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Country Commercial Guides for
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CHAPTER VIII. TRADE AND PROJECT FINANCINGBRIEF DESCRIPTION OF THE FINANCIAL SYSTEM
The central objective of the Egyptian Government's economic reform program, as it relates to the financial sector, is to increase the level of real growth, with a greater role for the private sector in banking and insurance. The elements of this financial reform are:
- Privatization of the banking system
The GOE plans to privatize its holdings in joint-venture banks, as well as to sell to the private sector, up to 10% of one of the four major public sector banks, the Bank of Alexandria. These actions would bring half of the banking sector into private control. (Private sector ownership currently represents less than 30%.) - Privatization of insurance companies
The People's Assembly (Egyptian Parliament) has endorsed a new insurance law that allows up to 100% ownership by foreign insurance companies, and allowed for the privatization of public sector insurance companies. - Upgrading the Egyptian stock market
The securities market has been revitalized since 1991 and now has a market capitalization of LE 83 billion (US$24 billion). The GOE aims at introducing new forms of securities, such as options and derivatives, in addition to upgrading the financial information system linking the Cairo and Alexandria stock markets. Companies in the stock exchange are required to comply with international accounting standards in preparing and publishing their financial statements. Moreover, an automated trading system is being implemented for the Egyptian Stock Exchange.
BRIEF DESCRIPTION OF THE BANKING SYSTEM
With the exception of three banks exempted from Central Bank of Egypt (CBE) control by law or treaty, all banks in Egypt are subject to CBE supervision. The three exempted banks are Misr African International Bank, the Arab International Bank, and the Egypt Export Development Bank. By 1995, the Egyptian banking system consisted of 69 banks (of which nine were public sector banks):
- 29 commercial banks
- 33 investment banks
- 7 specialized banksDuring 1957-1974, nationalization had a dramatic impact on Egypt's financial system. The closure of the Egyptian stock market and the confiscation of Egypt's 27 commercial banks and specialized banks turned the financial system into a stagnant, non-competitive sector. Only fully-owned Egyptian banks were permitted to operate in the country. Although the banking system has since been opened to private sector banks, the four state-owned commercial banks still dominate the banking market due to their large size in terms of assets, deposit base and branches. In 1974, Investment Law 43 permitted joint-venture commercial and investment banks with a minimum of 51% Egyptian ownership into the Egyptian market. Law 43 also gave these banks equal national treatment and tax benefits. However, foreign bank branches were restricted to foreign currency business until the March 1993 amendment to Banking Law 37/1992 permitted existing foreign bank branches to engage in local operations. The 27 Investment Law banks consist of 11 joint-venture banks and 16 foreign bank branches. On June 16, 1995, the Parliament approved the bill amending the Banking and Credit Law 163/1957 and Law 120/1975 permitting majority foreign ownership in joint-venture banks. Current reforms of the banking sector focus on the regulatory framework, institutional improvement, and use of sophisticated information technology packages to link banking services.
The banking system deposit base and loan portfolio totaled LE 200 billion ($54 billion) and LE 150 billion ($48 billion) respectively, at the end of June 1998. Total assets of banks were LE 300 billion ($73 billion). Banks are free to set their own interest rates and exchange rates, although the CBE provides informal guidelines, such as T-Bill auctions and discount rates. The CBE regulates the banking system by setting reserve and liquidity requirements and rules for loan classification. The minimum paid-in capital requirement for banks under Banking Law 37/1992 is LE 50 million ($14.7 million). A deposit insurance fund is being phased in and membership will be obligatory for all banks operating in Egypt, including foreign bank branches.
In 1999, the following American bank branches and representative offices are currently operating in Egypt, in both local and foreign currencies: Citibank, American Express Bank, Bankers Trust, Bank of New York, Chase Manhattan, and one Egyptian-American joint-venture commercial bank, Egyptian-American Bank.
Some foreign banks are dealing with Egyptian or international banks in Egypt without having a subsidiary. Under Banking Law 37/1992, as amended by Law 101/1993, foreign banks operating in Egypt, whether joint ventures or branches, receive equal treatment and are subject to the same regulations as national banks. Due to the large number of banks now operating in Egypt, CBE policy regarding new entrants into the banking market, whether foreign or Egyptian, is very restrictive and no new banks have been licensed.
FOREIGN EXCHANGE CONTROLS AFFECTING TRADE
Egypt liberalized foreign exchange rates in February 1991, conducting transactions through two markets: the primary market for government transactions and the free foreign exchange market. Effective October 8, 1991, the primary market was eliminated, and all transactions now are effected through the free market. The Egyptian pound exchange rate versus U.S. dollar has been stable from May 1991 to June 1997 at LE 3.4 per 1 USD. Foreign exchange is easily available in the banking system or in foreign exchange companies. As of the end of February 1998, the CBE had accumulated $20 billion in reserves.
Foreign Exchange Law of May 1994 allows individuals and legal entities to retain and transfer foreign exchange in Egypt and abroad. The new law stipulates that banks can engage in all foreign exchange transactions. Under this law, exporters and tourism companies are no longer obliged to repatriate their foreign exchange proceeds to Egypt. The only foreign exchange restriction is a five-year period for transfer of sales proceeds of real estate in Egypt owned by foreigners residing outside Egypt. Although the law does not specify the terms of transfer of sales proceeds, the assumption is that transfers will be made in equal installments over a five-year period.
GENERAL AVAILABILITY OF FINANCING
Banks may not be the only source of finance because of the availability of the emerging securities market, as well as the availability of donor-assistance credit lines, such as USAID and other bilateral aid, EU credits for the private sector, and the Social Fund for Development which is mainly donor-financed.
The Egyptian banking system is highly liquid. Financing in either Egyptian pounds or foreign currency is readily available, to the extent that Egyptian entrepreneurs deny that capital is a key problem in putting a project together. Banks are willing to finance activities in all economic sectors, but they have to know the customer well. The Egyptian pound deposit base has increased substantially. Deposit rates rose to a high of 17% in 1992 and currently range between 8.5-10%, tax-free. Lending rates have fallen from a peak of 21% in 1991 to 12-14% in 1998, while the prime lending rate is much lower.
By 1991/92, the Egyptian stock market was reactivated by the GOE in order to allow alternative financing to private and public firms. In 1998, the size of the stock market (blue chips and bonds) was estimated at LE 65 billion (about $22 billion), excluding closed companies, compared to LE 5 billion in 1992. Also, the volume of trading in 1998 was 50% more than the level in 1993. In addition, as of early 1998, there were 22 mutual funds in Egypt with a total estimated value of $3 billion. This indicates the significance of the Egyptian stock market in terms of providing financing and an opportunity to build savings. The development of professional investment banking capabilities will definitely help encourage the private sector to tap the securities market more often. The U.S. firm, Morgan Stanley, recently entered the Egyptian market in partnership with a local firm.
HOW TO FINANCE U.S. EXPORTS TO EGYPT/METHODS OF PAYMENT
U.S. exporters to Egypt typically rely on letters of credit from Egyptian buyers, arranged by the latter through Egyptian banks, confirmed irrevocably by a U.S. bank. Other financing sources include USAID's Private Sector Commodity Import Program, which makes available dollars to Egyptian banks which then lend to Egyptian importers (see description, end of section IV); the U.S. Export-Import Bank (EXIM), which generally requires a sovereign guarantee from the Egyptian government -- a lengthy process needing approval by the Egypt Parliament; and, for investors, the U.S. Overseas Private Investment Corporation (OPIC).
Multilateral banks and funds do not provide export financing to Egyptian exporters. An African Export-Import Bank (AFREXIM) began operation in early 1995 and offers low cost financing for foreign and intra-African trade.
For those U.S. companies interested in selling production equipment and raw materials to the Egyptian business sector, a look at the financial environment in which Egyptian manufacturers and exporters operate might be useful. Knowing the financing and insurance programs available to Egyptian manufacturers and exporters can provide both insight into the market and possible tools for helping to penetrate that market. For this reason, we include the following section.
EGYPTIAN FINANCIAL AND INSURANCE MECHANISMS
The local banking system and offshore banks operating in Egypt are the main source of finance for Egyptian exports. Export financing is usually short-term and is intended to cover the exporter's working capital during the production period. Financing term ranges from between three to four months to as much as one year. Banks decline to finance long-term export contracts, especially after the negative experiences of Egyptian exporters with the former USSR and Iraq. The exporter may use loans to finance imported inputs or locally produced ones. Banks prefer to lend exporters the same currency they will receive in payment for their exports to reduce foreign exchange risk.
Banks finance 50% to 80% of the value of an export order, whether in the form of a contract, shipping documents, insurance documents, or a letter of credit (L/C), depending on the credibility of the exporter. If the exporter is not well known in the market and does not have a proven track record, banks will request that the importer open an L/C to reduce their risk. Requesting an L/C constitutes an additional cost to the importer, which may reduce the competitiveness of Egyptian exports. On the other hand, creditworthy exporters are offered direct overdraft facilities. Interest rates on export financing range between 1.5-2% above LIBOR. Banks deduct loan repayments from the export proceeds. In general, export credit is a revolving form of credit.
Egypt has one export guarantee company, The Export Credit Guarantee Company of Egypt (ECGC), established by the Export Development Bank of Egypt, National Investment Bank, Misr Insurance Company, Al Shark Insurance Company and Egyptian National Insurance Company. ECGC started operation in October 1993. It provides guarantees against importer's risk or political risk to Egyptian or foreign exporters who export products that are totally or partially produced in Egypt. "Importer's risk" is defined as the importer's inability to pay for the exported goods or his/her refusal to receive the shipping documents of exported goods, although the exporter fulfilled all obligations. ECGC's guarantee also covers political risk (non-commercial), including the cancellation of the importer's license by his/her country's authorities, refusal of entry of goods by the importer's government, denial of permission to transit a country's territory, seizure or confiscation of exported goods by the importer's country or the transit country, insolvency of a public-owned importer, or military actions or civil disturbances that affect the importer's assets. The guarantee, on the other hand, does not cover foreign exchange risk and risks pertaining to the nature of the goods.
Whenever ECGC receives a request for guarantee, it investigates the importer thoroughly. Based on the importer's financial status and estimated country risk, ECGC decides on a coverage limit and informs the exporter. The guarantee can reach up to 80% of the importer's outstanding debt ECGC receives 0.5-2% premium depending on the importer's country and the product exported. The exporter can sell the guarantee to his/her bank.
PROJECT FINANCING
Banks are the main source of finance for projects in Egypt. As mentioned above, banks are highly liquid in both local currency and foreign exchange and are competing to finance credible, well-known clients. Although loan demand is high, actual borrowing is low because of restrictive collateral requirements and high loan rates. Egyptian pound lending rates have fallen considerably from a peak of 22% in 1991 and 1992 to an average of 12-14% in 1996, while the prime lending rate is much lower; as little as 7.5%, or LIBOR plus about 1.5%. Egyptian investors have also begun considering the stock or bond markets to obtain capital. The Cairo and Alexandria stock exchanges, dormant since 1956, started gaining momentum in late 1992. The new Capital Market Law 95/1992 was issued to help activate the securities market. In addition to supporting the privatization program, the law has succeeded in slowly revitalizing the market. Egypt is currently included in the International Finance Corporation (IFC) index for emerging markets. Corporate bonds issued by private sector companies indicate that investors have started to be aware of the importance of bonds as a source of finance. Wider use of bonds is further expected in the coming year.
U.S. Export-Import Bank loans and guarantees are available in Egypt. EXIM rates are relatively high compared to financing available from local banks.
Small investors who lack the right business connections and collateral required by banks find it difficult to start up small-and medium-size projects in Egypt. On the other hand, the Social Fund for Development, established to cushion the impact of economic reforms on low income groups, is providing funds to banks to lend to small-scale enterprises. A private sector credit guarantee company started operation in 1989 to encourage banks to finance small-scale enterprises. The Credit Guarantee Company guarantees up to 50% of loan principal for small enterprises. The company also provides services to small investors to help them choose suitable projects and to prepare feasibility studies.
THE WORLD BANK GROUP
The World Bank Group is a multilateral lending agency consisting of four closely related institutions: the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). The World Bank provides loans to developing countries to help reduce poverty and to finance investments that contribute to economic growth.
The International Bank for Reconstruction and Development (IBRD), frequently called the World Bank, was conceived in July 1944 at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The World Bank opened for business in June, 1946 and its first focus was the reconstruction of war-torn Europe. Today, the World Bank lends to the developing countries of Africa, Asia, Latin America, the Caribbean, the Middle East, and Europe. The World Bank and its affiliates are headquartered in Washington, D.C. A brief description of each group member follows:
The International Bank for Reconstruction and Development (IBRD) provides funding for creditworthy developing countries with relatively high per capita income. It also provides technical assistance and policy advice. IBRD raises the money through the sale of AAA-rated bonds in international capital markets. Loans are made only to governments or to agencies that can obtain a government guarantee. The IBRD also provides partial risk or partial credit guarantees (with a counter-guarantee from their government) to private lenders on development projects. The interest rates are variable, set at half a percentage point above the Bank's average cost of borrowing or LIBOR. Repayment is usually over 12 to 15 years, including a grace period of three to five years. Opportunities for U.S. companies exist to supply goods and services in connection with these loans.
The International Development Association (IDA) provides assistance on concessional terms to the poorest developing countries (per capita incomes below $865 in 1994) that are not sufficiently creditworthy for IBRD financing. It receives its funding largely from contributions from its wealthier member countries. The terms for IDA credits are maturities of 35 or 40 years (depending on the level of development of the borrower), including a ten-year grace period and no interest but a 0.75% annual service charge. IDA credits are made only to governments. As with the IBRD, procurement procedures are well-established and offer opportunities for U.S. suppliers, engineers and consultants.
The International Finance Corporation (IFC) is an affiliate of the World Bank that provides project financing for private investment in developing countries. IFC offers long-term loans and equity investments, as well as other financing services. IFC will generally invest up to 25% of the total project cost. In addition to project finance, IFC also provides legal and technical assistance to private enterprises. Unlike the IBRD and IDA, the IFC does not require government guarantees. U.S. companies seeking direct investment funds should contact the IFC.
The Multilateral Investment Guarantee Agency (MIGA) was established in April 1988 to help investors overcome the problems of political risk. Investors' concerns about political risk had the effect of slowing down the flow of foreign direct investment which in turn slowed the creation of jobs, and the transfer of modern technology. Midge's purpose is to promote the flow of foreign direct investment among member countries by insuring investments against non-commercial (political) risk and by providing promotional and advisory services to help member countries create an attractive investment climate. U.S. companies seeking investment guarantees should contact MIGA.
For further information and assistance contact the U.S. Commerce Department's Commercial Service Liaison Staff, Office of the U.S. Executive Director, The World Bank, 1818 H Street NW, Washington DC 20433, USA. Tel 202/458-0118 or 0120, Fax 202/477-2967.
MULTILATERAL INSTITUTIONS ABROAD:
Multilateral Development Bank Office
U.S. Department of Commerce
International Trade Administration
Room 1107, 14th and Constitution, NW
Washington, DC 20230
Tel: 202-482-3399, Fax: 202-273-0927
Janet Thomas, DirectorAfrican Development Bank
c/o The Commercial Service
U.S. Embassy
5 Rue Jesse Owens, 01 B.P. 1712
Abidjan 01, Cote d'Ivoire
Tel: 225-21-46-16, Fax: 225-22-24-37European Bank for Reconstruction and Development (EBRD)
Office of the U.S. Executive Director
One Exchange Square
London EC2A 2EH
United Kingdom
Tel: 44-71-338-6569, Fax: 44-71-338-6487International Finance Corporation (IFC)
1818 H Street, N.W.
Washington, DC 20433
Tel: 202-477-1234, Fax: 202-477-6391World Bank
Office of the U.S. Executive Director
1818 H Street, N.W.
Washington, DC 20433
Tel: 202-458-0120/0118, Fax: 202-477-2967MULTILATERAL INSTITUTIONS IN EGYPT:
Arab League
Dr. Esmat Abdel Meguid, Secretary General
The Arab League Bldg., Corniche El Nil, Cairo
Tel: 393-4499, Fax: 775-626African Export Import Bank (AFREXIM)
Mr. Christopher Edordu, President
World Trade Center Bldg., 3rd & 8th Floors
1191 Corniche El Nil, Cairo
Tel: 202-578-0281 (6 Lines), Fax: 202-578-0276/9Cairo Regional Center for International Commercial Arbitration
Dr. Mohamed Ibrahim Aboul Enein, Director
3 Aboul Feda St., Zamalek, Cairo
Tel: 340-1333/35/37, 342-3691/93, Fax: 340-1336Commission of the European Communities Delegation in Egypt
Amb. Christian Falkowsky, Head of the Delegation
6 Ibn Zenki St., Zamalek, Cairo
Tel: 340-8388, Fax: 340-0385International Finance Corporation (IFC)
Mr. Sami Haddad, Regional Representative for the Middle East
World Trade Center, 1191 Corniche El Nil St., 12th Fl., Cairo
Tel: 579-6565, 579-9900, Fax: 579-2211United Nations Development Program (UNDP)
Mr. Edmund Cain, Resident Coordinator & Representative
1191 Corniche El Nil, World Trade Center, Cairo
Tel: 578-4840/46, Fax: 578-4847World Bank
Dr. Khalid Ikram, Director, Egypt Country Department
1191 Corniche El Nil, World Trade Center, Cairo
Tel: 574-1670/1, Fax: 574-1676LIST OF LOCAL BANKS AND AMERICAN CORRESPONDENT BANKS:
American Express Bank
Mr. Ahmed Dabbous/Executive Director & Region Head, Middle East
4 Syria St., Mohandessin, Cairo
Tel: 360-8226/8, 360-5256/8, Fax: 570-3146Arab American Bank
Mr. Sherif Abdel Khalek/Vice President, Regional Representative
6 Salah El Din St., Zamalek, Cairo
Tel: 340-6767, Fax: 340-6753Citibank
Mr. Shayne Elliott/Vice President & Country Corporate Officer
4 Ahmed Pacha St., Garden City, Cairo
Tel: 355-1501, 355-1161, 355-1873/7, Fax: 355-8056Bank of Alexandria
Mr. Mahmoud Abdel Salam Omar/Chairman
49 Kasr El Nil St., Cairo
Tel: 391-9686, Fax: 390-7793Cairo Bank
Mr. Mohamed Aboul Fath/Chairman
22 Adly St., Cairo
Tel: 390-9575, Fax: 390-1735Bank Misr
Mr. Issam Al Ahmady/Chairman
151 Mohamed Farid St., Cairo
Tel: 391-4239, 391-1159, Fax: 393-5381National Bank of Egypt
Mr. Mahmoud Abdel Aziz/Chairman
Cairo Plaza Bldg., Corniche El Nil St., 24 Sherif St., Cairo
Tel: 574-6858, Fax: 574-6000Arab International Bank
Dr. Moustafa Khalil/Chairman
35 Abdel Khalek Tharwat St., Cairo
Tel: 390-5765, Fax: 391-6233Banque du Caire et de Paris
Mr. Hassan Samir Mansour/Chairman
3 Latin America St., Garden City, Cairo
Tel: 355-2906, 390-9575, Fax: 390-1735Cairo Barclays Bank
Mr. /Joint Managing Director
12 El Sheikh Youssef Sq., Garden City, Cairo
Tel: 354-0686, 355-7447, Fax: 355-2746Commercial International Bank (CIB)
Mr. Mahmoud Abdel Aziz/General Manager
Nile Tower Bldg., 4th Fl., 21/23 Giza St., Giza
Tel: 570-3172, Fax: 570-3043Egyptian British Bank (Ex-Hong Kong Bank)
Dr. Ibrahim Kamel/Chairman
3 Aboul Feda St., Zamalek, Cairo
Tel: 340-9186/286, Fax: 341-4010Delta Int'l Bank
Mr. Aly Negm/President
1113 Corniche El Nil, Cairo
Tel: 579-6910/11, Fax: 750-904Egyptian American Bank (EAB)
Mr. James Vaughn/Managing Director
6 Hassan Sabri St., Zamalek, Cairo
Tel: 341-7330/6150/7/8, 339-1572, Fax: 341-4924, 391-8601Misr International Bank
Mr. Issam Al Ahmady/Chairman
54 El Batal Ahmed Abdel Aziz St., Mohandessin, Ciaro
Tel: 349-4424/7091/0164, Fax: 349-8072Misr America Int'l Bank
Mr. Yousry Moustafa/Chairman
2 Nadi El Seid St., Dokki, Cairo
Tel: 361-6634/13/23/24/27, Fax: 361-6610Misr Exterior Bank
Mr. Mohamed Nabil Ibrahim/Chairman
Cairo Plaza Bldg., Corniche El Nil, Cairo
Tel: 778-021, Fax: 762-806Misr Iran Development Bank
Mr. Omar Mohanna/Deputy General Manager
Nile Tower Bldg., Giza St., Giza
Tel: 572-7311/004/890, Fax: 570-1185
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
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