Impact Story

This project was initiated by the Central Bank of Egypt (CBE) in 2003, at a time when the financial sector in Egypt was dominated by the banking system, which accounted for more than 60 percent of the financial system’s assets.  The banking system was comprised of 57 banks, and this included 28 commercial banks of which, four were state-owned, 26 were investment banks (11 joint venture banks and 15 branches of foreign banks), and three were specialized banks.  The banking sector was dominated by state owned commercial banks, which accounted for more than 51 percent of the banking system’s assets.  Although private and joint venture banks were growing, many were relatively small with modest branch networks.  The dominance of state owned banks did not encourage sector reform, and left a market that was highly concentrated and lacking in competition.

The Central Bank of Egypt had been making efforts to improve the soundness of the banking system.  It had worked on four main fronts, some of which were recommended by the FSAP (2002):

• On the legislative front, two main laws were drafted: the new Banking Law, giving more independence to the CBE, and an Electronic Signature Law;
• In terms of prudential regulations, regulations regarding connected and related party lending and market risk exposure were introduced;
• On the corporate governance side, the management of the four state owned commercial banks were changed, and clear responsibilities for managers and boards of directors were set; and,
• On the information infrastructure front, the CBE and banks worked toward development of an automated credit risk information system (CRIS), from which participants would be able to access, on-line, clients’ credit profiles (FIRST funded technical assistance to this activity).

Based on the request and the recommendations made by the FSAP team, the CBE submitted a proposal for FIRST funding to assist in strengthening aspects of CBE prudential regulations and supervision of banks in the areas of connected lending, large exposures and market risk assessment e.g. exposures to fluctuations in equity or currency values or interest rates.

The main project benefits were full implementation of recently issued regulations on connected lending, large exposures, and market risks and more comprehensive collection and analysis of banking data.  Successful implementation of the technical assistance would complete most of the outstanding recommendations of the FSAP and would bring the CBE more closely into full compliance with the Basel Core Principles.

Lessons learned:

Projects with training components are, in principle, an excellent fit for FIRST in view of its objectives.  However, they must be funded and executed in an environment in which the training can succeed.  At the time of the project, the CBE had no overarching training program. As such, any training provided to the examination staff was an ad hoc event rather than as part of a managed structure to promote sustainability.

Reports:

• Consultants Report of Review of Law, Policy and Procedures for: connected lending, large exposures and market risk. This report provides a good description of the issues in each of these three areas and makes recommendations which, though in this instance directed at the CBE, will have some relevance to varying degrees in other countries