High solvency, liquidity enable Egypt banking sector to function successfully amid COVID-19: Central Bank

Hossam Mounir
13 Min Read
The Central Bank of Egypt (CBE) has said that portfolio investment flows directed to emerging markets (EMs) will witness a slow and uneven recovery in favour of regions with the strongest economic recovery.

The stability of Egypt’s financial system and the improvement in the country’s economic performance helped immunise the domestic economy against internal and external disturbances, according to the Central Bank of Egypt’s (CBE) latest financial stability report.

This has been particularly important in dealing with the repercussions of the novel coronavirus (COVID-19) pandemic. It has also reduced the possibility of systemic risks affecting the stability of the country’s financial system.

The CBE report added that Egypt’s financial system witnessed a high level of stability in recent years, with its economic performance also improving as a result of the government’s successful economic reform programme in 2016-2019.

It explained that the country’s economy and banking sector have the ability to absorb the consequences of the COVID-19 pandemic on foreign currency resources. This stability has contributed to reducing pressure on the exchange rate, whilst also lowering market risks for the banking sector.

It has additionally resulted in the absence of systemic risks related to fluctuations in foreign capital, which has strengthened financial stability without resorting to the macro-precautionary policy.

The CBE has put in place a package of proactive measures to reduce the impact of the pandemic on companies and individuals, as part of the state’s plan to deal with the pandemic. As part of its activities, it has continued to issue instructions aimed at verifying the quality of assets and preserving the financial positions of banks working in Egypt.

The CBE noted that Egypt’s banking sector faced the pandemic with a range of financial solvency and high liquidity rates, which has enabled it to continue its successful performance in financial intermediation.

This has been possible without the CBE needing to resort to liberalising any of the financial pillars, or reducing the regulatory limits established on the banking sector.

According to the CBE, the domestic banking sector provided the necessary financing to import basic and strategic commodities to cover the needs of the market, once it was clear the coronavirus was more than a blip on the radar.

It also extended the period of excluding some food products from the cash cover requirements for a year, whilst studying and monitoring those sectors most affected by the pandemic.

It also developed plans to support companies operating in these sectors, in addition to providing the necessary credit limits to finance working capital, especially the payment of corporate employee salaries.

The CBE emphasised that the Financial Stability Index witnessed a remarkable improvement in 2019, but saw a decline with the beginning of 2020 as a result of the coronavirus pandemic on global economies and financial systems.

This was significantly reflected in the global economic climate index and the financial markets index. Moreover, the banking sector has maintained good financial health indicators, enabling it to face and absorb many shocks and contain their repercussions.

According to the CBE, the banking sector has witnessed a high level of financial stability over the past years, allowing it to deal with many crises and contain their repercussions. This has been thanks to: the sector’s development of strategies to manage various types of risks; taking the appropriate precautionary measures; and the application of supervisory instructions in a more conservative manner.

The banking sector has also continued to successfully perform its role in financial intermediation, while promoting financial inclusion and supporting economic growth.

The financial system showed an ability to absorb losses that may result from a second COVID-19 wave, as part of the application of stress tests.

The results of stress tests have shown the ability of the banking sector’s capital base to absorb the losses resulting from scenarios and financial risks that may result from the second wave.

The capital adequacy rate remained at a level higher than the minimum, in accordance with Basel instructions of 10.5%, and the minimum of 12.5% set by the CBE.

The banking sector’s liquidity ratios have continued at a level higher than the prescribed regulatory limits, as banks enjoy sufficient liquid assets.

The stress tests results have also shown the strong financial position of non-banking financial sector companies and institutions and their ability to face potential risks, whether from the repercussions of the current pandemic or in cases of unexpected crises.

The CBE said that the application of these tests is aimed at estimating the potential losses in light of the risks posed by the pandemic. They estimate the extent to which the solvency and capital base of companies and institutions would be affected by the risks arising from the precautionary measures to prevent the virus’ spread.

It stressed that the continued improvement of government financial performance reduces the possibility of the banking sector being exposed to risks of a public financial turmoil. It also contributes to improving financial space indicators, which have enabled the government to take incentive measures to contain the repercussions of COVID-19.

The CBE said that this improvement has resulted in the government being able to access markets, diversify sources of financing, and extend the average term of debts. It has additionally helped in reducing the risks of refinancing existing debts, and avoiding systemic risks related to the banking sector’s exposure to risks of a public financial turmoil.

It said that the banking sector accounted for about 89.6% of the Egyptian financial system’s total assets at the end of fiscal year (FY) 2018/19. It has seen an improvement of some of the top items of its financial positions, with good financial indicators until June 2020, despite COVID-19 repercussions.

The banking sector’s total assets amounted to about EGP 5.3trn in FY 2018/19, with a growth rate of 5.8%, and continued to increase to EGP 6.4trn in June 2020.

The CBE added that banking sector deposits remain stable, as family sector deposits account for 68% of total deposits. This reflects the confidence of individuals and different sectors in the banking sector during the COVID-19 pandemic.

The non-performing loan ratio decreased to 3.9% of total loans in June 2020, after remaining almost stable in FY 2018/19 and the previous fiscal year at about 4.1%. Banks continued to maintain a high percentage to cover allocations for non-performing loans, which amounted to 97.6% in FY 2018/19, and 97.2% in June 2020.

The capital adequacy ratio increased to 20.1% in June 2020, compared to 17.7% in FY 2018/19, and 15.7% in FY 2017/18.

According to the CBE, net foreign assets in banks rose to EGP 77.2bn in December 2019, compared to negative EGP 114.5bn in December 2018, as a result of increased foreign exchange inflows in 2019.

This has contributed to a rise in net international reserves to $45.5bn in December 2019 and an absence of pressure on the local currency. Due to the repercussions of COVID-19, however, net foreign assets decreased again to record negative EGP 61.2bn in March and negative EGP 27.1bn in June 2020.

This appeared in conjunction with the decline in net international reserves to record $40.1bn in March and $38.2bn in June. This came as part of measures to contain the pandemic’s consequences, and has contributed to the exchange rate’s stability and the reduction of market risks in the banking sector.

The CBE confirmed that banks working in the Egyptian banking sector have an increased ability in terms of facing operational risks and mitigating their severity by maintaining business continuity plans.

This included alternative plans to deal with customers and provide alternative places for doing business, with the availability of alternative electronic channels such as the Internet and mobile banking. Business procedures also take place remotely, with data and information protection and security measures in place.

The CBE indicated that the banking sector provided about EGP 68.8bn as part of the private sector initiative for industrial, agricultural and contracting at the end of June 2020.

Furthermore, the initiative to finance micro, small and medium enterprises (MSMEs) has also contributed to increasing the loan and facilities portfolio by EGP 201.8bn between the end of December 2015 to June 2020. The initiative of non-regular paying legal persons has benefited clients with EGP 13.6bn of debts settled at the end of June 2020.

The balances of debts that were settled as part of the initiative covering non-regular paying legal persons working in the tourism sector, whose debt balance is EGP 10m or more, reached about EGP 2.1bn until the end of June 2020.

In the same context, the CBE drew attention to the importance of issuing the new banking law, which aims to enhance the solvency and independence of CBE, protect customers’ rights and support financial stability.

It pointed out that the new Law No 194 of 2020 included the CBE and banking sector’s reorganisation, as it added payment systems and services, as well as credit guarantee companies, to the bodies subject to the CBE’s control and supervision.

It also strengthened the CBE’s technical, financial and administrative independence in accordance with the latest international standards. The law has stipulated new specialties to be carried out by the CBE, most importantly: protecting customers’ rights; protecting competition and preventing harmful monopolistic practices. It has also emphasised the CBE’s specialisation in setting and implementing the overall risk management policy in the banking system.

Moreover, the law stipulates the creation of the Financial Stability Committee, headed by the Prime Minister and the Minister of Finance, the Governor of the CBE, and the President of the Financial Regulatory Authority (FRA). The committee aims to preserve the stability of Egypt’s financial system.

This would take place by coordinating efforts to avoid any financial crisis and managing them in case they occur, without disrupting the CBE and FRA’s competencies.

The law also included an increase in the minimum capital for Egyptian banks to EGP 5bn, taking the form of an Egyptian joint stock company, and $150m for foreign bank branches, with the aim of strengthening the capital base of banks.

Each bank is obliged to prepare restructuring plans. The CBE also requires a settlement plan for each bank, and has introduced two new chapters to regulate early intervention and settle the situation of troubled banks.


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