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  1. 1. Central Bank of Egypt CENTRAL BANK OF EGYPT Egyptian Banking Sector Reform Policy: Areas of Future Actions April 2003 (July 2003 Update) 1
  2. 2. Central Bank of Egypt A – Overview Recent years have witnessed considerable efforts by the Central Bank of Egypt to increase the soundness and to modernize the Egyptian Banking Sector. As the banking sector is a major component of the Egyptian financial sector, and as efficiency in the utilization of the savings of the depositors and the banking sector resources is required to enhance the growth rate of the real sectors of the economy, the soundness of such sector is of a paramount importance. The Egyptian banking sector comprises 57 banks. This number includes 28 commercial banks of which 4 banks are state-owned banks, 26 investment banks of which 11 joint-venture banks and 15 branches of foreign banks, in addition to 3 specialized banks of which two are state-owned. The number of licensed branches of those banks in Egypt reached 2443 branch in addition to 39 branches are licensed to operate overseas. The rapid growth of the banking sector during the 1990’s together with the liberalization of the whole economy added extra burden on the Central Bank of Egypt as the sole regulator of the banking industry. Banks are supervised by the Banking Control Department of the CBE and in practice supervision is strong1. CBE has made considerable progress in developing its supervisory framework and staff using materials, procedures, and techniques obtained from other countries’ supervisory systems. According to the FSAP report of 2002, CBE complied with most of the Basel Core Principles for Effective Banking Supervision. To add to the strength of the CBE in the supervision of banks, the Government, together with CBE, has drafted a new Central Bank and Banking Sector Law to increase the degree of independence of CBE in maintaining price stability. In support for the efforts done to modernize this sector, further reforms need to be introduced. Broad areas of reform include: • Increasing the independence and the surveillance of the Central bank of Egypt, and increasing its capacity in enforcing banking reforms. • Conducting monetary policy to target inflation, and developing the short-term money market, in light of the new monetary policy framework developed by CBE. 1 See : IMF, FSAP Main Report, December 2002. 2
  3. 3. Central Bank of Egypt • Development of the informational infrastructure for the banking sector to support the decision making process in the areas of finance including both investment and credit. • Modernizing the Egyptian Payment System to cope up with the CPSS Core Principles for Systemically Important Payment Systems. • Enhancing and monitoring corporate governance in all banks. • Introducing forward-looking internal rating systems in all banks. • Privatizing joint-venture banks. B – Latest Developments Since the end of the first FSAP done jointly by the IMF and the World Bank in June 2002, the Central Bank of Egypt worked on four directions; the legislations required to introduce additional reforms, the prudential regulations for better banking practices, bank directors and corporate governance and the modernization of the informational infrastructure to support decisions of bank management. Some other important areas of responsibility of the CBE have been developed also. Those include monetary policy, foreign exchange system, payment system, and anti money laundering. The following is a quick overview of the accomplished tasks. 1- Legislations:  Central Bank, Banking Sector and Money new Law: A new law, confirming the independence of the Central Bank of Egypt, has been ratified by the Parliament and issued in June 2003. The New Law has been enacted on July 16, 2003. The Charter of the Central Bank and the Executive Orders of the Law shall be issued shortly.  Electronic Signature Law: The Ministry of Telecom and Technological Development and the Central Bank of Egypt have drafted a new Law for giving the electronic signature the legal power. This law is required for enhancing e-banking services. The draft Law have been approved by the Cabinet of Ministers and expected to be passed to the Parliament during 2003/2004. 3
  4. 4. Central Bank of Egypt 2- CBE Prudential Regulations and Institutional Capacity Buildup: According to the recommendations of the FSAP report, modifications and amendments of the CBE prudential rules and regulations have been introduced.  All banking supervision arrangements have been comprehensively documented. Such arrangements and prudential regulations have been published (Book, CD, and internet) and made available to the banking sector in one unified publication. (Second half of 2002)  New regulations regarding connected and related party lending have been enforced. The regulations provided a comprehensive definition of connected parties, credit exposure for connected exposure purposes, and the limit stipulated by the law for connected exposures (November 2002).  All banks have been requested to comply with new minimum capital adequacy ratio of 10%. By the 31st. of March 2003 the majority of banks complied with this prudential regulations including the 6 state-owned banks.  An additional capital injection to all state-owned banks have been implemented (March 2003).  Provisioning levels for classified loans are monitored very closely. A number of banks have been prohibited by the CBE from distributing dividends to their shareholders by the end of 2002 based upon the reports of their external auditors and the inspection reports of the CBE Bank Control Department showing insufficient level of provisioning.  The organization structure of the CBE was changed to achieve more consolidation of the business.  New comers to CBE bank inspectors have been hired. 3- Banks Management & Corporate Governance:  Privatizing the management has been implemented in all state owned banks. Changes included both executive as well as non-executive board members. The new directors are required to improve the performance and increase the soundness of their banks. (Dec. 2002-Jan. 2003).  CBE exercised its rights to protect depositors’ interests and introduced changes in the management of some private and JV banks.  CBE issued guidelines for the formation and functions of the Audit Committees in all licensed banks.  The Board of Directors of the CBE have decided that all banks should form audit committees composed of non- 4
  5. 5. Central Bank of Egypt executive directors, the rules and responsibilities of the audit committees issued earlier by the CBE was applied. Accordingly, audit Committees in banks became compulsory. Banks complied with this regulations and the CBE is currently monitoring the performance of such committees.  A monthly meeting between CBE top management and the Chairpersons and CEOs of all banks operating in Egypt is now a common practice. The purpose of such meetings is to discuss all common practices of the bankers and to introduce the new regulatory systems.  An ad-hoc Committee established by CBE started to set the rules & Procedures for privatizing J.V Banks.  A number of seminars have been arranged by the CBE Banking Institute for Egyptian bankers in preparation for Basel II requirements. 4- Informational infrastructure and Credit Info-System : As the Central Bank of Egypt finalized its electronic information network in 2002, banks were instructed to finalize their information networks projects connecting their branches electronically with their headquarters before the end of September 2003. This information network will help in enhancing and strengthening the credit information system currently managed by the CBE. This network will also be useful in strengthening the off-site supervision of banks by the Bank Control Department.  CBE developed its credit risk information system to include more details about the credit costumer of the banks.  Banks who finalize their information networks projects have been given the privilege of connecting their headquarters with the CBE network to receive clients credit profiles online using CBE credit risk information system.  As of the end of June 2003, 37 banks were connected to CBE credit risk information system.  Private sector firms have been invited to present their RFI to establish and manage a CBE national switch for connecting all private ATMs networks. In addition to the aforementioned developments, there are four important issues that were given a special attention by the Central Bank of Egypt:  Monetary Policy: 5
  6. 6. Central Bank of Egypt  A new framework for the CBE monetary policy has been designed. This new framework has been put into public discussions as well as discussions with the IMF, in order to come up with a detailed monetary policy framework.  According to the Law no. 88 of 2003 of the Central Bank, Banking Sector and Money, a “Monetary Policy Coordination Council (MPCC)” composing of members from the Government and the Central Bank. The Head of the State will issue the needed Decree during July 2003. The purpose of the MPCC is to set the objectives of Egypt’s monetary policy.  In preparation for applying the new monetary policy framework the organizational structure of the Central Bank of Egypt has been changed to allow for establishing a separate Monetary Policy Unit (MPU), reporting directly to the Governor.  A Monetary Policy Committee (MPC) was formed including some member of the board of Directors of the CBE.  To prepare the short- term money market to the application of the new monetary policy, additional open market tools were developed and introduced including accepting short term deposits of banks by the CBE for one week, 14 nights and 28 days maturity.  Changes in the reserve requirement maintenance period were enforced by the CBE and applied by all banks.  The basis for calculating the numerator of the reserve requirement has been changed to exclude treasury bills of less than 15 days for maturity was introduced in early March 2003.  Short-term money market including treasury bills market has been made more transparent.  The market has recognized the stance of the monetary policy after some measures have been taken by CBE before the end of 2002.  Bank deposit interest rates started to respond smoothly to changes in monetary policy and market conditions. However, bank lending rates did not respond quickly to the developments in the money market rates.  With the introduction of the Foreign Exchange new Floating system, CBE adopted a temporary tight monetary policy.  Foreign exchange system and management:  A new floating foreign exchange system was introduced on January 29, 2003.  A new CBE intervention policy has been developed. 6
  7. 7. Central Bank of Egypt  FX information system has been developed and the reporting system allows now for an hourly reports by all market participants.  A new convention for the FX interbank market has been prepared. It was presented to the banking sector dealers for discussion. It is expected that all participating banks in the interbank market will apply the convention as soon as they finalized its signature.  A daily market developments report is issued by the CBE with a limited circulation. An additional weekly report is issued.  CBE succeeded in dismantling some gentlemen agreements that was formed at the early stages of the new system.  As of end of June 2003, the system is operating. The rates outside the official channels are less than 1% higher than the banking rates.  Payment System Modernization  Automating Cairo Clearing House has already been done, and is functioning since June 2002.  A Payment System Department within CBE has been established.  The new Central Bank Law makes it clear that the responsibility of owning and operating the payment systems as well as the role of overseeing payment system lies within the responsibility of the CBE.  The Cabinet of Ministers has approved the Electronic Signature Law.  Central Bank Clearing House for government transactions have been automated and connected to Cairo clearing house (March 2003).  A pilot project allowing 5 big banks (public & Private) to monitor online bank reserve account balances held with the CBE has been finalized and operative.  TOR for RTGS has been prepared (March 2003).  Anti Money Laundry (AML CFT)  An independent anti-money laundering unit has been established.  A new law for AML has been ratified and enacted.  AML unit Board was formed.  The unit has been staffed with competent and experienced inspectors seconded from the CBE.  Training courses and seminars have taken place for all concerned parties. 7
  8. 8. Central Bank of Egypt  Regulations concerning AML – KYC have been issued and applied on banks, FX dealers and on money transfer companies.  Banks were requested to appoint compliance officer to monitor the KYC application.  The system is now working. C – Key Areas For Future Actions  Legislation: • The Charter of the CBE as well as the executive orders of the new Central Bank, Banking sector and Money Law. • The new electronic Signature law.  Application of the inflation targeting Monetary policy: • MPCC shall be formed and function • Definition of the core inflation, the targeted inflation rate and the other aspects of inflation targeting should be agreed upon with the Government. • Monetary policy targeting inflation will be executed through affecting short-term money market interest rates as the operational target and the reserve money as the nominal anchor. • Transmission mechanisms and channels of the monetary policy actions have to be defined taking into considerations the characteristics of the Egyptian economy. • Final document of the Monetary Policy Framework will be published. • A monitoring report will be developed.  Modernization of the Egyptian Payment System : • A semi-automated Port Said and Alexandria clearing houses are planned to be working by the end of 2003. • Real Time Gross System (RTGS) payment system is planned to be operating by the end of 2004. • Establishment of a National Switch for connecting all ATMs and POSs in Egypt is expected to be in place before March 2004. • CBE is developing a new credit risk information system for banks retail customers below LE 40 thousand. The system 8
  9. 9. Central Bank of Egypt will start with a negative list of non-performing bank customers to be available online to designated bank officials.  Information infrastructure and credit infosystem : • Connections between bank branches with their head offices, and between the head offices and the CBE network, is planned to be functioning fully before the end of 2003, aiming at enhancing the surveillance over the banking sector performance, and increasing the transparency of banks transactions. • Establishment of retail loans information system, consumer loans, and small medium size credit database within the CBE credit risk information system. • Establishment of a credit and debit cards information system within the CBE credit risk information system. • Using CBE network with banks to facilitate retrieval of information by banks on the above-mentioned databases. • A new online reporting system is under preparation and will be introduced to the banks and the foreign exchange dealers before December 2003.  Banking supervision and prudential regulations:  Increasing the minimum paid-up capital of banks to LE 500 million and to US$ 50 million for branches of foreign banks operating in Egypt (max. end of mid 2006).  Increasing the efficiency of the off-sight supervision of the CBE Supervision Department by using CBE network.  Preparing banks for the introduction of the Basel II new regulations.  The models applied by the FSA of England for identifying bank director’s responsibilities is currently under review by CBE and will be issued during 2003 including applying the fit and proper measures on the new members of the management of banks  .  CBE is developing a “special attention” category for provisioning purposes.  CBE advised banks to start building their own internal rating systems in preparation for Basel II. A regulation will be issued before the end of 2003. 9
  10. 10. Central Bank of Egypt  CBE is studying introducing stress testing techniques to enhance the early warning system in the banking sector.  Privatization of joint venture banks  Setting the guidelines for conducting the due diligence and the sale procedures for the JV Banks offered for sale will be approved by the CBE Board of Directors (NLT Sept. 2003).  List of all JV. Banks have been prepared and will be sent to the Ministerial Committee for Privatization (MCP) for approval (NLT Sept. 2003).  The MCP will set the list of eligible banks for privatization and the timetable and action plan for calling for tender offers. (NLT end 2003).  Launching the privatization process (2004-2006)  Human Resources Development  Development of the Egyptian banking institute role in enhancing the capabilities of bankers.  Continuing the potential bank leaders program. 10