Economic Research Forum (ERF)

Public banks and development in Egypt

4216
In Egypt, the role of public development banks is played by three government-owned commercial banks, namely National Bank of Egypt, Banque Misr and Banque du Caire. This column outlines the contributions they have made to the economy in recent times, including maintaining financial stability, promoting small businesses and enhancing financial inclusion. Digitalisation, financing the budget deficit and the aftermath of the pandemic are continuing challenges.

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.

Tags: , , , , ,

  • Jasmin Fouad
    Jasmin Fouad
    Professor, Faculty of Economics and Political Science, Cairo University and American University in Cairo
  • Chahir Zaki
    Chahir Zaki
    Chaired Professor of Economics, University of Orléans

Most read

Trust in Lebanon’s public institutions: a challenge for the new leadership

Lebanon’s new leadership confronts daunting economic challenges amid geopolitical tensions across the wider region. As this column explains, understanding what has happened over the past decade to citizens’ trust in key public institutions – parliament, the government and the armed forces – will be a crucial part of the policy response.

Qatarisation: playing the long game on workforce nationalisation

As national populations across the Gulf have grown and hydrocarbon reserves declined, most Gulf countries have sought to move to a more sustainable economic model underpinned by raising the share of citizens in the productive private sector. But, as this column explains, Qatar differs from its neighbours in several important ways that could render aggressive workforce nationalization policies counterproductive. In terms of such policies, the country should chart its own path.

Small businesses in the Great Lockdown: lessons for crisis management

Understanding big economic shocks like Covid-19 and how firms respond to them is crucial for mitigating their negative effects and accelerating the post-crisis recovery. This column reports evidence on how small and medium-sized enterprises in Tunisia’s formal business sector adapted to the pandemic and the lockdown – and draws policy lessons for when the next crisis hits.

Economic consequences of the 2003 Bam earthquake in Iran

Over the decades, Iran has faced numerous devastating natural disasters, including the deadly 2003 Bam earthquake. This column reports evidence on the unexpected economic boost in Bam County and its neighbours after the disaster – the result of a variety of factors, including national and international aid, political mobilisation and the region’s cultural significance. Using data on the intensity of night-time lights in a geographical area, the research reveals how disaster recovery may lead to a surprising economic rebound.

Qatar’s pursuit of government excellence: promises and pitfalls

As Qatar seeks to make the transition from a hydrocarbon-based economy to a diversified, knowledge-based economy, ‘government excellence’ has been identified as a key strategic objective. This column reports what government effectiveness means in terms of delivery of public services, digitalisation of services, and control of corruption – and outlines the progress made to date on these development priorities and what the country needs to do to meet its targets.

The impact of climate change and resource scarcity on conflict in MENA

The interrelationships between climate change, food production, economic instability and violent conflict have become increasingly relevant in recent decades, with climate-induced economic shocks intensifying social and political tensions, particularly in resource-constrained regions like MENA. This column reports new evidence on the impact of climate change on economic and food production outcomes – and how economic stability, agricultural productivity and shared water resources affect conflict. While international aid, economic growth and food security reduce the likelihood of conflict, resource scarcity and shared water basins contribute to high risks of conflict.

A Macroeconomic Accounting of Unemployment in Jordan:  Unemployment is mainly an issue for adults and men

Since unemployment rates in Jordan are higher among young people and women than other groups, unemployment is commonly characterised as a youth and gender issue. However, the majority of the country’s unemployed are adults and men. This suggests that unemployment is primarily a macroeconomic issue challenge for the entire labour market. The appropriate response therefore is coordinated fiscal, monetary, structural and institutional policies, while more targeted measures can still benefit specific groups.

The green energy transition: employment pathways for MENA

The potential employment impacts of green and renewable energy in the Middle East and North Africa are multifaceted and promising. As this column explains, embracing renewable energy technologies presents an opportunity for the region to diversify its economy, mitigate the possible negative impacts of digitalisation on existing jobs, reduce its carbon footprint and create significant levels of employment across a variety of sectors. Green energy is not just an environmental imperative but an economic necessity.

Global value chains, wages and skills in MENA countries

The involvement of firms in production across different countries or regions via global value chains (GVCs) can make a significant contribution to economic development, including improved labour market outcomes. This column highlights the gains from GVC participation in terms of employment quality in Egypt, Jordan and Tunisia. Given the high unemployment, sticky wages and wide skill divides that are common in the MENA region, encouraging firms to participate in GVCs is a valuable channel for raising living standards.

Tunisia’s energy transition: the key role of small businesses

Micro, small and medium-sized enterprises (MSMEs) play a critical role in Tunisia’s economy, contributing significantly to GDP and employment. As this column explains, they are also essential for advancing the country’s ambitions to make a successful transition from reliance on fossil fuels to more widespread use of renewable energy sources. A fair distribution of the transition’s benefits across all regions and communities will secure a future where MSMEs thrive as leaders in a prosperous, inclusive and sustainable Tunisia.