Dr. Fouad Shaker
Secretary General
Union of Arab Banks
Pros & Cons of Privatization in
Egyptian Banking System
MENA - OECD Investment
Programme
National Investment Reform
Agenda of Egypt
workshop
Cairo - Egypt – 17 May 2006
The Specificities of Privatization
1- Should be managed within a declared vision based on a
national strategy.
2- The privatization management process should be
ready to deal professionally with rational and/or
irrational rejection, be it in a good faith or vice-versa.
3- In principle it should be preceded by firm commitment
from both political leadership and acceptance in
principal from labor unions.
4- Should be implemented in a highly transparent
manner according to set-up legal rules approved by
concerned authorities.
5- Should consider the interests of the labor power in the
present and the future.
My Definition of Privatization
- The privatization is totally indigenous restructuring
process in a specific country whereby, it would be
assessed and interpreted through the chronology of
the
socio-political
developments
and
their
implications on the economic situation
Hence
- There is no one approach of privatization fits all.
- What are considered rules in a country are only
guidelines for other countries.
Chronology of major socio-political events
concerned banks privatization in Egypt
1952 - Military coup D’état
(July 23 revolution)
(The six principals)
of which
“Terminating the control of capital on ruling” came as
one of the said principals.
Where capital at that time was totally owned by private
sector.
1956 - Suez Canal Company nationalization
mobilization of public opinion against foreign investment
1958
- Egyptianization of Banks’ Ownership
deepening the public perception against foreign investment
in the financial system even for the Arab ownership.
1960 -Nationalization of banks and insurance
companies.
New role for banks to finance the first national plan 19601965 without competition among them and no role for
private ownership in financial institution.
1961 -Mass Nationalization across the board
for most of the companies in all economic
sectors.
(Services, Trade, Industry, Agriculture)
Announcement of socialism as a system for economic
management in Egypt.
1964 -Merging 32 banks, to have only 5
banks each of them allocated to serve
specific companies working in specific
activity.
Endeavoring to implement control by the unit of
currency like control by the role implemented in the
Soviet Union at that time.
1972 -The establishment of Arab
international bank.
In the form of private off-shore bank exempted from all
regulations other banks are subject to.
1974 -The issuance of law 120
- Allowing establishment of private bank
and also foreign banks to open branches.
- Liberalize public banks from rigid
governmental regulations.
- Easing foreign exchange rules.
- Strengthening the authority of the central
bank.
- Public banks established private banks in
collaboration with foreign or national
private sector
1981 -National
reform
conference
of
economic
- Infrastructure reform
- Reform and modernization of P.S.C
- Allow private sector to work in some
sectors in a conditional way.
(Ambiguous economic identity and banking as
well).
1991 -Economic reform and
adjustment program with IMF
structural
- For the first time in the recent history the country
accepted and adopted comprehensive economic program
based on realistic givens.
- The program included explicitly privatization among
the policies to be adopted, where privatization of
industrial and commercial companies would enhance the
capabilities of supply, and privatization of banks would
enhance demand side.
- Although the program achieved remarkable
improvement specially on the demand side, yet Egypt was
very reluctant to implement the privatization program as
planned to start on 1994.
1996
-Privatization Starts
In spite of the commitment of the government
to start on aggressive privatization plan
including banks specifically one of the public
sector banks, the implementation results were
disappointing (few companies only).
Much to ones surprise the formal address to
people from officials was not expressing a
favorable opinion towards privatization.
1997-2004 -Do-nothing government
(No comment)
(Self explanatory state)
In spite of the shown competition from other countries to
attract private sector investments (FDI)
Egyptian government involved in huge public sector project
with the least effort of privatization and sometimes
denouncing privatization as an economic approach.
July 2004 -Present: start of a new era
(dismantling 50 years of socialism)
- Serious and effective vision towards privatization.
- Banking Reform plan aiming to have a healthy
financial system that brings some public sector banks
to the point of sale.
Cons of Banking Privatization in Egypt
1- Negative cultural perception for privatization
among people.
2- Normal resistance from opposition and labor
force.
3- Investors fears from the usual instability of
laws and regulations in Egypt.
4- The strong dominance of public sector as
investor in market place which always threats
leveling the playground.
5- Insufficient transparency.
6- Slow movement in supply and weak domestic
demand for money
- weak contribution
ofReforming
banks to recovery
Privatization:
State – Owned banks
process
- excess liquidity in banks.
7- The unfavorable jurisdiction system.
8- Weaknesses of financial soundness
indicators average against other emerging
markets.
(2004/2005 figures)
Egypt
Emerging
Countries
Total World
ROA
0.6%
1.5%
1.4%
ROE
10.6%
15.5%
15.9%
Capital/Assets
5.3%
9.5%
8.6%
Bis ratio
12.0%
15.5%
14.8%
NPLS/total loans
27.0%
9.2%
7.7%
9- The increasing government budget deficit
because of subsidy, specially in energy prices
which conduced to investment distortion.
Pros of Public Banks Privatization in Egypt
1- For the first time, new faces with no
“socialist background, which means capable
decision makers for change management as
required in strong and transparent manner
without being hindered by precedent social
commitment.
2- Widely involvement of private sector in the
economic reform policies, explicitly and without
a hidden agenda.
3- Young internationally experienced and well
educated decision makers.
4- Full political support of the ruling national
democratic party (NDP).
5- The aggressive banking reform plan, which
includes, inter alia, strengthening regulatory
framework, good corporate governance,
selling or merging weak banks to well
capitalized and strong investors.
6- The Existence of well prepared
privatization program, that is consistent with
the overall economic reform program and
preserve the rights of all parties.
7- To the first time, strong formal
commitment towards privatization (between
July 2004 and March 2005, 17 non financial
companies were privatized, generated
proceeds of LE 2,35 Billion.)
Thank you