Banks operating in the Egyptian market are suffering from the pile up of the liquidity of the Egyptian pound and the lack of investment opportunities that can absorb that liquidity and cover its cost.
Banks received significant liquidity in the pound after the decision to float the pound in November and the increase in interest rates on the banks’ saving schemes that followed. The increase in interest rates varies between 3-8% and has not been applied gradually.
According to the deputy governor of the Central Bank of Egypt (CBE) Gamal Negm, the new certificates that the bank issued after the pound’s flotation which offered a 16% and 20% return attracted new liquidity worth approximately EGP 64bn from outside the banking system.
That amount increased the strain on banks that are already facing a big problem in investing pounds since January 2011 due to a lack of financing opportunities afforded to them, with the exception of the occasional syndicated loan for mega projects.
Banks are waiting on the economy to improve once recent reform measures start having an effect in order to be able to invest, rather than rely on investments in government debt instruments.
According to the CBE’s most recent report, the general loans to deposits ratio at banks registered approximately 44.5% by the end of June 2016, while the loans to deposits ratio in Egyptian pounds registered 39.5%.
“What raises concerns for me now is the pile up of liquidity in banks, and my biggest fear is that the banks’ role be limited to financing the state’s general budget deficit through treasury bills and bonds which generates profits without any real effort or cost,” said Ahmed Selim, general manager at a private bank and a banking expert. “I also fear that this issue will culminate in a crisis.”
“Investment procedures must be facilitated,” Selim said. “Closed factories must also be re-opened, especially those that produce the products which we import. That will lead to banks being able to invest their money, and factories being able to increase production and contribute to lowering unemployment. It will also decrease the demand on foreign currencies that are used for importing.”
According to the CBE’s figures, banks invested approximately EGP 120bn in fixed income instruments over the past week, of which EGP 15.5bn were in treasury bills and bonds and EGP 65bn in the CBE deposit operation. EGP 21.282bn of the investments were made within the CBE corridor mechanism, and a further EGP 18.236bn was invested in the interbank market.
The CBE’s figures indicate there is high demand among banks for investments in these instruments.
The CBE offered on behalf of the Ministry of Finance last week four treasury bond auctions with a combined value of EGP 15bn. Banks had subscribed to these auctions with EGP 32.01bn, more than double the amount needed. Another auction held by the CBE for treasury bonds with a total value of EGP 500m attracted EGP 1.98bn from banks, almost four times the amount.
In the ‘CBE deposit operation’, the CBE demanded EGP 65bn, while banks offered EGP 69.08bn.
A number of bank leaders told Daily News Egypt on numerous occasions that the banks are not happy investing their money in fixed income instruments, especially the government debt instruments. However, given any viable alternatives banks have little choice but to invest in the relatively safe investment opportunities afforded by fixed income instruments.
Bank leaders have also previously said that the banks will deal with the investment opportunities that exist, adding that they would invest in alternative opportunities if it were possible. Also, it is the banks’ interest to finance customers and projects and to open letters of credit in order to receive commissions and interest and make bigger profits.