|
Gathered under the auspices of Prime Minister Ahmed Nazif, leading figures and conference participants discussed the obstacles, improvements and future of Egypt’s financial sector during a conference entitled “The financial sector: Driving growth.” The one-day conference, held at the Semiramis InterContinental Hotel in Cairo on May 16, was divided into four consecutive sessions led by expert panels on the banking, capital markets, insurance and mortgage finance sectors in Egypt. Minister of Investment Mahmoud Mohieldin delivered the conference’s keynote speech.
Session I: Banking
The conference kicked off on a positive note as Gamal Moharam, AmCham executive vice president and chairman and CEO of Piraeus Bank, opened the banking session. He stressed that since Prime Minister Ahmed Nazif joined the cabinet in July 2004, the Egyptian economy has started to move forward, with bank reserves shifting from negative to positive and privatization assuming a higher priority on
the government’s agenda. Moharam declared that “about 70 to 80 percent of the recommendations that were given to the government about the economy were implemented through the Nazif cabinet.”
Moharam cited the budget deficit and a high unemployment rate as key obstacles to further growth in the financial sector. Stating that official unemployment figures stand between 9.9 and 10 percent, he explained how this high rate suffocates chances of boosting the yearly growth rate from its current status of 6 percent to a target of 7.5-8 percent. “At 6 percent growth, there are about 600,000 jobs created per year. We need to go higher than that so our growth level increases,” he urged.
Mahmoud Mohieldin, minister of investment, took the podium. He briefed the attendees about Egypt’s financial sector and its relation to growth, confirming the positive effect of the Nazif government on the economy. He stated that real economic growth has jumped from 3-3.5 percent to 5.1 percent, but warned that continuous efforts to increase investment on the foreign and domestic fronts are required to sustain this growth.
He continued by focusing on the positive steps that have been taken to decrease tax and custom rates, and efforts to fight the bureaucracy that previously crippled the opening and expanding of businesses and projects. “In the past, it used to take about 140 days to register a company; today it only takes 72 hours,” he declared.
Mohieldin admitted that privatization was “snailing its way along” and should be sped up. “Privatization is still very slow. We are privatizing about five companies per year,” he said. He urged the media to refrain from criticizing the privatization program in a way that has led people to think the government is selling Egypt’s assets at a far too “cheap” price.
Addressing the problem of access to finance, Mohieldin said he believes the private sector’s share of credit, currently about 3.5 percent of bank’s credit, must increase to 10-15 percent in order to expand its current activities. With regard to credit, Mohieldin shared the shocking rates at which banks were granting credit. In December 2005, 0.19 percent of clients received more than 52 percent of banks’ credit.
He explained that reluctance to extend credit to anyone but “triple A” bank clients has hampered and limited SME growth. Only 13 percent of SMEs have had access to credit, compared to 36 percent of large corporations. Mohieldin advised banks not to favor specific sectors when granting credit, but instead to provide fair and equal access.
Sahar El Sallab, vice chairman and managing director of Commercial International Bank (CIB), outlined the current state of banking reforms. She stressed that insufficient lending levels have resulted in increased liquidity, which means that banks are not growing at the expected rate. She suggested that increasing bank portfolios in consumer finance, mortgage lending, margin lending, SMEs and microfinance would enable the banks to expand.
El Sallab identified the lack of information about a company or bank clients as a major obstacle to granting credit to all sectors, and recommended that banks share consumer data through a centralized credit bureau, enabling decision-making and facilitating the granting of credit.
In conclusion, El Sallab highlighted the failure of the current system to provide effective debt collection. She pointed out that it takes three to five years to obtain a final and enforceable judgement that is typically followed by an appeal – further adding to the backlog.
The banking session was wrapped up by Mahmoud Abdel Latif, chairman and CEO of Bank of Alexandria, who shared his view on the current status of the Egyptian banking sector. He indicated that the sector is growing at a rate of 25-30 percent per annum. Regarding the issue of granting loans, Abdel Latif advised banks to be cautious. “We should not let the government or the media force us to grant loans... this was a huge mistake that we made in the 90s,” he said.
Session II: Capital Markets
Prince Abbas Hilmi, managing director, Concord International Investments, opened the second session with a presentation titled “Suggested changes to the Investment Law and its executive directives.” He highlighted the importance of framing Egypt’s capital market as an export service, which would present the country with a golden opportunity to become a regional financial hub for capital market services.
He recommended that to achieve further growth in mutual funds, Egypt must allow asset management companies to buy stocks and shares for their clients and register them in “street names,” or nominee companies, so that the buyer remains anonymous, allowing asset management companies to buy blocks and allocate the stocks to their clients afterwards.
Helmi encouraged the idea of same-day trading, pointing out that the current system does not allow for T+1 settlement because the Central Registry does not transfer title at the time of the transaction, but rather upon settlement, which is T+2. He supported online trading for existing brokerage firms willing to comply with specific CMA-set technical requirements. He further suggested that legislation should mirror reality and protect minority shareholders equally, including those who own one percent or less of a company’s capital.
Hani Sarie-Eldin, chairman of the Capital Market Authority, foretold of a “bright future” for the capital market industry, but stressed that structural adjustment and institutional reform are vital prerequisites for sustainable growth.
Session III: Insurance
A videoconferencing session launched animated discussion about Egypt’s insurance sector. Ambassador Frank Wisner, vice chairman for external affairs, American International Group, Inc. (AIG), praised the government’s reductions in tax, tariffs and customs charges. He saw them as a positive step towards establishing a future free trade agreement with the US. From his perspective in the US, he observed that “the reform program now in place will continue, and once begun, it cannot be held back.”
Wisner said that Egypt is still “highly underinsured” in comparison to other countries in the region and suggested that to boost the level of insurance, the government should decrease premium taxes, privatize public insurance companies, increase the number of international brokerage firms in the Egyptian market, and support an independent and properly staffed and funded regulator. By taking these actions, Wisner assured that the Egyptian economy’s activities would begin to bloom. “Goods and services move much more easily if they are adequately insured,” he asserted.
Following the videoconference, Mujib Khan, vice chairman and managing director of AIG Egypt Insurance, provided an overview of the insurance market in Egypt. He explained that four public sector insurance companies, one of which is a reinsurance company, dominate the market with roughly 71.6-percent market share despite the presence of 16 other companies. He indicated that the market is still essentially closed to foreign insurance intermediaries despite legislation passed in 1998 that removed the 49-percent cap on foreign holdings. Investors taking a stake of more than 10 percent still have to obtain approval from the Egyptian Insurance Supervisory Authority (EISA), he explained.
Lastly, he noted that the high cost of premium taxes and stamp duties, currently at 3 percent for life insurance, limit the penetration rate of insurance in the market. He recommended lowering life insurance taxes and duties to one percent and decreasing general insurance taxes and duties by 50 percent. He called for a single set of rules to govern the banking and insurance sectors, asserting “both banking and insurance must be streamlined and not have separate rules.”
Mahmoud Abdallah, senior adviser to the minister of investment, defended the government’s privatization rate. He said the government’s main objective is not to “jump” into privatization, but to double the insurance premium as a percentage of GDP. He referred to the valuation of the four public sector insurance companies completed in mid-2001, adding that no decision was taken regarding privatization. Rather than jumping in to privatize the companies, he suggested increasing the insurance sector labor force to between 20,000 and 25,000 people, strengthening employee and management skills within the sector, and optimizing the use of capital held by the four public companies.
Hammam Badr, chairman and CEO of Al Chark Insurance, agreed that one of the biggest challenges facing the government-dominated sector is the lack of skills and professionalism. He placed the problem within the historical context of the 1960s when the sector was dominated by foreign engineers, and the 1970s, when the majority traveled to the Gulf, leaving a gap in risk assessment expertise.
John Metcalf, chairman of Allianz Insurance Company, noted that the best way to expand the insurance sector labor force is to grant young graduates more opportunities and to bring in foreign agent-trainers to better familiarize them with the insurance sector.
Gamal Hamza, chairman and CEO of Egypt Re, predicted that the entrance of big players into the market would help revitalize the sector and spread the risk factor across the globe. He anticipated that in the near future opportunities for small players to enter the market would be negligible, and expected larger reinsurance companies to play a significant role.
A brief question and answer session followed the panel discussion. Metcalf provided a straightforward answer to a question from the floor regarding “why credit assessment is conducted twice, once at the bank and once at the insurance company.” He attributed the practice to the lack of information sharing through a universal credit bureau and estimated that mechanisms would be in place in “about two years’ time.”
Session IV: Mortgage Finance
“Is there mortgage finance in Egypt?” This was the question on everyone’s mind to which Fathy El-Sebai Mansour, chairman of Housing & Development Bank and Egypt Arab Land Bank, quickly replied, “Yes… there is an intention and insistence that mortgage finance should be working,” but, he added, “it is still in the developmental stages.”
Mohamed Abdallah, president of Coldwell Banker Affiliates of Middle East and Greater Africa, summarized the current status of mortgage finance and what can be done to improve it. Abdallah stated that loans worth £E 300 million have been issued, pointing out that loans repayable over a 3-10 year period are charged an interest rate between 14 and 30 percent, while interest rates for loans from multinational lenders range between 12 to 14 percent for loans repayable over a 10-30 year period.
Abdallah stressed the importance of instituting a “proper” registration system, as only registered property can be used as security. He criticized the current system that takes between 149 days and three years to register a property, and proposed reducing the processing time to 15 days for a flat fee of £E 2,000. Abdallah referred to a study conducted in 2004 by Hernando de Soto that identified some $240 billion in property capital to be unlocked.
To the contrary, Hala Bassiouni, CEO of Egyptian Housing Finance, was optimistic about the future of mortgage finance, citing major achievements in the past two years. “Before, we had to get a tax certificate,” she explained. “Now we depend on our own credit assessment.” Bassiouni then pinpointed the main dilemma facing the sector now as a mismatch in supply and demand. She urged developers to build more properties that “B” class buyers could afford and to market them through property companies, rather than selling directly to consumers who cannot afford them, only to repossess the properties and resell them after they have appreciated.
Ossama Saleh, chairman of the Mortgage Finance Authority (MFA), agreed that creating an awareness of mortgage finance is a critical step in achieving success. He presented several steps already taken by the MFA to educate the public such as the creation of flyers, an Arabic and English web portal (www.mf.gov.eg) and a hotline (536-6022) staffed to answer questions 12 hours a day, six days a week .
Saleh noted that Egypt currently has the right infrastructure for mortgage financing, but that benchmarks for long-term lending still do not exist. With interest rates considerably higher than international standards and law enforcement untested, the ultimate success of mortgage finance in Egypt has yet to be determined. |
