Depositors line up to withdraw funds from Banque du Caire, a state-owned bank in Egypt. Where has their money been? (Photo: Reuters/Amr Abdallah Dalsh)
With an estimated 800 billion Egyptian Pounds ($136 billion) in domestic deposits, you’d think Egyptian banks would have plenty of loans and credit available for Egyptian small- and medium- sized enterprises (SMEs). Not quite, when Egyptian government debt held domestically is nearly the same amount.
Egypt’s banks have taken a few important steps toward greater access to capital for SMEs. In the past decade, one state-owned bank in Egypt has been privatized, and the other three have undergone aggressive restructuring. Banks in Egypt have also implemented governance and risk management measures in compliance with the international Basel accords for banking supervision, with a focus on financing for SMEs. Transparency and competition are two forces that can drive banks toward disciplined and responsible small business lending, but Egyptian government debt remains a major constraint.
In part a legacy of writing blank checks for the Egyptian government during decades of authoritarian rule, Egyptian banks still have an insatiable thirst for financing government debt instead of lending to the private sector. In the summer of 2010, Egyptian banks maintained an anemic loan-to-deposit ratio of about 52 percent, compared with 100 percent ratios typical in Persian Gulf countries. Even in the midst of the U.S. credit crunch, U.S. banks maintained loan-to-deposit ratios closer to 80 percent. Healthy loan-to-deposit ratios tend to hover between 95 and 105 percent.
On top of that, Egypt’s onerous bankruptcy procedures discourage entrepreneurs and banks from doing more business with each other. So why extend more loans or credit to entrepreneurs when there are plenty of government bonds to buy that are safer, more available, and pay more than enough interest for banks to remain profitable? The insatiable thirst for government bonds isn’t entirely the banks’ fault.
It’s a classic case of what economists call crowding-out and it’s partly why Egyptian SMEs haven’t emerged to provide goods, services, and jobs that Egypt needs.
The rest of the Egyptian financial sector as it stood before January 25 held some hope with young firms offering factoring services or leasing equipment to SMEs. A few equity funds in Egypt even had limited interest in start-ups. In 2010, trading began on the Egypt-based NILEX, the Middle East and North Africa’s first small- and mid-cap stock exchange, and there is certainly room for impact investing and microcredit to step in and take on some of the lending that Egypt’s commercial banks aren’t taking on for themselves. But no matter how you slice it, commercial banks play an important role in allocating capital efficiently and responsibly. The total market capitalization of Egypt’s main stock exchange was only about half the value of the country’s bank deposits as of January 2011.
Even the cheaper Egyptian Pound, due to vast amounts of foreign capital and trade fleeing or avoiding Egypt, isn’t going to help exporters as much as it could without greater access to loans and cheaper credit. Egyptian exporters have duty free access to the EU as well as current and pending free access to 26 countries in Africa, but without capital to ramp up production and distribution quickly, there are plenty of lost opportunities.
There’s plenty of capital already in Egypt to mobilize as loans or credit to SMEs. Egyptian banks have implemented cumulative sector-wide reforms to help handle the risks and other challenges of small business lending. They need the 800 billion pound gorilla of government debt off their backs, and that’s a choice before the Egyptian people to demand from their future leaders.
Cross-posted on Nextbillion.net.