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Egyptian Banking Sector

No. 1 2 Page Particular No. Agricultural sector 1 Industrial sector 2 Automobiles manufacturing Chemicals Consumer electronics and home appliances Steel industries Textiles and clothing Construction and contracting sector Services sector 3 Banking & insurance Communications Transport Tourism sector Graphical presentation of different sectors of gdp 5 Introduction of Banking Industry in Egypt 6 The Egyptian Banking System: Structure and Competition 7 Comparative Position 8 Business opportunities in Egypt 9 Egypt Banking Sector Analysis 10 Egypt Banking trade policy 11 Banking risk score on Egypt 13 Conclusion 15 Suggestion 15

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During the 1970s, despite significant investment in land reclamation, agriculture lost its position as the leading economic sector. Agricultural exports, which were 87% of all merchandise export by value in 1960, fell to 35% in 1974 and to 11% by 2001. In 2000, agriculture accounted for 17% of Gross Domestic Production and 34% of total employment. Cotton has been the staple crop, but it is no longer vital as an export. Production in 1999 was 243,000 tons. Egypt is also a substantial producer of wheat, corn, sugarcane, fruit and vegetables, fodder, and rice; substantial quantities of wheat are also imported, especially from United States of America and Russia, despite increases in yield since 1970, and significant quantities of rice are exported. Citrus, dates, and grapes are the main fruits by acreage. Agricultural output in tons in 1999 included corn, 9,350,000; wheat, 6,347,000; rice, 5,816,000; potatoes, 1,900,000; and oranges, 1,525,000. The government exercises a strong degree of control over agriculture, not only to ensure the best use of irrigation water but also to confine the planting of cotton in favor of food grains. However, the government's ability to achieve this objective is limited by crop rotational constraints.

Egyptian Strawberry exports stood for 52 million dollars in 2009. Egypt's fertile area totals about 3.3 million hectares (8.1 million acres), about one-quarter of which is land reclaimed from the desert. However, the reclaimed lands only add 7 percent to the total value of agricultural production. Even though only 3 percent of the land is arable, it is extremely productive and can be cropped two or even three times annually. Most land is cropped at least twice a year, but agricultural productivity is limited by salinity, which afflicts an estimation of 35% of cultivated land, and drainage issues.


INDUSTRIAL SECTOR :Automobiles manufacturing :

El Nasr Automotive Manufacturing Company is Egypt's state owned automobile company, founded in 1960 in Helwan, Egypt. Established in 1977, the company manufactures various vehicles under license from Daimler AG, Kia,, and Peugeot. Their current lineup consists of the Jeep Cherokee; the open-top, Wrangler-based Jeep AAV TJL; the Kia Spectra; the Peugeot 405; and the Peugeot 406. Other manufacturers such as AAV - Arab American Vehicles, the Ghabbour Group, WAMCO - the Watania Automotive Manufacturing Company, and MCV Egypt - Manufacturing Commercial Vehicles, produce automobiles in Egypt. 2.2. Chemicals :

Abu Qir Fertilizers Company (AFC) is one of the largest producers of nitrogen fertilizers in Egypt and the Middle East. It produces about 50% of the Egyptian Nitrogen Fertilizers. The company and the 1st Ammonia Urea plant was established at 1976. It is located at Abu Qir bay, 20 kilometers East Of Alexandria, and there is Egypt Basic Industries Corporation (EBIC), one of the largest producers of greenfield ammonia plant. 2.3. Consumer electronics and home appliances :

Olympic Group is the largest Egyptian group of companies operating mainly in the field of domestic appliances. The main products it manufactures are washing machines, refrigerators, electric water heaters and gas cookers. It also operates in the fields of IT and real estate. Bahgat Group is a leading company in the fields of electronics and electrical home appliances, industries, constructions, internet service providing, and T.V. stations. The group is composed of the following companies: Egy Aircon, International Electronics Products, Electrical Home appliances, General Electronics and Trading, Goldi Trading, Goldi Servicing, Egy Medical, Egyptian Plastic Industry, Egy House, Egy Speakers, Egy Marble, Dreamland and Dream TV. 2.4. Steel industries :

EZDK is the largest independent producer of steel in the Middle East and North Africa (MENA) region and is the market leader in Egypt. It is ranked at the 65th place in the world biggest steel producers as per the World Steel Institute with total production of 4.5 Million Tons per year representing about three quarters of Egypt total annual production. 2.5. Textiles and clothing :

Textiles and clothing is one of the largest manufacturing and exporting processes in the country and a huge employment absorber. Egypt poses a high comparative advantage for a variety of TC products,

which it has developed into a competitive advantage in major foreign markets. The public sector accounts for 90% of cotton spinning, 60% of fabric production and 30% of apparel production in Egypt. 2.6. Construction and contracting sector :

Night view of the Nile City Towers.Orascom Construction Industries headquarters is at the south tower (on the right). The Fairmont Hotel lies in-between the two towers. Orascom Construction Industries is a leading Egyptian EPC (engineering, procurement and construction) contractor, based in Cairo, Egypt and active in more than 20 countries. OCI was established in Egypt in 1950 and owned by Onsi Sawiris. The company is the first multinational Egyptian corporation, and is one of the core Orascom Group companies. As a cement producer, OCI owned and operated cement plants in Egypt, Algeria, Turkey, Pakistan, northern Iraq and Spain, which had a combined annual production capacity of 21 million tonnes.


SERVICES SECTOR :Banking & insurance :

The banking sector has gone through many stages since the establishment of the first bank in 1856, followed by the emergence of private sector and joint venture banks during the period of the Open Door Policy in the 1970s. Moreover, the Egyptian banking sector has been undergoing reforms, privatization, and mergers and acquisitions from 1991 up to today. The banking system comprises 57 state owned commercial banks. This includes 28 commercial banks, four of which are state-owned, 26 investment banks (11 joint venture banks and 15 branches of foreign banks), and three specialized banks. Although private and joint venture banks are growing, many remain relatively small with few branch networks. Egypt's banking system has undergone major reforms since the 1990s and today consumers are faced with a liberalized and modernized system which is supervised and regulated according to internationally accepted standards. Although the mortgage market is underdeveloped in Egypt and as yet foreigners cannot yet obtain a mortgage for a property in Egypt. In the near future, a new mortgage law will enable purchasers to take out property loans. This will open up the market considerably and create a storm of development and real estate activity in the near future. 3.2 Communications :

Main article: Communications in Egypt Egypt has long been the cultural and informational centre of the Arab world, and Cairo is the region's largest publishing and broadcasting centre.

The telecommunications liberalisation process started in 1998 and is still ongoing, but at a slow pace. Private sector companies operate in mobile telephony, and Internet access. There were 10 million fixed phone lines, 31 million mobile phones, and 8.1 million Internet users by the August, 2007. 3.3 Transport :

Main article: Transport in Egypt Cairo Metro in Egypt, the subway of Cairo (1) Railway Transport:Transport in Egypt are centered in Cairo and largely follow the pattern of settlement along the Nile. The main line of the nation's 4,800-kilometer (3,000 mi) railway network runs from Alexandria to Aswan and is operated by Egyptian National Railways. The badly maintained road network has expanded rapidly to over 21,000 miles (34,000 km), covering the Nile Valley and Nile Delta, Mediterranean and Red Sea coasts, the Sinai, and the Western oases. (2) Air Transport:In addition to overseas routes, Egypt Air provides reliable domestic air service to major tourist destinations from its Cairo hub. The Nile River system (about 1,600 km (990 mi).) and the principal canals (1,600 km.) are important locally for transportation. (3) Water Transport:The Suez Canal is a major waterway of international commerce and navigation, linking the Mediterranean and Red Sea. The ministry of transportation, along with other governmental bodies are responsible for transportation in Egypt. Major ports are Alexandria, Port Said, and Damietta on the Mediterranean, and Suez and Safaga on the Red Sea.


Tourism sector :

Main article: Tourism in Egypt The Egyptian tourism industry is one of the most important sectors in the economy, in terms of high employment and incoming foreign currency. Egypt is one of the best known touristic countries in the world. It has many constituents of tourism, mainly historical attractions especially in Cairo, Luxor and Aswan, but also beach and other sea activities..



GDP Composition 2002

16% 53% 32% Agricultural Industrial Service

GDP Composition 17%2003

50% 33% Agricultural Industrial Service

GDP Composition 2004

15% Agricultural 54% 31% Industrial Service

GDP Composition 2005

14% Agricultural 53% 33% Industrial Service

GDP Composition 2006

15% Agricultural 49% 36% Industrial Service

GDP Composition 2007

14% Agricultural 52% 34% Industrial Service

GDP Composition 2008

15% Agricultural 50% 35% Industrial Service

GDP Composition 2009

14% Agricultural 48% 38% Industrial Service

5. Introduction of Banking Industry in Egypt

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 channeling 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. 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 emphasized 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 nontraditional 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 independent 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 uses the proceeds in purchasing tax free securities.

6. The Egyptian Banking System: Structure and Competition

The National Bank of Egypt, founded in 1898, had as a private institution the exclusive right to issue currency and act as the government's banker. In January 1961, although permitted to retain its commercial banking business, it was divested of its central banking function, which was given to the newly established Central Bank of Egypt. In 1957, when foreign banks refused to finance Egypt's cotton crop after the Suez Canal was nationalized, the government took over foreign banks and insurance companies. By the end of 1962, all banks had been nationalized. The number of registered banks dwindled to only four by 1971. As of 1999, there were 69 banks operating in Egypt: 4 state owned commercial banks; 29 commercial banks; 33 investment banks, and 7 specialized banks; including 20 foreign bank branches. The Egyptian banking sector expanded markedly in the mid-1970s spurred by the countrys so-called open door policy. This policy aimed at outward-looking growth with an active role for the private sector to promote economic performance. To serve the new policy, a banking law was enacted in 1975 (Law 120/1975) defining the nature and mode of operations for all banks. It identified three types of banks: (i) Commercial banks, which usually accept deposits and provide finance for a wide variety

of transactions. (ii) Business and investment banks, which carry out medium- and long-term operations such

as the promotion of new businesses and financing of fixed asset investments. They may also accept deposits and finance foreign-trade operations. (iii) Specialized banks, which carry out operations serving a specific type of economic activity.

They may accept demand deposits. Banks operating in Egypt can also be classified as public sector, private & joint venture, or foreign according to ownership. All specialized banks are state owned and are assigned the task of providing long term finance for real estate, agricultural and industrial development. They mainly cater to the needs of the private sector and depend in their fund rising on borrowing from financial institutions. There are also four public sector commercial banks and whose volume of business constitutes a significant share in total bank transactions.

7. Comparative Position
Composition of the Aggregate Liabilities of the Banking System-2006/07
Capital Reserves 3.5% 1.3%

Other liabilities 7.5%

Provisions Long-term loans 5.7% and bonds 2.8% Obligations to banks in Egypt 8.8% Obligations to banks abroad 1.1%

Total deposits 69.3%

Composition of the Aggregate Assets of the Banking System-200

Other assets Cash 0.8% 6.3%

Securities and investments in treasury bills 18.8%

Loans and discount balances 37.7% Balances with banks in Egypt 23.2%

Balances with banks abroad 13.3%


8. Business opportunities in Egypt

Stimulating foreign and domestic investments was the major priority for the Government of Egypt in 2004-2005 and total foreign investments in Egypt came in at EGP 3,062.5 million. Since launching of the privatization programmed in 1991, the government has moved ahead with 195 sales out of the 314 originally slated for privatization. The new Ministry of Investment, responsible for managing state owned companies, announced an initial list of companies to be privatized over the period 2004-2007 in the following sectors: spinning mill and cotton weaving, trade, metallurgical industries, chemical industries, food industries, housing, tourism and cinemas, maritime and river transport, and ten other companies in various sectors. Thanks to its strategic location in the Middle East and investment incentives available in particular for activities based in free zones and special economic zones, Egypt is used as a platform for re-export to the Middle East, the Maghreb and African countries. For exporters interested in the Egyptian market, the main opportunities are in equipment, machinery and environmental services, information technology and telecommunications, pharmaceutical products and medical equipment, equipment for oil exploration, hotel accommodation and restaurants, food processing, plastic industries, architecture and construction, agricultural machinery, packaging, franchising, retailing, electrical power systems, building materials, components and automotive spare parts In addition, Egypt wants to increase its exports of non-traditional products and to promote foreign investment in new branches like furniture manufacturing, leather transformation, chemical industries, glassmaking, paper mills and shipbuilding. It is also expected that public-private partnerships will be actively sought in sectors such as transportation, telecommunications, tourism and real estate development. The Ministry of Investment in coordination with other ministries has successfully created a dynamic database on investment opportunities available in the various sectors of Egypts economy. More details on these opportunities are available on the Ministry of Investments portal.


9. Egypt Banking Sector Analysis

When all the major economies of the world have been adversely hit by the financial crisis, the Egyptian banking industry remains largely stable, reflecting its relative isolation from and resilience to the global crisis. Egypt has shown considerable progress in the banking sector reforms over the years. The central banks NPL management plan has helped banks to settle around 90% of total outstanding NPLs. With the rapid merger and acquisitions in the recent past, the banking sector has become more strong and efficient. The number of banks operating in Egypt reduced to 39 as of the end of FY 2009 from 43 in FY 2006. As per our latest industry report titled Egypt Banking Sector Analysis, Egyptian banks have significantly intensified their lending activity during the past few years. Credit facilities provided to the business segment contribute to the majority of bank loans. However, external sector loans are experiencing rapid expansion on account of rise in loans to the private business segment, which are mostly provided to the trade sector in foreign currency. In future, banks are expected to further intensify their lending activities with rising demand for loans from domestic as well as external sector. Resultantly, bank loans are expected to grow at a CAGR of about 6.7% during FY 2011 - FY 2014. As per our team of experts, Egyptian banks have not only witnessed growth in lending activities, but have also seen reckonable growth in the deposits on rising consumer confidence on the system. With rapid expansion in household and business sector deposits, the country is expected to witness a thriving influx of deposits during the forecast period. Further, time and saving deposits will account for the majority of growth. Besides, we have analyzed the pattern of macroeconomic variables and their impact on the banking sector of the country. Our report has also identified emerging industry trends, which will decide the future of the Egyptian banking sector and the key players in the countrys banking system along with their detail business description and recent activities.


10. Egypt Banking trade policy

The Egyptian banking sector currently consists of 63 banks, of which 28 are commercial banks and 31 are investment and business banks; in addition there are two real estate banks, one agricultural and one industrial bank. Of the 63 banks, 24 are foreign owned or have a significant share held by foreign individuals or companies; the State has a majority share in nine banks. In 1998, the sector had total assets of US$93 billion and deposits of US$61 billion. The banks operate through a network of over 2,200 branches throughout Egypt. The largest subsector consists of the commercial banks, which account for over 75% of total capital reserves, distribute around 75% of loans, and account for around 90% of available deposits.

Of the commercial banks, four state-owned banks, (the National Bank of Egypt, the Bank of Alexandria, the Banque de Caire and the Banque Misr) account for almost 70% of the banking sector's total assets and around 40% of capital, reserves, and provisions. Egypt's largest bank, the National Investment Bank, holds long-term social security resources and accounts for around 25% of total bank deposits. The four state-owned banks also have substantial, although declining, shareholdings in five of 24 joint-venture banks.

Despite recent reforms, the sector remains dominated by the four state banks which, according to the IMF, appear to be less efficient than the private sector or joint-venture banks. In May 1998 new laws allowing privatization of the four banks, and four insurance companies remaining in the public sector were adopted by the Economic Committee of the People's Assembly. The Assembly subsequently passed legislation in June 1998 to privatize one of the banks by the end of 1998. The privatization has not yet taken place. Legislation granting independence to the Central Bank is currently being drafted

The banking sector is regulated by the Central Bank of Egypt (CBE), an autonomous body under the Ministry of Economy. The CBE carries out both off-site reviews and on-site examinations to assess compliance and levels of liquidity and capital adequacy. As part of new regulations, banks are required to be audited by two independent auditors, who must be changed every two years. The Egyptian Bank Union, a private, independent, juridical body, provides an interface between the banking industry and the CBE.

Present regulatory criteria include an initial capital of at least LE 100 million per bank and a capital adequacy ratio of at least 8%. According to the IMF, all four public sector banks and all but three joint-venture and private banks met the Basle standard of 8% minimum capital adequacy ratio by the end of June 1997. Non-performing loans, which were high largely because of loans made to loss-making public sector companies, had declined to 14.7% of total loans at the end of June 1996 and to just over 13% by June 1997.

Under current legislation, banks and their branches are required to register with the CBE Banking Control Department. Registration requirements include the submission of

documents relating to the nationalities of the founders and their share of the bank's initial capital, which should meet the requirement that the share of each individual not exceed 10%. The registering bank is also required to specify the percentage of its shares that would be offered through a public issue.

In order to increase competition in the economy and reduce the Government's presence in the banking industry, the Government has focused on privatization and liberalized foreign investment laws. Under Law 155 passed in 1998, moreover, the dominant four state-owned banks were required to reduce their stake in joint ventures with foreign and private banks to under 20%. According to the authorities, the Government presently holds shares of up to 20% in five joint-venture banks.

Foreign investment in the sector has also been liberalized; up to 100% foreign equity has been allowed since 1996, under Law 97. Previously, under Law 43 of 1974, foreign banks were allowed to hold a maximum equity of 49% in any joint-venture bank. As a result of the liberalized foreign investment and privatization laws, foreign players have increased their share in the joint venture companies, including large foreign banks such as Socit Gnrale, Crdit Commercial de France and Banque National de Paris. A number of international investment banks have also been established in Cairo.


11. Banking risk score on Egypt:The economic risk score of '9' is based on our maintained assessments of economic resilience as "very high risk," of economic imbalances as "high risk," and our lowered assessment of credit risk in the economy to "extremely high risk" from "very high risk," as our criteria define these terms. Uncertainties surrounding Egypt's political transition phase, and security issues, may hamper the country's economic growth and put additional pressure on public finances. Egypt is sensitive to a sharp economic downturn because of the low level of wealth in the country-GDP per capita is below $3,000--and its large and fast-growing population. Public finances have also weakened substantially during the past 12 months. Long-term economic prospects remain good as long as existing infrastructure and key service industries, such as tourism, are preserved.

The deterioration in the economy will weigh on the banking sector by increasing credit costs and lowering revenue generating capacity. On top of this, the real estate sector is in a correction phase. Although the banks' direct exposure to this sector and the stock market is limited, a major downturn could harm them, especially the large public sector banks. Credit risk is the main source of risk for Egyptian banks, in our view. Our successive lowering of Egypt's sovereign ratings over the past 14 months has reflected the rising sovereign credit risk that the Egyptian banking sector faces. Sovereign risk has increased significantly and systemwide direct and indirect exposure to domestic sovereign risk has also increased, amounting to about half of system assets. Most banks carry large credit exposure to sovereign debt compared with their equity bases. We believe that most Egyptian banks are unlikely to withstand a scenario where the sovereign defaulted on its debt obligations. Private sector debt is low compared with GDP, partly because only a small portion of the retail and corporate bases have bank or loan accounts. Lending to private sector companies remained flat year-on-year in absolute terms, standing at about Egyptian pound (EG) 290 billion as of Dec. 31, 2011, and we expect this figure to increase only slightly during 2012.

We consider lending and underwriting standards to be "relaxed," as our criteria define the term. On the lending side, banks deal with the most sophisticated customers, but for this reason the customer base is narrow, creating concentration risk. Banks are also exposed, directly and indirectly, to the performance of cyclical or vulnerable sectors like tourism, real estate, and construction. In addition, the legal system and payment culture do not support banking activities. Lending practices and enterprise risk management vary widely among banks. Recently reformed public sector banks still need to show a track record of appropriate credit risk management through a full economic cycle. Our industry risk score of '7' is based on our opinion that Egypt has "very high risk" in its "institutional framework," "high risk" in its "competitive dynamics," and "intermediate risk" in "system wide funding," as our criteria define these terms.

Despite recent improvements and a clear commitment from the authorities to reform the banking sector, this is still a work in progress. We also consider it highly likely that political uncertainties and the economic slowdown may delay the full implementation of the initial reform program, from the privatization of some state-owned banks to improved transparency. During the political transition, we do not exclude the possibility that regulations might be relaxed, and we could even see some cases of regulatory forbearance.

Risk appetite is restrained, in our view. The Central Bank of Egypt has been instrumental in prohibiting complex transactions or products. However, we consider that banks operate in a moderately unstable competitive environment. We view the Egyptian banking industry as fragmented--it has 39 licensed banks. The three largest state-owned banks represent 40% of the sector. These modernizing institutions are adopting more aggressive commercial practices, which could increase competition. In addition, the consolidation of the banking sector is not yet complete, in our view.


12. Conclusion
The face of banking is changing rapidly. Competition is going to be tough and with financial liberalization under the WTO, banks in Egypt will have to benchmark themselves against the best in the world. For a strong and resilient banking and financial system, therefore, banks need to go beyond peripheral issues and tackle significant issues like improvements in profitability, efficiency and technology, while achieving economies of scale through consolidation and exploring available cost-effective solutions. These are some of the issues that need to be addressed if banks are to succeed, not just survive, in the changing milieu. The banking system in Egypt is significantly different from that of other Asian nations because of the countrys unique geographic, social, and economic characteristics. Egypt has a large population and land size, a diverse culture, and extreme disparities in income, which are marked among its regions. The countrys economic policy framework combines socialistic and capitalistic features with a heavy bias towards public sector investment. Egypt has followed the path of growth-led exports rather than the exported growth of other Asian economies, with emphasis on self-reliance through import substitution

13. Suggestion
The finding suggestion that Egypt banking sector seems to have benefited from a series financial sector reforms launched in the three different stages by government over the sample period 1992 2007. There definite evidence to suggest that the banking that banking sector in Egypt has become more competitive and efficient over time. The results are consistent with conventional view that efficiency improvement enhances industry competitive. The finding suggestion that competitive and productive efficiency significantly influence economic growth in the short run. However, test result for a long run relationship are not statistically significant.