Al-Bahar: Egyptian banks succeeded in financing economic recovery
NBK Group Deputy CEO and Chairperson of NBK - Egypt in an interview with The Banker magazine
In an interview with The Banker international magazine, Shaikha Al-Bahar, NBK Group Deputy CEO and Chairperson of NBK - Egypt said that the year 2020 witnessed the harshest operating conditions and unprecedented challenges due to the COVID-19 pandemic. Nonetheless, the banking sector successfully proved its resilience and ability to overcome these conditions thanks to the high quality of its assets, healthy capitalization, and strong liquidity.
Exceptional performance
Al-Bahar mentioned that despite the crisis, Egyptian banks maintained a capital adequacy rate exceeding regulatory requirements, averaging 19.8 percent. Stress tests also reflected the strength of the banks’ capital base and their ability to absorb economic shocks that may arise from the second wave of COVID-19. The financial and monetary policies implemented by the government and the Central Bank of Egypt (CBE) to mitigate the pandemic economic impacts bode well for banks. Credit growth accelerated and was up 23 percent year-on-year at the end of December 2020, supported by lowering the interest rates to stimulate the economy and other measures introduced by CBE to support the industrial, agriculture and construction sectors, in addition to other initiatives to support and finance SMEs, noted Al-Bahar.
Banks maintained high quality assets despite the crisis. NPL containment measures enabled the authorities to carry on with the implementation of the infrastructure projects as part of a well-adjusted policy that balanced between imposing the necessary measures to contain the spread of the virus while mitigating economic implications, she added.
Al-Bahar highlighted that banks did not need any regulatory adjustments to increase their ability to finance government and CBE initiatives aimed at stimulating economic growth, thanks to their strong liquidity. Despite lowering the interest rates in March, total deposits jumped, within six months, by more than 12 percent, with more than EGP 5 trillion in deposits by the end of September.
Promising opportunities
On a question about her take on the future of the Egyptian economy, Al-Bahar said that Egypt was the only country in the region to witness economic growth during the pandemic. We expect the economy to improve further on hopes for sustainable progress in the vaccination campaign and a faster recovery in the global economy. Growth is projected to reach around 2.8 percent in the current fiscal year, and to rebound strongly to about 5 percent over the medium term, benefitting from the authorities’ continued commitment to reforms and renewed IMF support.
Egypt has an ambitious plan to develop its infrastructure and spend on its development projects. This was reflected in its draft budget for the current fiscal year which saw capital spending jump by 26 percent over the previous fiscal year, reaching EGP 177 billion. This represents a main pillar for business activity and supports credit growth, mentioned Al-Bahar.
Adding to the key factors that create promising prospects for the Egyptian economy, Al-Bahar said: “The Egyptian demographic profile is also another main pillar attributing to business growth, with 66 percent of the total population under the age of 35. Therefore, we see promising opportunities for the rapidly growing retail sector, as we aim to expand our market share in this lucrative sector going forward.”
Given this demographic composition, about twothirds of Egypt’s population don’t have bank accounts. This provides a great opportunity for future growth, especially in light of the initiatives rolled out by the government and CBE to increase financial inclusion, the most recent of which was CBE’s decision to facilitate the opening of new bank accounts for individual customers and SMEs.
Supporting the economy
About the banking sector’s role in providing support to the economy and customers during the pandemic, Al-Bahar mentioned: “Egyptian banks managed to carry out their financing role during the pandemic amid low interest rates and without the need for CBE to relax regulatory standards thanks to their strong financial solvency and high liquidity ratios that enabled them to finance increased government spending aimed at mitigating the spread of the virus and reviving the economy. There were also several initiatives launched by CBE to mitigate the economic impact of the pandemic on the affected sectors.”
Al-Bahar applauded CBE for launching several initiatives and directives that have greatly contributed to mitigating the economic impact of the pandemic, most importantly slashing interest rates by 400 basis points to stimulate economic growth, in addition to the deferral of all bank loan payments for individual customers and SMEs for a period of six months, with no additional interest or fines charged on late payments. Additionally, CBE issued instruction for debt restructuring based on the customer’s future cash flows, and launched several initiatives to support the most affected sectors including tourism.
Controlling inflation
Commenting on interest rate cut applied by CBE and its impact on the banking sector’s performance, Al-Bahar said: “Cutting interest rates as part of easing the monetary policy and control inflation led to the acceleration of credit growth, which was not affected by the crisis. This in turn contributed to reducing some of the pressures on interest margins due to cutting the interest rates. Credit growth was reflected in the loan-todeposit ratio, which exceeded 47 percent at the end of September, up from less than 45 percent at the end of 2019, supporting banks’ profitability.”
Margins may face some pressures during this year and next year as a result of lower interest rates and further easing of the monetary policy, especially as inflation continues to trend lower below its target levels, with most banks’ credit portfolio continue to depend on financing government debt instruments, exceeding EGP 2.7 trillion in government treasury bill investments. This number is expected to decline in light of the goals announced by the government to reduce the debt-to-GDP ratio, posing a challenge for banks to maintain their profitability, noted Al-Bahar.
“In general, despite the low interest rates, real interest rates remain attractive to foreign investment compared to other emerging markets. This is supported by a decline in inflation rates to less than CBE’s target levels and the ability to achieve most of the reform measures, which may increase inflationary pressures in the future,” she added.
The new banking regulations
About the new banking regulations, Al-Bahar said: “There is a growing need to issue new legislation to cope with the various economic stages and the ever-changing economic developments in general and the banking industry in particular due to the developments on the FinTech front and the challenges posed by the global financial crisis which resulted in numerous challenging factors, thus leading to urgent need to issue new legislation to regulate the banking sector framework to replace the old law presented over 17 years ago. The new integrated legislative framework is aimed at keeping pace with the latest economic, business, and banking sectors developments, and furnishes a new stage to develop the Egyptian banking system.”
Al-Bahar praised CBE for dedicating a whole chapter in the new law to regulate payment services and FinTechs, noting that the law also outlined a legislative framework that supports bank’s capitalization and increases their ability to deal with certain exceptional circumstances.
The law also focused on developing an integrated strategy to remedy loan default, ensuring early CBE intervention through clearly outlined standards and indicators that help protect the banking sector from future crises. A specific mechanism was also set for dealing with banks in the event of default and establish a fund to finance the settlement of those defaults, she added.
Digital transformation
On a question about digital banking and fintech grown in Egypt, Al-Bahar said: “The pandemic crises proved that digital transformation is no longer a luxury, it is critical to the survival of business. It is an alarm bell that warns anyone that slows down in taking serious steps towards their implementation by showing them that they have no place in the banking industry.”
In recent years, the government has been interested in FinTech and electronic payments. These efforts were clearly reflected on payments, as the number mobile payment service users exceeded 19 million, with an annual growth of 41 percent, and the value of monthly transactions reached approximately EGP 9.6 billion, added Al-Bahar.
On the digital services front, banks actively increased their investments in digital transformation, allocated departments for digital banking services and products, and continued to encourage customers to execute their banking transactions through electronic channels using online or phone banking solutions, she concluded.