for example, set up shop in the country in 1864, successfully expanding its operations from what was a primarily corporate base to establish a retail portfolio of approximately 127,000 customers, with more than 50 branches across all of governorates in Egypt. In October 2016 the bank sold all of its operations in the country to Morocco’s Attijariwafa Bank. HSBC, meanwhile, has had a presence in Egypt since 1982, and since then has built up a network of over 100 branches, making it one of the most visible of the multinational players.

More recently, however, the arrival of GCC-based banks in the Egyptian market – often taking the place of a European player – has been defining trend. In December 2012 BNP Paribas announced the sale of its entire 95.2% stake in BNP Paribas Egypt to Dubai-based Emirates NBD, and the subsequent purchase of the remaining stock by that institution made it the sole proprietor of the bank and its network of 69 branches. QNB’s entry soon followed, with its acquisition of NSGB, the second-largest publicly listed bank in the market and a network of 160 branches. In August 2015 Al Ahli Bank, from Kuwait, became the latest Gulf institution to enter the Egyptian market, having received a long-anticipated permission from the Egyptian Financial Supervisory Authority to do so. According to the deal, the Kuwaiti bank paid around $150m in cash for a 98.5% stake in Piraeus Bank’s Egyptian unit, which has a total of 39 branches in the country and total assets of nearly LE10bn ($530m).

In addition to the 40 locally licensed banks and subsidiaries of foreign institutions, the market contains more than 20 representative offices of foreign banks – including global financial brands such as JPM organ Chase, Credit Suisse, Standard Chartered, Royal Bank of Scotland and State Bank of India – although their activities are limited by the Regulation for Companies Law to market research and advisory services.


The government-owned institutions which, according to the CBE’s recent announcement, will be opened up to private investment are Banque du Caire and the Arab African International Bank. Initial public offerings are planned for both institutions, with 20% of the former being made available, and a 40% stake of the latter. Banque du Caire is expected to list its shares in the first half of 2017.

Given the prominent role of the Banque du Caire in the industry, its potential listing on the stock exchange garnered significant international interest in 2016, with Moody’s, a leading ratings agency, taking a positive view of the development, stating that it will increase the bank’s low capital buffers, improve its market access for raising more equity and debt and enhance reporting transparency and timeliness.

Egypt last privatised a bank in 2008, when it sold an 80% stake in ALEXBANK to Italy’s Intesa Sanpaolo for $1.6bn. The need to make the remaining state-owned lenders more attractive to investors delayed the banking sector privatisation programme, and the global economic crisis, followed by the outbreak of political unrest in 2011, effectively put an end to it until now.

Financial Stability

The defensive strength of the banking sector is apparent in its financial soundness indicators. As of December 2016 aggregate capital adequacy for the sector stood at a healthy 13.7%, comfortably above the 10% regulatory requirement. Banks have also reported a gradual improvement in asset quality since 2011, with the ratio of NPLs to total loans falling from 10.5% that year to 6.8% in December 2015. Moreover, the Egyptian banking sector’s loan-todeposit ratio declined from 50.2% to 41.5% in the same period, indicating that the sector has ample capacity for an increase in credit extension.

The stabilisation of the economy since 2013 has led Moody’s to reverse the sovereign and individual bank ratings downgrades of that year. In 2015 it followed an upgrade of Egypt’s sovereign bond rating with an upgrade for five of the country’s largest banks to reflect the improved operating environment, higher liquidity buffers and the government’s increased ability to assist banks in case of need.


In 2015 banks succeeded in overcoming the effects of a depreciating Egyptian pound on the wider economy to increase their assets by a collective $45.3bn by the end of November, up 31% year-on-year (y-o-y), and greater expansion than they had managed in 2014. Profitability for the year was strong. While the variety of financial reporting periods and styles seen in the sector means that only limited aggregated data for the banking industry is available, a 2016 report by Bank Audi found that the net profits of 11 listed banks rose by 35% in local currency terms (and 24% in dollar terms) in the first nine months of 2015. Egyptian banks opened 2016 with a similarly robust performance in terms of profitability. Most of the lenders listed on the stock exchange saw net profit grow on a y-o-y basis, with the largest private commercial bank by assets, CIB, posting a 17% gain in the first quarter, and QNB, Credit Agricole and National Bank of Kuwait Egypt reporting gains of 34% to 48% for the period. The ability of the sector to maintain this performance, however, was questioned by analysts throughout the year. A slowdown in business during Ramadan and the new lending regulations were among a range of potential hurdles to growth cited, but the issue that has risen to the fore is the shortage of foreign currency (see analysis).


The task of regulating Egypt’s increasingly dynamic banking sector falls to the CBE, which is also charged with facilitating the daily settlements and clearings of all licensed banks, which it carries out according to the Banking Sector and Money Law No. 88 of 2003 and its numerous amendments. The CBE is largely viewed as an effective regulator having successfully overseen a period of reform that has left the industry well placed to weather an unfavourable economic climate, as evidenced above.

Initiated in 2004, the CBE’s reform package has been implemented in two broad phases. The first stage of the process was a response to the NPL crisis which had developed over the 1990s, and took the form of increased minimum capital requirements, higher capital adequacy ratios, and the introduction of measures aimed at improving asset quality and establishing a more conservative provisioning regime. These reforms resulted in consolidation of the sector with a number of mergers and acquisitions taking place.


The second stage of reform focused on restructuring state banks, with a view to reducing the government’s direct interest. During this period the CBE also began to align its regulations with the Basel Accords. The process was interrupted briefly following the 2011 revolution, which saw the temporary closure of banks and the introduction of currency controls.

However, by the summer of 2016 the CBE was completing the second pillar of the Basel II regulations, and was on course to implement Basel III according to the internationally agreed timeline, the IMF said in a statement. The coming year will see Egypt’s banks adjust to the continued implementation of Basel III.

Between now and 2019 domestic banks are also due to experience a further tightening of the capital regulations which are already in place (including an increase of the capital conservation buffer to 2.5%), and the full implementation of the more recently imposed liquidity controls which will culminate in 2019 with a 100% liquidity coverage ratio.

Financial Inclusion

Egypt’s return to economic stability has allowed the regulator to resume its work towards a longer-term objective of boosting financial inclusion. According to the World Bank, as of 2014 just 14% of people aged over 15 in Egypt held an account in a financial institution, compared to 50% in Algeria and 27% in Tunisia, for example. The country had 4.6 commercial bank branches per 100,000 adults in 2015, whereas Algeria had 5.3 and Tunisia 19.9.

In late 2014 the CBE established new regulations concerning the opening of mini-sized branches by banks, introducing a range of capital requirements dependant on branch location in a bid to encourage the advance of branch networks into areas with low coverage. Financial inclusion was also one of the motivations behind the CBE’s revised lending regulations, which came into effect in 2016 and, taken together, are one of the most significant regulatory change of recent years. The new framework includes maximum loan limits for corporate borrowers, aimed at reducing credit concentration on lenders’ balance sheets, and new affordability criteria for retail borrowers, which are intended to reduce credit risk in banks’ rapidly expanding retail portfolios.

As well as expanding infrastructure and adjusting regulation to encourage retail lending, sector players suggest that education and technology have roles to play in increasing access to banking services. “Financial inclusion in Egypt must be supported by a higher level of financial literacy; private banks are well positioned to make use of technology to increase the level of knowledge and accessibility, which speeds up economic growth,” Dante Campioni, managing director and CEO of ALEXBANK, told OBG. Mohamed Naguib Ibrahim, chairman of SAIB Bank agreed, telling OBG, “Technology is helping to drive growth in the banking sector by increasing accessibility to services.”

Sme Lending

These measures have the potential to broaden banks’ customer bases and usefully shake up balance sheets, but perhaps the most far-reaching reform of the lending framework lies in the CBE’s new approach to credit for small and medium-sized enterprises (SMEs), also announced in 2016.

According to the new regulations, banks are required to limit interest rates on loans to SMEs that have revenues of between LE1m ($53,000) and LE20m ($1.06m) to 5% and raise the share of SME loans in their total loan portfolios to 20% over the next four years, a development which speaks directly to the government’s aim of improving financial access for this segment of the economy (see analysis).

“Tax incentives are required to push SMEs to formalise. Once they are formalised, they will be able to realise the benefits of having access to credit lines and grow their businesses,” Mohamed Ahmed Kafafi, chairman and CEO of Egyptian credit bureau I-Score, told OBG.

SMEs could also benefit from the emergence of financial leasing companies in Egypt. Although the sector is still nascent, according to Yehia Ezz Eldin, managing director of Incolease, an international leasing firm, it has the potential to grow over the next several years, providing businesses, especially medium-sized businesses, with alternative financing. “Awareness is growing of leasing as a financing option in Egypt, and there is significant room for growth in the market. However, starting a company in the sector requires a capital investment of LE100m ($5.3m) at least, which means that newcomers to the sector have been leasing companies started by banks,” he told OBG.

Staffing Regulations

The CBE has been steadily pushing to further incentivise private investment and build up technical expertise in the banking sector, but there remain a handful of regulations that may dampen the prospects of staff retention in the industry.

In 2013 the Cabinet passed a new maximum wage law, to be applied to all employees in the administrative body of the state, local government servants, and employees in the various economic, national and general authorities. As a result, the wage ceiling for these groups, which include those working in the public sector banks, is now set at LE42,000 ($2230) per month, a level which poses a challenge in terms of staff retention at state-owned banking institutions.

In 2016 the regulator made another unusual intervention in the form of a nine-year term limit for CEOs of banks operating in Egypt, including private sector institutions and foreign players. Both consecutive and non-consecutive terms would count towards the new limit, according to the CBE, which described the measure as a means to modernise the sector and “inject new blood”. In June 2016 a court suspended the decree, prompting the central bank to state that it would not implement its proposed term limit.


While banks have succeeded in maintaining profit growth over recent years, questions have arisen around the sector’s aggregate lending activity.

The major activity drivers in the sector in 2015, according to Bank Audi, were securities and investment in Treasury bills, which accounted for 30% of total activity growth – this is perhaps unsurprising given the large number of Treasury bills and government bonds that Egypt has issued over the past four years – followed by credit facilities (which accounted for 29%) and deposits with other Egyptian banks (26%).

The size of the domestic debt programme has helped the government to meet its fiscal commitments, but it has led to a radical alteration of the nation’s aggregate domestic credit profile. In June 2010, according to CBE data, net claims by Egypt’s banks on the government stood at LE326.1bn ($17.3bn), while claims on the private business sector and households totalled LE419.1bn ($22.2bn). However, by April 2015 claims on the government had expanded by 278% to reach LE1.2trn ($63.6bn), while the combined claims of private business and households had increased by only 44% to reach LE604.9bn ($32.1bn).

As a result of the government’s reliance on the domestic banking system to meet its fiscal obligations, lending to the private sector is being negatively affected. Of particular concern is lending to SMEs which have historically been neglected in favour of big-ticket lending to corporates, which generally brings higher returns at lower levels of risk. Yet the banking sector has capacity to lend more, exhibiting one of the lowest loan-to-deposit ratios in the MENA region, which stood at 41.5% in December 2015. The CBE’s 2016 decision to impose an SME loan quota for banks’ portfolios highlights the potential for boosting loan volumes, particularly to the SME sector, even amidst the continued debt issuances by the government.

Capital Controls

Egypt’s dollar shortage is one of the most pressing concerns facing the wider economy, and its effects have been felt by the entire banking industry. The CBE has attempted to control the flow of foreign currency out of the country since 2013, when it introduced a programme of dollar auctions for banks. Since then the industry has found it difficult to meet the foreign currency requirements of its customers, such as letters of credit needed by corporates and SMEs to import goods. Moreover, the difficulty faced by foreign investors in repatriating profits due to capital controls has acted as a brake on investment, thereby slowing the pipeline of projects from which domestic banks derive a key share of business. Many firms turned to the parallel market for their dollar needs, and in attempting to curb this practice the CBE put strict limits on the amount of dollars that could be deposited in cash at banks. In March 2016 the regulator lifted caps on dollar deposits and withdrawals for companies importing basic goods and attempted to ease the backlog of dollar requests with an exceptional foreign exchange auction. By the final quarter of the year the parallel market was still offering dollars at a 30% discount on the official exchange rate and the shortage of foreign currency remained a key concern of both the banking industry and potential investors. Then in November 2016 the CBE took the decision to float the country’s currency. The Egyptian pound was devalued by 32.3% to around 13 per dollar, down from the peg of 8.85 per dollar that had been in place since March.


Egypt’s banking sector is likely to continue to face some significant changes in 2017 and 2018. The country’s lenders are still well placed to weather volatility, and are generally in rude health, but the coming months will test their ability to adapt.

As with other banking sectors around the world, the aggregate effect of the raft of Basel measures which will be introduced over the next two years on Egypt’s domestic industry is difficult to ascertain. However, given that the Basel III requirements do not fully take into account the idiosyncrasies of emerging and frontier markets – such as the limited supply of long-term deposits – the impact of their roll-out on business lines such as securitisation and SME credit could affect the sector’s progress towards improving access to finance.

It may also take time for the country’s currency to stabilise following the float, which could have an impact on lenders’ performance – particularly for trade finance. However, a proposal made by the government in the summer of 2016 to reduce its domestic debt by converting a part of its obligation to banks into shares in a range of national projects could see a significant restructuring of balance sheets.

Finally, the sell-off of state banking assets – including those of what is one of the largest lenders in Egypt – will have impacts on competition in the sector in the long term, although it certainly bodes well for the future of private sector players in the country.



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The Report: Egypt 2017

Banking chapter from The Report: Egypt 2017

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