4. Introduction
To examine how financial markets such as bond, stock and foreign
exchange markets work
To examine how financial institutions such as banks and insurance
companies work
To examine the role of money in the economy
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 4 / 23
6. Financial Markets
Financial markets: markets in which funds are transferred from people
who have an excess of available funds to people who have a shortage
of funds.
Financial markets improve the allocation of capital by channeling
funds to entities which use capital most productive. This increases
capital productivity and economic efficiency. Hence well-functioning
financial markets help accelerate economic growth.
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 6 / 23
7. Financial Markets
A bond: is a debt security that promises to make payments
periodically for a specified period of time
An interest rate: is the cost of borrowing or the price paid for the
rental of funds
Common stock: represents a share of ownership in a corporation. A
share of stock is a claim on the earnings and assets of the corporation
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 7 / 23
8. Stock market: the Egyptian case
EGX 30 index, previously named CASE 30 includes the top 30 companies
in terms of liquidity and activity.
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1/12/2010
8/12/2010
14/12/2010
20/12/2010
26/12/2010
30/12/2010
5/1/2011
12/1/2011
18/01/2011
24/01/2011
24/03/2011
30/03/2011
5/4/2011
11/4/2011
17/04/2011
21/04/2011
2/5/2011
8/5/2011
12/5/2011
18/05/2011
24/05/2011
Source: Constructed by the author using the stock market data.
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 8 / 23
9. Foreign exchange market
The foreign exchange market: is where funds are converted from one
currency into another.
The foreign exchange rate is the price of one currency in terms of
another currency
The foreign exchange market determines the foreign exchange rate
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 9 / 23
13. Banking
Financial Intermediaries: institutions that borrow funds from people
who have saved and make loans to other people
Banks: institutions that accept deposits and make loans
Other Financial Institutions: insurance companies, finance companies,
pension funds, mutual funds and investment banks
Financial Innovation: in particular, the advent of the information age
and e-finance
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 13 / 23
14. Banking sector: the Egyptian case
Number of Banks
and Banking Density
End of June 2004+ 2005 2006 2007 2008 2009
Total Number of Banks Operating in Egypt 61 52** 43*** 41*** 40*** 39***
Total Number of Branches 2783 2841 2944 3056 3297 3443
Banking Density+ 24.9 24.8 24.5 24.2 22.9 22.3
Number of Public Sector Banks 7 7 7 6 6 5
Number of Branches of Public Sector Banks 2153 2185 2222 2074 2089 2088
Number of Private Sector Banks 35 34 29 28 27 27
Number of Branches of Private Sector Banks 571 607 674 930 1145 1270
Number of Private and Joint venture Banks 19 11 7 7 7 7
Number of Branches of Private and Joint venture Banks 59 49 48 52 63 85
*Population in thousand / Banking unit.
+ Egyptian banks abroad are not included , also two banks established under private laws and are not
registered with CBE :the Arab International Bank,and Nasser Social Bank .
** The decrease was because seven branches of foreign banks ended their
business.
*** The decrease was because seven branches of foreign banks ended their
business.
Source: CBE (2011)
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 14 / 23
16. Money and Monetary policy
Evidence suggests that money plays an important role in generating
business cycles. Recessions (unemployment) and booms (inflation)
affect all of us
Monetary Theory ties changes in the money supply to changes in
aggregate economic activity and the price level.
The government uses monetary policy to influence economic
aggregates.
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 16 / 23
17. Monetary Policy and Inflation
The aggregate price level is the average price of goods and services in
an economy
A continual rise in the price level (inflation) affects all economic
players
Data shows a connection between the money supply and the price
level
Interest rates are the price of money
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 17 / 23
18. Money and Monetary policy
900000
800000
700000
600000
500000
M2
400000
300000
200000
100000
0
0 100 200 300 400 500
CPI
Source: Constructed by the author using the CBE data.
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 18 / 23
19. 58
Banking sector: the Egyptian case
Central Bank of Egypt – Annual Report 2009/2010
Annual CPI and Price Index of Food & Non-Alcoholic Beverages
(Urban)
%
24
20
16
12
8
4
09
10
v.
ly
n.
g.
p.
c.
r.
ay
b.
.
.
ar
ct
Ap
Ju
No
20
Ja
20
Au
Se
De
Fe
M
O
M
n.
n.
Ju
Ju
All Items Food & Non-Alcoholic Beverages
Source: CAPMAS
Source: CBE (2011)
The inflation of food and non-alcoholic beverages accelerated to 18.5 percent
in the reporting year (from 12.2 percent in the previous FY). In spite of the fall in
international food prices by 4.8 percent in the reporting year, it did not curb the rise
in inflation rate at the domestic level, indicating the weak response of local2012
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, markets / 23
19
20. Bankingreporting yearof(fromEgyptian in thebeverages accelerated to of thepercent
The inflation food and non-alcoholic
in the sector: the 12.2 percent case previous FY). In spite
18.5
fall in
international food prices by 4.8 percent in the reporting year, it did not curb the rise
in inflation rate at the domestic level, indicating the weak response of local markets
to the changes in international food prices, especially when they take a downturn.
% International and Domestic Prices of Food (Change Rate)
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0 International Prices
-20.0 Domestic Prices
-25.0
-30.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008/2009 2009/2010
Source: IMF
Source: CBE (2011)
The rise in the share of food and non-alcoholic beverages was ascribed to
stronger contributions of most subgroups, especially vegetables (3.9 percentage
points against 1.7 point) and meat and poultry (2.8 points against 1.5 point).
However, declines were observed Money and Bankingof fish (-0.2 point against 0.7 point) / 23
Chahir Zaki (FEPS, Cairo University)
in the groups Second semester, 2012 20
21. Monetary Policy and Fiscal Policy
Monetary policy:
is the management of the money supply and interest rates
Conducted in Egypt by the Central Bank of Egypt (CBE)
Fiscal policy
is government spending and taxation
Budget deficit is the excess of expenditures over revenues for a
particular year
Budget surplus is the excess of revenues over expenditures for a
particular year
Any deficit must be financed by borrowing
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 21 / 23
22. billion and 6.9 percent a year earlier. Such developments reflect the increasing ratio
Fiscal policy low as 3.5 percent byto mention that the afiscal policy aimsdecreasing
of overall deficit/GDP. It is worthy
such ratio to as FY 2014/2015, as prerequisite for
to reduce
the ratio of domestic public debt/ GDP.
Ratios of Expenditures, Revenues & Overall Deficit / GDP
%
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
2005/2006 2006/2007 2007/2008 2008/2009 2009/2010
Revenues Expenditures Deficit
Hereunder is a follow-up of the execution of the consolidated fiscal operations
Source: the general government in FY 2009/2010, according to the preliminary actual data
of CBE (2011)
of the Ministry of Finance:
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 22 / 23
23. References
Mishkin, Introduction
Mishkin, chapter 1.
Central Bank of Egypt.
Chahir Zaki (FEPS, Cairo University) Money and Banking Second semester, 2012 23 / 23
