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DE RUEHEG #1200/01 1790840
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R 280840Z JUN 09
FM AMEMBASSY CAIRO
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UNCLAS CAIRO 001200 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV EAID PGOV PREL EG
SUBJECT:  Update on banking sector reforms in Egypt 
 
¶1. (SBU) Key points: 
 
--   Egypt's banking sector continues to weather the storm better 
than most; 
 
--   The U.S.-backed financial sector MOU has contributed to the 
financial sector's improvements; 
 
--   The next round of audits is unlikely to show that GOE has met 
the MOU's target of 62.5% of loans coming from private banks; 
 
--   The National Bank of Egypt is reportedly starting to turn 
itself around significantly, largely as a result of its new CEO. 
 
Background 
---------- 
 
¶2. (SBU) In 2005, the U.S. began working closely with Egypt's new 
reform cabinet and the World Bank, African Development Bank (AFDB) 
and IMF to support reform in the financial sector.  As a result of a 
long and intensive dialogue, the U.S. designed a Financial Sector 
MOU which supported several policy reform recommendations which had 
been identified by the IMF and World Bank's Financial Sector 
Assessment Program (FSAP).  The Financial Sector MOU seeks to 
strengthen the overall financial sector through restructuring and 
privatizations of the banking sector, developing the mortgage market 
and enhancing the efficiency of the securities market.  The Head of 
Banking Supervision at the Central Bank of Egypt (CBE), Gamal Negm, 
spoke with us recently about progress of the banking reform effort 
and specifically about the Financial Sector MOU. 
 
¶3. (SBU) Three of the Financial Sector MOU benchmarks were tied to 
actual performance in improving the quality of the financial sector. 
 Based on a 2005 baseline audit and three subsequent audits (for 
fiscal years 2006, 2007, and 2008) disbursements are released on a 
pro rata basis according to actual progress.  Payments for 2006 were 
disbursed last year and progress against 2007 progress has been 
validated and is being processed now. The audit results for 2008 are 
expected to be presented to us prior to the Sept. 30, 2009 end of 
the fiscal year.  The three benchmarks under the MOU include: 
increasing the private sector banks' share of new loans (from 43.4% 
in 2005 to a target of 62.5% by the 2008 audit results); reducing by 
50% the number of non-performing loans (NPLs) in the banking system 
(from 42.4% in 2005 to a target of 20.6% in the 2008 audit results); 
and recovering 10% of all NPLs in cash. 
 
¶4. (SBU) Most other benchmarks under this MOU have been completed 
and disbursements made.  Examples include: (i) The CBE shall 
establish a monetary policy unit and a non-performing loan unit; 
(ii) a primary dealer system shall be established to purchase 
government debt; (iii) the four largest banks shall be audited and 
one bank sold; (iv) a national land title registration shall be 
established; (v) a private credit bureau created; and (vi) a 
corporate governance best practice code shall be published.  Due to 
Congressional rescissions, the funding for two benchmarks was 
removed.  These two benchmarks were the privatization of a public 
insurance company and adopting a master repurchase agreement in 
order to deepen the secondary debt market. 
 
Where do we stand? 
------------------ 
 
¶5. (SBU) Gamal Negm shared several observations about the banking 
system.  First, he indicated that the Egyptian banking system 
remains very sound and that the impacts of the global slowdown have 
not manifested themselves in the Egyptian banking system.  He 
attributed this to the types of reforms that the GOE initiated in 
the years prior to the crisis and the relative conservative approach 
of Egyptian regulators.  He indicated that the CBE is largely 
focused on improving its ability to implement Basel II banking 
regulations,and that the European Central Bank now has a residet 
advisor in place full time at the CBE who is hlping them with Basel 
II implementation (Note: CE had a resident advisor from the 
European Centrl Bank working on banking supervision issues until 
the end of 2007.  Basel II banking regulations ar designed to 
attempt to improve international baking regulations by improving 
risk and capital mnagement requirements so that a bank holds 
capitl reserves appropriate to the risk to which the bak is 
exposed. End note) 
 
¶6. (SBU) Turning to th financial sector MOU, he noted that the 
audits or the 2008 fiscal year are ongoing and will be copleted in 
the coming months.  He expected good pogress on the NPL target, but 
recognized that th target of 62.5% of the loans coming from privatesector 
 banks would likely not be met (Note: The cah recovery target 
has already been fully met. En note.).  When the bank restructuring 
reform begn, the CBE anticipated that the growth of the privte 
sector banks and their ability to attract new ustomers would result 
in the share of new loans rom state-owned banks contracting as a 
percentag of total banking assets.  That has happened to a egree, 
but the largest state-owned bank, the Natonal Bank of Egypt (NBE), 
now has a dynamic CEO, a former CBE deputy governor, Tarek Amer, who 
has injected some life into NBE.  Amer has been able to attract high 
quality staff to NBE and tried to recast the bank's historical 
stodgy state-owned image.  Negm believes that NBE will continue to 
grow (in both nominal and percentage terms) and will "trounce its 
competition" in the coming years.  As a result, Negm expects that 
the progress towards the target of 62.5% of loans coming from 
private banks will not be met in the 2008 data (Note: The private 
sector share stood at 54.7% as of the end 2007 data.  End note.). 
 
¶7. (SBU) Negm noted that while the NPL figures are much improved 
since 2005, when taken into consideration with the huge increase in 
provisioning in the banks, the numbers look even better.  He noted 
that all the banks are now fully provisioning for their NPLs, 
something which had historically not been the case.  He specifically 
noted that NBE sold a particular investment worth six billion EGP 
(US$ 1.1 billion) right before the financial crisis and put the full 
amount into provisioning. 
 
¶8. (SBU) Comment: Negm has been an important interlocutor for the 
past several years and is a well regarded regulator.  His commentary 
that one of the benchmarks will likely not be fully met is not 
surprising and his analysis that NBE will grow as a result of its 
improved management is likely accurate.  In meetings with some of 
the new staff of NBE, we do sense a greater focus on service, risk 
management, and product diversification.  His comment that the 
banking sector is in better condition today than it has been for 
years is consistent with that of the Central Bank governor and other 
independent voices.  However, NBE and the two other state-owned 
banks have been poorly managed for years and have been vulnerable to 
government interference, so to permanently change the culture and 
performance of the institutions will take much time.  After the sale 
of the Bank of Alexandria in 2006 and the suspension of the sale of 
Banque du Caire in 2008, the GOE does not seem to be keen to try to 
sell any more public sector banks.  Egyptian banks remain very 
liquid with very conservative loan-to-deposit ratios, and while this 
has served the banking sector well during the current global 
downturn, it has meant that the Egyptian banking system is still an 
inefficient distributor of capital and that many individuals and 
companies have limited access to affordable finance. End comment. 
 
SCOBEY