Contents
Introduction .................................................................................................................2
Research problem .........................................................................................................4
Research objectives.......................................................................................................4
Research Methodology ..................................................................................................5
Literature review ..........................................................................................................5
1. Definition of bankruptcy and liquidation ...............................................................5
2. Egyptian law regulates anti-discrimination and concentration of lending
.............6
3. Cases of lending discrimination and concentration of lending in Egypt .................. 10
4. Procedures to prevent concentration and discrimination in lending ..................... 13
Recommendation ........................................................................................................ 14
References ................................................................................................................. 15
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Introduction
Egypt suffered from transformation process (privatization), subsequent governments
in Egypt during the period 1985 to 2010 tried to more incentives to investors to
acquiring the public sector , those incentives allowed to reduce the regulation s and
monitoring used by central bank to monitoring the banking sector in Egypt, so that
many businessmen obtained massive amount of loans from Egyptian banks to
finance privatization process without effective monitoring and guarantees to secure
deposits of depositors.
Many of businessmen have been failed to repay the principals and interest to banks,
many cases was happened in Egypt during nineteenth of the last century (scandal of
Parliamentarians' loan) , they escaped out from Egypt with whopping amount of
Egyptian money.
Absence of regulations, corporate governance and spread of corruption allowed to
bad treaty and unfairness to providing loans to all people based on specific roles and
regulations. For example there are many obstacles to providing loans for small –
medium projects that leads to increase imports , increase unemployment and
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industries became depends on the imports to satisfy its needs from raw material and
semi-finished goods.
Bank discrimination in Egypt must face by laws that allow giving loans to small and
medium enterprises at the same time the banks must increase oversight and guarantees
tools for the granting of such loans.
Central bank of Egypt have a significance role to increase monitoring tools for
granting loans.
Banking system regulated by law no. 88 of the year 2003 , this law regulate the
banking system and central bank in Egypt .
According to article 4 central bank have authority to influence the bank credit in a
way warranting the fulfillment of the actual needs of the different aspects of economic
activity, and supervision the banking sector in Egypt.
In fact, before 25th January we haven't see central bank practice its roles to influence
and supervise the banking sector.
In 2008, the Basel II Program Memorandum of Understanding was signed between
the CBE and the European Central Bank (“ECB”) in cooperation with seven European
National Central Banks (“NCBs”).
Banks have been applying Basel II pillar I
regulations since December 2012.
The CBE is currently in the process of
implementing Basel III and is studying monetary policy requirements in order to cater
for Basel III.
he CBE has published recent bank governance rules in 2011. According to the said
rules, each bank must appoint a competent board of directors that is mainly
responsible for determining the bank’s strategic purposes, striving to achieve said
purposes, supervising senior management, ensuring efficiency of internal control
systems and risk management, in addition to the responsibilities and obligations of the
board members. Each bank’s board of directors must be constituted of an adequate
number of members, bearing in mind diversification in skills, experience, abilities and
knowledge, including one member representing minority shareholders, in case their
total shareholding represents 5% of the total share capital. Each bank registered with
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the CBE must disclose the aggregate value (on an average monthly per annum basis)
of the 20 highest paid employees, in terms of wages and benefits, jointly.
In this research we will discussing the bank discrimination and fairness in Egyptian
banking system, causes and consequences and the role of central bank, the impact of
political transformation, also we will providing two cases studies that happened
during nineteenth of the last century.
Economic institutions operating in fluctuation business environment, this environment
include many and variety types of risk. These risks threaten its existence, therefore
firms must give importance to predict bankruptcy and financial failure and use
appropriate tool to predict bank insolvency.
Companies must follow the laws and regulation necessary to protect the company
from bankruptcy, and follow the corporate governance procedures. Financial
legislation designed to provide the appropriate environment for all business with the
creation of the environment and legal procedures required. This legislation also
discusses liquidation and bankruptcy proceedings or the Magistrate condom from
bankruptcy.
Research problem
Laws and regulations play important role to reduce bankruptcy, through reducing the
unethical acts such as those that occurred because discrimination and concentration in
lending. Predicting by financial insolvency has an important role to preventing it
before it happens.
Research objectives
In this research we attempt to identify bankruptcy concept, financial insolvency ,laws
regulate the Egyptian banking system , articles that prevent and
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inhabit
discrimination and concentration in lending process by Egyptian banks and give case
study (Deputies loans).
Research Methodology
In this paper we use the descriptive analytical method and through the work of a case
study . the laws and procedures that address the bank discrimination and
concentration in lending.
Literature review
1. Definition of bankruptcy and liquidation
Bankruptcy: refers to a legal rule and procedural process involving a person or
organization or bank that have inability to repay debts, bankruptcy process begins
with a petition filed usually by the debtor or on behalf of creditors rarely . (
Carmen M. Kenth S, 2009).
Or is a legal position of the firm or person that cannot repay the obligations to
creditor, bankruptcy imposed by a court order.
According to Gitman (2011) Bankruptcy happened when the face value of a
firm's obligations more than the market value of the firm's assets. This means the
bankrupt business has a equity less than zero. This means the firm cannot repay
its obligation and satisfy the creditor requirements by the firm's assets if dissolved.
Unless if liquidated assets above it book value
Business failure: refers to the firm inability to recover its debts because the firm
have a negative earning and a firm suffer from constantly report operating losses
and falling the market value of shares also business fails if it can't recover its cost
of capital from its return.
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Bankruptcy is an obvious type of business failure the court treat technical
insolvency and bankruptcy in same way. They are both considered to indicate the
financial failure of the firm.
Why bankruptcy
The reasons of occur bankruptcy and solvency changed over the time. As a result
of change of market economy and corporation the bankruptcy and insolvency
seemed to the result of impersonal factors that are less easy to influence. A
general use of bookkeeping and an emerging insight into the existence of national
and international business cycle movements were, among other things, factors that
served to depersonalize the questions of cause and responsibility .
According to Mann (2002) in 19th century was characteristics by a redefinition of
insolvency from sin to risk , from moral failure to economic failure.
Major causes of business insolvency and failure
1. Mismanagement : inappropriate managerial decisions can lead to the firm
insolvency and failure. Such as bad action, irrational decisions ,high leverage
whether financial or operating , poor financial actions, an ineffective sales
force, and high production costs.
2. Economic activity: during recession can contribute to the failure of a firm, in
recession sales decline and leaving the firm with high fixed costs and
inadequate revenues to cover them. High interest rates just prior to a recession
can further contribute to cash flow failure.
3. Corporate maturity: firms do not have infinite live, product passes through
birth, growth, maturity and decline , management attempt to prolong the
growth stage through R&D or new product and merger.
2. Egyptian law regulates anti-discrimination and concentration of lending
The Egyptian banking system is subject to the law No. 88 of 2003, the Central Bank
of Egypt is interested in the safety and stability of the banking system through direct
censorship on the Egyptian banking sector or foreign operating in Egypt.
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According to article 57 of the law to give a credit to customer, the bank must ensure
that the customer has a good reputation and has enough and adequate self –resources
to satisfy his obligations toward bank, bank should studies that prove the expected
cash flows of the customer activities are adequate to meet his obligations.
The bank in cases it determines ask customer to provide additional guarantees
whether in kind or any other form to save its funds from default.
According to executive regulations of law No88 for 2003 in article 17 Banks should
fully disclose to its customers for rates of return and the prices of banking services
provided by, and in accordance with the following rules:
A. to be disclose in terms of the contract when they make contract with the client and
notify the customer of the bank in accordance with the terms of the contract upon
renewal or modification rates or prices.
B. to be disclosed in the halls of customer reception of banks and their branches, or in
advertising in newspapers and other media services offered by the bank to customers,
or in private correspondence and bulletins sent by them.
C-that includes disclosure of the actual annual rate of return in accordance with
banking norms.
The bank should when providing financing or credit facility for the client taking into
account the following controls:
A. sure of the creditworthiness of the client and the efficiency of his
administration and correctness of the information and data submitted by it, in
accordance with the rules and procedures for evaluating credit set by the
Board of Directors pursuant to the provisions of Article 63 of the law.
B. The inclusion of the statement of balances the debt referred to in Article 62 of
the Law of the debts associated with the customer's parties.
C. Met querying the client from reliable sources, according to the models adopted
by the Board of Directors, taking into account renew the query at least once
every six months.
D. Ensure the proper client's reputation and the availability of enough resources
to display commensurate with the size of the financing or credit facility
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provided to him from the bank and from banks and other parties, and the
adequacy of the expected cash flows from its activities to be funded to meet its
obligations.
E. Access to the client's statement and its related parties which is provided the
information gathered by the central bank in its data base, before making a
decision to provide funding or facility or increase or renovated or modified
conditions.
F. The bank should take into account that the funding of domestic and foreign
entities to equity ratio in a customer's firm does not lead the client to a breach
of its ability to satisfy its obligation.
G. Loanable funds must be for specific purpose, and bank ensures that funds uses
in this purpose only
H. Should Combined with grant funding or credit facility in foreign currency to
the availability of foreign currency at the client to help him to repay resources.
I. Bank shouldn't concentrate its funds and credit facilities to a limited number
of clients, activities or sectors.
J. commitment to the powers of managers at headquarters and in the bank's
branches in the provision of credit and approval, as well as lower credit limits
for requests to be submitted to the Board of Directors of the Bank, all as
determined by the internal regulations of the bank.
K. met all the conditions contained in the credit approval before allowing the use
of financing or credit facility at all stages of this use.
L. Any other controls determined by the Board of the Central Bank.
According to article 61 "prohibits the bank to provide financing or payments under
the account or credit facility or guarantee of any kind for the chairman and members
of its Board of Directors and monitors its accounts or their spouses or their children or
their relatives to the second degree, or to any party they shall be, or their spouses or
their children or their relatives to the second degree partners or shareholders but his
main concern effective control them or members of their boards of directors in their
personal capacity".
According to article 65 "Every bank should establish a system for continuous and
immediate registration of the accounts of customers who receive financing or credit
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facilities, should be linked to database information system of the Central Bank, The
Central Bank may request from any bank making any modifications are necessary to
modernize that system, and to ensure the inclusion of its data centers from the debtors
of its currency.
Each bank should inform the central bank by statement about the status of each client
gets the financing or credit facilities.
Article 68. After the central bank's record of consulting firms are able to participate in
the evaluation of the guarantees provided to banks, regulate executive regulations of
this law, the rules and conditions and procedures for registration in the register and
identify obligations and responsibility these houses for what is contained in the
evaluation reports.
Article 69. Each bank maintains a record of the guarantees in kind provided by
customer for the finance and credit facilities provided for them, and he has to
ascertain the validity of these guarantees and guaranteed ownership and value for
providing credit.
Audit Committee provided for in Article 82 of this Law can be sure that the executive
management of the bank to review periodically the values of those guarantees, and
identifies actions to be taken to counter any decrease in the values of this.
These records are subject to inspection by the Central Bank, and it may call to
strengthen these guarantees when necessary.
According to article No.20 of the executive regulations that in cases where the Bank
decides to get collateral from the customer, bank should evaluate these guarantees,
through the houses of specialized expertise and registered with the Central Bank in
accordance with professional standards, and particularly the following:
1. the value at acquisition.
2. Changes in the value of the original guarantor from the date of possession.
3. Changes and their impact on the market value of the change in the original
guarantor
4. Realizable value of assets of similar time of the evaluation.
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5. Likely risks presented her original guarantor.
To prevent the concentration of loans in accordance with the law in Article 71 of the
Council of the Central Bank, in such cases where necessary, determine the ratio of
credit provided by the bank per customer and the parties associated with it, which, in
all cases, should not this ratio exceeded 30% of the capital base of the bank.
Article 80. The deregistration bank decision of the Central Bank in the following
cases:
(A) If found guilty of violating the provisions of this Act or its implementing
regulations or its executive orders , and did not remove the violation within the period
and under the conditions specified by the Central Bank that.
(B) If bank follow a policy that would harm the general economic interest or the
interests of depositors or shareholders.
(C) If it stops practicing his activity.
(D) If declared bankrupt or liquidated decided.
(E) If it is found that the license has been based on the wrong data submitted to the
Central Bank. Delisting decision may not be issued until after the bank announced it
by registered letter with acknowledgment of receipt to present defenses in writing
within fifteen days from the date of the declaration.
Egyptian law in Egypt set rules to prevent lending concentration and discrimination,
these laws and its executive regulations have three pillars to be effective tool:
1. Monitoring and good governance.
2. Good execution of the laws without exceptions.
3.
Strict punishment for offending
3. Cases of lending discrimination and concentration of lending in Egypt
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Deputies loans, they are deputies in the Council of the Egyptian people took
advantage of their position to obtain financial loans worth 892 million pounds without
bank guarantees.
Deputies issue loans and corruption in the financial and banking sector in Egypt, one
of the issues that preoccupied the public opinion in nearly 12 years, has been detected
for the year 1995 and the case was referred to the public prosecution in 1997..
This case began as I mentioned Egyptian local newspapers followed up - a tip from
an administrative control on August 17, 1995 that the national economy exhibition of
collapse, because some businessmen formed «lobby» seized the bank funds was the
fear that leads to repeat the experience of the collapse of BCCI at the time.
At September 18, 1995 formed the prosecution of a committee of the central bank for
the accounts and transactions of the accused "Ajlan tray and Azzam and Khaled
Mahmud and Ashraf Labib" in banks replace the lawsuit and all the banks since July
1994, and the report - as the newspaper News of the Egyptian weekly incidents
reported - that Ajlan got loan of «42» million pounds of Arab Bank to guarantee
deposits superiority Bank also received a loan from the bank of the Suez Canal, Arab
banking Corporation to guarantee deposits as well, and the joint account Ajlan cake
and Abdul Wahab. Been paid off and close it in the September 30, 1995, and
forwarded the prosecution of the accused to court on charges of willful damage, then
the investigation adviser added charges of profiteering and facilitating the seizure and
issued a decision to refer the defendants to trial on charges of damaging public
property in April 1997.
Causes of this case:
1. The weakness of laws an rules to prevent lending concentration.
2. Non- commitment by bank's board of directors by controls set by the Central
Bank especially collaterals or guarantees for granting loans.
3. Weak supervision of the Central Bank.
4. Lake of the information system and database.
5. Overlap between politics and economics (corruption).
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According to the Auditing report of Central bank about the results of financial
control and evaluation of the performance of the central bank, commercial banks and
specialized public sector, there are number of observations and recommendations for
the financial year ended 2014.
The auditing report included comments such as :
1. The concentration of large part of the credit facilities to the focus on a limited
number of clients (48 client) leading to increased credit risk.
2. Employment loans by National and Misr banks exceeds the maximum limit
allowed by law 88 in article 71.
3. Indebtedness of the National Bank amounted to about 2.4 billion pounds
facility directly and shift 1.1 billion pounds indirect facilities and shows a lack
of guarantees covering these facilities, as another client's debt amounted to
about 1.1 billion pounds and show the client classified under debt nonperforming category since May 2013 and was sued lawsuit against the bank
customer to demand the full value of the debt.
4. Investment by national bank in Egypt in its clients about 2 billion pounds, and
showing the absence of a recent study to evaluate companies and there are
many mutual claims between the bank and the client.
5. A total indebtedness of clients in Banque Misr about 1.8 billion pounds,
including contingent liabilities of about 228 million pounds, and have found
that the combined losses of the client since January 2011 amounted to about 7
billion pounds, while another client's debt amounted to about 1.2 billion
pounds, without collateral and show achieved through losses 2011 and 2012
amounted to about 231 and 253 million pounds, respectively, and the customer
to borrow in 2012 to refinance part of the installments due in 2013.
6. The present value of investment by Bank Misr in capital one companies within
the financial investments in subsidiaries and associates about 1.9 billion
pounds, up 99.99% and was found to achieve the company's net loss amounted
to 293.4 million pounds in 2013, and totaled losses December 31, 2013
approximately 1.8 billion pounds.
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7. A deficit balance in the provision for impairment losses for loans in Egyptian
Arab Real Estate Bank reached 3.4 billion pounds, according to the study of
the bank.
8. Debt irregular in Egyptian Arab Real Estate Bank amounted to about 4.9
billion pounds, 46% of the total loan portfolio amounting to approximately
10.6 billion pounds on June 30, 2014.
4. Procedures to prevent concentration and discrimination in lending
1. That banks take the necessary actions to reduce the concentration of
investments with a limited number of customers, and not exceed the maximum
limit of employments loans in one client more than 20% of the capital base of
the bank, and 25% of the customer and the parties associated with.
2. Take the necessary steps to get the funds from customers. Revaluate its assets
possess by clients.
3. Directing a greater proportion of bank deposits to invest in agricultural and
industrial projects in order to increase production, exports and create
employment opportunities.
4. Improve the banks regulations about granting loans.
Conclusion
The major goal of banking system laws is to achieve stabilization in the economic
system. law No. 88 of 2003 provide procedures to achieve this goal in banking system
and give executive authority –central bank- the right to control and monitoring the
procedures of granting loans to facilitate the economic activities and enhance the
economic growth.
The application of the law in Egypt suffers from many imperfections such as lack of
controlling and monitoring, and corruption.
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Law no.88 give many procedures to prevent discrimination especially the procedures
of granting loans to secure the depositors funds and economic system , and inhabit all
transactions generates inequity and unfair between people. Also prevent of
concentration when bank gives funds to specific number of persons.
Finally we found the that the Egyptian law for banking system and central bank is
sufficient to achieve equity and fairness but in fact the application of the law in
banking system in Egypt suffered from lack of accountability and supervision.
Good governance and accountability is very important to control on banking
procedures in granting loans to prevent discrimination and concentration.
Recommendation
From our research we recommend the following points to avoiding mistakes:
1. Good governance and accountability.
2. Establish an indicator to identifying banks which is violate the law and its
executive regulation.
3. Tighten sanctions on violators.
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References
1. WWW. CBE.com
2. ExecutiveRegulationsoftheCBEBankingSectorandMoneyLaw
3. LawNo88for2003
4. Brigham E, and Gapensiky 2002. Capital Structure and Ownership Structure: A
Review of Literature. The Journal of Online Education.
5.
G. Karl, 2008. History of Insolvency and Bankruptcy from an International Perspective.
6. Carmen M. Kenth S, 2009. INSOLVENCY LAW REFORM IN TRANSITION ECONOMIES..
Doctoral Thesis.
7. Gitman, 2011. Principles of managerial finance, book ed10.
8.
Ministry of investment, 2014. Periodical publications.
9.
Schwarszmann et al., 2014. Aguide to insolvency terminology and
procedure.business recovery services Uk.
10. R. Moreno,2005. The changing nature of risks facing banks. BIS Papers No 28
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