In a nutshell
The introduction of stress testing since 2011 has enabled the Egyptian banks to react to several shocks including Covid-19; in the future, stress testing can focus on mitigating the risks of political challenges, economic fluctuations and natural disasters.
The pandemic has accelerated the complete adoption of digitalisation: it is important in that context to have the regulatory frameworks to protect banks and customers from various cyber threats.
There is a need for a flexible prudential regulation framework to allow banks to operate freely and still maintain high levels of financial resilience; the application of Basel IV principles is a further step in the right direction.
Like any other banks, public development bank (PDBs) serve as financial intermediaries – but their main goal is to promote development. Indeed, many development banks focus on a specific and limited number of sectors of the economy according to the needs of the country, such as agriculture, industry, housing, health or education. In such cases, the development bank will be specialised in one sector and hence entirely dedicated to its development. At the global level, such banks represent 10% of global financial flows.
Development banking will always be a risky initiative, but with efficient and proper management, it can help to achieve development objectives. The most celebrated role of PDBs since the outbreak of the global financial crisis has been their countercyclical function. During the crisis, PDBs were able to provide liquidity to financial markets, which enabled them to avoid the downtrend.
The financial sector operates pro-cyclically, so private banks’ behaviour tends to aggravate crises by decreasing the flow of liquidity to the system when it is most necessary. It is therefore crucial that PDBs play this countercyclical role to protect the economy and correct market failures.
This is the main argument that justifies public intervention in the credit market. PDBs can play this important role through various channels:
- Ensuring the security and soundness of the financial system through managing liquidity in times of crises.
- Creating an information base to combat the negative effects of asymmetric information on the financial market.
- Financing socially important projects.
- Promoting financial development.
The last role is even more crucial for developing countries where market imperfections or failures exist, such as asymmetry of information, imperfect competition and underdeveloped and fragile capital markets. In this context and when private banks are not able to achieve these objectives, then public banks emerge as the second-best alternative.
The Egyptian case is of particular interest for two reasons. First, while PDBs have a long history in the Egyptian economy, their role and interventions have been rather limited. This applies to banks that were created during the socialist era of Nasser.
The decreasing role of these banks is due to several causes. On the one hand, as Moheildin and Nasr (2003) argue, with the Egyptianisation and nationalisation measures of the 1950s and 1960s, the banking sector became highly concentrated with the application of sectoral and functional specialisation making the system a sector-based mono-bank one (with mandatory public ownership/governance) with less competition and less innovation.
On the other hand, most of these banks were always backed up and sponsored by the government. Yet with the lack of incentives, political interference, poor governance, complicated bureaucratic procedures for loans processing, and overstaffing, their performance deteriorated and their profits decreased. This affected their interventions and financing capabilities. Moreover, with the privatisation of the banking sector in the early 2000s, the only banks that remained public were the largest commercial banks.
The second striking feature of PDBs in Egypt is the largest share of the PDBs-related projects implemented in Egypt is undertaken by government-owned commercial banks – namely National Bank of Egypt (NBE), Banque Misr (BM) and Banque du Caire (BdC) – which have a large market share.
In fact, while NBE has the highest market share (total assets accounted for 31.5% of Egyptian banks’ total assets in 2020), BM’s market share is EGP 967.3 billion and BdC’s EGP 211 billion. Their public ownership promotes their role in the implementation of the development agenda of the government.
Our research findings (financed by a grant from l’Agence Française du Développement) suggest that NBE, BM and BdC play an important role as stabilisers to maintain economic stability. They also mitigated the negative repercussions of Covid-19 on the economy. Their financial resilience rests on high capital adequacy ratios and liquidity.
The three banks also contribute to development through their pivotal role in promoting small and medium-sized enterprises (SMEs) and various mega projects in the economy. The three banks also enhance financial inclusion through digitalisation and the application of innovative tools.
These three main roles – namely maintaining financial stability, promoting SMEs and enhancing financial inclusion – allow for the characterisation of the public commercial banks as PDBs. Yet several reforms are needed to increase their effectiveness in coping with future crises and new megatrends such as fintech and digitalisation.
The way forward
Generally, development banks can only play their important role if they have independence, flexibility and expertise. The mandate of development banks is of lesser importance. But it is important to distinguish between their development and macroeconomic roles since financing the government debt is not per se a development role.
The introduction of stress testing since 2011 has enabled the Egyptian banks to react to several shocks including Covid-19. In the future, stress testing can focus on mitigating the risks of political challenges, economic fluctuations and natural disasters.
Moreover, the pandemic has accelerated the complete adoption of digitalisation. It is important in that context to have regulatory frameworks that will protect banks and customers from various cyber threats. While the Financial Regulatory Authority (FRA) has drafted a law to regulate non-banking fintech operations, the Central Bank of Egypt has not taken visible steps in this direction for the banking sector.
Finally, at the regulatory level, there is a need for a flexible prudential framework to allow banks to operate freely and still maintain high levels of financial resilience. The application of Basel IV principles is a further step in the right direction.
In addition, the future of the banking sector will be different and all banks have to equip themselves with all the requirements of the new era, which requires a fast-paced flexible technological infrastructure and sufficient training for all staff on all the new financial tools.
Further reading
Fernanda F, and F Carmem (2021) ‘Development Banks as an Arm of Economic Policy – Promoting Sustainable Structural Change’, International Journal of Political Economy 50(1): 44-59.
Fouad, J, M Said, W Sherif and C Zaki (2022) ‘Public Banks and Development in Egypt: Overview, Issues and the Way Forward’, ERF Working Paper No. 1594.
Marodon, R (2020) ‘Can development banks step up to the challenge of sustainable development?’, l’Agence Française du Développement research papers No. 175.
Mohieldin, M, and S Nasr (2003) ‘On Bank Privatization in Egypt’, ERF Working Paper No. 325.
Xu, J, R Marodon, X Ru, X Ren and X Wu (2021) ‘What are public development banks and development financing institutions? Qualification criteria, stylized facts and development trends’, China Economic Quarterly International 1(4): 271-94.
