The January 25th 2011 revolution briefly crippled the Egyptian economy and drove many foreign investors and tourists away. However, after the revolution, the Egyptian government pledged economic and political reforms to attract foreign direct investments (FDI) such as providing financial facilities that are attractive to foreign investors and this includes measures and incentives to attract foreign banks. The result is now an appealing market for investors and international banks looking to expand into the country.
Financial sector reform
The financial reform program was launched by the Egyptian government in September 2004 to ensure that the banking system is well-capitalized, efficient, competitive and well-managed. The Egyptian government worked with the World Bank to support reform in the financial sector. The reform program has led to significant results: for example, the banking sector has moved from a state-dominated to a private sector-led system.
To meet the Egyptian government’s objective to attract more FDI, banks are offering a wider choice of financial products and services. Ultimately, the reforms have improved access to finance in Egypt. According to the World Bank, the number of loans increased by 60%, the number of deposit accounts by 15%, bank density by 60% and the number of ATMs by 26% between 2006 and 2009. Banks have also been actively offering all types of financial services such as debit and credit cards to consumers.
In March 2013, Moody downgraded the local-currency deposit ratings of five Egyptian banks, including the National Bank of Egypt SAE, Banque Misr SAE, Banque Du Caire SAE, and Commercial International Bank (Egypt) SAE from Caa1 to B3, and Bank of Alexandria SAE from B2 to B1. Nonetheless, the economy remains fundamentally strong and many foreign banks and investors still view Egypt as a country with great growth potential.
Egypt’s attractiveness to foreign investors and international banks
Egypt is one of the most populous countries in the Middle East, with an estimated population of 85 million in July 2013, according to the United States Central Intelligence Agency’s (CIA) World Factbook. The Egyptian population represents a large and growing base of consumers whose income is rising.
The Egyptian government has also invested in education and infrastructure to make the country an excellent place to set up a business. Loans from the International Monetary Fund (IMF) and aid from foreign countries like the United States will help to restructure the Egyptian government’s finances and improve the economy. This will boost investors’ confidence and attract more FDI. When the political situation completely stabilises in Egypt, foreign investors are likely to return. Hence, there are numerous opportunities for banks to provide finance to the business sector. Furthermore, there are opportunities for banks to finance companies located across the wider Middle East and North Africa (MENA) region.
International banks’ expansion plans in Egypt
Egypt Independent reported recently that Arab banks are seeing the credit crunch crisis in Egypt as an indication that the market is recovering and as an opportunity to acquire and invest in some of the country’s largest financial institutions. For example, the National Bank of Dubai took over France’s BNP Paribas operations in Egypt and Qatar National Bank’s (QNB) acquired the National Société Générale Bank’s Egyptian business. Even though the Egyptian government has imposed a 10% tax on investment gains from QNB’s acquisition, Reuters reported that the government has recently announced that it will refund the 10.2m Egyptian pounds in taxes that it collected from the takeover back to shareholders.
According to Bloomberg Businessweek, HSBC announced in October 2012 that it is planning to increase its consumer lending and wealth management business in Egypt. Barclays Bank will also boost its branch network by 10% in 2013 and intends to offer Islamic banking services. Reuters reported that bankers are expecting more financial mergers and acquisitions to happen in Egypt, such as Crédit Agricole’s 61% stake in Crédit Agricole Egypt and Italian bank Intesa Sanpaolo’s 70% stake in Bank of Alexandria even though no formal process has yet taken place.
Morgan Stanley’s MENA investment banking head, Kalus Froehlich, told Reuters: “The larger the country, particularly in terms of population, the greater the attraction for retail banks to be present. So Egypt, for example, with a population of around 80 million, is a compelling opportunity for some banks.”
With the release of the 2013/14 budget, the Egyptian government forecasts that the Egyptian economy will grow by 3.8% in the fiscal year starting in July. This would give a positive signal to investors and international banks that there is potential yet for growth in the Egyptian economy.