1/Q: Could you give us a brief historical background of the Central Bank of Egypt?
The Central Bank functions were partially performed by the National Bank of Egypt which was established in 1898 as a joint stock company, and from the very beginning was the sole body liscensed to issue Egyptian banknotes. Gradually, the central bank activities increased and in 1951 a decree was issued to give the National Bank of Egypt the status of the Central Bank of the country. In 1957, the Banking Act was isued ascertaining the status of the National Bank as the Central Bank of the country. In February 1960, the National Bank of Egypt was nationalized and in 1961 the National Bank of Egypt, which continued to operate as a commercial bank and a new Central Bank of Egypt has been operating and performing its responsibilities in the context of the banks and credit law, and the status of the CBE and its executive regulations as amended.
2/Q: Do you think that Egypt enjoys a well-developed and well-operating financial system? Whether the answer is ‘yes’ or ‘no’, could you tell us why it is so?
The answer is yes. When we talk about the banking system in Egypt I can tell you that all the banks in Egypt are applying BASLE Accord measures since 1991. We are carefully and strictly following these measures whether it is regarding to the capital adequacy ratio or the classification of assets and providing for these categories of performing and non-performing assets as stated by other developed countries and internaional rules of bank conduct. We have other prudential regulations and supervision on banks, whether on-site or off-site. We have liberalized the banking system, and accepted the outcome of the Uruguay Round that concerns banking and financial services in general (GATS). We have strong bank supervision. We also apply other measures such as foreign currencies exposure ratios, single customer exposure limits, and other credit risk limits and similar prudential measures. In addition, we adopt indirect instruments in conducting our monetary policy including repos and reserve repos.
We are increasing the degree of transparency. Banks in Egypt are fully strictly applying the international accounting standards. They also required to publish their semi audited financial statements on quarterly basis. This started since the beginning of 1998. In addition, the Central Bank publishes a series of detailed data on on the banking system every month with a time lag of only 8 weeks. We accepted the Standard Data Dissemination System (SDDS) adopted by the IMF. This explains the high degree of transparency as such data are intended to be published in a CBE page on the internet.
3/Q: Since the government started its reform program Egypt has already achieved major goals. Fiscal deficit fell to 0.8% last year, inflation rate went down to
4% last May… What has been the role of the Central Bank in achieving those goals?
The Central Bank played a very prominent role. When we started to intensify the economic reform as of 1991, monetary policy had to play a very important role. You cannot bring down the inflation rate without a prudent and strong monetary policy, especially while you are liberalizing prices and lifting subsidies on a wide range of goods and services in addition to the privatization program. The government started to implement these policies after the completion of the infrastructure and other required actions during the 1980’s. When you go back to the year 1991 you will find that the government liberated interest rates, where it was left completely to the market to be decided by each individual bank whether on deposits or on loans and advances. On the third day of January 1991 the government started to issue treasury bills into the market on auction basis to provide the required finance for the government through real savings rather than overdrafts with the Central Bank as well as to absorb excess liquidity. What happened immediately was that the interest rate went up because the inflation rate was high at that time. This was a good sign because we started to have a positive real interest rate. Earlier it was negative. This was the role of the monetary policy. Also the liberation of the interest rate is part of the monetary policy. In addition, in February
1991 the foreign exchange market was liberated. We eliminated all the restrictions on the foreign exchange operations and transfers. This was at a very crucial time. The impact of having a positive real interest rate, a free foreign exchange market, reliance of mobilization of savings to finance both budget deficit together with other fiscal measures, helped gradually bring down the budget deficit, as a ratio to GDP, and inflation. Accordingly, inflation declined to below 4%, the budget deficit came down to 1% and this coincided with an increasing growth in real terms.
When we liberalized interest rates, it rose to the inflation rate or higher. This affected investment and caused a slow down in the economy. We realized this fact and we came to this low level of growth in 1992. But, because both the monetary and fiscal policies were working together we started to gain their fruits. Due to these results, together with the foreign exchange policy we started to have a surplus in the balance of payments and the current account. This surplus helped us to build the reserves. Our reserves prior to that time were negative. Now it covers virtually 15 months imports.
4/Q: Egypt is in the second phase of the reform program. What will be the status of the Central Bank in framing the monetary policy for the coming years?
We are controlling liquidity to make sure that liquidity in the economy is consistent with our targets of growth and inflation. The challenge that we are facing is to keep the inflation down to the level of our trading partners and in the meantime to have a reasonable real growth rate in the economy. The target for growth rate is to reach three times the population rate. We are working on both fronts to keep the population rate down, which is a long-term policy, and to achieve increasing growth rate. I think that we succeeded to a large extent in achieving theses targets.
The responsibility of the Central Bank is to ensure that the monetary policy is serving the ultimate goal of the economy. We are working very closely with the Ministry of Finance and other ministries in this respect.
5/Q: Concerning the privatization of the largest state owned banks, the Big 4, could you tell us what is the current situation?
We should go to the time when we intensified the economic reform in
1991. At the time we had the Big 4 commercial banks in addition to four specialized banks: the 2 real estate banks, industrial bank and agricultural bank.
Let me first give you a description of the banking system in 1991. We had the Central Bank, the Big 4 public sector commercial banks and 24 private commercial and joint venture banks. In addition, we had 33 other banks that fell under the category of business and investment banks. Of these 33 banks, 22 are branches of foreign banks and the remaining 11 are incorporated companies in Egypt. So, we had 57 banks in addition to the Big 4 state owned banks. So, in total there were 61 banks apart from the specialized banks. Out of those 57 banks, the big four public sector banks owned more than 51% in 26 of them. Those were the joint venture banks. In 1991 we decided to privatize all the banking system aiming at increasing competitiveness and efficiency in the banking industry in Egypt. Our strategy to start to bring down the shareholding of the four public sector banks in the other 26 joint-venture banks. At present, we succeeded in doing this and we brought the ownership below majority in 23 of those banks. All banks were required not to own more than 20% of the equity of any other bank provided that this 20% is not a blocking minority. The idea was to secure competitiveness. In the mean time we had a ceiling of 49% for the non-Egyptian shareholding in banks that operate in both local and foreign currencies. We lifted this ceiling completely and we permitted non-Egyptians to go up to
100% in shareholding ownership. | In the meantime, in conjunction with this, we introduced the new measure that the Central Bank should give the approval for any shareholder that exceeds 10% of ownership or more. This applies on Egyptians and non-Egyptians, individuals, corporations and banks. In practice, we gave the approval to non-Egyptian to own the majority when they applied for this. Afterwards, we found that we needed legislation to permit the participation of the private sector in the 4 public sector banks. So, we went to Parliament and we got the legislation in June 1998. Immediately after that, we are working on preparing one of the public sector banks for privatization. This includes evaluation, hiring privatization consultants and deciding on the modality, scope, timing and pricing. In parallel to this, we are strengthening the role of the Central Bank so as to make supervision comprehensively sufficient. The idea is not who owns the bank but who regulates the banks. This is our policy now.
We have notyet announced which bank will beprivatized pending to resolve all above issues. The appropriate time for the announcement will definitely come soon.
-Some say that Egypt is over banked and there will be a need for mergers among small banks in order to build up the sector. What is your opinion?
When we agreed on the outcome of the Uruguay Round we kept the establishment of new banks to the economic needs. So, we can not say that we are over banked. In the meantime we do not allow permits for new banks simply because we are in the process of a banking reform and privatization. We like to finish this stage and then decide whether additional banks are required. Anyway, I do not see a link between what you are saying with the mergers because the idea is not the number of banks but the capacity of the banking system to provide the financial services that the economy needs. So, at present we do not have restrictions on branching in Egypt as long as the bank applying for new branch meets the criteria that is set for this purpose. We require that banks have capital adequacy ratio in line with the Basle requirements, sufficient provisions, to abide with other prudential regulations. Also, we require that the banks have a management that is able to manage and efficiently operate the new branches.
6/Q: One of the tasks of the government is to attract foreign direct investment. Still, Egypt needs to diversify the types of bonds it offers and issue them regularly to develop its bond market. What is being done in this sense?
If you go back to the time before the developments in the 1990s, you will find that bonds were not listed on the stock exchange. It is true that we had government bonds but they were not traded. Bonds were negotiable only among banks and not for the public. We worked together with the Ministry of Finance to issue government bonds. In 1995 and 1997, government bonds were issued with the total amount of L.E. 7 billion. They were immediately listed on the stock exchange and actively traded. In addition, in
1998, we worked together to produce three Treasury bond issues each of L.E. 500 million. However, one purpose of issuing such government bonds was to encourage the market to issue corporate bonds and it worked. Some banks started to issue corporate bonds and other industrial and trade companies followed. I can tell you that we have a wide range of bonds in the market. It is not sufficient but if you look at the timing and examine the situation when we began this process and where we are now, you can easily predict that in a very short time we will have the balance between bonds and shares in the stock exchange.
6/Q: Could you give us your opinion on the stock exchange as well. It seems that it is quite low. Many institutional investors believe that it is still in its infancy and that it needs to attract more investors. How do you foresee its future?
We passed the Stock Exchange Act in 1992. We started to build the market at that time because prior to that there was no need for a stock exchange. After the monetary and fiscal policies were applied and success began to show and privatization enhanced, the role of the stock exchange started to become more important. It is a major development by all means if you compare what has been achieved in this short period of time in which it has been done and that is from 1992 to 1998. However, with the privatization of various sectors in the economy it was very important to have an active stock exchange. The stock exchange then helped in the privatization process itself. However we had no brokerage firms. So, market institutions like brokerage firms, investment and portfolio managers, mutual funds started re-appearing. We worked on that process at the time when privatization was taking place. So, the supply of shares of the privatized companies came at the same time and helped to make the market strong from the beginning. It encouraged many people to subscribe and enter the securities market. Then the prices went up and we had some corrections in the market until we were faced with the Asian crisis. It affected the market here because foreign investors had to reconsider their policies. They had the right to assume that this could happen in Egypt. The Asian markets were hit and the investors wanted to protect themselves. They changed their strategies a little bit. They decided to wait and see what was happening before going forward. This affected the market but immediately after that we started to see that the market was moving. It was going down but not sharply. It is fine to go up or down as long as it is not sharply or lacking justifiable reasons. I believe that the stock exchange is doing well and serving the economy.
8/Q: Could you give our readers a background of your academic history?
I started my career after graduation from Ein-Shams University in 1959 at control of banks department of the the Central Bank. I worked in this department until I became the General Manager. Then I worked as an advisor to the government of South Yemen for three and a half years seconded by the International Monetary Fund. I was also assigned in Seychelles for three months working for the IMF. At the time the capital market authority was established in 1980, I was seconded to this authority for three and a half years as a Deputy Chairman. In 1984, I resigned from the Central Bank. I worked in a private bank in Egypt. Soon after the board of directors of that bank was resolved I was appointed as a commissioner with the responsibility of the board of directors. After the appointment of a new Board for that bank I had to leave the bank. Then, I worked as Chairman and Managing Director of one of the joint-venture banks in Egypt. At that time it had some problems but now it is one of the best banks. This was in 1988 until I was appointed as Chairman of one of the 4 public sector banks, the Bank of Alexandria, from
1991 until 1993. In October of 1993 I was appointed as Governor of the Central Bank.
9/Q: Keeping in mind that Forbes magazine reaches more than 4 million readers, what will your final message to them be?
My final message is that the banking industry is playing a very important role in the economy nowadays. It should be strong enough to deal with any problems that arise in the economy. This industry can not afford relaxation. You have to keep an eye on the development of the Central Bank and Commercial banks, and to deal with the problems immediately as and when they arise because then you cannot afford accumulation of problems or else the damage could be too big to deal with. You cannot prevent problems from happening but you have to be ready to react. There is a question that I keep asking myself and my colleagues and that is "what if", "what should we do when a specific problem happens". We should have a contingency plan when problems arise..
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