Financial Services, Egypt

EGYPT'S FINANCIAL SERVICES sector —one of the oldest and most-established in the Middle East — is also one of the best-developed in the region thanks to the industriousness of the private sector and a series of key regulatory re­forms launched in 2005.

Today, the nation's banks, brokerages, investment banks and private equity houses are among the most vibrant in the MENA region, attracting heavy foreign investment from major Arab and international names while launching their own ambitious regional expansion plans.

And despite the recent wave of privatization sales, merg­ers, acquisitions and expansions, the sector still holds massive untapped potential in everything from retail and commercial banking to brokerage, insurance and mortgage finance.

The growth story began in 2005 with key regulatory re­forms addressing issues including increasing capital adequa­cy requirements, the privatization of public-sector banks and the consolidation of small private institutions into more robust entities. The result was a series of mergers and acquisitions in 2006 and 2007 that has left the growing sector on exceptional­ly solid ground.

The government endorsed an aggressive reform program that addressed the financial and administrative restructuring of state-owned banks, the problem of non-performing loans and the strengthening of the Central Bank of Egypt's regulatory and supervisory apparatuses. At the same time, the state began sell­ing its stakes in joint-venture banks and pledging to privatize at least one of the "Big Four" state-owned banks that dominate the sector.

The implementation of Unified Banking Law No. 88 of 2003 has enforced a minimum capital requirement of EGP 500 mil­lion for local institutions and US$ 50 million for branches of foreign banks. This requirement stream­lined a relatively crowded banking sector and brought the number of li­censed banks operating in Egypt down from 57 in 2004 to the cur­rent 37. The result: A much health­ier cohort of competitors who are now courting retail and corporate client alike with new products and improved commitments to custom­er service.

The Bank of Alexandria (BA) was the first of the Big Four to be priva­tized. In late 2006, Italy's Sanpaolo IMI acquired 80% of BA's shares for US$ 1.6 billion— a record-breaking price that was six times the bank's book value. Meanwhile, the govern­ment is moving forward with plans to privatize Banque du Caire. the third-largest of the former Big Four.

A number of leading European and Arab banks have joined Sanpaolo IMI in courting the local market since 2005. In the past three years, international banks have moved into Egypt through large acquisitions, signaling an international trust in the Egyptian banking sector. (See box for a list of recent M&A activity in the sector.)

Investment banking, private equity and brokerage services have roared to new life in Egypt, with several of the country's leading institutions now established as the dominant regional players or well on their way to becoming so.

EFG-Hermes, the country's largest investment banking, brokerage and asset management firm, has estab­lished a regional presence in Dubai. Saudi Arabia and Qatar, among oth­er countries, and has a strategic al­liance with Banque Audi, in which it has a substantial holding. Other significant players in the market in­clude Beltone Financial, HC Securi­ties, Prime Securities and HSBC Se­curities, a subsidiary of UK-based HSBC.

In the rapidly growing field of pri­vate equity, Cairo-based Citadel Capital has emerged as the regional leader with US$ 8.3 billion in invest­ments under control in sectors rang­ing from cement to retail and oil and gas. The Commercial International Bank (CIB), which is backed by in­vestment from a consortium led by America's Ripplewood Holdings, has also established a new company spe­cializing in investment banking and private-equity.

Insurance

New private-sector entrants, strong legislative change and an extensive public awareness campaign have set the stage for growth in the Egyptian insurance sector.

Though still relatively small by international standards, insurance premiums as a percentage of GDP have doubled to 0.83% in 2006/07 from 0.59% in 2000/01.

There are now 21 insurance and reinsurance companies operating in Egypt, and re­cent regulatory changes allow foreign firms to wholly own Egyptian insurance com­panies without a local joint-venture partner.

Meanwhile, the People's Assembly has approved a draft law on mandatory insur­ance covering civil liability in automobile accidents that will bring millions of Egyp­tians into the insurance sector for the first time, opening exciting new frontiers for growth.

 Mortgage Finance

Egypt's relatively young mortgage finance industry is now in a rapid-growth phase, with more than EGP 2 billion in mortgages being taken out since the executive regu­lations governing the Mortgage Finance Law were made official in 2005.

Of the EGP 2 billion, 76% has been provided by banks backed by five mortgage fi­nance companies including the Egyptian Mortgage Refinance Company (EMRC), a newly established government institution that will enable mortgage finance compa­nies to offer more competitive terms.

A reduction of property registration fees (to a maximum of EGP 2,000) has taken place.

The market — as all others that rely on credit — can also now avail itself of the ser­vices of  Score, the newly established Egyptian credit bureau when verifying the cred­itworthiness of applicants.