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Pros & Cons of Privatization in Egyptian Banking System. Dr. Fouad Shaker Secretary General Union of Arab Banks. MENA - OECD Investment Programme National Investment Reform Agenda of Egypt workshop Cairo - Egypt – 17 May 2006. The Specificities of Privatization

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pros cons of privatization in egyptian banking system

Pros & Cons of Privatization in Egyptian Banking System

Dr. Fouad Shaker Secretary General Union of Arab Banks

MENA - OECD Investment Programme

National Investment Reform Agenda of Egypt

workshop

Cairo - Egypt – 17 May 2006

slide2

The Specificities of Privatization

1- Should be managed within a declared vision based on a national strategy.

2- The privatization management process should be ready to deal professionally with rational and/or irrational rejection, be it in a good faith or vice-versa.

3- In principle it should be preceded by firm commitment from both political leadership and acceptance in principal from labor unions.

4- Should be implemented in a highly transparent manner according to set-up legal rules approved by concerned authorities.

5- Should consider the interests of the labor power in the present and the future.

slide3

My Definition of Privatization

    • - The privatization is totally indigenous restructuring process in a specific country whereby, it would be assessed and interpreted through the chronology of the socio-political developments and their implications on the economic situation
  • Hence
    • - There is no one approach of privatization fits all.
    • - What are considered rules in a country are only guidelines for other countries.
slide4

Chronology of major socio-political events concerned banks privatization in Egypt

1952 - Military coup D’état

(July 23 revolution)

(The six principals)

of which

“Terminating the control of capital on ruling” came as

one of the said principals.

Where capital at that time was totally owned by private

sector.

1956 - Suez Canal Company nationalization

mobilization of public opinion against foreign investment

slide5

1958 - Egyptianization of Banks’ Ownership

deepening the public perception against foreign investment in the financial system even for the Arab ownership.

1960 -Nationalization of banks and insurance companies.

New role for banks to finance the first national plan 1960-1965 without competition among them and no role for private ownership in financial institution.

1961 -Mass Nationalization across the board for most of the companies in all economic sectors.

(Services, Trade, Industry, Agriculture)

Announcement of socialism as a system for economic management in Egypt.

slide6

1964 -Merging 32 banks, to have only 5 banks each of them allocated to serve specific companies working in specific activity.

Endeavoring to implement control by the unit of currency like control by the role implemented in the Soviet Union at that time.

1972 -The establishment of Arab international bank.

In the form of private off-shore bank exempted from all regulations other banks are subject to.

slide7

1974 -The issuance of law 120

    • - Allowing establishment of private bank and also foreign banks to open branches.
    • - Liberalize public banks from rigid governmental regulations.
    • - Easing foreign exchange rules.
    • - Strengthening the authority of the central bank.
    • - Public banks established private banks in collaboration with foreign or national private sector
slide8

1981 -National conference of economic reform

    • - Infrastructure reform
    • - Reform and modernization of P.S.C
    • - Allow private sector to work in some sectors in a conditional way.
  • (Ambiguous economic identity and banking as
  • well).
slide9

1991 -Economic reform and structural adjustment program with IMF

    • - For the first time in the recent history the country accepted and adopted comprehensive economic program based on realistic givens.
    • - The program included explicitly privatization among the policies to be adopted, where privatization of industrial and commercial companies would enhance the capabilities of supply, and privatization of banks would enhance demand side.
  • - Although the program achieved remarkable
  • improvement specially on the demand side, yet Egypt was
  • very reluctant to implement the privatization program as
  • planned to start on 1994.
slide10

1996 -Privatization Starts

In spite of the commitment of the government to start on aggressive privatization plan including banks specifically one of the public sector banks, the implementation results were disappointing (few companies only).

Much to ones surprise the formal address to people from officials was not expressing a favorable opinion towards privatization.

slide11

1997-2004 -Do-nothing government

  • (No comment)
  • (Self explanatory state)
  • In spite of the shown competition from other countries to attract private sector investments (FDI)
  • Egyptian government involved in huge public sector project with the least effort of privatization and sometimes denouncing privatization as an economic approach.
  • July 2004 -Present: start of a new era (dismantling 50 years of socialism)
    • - Serious and effective vision towards privatization.
    • - Banking Reform plan aiming to have a healthy financial system that brings some public sector banks to the point of sale.
slide12

Cons of Banking Privatization in Egypt

1- Negative cultural perception for privatization among people.

2- Normal resistance from opposition and labor force.

3- Investors fears from the usual instability of laws and regulations in Egypt.

4- The strong dominance of public sector as investor in market place which always threats leveling the playground.

slide13

5- Insufficient transparency.

  • 6- Slow movement in supply and weak domestic demand for money
    • - weak contribution of banks to recovery process
    • - excess liquidity in banks.
  • 7- The unfavorable jurisdiction system.

Privatization: Reforming State – Owned banks

slide14

8- Weaknesses of financial soundness indicators average against other emerging markets.

(2004/2005 figures)

9- The increasing government budget deficit because of subsidy, specially in energy prices which conduced to investment distortion.

slide15

Pros of Public Banks Privatization in Egypt

1- For the first time, new faces with no “socialist background, which means capable decision makers for change management as required in strong and transparent manner without being hindered by precedent social commitment.

2- Widely involvement of private sector in the economic reform policies, explicitly and without a hidden agenda.

slide16

3- Young internationally experienced and well educated decision makers.

4- Full political support of the ruling national democratic party (NDP).

5- The aggressive banking reform plan, which includes, inter alia, strengthening regulatory framework, good corporate governance, selling or merging weak banks to well capitalized and strong investors.

slide17

6- The Existence of well prepared privatization program, that is consistent with the overall economic reform program and preserve the rights of all parties.

7- To the first time, strong formal commitment towards privatization (between July 2004 and March 2005, 17 non financial companies were privatized, generated proceeds of LE 2,35 Billion.)