1 August 2007
The Egyptian government is facing criticism from members of its parliament over plans to sell off the country’s publicly owned banks. The plan to privatize several national banks within the framework of an $8.7 billion financial sector reform program has the backing of the World Bank, the International Monetary Fund, the African Development Bank and US Agency for International Development.
On July 6, the Egyptian government announced it will offer 80 percent of Banque de Caire, one of the nation’s four largest public sector banks, to a strategic investor. The smallest of the four, Bank of Alexandria, was sold to an Italian bank last October.
The government announcement came as a surprise, even to the Egyptian Parliament. Some members are asking the government to stop the deal. The legislators had been told of a plan to merge Banque du Caire with the second largest public bank, Bank Misr, but nothing of transferring either bank into private hands. The Egyptian Prime Minister insists the government had been studying the possibility for over a year and is prepared for the decision. At a special hearing on the privatization plan July 18, the government argued the step is beneficial to the national economy.
Egyptian Banks have been in the spotlight in recent months. Three regional commercial banks have had a veritable bidding war over Al-Watany Bank, and the National Bank for Development is just off the auction block. In April, the government signed a memorandum agreement transferring 49 percent of NBD’s shares to an Abu Dhabi Islamic Bank-led consortium. Despite some controversy in Egypt over foreigners controlling Egyptian banks, the Prime Minister said he would not impose any restrictions on the bidders.
The privatization deals are part of a larger financial sector reform program estimated by the African Development Bank (AfDB) to cost some $8.7 billion. The program is funded by the AfDB, the World Bank, USAID and the Egyptian government. The AfDB’s $500 million contribution to the program last year was the single largest loan in the Bank’s history.
According to the World Bank's project information document for its financial sector reform loan, the original plan was to privatize the Bank of Alexandria, merge Banque du Caire and Bank Misr and restructure the newly merged institution and the National Bank. The government sold the Bank of Alexandria in October 2006 according to plan, but then changed course to privatize Banque du Caire. Although the Prime minister has publicly affirmed that Bank Misr and the National Bank will not be privatized, many remain dubious about the future of the two largest remaining national banks. Given the unexpected announcement to privatize Banque du Caire, there is reason to doubt.
Observers have raised a number of concerns over the sales. They have commented on the potential for a large number of bank employees being laid off, the lack of transparency in the privatization procedures and the nationality of the bidders. The public remains frustrated by their lack of input and concerned government corruption fueled the privitizations. One must ask how impartial the Egyptian government could be in deciding on the sale of public assets, such as state-owned banks.
There is talk of transforming the NBD into an Islamic bank which would operate with different lending principles than other commercial banks. If a Saudi national or another Islamic investor won the bid for Banque du Caire, some wonder whether it also might be converted into an Islamic bank. How this transformation would impact Egypt’s economy remains unclear. What is certain, based on the reaction of parliament and the public, is that greater transparency and an open debate is needed in determining the future of the country’s financial sector.
The IMF has closely followed Egypt’s bank privatizations, but the extent of its influence on the process is unknown. In the conclusion of the IMF's 2006 Article IV consultation with the Arab Republic of Egypt, the IMF encouraged the Egyptian authorities to develop a clear medium-term plan for the privatization of the remaining major state banks. The IMF plans to carry out a fuller review of the Financial Sector Reform Program mid-2007. The relationship between the decision to privatize Banque du Caire and this review is not clear.
The Egypt Country Assistance Strategy (CAS) endorsed by the World Bank’s Board of Directors for the period FY 2006 to 2009 sets a high case lending scenario with an average World Bank commitment of $700 million per annum to Egypt. This scenario would be effective only if the Egyptian government presents—among other triggers—a financial plan for funding the financial sector reform program. At least 10 percent of the needed $8.7 billion must come from non-debt-creating sources.
According to the CAS, the Financial Sector Restructuring Loan that the World Bank disbursed to Egypt in FY 2007 was part of the high case lending scenario. The loan was approved in June 2006 and the project was closed in June 2007. That indicates that the high case lending scenario is in place and the Egyptian government presented the needed triggers over a year ago to obtain the Bank's approval to the loan.
Notably, the Egyptian Prime Minister insists the government has been studying this privatization decision for over a year. Did it include the privatization of Banque du Caire in the funding plan in order to meet the requirement that 10 percent of funding be obtained from non-debt-creating sources? Or was the decision to privatize the bank added later? Those questions will remain unanswered as long as the details of the deal between the government and the World Bank are not published. Indeed, they remain unknown even to members of its Parliament. The surprise announcement to privatize Banque du Caire has inevitably led to speculation over the amount of secrecy involved and who benefited from it.
Meanwhile, significant sums of money have been flowing into the financial sector in the Middle East and North Africa (MENA). The International Finance Corporation, the private sector arm of the World Bank, has prioritized lending to commercial banks and financial institutions in the region. It says this is to increase available credit, particularly to small and medium-sized enterprises. MENA represents the fastest growing region in IFC’s investment portfolio.
Further study is needed to assess the economic, social and environmental impacts of growing private sector participation in the banking sector in MENA.
REsources
- Egyptian Parliament against bank privatization July 18, 2007 (Al Alahy website) (Arabic)
- Some Egyptian Parliament members question the government impartiality in the privatization process (Arabic)
- Egypt reaps more than $1.6 billion from privatization of Banque du Caire July 16, 2007 (Reuters- Arabic)
- IMF mission reviews economic developments and policies in the Arab Republic of Egypt December 18, 2006 (IMF website)
- IMF Executive Board concludes 2006 Article IV consultation with the Arab Republic of Egypt. July 11, 2006 (IMF website)
- Read more about the agreement between the National Bank of Development (NBD) and Abu Dhabi Islamic Bank June 2007 (Business Today Egypt website)
- Read more about the privatization of Al-Watany Bank and the agreement between NBD and Abu Dhabi Islamic Bank in The Roundup 2007 (Business Today Egypt website)
- Serious violations in the performance of the the three largest banks in Egypt (Almasry- alyoum website) (Arabic)
- AfDB press release on loan for Egyptian financial sector reform, "Egypt - ADB Supports Financial Reform Programme. Board Approves US$ 500 Million Budget Support Loan" July 26, 2006 (AfDB website)
- Project Information Document EG-Financial Sector Reform World Bank, January 12, 2006 (Acrobat PDF 20kb)
- The World Bank-Egypt Country Assistance Strategy
- The Islamaization of Egyptian Banks July 11, 2007 (Al Ahaly website) (Arabic)
- Egypt bank sale reawakens fears of colonialism, July 24,2007 (Middle East Times)
- IPS highlights IFC role in MENA region Bank Information Center, July 16, 2007 (BIC website)
- BIC's new Middle East and North Africa webpage